-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, P6IAt4Zz2W6OJKfyqwr7cGD0p3DOqg0oKh4mkW1+nBTAHk1Ca/cV4GbR9UKIuUlA MFKIepEKcRCI+vewys48KQ== 0000912282-99-000189.txt : 19991104 0000912282-99-000189.hdr.sgml : 19991104 ACCESSION NUMBER: 0000912282-99-000189 CONFORMED SUBMISSION TYPE: 10-12G PUBLIC DOCUMENT COUNT: 18 FILED AS OF DATE: 19991103 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PAWNBROKER COM INC CENTRAL INDEX KEY: 0001058154 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-BUSINESS SERVICES, NEC [7389] IRS NUMBER: 330794473 FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-12G SEC ACT: SEC FILE NUMBER: 000-27215 FILM NUMBER: 99740156 BUSINESS ADDRESS: STREET 1: 85 KEYSTONE, SUITE F STREET 2: #105 CITY: RENO STATE: NV ZIP: 89503 BUSINESS PHONE: 7753325048 10-12G 1 REGISTRATION STATEMENT UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10 GENERAL FORM FOR REGISTRATION OF SECURITIES Pursuant to Section 12(b) or (g) of the Securities Exchange Act of 1934 PAWNBROKER.COM, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 33-0794473 - ------------------------------------ ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 85 Keystone, Suite F, Reno, Nevada 89503 - ------------------------------------ ------------------------------------ (Address of principal executive offices) (Zip Code) Registrant's telephone number: (775) 332-5048 Securities to be registered under Section 12(b) of the Act: NONE None - ------------------------------------ ------------------------------------ Title of each class to be so registered Name of each exchange on which each class is to be registered Securities to be registered under Section 12(g) of the Act: Common Shares, Par Value $0.00001 Per Share - -------------------------------------------------------------------------------- (Title of Class) Not Applicable - -------------------------------------------------------------------------------- (Title of Class) TABLE OF CONTENTS NOTE REGARDING FORWARD LOOKING STATEMENTS........................................................................1 Item 1. Description of Business..................................................................................2 Item 2. Financial Information...................................................................................35 Item 3. Properties..............................................................................................42 Item 4. Security Ownership of Certain Beneficial Owners and Management..........................................42 Item 5. Directors, Executive Officers, Promoters and Control Persons............................................44 Item 6. Executive Compensation..................................................................................46 Item 7. Certain Relationships and Related Transactions..........................................................52 Item 8. Legal Proceedings.......................................................................................53 Item 9. Marketing Price of and Dividends on Registrant's Common Equity and Related Stockholder Matters..........52 Item 10. Recent Sales of Unregistered Securities................................................................54 Item 11. Descriptions of Registrant's Securities to be Registered...............................................56 Item 12. Indemnification of Directors and Officers..............................................................54 Item 13. Financial Statements and Supplementary Data............................................................56 Item 14. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...................57 Item 15. Financial Statements and Exhibits.....................................................................56
-i- NOTE REGARDING FORWARD LOOKING STATEMENTS Except for statements of historical fact, certain information contained herein constitutes "forward-looking statements," including without limitation statements containing the words "believes," "anticipates," "intends," "expects" and words of similar import, as well as all projections of future results. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results or achievements of the Registrant to be materially different from any future results or achievements of the Registrant expressed or implied by such forward-looking statements. Such factors include, but are not limited to the following: the Registrant's limited operating history; history of losses; risks involving new product development; competition; management of growth and integration; risks of technological change; the Registrant's dependence on key personnel, marketing relationships with pawnshops and third party suppliers; the Registrant's ability to protect its intellectual property rights; government regulation of Internet commerce and the pawn industry; economic and political factors; dependence on continued growth in use of the Internet; risk of technological change; capacity and systems disruptions; liability for Internet content; uncertainty regarding infringing intellectual property rights of others; security risks; year 2000 compliance risks and the other risks and uncertainties described under "Description of Business - Risk Factors" in this registration statement. Certain of the forward looking statements contained in this registration statement are identified with cross-references to this section and/or to specific risks identified under "Description of Business - Risk Factors". The Registrant's management has included projections and estimates in this registration statement, which are based primarily on management's assessment of the Registrant's results of operations, discussions and negotiations with third parties, management's experience and a review of information filed by its competitors with the Securities and Exchange Commission. Investors are cautioned against attributing undue certainty to management's projections. -1- Item 1. Description of Business. General Overview We, Pawnbroker.com, Inc., are a Delaware corporation in the development stage, which means we are in the process of developing our business and have no revenues from our operations and have not generated any profits. We intend to launch a web site designed to provide online customers a fundamentally new method to search for and buy merchandise from the inventories of pawnshops. Our web site is located at www.pawnbroker.com. We intend to enter into agreements with "brick-and-mortar" pawnshops with existing physical locations under which each participating pawnshop will agree to make certain items or all of their inventory available for purchase through Pawnbroker.com at prices established by the pawnshop or on a "make an offer" basis. Based on our discussion with potential participants, we believe that our Pawnbroker.com web site services will be particularly attractive to small independent pawnshops and small pawnshop chains, who sell their merchandise exclusively through their physical locations and may be limited by the scope of their geographic market. We intend to generate revenues by charging pawnshops a transaction fee, ranging between 5% to 10% of the purchase price, on successfully completed transactions. The Company's management and its board of advisors are in the process of determining an appropriate transaction fee policy, and the Company anticipates that the transaction fee policy will be finalized in late November 1999. We are currently in the process of completing the development of the software and technology related to our business and intend to beta test our web site in December 1999 with approximately 65 pawnshops who have orally committed to participate in the tests by each listing approximately 500 items of merchandise on our site. See "Plan of Operation - Complete Beta Testing of Our Web Site." After completing beta tests and debugging our software, we intend to launch our site to the general public in two phases: 1. Soft Launch: Our soft launch is scheduled for January 2000 and is anticipated to feature between 65 and 100 participating pawnshops. The general public will be allowed to access general information about (i) the pawn industry, (ii) our web site, (iii) our participating pawnshops, (iv) our policies related to purchasing merchandise on our web site and our Pawnbroker.com Satisfaction Program and (iv) the schedule for our hard launch when they will be able to purchase merchandise on our web site. Participating pawnshops will be able to (i) use Pawnbroker.com email; (ii) complete applications to become a participating pawnshop; (iii) upload inventory lists of merchandise to sell on our web site when we complete the hard launch of our web site; and (iv) access information specifically designed for pawnshops including pawnshop regulatory information, instructions and guidelines related to listing merchandise for sale on our web site, our policies and procedures related to participating pawnshops and information posted on our web site by our participating pawnshops. We do not anticipate that visitors will be able to purchase merchandise on our web site during our soft launch. 2. Hard Launch: Our hard launch is scheduled for March 2000 and is anticipated to feature between 100 and 200 participating pawnshops. After our hard launch, we anticipate that our web site will be fully operational and that we will begin to facilitate transactions between -2- visitors and our participating pawnshops. We anticipate that each participating pawnshop will feature approximately 300 to 500 items for sale on our pawnbroker.com web site. Our goal is to have a total of up to 2,000 participating pawnshops offering an average of 275 items each by December 2000. We have presented our web site concept to over 3,000 pawnshops at conventions and tradeshows and have oral expressions of interest or requests for additional information from approximately 2,000 pawnshops. We do not intend to enter into any definitive agreements with pawnshops until we have completed the beta testing of our web site. We also cannot assure you that we will successfully complete the development of the technology required to launch our web site or enter into any definitive agreements with pawnshops as planned or that we will generate sufficient revenues to become profitable. Participating pawnbrokers will be able to run our Pawnbroker.com software on IBM-compatible PCs with Microsoft Windows 95/98. We anticipate that participating pawnbrokers will be able to purchase an IBM-compatible PC with Microsoft Windows 95/98 and a laser printer to print invoices and shipping labels at a cost of less than $2,000. We will also recommend the use of a digital camera to display pictures of merchandise on our web site. See "Participating Pawnbroker Systems Requirements." Our web site will include an automated, easy-to-use search and retrieval system that is designed to make purchasing merchandise on our Pawnbroker.com web site easy and popular. We plan to incorporate visual displays on our web site that permit a visitor to view pictures of merchandise and interactive capabilities that allow buyers to make offers on merchandise at any point in their visit. Our software developer, Banshee, Inc., is in the process of developing the technologies that will allow us to integrate these features on our web site. The software is anticipated to be ready for beta testing in December 1999. We believe that our Pawnbroker.com web site will be attractive to consumers of merchandise typically offered at pawnshops, such as jewelry, consumer electronics, tools, collectibles, coins, cameras and musical instruments. We intend to attract buyers by offering consumers an opportunity to locate and purchase merchandise from an inventory that we anticipate will be larger than any single pawnshop or pawnshop chain. We do not intend to post firearms, adult materials or other potentially illegal merchandise for sale on our web site. Our web site is designed to facilitate seamless, secure transactions, unlike other existing systems that require buyers to visit other web sites or contact the pawnshop directly to complete a secure transaction. We intend to create buyer confidence by offering a unique 10-day Pawnbroker.com Satisfaction Program that is intended to reduce the risk and uncertainty of purchasing merchandise from independent pawnshops. See "Pawnbroker.com Satisfaction Guarantee." We intend to increase repeat purchases and build loyalty to our service by using post-sale marketing techniques including follow-up email messages to remind customers of our web site and personalized services that will allow visitors to (i) request merchandise that is not listed for sale on our web site, (ii) notification by email when a particular item of merchandise is available on our web site, and (iii) automatic email reminders of specific occasions like birthdays, holidays or anniversaries. -3- We anticipate that the number of transactions facilitated on Pawnbroker.com will increase and decrease during certain times of the year, similar to the sales fluctuations experienced by physical pawnshops in their retail sales. Based on our management's experience in the pawnshop industry, we anticipate our sales will be higher during the periods immediately prior to Christmas, Valentine's Day, Mother's Day and Father's Day than during other times of the year. Our revenues will depend on transaction fees, ranging from 5% to 10% of the purchase price, paid by pawnshops for successful transactions completed with purchasers. Based on our discussions with potential advertisers, we believe that when and if our site traffic reaches 10,000 or more visitors per day, we may receive additional revenues by selling banner ads. In the future, we plan to generate additional revenue by licensing a point-of-sale & inventory management application that allows participating pawnshops to seamlessly post items in their inventory database for sale on our web site and to manage their in-store and online inventory in an effective, efficient manner. We have no revenues from our operations and we have a history of losses. As of June 30, 1999, we had an accumulated deficit of $203,349. We anticipate that we will continue to incur substantial losses for the foreseeable future. We estimate that we will require additional financing of at least $5 million to meet our cash requirements through the fiscal quarter ending June 30, 2000. See "Note Regarding Forward Looking Statements." Our ability to fully implement our business strategy will depend on our ability to raise future financing. Factors that will affect our ability to raise such financing may include, among other things: o the market acceptance of our Pawnbroker.com web site by buyers of pawnshop merchandise; o traffic on our web site; o our ability to obtain participating member pawnshops; and o the revenues generated from our operations. We anticipate that we will raise additional financing through private placements of our equity or debt during the fourth quarter of 1999. We are currently seeking such financing by presenting our business plan to merchant and investment banks, fund managers and investment advisors. We cannot assure you that we will successfully complete any private placements or that we will obtain additional financing to implement our business plans on acceptable terms, if at all. We intend to compete in the highly competitive Internet commerce industry. Many of our competitors have substantially greater financial, technical and other resources than us. Several competitors already have established web sites, brand names, strategic relationships with advertisers and other web sites and user loyalty, all of which create a competitive advantage over us. We have not launched our web site or begun the process of developing our brand name or promoting our web site. We cannot guarantee that we will be able to compete effectively or that we will ever generate sufficient revenues from our operations to make our business commercially viable. Industry Background The Internet is an increasingly significant global interactive medium for communications, content and commerce. Growth in Internet usage has been fueled by a number of factors, including (i) the large and growing base of personal computers in the workplace and home, -4- (ii) advances in the performance of personal computers and modems, (iii) improvements in network systems and infrastructure, (iv) readily available and lower cost access to the Internet, (v) increased awareness of the Internet among businesses and consumers, (vi) increased volume of information and services offered on the Web and (vii) reduced security risks in conducting transactions online. We believe that the growing adoption of the Internet represents an opportunity for businesses to conduct commerce electronically without borders over the Internet. The Pawnshop Industry According to information published by the National Pawnbroker's Association, the pawnshop industry in the United States is a growing industry. Pawnshops are primarily regulated by state and local laws. Based on information available from the National Pawnbroker's Association, we believe that the majority of pawnshops are owned by individuals operating one to three locations, and that the pawnshop industry is fragmented and comprised primarily of several thousand independent "mom and pop" 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, Onsale, Bidz, First Auction, Surplus Auction and uBid. Several pawnshops advertise on web sites that post links to pawnshop web sites, such as Pawn Shop Links, and classified ad web sites. We do not believe there is currently a web site that compiles the inventory of participating pawnshops into a single searchable database and that offers the transaction clearing capabilities of our Pawnbroker.com web site. Based on management's experience, we believe that several characteristics of the traditional pawnshop industry have created inefficiencies in the industry. Brick-and-mortar based pawnshops must make significant investments in credit capital, inventory, real estate and personnel for each retail location. Further, because most pawnshops obtain most of their inventory locally, they must contend with the logistical problems of matching pawned merchandise to unpredictable demand for such merchandise. We believe the growth of the Internet has facilitated the development of solutions to some of these traditional problems and will lead to growth and efficiencies in the pawnshop industry. Competition We intend to compete with a number of other companies with substantially greater financial, technical and human resources than us. Our competitors, in connection with the sale of merchandise, include numerous brick-and-mortar retail and wholesale stores, including jewelry stores, discount retail stores, consumer electronics stores, pawnshops, and other retailers of new and previously-owned merchandise. Competitive factors in our business include: -5- (i) the ability to provide the customer with a variety of merchandise at an exceptional value; (ii) the quality of merchandise offered; (iii) consumer brand loyalty to the merchandiser; and (iv) level of service provided by the merchandiser. We also compete with numerous other retailers who have significantly greater financial resources than the Company. At the present time, we believe we will compete with three principal types of distribution channels available to pawnshops on the Internet: (i) list services, (ii) independent pawnshop web sites, and (iii) large Internet resellers. List Services A variety of list services are presently available on the Internet. These services, such as Secondhand.com and Pawn Shop Link, are similar to advertisements in the yellow pages and make 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 are also problematic for sellers because they effectively require pawnshops to deal directly with the customer and to handle most of the functions related to processing the transaction and updating the web site inventory. We believe that there are severe limitations with list services that create inefficiencies for buyers and sellers. Retail buyers experience multiple-step purchasing and a likelihood for errors. We believe that the existing systems are also inconvenient for participating pawnshops because the systems can require high administrative and transactional costs. In the future, we intend to develop or license an integrated Internet software system for pawnshops that is compatible with an in-store inventory and point of sale system, which may allow pawnshops to update both their in-store inventory and Pawnbroker.com postings simultaneously. Independent Pawnbroker Web sites A number of pawnshops currently maintain retail web sites on the Internet. These independent pawnshops range from large retailers, such as EZ Pawn, operated by EZCorp, Inc., and First Cash, to small independent pawnshops. -6- Independent pawnshops' web sites generally allow buyers to search for merchandise contained within the seller's inventory. In general, buyers search for and acquire merchandise from independent pawnshops by visiting the web site and dealing directly with the pawnshop. We believe that due to the limited inventory of most independent pawnshops, retail customers may find searching for merchandise an unsatisfactory experience. Customers may perceive purchasing directly from independent pawnshops as risky. Based on information available from the National Association of Pawnbrokers and our discussions with industry experts, we believe there are more than 13,000 pawnshops in the United States that can benefit from our Internet system. We are positioning our system to offer certain features including: (i) the convenience created by offering visitors an opportunity to browse and select from a large inventory; (ii) search tools designed to allow a visitor to search for specific items of merchandise, comparison shop specific brands, merchandise and prices and view the merchandise of several pawnbrokers throughout the United States at a single web site; and (iii) our Pawnbroker.com Satisfaction Program, designed to reduce consumer risk in the buying merchandise from pawnshops online. We believe that by offering the merchandise of several hundred pawnshops on a single web site with search and transaction processing capabilities will be appealing to buyers. We also believe that by serving as an independent facilitator of pawnbroker-to-consumer transactions featuring our unique Pawnbroker.com Satisfaction Program, we can provide an Internet solution that will appeal to consumers and to pawnshops. See "Our Pawnbroker.com Satisfaction Program." We also believe our system may reduce start-up costs for participating pawnshops related to marketing merchandise on the Internet. Large Internet Resellers The market for person-to-person trading over the Internet is new, rapidly evolving and intensely competitive, and we expect competition to intensify in the future. A variety of auction-type web sites are presently available on the Internet. These services allow sellers to post merchandise on the Internet and allow buyers to locate items and submit bids online. These services generally organize merchandise by categories and provide descriptions, pictures or graphic capabilities and allow bidders to submit bids on the merchandise. We believe there are a number of pawnshops that post merchandise for sale on these auction sites. Barriers to entry are relatively low, and current and new competitors can launch new sites at a relatively low cost using commercially available software. Our web site will compete directly with online auction services such as eBay, Amazon.com, MSN.com, Yahoo! Auctions, Fairmarket.com, Auction Universe, Onsale, First Auction, Surplus Auction, uBid and a number of other small services, including those that serve specialty or regional markets such as CityAuction. Some of these auction services are free to sellers and buyers. We potentially face competition from a number of large online communities and services that have expertise in developing online commerce and in facilitating online business-to-person interaction, including America Online, AOL, Lycos, Inc. and Microsoft Corporation. Other large companies with strong brand recognition and experience in online commerce, such as Cendant -7- Corporation, QVC, USA Network and large newspaper or media companies, also may seek to compete in the online market to sell merchandise to our target customers. Our Pawnbroker.com web site is designed specifically for the special needs of pawnshops. We believe our Pawnbroker.com system may effectively reduce transaction costs for pawnshops selling merchandise over the Internet because we intend to charge a transaction fee based solely on successful transactions. Pawnshops will be able to post their entire inventory on Pawnbroker.com and will only be obligated to pay us a fee if we facilitate a transaction. We believe our 10-day Pawnbroker.com Satisfaction Program also will reduce the risk that a visitor may associate with an Internet transaction, without charging the buyer a service fee. See "Our Pawnbroker.com Satisfaction Program." We are attempting to establish Internet traffic arrangements with other online services like America Online, Yahoo!, Excite and other search engine companies. Yahoo! has accepted our request to be listed on their search engine, pursuant to which we will be listed on Yahoo! Based on our experience, we believe Yahoo! accepts most requests to be listed in their search engine, and we have no formal agreement with Yahoo! We cannot assure you that we will benefit from a listing on Yahoo! or that we will not be delisted from the Yahoo! search engine in the future. We anticipate we will enter into other such arrangements once we have completed beta testing of our web site and launch our web site in the first quarter of 2000. However, we cannot assure you that these arrangements can be established on commercially reasonable terms. Even if these arrangements are established, they may not result in increased usage of our service. In addition, companies that control access to transactions through network access or web browsers could promote our competitors' services or charge us substantial fees for participation. The Pawnbroker.com Solution Pawnbroker.com offers Internet capabilities to traditional physical brick-and-mortar pawnshops. We believe that our system may enhance the distribution of pawnshop merchandise online and may lower the overall transaction costs and risks of conducting business online by charging transaction fees only for successfully completed transactions. Further, we believe that our Pawnbroker.com web site will make purchasing pawnshop merchandise more convenient for consumers than visiting physical stores and that our Pawnbroker.com Satisfaction Program may provide an incentive to buyers to purchase merchandise through our web site. Our long term goal will be to provide pawnshops with an integrated inventory and Internet merchandising system that will seamlessly allow a pawnshop to manage its in-store and online inventory with one system. A Transaction on Pawnbroker.com Each transaction between the pawnshop and the purchaser is planned to be structured as follows: 1. the pawnshop will register to become a participating member pawnshop of Pawnbroker.com; 2. the participating pawnshop will electronically transmit a list of available inventory to Pawnbroker.com, which they desire to post on the Pawnbroker.com web site. The list will include (a) the category in which each item of merchandise will be listed, (b) a brief description of the merchandise, (c) pictures of the merchandise, if desired, (d) the suggested or "ask price" for the merchandise, (e) a minimum bid offer that will be considered, (f) full disclosure of the condition of the item, and (g) any other useful information about the item; -8- 3. we will post the listed merchandise on the Pawnbroker.com web site in the predetermined category and post the information provided by the participating pawnbroker; 4. we intend to establish oversight and quality control procedures to monitor types of merchandise posted and the information provided by the participating pawnshop; 5. we anticipate that visitors to our Pawnbroker.com web site will be able to browse our site by category and view available merchandise posted for sale by participating pawnbrokers; 6. if the visitor makes a purchase decision and chooses to pay the ask price or to make an offer at other than the ask price, the visitor will be required to register the purchase "offer" by providing us with information such as (a) name, (b) shipping address, (c) special shipping instructions, (d) method of payment, including credit card or online electronic check, (e) the item the purchaser desires to purchase and (f) the offer price; 7. we will process offers as follows: (a) offers at the ask price in accordance with Step 10 below; (b) offers above the minimum offer a pawnshop has indicated it would consider will be transmitted to the pawnshop immediately by email; and (c) offers below the minimum offer price will be rejected; 8. if the offer price is less than the ask price, the pawnshop may accept the offer or counter-offer with a different price within 24 hours by transmitting a message to us by email, and we will forward the "counter-offer" to the offeror; 9. we will inform the offeror by email if the final offer is accepted or rejected immediately after we receive notice from the pawnshop, all offers not accepted within 24 hours will automatically be rejected; 10. if an offer or counter offer is accepted, we will send an acceptance notification to the offeror, and we will simultaneously (a) process payment, including shipping costs and the applicable taxes as specified by the pawnshop, (b) establish an escrow for the transaction, and (c) electronically transmit order shipping information to the participating pawnbroker; 11. the pawnshop will be responsible for retrieving the merchandise from inventory, packing it in a shipping container, labeling the package with a Pawnbroker.com label, and shipping the merchandise to the customer; 12. we intend to confirm receipt of the merchandise with the purchaser by email, and the purchaser will have 10 days after delivery to examine the merchandise under our Pawnbroker.com Satisfaction Program; 13. if the purchaser has not notified us or returned the merchandise to the participating pawnshop within 10 days of receipt, we will authorize the release of the escrow funds to the pawnshop; and -9- 14. If the merchandise is returned during the Pawnbroker.com Satisfaction Program period, we will credit the purchaser's credit card for credit card purchases or send a check for cash purchases in the amount of the purchase price, less shipping costs. Participating pawnshops will be required to post merchandise; update their available inventories; accept offers or submit counteroffers in a timely manner; pack, label and ship merchandise to buyers and to notify us when merchandise is returned by buyers under the Pawnbroker.com Satisfaction Program. We are in the process of developing a policies and procedures manual for participating pawnshops that will outline our policies and procedures for posting merchandise, updating the inventory list, accepting offers, making counter-offers, packing, shipping and processing orders, and rectifying credit and payment for merchandise. We also intend to enter into agreements with each of our participating pawnshops, pursuant to which they will agree to follow our policies and procedures as a condition to posting merchandise for sale on Pawnbroker.com and participating in our program. We intend to revise our policies and procedures based on the results of our beta tests and the comments of our customers and beta testers. If participating pawnshops do not follow our policies and procedures or such policies and procedures do not allow us to facilitate transactions in an efficient and effective manner, we may be unable to facilitate a sufficient number of transactions to be commercially viable. Based on our discussions with prospective participating pawnbrokers, a majority of prospective pawnbrokers currently ship items to customers or would be willing to ship merchandise to online customers. In order to facilitate order fulfillment, we are designing our policies to address logistical issues of speed of order fulfillment, convenience, accountability and quality assurance. We are considering options that will allow web-based tracking and other conveniences to consumers. We are pursuing relationships with major carriers, including UPS and FedEx to service our participating pawnshops. In the future, we intend to develop or license other technology that will improve the functionality of our web site and provide Internet solutions that will assist participating pawnshops. Such technology may include inventory management software that will permit participating pawnshops to integrate an in-store inventory management and point of sale system with our Pawnbroker.com web site. We anticipate that such a system will allow the participating pawnshop to automatically update the inventory they offer on the Pawnbroker.com web site with the inventory offered in their physical location. We cannot assure you that we will successfully develop the technology required to complete the initial launch of our Pawnbroker.com web site or that we will successfully attract participating pawnshops to use our services. Our Pawnbroker.com Satisfaction Program Our Pawnbroker.com Satisfaction Program is designed to ensure customer satisfaction with merchandise purchased on our web site. We intend to implement the following policies related to our Pawnbroker.com Satisfaction Program: (i) all orders for merchandise must be paid for at the time the offer is accepted; (ii) prior to shipment we will process the payment and establish an escrow of the purchase price less shipping and handling costs; (iii) the pawnshop will be responsible for shipping the merchandise, no later than three days after the offer is accepted and the escrow is established; -10- (iv) we will confirm the receipt of the merchandise with the purchaser by email, we will credit the charge card of the purchaser if we have not received verification of the shipment from the pawnshop within seven days after the offer is accepted; (v) the purchaser will have 10 days from the date the merchandise is received to examine the merchandise; (vi) if the purchaser is not satisfied with the merchandise, the purchaser must (a) return the merchandise to the pawnbroker and (b) notify us by email of the return no later than 10 days from the date the merchandise is received; (vii) we will notify the pawnbroker of the return; (viii) once we have confirmed that the returned merchandise has been received by the pawnbroker, we will credit the purchaser's credit card or send a check to the purchaser in the amount of the purchase price less shipping and handling costs; (ix) In the event there is a dispute between the purchaser and the pawnbroker: (a) we will hold the purchase price in escrow (b) our customer service department will attempt to resolve the dispute; and (c) in the event the dispute is unresolved by our customer service department, we will continue to hold the funds pending resolution and written notification from the purchaser and the pawnbroker. We intend to monitor the returns ratio for each participating pawnbroker and each customer of Pawnbroker.com. We will establish an acceptable return ratio for pawnbroker participation in our program. In the event the pawnbroker experiences a returned merchandise ratio higher than our acceptable level or we receive an unacceptable number of complaints from our customers, we will not allow that pawnbroker to participate in our program. We also intend to establish an acceptable return ratio for customers and will not accept offers from customers that have a history of returning merchandise. We anticipate establishing our definitive policies for our Pawnbroker.com Satisfaction Program once beta testing is completed and we have received suggestions from participating pawnshops. Our Business Solution Goals Key goals of our business solution include the following: o Act as a trusted transaction host. Under our business plan, retail customers purchasing merchandise at our Pawnbroker.com Web site will enter into an electronic transaction with Pawnbroker.com in which we act as a financial intermediary between the customer and the individual pawnshop that owns the merchandise. By hosting the sale, we will take the customer's payment information, place the proceeds into escrow during the 10-day Pawnbroker.com Satisfaction Program period and remit payment for the merchandise to the selling pawnshop, less costs and a transaction fee. We will effectively reduce transaction risks for the consumer by offering our 10-day Pawnbroker.com Satisfaction Program. o Provide advantages over auction sites to consumers. Our Pawnbroker.com system is designed to provide advantages to our customers. Our automated offer and counter-offer mechanisms and other special features are designed to exert downward pressure on prices, unlike in auctions, where prices are bid up and an item cannot be bought until an auction is over. For the right price, the consumer can buy an item quickly on the Pawnbroker.com site. We have designed several features to distinguish our -11- services from auction sites, including integrated payment and shipping functions, standardized product descriptions, our Pawnbroker.com Satisfaction Program and a wish-list function that allows consumers to send an email to our participating pawnshops to request unlisted items. o Provide free services and novel shopping mechanisms. We plan to provide free services such as email, chat rooms, consumer information, shopping tips, a wish-list function and other services to visitors that we anticipate will attract positive feed back from visitors and may encourage media coverage and increased site traffic. We believe that these services, combined with advanced personalization technology will make our site attractive to the public. We also plan to use special promotions and advertising campaigns to build awareness and interest in our site. o Provide sophisticated business systems to pawnshops at low cost. We believe that our system will lower transaction costs for pawnshops that desire to conduct business over the Internet because we absorb the costs associated with maintaining the computer systems and infrastructure and we update the technology. By absorbing the sunk costs generally associated with launching an Internet web site and developing the technology, we believe we can bring a pawnshop online faster with innovative and advanced technology. In the future, we anticipate that we will make available to participating pawnshops an integrated inventory control software to allow pawnshops to accurately track the store's inventory by using a point of sale system that can be connected to and used with our Pawnbroker.com web site. o Create a master database of transactional data for use by pawnshops. We intend to compile a master database of product sales, offer histories and statistical data related to pricing, inventory turn around and sales by geographic location. This master database will have `blue-book' or pricing information that will allow pawnshops to view the ask price for merchandise, data related to historical selling prices of merchandise sold on Pawnbroker.com, statistical information on the number of days products are offered for sale and sales patterns of various categories of merchandise during the year. This database is designed to assist pawnshops in making purchasing, pricing, inventory management and other business decisions. o Create a global database of lost/stolen items. We intend to offer, at no cost to the public, the ability to list missing items in a database. We intend to make this list available, free of cost, to law enforcement agencies and also offer it to businesses that purchase previously-owned merchandise. o Expand the potential customer base for pawnshops. By joining our system, a participating pawnshop opens for business on the Internet and has access to global marketing opportunities. As a result, a pawnshop's base of potential customers is not limited by geography or operating hours. Our Internet service makes 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. Also, we intend to launch a multi-million dollar marketing campaign to build awareness of our Pawnbroker.com web site that would be difficult for independent pawnshops to undertake with their own resources. A pawnshop may also benefit from an increase in foot-traffic as a result of web consumers who visit pawnshops listed in our online pawnshop directory. o Benefits over listing with auction houses. We intend to charge minimal fees and to offer an item-upload methodology that is tailored to the pawnbroker business. Our upload system is designed to categorize merchandise commonly offered by pawnshops into such types as jewelry, tools and -12- electronics. Pawnshops will be able to keep listed items on our site until sold. Our role as facilitator is designed to eliminate the necessity of an email dialogue between pawnshops and the public. Based on our discussions with potential participating pawnshops, we perceive these to be advantageous over services offered by auction sites. o Membership benefits. We intend to provide a variety of services used by the industry, including access to consumer wish-lists, access to our marketing information database, educational resources, supplier directories, discussion forums and trading areas on the site. Our offer of free web-based email on the Pawnbroker.com domain is designed to assist pawnshops in branding themselves as a member of an online pawnbroking community. Our Pawnbroker.com lost items database is designed to provide pawnshops the ability to check items against items that are reported stolen, which may result in lowering business insurance rates for stores that use our service. Plan of Operation Our plan of operation is based on information provided in discussions with our consultants, discussions with pawnshop owners, our results of operations, our negotiations and discussions with third party vendors, experience of management and the decisions of our management. Set out below is a summary of our plan of operation for each of our projects and for administration and marketing through June 30, 2000. Our plan of operation for the next three fiscal quarters is to (i) complete development of the Pawnbroker.com system, (ii) commence the commercial launch of our Pawnbroker.com web site and operations and (iii) enter into participation agreements with pawnshops in the United States and Canada. The Company intends to accomplish this strategy through the following activities: o Hire Key Consultants and Personnel to Implement Our Business Strategy. We hired Neil McElwee, our Chief Executive Officer, and Vahid Rafizadeh, our Chief Technology Officer, both of whom have e-commerce business experience. Mr. McElwee served as director of business development for InfoSeek before joining us, and Mr. Rafizadeh served as the Chief Technology Officer of KSM, Inc., a software development company, before joining us. See "Directors, Executive Officers, Promoters and Control Persons." Joseph Schlader, our President, and William Galine, our Vice President, have business experience in the pawnbroker industry. Mr. Schlader founded and served as President of Pacific Pawnbrokers, a chain of four pawnshops in Nevada and California, before joining us, and Mr. Galine served as Vice President of Pacific Pawnbroker from 1984 to 1999. See "Directors, Executive Officers, Promoters and Control Persons." We anticipate hiring additional consultants and personnel with Internet e-commerce experience to complement our current management team. Our management team will design, manage and implement the operational and management systems for Pawnbroker.com during the fourth quarter of 1999 and the first two quarters of 2000. o Complete initial prototype of the item listing component of our technology. We intend to develop a working version of the item-upload and listing component of our technology during the fourth quarter of 1999. This component of our technology will permit the tracking on an online database of the uploaded inventory of participating pawnshops. We expect to beta test our technology with 65 pawnshops, including Pacific Pawnbrokers, which operates three pawnshops in Nevada and one in California. See "Certain Relationships and Related Transactions." -13- o Complete Beta Testing of Our Web Site. We have oral commitments from approximately 65 pawnshops to assist us in beta testing our web site and related software. We plan to begin beta testing in December 1999. Under our planned beta test, we will: o Provide internal web site access to the pawnshops participating in our beta test and our board of advisors by issuing passwords to our beta testers. o Assist each participating pawnshop in uploading inventory lists of approximately 500 items to our web site database. o Trial test our operating system software in a closed environment where we will place mock orders for inventoried merchandise from various locations. o Trial test our fulfillment systems by transmitting mock offers to each participating pawnshop. o Trial test our order confirmation systems. o Trial test our escrow and invoice processing systems. o Trial test our Pawnbroker.com Satisfaction Program systems. o Modify and debug our web site and software based on comments from our participating pawnshops and our Board of Advisors. We anticipate the beta test of our web site and system software will require approximately 30 days to complete. We cannot guarantee that we will successfully complete all of the testing and debugging of our web site and our software systems as planned. o Use our Board of Advisors to assist us in developing our policies. We have recently established a Board of Advisors, comprised of members with experience in the pawnbroker industry. We intend to solicit feedback from our Board of Advisors to develop our policies and to assist us in establishing a base of participating pawnshops. Our Board of Advisors is as follows: Ron Atlas, Wheeling, IL LLB, Certified Public Accountant Edward Bean, Boston, MA Board of Directors and Board of Governors, National Pawnbrokers Association Tim Cassidy, Stockton, CA Board of Directors, Collateral Loan and Second Hand Dealers Association of California Board of Directors, National Pawnbrokers Association Harold Dambrot, Brooklyn, NY Executive V.P., Collateral Loanbrokers Association of New York State Board of Directors, National Pawnbrokers Association Erminia Drobkin, Las Vegas, NV V.P., Collateral Loan Association of Nevada Steve Fowler, Tucson, AZ Board of Directors, National Pawnbrokers Association -14- Nick Fulton, Ridgeland, MS Board of Directors, National Pawnbrokers Association Michael Hyman, Santa Rosa, CA Board of Directors, Collateral Loan and Second Hand Dealers Association Board of Directors, National Pawnbrokers Association Michael Isman, New Westminster, Board of Directors, National BC, Canada Pawnbrokers Association Director of BC Pawnbrokers Association Steve Krupnik, Southbend, IN President, Indiana Pawnbrokers Association Tim Lanham, Fort Collins, CO Board of Directors, National Pawnbrokers Association David Newman, San Francisco, CA Board of Directors, Collateral Loan and Second Hand Dealers Association of California Board of Directors, National Pawnbrokers Association Brian Smith, Ridgeland, MS Board of Directors and Board of Governors, National Pawnbrokers Association Sam Shocket, Los Angeles, CA Board of Directors, Collateral Loan and Second Hand Dealers Association of California Mike Stogner, Greensboro, NC Board of Directors and Board of Governors, National Pawnbrokers Association Curtis Sutherland, Austin, TX Board of Directors, Texas Association of Pawnbrokers Board of Directors, National Pawnbrokers Association Brooks Thiele, Scottsdale, AZ Mortgage Lending Consultant Jerry Whitehead, Margate, FL Board of Directors, National Pawnbrokers Association o Unveil a fully-functional retail web site at www.pawnbroker.com by the first quarter of 2000. We have oral commitments from approximately 65 pawnshops to participate in our beta test launch in December 1999. After beta testing our technology, we intend to roll out our site beginning with a soft launch in January 2000 and a full hard launch including between 100 and 200 pawnshops, each featuring approximately 300 to 500 items of merchandise, in March 2000. See "Description of Business - General Overview." We have presented our concept to approximately 3,000 potential participating pawnshops at the National Pawnbroker Association 1999 Convention, the Florida State Pawnbroker Convention, and the Oklahoma State Pawnbroker Convention. Approximately 2,000 pawnshops have expressed interest in participating in our Pawnbroker.com program or receiving additional information about our program and web site. We are in the process of creating a master database of those pawnshops that have expressed an interest in our program. o Complete prototype of the point-of-sale component of our technology. The other primary component of our proprietary system is expected to consist of an inventory management and point of -15- sale system that will function electronically over the Internet in conjunction with in-store inventory management systems. We intend to develop a working version of this component of our technology and to begin testing it on a working web site during the fourth quarter of 2000. We estimate that our current cash requirements are approximately $349,000 a month, principally for salaries, professional services, marketing and office expenses. We anticipate that our cash requirements will increase to approximately $440,000 to $500,000 per month in the first quarter 2000 as a result of professional services associated with the development of our proprietary system and increased salary and related expenses associated with the anticipated testing and pre-launch of the Pawnbroker.com web site. We anticipate that our cash requirements will increase during the first two fiscal quarters of 2000 as we launch our web site and expenditures related to marketing and advertising increase. However, we cannot guarantee that we will generate sufficient revenues from our operations to operate a commercially viable business or to earn a profit. In order to reduce our cash requirements, we intend to initially outsource certain development, marketing, human resources, legal and accounting functions. Similarly, in order to reduce capital expenditures, we intend to enter into leasing agreements for hardware and other equipment requirements. Summary of Operating Budget Set forth below are our estimated operating budgets for operations and research and development for the four fiscal quarters ending June 30, 2000. Description: Quarter Ending Quarter Ending Quarter Ending Quarter Ending September 30, 1999 December 31, 1999 March 31, 2000 June 30, 2000 - ---------------------------------- ------------------- -------------------- -------------------- ------------------- Research and Development $113,663 $116,000 $133,000 $353,000 Equipment/Hardware 46,576 113,400 109,200 132,000 Management salaries/ Consulting 225,075 122,000 154,000 154,500 fees Marketing Costs 134,816 425,000 435,000 435,000 Registrations/Licensing fees 2,119 6,150 6,900 6,900 Office Leases 17,525 21,075 42,525 48,525 Office Administration 257,100 469,800 567,400 666,300 Office/Telephone/Supplies 16,328 25,141 31,141 34,441 Insurance 375 12,375 15,375 15,525 Legal/Audit/Professional Fees 11,400 15,000 15,000 15,000 Travel Expense (Trade Shows, 57,579 88,500 90,000 95,000 Conventions) Miscellaneous/Contingency 30,726 30,726 30,726 30,726 - ---------------------------------- ------------- -------------------- -------------------- ------------------- Total: $913,282 $1,445,167 $1,630,767 $1,986,917
Our operating budget for the period beginning July 1, 1999 through December 31, 1999 is estimated to be approximately $2,358,498, and $3,617,184 for the period beginning January 1, 2000 through June 30, 2000. We cannot guarantee our actual expenditures for these periods will not exceed our estimated operating budget. Actual expenditures will depend on a number of factors, some of which are beyond our control, including, among other things, timing of our software development, beta testing, the availability of financing on acceptable terms, reliability of the assumptions of management in estimating cost and timing, the time expended by consultants, marketing costs associated with recruiting -16- participating pawnshops and professional fees. As of June 30, 1999, we had a working capital of $2,538,743. We will need to raise approximately $5 million in additional capital during the fourth quarter of 1999 to meet our anticipated cash needs for the first two calendar quarters of 2000. If we are unable to raise additional financing on acceptable terms, we may be forced to delay the implementation of certain portions of our plan of operation, which may adversely affect our business and results of operations. Business/Strategic Associates We intend to enter into agreements with existing pawnshops under which these pawnshops will make inventory available to our customers at a price structure established by the pawnshop. By acting as the host of online sales, we believe that we can reduce the cost of conducting business on the Internet for the participating pawnshops and assist them in increasing their overall sales. We anticipate participating pawnshops will assist us in developing our policies and procedures. We have an agreement with Banshee, Inc. to develop our technology, software and systems, and we anticipate we may enter into additional development agreements with Banshee or other development companies to develop our Internet based solutions for the pawnshop industry. See "Development Agreement - Banshee, Inc." We intend to enter into agreements with providers of hardware and equipment for maintenance of our equipment and leasing companies to provide equipment and capacity for our future needs. We have begun negotiations to provide us with off-site servers for our web site. We also may enter into agreements with potential providers of such services and expect to enter agreements for off-site server capacity in early-November 1999, prior to the beta testing of our software. We may enter into strategic relationships with other Internet providers to direct traffic to our Pawnbroker.com web site. We may also participate in cooperative marketing arrangements designed to build our brand name and our web site presence on the Internet. Except for Yahoo!, which has accepted our request to be listed, we have not entered into any arrangements with other Internet providers. We anticipate such agreements will be made prior to our launch in 2000. We intend to rely on third-party service providers of security and credit card processing services to assist us in facilitating transactions on Pawnbroker.com web site. We are currently in the process of negotiating with service providers to provide us such services and anticipate to have agreements with such providers when we launch Pawnbroker.com for beta testing in December 1999. Research & Development Our technology is currently being developed by Banshee, Inc. which is based in Minden, Nevada. Under an agreement between Banshee and Pawnbroker.com (Nevada), Banshee will initially develop the software and the e-commerce architecture for the in-store item listing component, the Pawnbroker.com database and the Pawnbroker.com Web site. At this time, we anticipate continuing our relationship with Banshee to maintain our site and to engage in further research and development efforts, and to enhance functionality for site upgrades, including a point of sale system. During the fourth quarter 1999, we intend to begin staffing our own in-house development team to further develop our technologies and software. We intend to use currently available technology and products and to contract out most -17- technical services required for customization. We also intend to retain rights to the proprietary intellectual property embodied in our technology including, wherever possible, source code, and to maintain a continual right to use the system for our purposes. As of September 30, 1999, we have spent approximately $200,000 for research and development including expenses related to programming, testing and prototyping and technologies. We expect that research and development of our solution will cost between approximately $500,000 to $1,750,000. Maintenance, updates and developing additional components will cost a minimum of $25,000 per month after launch. In addition, we intend to maintain a relationship with a data hosting and Internet server center, which would provide reliability and scalability for our networking needs; that service is expected to cost approximately $20,000 per month upon commencement, and rise to approximately $50,000 per month by the end of 2000. Development Agreement - Banshee, Inc. We entered into a development agreement with Banshee to develop our web site and the technologies related to our web site. Under the Banshee agreement, Banshee agreed to complete the following: o Complete the initial design of our web site including determining the hardware requirements, network requirements, browser design and interface and page layout; o Develop and install web site hardware and systems requirements including site server requirements, communication server requirements and software requirements; o Develop third-party system integration and interface software; o Develop database systems; o Assist us in the alpha and beta testing and debugging of software and hardware systems; and o Assist us in the commercial launch of our Pawnbroker.com web site. We agreed to pay Banshee $100,000 upon signing of the agreement, $100,000 on July 15, 1999 and $45,000 upon the completion and commercial launch of our web site. As of September 30, 1999, we have paid Banshee $200,000. Upon completion of the project, we will own the technologies developed by Banshee under the agreement. Our Technology Our technology is designed to include three principal components: a web inventory system, the web transaction interface, and the Pawnbroker.com database. Web Inventory System: The web inventory system will consist of an item listing and uploading component that allows participating pawnshops to transmit for posting (a) the category in which each item of merchandise will be listed, (b) a brief description of the merchandise, (c) pictures of the merchandise, if desired, (d) the suggested or "ask price" for the merchandise and (e) other item specific -18- information. The web inventory system is proprietary technology developed exclusively for use by Pawnbroker.com. Our software will require that the pawnbroker's system run Windows 95/98. In the future, we may offer an inventory management system that incorporates inventory management capabilities with a point of sale computer, printer, label printer, credit card reader, bar code scanner and cash register. We anticipate that users of the turn-key inventory management system will be connected to the Internet with a persistent or "always on" connection in order to facilitate transactions and offer real-time response to customers. Currently, a modem dial-up to a local ISP through an additional phone line will suffice for item-uploading purposes. Web Transaction Interface: Our web transaction interface is expected to use industry standard credit card clearing and security procedures such as SSL and online transaction processing services. We anticipate that our web site will also include custom components and the ability to randomly browse for interesting merchandise, for an online experience more like shopping in brick-and-mortar stores. Pawnbroker.com Database: We intend to use the services of database administrators who will maintain the underlying structure of the Pawnbroker.com database. Vahid Rafizadeh, our Chief Technical Officer, is in the process of selecting a database administrator to maintain our database. Our Pawnbroker.com database was developed by Banshee based on the specifications of the Pawnbroker.com transaction model and information architecture. Each participating pawnshop will be required to have Internet access and hardware that meets minimum system requirements. See "Participating Pawnbroker Systems Requirements." We intend to provide technical assistance to participating pawnshops, including assistance with hardware system configuration, software installation and technical support by telephone. We anticipate that our technical support staff will assist participating pawnshops in our initial launch pilot program without costs and, thereafter, we intend to provide on site technical support to participating pawnshops for a fee based on our actual costs. Participating Pawnbroker Systems Requirements We anticipate that each pawnshop will be connected to the Internet with a local Internet service provider dial-up connection with a dedicated phone line in order to facilitate transactions and offer real-time response to customers. A persistent connection is highly recommended, but is not a requirement. The minimum systems requirement for participating pawnshops consist of an IBM-compatible PC, with a minimum of 32MB of RAM, a P-166 processor, 500MB of available disk space, a VGA card and a 28.8 kbps modem. We expect most systems in use and any value-priced new system to exceed these requirements. Our software will require that the pawnshop's system run Windows 95/98 and recommend that pawnshops use a digital camera to take advantage of our graphic capabilities. We intend to offer hardware configurations to participating pawnshops in the future that will consist of a computer, laser printer, high speed modem, credit card reader, digital camera and bar code scanner. In the future, we intend to develop software and a hardware system configuration that can replace the software being used by participating pawnshops to permit the posting of the pawnshops' entire inventory on our Pawnbroker.com web site. -19- Intellectual Property and Trademarks We regard the protection of our copyrights, service marks, trademarks, trade dress and trade secrets as critical to our success. We have filed trademark applications with the United States Patent and Trademark Office for "Pawnbroker.com", our Pawnbroker.com logo and "FreeFall." We are in the process of filing trademark applications for "RecoverIt" and "SecureIt." We intend to rely on a combination of patent, copyright, trademark, service mark and trade secret laws and contractual restrictions to protect our proprietary rights in products and services. We intend to enter into confidentiality and invention assignment agreements with our employees and contractors, and nondisclosure agreements with third parties with access to our business information and to limit access to and disclosure of our proprietary information. These contractual arrangements and the other steps taken by us to protect our intellectual property may not prevent misappropriation of our technology or deter independent third-party development of similar technologies. We anticipate that we may receive communications alleging that certain items listed or sold on Pawnbroker.com by our users infringe third-party copyrights, trademarks and tradenames or other intellectual property rights. Upon receipt of a written claim of intellectual property infringement, we intend to remove the offending item from the Pawnbroker.com web site and take actions to prevent future infringing by listing pawnshops. An allegation of infringement of third-party intellectual property rights may result in litigation against us. Any such litigation could be costly, could result in increased costs of doing business through adverse judgment or settlement, could require us to change our business practices in expensive ways, or could otherwise harm our business. Sales & Marketing Strategy Our goal is to be a leading facilitator of transactions between pawnbrokers and purchasers of merchandise from pawnshops. Our marketing strategy is designed to strengthen the Pawnbroker.com brand name, increase customer traffic to our Pawnbroker.com web site, build strong customer loyalty, maximize repeat purchases and develop incremental revenue opportunities. Our marketing strategy and promotional activities will be aimed at both pawnshops that can benefit from our services and the consumer. We intend to employ a variety of methods to promote our brand and attract potential buyers. We believe that our domain name is easy to remember and easy to associate with the products we intend to list and the services we provide. We intend to use our domain name to market our web site and establish the brand name "Pawnbroker.com." We expect our Internet advertising campaign to include banner ads. We intend to engage in a coordinated program of print advertising in specialized and general circulation newspapers and magazines. We will place additional advertisements regionally in those areas we target for expansion. We expect the advertisements in traditional media to result in traffic to our web site. We believe that such advertising will serve to increase awareness of the Pawnbroker.com brand and our URL. We also intend to provide superior customer service in an effort to generate positive word of mouth referrals to our web site. -20- Our marketing efforts directed to existing pawnshops will include participation in industry trade shows and direct selling efforts. We have exhibited in and/or participated in the following industry trade shows and conventions: o National Pawnbroker's Association Convention in June 1999; o Florida State Pawnbroker's Convention in August 1999; o Oklahoma State Pawnbroker's Convention August 1999; and o North Carolina State Pawnbroker's Convention in October 1999. We have presented our web site concept to over 3,000 pawnshops and have oral expressions of interests or requests for additional information from approximate 2,000 of these pawnshops. We anticipate that we will exhibit in the California State Pawnbroker's Convention in November 1999. Based on feedback from potential participating pawnshops, we anticipate that the benefits to pawnshop owners of a ready to use electronic-commerce Internet solution will outweigh the initial cost of installing a compatible computer system and the administrative cost of posting products. We anticipate that we will install all the necessary hardware and software in the Pacific Pawnbrokers stores and certain other test stores to beta test our technology, and that our representatives will work closely with these stores' owners, managers, and employees to bring the stores online and to test our systems. We also intend to implement an after-sale marketing program that we anticipate will include customer promotional and incentive programs to support customer retention and to promote the Pawnbroker.com brand. Other programs targeted at participating pawnshops may include volume discounts, software updates and in-store promotional materials. Employees We currently have 10 employees. In addition to management, we employ marketing, sales, product development and technical personnel. We expect to hire a customer service manager, database administrator, a developer/IT specialist, customer service representatives, technical support representatives and a Producer/HTML code developer. In total, we expect to have a staff of 20 to 30 when we launch of our full-scale operations, scheduled for the first quarter of 2000. Development of Our Business to Date Since June 30, 1999, we have taken the following steps to implement our business plan: o Acquired Pawnbroker.com (Nevada). o Developed the Pawnbroker.com business plan and marketing strategy. o Began development of operating software for our Pawnbroker.com web site. o Secured computer software licenses related to our Pawnbroker.com technology. o Assembled a board of advisors to assist us in developing our policies and procedures. -21- o Obtained oral commitments from 65 pawnshops to assist us in beta testing our software and web site. o Completed a private placement totaling $3,003,000, which we anticipate will provide sufficient capital to develop our plan through the fourth quarter 1999. o Hired Neil McElwee, our Chief Executive Officer, and Vahid Rafizadeh, our Chief Technology Officer, to join our executive and management team. o Negotiated consulting and software development agreement with Banshee, Inc. to develop software, technology and our web site. o Entered into a strategic relationship with Pacific Pawnbrokers of Nevada to assist us in the testing of our technology and implementation of live testing of our Pawnbroker.com web site. o Attended a variety of trade shows and conventions to present our Pawnbroker.com concept to potential participating pawnshops. History of Our Corporation We were incorporated in the State of Delaware on February 13, 1998 as "Digital Sign Corporation" with an authorized share capital of 70,000,000 shares consisting of 50,000,000 shares of common stock, with a par value of $0.00001 per share, and 20,000,000 shares of preferred shares, with a par value of $0.00001 per share. We were initially organized to acquire the issued and outstanding shares of Digital Sign, Inc., a California corporation, and to engage in the business of development and sales of scrolling outdoor digital display signs for commercial businesses. On February 14, 1998, we issued 100,000 shares at par value for all of the issued and outstanding shares of Digital Signs, Inc., which had no assets or liabilities, to Edward F. Meyers III, our then President. We were unable to obtain sufficient financing to implement our business plan, and we were inactive until April 1999. On April 6, 1999, we acquired all of the issued and outstanding shares of common stock of Eriko Internet Inc., a Washington corporation engaged in the business of developing Internet technologies, pursuant to a statutory share exchange under the laws of the state of Washington. See "Our Acquisition of Eriko Internet, Inc." 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. See "Our Acquisition of -22- Pawnbroker (Nevada)." The Nevada corporation was a shell company with no assets, liabilities, revenues or expenses. Our common stock is currently quoted on the National Association of Securities Dealers' over-the-counter bulletin board and trades under the symbol "PBRR". Our corporate organization structure is as follows: Pawnbroker.com, Inc. Organizational Chart -------------------------------------- Pawnbroker.com, Inc. a Delaware corporation -------------------------------------- - ------------------------------------- -------------------------------------- ---------------------------------- Eriko Internet Inc. Pawnbroker.com, Inc. Digital Signs, Inc. a Washington corporation "Pawnbroker (Nevada)" a California corporation a Nevada corporation - ------------------------------------- -------------------------------------- ---------------------------------- www.pawnbroker.com - Inactive Internet Marketing Inactive
We have not been subject to any bankruptcy, receivership or other similar proceeding. Our Acquisition of Eriko Internet, Inc. On April 6, 1999, we acquired all of the issued and outstanding shares of common stock of Eriko Internet Inc., a Washington corporation, 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." As a result of the share exchange, control of the combined companies passed to the former shareholders of Eriko Internet Inc. and Eriko became our wholly-owned subsidiary. However, for accounting purposes, we accounted for the share exchange as a capital transaction accompanied by a recapitalization of Eriko rather than a business combination. See "Financial Information - Management's Discussion and Analysis of Financial Condition and Results of Operations." 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. -23- Our Acquisition of Pawnbroker (Nevada) On June 14, 1999, we acquired all of the issued and outstanding share capital of Pawnbroker (Nevada), our wholly-owned subsidiary, by issuing a total of 6,240,000 shares of our common stock at par value to Joseph Schlader, Cheryl Schlader and William Galine. As a result of the acquisition, we acquired all of the assets of Pawnbroker (Nevada), which consisted of the business concept of offering the merchandise of pawnshops on the Internet, and are currently pursuing a business plan based on Pawnbroker (Nevada)'s business concept. Pawnbroker (Nevada) had no assets or liabilities at the time of the acquisition. Under the terms of the acquisition agreement: (a) We effected a 1-for-4 reverse split of our share capital, whereby our then outstanding capital of 37,499,000 shares of common stock, was consolidated into 9,374,750 shares of common stock. (b) We issued 6,240,000 post-split shares to Joseph Schlader (1,541,200 shares), Cheryl Schlader (1,591,200 shares), and William Galine (3,057,600 shares) for all of the issued and outstanding shares of common stock of Pawnbroker (Nevada). (c) We completed a private placement of 1,300,000 units at $2.31 per unit to Packard Financial Group Inc., for proceeds to us of $3,003,000. Each unit consisted of one share of common stock and one-half of one non-transferable share purchase warrant. Each whole share purchase warrant is exercisable to acquire one additional share of our common stock at a price of $2.31 per share until June 23, 2000, and thereafter at a price of $2.90 per share until June 23, 2001. See "Recent Sales of Unregistered Securities." (d) We filed this Form 10 registration statement with the SEC to register our common stock under the Exchange Act of 1934, as amended. (e) We appointed Joseph Schlader and William Galine as directors and officers of our corporation. (f) We acquired all of the issued and outstanding shares of Pawnbroker (Nevada), and we commenced the development of technology, software and systems to launch our Pawnbroker.com web site. The terms of the share exchange agreement were negotiated at arms' length by parties represented by separate counsel. Prior to the share exchange, none of our officers and directors had any relationship with Pawnbroker (Nevada) or its officers, directors or shareholders. RISK FACTORS We are a development stage company in the process of developing an Internet based business that is designed to allow pawnshops throughout North America the ability to post merchandise for sale on the Internet and allow visitors to our web site to search the inventories of participating pawnshops for merchandise. Our business is subject to a number of risks, as outlined below. An investment in our securities is speculative in nature and involves a high degree of risk. You should read this registration statement carefully and consider the following risk factors. -24- Our ability to meet our business projections through the second quarter of 2000 may depend on the securing of additional operating capital in the amount of $5 million or more in the fourth quarter of 1999 In their independent auditor's report dated November 2, 1999, 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 anticipate we may need to seek additional capital in the amount of $5 million or more in the fourth quarter of 1999 to support our capital requirements through the second quarter of 2000. We cannot assure you that any additional financing would be available or, if available, that it would be available on terms acceptable to us. See "Note Regarding Forward Looking Statements." Furthermore, any issuance of additional securities may result in dilution to the then existing shareholders. If adequate funds are not available, we will lack sufficient capital to pursue our business plan fully, which will have a material adverse effect upon our ability to meet our business projections. We have a limited operating history and a history of losses, which makes our ability to continue as a going concern questionable We have incurred net losses since our inception and anticipate that we will continue to incur losses. During the period beginning from our inception on February 5, 1999 to June 30, 1999, we incurred cumulative net losses of $203,349. We had no revenues prior to June 30, 1999. During this period, we incurred operating expenses of $203,349 and spent $364,354 on property and equipment, including $125,000 to acquire our domain names, $210,518 on equipment and software, and $28,835 on furniture and fixtures. We do not believe that we will generate sufficient revenues to support our operations in fiscal 1999 because of our projected development and marketing costs. Therefore, in the foreseeable future, we believe that such expenses will increase our net losses, and we cannot assure you that we will ever be profitable. As of June 30, 1999, we had approximately $2,862,751 in cash. We believe that we will, on average, spend approximately $349,000 per month through the third quarter of 1999, and approximately $440,000 to $500,000 per month thereafter until we can generate revenues from our operations. We anticipate raising additional capital through sales of our equity and/or debt; however, we cannot assure you that we will be able to obtain adequate financing to support our operations or that our estimates of our expenses will be accurate. Because we have recently begun operations, it is difficult to evaluate our business and our prospects. Our revenue and income potential is unproven and our business model is still emerging. We cannot assure you that we will attract participating pawnbrokers, buyers or advertisers, to use our web site or generate significant revenues in the future. We cannot guarantee we will ever establish a sizeable market share or achieve commercial success. -25- Our success depends on the services of our key officers, Neil McElwee, our Chief Executive Officer, Joseph Schlader, our President and Co-Founder, and William Galine, our Vice President and Co-Founder, and our ability to attract and maintain qualified, experienced personnel Our future success will depend on Neil McElwee, our Chief Executive Officer, Joseph Schlader, our President and Co-Founder, William Galine, our Vice President and Co-Founder, and Vahid Rafizadeh, our Chief Technical Officer. We also rely upon consultants and advisors who are not employees like Banshee, Inc., our software developer. The loss of key personnel could have an adverse effect on our operations. We are in the process of obtaining insurance to cover losses that may result from the death of any of our key personnel, but do not have coverage at this time. Competition for qualified employees is intense, and an inability to attract, retain and motivate additional, highly skilled personnel required for expansion of operations and development of technologies could adversely affect our business, financial condition and results of operations. Each of our officers and directors has been affiliated with us for less than six months, including Mr. McElwee and Mr. Rafizadeh, who joined us in the past two months. Our ability to retain existing personnel and attract new personnel may also be adversely affected by our financial situation. We cannot assure you that we will be able to retain our existing personnel or attract additional, qualified persons when required and on acceptable terms. We may be required to sell additional common stock or parties may exercise options and warrants that cause dilution of your shares The number of shares of our outstanding common stock held by non-affiliates is large relative to the trading volume of the common stock. Any substantial sale of our common stock or even the possibility of such sales occurring may have an adverse effect on the market price of the common stock. As of August 15, 1999 we had outstanding warrants to purchase an aggregate of 650,000 shares of our common stock at $2.31 per share until June 23, 2000 and thereafter at $2.90 per share until June 23, 2001. Under our agreement with IRG Investor Relations Group Ltd., a consultant to Pawnbroker.com, Inc., we granted options, vesting immediately upon grant, to acquire 250,000 shares of our common stock at $6.75 per share and options to acquire an additional 150,000 shares of our common stock at $6.75 per share, vesting to acquire 50,000 shares each time we successfully obtain financing of $5,000,000 or more. We have reserved up to an additional 2,000,000 shares of common stock for issuance upon exercise of options under an incentive plan, which our Board of Directors and a majority of our shareholders approved and adopted on October 28, 1999. We agreed to grant options to acquire up to 690,000 shares of our common stock to the following employees under the plan: o We agreed to grant Joseph Schlader, our President, options to acquire 250,000 shares of our common stock at $6.75 per share, vesting pro rata 25% on each anniversary date, June 14, of his employment over the next four years. -26- o We agreed to grant William Galine, our Vice President, options to acquire 100,000 shares of our common stock at $6.75 per share, vesting pro rata 25% on each anniversary date, June 14, of his employment over the next four years. o We agreed to grant Mr. Rafizadeh, our Chief Technical Officer, options to acquire up to 340,000 shares of our common stock. We are in the process of entering into a definitive employment agreement with Mr. Rafizadeh with regard to the terms of his compensation and options grants. (a) We have agreed to grant options to acquire 170,000 shares exercisable at $6.75 per share, vesting as follows: 100,000 in September 2000, 35,000 in October 2001, and 35,000 in October 2002, provided Mr. Rafizadeh is an employee of our company on such date. (b) We have also agreed to grant Mr. Rafizadeh, in each of his second and third years of employment with our company, options to acquire 85,000 shares, exercisable at $6.75 per share and vesting over three years, provided that our company meets certain milestones and that Mr. Rafizadeh is an employee of our company on such date. We have not determined these milestones. On October 28, 1999, our Board of Directors and a majority of our shareholders approved and adopted an incentive stock option plan. We intend to grant options to Mr. Schlader, Mr. Galine and Mr. Rafizadeh in November 1999. We are in the process of negotiating and finalizing a definitive employment agreement with Neil McElwee, our Chief Executive Officer. We have agreed to grant options to Mr. McElwee exercisable at $6.75 per share to acquire a total of 782,590 shares of our common stock vesting on anniversary dates as follows, provided Mr. McElwee is an employee on such date: 260,864 on September 12, 2000; 260,863 on September 12, 2001; and 260,863 on September 12, 2002. Holders of such warrants and options are likely to exercise them when, in all likelihood, we could obtain additional capital on terms more favorable than those provided by the options and warrants. Further, while our warrants and options are outstanding, our ability to obtain additional financing on favorable terms may be adversely affected. The e-commerce industry is highly competitive, and we cannot assure you that we will be able to compete effectively The market for Internet products, services and marketing is new, rapidly evolving and intensely competitive. Our Pawnbroker.com web site will potentially compete with many providers of web classified advertisers, auction sites, web sites of independent and chain pawnshops, and other e-commerce transaction facilitators as well as traditional distribution channels including brick and mortar stores. See "Competition." We expect competition to intensify in the future. Barriers to entry may not be significant, and current and new competitors may be able to launch new web sites at a relatively low cost. Accordingly, we believe that our success may depend heavily upon achieving significant market acceptance before our competitors and potential competitors introduce competing services. Many of our competitors offer additional features and content that we have elected not to offer. Also, many of these competitors, as well as potential entrants into our market, have longer operating histories, larger customer or user bases, greater brand recognition and significantly greater financial, marketing -27- and other resources than we do. Many of these current and potential competitors can devote substantially greater resources to promotion and Web site and systems development than we can. In addition, as the use of the Internet and other online services increases, larger, well-established and well-financed entities may continue to acquire, invest in or form joint ventures with providers of services similar to ours. Any of these trends may increase the competition we face and could adversely affect our business and operating results. If we are unable to successfully develop a network of participating pawnshops who are willing to adhere to our policies, we are unlikely to become profitable We are currently in the process of developing a network of relationships with participating pawnshops. We estimate that we will need to bring approximately 2,000 pawnshops offering an average of 500 items of merchandise into our system by December 2000 to meet our goals. We cannot guarantee that these relationships will develop, or that they will develop in a satisfactory manner. We intend to rely on participating pawnshops to post merchandise for sale on Pawnbroker.com; update their available inventories; accept offers or submit counteroffers in a timely manner; pack, label and ship merchandise to buyers; and notify us when merchandise is returned by buyers under our Pawnbroker.com Satisfaction Program. Most pawnshops have only limited experience, if any, with merchandising products on the Internet and have not devoted a significant portion of their marketing and sales expenditures to Internet marketing. We initially intend to target a fragmented market of small to medium sized pawnshops, some of which may not have computer based inventory management systems or a computer system. Some pawnshops may be unwilling to invest the capital required to establish such a system and others may be adverse to change and may not participate because of a lack of technological proficiency or Internet familiarity. We cannot predict if the level of acceptance by pawnshops will support a market for our Internet based solution for merchandising products. If we are unable to achieve a significant number of visitors, successfully facilitated transactions and consumers, we may be unable to generate sufficient revenues to earn a profit The success of our Pawnbroker.com web site may be dependent upon achieving significant market acceptance of our web site by consumers. We anticipate that this point will be reached when 10,000 visitors visit our web site regularly and facilitate 1,000 or more transactions per day. Our Pawnbroker.com web site has not been tested and we anticipate that we will have very limited market acceptance until our brand name is established. Internet e-commerce is in the early stage of development, and our business concept of offering an Internet solution for merchandising to participating pawnshops has not been tested. Our competitors and potential competitors may offer more cost-effective merchandising solutions than us, which could damage our business and our ability to successfully launch our web site. Our failure to attract visitors, successfully complete transactions and generate pawnshop participation in our program will seriously harm our business and our ability to earn a profit. We are in the process of developing a policies and procedures manual, which participating pawnshops will be required to agree to prior to posting merchandise. If participating pawnshops do not follow our policies and procedures or such policies and procedures do not allow us to facilitate transactions in an -28- efficient manner, we may be unable to facilitate a sufficient number of transactions to be commercially viable. If we are unable to develop online relationships with a network of affiliates who provide links or other referrals to our web site, our web site may never achieve market acceptance or generate any significant revenues We anticipate that our Pawnbroker.com web site may depend on traffic from a limited number of third party web sites. We anticipate we may obtain traffic from these sources pursuant to short-term agreements. We currently have no agreements in place and there can be no assurance that they will be successful in obtaining any of these agreements on commercially acceptable terms. We may not be able to enter into arrangements with Internet affiliates to direct Internet traffic to our Pawnbroker.com web site. Potential affiliates include those businesses, such as America Online, Yahoo! and Excite, that index Internet resources or publish Internet finding aids, and other compatible businesses with which we might establish mutual links or other forms of mutual referrals, including co-branding. We believe that establishing these relationships is important in order to facilitate broad market acceptance of our service and enhance our sales. Our future ability to attract consumers to our Pawnbroker.com web site service may be dependent upon the growth of our network of affiliates, which has not yet been established. If we are unable to obtain agreements or arrangements for traffic on commercially acceptable terms or to establish a relationship with a network of affiliates, our Pawnbroker.com web site business may never be successfully launched. We cannot guarantee that we will be successful in obtaining any of these agreements on commercially acceptable terms. We have capacity constraints and system development risks that could damage our customer relations or inhibit our possible growth, and we may need to expand our management systems and controls quickly Our success and our ability to provide high quality customer service largely depends on the efficient and uninterrupted operation of our computer and communications systems and the computers and communication systems of third party vendors in order to accommodate any significant numbers or increases in the numbers of consumers and pawnshops using our services. Our success also depends upon us and our vendors' abilities to rapidly expand transaction-processing systems and network infrastructure without any systems interruptions in order to accommodate any significant increases in use of our service. We are still in the process of negotiating with potential providers of such services and have not entered into any definitive agreements related to the server, computer and communications systems required for our Pawnbroker.com web site. We cannot assure you that we will enter into such agreements in a timely manner, on acceptable terms or that the vendor we select will be capable of accommodating any significant numbers or increases in the numbers of consumers and pawnshops using our services. Such failures will have a material adverse affect on our business and results of operations. We have entered into a software development agreement with Banshee, Inc. to develop software, technology and our web site, and are dependent on Banshee, Inc.'s ability to deliver such services. In the future, we intend to rely on Banshee, Inc., and other software developers which we may hire in the future, to assist us in expanding our data base, our transaction-processing systems and network infrastructure as we grow. We may experience periodic systems interruptions and infrastructural -29- damage, which may cause customer dissatisfaction and may adversely affect our results of operations. Limitations of our and our vendors' technology infrastructure may prevent us from maximizing our business opportunities. Changing technology may render our equipment, software and programming obsolete or irrelevant The market for Internet-based products and services is characterized by rapid technological developments, frequent new product introductions and evolving industry standards. The emerging character of these products and services and their rapid evolution will require that we continually improve the performance, features and reliability of our Internet-based products and services, particularly in response to competitive offerings. We cannot guarantee that we will be successful in responding quickly, cost effectively and sufficiently to these developments. In addition, the widespread adoption of new Internet technologies or standards could require substantial expenditures by us to modify or adapt our Internet sites and services and could fundamentally affect the character, viability and frequency of Internet-based advertising, either of which could have a material adverse effect on our business, financial condition and operating results. In addition, new Internet-based products, services or enhancements offered by us may contain design flaws or other defects that could require costly modifications or result in a loss of consumer confidence, either of which could have a material adverse effect on our business, financial condition and operating results. Increased security risks of online commerce may deter future use of our services which may adversely affect our ability to generate revenues Concerns over the security of transactions conducted on the Internet and the privacy of consumers may inhibit the growth of the Internet and online commerce. Our inability to prevent security breaches could significantly harm our business and results of operations. We cannot be certain that advances in computer capabilities, new discoveries in the field of cryptography, or other developments will not result in a compromise or breach of the algorithms used to protect our transaction data. Anyone who is able to circumvent our or our third party vendors' security measures could misappropriate proprietary information, cause interruptions in their operations or damage our brand and reputation. We may be required to incur significant costs to protect against security breaches or to alleviate problems caused by breaches. Any well-publicized compromise of security could deter people from using the Internet to conduct transactions that involve transmitting confidential information or downloading sensitive materials. We depend on third parties for uninterrupted Internet access and may be harmed by the loss of any such service We are in the process of negotiating the terms of an agreement with an Internet service provider located in Reno, Nevada, for uninterrupted Internet access. We will depend upon a third party 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. We have not entered into a definitive agreement for such services. In addition, our customers will 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 -30- 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 no patents or trademarks issued to date on our technology. We submitted applications with the Trademark Office to trademark our Pawnbroker.com logo and the names `Pawnbroker.com' and "FreeFall." We are in the process of filing trademark applications for "RecoverIt" and "SecureIt." We also intend to patent our business model and the proprietary features of our service. Fenwick & West, L.L.P. is assisting us with our intellectual property claims. We cannot assure you that our intellectual property protection applications will be granted or that we will be able to continue to successfully negotiate agreements protecting our intellectual property. In addition, despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or services or to obtain and use information that we regard as proprietary. Third parties may also independently develop similar technology without breach of our proprietary rights. In addition, the laws of some foreign countries do not protect the proprietary rights to the same extent as do the laws of the United States. If we cannot protect our Internet domain name, our ability to conduct our operations may be impeded We anticipate that the Internet domain name, "pawnbroker.com" will be an extremely important part of our business and the business of our subsidiaries. We own both the "pawnbroker.com" and -31- "pawnbrokers.com" domain names. Additionally, we own at this time, the following domain names: "buysellshops.com", "bargainpurchase.com", "fairbargain.com", "fairbargains.com", "collectibleshops.com" and "rarebargains.com". Governmental agencies and their designees generally regulate the acquisition and maintenance of domain names. The regulation of domain names in the United States and in foreign countries may be subject to change in the near future. Governing bodies may establish additional top-level domains, appoint additional domain name registrars or modify the requirements for holding domain names. As a result, we may be unable to acquire or maintain relevant domain names in all countries in which we conduct business. Furthermore, the relationship between regulations governing domain names and laws protecting trademarks and similar proprietary rights is unclear. Therefore, we may be unable to prevent third parties from acquiring domain names that are 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 -32- 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 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 -33- 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. We do not intend to declare dividends, which may lower the market value of our shares We have never declared or paid any cash dividends on our capital stock. We currently intend to retain any future earnings for funding growth and, therefore, do not expect to pay any dividends in the foreseeable future. Broker-dealers may be discouraged from effecting transactions in our shares because they are considered penny stocks and are subject to the penny stock rules Rules 15g-1 through 15g-9 promulgated under the Exchange Act impose sales practice and disclosure requirements on NASD brokers-dealers who make a market in "a penny stock." A penny stock generally includes any non-NASDAQ equity security that has a market price of less than $5.00 per share. Our shares are quoted on the OTCBB and the closing price of our shares on September 30, 1999 was $4.813. Purchases and sales of our shares are generally facilitated by NASD broker-dealers who act as market makers for our shares. The additional sales practice and disclosure requirements imposed upon brokers-dealers may discourage broker-dealers from effecting transactions in our shares, which could severely limit the market liquidity of the Shares and impede the sale of our shares in the secondary market. Under the penny stock regulations, a broker-dealer selling penny stock to anyone other than an established customer or "accredited investor" (generally, an individual with net worth in excess of $1,000,000 or an annual income exceeding $200,000, or $300,000 together with his or her spouse) must make a special suitability determination for the purchaser and must receive the purchaser's written consent to the transaction prior to sale, unless the broker-dealer or the transaction is otherwise exempt. In addition, the penny stock regulations require the broker-dealer to deliver, prior to any transaction involving a penny stock, a disclosure schedule prepared by the Commission relating to the penny stock market, unless the broker-dealer or the transaction is otherwise exempt. A broker-dealer is also required to disclose commissions payable to the broker-dealer and the registered representative and current quotations for the securities. Finally, a broker-dealer is required to send monthly statements disclosing recent price information with respect to the penny stock held in a customer's account and information with respect to the limited market in penny stocks. -34- Item 2. Financial Information. Selected Financial Data On April 6, 1999, we acquired all of the issued and outstanding shares of Eriko Internet Inc. in exchange for 8,500,000 (post-consolidation) shares of our common stock.). As a result of the share exchange, control of the combined companies passed to the former shareholders of Eriko Internet Inc. and Eriko became our wholly-owned subsidiary. However, for accounting purposes, we accounted for the share exchange as a capital transaction accompanied by a recapitalization of Eriko. Recapitalization accounting results in our consolidated financial statements being issued under our name, Pawnbroker.com, Inc., but our consolidated financial statements are considered a continuation of Eriko Internet Inc.'s financial results. As a result, the financial statements and the financial data contained in this registration statement represent (i) the consolidated financial position of us and our subsidiaries as at June 30, 1999; (ii) the results of operations of Eriko for the period from February 5, 1999 (date of incorporation) to June 30, 1999; and (iii) the results of operations and cash flows of Pawnbroker.com, Inc., Pawnbroker.com, Inc. (Nevada) and Digital Signs Inc. from their deemed dates of acquisition during the period. During the period from February 5, 1999, to April 6, 1999 (the date of the share exchange), Digital Sign Corporation had no revenues, expenses or other transactions. Accordingly, there would be no pro forma adjustments required to reflect the share exchange and we have not provided pro forma financial statements with this Registration Statement. The following table sets forth selected financial data regarding our consolidated operating results and financial position. The data has been derived from our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States ("US GAAP"). See "Management's Discussion and Analysis of Financial Condition and Results of Operation." The following selected financial data is qualified in our entirety by, and should be read in conjunction with, the consolidated financial statements and notes thereto included elsewhere in this Registration Statement. Period From Inception on February 5, 1999 to June 30, 1999 ---------------------- $ - ---------------------------------- ---------------------- Operating Revenues -- General & Administrative Expenses 203,349 Net (Loss) from Continuing (203,349) Operations Net Loss Per share (1) (0.02) - ---------------------------------- ---------------------- -35- June 30, 1999 ------------------- $ - ------------------------------------ ------------------- Working Capital 2,538,493 Total Assets 3,209,041 Total Liabilities 326,071 Shareholders' Equity 3,882,970 Long-term Obligations -- Cash Dividends -- - ------------------------------------ ------------------- (1) After giving effect to a 1-for-4 reverse stock split that occurred on June 9, 1999. Management's Discussion and Analysis of Financial Condition and Results of Operation The information contained in this Management's Discussion and Analysis of Financial Condition and Results of Operation contains "forward looking statements." Actual results may materially differ from those projected in the forward looking statements as a result of certain risks and uncertainties set forth in this report. Although management believes that the assumptions made and expectations reflected in the forward looking statements are reasonable, there is no assurance that the underlying assumptions will, in fact, prove to be correct or that actual future results will not be different from the expectations expressed in this Registration Statement. Overview We were incorporated in the State of Delaware on February 13, 1998 under the name "Digital Sign Corporation" with an authorized share capital of 70,000,000 shares consisting of 20,000,000 Preferred shares of a par value of $0.00001 each and 50,000,000 Common shares of a par value of $0.0001 each. On April 6, 1999, we acquired all of the issued and outstanding shares of common stock of Eriko Internet Inc., a Washington corporation engaged in the business of developing Internet technologies, pursuant to a statutory share exchange under the laws of the state of Washington. 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. The financial statements filed with our Registration Statement and our management's discussion and analysis of financial condition and results of operation are for the period from February 5, 1999, the date of inception of Eriko Internet Inc., to June 30, 1999. -36- Results of Operations Period from our inception on February 5, 1999 to June 30, 1999 The period from February 5, 1999 to June 30, 1999 was our first period of material operations. We had no revenues from operations. Our loss during this period of $203,349 was as a result of costs associated with corporate acquisition expenses, developing our business plan, research and development expenditures related to the development of our Pawnbroker.com web site and technologies and general overhead and administrative expenses. These expenses included $33,517 in expenses related to marketing and promotion; $23,631 in travel expenses; $36,089 in salary expenses; $27,000 in consulting and management fees; $18,996 in professional fees; $21,865 in rent expenses and $59,151 in expenses related to general administrative expenses and overhead. We expect expenses related to research and development and administrative expenses to continue to be a material component of our expenses during the start-up phase of our development. We anticipate that professional fees will increase during the start-up phase of our development and as we complete the Exchange Act registration process. We also anticipate that expenses related to marketing and sales will increase substantially during the fourth quarter ending December 31, 1999 and the first half of 2000, as we begin an extensive campaign to market and promote our Pawnbroker.com Web site and develop strategic alliances with participating pawnshops. With the receipt of $3,003,000 by the private placement of private placement of 1,300,000 units at $2.31 per unit, as at June 30, 1999, our working capital increased to $2,538,493. Liquidity and Capital Resources As at June 30, 1999 we have $2,862,751 in cash or term deposits, which we believe will be sufficient to satisfy our cash requirements through our third fiscal quarter ending December 31, 1999. We will need to raise additional financing to fund our operations after December 31, 1999. We intend to raise such financing through private equity or debt offerings during the fourth calendar quarter of 1999; however, we cannot assure you that we will acquire this financing on acceptable terms, if at all. Since our inception on February 5, 1999, we raised net cash from financing of $3,293,326 during the fiscal quarter ended June 30, 1999, including $3,003,000 in capital through private placements of our common stock and $290,326 in advances to us. Since our inception on February 5, 1999 to June 30, 1999, we used net cash of $511,075. We received no cash from our operations during these periods, and our use of cash during such periods were primarily as a result of expenses related to research and development of our web site, expenses related to marketing and promotion, salary expenses, professional fees and expenses related to general administrative expenses and overhead. During the period from our inception on February 5, 1999 to June 30, 1999, we applied cash of $239,353 towards the purchase of capital assets and $125,000 towards the purchase of the domain names "pawnbroker.com" and "pawnbrokers.com". Our cash position at June 30, 1999 was $2,862,751. Our operating budget for the period beginning July 1, 1999 through December 31, 1999 is estimated to be approximately $2,358,449, and $3,617,684 for the period beginning January 1, 2000 through June 30, 2000. We cannot assure you that our actual expenditures for these periods will not exceed our estimated -37- operating budget. Actual expenditures will depend on a number of factors, some of which are beyond our control, including, among other things: (i) timing of the development and testing of our software and web site, (ii) our ability to attract visitors to our web site, (iii) our ability to attract pawnshops to use our services, (iv) our ability to launch our web site in a timely manner, (v) our ability to successfully complete transactions, (vi) the availability of financing on acceptable terms, (vii) reliability of the assumptions of management in estimating cost and timing, (viii) the time spent by consultants and professionals developing our web site, (ix) competition; and (x) other factors that may be beyond our control. We estimate that we will be required to raise approximately $5 million in additional capital during the fourth calendar quarter 1999 to meet our anticipated cash needs during the first two calendar quarters of 2000. In their independent auditor's report dated November 2, 1999, 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 estimate that our minimum cash requirement for the period from July 1, 1999 through June 30, 2000 is approximately $4 million, primarily for expenses related to general over head and administration, launching and web site, web site maintenance, web site and data base development, server maintenance and costs associated with facilitating transactions between our customers and participating pawnshops. As such, we will need to raise at least $1,250,000 during the first half of 2000 to remove the going concern qualification raised by our auditors. We intend to raise additional financing through private placements of our equity or debt in the fourth quarter of 1999. We engaged Investor Relations Group to assist us in develop a strategy to raise additional financing and to provide investor relations services. Our relation with IRG has been as follows: o IRG assisted in defining our investor relations goals and objectives; o IRG Capital assisted us in preparing a corporate fact sheet for distribution to targeted investment professionals and certain accredited investors; o IRG arranged periodic meetings with interested retail brokers, fund managers and investment advisers; o IRG provided potential investors with certain company approved due diligence/investor relations kits; and o IRG agreed to assist us in developing relationships with merchant and investment banks, private placement professionals and other intermediaries which could provide us with additional private placement financing; -38- We have presented our business concept and marketing strategy to more than twenty-one potential investors. We anticipate that we will complete a private placement of approximately $5 million in the fourth calendar quarter of 1999. We anticipate we will require approximately $12 million to meet our cash requirements for the period from July 1, 2000 through December 31, 2000, and approximately $21 million to meet our cash requirements for the calendar year 2001. Our cash requirements for these periods will primarily be to satisfy expenses related to marketing our web site and web site and data base development costs. Our marketing costs are expected to constitute approximately 65% - 75% of our total budget for these periods. We intend to meet our cash requirements through revenues generated from our operations and private or public placements of our equity or debt. We have not had any discussions related to raising additional financing beyond our planned private placement in the fourth calendar quarter 1999, and have no definitive plan to raise such financing. 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 estimate that our minimum cash requirement to remove the going concern qualification raised by our auditor is approximately $7.5 million for the 18 month period from July 1, 2000 through December 31, 2001, primarily for expenses related to general overhead and administration, web site maintenance, web site and data base development, server maintenance and costs associated with facilitating transactions between our customers and participating pawnshops. We cannot assure you that we will successfully obtain additional financing on acceptable terms, if at all. If we are unable to secure additional financing, we intend to concentrate our resources on developing our web site and intend to reduce the amount of resources we have budgeted for marketing our web site. Such a reduction may have a material adverse affect on our business and results of operations. -39- Recent Financing Our business activities and operations have been funded to date through issuance of shares of our common stock in the following transactions: Summary of Transactions - -------------------------------------------------------------------------------------------------------------- Number of Shares Total Price of Shares ($) -------------------- -------------------- Founders shares issued at par value (post-consolidated) 968,750(1) 388(1) Issued as consideration for the acquisition of shares in Digital Sign, Inc. (post-consolidated). 25,000(1) 10(1) 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 Internet, Inc. (post-consolidated). 8,500,000(1)(2) 3,007(1) Issued as consideration for the acquisition of all the issued and outstanding shares of Pawnbroker.com. 6,240,000 Nil(3) Cancellation/surrender of 250,000 shares (250,000)(4) (250) Issued for cash at $2.31 per share(4) 1,300,000 3,003,000 - -------------------------------------------------------------------- -------------------- -------------------- TOTAL 16,914,750 3,032,087
(1) On a post split basis. On June 10, 1999, we amended our Articles of Incorporation to effect a 1-for-4 reverse stock split of our issued and outstanding share capital. (2) We issued 34,000,000 pre-split shares in connection with a statutory share exchange between us and Eriko Internet, Inc. (3) The shares were issued in exchange for all of the issued and outstanding shares of Pawnbroker (Nevada) to Joseph Schlader, our President, Cheryl Schlader, and William Galine, our Vice President. The shares were issued based on the book value of Pawnbroker (Nevada), which was nil. (4) On May 19, 1999, Cameron Woodbridge, a founding shareholder of Eriko Internet, Inc., contributed 1,000,000 pre-consolidation shares to the corporation for $250. The shares were initially issued as founder's shares for nominal consideration by Eriko Internet, Inc., subject to Mr. Woodbridge serving as a director and officer of Eriko. Mr. Woodbridge contributed the shares because he was no longer actively involved in Eriko at the time of our share exchange with Eriko. (5) We issued 1,300,000 Units consisting of one Common share and one-half of one common Share Purchase Warrant. Each whole Share Purchase Warrant is exercisable to acquire one additional common share at $2.31 per share until June 23, 2000 and at $2.90 per share until June 22, 2001. There can be no assurance that such warrants will be exercised. -40- Year 2000 Compliance The Year 2000 issue arises with the change in century and the potential inability of information systems to correctly "rollover" dates to the new century. To save on computer storage space, many systems were programmed with a two-digit century (i.e. December 31, 1999 would appear as 12/31/99) assuming that all years would be part of the 20th century. On January 1, 2000, systems with this programming will default to 01/01/1900 instead of 01/01/2000, and calculations using or reporting the date will not be correct and errors will arise (the "Year 2000 Issue"). To prevent this from occurring, information systems need to be updated to ensure they recognize dates during and after the Year 2000. The potential exists that we and each of our subsidiaries are exposed to a risk that certain aspects of their businesses will fail or suffer impairment as a result of internally operated or externally contracted hardware or software systems and services not being able to correctly "rollover" dates to the new century. The risk stems from our reliance on certain hardware, software and services to carry out the daily operation of our proposed respective businesses. The exposure may result from, amongst other things, the use of computers, general software and servers for office purposes and data storage; connections to and use of the services of Internet Service Providers and telephone companies for office purposes and customer and investor relations; the software underlying the operation of the Web site web site and the online business operations and the Registrant's servers. We have only been operating and developing our business during the last four months and the office hardware, administrative general software, software development tools, servers and services of Internet Service Providers and telephone companies have been acquired during this period. As a result, and in oral consultation with the suppliers of this hardware, software and services, we believe the related systems that we intend, directly or indirectly, to use in our respective businesses are Year 2000 compliant. Our due diligence also included an evaluation of supplier provided technology and the implementation of new policies to require our suppliers to confirm in writing that they have disclosed and will correct Year 2000 compliance issues. We have not received written confirmation from all of our vendors. Although we are relying primarily on systems developed with current technology and on systems designed to be Year 2000 compliant, we may have to replace, upgrade or reprogram certain systems to ensure that all interfacing technology will be Year 2000 compliant when running jointly. In the event that we incur expenses associated with resolving Year 2000 compliance issues, we intend to expense the operating costs as they are incurred and capitalize the capital costs as they are incurred. However, our purchases of hardware and general and specific purpose software have been relatively recent, and the more expensive of the hardware and general and specific software items that we have purchased are covered under warranties that will extend over the rollover period to January 1, 2000. As a result, we do not expect to incur any major operating or capital expenditures that would have a material impact on our financial condition or results of operations. While we believe that our hardware and general and specific purpose software applications will be Year 2000 compliant, there can be no assurance until the Year 2000 occurs that all systems will function adequately. In the worst case scenario, a Year 2000 problem would cause Internet systems to fail and we would not be able to commercially launch our web site. Such a failure would cause us to delay our commercial launch until the Internet is operational, and would have a material adverse affect on our business. -41- We do not currently anticipate any disruption in our operations as the result of the Year 2000 issue. We do not have any information concerning the Year 2000 compliance status of our suppliers and customers that would affect our operations. Any failure of our material systems, our vendors' material systems or the Internet to be Year 2000 compliant may have a material adverse effect on our business and results of operations. In order to protect against the possibility of any material disruption in our operations as the result of the Year 2000 issue we have taken the following precautions: - - developed, initiated and maintained procedures that ensure that the information stored on the office computer hard drives are backed up on a regular basis and stored safely; - - copies of the source code for the special purpose software are maintained in secure offsite locations by the developers of the software; - - installed a backup server in Minden, Nevada at the headquarters of Banshee, Inc.; and - - implemented a policy of acquiring name brand hardware and retained experienced consultants upon whose warranties we believe that we can rely. We do not believe the Year 2000 issue will have any material affect on our business or that we will have any material expenditures related to problems arising out of the Year 2000 issue. Quantitative and Qualitative Disclosures About Market Risks We intend to transact our business in United States Dollars, and we anticipate that we will have no material risks resulting from sales commitments, inventory or similar items. Item 3. Properties. We currently lease our principal business office through our subsidiary, at 85 Keystone, Suite F, Reno, Nevada pursuant to a lease that expires on April 14, 2002. The monthly payments under the lease are approximately $1300. Neither we nor any of our subsidiaries presently own or lease any other property or real estate. Item 4. Security Ownership of Certain Beneficial Owners and Management. The following table sets forth certain information concerning the number of shares of our common stock owned beneficially as of August 15, 1999 by: (i) each person (including any group) known to us to own more than five percent (5%) of any class of our voting securities, (ii) each of our directors, and (iii) officers and directors as a group. Unless otherwise indicated, the shareholders listed possess sole voting and investment power with respect to the shares shown. -42- Title of Class Name and Address of Amount and Nature of Percentage of Class(1) Beneficial Owner Beneficial Ownership - ------------------------------- ---------------------------- ---------------------------- ---------------------------- Common Stock Dotcom Fund, S.A. 1,600,000 9.46% Box 571, Providenciales, Turks & Caicos Islands - ------------------------------- ---------------------------- ---------------------------- ---------------------------- Common Stock Packard Financial Group 1,950,000(2) 9.01%(2) #11 Old Parham Rd, St. Charles Nevis, West Indies - ------------------------------- ---------------------------- ---------------------------- ---------------------------- Common Stock Doug McLeod(3) 1,243,750 7.35% 688-6 Ishikawa, Kanagawa, Japan - ------------------------------- ---------------------------- ---------------------------- ---------------------------- Common Stock Neil McElwee nil nil 85 Keystone, Suite F Reno, NV 89503 - ------------------------------- ---------------------------- ---------------------------- ---------------------------- Common Stock William Galine 3,057,600 18.08% 85 Keystone, Suite F Reno, NV 89503 - ------------------------------- ---------------------------- ---------------------------- ---------------------------- Common Stock Cheryl Schlader(4) 3,182,400(4) 18.81%(4) 85 Keystone, Suite F Reno, NV 89503 - ------------------------------- ---------------------------- ---------------------------- ---------------------------- Common Stock Joseph Schlader(5) 3,182,400 (5) 18.81%(5) 85 Keystone, Suite F Reno, NV 89503 - ------------------------------- ---------------------------- ---------------------------- ---------------------------- Common Stock Officers and Directors as 6,240,000 36.89% a Group - ------------------------------- ---------------------------- ---------------------------- ----------------------------
(1) Based on an aggregate of 16,914,750 shares outstanding as of September 30, 1999. (2) Includes Warrants immediately exercisable to acquire 650,000 shares at $2.31 per share until June 23, 2000 and at $2.90 per share until June 22, 2001. (3) Doug McLeod served as an officer and director of the Registrant from March 1999 to September 30, 1999. (4) Joseph Schlader and Cheryl Schlader are husband and wife. As such, each would be deemed to be the beneficial owner the other's shares. Includes 1,591,200 shares of common stock owned by Cheryl Schlader. (5) 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 Joseph Schlader. Security Ownership of Management We are not aware of any arrangement that might result in a change in control in the future. -43- Item 5. Directors, Executive Officers, Promoters and Control Persons. Directors and Officers All of our directors are elected annually by the shareholders and hold office until the next annual general meeting of shareholders or until their successors are duly elected and qualified, unless they sooner resign or cease to be directors in accordance with our Articles and Bylaws. Our next regular meeting will be held in September 2000. Our executive officers are appointed by and serve at the pleasure of our Board of Directors. As at November 3, 1999, the following persons were our directors, executive officers, promoters and control persons: Principal occupation and if not at present an Director elected director, occupation during the Name and present office held since preceding five years - ---------------------------- ----- -------------------- Neil McElwee, Chief Executive Officer September Internet Marketing Consultant - Principal of 1999 McElwee & Associates, a consulting firm, since 1996 to present; director of business development for Infoseek Corporation from 1998 to 1999; Vice President of Marketing for Caligari Corporation from 1995 to 1996. Joseph Schlader, Promoter, Director and June 1999 Pawnbroker Executive - Director, Pacific President(1) Pawnbrokers from 1981 to present. William Galine, Promoter, Director and June 1999 Pawnbroker Executive - Secretary and Treasurer, Vice President(1) Director, Pacific Pawnbrokers from 1984 to present. Vahid Rafizadeh, Chief Technical Officer October 1999 Software Architect - Chief Technical Officer and Vice President, KSM, Inc. from 1998 to 1999; Chief Software Architect, Lockheed Martin from 1996 to 1998; software architect, North American Drager from 1994 to 1996. Doug McLeod, Promoter(2) March 1999 Internet Consultant - Director AbleAuctions.com, Inc. from May 1999 to present; Blue Zone Entertainment Inc. from May 1999 to present; President of Eriko Internet, Inc. from April 1999 to October 1999; Secretary of the Company from April 1999 to October 1999; independent consultant from 1995 to present. Cheryl Schlader, Promoter June 1999 Pawnbroker Executive - President and Director, Pacific Pawnbrokers from 1992 to present.
- ---------------------- (1) Member of the Registrant's audit committee. (2) Doug McLeod served as an officer and director of our company from March 1999 to September 30, 1999. -44- The following is a brief biographical information on each of the officers and directors of listed: Neil McElwee, Chief Executive Officer - Age 53 Mr. McElwee joined as our Chief Executive Officer in September 1999. He has been a senior marketing and business development executive for over 15 years. Mr. McElwee has been a principal of McElwee & Associates, a consulting firm, since 1996 to present. Mr. McElwee also served as a director of business development for Infoseek Corporation, an Internet commerce company, from 1998 to 1999. Mr. McElwee was Vice President of Marketing for Caligari Corporation, a marketer of 3D graphics and animation software, from 1995 to 1996. Mr. McElwee will be employed full time with Pawnbroker.com Joseph Schlader, Director, President - Age 47 Joseph Schlader, who played a central role in the formation of the Pawnbroker.com (Nevada), was appointed our President and a director in June 1999. Schlader has over eighteen years experience in the pawnbrokering industry. In 1981, Schlader founded Pacific Pawnbrokers in Sparks, Nevada. Since that time, Pacific Pawnbrokers has expanded its operations to four stores located in the Reno and Lake Tahoe areas. Schlader is also a graduate of the Gemological Institute of America and a member in the National Pawnbrokers' Association. William Galine, Director, Vice-President - Age 48 William Galine has joined the Company as Vice-President and director in June 1999. Galine has worked in the pawn industry for the 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. Doug McLeod, Promoter - Age 39 Doug McLeod served as our Treasurer and a director from March 1999 to October 1999. Mr. McLeod has spent the last five years as an Internet consultant and is the President, Founder and Promoter of Eriko Internet Inc. Mr. McLeod attended York University in Toronto, Ontario from 1992 to 1995 under the University's Bachelor of Arts program. Mr. McLeod also serves as a director of Ableauctions.com Inc., an Internet provider of auctions services for retail auction houses, since May 1999 and a director of Blue Zone International, Inc., a provider of high speed Internet services for businesses since June 1999. -45- Cheryl Schlader, Promoter - Age 50 Cheryl Schlader is the spouse of Joseph Schlader and a promoter of our company. Ms. Schlader has over 10 years experience in the pawnbrokering industry and has served as President and Director of Pacific Pawnbrokers since June 1999, and an operations manager of Pacific Pawnbrokers from 1992 to 1999. Other Information Members of the Board of Directors are elected by our shareholders. Our Board of Directors meets periodically to review significant developments affecting our company and to act on matters requiring Board approval. Although the Board of Directors delegates many matters to others, it reserves certain powers and functions to itself. This committee is directed to review the scope, cost and results of the independent audit of our books and records, the results of the annual audit with management and the adequacy of our accounting, financial and operating controls; to recommend annually to the Board of Directors the selection of the independent auditors; to consider proposals made by the Registrant's independent auditors for consulting work; and to report to the Board of Directors, when so requested, on any accounting or financial matters. None of our directors or executive officers is a party to any arrangement or understanding with any other person pursuant to which said he was elected as a director or officer. None of our directors or executive officers has any family relationship with any other officer or director. None of our officers or directors have been involved in the past five years in any of the following: (1) bankruptcy proceedings; (2) subject to criminal proceedings or convicted of a criminal act; (3) subject to any order, judgment or decree entered by any court limiting in any way his or her involvement in any type of business, securities or banking activities; or (4) subject to any order for violation of federal or state securities laws or commodities laws. Item 6. Executive Compensation. The following table contains information concerning the annual compensation and long-term compensation to named executive officers during the period from our inception on February 5, 1999 to March 31, 1999, and the compensation payable for the during the fiscal year ended March 31, 2000. -46- SUMMARY COMPENSATION TABLE Annual Compensation Long-Term Compensation --------------------------------- --------------------------- ----------- Awards Pay-outs ------------ -------------- ----------- Other Securities LTIP Annual Restricted Under-lying Payouts All Other Compen- Stock Options/SARs Compen- Name and Salary Bonus sation Award(s) (#) sation Principal Position Year Ended ($) ($) ($) ($) ($) - ---------------------- ----------- ---------- ----------- ---------- ------------ -------------- ----------- ------------ Neil McElwee, 3/31/00 200,000 nil nil nil nil nil nil Chief Executive 3/31/99 nil nil nil nil nil nil nil Officer Joseph Schlader, 3/31/00 90,000 nil nil nil nil nil nil President 3/31/99 nil nil nil nil nil nil nil William Galine 3/31/00 75,000 nil nil nil nil nil nil Vice President 3/31/99 nil nil nil nil nil nil nil Vahid Rafizadeh, 3/31/00 140,000 nil nil nil nil nil nil Chief Technical 3/31/99 nil nil nil nil nil nil nil Officer
Our Directors do not receive any stated salary for their services as directors or members of committees of the Board of Directors, but by resolution of the Board, a fixed fee and expenses of attendance may be allowed for attendance at each meeting. Directors may also serve our company in other capacities as an officer, agent or otherwise, and may receive compensation for their services in such other capacity. Stock Options We have not granted stock options/SARs to named executive officers. We have reserved 2,000,000 shares for issuance pursuant to a stock option plan. See "Description of 1999 Stock Option Plan." We anticipate we will grant options to certain of our directors, executive officers and consultants in November 1999. We intend to register our stock option plan under the Securities Act after we adopt a plan. We intend to grant stock options to the following officers, directors and consultants after we approve and adopt a stock option plan: -47- - ----------------------------- -------------------- ------------------------------ --------------------- Grantee Number of Options Exercise Price Expiry - ----------------------------- -------------------- ------------------------------ --------------------- Neil McElwee 782,590(2) $6.75 3 years - ----------------------------- -------------------- ------------------------------ --------------------- Joseph Schlader 250,000(1) $6.75 4 years - ----------------------------- -------------------- ------------------------------ --------------------- William Galine 125,000(1) $6.75 4 years - ----------------------------- -------------------- ------------------------------ --------------------- Vahid Rafizadeh 170,000(2)(3) $6.75 3 years - ----------------------------- -------------------- ------------------------------ --------------------- Total 1,327,540 - ----------------------------- -------------------- ------------------------------ ---------------------
(1) We reserved for issuance and agreed to grant stock options to Joseph Schlader and William Galine pursuant to a stock option plan. As of November 3, 1999, we have not granted such options. (2) We are in the process of negotiating the terms of definitive employment agreements with Neil McElwee, our Chief Executive Officer, and Vahid Rafizadeh, our Chief Technology Officer, pursuant to which we anticipate we will issue options exercisable to acquire shares of our common stock at $6.75 per share under our stock option plan. The terms of these grants have not been finalized as of November 3, 1999. (3) We have also agreed to grant Mr. Rafizadeh, in each of the second and third years of his employment with our company, options to acquire 85,000 shares at $6.75 per share in the event that our company meets certain milestones and Mr. Rafizadeh is an employee on such date; these milestones have not been determined. We had no stock options/SARs held by named executive officers. As such, no share purchase options were exercised during the period from our inception to February 5, 1999 to June 30, 1999. Employment and Consulting Agreements The following are employment, consulting or other service contracts or arrangements between us or our subsidiaries and our directors, executive officers and consultants. Neil McElwee Employment Agreement We in the process of finalizing a definitive employment agreement with Neil McElwee, our Chief Executive Officer. The term of Mr. McElwee's employment will be for three years beginning September 12, 1999 and ending September 12, 2002, provided that we may terminate Mr. McElwee's employment upon (i) three months written notice during the first year of his employment, (ii) six months notice during the second or third year of employment or (iii) at an time during his employment for cause, including conviction for criminal acts, committing acts gross negligence or breach of the employment agreement. Mr. McElwee agreed to serve full time as our Chief Executive Officer. We agreed to compensate Mr. McElwee as follows: (i) We will pay Mr. McElwee a salary of $200,000 per year during the first year of his employment commencing on September 12, 1999 through September 12, 2000. Mr. McElwee's salary will increase 12% per year during the term of his employment after the first year, subject to fulfilling the goals outlined by our board of directors at the beginning of each year. -48- (ii) We agreed to grant Mr. McElwee options to acquire up to 782,590 shares of our common stock at $6.75 per share under our stock option plan, vesting as follows: (a) options exercisable to acquire 260,864 shares on September 12, 2000; (b) options exercisable to acquire 260,863 shares on September 12, 2001; and (c) options exercisable to acquire 260,863 shares on September 12, 2002, provided that Mr. McElwee is as employee on such date. (iii) We agreed to pay Mr. McElwee a bonus of $25,000 in the event we close a financing of at least $3 million prior to January 15, 2000. As of November 3, 1999, our legal counsel has been in the process of finalizing Mr. McElwee's employment agreement, and we anticipate that a definitive employment agreement will be finalized in early-November 1999. Joseph Schlader Employment Agreement We in the process of finalizing a definitive employment agreement with Joseph Schlader, our President. The term of Mr. Schlader's employment will be for three years beginning June 14, 1999 and ending June 14, 2002, provided that we may terminate Mr. Schlader's employment upon (i) three months written notice during the first year of his employment, (ii) six months notice during the second or third year of employment or (iii) at an time during his employment for cause, including conviction for criminal acts, committing acts gross negligence or breach of the employment agreement. Mr. Schlader agreed to serve full time as our President and a member of our board of directors. We agreed to compensate Mr. Schlader as follows: (i) We agreed to pay Mr. Schlader a salary of $90,000 per year during the first year of his employment commencing on June 14, 1999 through June 14, 2000. Mr. Schlader's salary will increase at the discretion of our board of directors. (ii) We also agreed to grant Mr. Schlader options to acquire up to 250,000 shares of our common stock at $6.75 per share under our stock option plan vesting pro rata 25% on each anniversary date, June 14, of his employment over the next four years. As of November 3, 1999, our legal counsel has been in the process of finalizing Mr. Schlader's employment agreement, and we anticipate that a definitive employment agreement will be finalized in early-November 1999. William Galine Employment Agreement We in the process of finalizing a definitive employment agreement with William Galine, our Vice President. The term of Mr. Galine's employment will be for three years beginning June 14, 1999 and ending June 14, 2002, provided that we may terminate Mr. Galine's employment upon (i) three months written notice during the first year of his employment, (ii) six months notice during the second or third year of employment or (iii) at an time during his employment for cause, including conviction for criminal acts, committing acts gross negligence or breach of the agreement. Mr. Galine agreed to serve -49- full time as our Vice President and a member of our board of directors. We agreed to compensate Mr. Galine as follows: (i) We agreed to pay Mr. Galine a salary of $75,000 per year during the first year of his employment commencing on June 14, 1999 through June 14, 2000. Mr. Galine's salary will increase at the discretion of our board of directors. (iii) We also agreed to grant Mr. Galine options to acquire up to 125,000 shares of our common stock at $6.75 per share under our stock option plan vesting pro rata 25% on each anniversary date, June 14, of his employment over the next four years. As of November 3, 1999, our legal counsel has been in the process of finalizing Mr. Galine's employment agreement, and we anticipate that a definitive employment agreement will be finalized in early-November 1999. Vahid Rafizadeh Employment Agreement We in the process of finalizing a definitive employment agreement with Vahid Rafizadeh, our Chief Technology Officer. The term of Mr. Rafizadeh's employment will be for three years beginning October 5, 1999 and ending September 16, 2002, provided that we may terminate Mr. Rafizadeh's employment upon (i) three months written notice during the first year of his employment, (ii) six months notice during the second or third year of employment or (iii) at an time during his employment for cause, including conviction for criminal acts, committing acts gross negligence or breach of the agreement. Mr. Rafizadeh agreed to serve full time as our Chief Technology Officer. We agreed to compensate Mr. Rafizadeh as follows: (i) We agreed to pay Mr. Rafizadeh a salary of $140,000 per year during the first year of his employment commencing on September 16, 1999. Mr. Rafizadeh's salary will increase at the discretion of our board of directors. (ii) We agreed to grant Mr. Rafizadeh options to acquire up to 170,000 shares of our common stock at $6.75 per share under our stock option plan, vesting as follows: 100,000 in September 2000, 35,000 in September 2001, and 35,000 in September 2002, provided that Mr. Rafizadeh is an employee on such date. (iii) We also agreed to grant Mr. Rafizadeh, in each of his second and third years of employment with our company, options to acquire 85,000 shares, exercisable at $6.75 per share and vesting over three years, if our company meets certain milestones in that year and Mr. Rafizadeh is an employee on such date. We have not determined these milestones. As of November 3, 1999, our legal counsel has been in the process of finalizing Mr. Rafizadeh's employment agreement, and we anticipate that a definitive employment agreement will be finalized in early-November 1999. -50- Description of 1999 Stock Option Plan On October 28, 1999, our board of directors and a majority of our shareholders approved and adopted a stock option plan and authorized the issuance of up to 2,000,000 shares of our common stock as incentive stock options to our current and future key employees and consultants. The following is a summary of the principal features of the plan. Under our stock option plan, we reserved a total of 2,000,000 shares of common stock for issuance under the plan, which may be incentive stock options within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended, or nonqualified stock options. If any outstanding option expires or is terminated for any reason, the shares of common stock allocable to the unexercised portion of that option may again be subject to an option to the same optionee or to a different person eligible under the plan. The option grant program is administered by the Board of Directors or a committee of two or more members of the Board. Plan administrators have sole authority to prescribe the form, content and status of options to be granted, select the eligible recipients, determine the timing of option grants, determine the number of shares subject to each grant, the exercise price, vesting schedule, and term for which any option will remain outstanding, provided, however, that the exercise price for any option granted may not be less than the fair market value per share of the common stock at the date of grant. The Board of Directors has the authority to determine the terms and restrictions on all restricted option awards granted under the plan, and in general, to construe and interpret any provision of the plan. The exercise price for outstanding option grants under the plan may be paid in cash or in shares of common stock valued at fair market value on the exercise date, having shares withheld from the amount of shares of common stock to be received by the optionee, by delivery of an irrevocable subscription agreement obligating the optionee to take and pay for the shares of common stock to be purchased within one year of the date of such exercise, through a same-day cashless exercise program or a reduction in the amount of any liability on our behalf to the optionee, or by such other consideration and method of payment for the issuance of shares to the extent permitted by applicable laws. Under the plan, no stock option can be granted for a period longer than ten years or for a period longer than five years for incentive stock options granted to optionees possessing more than 10% of the total combined voting power of all of our classes of stock. Unless extended by the Plan administrators until a date not later than the expiration date of the option, the right to exercise an option terminates 90 days after the termination of an optionee's employment, contractual or director relationship with Pawnbroker.com, Inc. If the optionee dies or is disabled, the option will remain exercisable for a period of one year after the termination of employment or relationship with us. Other Consulting Agreements We entered into a consulting agreement with IRG Investor Relations Group Ltd., a consultant to Pawnbroker.com, Inc., dated June 25, 1999. Under the terms of the agreement, IRG agreed to provide us certain investor relations consulting services. We agreed to pay IRG as consideration for such services $100,000 (paid) upon execution of the agreement and a monthly fee in the amount of $20,000 for the term of the agreement. We also agreed to grant options exercisable to acquire up to 400,000 shares of our common stock for no additional consideration, of which options to acquire 250,000 shares -51- will vest immediately upon grant and 50,000 shares will vest each time we successfully obtain financing of $5,000,000 or more. The options we agreed to grant to IRG will expire on June 25, 2000. We also agreed to use reasonable efforts to file a registration statement to register the shares issuable under the options pursuant to the Securities Act of 1933, as amended. As of September 30, 1999, we have not granted such options to IRG. IRG agreed to provide the following consulting and investor relations services: o IRG assisted us in defining our investor relations goals and objectives; o IRG Capital assisted us in preparing a corporate fact sheet for distribution to targeted investment professionals and certain accredited investors; o IRG arranged periodic meetings with interested retail brokers, fund managers and investment advisers; o IRG assisted us in preparing and disseminating press release materials to the financial community and media; o IRG assisted us in communicating with NASD market makers by informing them of recent company developments; o IRG provided potential investors with certain company approved due diligence/investor relations kits; o IRG provided us with recommendations to improve disclosure on our Web site related to investors relations; o IRG agreed to assist us in developing relationships with merchant and investment banks, private placement professionals and other intermediaries which could provide us with additional private placement financing; and o IRG assisted us in developing relationships with potential strategic e-commerce affiliates. Item 7. Certain Relationships and Related Transactions. Joseph Schlader, a director and our President, and William Galine, a director and our Vice President, are directors of Pacific Pawnbrokers. Mr. Galine is also an officer of Pacific Pawnbrokers. Pacific Pawnbrokers has agreed to 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. -52- 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. Except for relationships and transactions that we have disclosed above and in other sections of this registration statement such as (a) the ownership of our securities and (b) the compensation described herein, to our knowledge, none of our directors, executive officers, holders of ten percent of our outstanding shares of common stock, or any associate or affiliate of such person, have had a material interest, direct or indirect, since our inception or in any proposed transaction which may materially affect us. Item 8. Legal Proceedings. To the best of our knowledge, we are not subject to any active or pending legal proceedings or claims against us or any of our properties. However, from time to time, we may become subject to claims and litigation generally associated with any business venture. Item 9. Market Price of and Dividends on Registrant's Common Equity and Related Stockholder Matters. On September 17, 1998 our common stock was approved for trading on the National Securities Dealer's Association - over the counter bulletin board under the symbol "DGSG". There was no material market for our common shares prior to March 31, 1999. Our trading symbol was changed to "PBRR" effective June 14, 1999. The following table sets forth, for the periods indicated, the range of the high and low bid quotations as reported by NASD. The bid quotations set forth below reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not reflect actual transactions: -53- OTCBB - ---------------------- -------------------------- ------------------------- -------------------------- 1999 High Low Volume - ---------------------- -------------------------- ------------------------- -------------------------- 2nd Quarter 7.50 6.75 266,000 3rd Quarter 8.00 4.625 1,148,745 - ---------------------- -------------------------- ------------------------- --------------------------
On September 30, 1999, the last reported sale price of our common stock reported by the NASD was $4.813. As of September 30, 1999, there were 13 holders of record of our common stock. We have not declared or paid any cash dividends on our common stock since our inception, and our Board of Directors currently intends to retain all earnings for use in the business for the foreseeable future. Any future payment of dividends will depend upon our results of operations, financial condition, cash requirements and other factors deemed relevant by our Board of Directors. Item 10. Recent Sales of Unregistered Securities. Pursuant to a resolution of the Board of Directors dated February 14, 1998, we initially issued 968,750 (post-split)1 shares of common stock to certain officers, directors and other related persons at par value. The issuance of Original Shares was exempt from registration under the provisions of Section 4(2) of the Securities Act of 1933, as amended. The issuance of the shares did not involve a public offering. Pursuant to a resolution of the Board of Directors dated February 14, 1998, we issued 25,000 (post-split)1 shares of common stock to Edward F. Meyers III, President of Digital Sign Corporation, to acquire all of the issued and outstanding shares of Digital Signs, Inc., a California corporation. The issuance of the shares was exempt from registration under the provisions of Section 4(2) of the Securities Act of 1933, as amended. The issuance of the shares did not involve a public offering. Pursuant to a resolution of the Board of Directors dated February 14, 1998, we issued 106,125 (post-split)1 shares of our common stock for $0.20 per share to raise $20,895, and subsequent to March 31, 1998, we issued an additional 24,875 (post- split) 1 shares of common stock for $0.20 per share to raise $4,975. These offerings were fully subscribed and the shares were issued on March 31, 1998 to the 86 private investors. The offering was not underwritten. This sale was exempt from registration in reliance upon Rule 504 under Regulation D promulgated under the Securities Act. The aggregate offering price did not exceed $1,000,000, and the offering was otherwise in compliance with Rules 501 and 502 promulgated under the Securities Act. On April 6, 1999, we acquired all of the issued and outstanding shares of common stock of Eriko Internet Inc., a Washington corporation engaged in the business of developing Internet technologies, pursuant to a statutory share exchange under the laws of the state of Washington. Pursuant to an Agreement and Plan of Share Exchange, we issued four (4) shares of our common stock for each one - ------------------- 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. -54- 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. -55- Item 11. Descriptions of Registrant's Securities to be Registered. Our authorized capital consists of 70,000,000 shares consisting of 20,000,000 Preferred shares of a par value of $0.00001 each and 50,000,000 common shares of a par value of $0.0001 each. At August 15, 1999, there were 16,914,750 shares of common stock issued and outstanding and an additional 650,000 shares of common stock have been allotted and reserved for issuance pursuant to outstanding private placement options to purchase shares and warrants. We also agreed to grant options to acquire up to 400,000 shares of our common stock to IRG. We have reserved 2,000,000 shares of our common stock for issuance under our incentive stock option plan. See "Description of 1999 Stock Option Plan." All shares of common stock are of the same class and have the same rights, preferences and limitations. Holders of shares of common stock are entitled to receive dividends in cash, property or shares when and if dividends are declared by our Board of Directors out of funds legally available therefor. There are no limitations on the payment of dividends. A quorum for a general meeting of shareholders is one shareholder entitled to attend and vote at the meeting who may be represented by proxy and other proper authority, holding at least a majority of the outstanding shares of common stock. Holders of shares of common stock are entitled to one vote per share of common stock. Upon any liquidation, dissolution or winding up of our business, if any, after payment or provision for payment of all of our debts, obligations or liabilities shall be distributed to the holders of shares of common stock. There are no pre-emptive rights, subscription rights, conversion rights and redemption provisions relating to the shares of common stock and none of the shares of common stock carry any liability for further calls. The rights of holders of shares of common stock may not be modified other than by vote of majority of the shares of common stock voting on such modification. Because a quorum for a general meeting of shareholders can exist with one shareholder (proxy-holder) personally present, the rights of holders of shares of common stock may be modified by less than a majority of the issued shares of common stock. Item 12. Indemnification of Directors and Officers Our Articles of Incorporation and Bylaws require us to indemnify to the fullest extent permitted by Delaware law, each person that we have the power to indemnify. Delaware law permits a corporation, under specified circumstances, to indemnify its directors, officers, employees or agents against expenses (including attorney's fees), judgments, fines and amounts paid in settlements actually and reasonably incurred by them in connection with any action, suit or proceeding brought by third parties by reason of the fact that they were or are directors, officers, employees or agents of the corporation, if such directors, officers, employees or agents acted in good faith and in a manner they reasonably believed to be in or not opposed to the best interests of the corporation and, with respect to any criminal action or proceeding, had no reason to believe their conduct was unlawful. In a derivative action, that is, one by or in the right of the corporation, indemnification may be made only for expenses actually and reasonably incurred by directors, officers, employees or agents in connection with the defense or settlement of an action or suit, and only with respect to a matter as to which they shall have acted in good faith and in a manner they reasonably believed to be in or not opposed to the best interests of the corporation, except that no indemnification shall be made if such person shall have been adjudged liable to the corporation, unless and only to the extent that the court in which the action or suit was brought shall determine upon application that the defendant directors, officers, employees or agents are fairly and reasonably entitled to indemnity for such expenses despite such adjudication of liability. -56- 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. Item 13. Financial Statements and Supplementary Data. Not Applicable. Item 14. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. Not applicable. Item 15. Financial Statements and Exhibits. The following financial statements and related schedules are included in this Item: (a) Financial Statements Audited Financial Statements for the period beginning from inception (February 5, 1999) to June 30, 1999 Auditors' Reports Consolidated Balance Sheets as at June 30, 1999. Consolidated Statements of Operations for the fiscal period beginning from inception (February 5, 1999) to June 30, 1999. Consolidated Statements of Cash Flows for the fiscal period beginning from inception (February 5, 1999) to June 30, 1999. Notes to Consolidated Financial Statements. (b) Exhibits Exhibit Number Description - ------ ----------- 2.1 Agreement of Reorganization by and between Digital Sign Corporation, Edward F. Meyers III and Digital Signs, Inc. dated February 14, 1998. 2.2 Agreement and Plan of Share Exchange by and between Digital Sign Corporation and Eriko Internet, Inc. dated April 4, 1999. -57- Exhibit Number Description - ------ ----------- 2.3 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 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 Certificate of Incorporation of Digital Sign Corporation filed February 13, 1998. 3.2 Certificate of Amendment of Digital Sign Corporation filed June 10, 1999. 3.3 Bylaws of Digital Sign Corporation. 10.1 Form of Private Placement Subscription Agreement dated February 1998. 10.2 Contribution Agreement by and between Digital Sign Corporation and Cameron Woodbridge dated May 19, 1999. 10.3 Subscription Agreement by and between Pawnbroker.com, Inc. and Packard Financial Group Inc. dated June 14, 1999. 10.4 Form of Share Purchase Warrant issued to Packard Financial Group Inc. on June 14, 1999 10.5 85 Keystone Lease Agreement by and between Pawnbroker.com, Inc. and The Kowalski Family Trust dated April 1, 1999. 10.6 Design and Development Agreement by and between Pawnbroker.com, Inc. and Banshee, Inc. dated April 26, 1999 10.7 Consulting Agreement by and between Pawnbroker.com, Inc. and IRG Investor Relations dated June 25, 1999 10.8 Stock Option Plan 21.1 Subsidiaries of the Registrant 27.1 Financial Data Schedule -58- PAWNBROKER.COM INC. (formerly Digital Sign Corporation) (A Development Stage Company) CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1999 A Partnership of Incorporated Professionals DAVIDSON & COMPANY=========Chartered Accountants================================ INDEPENDENT AUDITORS' REPORT To the Directors and Stockholders of Pawnbroker.com, Inc. (formerly Digital Sign Corporation) (A Development Stage Company) We have audited the accompanying consolidated balance sheet of Pawnbroker.com, Inc. (formerly Digital Sign Corporation) (A Development Stage Company) as at June 30, 1999 and the related consolidated statement of operations, changes in stockholders' equity and cash flows for the period from February 5, 1999 to June 30, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards in the United States of America. Those standards require that we plan and perform an audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. The accompanying financial statements have been prepared assuming that Pawnbroker.com, Inc. (formerly Digital Sign Corporation) will continue as a going concern. The Company is in the development stage and does not have the necessary working capital for its planned activity which raises substantial doubt about its ability to continue as a going concern. Management's plans in regards to these matters are discussed in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Pawnbroker.com, Inc. (formerly Digital Sign Corporation) (A Development Stage Company) as at June 30, 1999 and the results of its operations and its cash flows for the period from February 5, 1999 to June 30, 1999 in conformity with generally accepted accounting principles in the United States of America. /s/ Davidson & Company Vancouver, Canada Chartered Accountants November 2, 1999 A Member of Accounting Group International ========================================== Suite 1270, Stock Exchange Tower, 609 Granville Street, P.O. Box 10372, Pacific Centre, Vancouver, B.C., Canada V7Y 1G6 Telephone (604) 687-0947 Fax (604) 687-6172 PAWNBROKER.COM INC. (formerly Digital Sign Corporation) (A Development Stage Company) CONSOLIDATED BALANCE SHEET AS AT JUNE 30, 1999 ================================================================================ ASSETS Current Cash $ 2,862,751 Employee advances 500 Prepaid expenses 1,313 --------------- 2,864,564 Capital assets (Note 4) 222,949 Domain name (Note 5) 121,528 --------------- $ 3,209,041 ========================================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable and accrued liabilities $ 35,745 Advances - Pacific Pawn Broker (Note 7) 15,326 Advances - A Canadian corporation (Note 7) 275,000 --------------- 326,071 Stockholders' equity Capital stock (Note 8) Authorized 20,000,000 preferred stock with a par value of $0.00001 50,000,000 common stock with a par value of $0.00001 Issued and outstanding June 30, 1999 - 16,914,750 common shares 170 Additional paid-in capital 3,086,149 Deficit accumulated during the development stage (203,349) --------------- 2,882,970 $ 3,209,041 ==========================================================================================================
On behalf of the Board: Director - ---------------------------------------- The accompanying notes are an integral part of these consolidated financial statements. PAWNBROKER.COM INC. (formerly Digital Sign Corporation) (A Development Stage Company) CONSOLIDATED STATEMENT OF OPERATIONS PERIOD FROM FEBRUARY 5, 1999 TO JUNE 30, 1999 ================================================================================ OPERATING EXPENSES Contract services $ 8,719 Consulting 6,000 Depreciation 19,877 General and administrative 10,764 Management fees 21,000 Marketing and related expenses 9,009 Professional fees 18,996 Promotion 24,508 Rent 21,865 Salary and wages 36,089 Shareholder information and transfer agent fees 735 Taxes 2,156 Travel and related 23,631 -------------- Loss for the period $ (203,349) ================================================================================================= Basic and diluted loss per common share (Note 3) $ (0.02) ================================================================================================= Weighted average shares outstanding 11,873,212 =================================================================================================
The accompanying notes are an integral part of these consolidated financial statements. PAWNBROKER.COM INC. (formerly Digital Sign Corporation) (A Development Stage Company) CONSOLIDATED STATEMENT OF CASH FLOWS PERIOD FROM FEBRUARY 5, 1999 TO JUNE 30, 1999 ================================================================================ CASH PROVIDED BY (APPLIED TO): CASH FLOWS FROM OPERATING ACTIVITIES Loss for the period $ (203,349) Item not affecting cash: Depreciation 19,877 Net change in non-cash working capital items: Increase in employee advances (500) Increase in prepaid expenses (1,313) Increase in accounts payable and accrued liabilities 30,557 -------------- Net cash provided by operating activities (154,728) -------------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase of capital assets (239,354) Purchase of domain name (125,000) Acquisition of cash on purchase of subsidiary 8,007 -------------- Net cash applied to investing activities (356,347) -------------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of common stock 3,003,000 Advances from Pacific Pawn Broker and a Canadian corporation 290,326 Net cash provided by financing activities 3,293,326 -------------- Change in cash position for the period 2,782,251 Cash position, beginning of period 80,500 Cash position, end of period $ 2,862,751 ====================================================================================================
Supplemental disclosure with respect to cash flows (Note 9) The accompanying notes are an integral part of these consolidated financial statements. PAWNBROKER.COM INC. (formerly Digital Sign Corporation) (A Development Stage Company) CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY ================================================================================ Deficit Accumulated Common Stock Additional During Total -------------- ------------- Paid-in Development Stockholders' Shares Amount Capital Stage Equity - ------------------------------------------------------------------------------------------------------------------------------ Balance, February 5, 1999 - $ - $ - $ - $ - Common stock issued for cash 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) Loss for the period - - - (203,349) (203,349) ------------- ----------- ------------ ----------- ----------- Balance, June 30, 1999 16,914,750 $ 170 $ 3,086,149 $(203,349) $ 2,882,970 ===============================================================================================================================
The accompanying notes are an integral part of these consolidated financial statements. PAWNBROKER.COM INC. (formerly Digital Sign Corporation) (A Development Stage Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1999 ================================================================================ 1. ORGANIZATION OF THE COMPANY Digital Sign Corporation ("the Company), a Delaware corporation, was incorporated on February 13, 1998. On February 14, 1998, the Company issued 100,000 (25,000 post-consolidation) common shares at par value for all of the issued and outstanding shares of Digital Signs, Inc. On April 6, 1999, the Company acquired all of the issued and outstanding shares of Eriko Internet Inc. in exchange for 34,000,000 (8,500,000 post-consolidation) common shares of the Company. On June 10, 1999, the Company consolidated its issued and outstanding shares of common stock through a one for four reverse stock split, from 38,499,000 issued and outstanding to 9,624,750 issued and outstanding. Effective June 14, 1999, the Company acquired all of the issued and outstanding shares of Pawnbroker.com Inc. (a Nevada corporation), in exchange for 6,240,000 common shares of the Company. On June 10, 1999, the Company changed its name to Pawnbroker.com Inc. 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 presented represent the consolidated financial position of the above Companies as at June 30, 1999 and the results of operations of Eriko for the period from February 5, 1999 (incorporation) to June 30, 1999 and the results of operations and cash flows of Pawnbroker.com, Inc., Pawnbroker.com, Inc. (Nevada) and Digital Signs Inc. from their deemed dates of acquisition during the period. The number of shares outstanding at June 30, 1999 as presented are those of Pawnbroker.com, Inc. The Company is in the development stage, and is currently developing an internet based electronic-commerce web site to provide retail customers with the ability to search for and acquire, via the internet, merchandise in inventories of pawnshops throughout North America. 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 detain additional working capital through equity financings. --------------------------------------------------------------------------- June 30, 1999 --------------------------------------------------------------------------- Deficit accumulated during the development stage $ (203,349) Working capital 2,538,493 =========================================================================== 3. SIGNIFICANT ACCOUNTING POLICIES Principles of consolidation The consolidated financial statements include Eriko Internet Inc., Pawnbroker.com Inc. (formerly Digital Sign Corporation) and its wholly-owned subsidiaries, Digital Signs, Inc., and Pawnbroker.com Inc. (a Nevada corporation). All significant inter-company balances and transactions have been eliminated in consolidation. PAWNBROKER.COM INC. (formerly Digital Sign Corporation) (A Development Stage Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1999 ================================================================================ 3. SIGNIFICANT ACCOUNTING POLICIES (cont'd.....) Revenue recognition The Company will recognize revenue from transaction fees charged to pawn shops when completion of the sale of the related item has occurred and the Company has received its portion of the sales proceeds released from escrow. Use of estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the period. Actual results could differ from these estimates. Cash and cash equivalents The Company considers all investments with a maturity of three months or less to be cash equivalents. Loss per share Earnings per share are provided in accordance with Statement of Financial Accounting Standards No. 128, "Earnings Per Share". Due to the Company's simple capital structure, with only common stock outstanding, only basic loss per share must be presented. Basic loss per share is computed by dividing losses available to common stockholders by the weighted average number of common shares outstanding during the period. Income taxes Income taxes are provided in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes". A deferred tax asset or liability is recorded for all temporary differences between financial and tax reporting and net operating loss carryforwards. Deferred tax expenses (benefit) results from the net change during the year of deferred tax assets and liabilities. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. Accounting for derivative instruments and hedging activities In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging Activities" which establishes accounting and reporting standards for derivative instruments and for hedging activities. SFAS 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. The Company does not anticipate that the adoption of the statement will have a significant impact on its financial statements. Reporting on costs of start-up activities In April 1998, the American Institute of Certified Public Accountant's issued Statement of Position 98-5 ("SOP 98-5"), "Reporting on the Costs of Start-Up Activities" which provides guidance on the financial reporting of start-up costs and organization costs. It requires costs of start-up activities and organization costs to be expensed as incurred. SOP 98-5 is effective for fiscal years beginning after December 15, 1998 with initial adoption reported as the cumulative effect of a change in accounting principle. The Company has adopted this statement during the period. PAWNBROKER.COM INC. (formerly Digital Sign Corporation) (A Development Stage Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1999 ================================================================================ 3. SIGNIFICANT ACCOUNTING POLICIES (cont'd.....) Stock-based compensation Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," encourages, but does not require, companies to record compensation cost for stock-based employee compensation plans at fair value. The Company has chosen to account for stock-based compensation using Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." Accordingly compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Company's stock at the date of the grant over the amount an employee is required to pay for the stock. Comprehensive income 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 June 30, 1999. Software development The Company has adopted Statement of Position 98-1 ("SOP 98-1"), "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use", as its accounting policy for internally developed computer software costs. Under SOP 98-1, computer software costs incurred in the preliminary development stage are expensed as incurred. Computer software costs incurred during the application development stage are capitalized and amortized over the software's estimated useful life. Capital assets Capital assets will be recorded at cost less accumulated depreciation. The cost of capital assets is depreciated over the estimated useful lives of the related assets. Depreciation is computed on the Modified Accelerated Cost Recovery System (MACRS) method for both financial reporting and income tax purposes. Domain names The cost of domain name rights will be amortized over 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. 4. CAPITAL ASSETS Accumulated Net Cost Depreciation Book Value -------------------------------------------------------------------------------------------------- Furniture and fixtures $ 28,835 $ 938 $ 27,897 Equipment and software 210,518 15,466 195,052 -------- --------- ---------- $239,353 $ 16,404 $ 222,949 ==================================================================================================
PAWNBROKER.COM INC. (formerly Digital Sign Corporation) (A Development Stage Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1999 ================================================================================ 5. DOMAIN NAME June 30, 1999 ---------------------------------------------------------------------------- Domain name $ 125,000 Accumulated amortization (3,472) -------------- $ 121,528 ============================================================================ 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 are 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 impossible to estimate the actual market value of the 8,500,000 common shares. Therefore, the cost of the acquisition, $3,007, has been determined by the fair value of 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 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. ADVANCES The advances are non-interest bearing and contain no terms of repayment. PAWNBROKER.COM INC. (formerly Digital Sign Corporation) (A Development Stage Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1999 8. CAPITAL STOCK 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. 9. SUPPLEMENTAL DISCLOSURE WITH RESPECT TO CASH FLOWS June 30, 1999 --------------------------------------------------------------------------- Cash paid for income taxes $ - Cash paid for interest - =========================================================================== Non-cash investing and financing transactions during the three month period ended June 30, 1999 were as follows: a) The Company issued 8,500,000 shares of common stock at a deemed value of $3,007 to acquire 100% of the outstanding of shares of Eriko Internet Inc. b) The Company issued 6,240,000 shares of common stock at a deemed value of $62 to acquire 100% of the outstanding shares of Pawnbroker.com-Nevada. c) The Company received 250,000 shares of common stock for cancellation at a deemed value of $250, of which amount is included in accounts payable at June 30, 1999. 10. COMMITMENTS a) On June 25, 1999, the Company entered into a one-year consulting agreement commencing on July 1, 1999, whereby the Company is obligated to pay $20,000 per month. The first month's fee was due and payable upon execution of the agreement. The Company further agreed to pay the consultant $100,000 upon execution of the agreement. Both payments were paid subsequent to June 30, 1999. In addition, the consultant will be granted 400,000 options to purchase common shares of the Company, exercisable at the market price, post reverse stock split on the first day of trading on the newly consolidated shares, for a period of one year from the date of execution of the agreement. Of these options, 250,000 will vest immediately upon board approval, the remaining 150,000 options will vest in equal amounts of 50,000 for each successful financing of $5,000,000. b) The Company has formed a stock option plan under which it may grant stock options to acquire up to a total of 2,000,000 shares of the Company's common stock, at a price to be determined by the plan administrator. To date, no option have been granted under the plan. 11. SHARE PURCHASE WARRANTS During the period from February 5, 1999 to June 30, 1999, the Company issued 1,300,000 units of a private placement consisting of one common share and one-half of a share purchase warrant for $2.31 per unit for total proceeds of $3,003,000. One full share purchase warrant entitles the holder to acquire one additional common share at a price of $2.31 per share until June 23, 2000 and at a price of $2.90 per share until June 23, 2001. As of June 30, 1999, there were 650,000 share purchase warrants outstanding. 12. RELATED PARTY TRANSACTIONS During the period from February 5, 1999 to June 30, 1999, the Company paid the following: a) Advanced $15,326 to a company with directors in common. b) Management fees of $21,000 to directors of the Company. c) Salaries of $14,052 to officers of the Company. SIGNATURES In accordance with Section 12 of the Securities and Exchange Act of 1934, the registrant caused this Registration Statement to be signed on our behalf by the undersigned, thereunto duly authorized. Date: November 3, 1999 /s/ Joseph Schlader --------------------------------------- Joseph Schlader, President Exhibit Number Description - ------ ----------- 2.1 Agreement of Reorganization by and between Digital Sign Corporation, Edward F. Meyers III and Digital Signs, Inc. dated February 14, 1998. 2.2 Agreement and Plan of Share Exchange by and between Digital Sign Corporation and Eriko Internet, Inc. dated April 4, 1999. 2.3 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 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 Certificate of Incorporation of Digital Sign Corporation filed February 13, 1998. 3.2 Certificate of Amendment of Digital Sign Corporation filed June 10, 1999. 3.3 Bylaws of Digital Sign Corporation. 10.1 Form of Private Placement Subscription Agreement dated February 1998. 10.2 Contribution Agreement by and between Digital Sign Corporation and Cameron Woodbridge dated May 19, 1999. 10.3 Subscription Agreement by and between Pawnbroker.com, Inc. and Packard Financial Group Inc. dated June 14, 1999. 10.4 Form of Share Purchase Warrant issued to Packard Financial Group Inc. on June 14, 1999 10.5 85 Keystone Lease Agreement by and between Pawnbroker.com, Inc. and The Kowalski Family Trust dated April 1, 1999. Exhibit Number Description - ------ ----------- 10.6 Design and Development Agreement by and between Pawnbroker.com, Inc. and Banshee, Inc. dated April 26, 1999 10.7 Consulting Agreement by and between Pawnbroker.com, Inc. and IRG Investor Relations dated June 25, 1999 10.8 Stock Option Plan 21.1 Subsidiaries of the Registrant 27.1 Financial Data Schedule EX-2.1 2 AGREEMENT OF REORGANIZATION EXHIBIT 2.1 AGREEMENT OF REORGANIZATION By and Between DIGITAL SIGN CORPORATION A Delaware Corporation, and Edward F. Myers III As SHAREHOLDERS and DIGITAL SIGNS, INC. A California Corporation AGREEMENT OF REORGANIZATION THIS AGREEMENT is made effective February 14, 1998, at San Diego, California, by and between DIGITAL SIGN CORPORATION, a Delaware Corporation (hereinafter referred to as "DIGITAL SIGN CORPORATION"), Edward F. Myers III, hereinafter referred to as "SHAREHOLDERS"), and DIGITAL SIGNS, INC. a California Corporation (hereinafter referred to as the "CORPORATION"). WHEREAS, the SHAREHOLDERS have represented that they own all of the outstanding stock of the CORPORATION, and WHEREAS, DIGITAL SIGN CORPORATION desires to acquire from the SHAREHOLDERS and the SHAREHOLDERS desire to exchange stock with Digital Signs, Inc., which are 100% of the outstanding stock of the CORPORATION ("the shares"), and WHEREAS, the CORPORATION desires that this transaction be consummated. NOW, THEREFORE, in consideration of the mutual covenants, promises, conditions, agreements, representations and warranties contained in this Agreement, setting aside all previous agreements both oral and written the parties agree as follows: 1. PURCHASE AND SALE OF SHARES 1.1. The parties hereto adopt this Agreement as a Type B tax-free plan of reorganization under Section 368(a)(1)(B) of the Internal Revenue Code. 1.2. Subject to the terms and conditions set forth in this Agreement, on the closing, SHAREHOLDERS will transfer and convey to DIGITAL SIGN CORPORATION, 10,000 shares of common stock in the CORPORATION which represents 100% of the issued and outstanding shares of stock in the CORPORATION. 1.3. As consideration for the transfer of the shares by SHAREHOLDERS, DIGITAL SIGN CORPORATION shall deliver at the closing, certificates representing 100,000 shares of DIGITAL SIGN CORPORATION'S common stock. 1.4. The 100,000 shares of DIGITAL SIGN CORPORATION' common stock shall be issued in the amount following each SHAREHOLDER'S name in Schedule "A". 2. REPRESENTATIONS AND WARRANTIES OF THE PARTIES 2.1. The SHAREHOLDERS represent and warrant that the SHAREHOLDERS are owners, beneficially and of record, of all the shares free and clear of liens, encumbrances, security agreements, equities, options, claims charges, and restrictions, other than any restriction set forth by the California Commissioner of Corporations. SHAREHOLDERS have full power to transfer the shares to DIGITAL SIGN CORPORATION without obtaining the consent or approval of any other person, governmental authority or the Corporation. 2.2. The SHAREHOLDERS and the CORPORATION to the best of their knowledge, represent and warrant as follows: a. CORPORATION is a corporation duly organized validly existing, and in good standing under the laws of California and has all necessary corporate powers to own its properties and to operate its business as now owned and operated by it. b. The authorized capital stock of the CORPORATION consists of 1,000,000 shares of common stock, having a par value of $0.0001, of which 10,000 shares (the shares) are issued and outstanding. All the shares are validly issued, fully paid, and non-assessable, and such shares have been so issued in full compliance with all federal and state securities laws. There are no outstanding subscriptions, options, rights, warrants, convertible securities, or other agreements or commitments obligating the CORPORATION to issue or to transfer from treasury any additional shares of its capital stock of any class. c. That there is no suit, action, arbitration, or legal administrative, or other proceeding, to the best knowledge of CORPORATION; against or effecting CORPORATION or any other business, assets, or financial condition. d. The financial statements in Exhibit B have been prepared in accordance with generally accepted accounting principles consistently followed by the CORPORATION as of the respective dates of said financial statements, and the results of its operation for the respective periods indicated. e. That there has not been since the date of the attached financial statements any material change in the financial condition, liabilities, assets, business or prospects of the CORPORATION. f. Since January 28, 1998, that within the times and in the manner prescribed by law, the CORPORATION has filed all federal, state, and local tax returns required by law and has paid all taxes assessments, and penalties due and payable. There are not present disputes as to taxes of any nature payable by the CORPORATION. g. The CORPORATION is in possession of all premises leased to it from others. h. Neither the SHAREHOLDERS, nor any officer, director, or employee of the CORPORATION, nor any spouse, child, or other relative of any of these persons, owns, or has any interest, directly or indirectly, in any of the real or personal property owned by or leased to the CORPORATION. That the CORPORATION does not occupy any real property in violation of any law, regulation, or decree. i. The execution and delivery of this Agreement by the CORPORATION, and the performance of its covenants and obligations under it, shall have been duly authorized by all necessary corporate action, and the CORPORATION shall have received copies of all resolutions pertaining to that authorization, certified by the secretary of the CORPORATION. k. Each SHAREHOLDER is acquiring the stock of the CORPORATION as an investment and not with a view to distribution, and each hereby consents that the shares of the CORPORATION, may be legended to the effect that such shares are not registered under the Securities Act of 1933. l. The CORPORATION has given no options or other rights to purchase or subscribe for any shares of stock of the CORPORATION in favor of any person, firm or corporation. Stockholders do not have preemptive rights. m. The CORPORATION has no assets or business other than those shown in these financial statements. n. The CORPORATION is not party to any employment agreements. 2.3 DIGITAL SIGN CORPORATION represents and warrants as follows: a. DIGITAL SIGN CORPORATION is a corporation duly organized, validly existing, and in good standing under the laws of Delaware and has all necessary corporate powers to own its properties and to operate its business as now owned and operated by it; and neither the ownership of its properties nor the nature of its business requires DIGITAL SIGN CORPORATION to be qualified in any jurisdiction other than the state of its incorporation. b. The authorized capital stock of DIGITAL SIGN CORPORATION consists of 50,000,000 shares of common stock, having a par value of $0.00001 each, 3,850,000 of which are issued and outstanding. Such shares have been so issued full compliance with all federal and state securities laws. DIGITAL SIGN CORPORATION has also authorized 20,000,000 shares of preferred stock, having a par value of $0.00001, none of which are issued. There are no outstanding subscriptions,options, rights, warrants, convertible securities,or other agreements or commitments obligating DIGITAL SIGN CORPORATION to issue or to transfer from treasury any class of stock. c. The financial statements in Exhibit A have been prepared in accordance with generally accepted accounting principles consistently followed by DIGITAL SIGN CORPORATION throughout the periods indicated and fairly present the financial position of DIGITAL SIGN CORPORATION as of the respective dates of said financial Statements, and the results of its operations for the respective periods indicated. d. That there has not been since the date of the attached financial statements any material change in the financial condition, liabilities, assets, business or prospects of DIGITAL SIGN CORPORATION. e. That DIGITAL SIGN CORPORATION does not have any debt, liability, or obligation of any nature, whether accrued, absolute, contingent, or otherwise, and whether due or to become due, that is not reflected in the financial statements or set forth in Exhibit A to this Agreement, and that all debts, liabilities, and obligations incurred after that date were incurred in the ordinary course of business, and are usual and normal in amount both individually and in the Agreement. f. That the total liabilities on the part of DIGITAL SIGN CORPORATION does not exceed the approximate amount of $1,000.00. g. That within the times and in the manner prescribed by law, DIGITAL SIGN CORPORATION has filed all federal, state, and local tax returns required by law and has paid all taxes, assessments, and penalties which in DIGITAL SIGN CORPORATION'S opinion are due and payable and has made all filings required by all applicable state and federal laws. h. That DIGITAL SIGN CORPORATION has good and marketable title to all of its respective assets and interests in assets, whether real, personal, mixed, tangible, and intangible, which constitute all the assets and interests in assets that are used in the business of DIGITAL SIGN CORPORATION. All these assets are free and clear of restrictions or of conditions of transfer or assignment, and free and clear of mortgages, liens, pledges, charges, encumbrances, equities, claims, easements, rights of way, covenants, conditions or restrictions, except for (i) these disclosed in DIGITAL SIGN CORPORATION financial statements in Exhibit A to this Agreement; (ii) the lien of current taxes not yet due and payable; and (iii) possible minor matters that in the aggregate, are not substantial in amount and do not materially detract from or interfere with the present or intended use of any of these assets, nor materially impair business operations. All real property and tangible personal property of DIGITAL SIGN CORPORATION is in good operating condition and repair, ordinary wear and tear excepted. DIGITAL SIGN CORPORATION is in possession of all premises leased to it from others. i. That there is no suit, action, arbitration, or legal administrative, or other proceeding, or governmental investigation pending or, to the best knowledge DIGITAL SIGN CORPORATION threatened, against or affecting DIGITAL SIGN CORPORATION, or any of its business, assets, or financial condition. j. The execution and delivery of this Agreement by DIGITAL SIGN CORPORATION and the performance of its covenants and obligations under it, shall have been duly authorized by all necessary corporate action, and SHAREHOLDERS have received copies of all resolutions pertaining to that authorization, certified by the secretary of DIGITAL SIGN CORPORATION. k. That they have had an opportunity to review the financial statements in Exhibits B to this Agreement and based upon such financial statements they have .entered into this Agreement. 3. DOCUMENTATION, DELIVERY AND COOPERATION 3.1. The CORPORATION will furnish to DIGITAL SIGN CORPORATION for its examination (i) copies of the Article of Incorporation and By-Laws of the CORPORATION; (ii) the minute books of the CORPORATION containing all records required to be set forth of all proceedings, consents, actions, and meetings of the SHAREHOLDERS and Boards of Directors of the CORPORATION; (iii) all permits, orders, and consents issued with Respect to corporation, or any security, and all applications for such permits, orders, and consents; and (iv) the stock transfer books of the CORPORATION setting forth all transfers of any capital stock. 3.2. At the closing, the SHAREHOLDERS shall deliver to DIGITAL SIGN CORPORATION the following instruments, in form and substance satisfactory to DIGITAL SIGN CORPORATION and its counsel: a. A certificate or certificates representing the shares, registered in the names of the SHAREHOLDERS, duly endorsed by the SHAREHOLDERS transfer or accompanied by an assignment of the shares duly executed by the SHAREHOLDERS. On submission of that certificate or certificates to the CORPORATION for transfer, the CORPORATION shall issue to DIGITAL SIGN CORPORATION a certificate representing the shares, registered in the name of DIGITAL SIGN CORPORATION. b. The stock books, stock ledgers, minute books, and corporate seals of the CORPORATION, and; 3.3. At the closing, DIGITAL SIGN CORPORATION shall deliver to SHAREHOLDERS the following instruments and documents: a. The share certificates as set forth in paragraph 1.3. 3.4. All of the parties further agree that they will do all things necessary and reasonable to accomplish and facilitate the transfer of the shares in conformance with any and all governmental bodies and regulatory agencies, and that they will sign and execute any and all documents necessary to bring about and perfect the purposes of the Agreement. 4.1. The obligations of the SHAREHOLDERS hereunder are, at the option of the SHAREHOLDERS, subject to the conditions that on or before the Closing: a. The SHAREHOLDERS shall not have discovered any material error, or misstatement or omission in the representations, and warranties made by DIGITAL SIGN COPORATION herein, and all the terms and conditions of this Agreement to be complied with and performed by DIGITAL SIGN COROPRATION at or before the Closing shall have been complied with and performed in all material respects. b. The representations and warranties made by DIGITAL SIGN CORPORATION in this Agreement shall be correct in all material respects at and as of the Closing. c. The Commissioner of Corporations of the State of California has issued, if necessary, the appropriate permit or permits pursuant to the California Corporations Code the qualification of the securities which are the subject of this Agreement. 4.2. The obligations of DIGITAL SIGN CORPORATION hereunder are, at the option of DIGITAL SIGN CORPORATION, subject to the conditions that on or before the Closing: a. DIGITAL SIGN CORPORATION shall not have discovered any material error, misstatement or omission in the presentations and warranties made by the SHAREHOLDERS of the CORPORATION, and all the terms and conditions of this Agreement to be complied with and performed by the SHAREHOLDERS and the CORPORATION on or before the Closing shall have been complied with and performed in all material respects. b. The representations and warranties made by the SHAREHOLDERS and the CORPORATION in this Agreement shall be correct in all material respects at and as of the Closing. c. The Commissioner of Corporations of the State of California has, if necessary, issued the appropriate permit or permits pursuant to the California Corporations Code for the qualification of the securities which are the subject of this Agreement. 4.3. The Closing under this Agreement shall take place at the law offices of Carmine Bua, 3838 Camino Del Rio North Ste. 333, San Diego, CA 92108, or at such place, time or date, as may be agreed upon by the parties. This Agreement may be signed in one or more counterparts. /s/ Edward F. Myers III /s/ Edward F. Myers III DIGITAL SIGN CORPORATION DIGITAL SIGNS, INC. (a Delaware Corporation) (a California Corporation) STOCKHOLDERS /s/ Edward F. Myers III ---------------------------------- Edward F. Myers III EXHIBIT A SELECTED FINANCIAL INFORMATION SUMMARY BALANCE SHEET DATA: February 13, 1998 Current Assets: $ 0.00 Other Assets: $ 0.00 Total Assets: $ 0.00 Total Liabilities: $ 0.00 Shareholders Equity $ 0.00 SUMMARY STATEMENT OF OPERATIONS DATA: (for period ending Feb. 14, 98) Total Income $ 0 Net Loss $ 0 Net Loss Per Share: $ 0 Exhibit B SELECTED FINANCIAL INFORMATION SUMMARY BALANCE SHEET DATA: February 13, 1998 Current Assets Cash On Hand $ 000400 Computer Equipment $ 000.00 Organization Expense $ 715.00 Total Assets: $ 715.00 Total Liabilities:. $ 0.00 Shareholders Equity. $ 715.00 SUMMARY STATEMENT OF OPERATIONS DATA: (for period ending Feb. 14, 98) Total Income $ 0 Net Loss $ 0 Net Loss Per Share: $ 0 Schedule A Stock Aquired by Digital Stock Issued Shareholders Signs, Inc. in Exchange - ------------ ----------- ----------- Edward F. Myers 111 10,000 100,000 EX-2.2 3 AGREEMENT AND PLAN OF SHARE EXCHANGE EXHIBIT 2.2 AGREEMENT AND PLAN OF SHARE EXCHANGE This AGREEMENT AND PLAN OF SHARE EXCHANGE (the "Agreement") is made as of the --- day of April, 1999 by and between Eriko Internet Inc., a Washington corporation ("Eriko") and Digital Sign Corporation, a Delaware corporation ("Digital") (collectively, the "Constituent Corporations") with reference to the following facts: A. Digital wishes to acquire the entire issued and outstanding share capital of Eriko and Eriko wishes to become the wholly owned subsidiary of Digital. B. Each of the Constituent Corporations has, subject, in the case of Eriko, to approval by its shareholders, adopted the plan of share exchange embodied in this Agreement. C. The share exchange is intended to qualify as a reorganization under Section 368(a)(1)(B) of the Internal Revenue Code (the "Code"). NOW, THEREFORE, the Constituent Corporations do hereby agree to the share exchange, on the terms and conditions herein provided, as follows: 1. On the Effective Date, by virtue of the share exchange and without any action on the part of the holders thereof, each then outstanding share of common stock of Eriko shall be exchanged for four (4) shares of common stock to be issued by Digital. 2. The "Effective Date" of the share exchange shall be, and such term as used herein shall mean, 5:00 p.m., Seattle, Washington time, on the day on which the Articles of Share Exchange in substantially the form attached hereto as Exhibit A are filed in the office of the Secretary of State of the state of Washington, after satisfaction of the requirements of applicable laws of the state's prerequisites to such filings. 3. Notwithstanding anything contained in this Agreement to the contrary, this Agreement may be terminated and the share exchange abandoned: (a) Upon written notice at any time prior to the Effective Date by mutual consent of the Constituent Corporations; (b) If holders of at least a majority of the outstanding shares of common stock of a Constituent Corporation shall not vote in favor of the share exchange; or (c) If there exists a suit, action, or other proceeding commenced, pending or threatened, before any court or other governmental agency of the federal or state government, in which it is sought to restrain, prohibit or otherwise adversely affect the consummation of the share exchange contemplated hereby. 4. Notwithstanding anything contained in this Agreement, this Agreement may be amended or modified in writing at any time prior to the Effective Date; provided that, an amendment made subsequent to the adoption of this Agreement by the shareholders of a Constituent Corporation shall not: (1) alter or change the amount or kind of shares, securities, cash, property and/or rights to be received in exchange for or on conversion of all or any of the shares of any class or series thereof of the Constituent Corporations; (2) alter or change any term of the Articles of Incorporation of a Constituent Corporation; or (3) alter or change any of the terms and conditions of this Agreement if such alteration or change would adversely affect the holders of any class or series thereof of the Constituent Corporations; provided, however, the Constituent Corporations may by agreement in writing extend the time for performance of, or waive compliance with, the conditions or agreements set forth herein. 5. In exercising their rights under Sections 4. or 5., each of the Constituent Corporations may act by its Board of Directors, and such rights may be so exercised, notwithstanding the prior approval of this Agreement by the shareholders of a Constituent Corporation. 6. Each of the Constituent Corporations shall (A) keep its records and file in connection with its federal and state income tax returns all such information as may be required by Treas. Reg. Section 1.368-3; (B) for federal and state income tax purposes report the share exchange as qualifying as a reorganization under Section 368(a)(1)(B) of the Code; (C) refrain from taking any position in connection with its federal or any state income tax liability that would be inconsistent with such qualification; and (D) comply with all the requirements of Section 368(a)(1)(B) applicable to such corporation. ERIKO INTERNET INC., a Washington corporation By: /s/ Cameron Woodbridge ------------------------------------------ Its: President ----------------------------------------- DIGITAL SIGN CORPORATION, a Delaware corporation By: Barbra Paul ------------------------------------------ Its: President ----------------------------------------- EXHIBIT A ARTICLES OF SHARE EXCHANGE between DIGITAL SIGN CORPORATION a Delaware corporation and ERIKO INTERNET INC. a Washington corporation In accordance with RCW 23B.11.050 The undersigned, Barbra Paul, being the President of Digital Sign Corporation, a Delaware corporation, ("Digital") and Cameron Woodbridge, being the President of Eriko Internet Inc., a Washington corporation, ("Eriko"), DO HEREBY CERTIFY as follows: (1) The constituent corporations in the share exchange (the "Exchange") are Digital Sign Corporation, a Delaware corporation, and Eriko Internet Inc, a Washington corporation; (2) An Agreement and Plan of Share Exchange dated as of April 5, 1999 (the "Share Exchange Agreement") has been approved, adopted, and executed by each of the constituent corporations in accordance with RCW 23B.11.010 et seq. The Share Exchange Agreement is attached hereto as Exhibit A and incorporated herein by reference; (3) The Exchange was duly approved by the shareholders of Eriko in accordance with Section 23B.011.030 of the Washington Business Corporation Act. The shareholders of Digital are not required to approve the Exchange. The Exchange shall become effective on the date on which these Articles of Share Exchange are filed by the Secretary of State of the state of Washington. IN WITNESS WHEREOF, the parties hereto have caused these Articles of Share Exchange to be duly executed as of this 5th day of April, 1999. ERIKO INTERNET INC., a Washington corporation By: /s/ Cameron Woodbridge ------------------------------------------ Its: President ----------------------------------------- DIGITAL SIGN CORPORATION, a Delaware corporation By: Barbra Paul ------------------------------------------ Its: President ----------------------------------------- EX-2.3 4 AGREEMENT AND PLAN OF REORGANIZATION EXHIBIT 2.3 AGREEMENT AND PLAN OF REORGANIZATION THIS AGREEMENT AND PLAN OF REORGANIZATION MADE EFFECTIVE AS OF 14 MAY 1999 (the "Effective Date"). BETWEEN: JOSEPH SCHLADER ("Mr. Schlader"), of 3085 Windermere Way, Sparks, Nevada, 89431 CHERYL SCHLADER ("Ms. Schlader"), of 3085 Windermere Way, Sparks, Nevada, 89431 WILLIAM GALINE ("Mr. Galine"), of 4332 Amberwood Avenue, Reno, Nevada, 89509 (individually, a "Shareholder" and collectively, the "Shareholders"); AND: PAWNBROKER.COM INC., a corporation incorporated under the laws of the State of Nevada having a place of business at 701 Ryland Avenue, Reno, Nevada, U.S.A., 89502 ("Pawnbroker"); AND: DIGITAL SIGN CORPORATION, a company incorporated under the laws of the State of Delaware having a place of business at 688 - 6 Ishikawa, Kanagawa, Japan, 252 0815 (the "Acquiror"); WHEREAS: A. The authorized share capital of Pawnbroker consists of 25,000 common shares without par value of which only 1,000 common shares (the "Pawnbroker Shares") are issued and outstanding; B. The Shareholders are the registered and beneficial owners of the Pawnbroker Shares as follows: Mr. Schlader as to 255 Pawnbroker Shares Ms. Schlader as to 255 Pawnbroker Shares Mr. Galine as to 490 Pawnbroker Shares ------------------------- Total: 1,000 Pawnbroker Shares ========================= C. The Shareholders have agreed to transfer the Pawnbroker Shares to the Acquiror and the Acquiror has agreed to acquire the Pawnbroker Shares from the Shareholders in exchange for voting common shares of the Acquiror, in a share exchange which is intended to qualify as a "reorganization" within section 368(a)(1)(B) of the Internal Revenue Code of 1986, as amended, for U.S. federal income tax purposes, on the following terms and conditions; NOW THEREFORE THIS AGREEMENT WITNESSES that in consideration of the covenants and agreements herein contained, the parties hereto do covenant and agree (the "Agreement") as follows: 1. SHARE EXCHANGE 1.1 Subject to the terms and conditions of this Agreement, the Shareholders agree to transfer all of the Pawnbroker Shares to the Acquiror, and the Acquiror agrees to acquire all of the Pawnbroker Shares, in exchange for 4,800,000 voting common shares of the Acquiror (the "Digital Shares") with an aggregate value of US$1,500,000 (at the deemed price of US$0.3125 per Digital Share). 1.2 The Digital Shares shall be issued by the Acquiror to the Shareholders as follows: Mr. Schlader as to 1,224,000 Digital Shares Ms. Schlader as to 1,224,000 Digital Shares Mr. Galine as to 2,352,000 Digital Shares ------------------------- Total: 4,800,000 Digital Shares ========================= 1.3 The issuance of the Digital Shares has not been approved or disapproved by the United States Securities and Exchange Commission, any state securities agency, or any foreign securities agency, and the Acquiror is not registered under the United States Securities Exchange Act of 1934 (the "Exchange Act"). 1.4 The transactions contemplated under this Agreement shall be completed (the "Completion") at the offices of the Acquiror's solicitors, Messrs. Campney & Murphy, 2100 - 1111 West Georgia Street, Vancouver, British Columbia, or at such other place as may be agreed between the parties, at 11:00 o'clock a.m. local time in Vancouver, B.C., or at such other time as may be agreed between the parties, (the "Time of Closing") on 16 June 1999, or on such other date as may be agreed between the parties, (the "Closing Date"). 2. CONDITIONS PRECEDENT 2.1 The Acquiror's obligation to carry out the terms of this Agreement and to complete its transactions contemplated under this Agreement is subject to the fulfilment to the satisfaction of the Acquiror of each of the following conditions that: (a) on or before 16 June 1999, the Acquiror shall have been able to complete the Acquiror's Investigation (defined below) with results to its reasonable satisfaction; (b) at the Time of Closing, the solicitors for the Shareholders shall provide an opinion dated as of the Closing Date, substantially in the form of Schedule A to this Agreement (the "Pawnbroker Solicitor Opinion"); (c) as of the Time of Closing, the Shareholders and Pawnbroker shall have complied with all of their respective covenants and agreements contained in this Agreement; (d) as of the Time of Closing, the representations and warranties of the Shareholders and of any one of them contained in this Agreement or contained in any certificates or documents delivered by them or any one of them pursuant to this Agreement shall be 2 completely true as if such representations and warranties had been made as of the Time of Closing; and (e) the Directors and, if required, the shareholders of the Acquiror shall have approved this Agreement and all the transactions of the Acquiror contemplated hereunder. The conditions set forth above are for the exclusive benefit of the Acquiror and may be waived by the Acquiror in whole or in part at any time at or before the Time of Closing. 2.2 The Shareholder's respective obligations to carry out the terms of this Agreement and to complete their respective transactions contemplated under this Agreement are subject to the fulfilment to their satisfaction of each of the following conditions that: (a) on or before 16 June 1999, the Acquiror shall have restructured or otherwise altered its share capital so that the Acquiror's authorized capital is sufficient to permit issuance of the Digital Shares, and so that upon issuance of the Digital Shares the Acquiror's issued share capital will be 12,011,346 common shares (excluding the Acquiror's common shares to be issued in the course of the Financing defined below); (b) at the Time of Closing, the solicitors for the Acquiror shall provide an opinion dated as of the Closing Date, substantially in the form of Schedule B to this Agreement (the "Digital Solicitor Opinion"); (c) as of the Time of Closing, the Acquiror shall have complied with all of its covenants and agreements contained in this Agreement; and (d) at the Time of Closing, the representations and warranties of the Acquiror contained in this Agreement or contained in any certificates or documents delivered by it pursuant to this Agreement shall be completely true as if such representations and warranties had been made by the Acquiror as of the Time of Closing. The conditions set forth above are for the exclusive benefit of each of the Shareholders and may be waived by each of them in whole or in part at or before the Time of Closing. 2.3 The parties acknowledge and agree each with the other that this Agreement and all of the transactions contemplated under this Agreement are subject to receipt of any regulatory approvals that may be required under Applicable Laws. If any such approvals are required but are not obtained by the Closing Date, then this Agreement shall terminate and be of no further force and effect. 3. COVENANTS, AGREEMENTS AND ACKNOWLEDGEMENTS 3.1 The Shareholders and Pawnbroker jointly and severally covenant and agree with the Acquiror that the Shareholders and Pawnbroker shall: (a) from and including the Effective Date through to and including the Time of Closing, permit the Acquiror, through its directors, officers, employees and authorized agents and representatives, at the Acquiror's own cost, full access to Pawnbroker's books, records and property including, without limitation, all of the assets, contracts and minute books of Pawnbroker, so as to permit the Acquiror to make such investigation (the "Acquiror's Investigation") of Pawnbroker as the Acquiror considers advisable; 3 (b) provide to the Acquiror all such further documents, instruments and materials and do all such acts and things as may be required by the Acquiror to obtain any regulatory approvals that may be required under Applicable Laws; (c) from and including the Effective Date through to and including the Time of Closing, do all such acts and things that may be necessary to ensure that all of the representations and warranties of the Shareholders, Pawnbroker or any one of them contained in this Agreement or any certificates or documents delivered by them or any one of them pursuant to this Agreement remain true and correct; (d) from and including the Effective Date through to and including the Time of Closing, preserve and protect all of the goodwill, assets, business and undertaking of Pawnbroker and, without limiting the generality of the foregoing, carry on the business of Pawnbroker in a reasonable and prudent manner; and (e) from and including the Effective Date through to and including the Time of Closing, keep confidential all discussions and communications (including all information communicated therein) between the parties, and all written and printed materials of any kind whatsoever exchanged by the parties, except only any information or material that: (i) was in the public domain at the time of disclosure to a party (the "Recipient"); (ii) was already in the possession of the Recipient prior to disclosure, as demonstrated by the Recipient through tangible evidence; (iii) subsequently enters the public domain through no fault of the Recipient or any officer, director, employee or agent of the Recipient; or (iv) is required to be disclosed by law or by a court or regulatory authority of competent jurisdiction; and, if so requested by the Acquiror, the Shareholders and Pawnbroker shall arrange for any director, officer, employee, authorized agent or representative of Pawnbroker to enter into and the Shareholders themselves shall enter into a non-disclosure agreement with the Acquiror in a form acceptable to the Acquiror acting reasonably. 3.2 The Shareholders and Pawnbroker jointly and severally covenant and agree with the Acquiror that, from and including the Effective Date through to and including the Time of Closing, the Shareholders and Pawnbroker shall: (a) not do any act or thing that would render any representation or warranty of the Shareholders, Pawnbroker or any one of them contained in this Agreement or any certificates or documents delivered by them or any one of them pursuant to this Agreement untrue or incorrect; and (b) not sell, encumber or dispose of, or negotiate with any other person in respect of a sale, encumbrance or disposition of, any of the Pawnbroker Shares or any goodwill, assets, business or undertaking of Pawnbroker, other than a sale of part of the assets of Pawnbroker in the ordinary course of Pawnbroker's business. 4 3.3 The Shareholders and Pawnbroker jointly and severally acknowledge to and agree with the Acquiror that the Acquiror's Investigation shall in no way limit or otherwise adversely affect the rights of the Acquiror as provided for hereunder in respect of the representations and warranties of the Shareholders and Pawnbroker or any of them contained in this Agreement or in any certificates or documents delivered by them or any of them pursuant to this Agreement. 3.4 The Acquiror covenants and agrees with the Shareholders and with Pawnbroker that the Acquiror shall: (a) use its reasonable best efforts to obtain any regulatory approvals for this Agreement and the transactions contemplated hereunder required by Applicable Laws on or before the Closing Date; (b) from and including the Effective Date through to and including the Time of Closing, do all such acts and things that may be necessary to ensure that all of the representations and warranties of the Acquiror contained in this Agreement or in any certificates or documents delivered by it pursuant to this Agreement remain true and correct; (c) from and including the Effective Date through to and including the Time of Closing, subject to its legal reporting obligations, keep confidential all discussions and communications (including all information communicated therein) between the parties, and all written and printed materials of any kind whatsoever exchanged by the parties, except only any information or material that: (i) was in the public domain at the time of disclosure to a party (the "Recipient"); (ii) was already in the possession of the Recipient prior to disclosure, as demonstrated by the Recipient through tangible evidence; (iii) subsequently enters the public domain through no fault of the Recipient or any officer, director, employee or agent of the Recipient; or (iv) is required to be disclosed by law or by a court or regulatory authority of competent jurisdiction; and, if so requested by the Shareholders or by Pawnbroker, the Acquiror shall arrange for any director, officer, employee, authorized agent or representative of the Acquiror to enter into, and the Acquiror itself shall enter into, a non-disclosure agreement with the Shareholders and Pawnbroker in a form acceptable to the Shareholders and Pawnbroker acting reasonably; (d) on Closing, appoint Mr. Schlader as a Director and President of the Acquiror, with responsibilities that will include assisting in the assembly of a new Board of Directors of the Acquiror; and (e) following the Closing Date, the Acquiror will use its reasonable best efforts to undertake a financing (the "Financing") to raise US$3,000,000 for working capital purposes. 3.5 The Acquiror covenants and agrees with the Shareholders and with Pawnbroker that, from and including the Effective Date through to and including the Time of Closing, the Acquiror shall 5 not do any act or thing that would render any representation or warranty of the Acquiror contained in this Agreement or any certificates or documents delivered by it pursuant to this Agreement untrue or incorrect. 3.6 At the request of any or all of the Shareholders, the Acquiror covenants to execute and deliver to each Shareholder, for filing, such form of election that may be specified in applicable income tax legislation for election of proceeds of disposition that is equal to or less than the fair market value of the number of Digital Shares issuable to that Shareholder under this Agreement and that is equal to or greater than the cost amount to that Shareholder of the Pawnbroker Shares exchanged by that Shareholder, for the purposes of lawfully reducing the amount of income tax payable in respect of the Shareholder's exchange of Pawnbroker Shares. 4. REPRESENTATIONS AND WARRANTIES 4.1 In order to induce the Acquiror to enter into this Agreement and complete its transactions contemplated hereunder, the Shareholders and Pawnbroker jointly and severally represent and warrant to the Acquiror that: (a) Pawnbroker was and remains duly incorporated and validly existing under the laws of the State of Nevada and Pawnbroker: (i) is not subject to the reporting requirements of section 13 or section 15 of the Exchange Act; (ii) has the power, authority and capacity to enter into this Agreement and carry out its terms; and (iii) is in good standing with respect to the filing of annual reports required under the laws of Nevada; (b) the authorized and issued share capital of Pawnbroker is as set forth in paragraphs A and B of the recitals to this Agreement; (c) the Pawnbroker Shares are and will on the Closing Date immediately prior to Completion be validly issued and outstanding fully paid and non-assessable common shares of Pawnbroker registered in the names of, and legally and beneficially owned by, the Shareholders as set forth in paragraph B of the recitals to this Agreement, free and clear of all voting restrictions, trade restrictions, liens, charges or encumbrances of any kind whatsoever; (d) except for the Pawnbroker Shares, there are no documents, instruments or other writings of any kind whatsoever which constitute a "security" of Pawnbroker as that term is defined in the United States Securities Act of 1933, as amended (the "Securities Act") and, except as is provided for by operation of this Agreement, there are no options, agreements or rights of any kind whatsoever to acquire all or any part of the Pawnbroker Shares or any interest in them from the Shareholders or any one of them, or to acquire any other shares of Pawnbroker from Pawnbroker; (e) the constating documents of Pawnbroker have not been altered since the incorporation of Pawnbroker; 6 (f) all of the material transactions of Pawnbroker have been promptly and properly recorded or filed in or with the books or records of Pawnbroker and the minute books of Pawnbroker contain all records of the meetings and proceedings of Pawnbroker's shareholders and directors since its incorporation; (g) Pawnbroker holds all licences and permits that are required for carrying on its business in the manner in which such business has been carried on; (h) Pawnbroker is the registered and beneficial owner of all of the properties and assets used by Pawnbroker and which are necessary or useful in the conduct of its business (collectively the "Assets"), including without limitation the domain names "Pawnbroker.com" and "Pawnbrokers.com" (the "Domain Names") and the other assets listed on Schedule C to this Agreement; (i) Pawnbroker has the corporate power to own the Assets and to carry on the business carried on by it, and Pawnbroker is duly qualified to carry on business in all jurisdictions in which it carries on business; (j) Pawnbroker has good and marketable exclusive title to the Assets free and clear of all liens, charges and encumbrances of any kind whatsoever save and except those specified as "Permitted Encumbrances" on Schedule C to this Agreement, and in particular: (i) Pawnbroker is the sole and exclusive legal and beneficial owner of the Domain Names, free and clear of all encumbrances whatsoever, and is not a party to or bound by any contract or any other obligation whatsoever that limits or impairs its ability to sell, transfer, assign or convey, or that otherwise affects, the Domain Names; (ii) Pawnbroker is the registered owner of the Domain Names, and all fees or other costs associated with maintaining the registration of the Domain Names have been paid as of 1 January 1999 and the registration of the Domain Names is in good standing with Network Solutions, Inc.; and (iii) no other person has been granted any interest in or right to use all or any portion of the Domain Names; (k) no third party privacy or intellectual property rights, including without limitation, copyright, trade secret or patent rights, were violated in the creation, compilation or acquisition of the Assets by Pawnbroker or by any party through whom Pawnbroker acquired title and, to the knowledge of the Shareholders and Pawnbroker, the use of the Domain Names by Pawnbroker does not infringe upon or induce or contribute to the infringement of any intellectual property rights, domestic or foreign, of any other person; (l) each item of machinery and equipment of any kind whatsoever comprised in the Assets is in reasonable operating condition and in a state of reasonable maintenance and repair taking into account its age and use; (m) all of the bank accounts and safety deposit boxes of Pawnbroker are listed on Schedule C to this Agreement; 7 (n) the books and records of Pawnbroker (collectively the "Pawnbroker Records"), full access to which has been provided by Pawnbroker to the Acquiror, are true and correct in every material respect and present fairly and accurately the financial position and results of the operations of Pawnbroker for the periods indicated, and have been prepared in accordance with generally accepted accounting principles applied on a consistent basis; (o) the Pawnbroker Records disclose all material financial transactions of Pawnbroker since Pawnbroker's incorporation on 22 April 1999 and such transactions have been fairly and accurately recorded; (p) except as disclosed in the Pawnbroker Records: (i) no dividends or other distributions of any kind whatsoever on any shares in the capital of Pawnbroker have been made, declared or authorized; (ii) Pawnbroker is not indebted to the Shareholders or any one of them; (iii) none of the Shareholders or any other officer, director or employee of Pawnbroker is indebted or under obligation to Pawnbroker on any account whatsoever; and (iv) Pawnbroker has not guaranteed or agreed to guarantee any debt, liability or other obligation of any kind whatsoever of any person, firm or corporation of any kind whatsoever; (q) the total debt of Pawnbroker to all creditors does not exceed US$275,000, and there are no material liabilities of Pawnbroker, whether direct, indirect, absolute, contingent or otherwise, which are not disclosed or reflected in the Pawnbroker Records; (r) any accounts receivable of Pawnbroker shown in the Pawnbroker Records are bona fide, good and collectible without setoff or counterclaim; (s) since Pawnbroker's incorporation: (i) there has not been any material adverse change of any kind whatsoever in the financial position or condition of Pawnbroker or any damage, loss or other change of any kind whatsoever in circumstances materially affecting the business or Assets of Pawnbroker or the right or capacity of Pawnbroker to carry on its business; (ii) Pawnbroker has not waived or surrendered any right of any kind whatsoever of material value; (iii) except as permitted under this Agreement, Pawnbroker has not discharged, satisfied or paid any lien, charge or encumbrance of any kind whatsoever or obligation or liability of any kind whatsoever other than current liabilities in the ordinary course of its business; (iv) the business of Pawnbroker has been carried on in the ordinary course; and 8 (v) no new machinery or equipment of any kind whatsoever has been ordered by, or installed or assembled on the premises of, Pawnbroker; (t) the directors, officers, key employees and independent contractors and consultants of Pawnbroker and all of their compensation arrangements with Pawnbroker, whether as directors, officers or employees of, or as independent contractors or consultants to, Pawnbroker, are as listed on Schedule D to this Agreement; (u) no payments of any kind whatsoever have been made or authorized by Pawnbroker to or on behalf of the Shareholders or any one of them or to or on behalf of any of the directors, officers, key employees, independent contractors or consultants of Pawnbroker except in accordance with those compensation arrangements specified on Schedule D to this Agreement or except as contemplated by this Agreement; (v) there are no pensions, profit sharing, group insurance or similar plans or other deferred compensation plans of any kind whatsoever affecting Pawnbroker other than those specified on Schedule D to this Agreement; (w) Pawnbroker is not now, and has never been, a party to any collective agreement with any labour union or other association of employees of any kind whatsoever, no collective bargaining agent has been certified in respect of Pawnbroker and there is no application pending for certification of a collective bargaining agent in respect of Pawnbroker; (x) the contracts and agreements included on Schedule D to this Agreement and those additional contracts and agreements specified on Schedule E to this Agreement (collectively the "Material Contracts") constitute all of the material contracts and agreements of Pawnbroker; (y) except as is noted on the appropriate Schedule to this Agreement, the Material Contracts are in good standing in all respects and not in default in any respect; (z) Pawnbroker has not licensed, leased, transferred, disposed of or encumbered any of the Assets in any way, or permitted any third party access to any of the Assets the value of which may be compromised by such access, including in particular the source code to any computer software or any trade secret information included in the Assets, except only in accordance with the terms of the Material Contracts; (aa) all tax returns and reports of Pawnbroker required by law to have been filed have been filed and are substantially true, complete and correct and all taxes and other government charges of any kind whatsoever of Pawnbroker have been paid or accrued in the Pawnbroker Records; (bb) Pawnbroker has not: (i) made any election under any applicable tax legislation with respect to the acquisition or disposition of any property at other than fair market value; (ii) acquired any property from a person with whom Pawnbroker was not dealing with at arm's length for proceeds greater than the fair market value thereof; or 9 (iii) disposed of anything to a person with whom Pawnbroker was not dealing with at arm's length for proceeds less than the fair market value thereof; (cc) Pawnbroker has made all elections required to have been made under any applicable tax legislation in connection with any distributions made by it and all such elections were true and correct and filed in the prescribed form and within the prescribed time period; (dd) adequate provision has been made for taxes payable by Pawnbroker for the current period for which tax returns are not yet required to be filed and there are no agreements, waivers or other arrangements of any kind whatsoever providing for an extension of time with respect to the filing of any tax return by, or payment of, any tax or governmental charge of any kind whatsoever by Pawnbroker; (ee) Pawnbroker does not have any contingent tax liabilities of any kind whatsoever, and there are no grounds which would prompt a reassessment of Pawnbroker, including for aggressive treatment of income or expenses in earlier tax returns filed; (ff) there are no amounts outstanding and unpaid for which Pawnbroker has previously claimed a deduction under any applicable tax legislation; (gg) Pawnbroker has made all collections, deductions, remittances and payments of any kind whatsoever and filed all reports and returns required by it to be made or filed under the provisions of all applicable statutes requiring the making of collections, deductions, remittances or payments of any kind whatsoever in those jurisdictions in which Pawnbroker carries on business; (hh) there are no actions, suits, judgements, investigations or proceedings of any kind whatsoever outstanding, pending or threatened against or affecting the Shareholders or any one of them or Pawnbroker at law or in equity or before or by any federal, provincial, state, municipal or other governmental department, commission, board, bureau or agency of any kind whatsoever and there is no basis therefor; (ii) to the best of their knowledge, Pawnbroker is not in breach of any law, ordinance, statute, regulation, by-law, order or decree of any kind whatsoever; (jj) the Shareholders and Pawnbroker have good and sufficient power, authority and capacity to enter into this Agreement and complete their respective transactions contemplated under this Agreement on the terms and conditions set forth herein; (kk) the execution and delivery of this Agreement, the performance of their respective obligations under this Agreement and the Completion will not: (i) conflict with, or result in the breach of or the acceleration of any indebtedness under, or constitute default under, any of the constating documents of Pawnbroker or any of the terms of any indenture, mortgage, agreement, lease, licence or other instrument of any kind whatsoever to which Pawnbroker, the Shareholders or any one of them is a party or by which any one of them is bound, or any judgement or order of any kind whatsoever of any court or administrative body of any kind whatsoever by which any one of them is bound; nor 10 (ii) result in the violation of any law or regulation of any kind whatsoever by any of the Shareholders or by Pawnbroker; (ll) neither Pawnbroker nor the Shareholders or any one of them has incurred any liability for agency, brokerage, referral or finder's fees, commissions or compensation of any kind whatsoever with respect to this Agreement or any transaction contemplated under this Agreement; and (mm) the representations and warranties of the Shareholders and Pawnbroker contained in this Agreement disclose all material facts specifically relating to the transactions involving the Shareholders and Pawnbroker contemplated under this Agreement which materially and adversely affect, or in the future may materially and adversely affect, their respective abilities to perform their respective obligations under this Agreement or the value of the Pawnbroker Shares or the Assets. 4.2 Each of the Shareholders covenants, represents and warrants to the Acquiror that: (a) he or she has such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of an investment in the Digital Shares and he or she is able to bear the economic risk of loss of his or her entire investment; (b) the Acquiror has provided to him or her the opportunity to ask questions and receive answers concerning the terms and conditions of the offering and he or she has had access to such information concerning the Acquiror as he or she has considered necessary or appropriate in connection with the investment decision to acquire the Digital Shares; (c) he or she is acquiring the Digital Shares for his or her own account, for investment purposes only and not with a view to any resale, distribution or other disposition of the Digital Shares in violation of the United States securities laws; (d) he or she understands that the Digital Shares have not been and will not be registered under the Securities Act or the securities laws of any state of the United States or other jurisdiction and that the sale contemplated hereby is being made in reliance on an exemption from such registration requirements; (e) he or she satisfies one or more of the categories indicated below (each Shareholder must initial at least one applicable line): --- Category 1. An organization described in Section 501(c)(3) of the United States Internal Revenue Code, a corporation, a Massachusetts or similar business trust or partnership, not formed for the specific purpose of acquiring the Digital Shares, with total assets in excess of US$5,000,000; --- Category 2. A natural person whose individual net worth, or joint net worth with that person's spouse, at the date hereof exceeds US$1,000,000; --- Category 3. A natural person who had an individual income in excess of US$200,000 in each of the two most recent years or joint income with that person's spouse in excess of US$300,000 in each of those years and has a reasonable expectation of reaching the same income level in the current year; 11 --- Category 4. A trust that (a) has total assets in excess of US$5,000,000, (b) was not formed for the specific purpose of acquiring the Digital Shares and (c) is directed in its purchases of securities by a person who has such knowledge and experience in financial and business matters that he or she is capable of evaluating the merits and risks of an investment in the Securities; --- Category 5. An investment company registered under the Investment Company Act of 1940 or a business development company as defined in Section 2(a)(48) of that Act; --- Category 6. A Small Business Investment Company licensed by the U.S. Small Business Administration under Section 301(c) or (d) of the Small Business Investment Act of 1958; --- Category 7. A private business development company as defined in Section 202(a)(22) of the Investment Advisors Acts of 1940; or --- Category 8. An entity in which all of the equity owners satisfy the requirements of one or more of the foregoing categories. (f) he or she has not purchased the Digital Shares as a result of any form of general solicitation or general advertising, including advertisements, articles, notices or other communications published in any newspaper, magazine or similar media or broadcast over radio, or television, or any seminar or meeting whose attendees have been invited by general solicitation or general advertising; (g) if he or she decides to offer, sell or otherwise transfer any of the Digital Shares, he or she will not offer, sell or otherwise transfer any of such Digital Shares directly or indirectly, unless: (i) the sale is to the Acquiror; (ii) the sale is made pursuant to the exemption from the registration requirements under the Securities Act provided by Rule 144 thereunder and in accordance with any applicable state securities or "Blue Sky" laws; or (iii) the Digital Shares are sold in a transaction that does not require registration under the Securities Act or any applicable state laws and regulations governing the offer and sale of securities, and he or she has prior to such sale furnished to the Acquiror an opinion of counsel reasonably satisfactory to the Acquiror; (h) the certificates representing the Digital Shares will bear a legend stating that such shares have not been registered under the Securities Act or the securities laws of any state of the United States and may not be offered for sale or sold unless registered under the Securities Act and the securities laws of all applicable states of the United States or an exemption from such registration requirements is available; (i) he or she understands and agrees that there may be material tax consequences to a Shareholder in respect of an acquisition or disposition of the Digital Shares, and that the Acquiror gives no opinion and makes no representation with respect to the tax 12 consequences to the Shareholder under United States, state, local or foreign tax law in respect of the Shareholder's acquisition or disposition of the Digital Shares; and (j) he or she consents to the Acquiror making a notation on its records or giving instructions to any transfer agent of the Acquiror in order to implement the restrictions on transfer set forth and described herein. 4.3 The representations and warranties of the Shareholders and Pawnbroker contained in this Agreement shall be true at the Time of Closing as though they were made at the Time of Closing and they shall survive the Completion and remain in full force and effect thereafter for the benefit of the Acquiror. \ 4.4 In order to induce the Shareholders to enter into this Agreement and complete their respective transactions contemplated hereunder, the Acquiror represents and warrants to the Shareholders that: (a) the Acquiror was and remains duly incorporated and validly existing under the laws of the State of Delaware, and the Acquiror is in good standing with respect to the filing of annual reports required under the laws of Delaware; (b) as of the Effective Date, the authorized share capital of the Acquiror consists of 20,000,000 preferred shares having a par value of one-one thousandth of a cent (US$0.00001) each, of which none are issued and outstanding, and 50,000,000 common shares having a par value of one-one thousandth of a cent (US$0.00001) each, of which 38,499,000 shares (the "Outstanding Shares") are issued and outstanding; (c) prior to the Closing Date, the Acquiror will effect a 5.2:1 rollback of the Outstanding Shares so that on the Closing Date the Acquiror will have 7,211,346 common shares issued and outstanding (d) there are no commitments, plans or arrangements of any kind whatsoever to issue shares of the Acquiror, nor are there any outstanding options, warrants, convertible securities or other rights of any kind whatsoever calling for the issuance of any of the unissued shares of the Acquiror, other than as contemplated in respect of the Financing; (e) the Digital Shares to be issued on Completion will be, when issued, validly issued as fully paid and non-assessable; (f) the Acquiror has good and sufficient power, authority and capacity to enter into this Agreement and complete its transactions contemplated under this Agreement on the terms and conditions set forth herein; and (g) the execution and delivery of this Agreement, the performance of its obligations under this Agreement and the Completion will not: (i) conflict with, or result in the breach of or the acceleration of any indebtedness under, or constitute default under, the constating documents of the Acquiror or the terms of any indenture, mortgage, agreement, lease, licence or other instrument of any kind whatsoever to which the Acquiror is a party or by which 13 it is bound, or any judgment or order of any kind whatsoever of any Court or administrative body of any kind whatsoever by which the Acquiror is bound; nor (ii) result in the violation of any law or regulation of any kind whatsoever by the Acquiror. (h) the Certificate of Incorporation of the Acquiror is that filed on 13 February 1998 with the Secretary of State of Delaware and there are no other documents amending such certificate which have been filed or contemplated except the Certificate of Designation reducing the number of issued and outstanding common shares of the Acquiror to 7,011,346 immediately before the Closing Date; (i) all of the material transactions of the Acquiror have been promptly and properly recorded or filed in or with the books or records of the Acquiror and the minute books of the Acquiror contain all records of the meetings and proceedings of the Acquiror's shareholders and directors since its incorporation; (j) the Acquiror holds all licences and permits that are required for carrying on its business in the manner in which such business has been carried on; (k) the Acquiror has the corporate power to own the Assets and to carry on the business carried on by it, and the Acquiror is duly qualified to carry on business in all jurisdictions in which it carries on business; (l) the Acquiror has not assigned or contracted or promised to assign this Agreement, the Assets or the Domain Names or any of its related intellectual property rights to any third party; (m) the books and records of the Acquiror (collectively the "Acquiror Records"), shown to the Shareholders are true and correct in every material respect and present fairly and accurately the financial position and results of the operations of the Acquiror for the periods indicated, and have been prepared in accordance with generally accepted accounting principles applied on a consistent basis; (n) the Acquiror Records disclose all material financial transactions of the Acquiror since the Acquiror's incorporation on 13 February 1998 and such transactions have been fairly and accurately recorded; (o) except as disclosed in the Acquiror Records: (i) no dividends or other distributions of any kind whatsoever on any shares in the capital of the Acquiror have been made, declared or authorized; (ii) the Acquiror is not indebted to anyone; and (iii) the Acquiror has not guaranteed or agreed to guarantee any debt, liability or other obligation of any kind whatsoever of any person, firm or corporation of any kind whatsoever; 14 (p) there are no material liabilities of the Acquiror, whether direct, indirect, absolute, contingent or otherwise, which are not disclosed or reflected in the Acquiror Records; (q) any accounts receivable of the Acquiror shown in the Acquiror Records are bona fide, good and collectible without setoff or counterclaim; (r) since the Acquiror's incorporation: (i) there has not been any material adverse change of any kind whatsoever in the financial position or condition of the Acquiror or any damage, loss or other change of any kind whatsoever in circumstances materially affecting the business or assets of the Acquiror or the right or capacity of the Acquiror to carry on its business; (ii) the Acquiror has not waived or surrendered any right of any kind whatsoever of material value; and (iii) except as permitted under this Agreement, the Acquiror has not discharged, satisfied or paid any lien, charge or encumbrance of any kind whatsoever or obligation or liability of any kind whatsoever other than current liabilities in the ordinary course of its business; (s) the directors, officers, key employees and independent contractors and consultants of the Acquiror and all of their compensation arrangements with the Acquiror, whether as directors, officers or employees of, or as independent contractors or consultants to, the Acquiror, are as listed on Schedule F to this Agreement; (t) there are no material contracts between the Acquiror and third parties except this Agreement; (u) all tax returns and reports of the Acquiror required by law to have been filed have been filed and are substantially true, complete and correct and all taxes and other government charges of any kind whatsoever of the Acquiror have been paid or accrued in the Acquiror Records; (v) the Acquiror has made all elections required to have been made under any applicable tax legislation in connection with any distributions made by it and all such elections were true and correct and filed in the prescribed form and within the prescribed time period; (w) adequate provision has been made for taxes payable by the Acquiror for the current period for which tax returns are not yet required to be filed and there are no agreements, waivers or other arrangements of any kind whatsoever providing for an extension of time with respect to the filing of any tax return by, or payment of, any tax or governmental charge of any kind whatsoever by the Acquiror; (x) the Acquiror does not have any contingent tax liabilities of any kind whatsoever, and there are no grounds which would prompt a reassessment of the Acquiror, including for aggressive treatment of income or expenses in earlier tax returns filed; 15 (y) there are no actions, suits, judgements, investigations or proceedings of any kind whatsoever outstanding, pending or threatened against or affecting the Acquiror at law or in equity or before or by any federal, provincial, state, municipal or other governmental department, commission, board, bureau or agency of any kind whatsoever and there is no basis therefor; (z) to the best of its knowledge, the Acquiror is not in breach of any law, ordinance, statute, regulation, by-law, order or decree of any kind whatsoever; (aa) the Acquiror has incurred no liability for agency, brokerage, referral or finder's fees, commissions or compensation of any kind whatsoever with respect to this Agreement or any transaction contemplated under this Agreement; and (bb) the representations and warranties of the Acquiror contained in this Agreement disclose all material facts specifically relating to the transactions involving the Acquiror contemplated under this Agreement which materially and adversely affect, or in the future may materially and adversely affect, the Acquiror's ability to perform its obligations under this Agreement. 4.5 The representations and warranties of the Acquiror contained in this Agreement, except for the number of outstanding shares set forth in subparagraph 4.4(b) of this Agreement, shall be true at the Time of Closing as though they were made at the Time of Closing, and they shall survive the Completion and remain in full force and effect thereafter for the benefit of the Shareholders. 5. INDEMNITIES 5.1 Notwithstanding the Completion of the transactions contemplated under this Agreement or the Acquiror's Investigation, the representations, warranties and acknowledgements of the Shareholders, Pawnbroker or any one of them contained in this Agreement or any certificates or documents delivered by them or any one of them pursuant to this Agreement shall survive the Completion and shall continue in full force and effect thereafter for the benefit of the Acquiror. If any of the representations, warranties or acknowledgements given by the Shareholders, Pawnbroker or any one of them is found to be untrue or there is a breach of any covenant or agreement in this Agreement on the part of the Shareholders, Pawnbroker or any one of them, the Shareholders and Pawnbroker shall jointly and severally indemnify and save harmless the Acquiror from and against any and all liability, claims, debts, demands, suits, actions, penalties, fines, losses, costs (including legal fees, disbursements and taxes as charged on a lawyer and own client basis), damages and expenses of any kind whatsoever which may be brought or made against the Acquiror by any person, firm or corporation of any kind whatsoever or which may be suffered or incurred by the Acquiror, directly or indirectly, arising out of or as a consequence of any such misrepresentation or breach of warranty, acknowledgement, covenant or agreement. Without in any way limiting the generality of the foregoing, this shall include any loss of any kind whatsoever which may be suffered or incurred by the Acquiror, directly or indirectly, arising out of any material assessment or reassessment levied upon Pawnbroker for tax, interest and/or penalties relating to any period of business operations up to and including the Closing Date and all claims, demands, costs (including legal fees, disbursements and taxes as charged on a lawyer and own client basis) and expenses of any kind whatsoever in respect of the foregoing. 5.2 Notwithstanding the Completion of the transactions contemplated under this Agreement, the representations, warranties and acknowledgements of the Acquiror contained in this Agreement or any certificates or documents delivered by the Acquiror pursuant to this Agreement shall survive the 16 Completion and shall continue in full force and effect thereafter for the benefit of the Shareholders and Pawnbroker. If any of the representations, warranties or acknowledgements given by the Acquiror is found to be untrue or there is a breach of any covenant or agreement in this Agreement on the part of the Acquiror, then the Acquiror shall indemnify and save the Shareholders and Pawnbroker harmless from and against any and all liability, claims, debts, demands, suits, actions, penalties, fines, losses, costs (including legal fees, disbursements and taxes as charged on a lawyer and own client basis), damages and expenses of any kind whatsoever which may be brought or made against the Shareholders or Pawnbroker by any person, firm or corporation of any kind whatsoever or which may be suffered or incurred by the Shareholders or Pawnbroker, directly or indirectly, arising out of or as a consequence of any such misrepresentation or breach of warranty, acknowledgement, covenant or agreement. 6. CLOSING 6.1 At the Time of Closing, the Shareholders shall deliver to the solicitors for the Acquiror: (a) a certified true copy of the resolutions of the directors of Pawnbroker evidencing that the directors of the Pawnbroker have approved this Agreement and all of the transactions of Pawnbroker contemplated hereunder, specifically referring to: (i) the exchange and transfer of the Pawnbroker Shares from the Shareholders to the Acquiror as provided for in this Agreement; (ii) the cancellation of the share certificates (the "Old Share Certificates") representing the Pawnbroker Shares held as set forth in paragraph B of the recitals to this Agreement; and (iii) the issuance of a new share certificate (the "New Share Certificate") representing the Pawnbroker Shares registered in the name of the Acquiror; (b) the Old Share Certificates; (c) the New Share Certificate; (d) the Pawnbroker Solicitor Opinion; (e) a certificate of confirmation from each of the Shareholders substantially in the form of Schedule G to this Agreement; and (f) any other materials that are, in the opinion of the solicitors for the Acquiror, reasonably required to complete the transactions contemplated under this Agreement. 6.2 At the Time of Closing, the Acquiror shall deliver to the solicitors for the Shareholders: (a) certified true copies of the resolutions of the directors and, if shareholder approval is required, of the shareholders of the Acquiror, evidencing that the directors and, as applicable, the shareholders, of the Acquiror have approved this Agreement and all of the transactions of the Acquiror contemplated hereunder; (b) share certificates representing the Digital Shares registered in the names of the Shareholders as provided for in paragraph 1.2 of this Agreement; 17 (c) the Digital Solicitor Opinion; and (d) a certificate of confirmation signed by a director or officer of the Acquiror substantially in the form of Schedule H to this Agreement. 7. GENERAL 7.1 Time and each of the terms and conditions of this Agreement shall be of the essence of this Agreement and any waiver by the parties of this paragraph 7.1 or any failure by them to exercise any of their rights under this Agreement shall be limited to the particular instance and shall not extend to any other instance or matter in this Agreement or otherwise affect any of their rights or remedies under this Agreement. 7.2 The Schedules to this Agreement incorporated by reference and the recitals to this Agreement constitute a part of this Agreement. 7.3 This Agreement constitutes the entire Agreement between the parties hereto in respect of the matters referred to herein and there are no representations, warranties, covenants or agreements, expressed or implied, collateral hereto other than as expressly set forth or referred to herein. 7.4 The headings in this Agreement are for reference only and do not constitute terms of the Agreement. 7.5 The provisions contained in this Agreement which, by their terms, require performance by a party to this Agreement subsequent to the Closing Date of this Agreement, shall survive the Closing Date of this Agreement. 7.6 No alteration, amendment, modification or interpretation of this Agreement or any provision of this Agreement shall be valid and binding upon the parties hereto unless such alteration, amendment, modification or interpretation is in written form executed by the parties directly affected by such alteration, amendment, modification or interpretation. 7.7 Whenever the singular or masculine is used in this Agreement the same shall be deemed to include the plural or the feminine or the body corporate as the context may require. 7.8 The parties hereto shall execute and deliver all such further documents and instruments and do all such acts and things as any party may, either before or after the Closing Date, reasonably require in order to carry out the full intent and meaning of this Agreement. 7.9 Any notice, request, demand and other communication to be given under this Agreement shall be in writing and shall be delivered by hand to the appropriate party at the address as first set out above or to such other addresses or by such other means as may be designated in writing by the parties hereto in the manner provided for in this paragraph, and shall be deemed to have been received on the date of delivery by hand, or if delivered by e-mail or telecopy, then on the date transmission completes. 7.10 This Agreement shall be subject to, governed by, and construed in accordance with the laws of the State of Nevada and the federal laws of the United States of America pertaining thereto. 18 7.11 This Agreement may be signed by the parties in as many counterparts as may be deemed necessary, each of which so signed shall be deemed to be an original, and all such counterparts together shall constitute one and the same instrument. IN WITNESS WHEREOF the parties have hereunto set their hands and seals as of the Effective Date: SIGNED, SEALED & DELIVERED ) by JOSEPH SCHLADER in the presence of: ) ) /s/ Tracee Carmate ) - ----------------------------------------) /s/ Joseph Schlader Signature of Witness ) ----------------------------------- ) JOSEPH SCHLADER Name: Tracee Carmate ) Address: 4146 Fancas Dr. ) Napa, CA 94558 ) Occupation: Hotel Hospitality ) SIGNED, SEALED & DELIVERED ) by CHERYL SCHLADER in the presence of: ) ) /s/ Tracee Carmate ) - ----------------------------------------) /s/ Cheryl Schlader Signature of Witness ) ----------------------------------- ) CHERYL SCHLADER Name: Tracee Carmate ) Address: 4146 Fancas Dr. ) Napa, CA 94558 ) Occupation: Hotel Hospitality ) SIGNED, SEALED & DELIVERED ) by WILLIAM GALINE in the presence of: ) ) /s/ John Fowler ) - ----------------------------------------) /s/ William Galine Signature of Witness ) ----------------------------------- ) WILLIAM GALINE Name: John Fowler ) Address: 333 Holcomb Ave. ) Reno, NV ) Occupation: Attorney ) 19 THE CORPORATE SEAL of ) PAWNBROKER.COM INC. ) was hereunto affixed in the presence ) of its authorized signatory(ies): ) ) c/s - --------------------------------------- ) Name: --------------------------------- ) Title: -------------------------------- ) ) - --------------------------------------- ) Name: --------------------------------- ) Title: -------------------------------- ) THE CORPORATE SEAL of ) DIGITAL SIGN CORPORATION ) was hereunto affixed in the presence ) of its authorized signatory(ies): ) ) c/s /s/ Doug McLeod ) - --------------------------------------- ) Name: Doug McLeod ) Title: President ) 20 SCHEDULE A Pawnbroker Solicitor Opinion ---------------------------- (letterhead of solicitors for the Shareholders and Pawnbroker) - --, 199-- - ---------------------------- c/o Campney & Murphy Barristers and Solicitors P.O. Box 48800 2100-1111 West Georgia Street Vancouver, B.C. V7X 1K9 Attention: ----------------- Dear Sirs: Re: Share Exchange Agreement (the "Agreement") made effective as of the 14 day of May, 1999 between Joseph Schlader, Cheryl Schlader and William Galine (collectively the "Shareholders"), Pawnbroker.com, Inc. ("Pawnbroker") and Digital Sign Corporation (the "Acquiror") We are the solicitors for the Shareholders and for Pawnbroker. We provide this opinion pursuant to subparagraphs 2.1(c) and 6.1(f) of the Agreement. We have also acted as counsel for Pawnbroker and the Shareholders in connection with the negotiation, execution and completion of the Agreement. We have considered such questions of law and examined such statutes and regulations, corporate records, certificates and other documents and have made such other examinations, searches and investigations as we have considered necessary for the purpose of the opinion hereinafter expressed. In such examination, we have assumed the genuineness of all signatures and the authenticity of all documents submitted to us as originals and the conformity to original documents of all documents submitted to us as certified or as photocopies. Based on and subject to the foregoing, we are of the opinion that: 1. Pawnbroker is a company duly incorporated and validly existing under the laws of the State of Nevada. Pawnbroker is in good standing with respect to the filing of annual reports with the ----- Registrar of Companies for the State of Nevada. 2. To the best of our knowledge, Pawnbroker has all requisite corporate power and authority to conduct the business now carried on by it, and to own its property and assets as described in the Agreement and Pawnbroker has all requisite corporate power and authority to enter into and to perform its obligations under the Agreement. 3. All necessary steps and corporate action and proceedings have been taken to authorize the execution and delivery of the Agreement by Pawnbroker. 4. To the best of our knowledge, neither the execution and delivery of, nor the performance of its obligations under the Agreement by Pawnbroker will conflict with or constitute a breach or default under the constating documents of Pawnbroker or any commitment, agreement or other instrument to which Pawnbroker is a party or by which it is bound. 5. To the best of our knowledge, there are no claims, judgement, actions, suits, litigation, proceedings or investigations, actual, pending or threatened against Pawnbroker which might materially affect any business, properties, assets, prospects or conditions, financial or otherwise, of Pawnbroker or which could result in any material liability to Pawnbroker. 6. The authorized capital of Pawnbroker consists of ----- common shares of which only 1,000 common shares (the "Pawnbroker Shares") are validly authorized, created, allotted, issued and outstanding, and, to the best of our knowledge, are fully paid for and non-assessable, as at the date hereof. 7. All necessary steps and corporate action and proceedings have been taken to effect the valid transfer of the Pawnbroker Shares to the Acquiror as contemplated under the Agreement. The Acquiror is the registered owner of the Pawnbroker Shares on the books and records of Pawnbroker. The opinion expressed is subject to the qualification that enforceability of the Agreement may be limited by applicable bankruptcy, insolvency or other laws affecting creditors' rights generally, and that equitable remedies such as the remedies of specific performance or injunction are in the discretion of the court from which they are sought. Yours truly, - ----------------------------- Per: - ----------------------------- -2- SCHEDULE B Digital Solicitor Opinion ------------------------- (letterhead of solicitors for the Acquiror) - -----, 199- - ---------------------------- c/o ------------------------ Attorneys at Law - ---------------------------- Attention: Mr. John Fowler Dear Sirs: Re: Share Exchange Agreement (the "Agreement") made effective as of the 14 day of May, 1999 between Joseph Schlader, Cheryl Schlader and William Galine (collectively the "Shareholders"), Pawnbroker.com, Inc. ("Pawnbroker") and Digital Sign Corporation (the "Acquiror") We are the solicitors the Acquiror. We provide this opinion pursuant to subparagraphs2.2(b) and 6.2(c) of the Agreement. We have acted as counsel for the Acquiror in connection with the negotiation, execution and completion of the Agreement. We have considered such questions of law and examined such statutes and regulations, corporate records, certificates and other documents and have made such other examinations, searches and investigations as we have considered necessary for the purpose of the opinion hereinafter expressed. In such examination, we have assumed the genuineness of all signatures and the authenticity of all documents submitted to us as originals and the conformity to original documents of all documents submitted to us as certified or as photocopies. Based on and subject to the foregoing, we are of the opinion that: 1. The Acquiror is a company duly incorporated and validly existing under the laws of the State of Delaware. The Acquiror is in good standing with respect to the filing of annual reports with the ----- Registrar of Companies for the State of Delaware. 2. The Acquiror has all requisite corporate power and authority to enter into and to perform its obligations under the Agreement. 3. All necessary steps and corporate action and proceedings have been taken to authorize the execution and delivery of the Agreement by the Acquiror. 4. To the best of our knowledge, neither the execution and delivery of, nor the performance of its obligations under the Agreement by the Acquiror will conflict with or constitute a breach of or default under the constating documents of the Acquiror or any commitment, agreement or other instrument to which the Acquiror is a party or by which it is bound. 5. As at the Effective Date of the Agreement, the authorized capital of the Acquiror consisted of common shares without par value of which 38,499,.000 were validly authorized, created, allotted, issued and outstanding, and, to the best of our knowledge, fully paid for and non-assessable. 6. All necessary steps and corporate action and proceedings have been taken to effect the valid issuance of the Digital Shares to the Shareholders as contemplated under the Agreement. The opinion expressed is subject to the qualification that enforceability of the Agreement may be limited by applicable bankruptcy, insolvency or other laws affecting creditors' rights generally, and that equitable remedies such as the remedies of specific performance or injunction are in the discretion of the court from which they are sought. Yours truly, - ---------------------------- Per: - ---------------------------- -2- SCHEDULE C Pawnbroker Assets ----------------- All rights, title and interest in and to all tangible and intangible property associated with the business (the "Business") carried on at, through or in association with either or both of the internet domain names "Pawnbroker.com" and "Pawnbrokers.com" (the "Domain Names"), and all related internet website development (collectively, the "Website"), including without limitation: (i) the contractual right to maintain registration of the Domain Names with Internic (Network Solutions Inc.); (ii) all URL's associated with the Domain Names or the Website; (iii) all databases, books and records relating to the Business including, without limitation, all recorded information relating to customers of the Business, and advertisers on and visitors to the Website; (iv) copyright in all graphics and text displayed at the Website; (v) copyright in all customized (non-retail) software relating to the Website or used in the Business; (vi) all trade-mark and trade name rights that the Shareholder may have anywhere in the world in respect of the Business, the Website or either of the Domain Names; (vii) all goodwill associated with the Business, the Website or either of the Domain Names; and (viii) all incidental furniture and fixtures used in the Business. Permitted Encumbrances ---------------------- NIL. SCHEDULE D Pawnbroker Directors, Officers, Employees, Contractors and Consultants ---------------------------------------------------------------------- Name and Address Relationship Compensation Arrangement - ---------------------------------------------------- -------------------------- -------------------------------------- Joseph Schlader, 3085 Windermere Way, Sparks, Director and President None. Nevada, 89431 - ---------------------------------------------------- -------------------------- -------------------------------------- Cheryl Schlader, 3085 Windermere Way, Sparks, Director and Vice None. Nevada, 89431 President - ---------------------------------------------------- -------------------------- -------------------------------------- William Galine, 4332 Amberwood Avenue, Reno, Director and Secretary None. Nevada, 89509 - ---------------------------------------------------- -------------------------- --------------------------------------
SCHEDULE E Pawnbroker Material Contracts ----------------------------- 1. (Computer Equipment Lease) 2. (Premises Lease); and 3. (Telephone Lease). -2- Draft #2: May 12/99: 695325 SCHEDULE F Acquiror Directors, Officers, Employees, Contractors and Consultants -------------------------------------------------------------------- - ---------------------------------------------------- -------------------------- -------------------------------------- Name and Address Relationship Compensation Arrangement - ---------------------------------------------------- -------------------------- -------------------------------------- ---------------- ---------------- ---------------- - ---------------------------------------------------- -------------------------- -------------------------------------- ---------------- ---------------- ---------------- - ---------------------------------------------------- -------------------------- -------------------------------------- ---------------- ---------------- ---------------- - ---------------------------------------------------- -------------------------- -------------------------------------- ---------------- ---------------- ---------------- - ---------------------------------------------------- -------------------------- -------------------------------------- ---------------- ---------------- ---------------- - ---------------------------------------------------- -------------------------- --------------------------------------
SCHEDULE G Certificate of Confirmation --------------------------- Pursuant to subparagraph 6.1(e) of the Share Exchange Agreement made effective as of the 14 day of May, 1999 (the "Agreement") between Joseph Schlader, Cheryl Schlader and William Galine (collectively the "Shareholders"), Pawbroker.com, Inc. and Digital Sign Corporation (the "Acquiror"), the undersigned Shareholder hereby confirms to the Acquiror that the representations and warranties of the Shareholders contained in the Agreement or contained in any certificates or documents delivered by them or any of them pursuant to the Agreement are true and correct in every respect as of the Time of Closing of the Agreement being 11:00 o'clock a.m. local time in Vancouver, B.C. on the 16 day of June, 1999. Dated at --------, this 16th day of June, 1999. ------------------------------------------ -31- SCHEDULE H Certificate of Confirmation --------------------------- Pursuant to subparagraph 6.2(d) of the Share Exchange Agreement made effective as of the 14 day of May, 1999 (the "Agreement") between Joseph Schlader, Cheryl Schlader and William Galine (collectively the "Shareholders"), Pawbroker.com, Inc. and Digital Sign Corporation (the "Acquiror"), the Acquiror confirms to the Shareholders that the representations and warranties of the Acquiror contained in the Agreement or contained in any certificates or documents delivered by it pursuant to the Agreement are true and correct in every respect as of the Time of Closing of the Agreement, being 11:00 o'clock a.m. local time in Vancouver, B.C. on the 16th day of June, 1999. Dated at Vancouver, British Columbia, this 16th day of June, 1999. Digital Sign Corporation Per: --------------------------------- ----------------------, Director EX-2.4 5 ADDENDUM TO AGREEMENT AND PLAN OF REORGANIZATION EXHIBIT 2.4 ADDENDUM THIS ADDENDUM MADE EFFECTIVE AS OF 11 JUNE 1999 AMENDS THE AGREEMENT AND PLAN OF REORGANIZATION MADE EFFECTIVE AS OF 14 MAY 1999 (the "Agreement"), BETWEEN: JOSEPH SCHLADER ("Mr. Schlader"), of 3085 Windermere Way, Sparks, Nevada, 89431 CHERYL SCHLADER ("Ms. Schlader"), of 3085 Windermere Way, Sparks, Nevada, 89431 WILLIAM GALINE ("Mr. Galine"), of 4332 Amberwood Avenue, Reno, Nevada, 89509 (individually, a "Shareholder" and collectively, the "Shareholders"); AND: PAWNBROKER.COM INC., a corporation incorporated under the laws of the State of Nevada having a place of business at 701 Ryland Avenue, Reno, Nevada, U.S.A., 89502 ("Pawnbroker"); AND: PAWNBROKER.COM INC. (formerly DIGITAL SIGN CORPORATION), a company incorporated under the laws of the State of Delaware having a place of business at 688 - 6 Ishikawa, Kanagawa, Japan, 252 0815 (the "Acquiror"); WHEREAS: A. The Shareholders, Pawnbroker and the Acquiror entered into the Agreement on 18 May 1999, and have since agreed to amend certain terms of the Agreement; NOW THEREFORE THIS ADDENDUM (this "Addendum") WITNESSES that in consideration of the mutual covenants and agreements herein contained, the parties hereto do covenant and agree as follows: 1. SHARE EXCHANGE 1.1 Paragraph 1.1 of the Agreement is hereby amended to provide that the Shareholders shall transfer all of the Pawnbroker Shares to the Acquiror, and the Acquiror agrees to acquire all of the Pawnbroker Shares, in exchange for 6,240,000 voting common shares of the Acquiror (the "Digital Shares") with an aggregate value of US$1,500,096 (at the deemed price of US$0.2404 per Digital Share). 1.2 Paragraph 1.2 of the Agreement is hereby amended to provide that the Digital Shares shall be issued by the Acquiror to the Shareholders as follows: Mr. Schlader as to 1,591,200 Digital Shares Ms. Schlader as to 1,591,200 Digital Shares Mr. Galine as to 3,057,600 Digital Shares Total: 6,240,000 Digital Shares ======================== 1.3 Paragraph 1.4 of the Agreement is hereby amended to provide that the transactions contemplated under the Agreement shall be completed (the "Completion") at the offices of the Acquiror's solicitors, Messrs. Campney & Murphy, 2100 - 1111 West Georgia Street, Vancouver, British Columbia, or at such other place as may be agreed between the parties, at 11:00 o'clock a.m. local time in Vancouver, B.C., or at such other time as may be agreed between the parties, (the "Time of Closing") on 23 June 1999, or on such other date as may be agreed between the parties, (the "Closing Date"). 2. CONDITIONS PRECEDENT 2.1 Subparagraph 2.1(a) of the Agreement is hereby amended to provide that the Acquiror's obligation to carry out the terms of the Agreement and to complete its transactions contemplated under the Agreement is subject to the fulfilment to the satisfaction of the Acquiror of the condition that: (a) on or before 23 June 1999, the Acquiror shall have been able to complete the Acquiror's Investigation (defined below) with results to its reasonable satisfaction; and the fulfilment to the satisfaction of the Acquiror of each of the other conditions listed in paragraph 2.1 of the Agreement. 2.2 Subparagraph 2.2(a) of the Agreement is hereby amended to provide that the Shareholders' respective obligations to carry out the terms of the Agreement and to complete their respective transactions contemplated under the Agreement are subject to the fulfilment to the satisfaction of the Shareholders of the condition that: (a) on or before 23 June 1999, the Acquiror shall have restructured or otherwise altered its share capital so that the Acquiror's authorized capital is sufficient to permit issuance of the Digital Shares, and so that upon issuance of the Digital Shares the Acquiror's issued share capital will be 15,614,750 common shares (excluding the Acquiror's common shares to be issued in the course of the Financing defined below); and the fulfilment to the satisfaction of the Shareholders of each of the other conditions listed in paragraph 2.2 of the Agreement. 3. COVENANTS, AGREEMENTS AND ACKNOWLEDGEMENTS 3.1 Subparagraph 3.4(e) of the Agreement is hereby amended to provide that prior to the Closing Date, the Acquiror will use its reasonable best efforts to undertake a financing (the "Financing") to raise US$3,000,000 for working capital purposes. -2- 4. REPRESENTATIONS AND WARRANTIES 4.1 Subparagraphs 4.4(c) and 4.4(h) of the Agreement are hereby amended to provide that, in order to induce the Shareholders to enter into this Agreement and complete their respective transactions contemplated hereunder, the Acquiror represents and warrants to the Shareholders that: (c) prior to the Closing Date, the Acquiror will effect a repurchase and cancellation of some of the Outstanding Shares and a 4:1 rollback of the Outstanding Shares, so that on the Closing Date the Acquiror will have 9,374,750 common shares issued and outstanding; and (h) the Certificate of Incorporation of the Acquiror is that filed on 13 February 1998 with the Secretary of State of Delaware and there are no other documents amending such certificate which have been filed or contemplated except the Certificate of Designation reducing the number of issued and outstanding common shares of the Acquiror to 9,374,750 immediately before the Closing Date. 5. GENERAL 5.1 Schedules A, B, G and H to this Addendum are hereby substituted for Schedules A, B, G and H to the Agreement, respectively. 5.2 All terms of the Agreement not specifically amended by this Addendum shall continue in full force and effect, unamended, subject to any further agreement in writing between the parties. 5.3 This Addendum may be signed by the parties in as many counterparts as may be deemed necessary, each of which so signed shall be deemed to be an original, and all such counterparts together shall constitute one and the same instrument. IN WITNESS WHEREOF the parties have hereunto set their hands and seals as of 11 June 1999: SIGNED, SEALED & DELIVERED ) by JOSEPH SCHLADER in the presence of: ) ) /s/ John Fowler ) - ----------------------------------------) /s/ John Schlader Signature of Witness ) ----------------------------------- ) JOSEPH SCHLADER Name: --------------------------------- ) Address: ------------------------------ ) - ----------------------------------------) Occupation: --------------------------- ) -3- SIGNED, SEALED & DELIVERED ) by CHERYL SCHLADER in the presence of: ) ) /s/ John Fowler ) - ----------------------------------------) /s/ Cheryl Schlader Signature of Witness ) ----------------------------------- ) CHERYL SCHLADER Name: --------------------------------- ) Address: ------------------------------ ) - ----------------------------------------) Occupation: --------------------------- ) SIGNED, SEALED & DELIVERED ) by WILLIAM GALINE in the presence of: ) ) /s/ John Fowler ) - ----------------------------------------) /s/ William Galine Signature of Witness ) ----------------------------------- ) WILLIAM GALINE Name: --------------------------------- ) Address: ------------------------------ ) - ----------------------------------------) Occupation: --------------------------- ) THE CORPORATE SEAL of ) PAWNBROKER.COM INC. ) was hereunto affixed in the presence ) of its authorized signatory(ies): ) ) c/s /s/ Joseph Schlader ) - --------------------------------------- ) Name: Joseph Schlader ) Title: President ) ) /s/ William Galine ) - ----------------------------------------) Name: William Galine ) Title: Secretary ) THE CORPORATE SEAL of ) PAWNBROKER.COM INC. (formerly) ) DIGITAL SIGN CORPORATION ) was hereunto affixed in the presence ) of its authorized signatory(ies): ) ) c/s /s/ Doug McLeod ) - --------------------------------------- ) Name: Doug McLeod ) Title: President ) ) - --------------------------------------- ) Name: --------------------------------- ) Title: -------------------------------- ) -4- SCHEDULE A Pawnbroker Solicitor Opinion ---------------------------- (letterhead of solicitors for the Shareholders and Pawnbroker) - --------, 199- Pawnbroker.com, Inc. (formerly c/o Campney & Murphy Barristers and Solicitors P.O. Box 48800 2100-1111 West Georgia Street Vancouver, B.C. V7X 1K9 Attention: ----------------------- Dear Sirs: Re: Agreement and Plan of Reorganization (the "Agreement") made effective as of 14 May, 1999, as amended by Addendum made effective as of 11 June 1999 (the "Addendum"), between Joseph Schlader, Cheryl Schlader and William Galine (collectively the "Shareholders"), Pawnbroker.com, Inc., a Nevada corporation ("Pawnbroker"), and Pawnbroker.com, Inc., a Delaware corporation (formerly Digital Sign Corporation) (the "Acquiror") We are the attorneys for the Shareholders and for Pawnbroker. We provide this opinion pursuant to subparagraphs 2.1(c) and 6.1(f) of the Agreement. We have also acted as counsel for Pawnbroker and the Shareholders in connection with the negotiation, execution and completion of the Agreement and the Addendum. In connection with this letter, we have examined the following documents only: 1. Articles of Incorporation for Pawnbroker as filed with the Nevada Secretary of State's Office on April 22, 1999; 2. Bylaws of Pawnbroker as adopted by the Board of Directors on April 26, 1999; 3. Minutes of the Organizational Meeting of the Board of Directors of Pawnbroker dated April 26, 1999; 4. Stock Certificates numbered 1, 2 and 3 for the common stock of Pawnbroker evidencing the shares of Pawnbroker" common stock issued to Joseph Schlader, Cheryl Schlader and William Galine; 5. a copy of the Agreement as executed by the Shareholders, Pawnbroker and Acquiror; 6. a copy of the Addendum as executed by the Shareholders, Pawnbroker and Acquiror; 7. Resolutions of the Board of Directors of Pawnbroker dated ____________ authorizing the execution, delivery and performance of the conditions of the Agreement and other matters related thereto; and 8. Resolutions of the Board of Directors of Pawnbroker dated ____________ authorizing the execution, delivery and performance of the conditions of the Addendum and the Agreement as amended thereby. In rendering this opinion, we have assumed legal capacity of all individuals to execute all documents in their individual capacities and the genuineness of the signatures and the authenticity of all documents submitted to us as originals. We have assumed the conformity to authentic original documents of all documents submitted to us as copies. We have assumed the due authorization, execution and delivery of the Agreement and the Addendum by the Acquiror. We have not conducted independent investigations or inquiries to determine the existence of matters, actions, proceedings, items, documents, facts, judgments, suits, litigation or investigations or the like and have made no independent search of the records of any court, arbitrator or governmental authority. Therefore, when we state that a matter is "to the best of our knowledge", the knowledge is the actual knowledge of John P. Fowler of this firm without any of the investigations described in the preceding sentence. Based on and subject to the foregoing, we are of the opinion that, under Nevada law: 1. Pawnbroker is a company duly incorporated, validly existing and in good standing under the laws of the State of Nevada. 2. To the best of our knowledge, Pawnbroker has all requisite corporate power and authority to conduct the business now carried on by it, and to own its property and assets as described in the Agreement and Pawnbroker has all requisite corporate power and authority to enter into and to perform its obligations under the Agreement, as amended by the Addendum. 3. All necessary steps and corporate action and proceedings have been taken to authorize the execution and delivery of the Agreement and the Addendum by Pawnbroker. 4. To the best of our knowledge, neither the execution and delivery of, nor the performance by Pawnbroker of its obligations under the Agreement, as amended by the Addendum, will conflict with or constitute a breach or default under the articles of incorporation or bylaws of Pawnbroker or any commitment, agreement or other instrument to which Pawnbroker is a party or by which it is bound. 5. To the best of our knowledge, there are no claims, judgement, actions, suits, litigation, proceedings or investigations, actual, pending or threatened against Pawnbroker which might materially affect any business, properties, assets, prospects or conditions, financial or otherwise, of Pawnbroker or which could result in any material liability to Pawnbroker. 6. The authorized capital of Pawnbroker consists of 25,000 shares of common stock of which only 1,000 common shares (the "Pawnbroker Shares") are validly issued and outstanding, and, to the best of our knowledge, the Pawnbroker Shares are fully paid for and non-assessable, as of the date hereof. -2- 7. All necessary steps and corporate action and proceedings have been taken to effect the valid transfer of the Pawnbroker Shares to the Acquiror as contemplated under the Agreement as amended by the Addendum. The Acquiror is the registered owner of the Pawnbroker Shares on the books and records of Pawnbroker. We have not examined, and do not opine as to, the laws of any jurisdiction other than the State of Nevada. This opinion is being furnished to you solely for your use and no other person other than you may rely on this opinion in any manner. This opinion is rendered as of the date hereof and we have undertaken no, and hereby disclaim any, obligation to advise you of any changes in, or any new development which might affect, any matters or opinions set forth in this letter. Very truly yours, MARSHALL HILL CASSAS & de LIPKAU By: ---------------------------------- John P. Fowler -3- SCHEDULE B Digital Solicitor Opinion ------------------------- (letterhead of solicitors for the Acquiror) - ----------, 199- - ------------------------------- Attorneys at Law - ------------------------------- Attention: Mr. John Fowler Dear Sirs: Re: Agreement and Plan of Reorganization (the "Agreement") made effective as of 14 May 1999, as amended by Addendum made effective as of 11 June 1999 (the "Addendum") between Joseph Schlader, Cheryl Schlader and William Galine (collectively, the Shareholders"), Pawnbroker.com, Inc., a Nevada corporation ("Pawnbroker") and Pawnbroker.com Inc., a Delaware corporation (formerly Digital Sign Corporation) (the "Acquiror") Dear Sirs: We have acted as counsel for Pawnbroker.com, Inc. (formerly Digital Sign Corporation) a Delaware corporation (the "Acquiror"), in connection with the acquisition of all of the issued and outstanding shares of Pawnbroker.com, Inc., a Nevada corporation ("Pawnbroker"), from Joseph Schlader, Cheryl Schlader and William Galine (collectively the "Shareholders"), pursuant to an Agreement and Plan of Reorganization by and among the Acquiror, Pawnbroker and the Shareholders effective as of the 14th day of May, 1999 (the "Agreement"), as amended by Addendum made effective as of the 11th day of June, 1999 (the "Addendum"). We are rendering this opinion at the request of our client and as contemplated by subparagraphs 2.2(b) and 6.2(c) of the Agreement. In so acting, we have examined the following documents, instruments and certificates: 1. the Agreement, which provides that it is governed by the laws of Nevada; 2. the Addendum; 3. a Certificate of Good Standing dated June __, 1999 with respect to the Acquiror by the Secretary of State of the State of Delaware; 4. the Certificate of Incorporation of the Acquiror, as amended, certified as of June __, 1999 by the Secretary of State of the State of Delaware; and 5. a certificate of an Officer of the Acquiror, a copy of which has been provided to Pawnbroker and the Shareholders; and we have reviewed and relied upon such other certificates, documents, records and materials, and have made such other investigations of law, as we have deemed necessary for purposes of rendering this opinion. In rendering the opinions expressed below, we have assumed with your permission and without independent verification: (a) the genuineness of all signatures, the authenticity of all documents, certificates and records submitted to us as originals or copies, the exact conformity with the executed original of all documents, certificates and records submitted to us as copies and the completeness and accuracy as of the date of this opinion letter of the information contained in such documents, certificates and records; (b) that the representations and warranties as to factual matters made in the Agreement are true, complete and accurate; As to questions of fact material to this opinion letter, we have relied without independent verification solely upon the representations and recitals contained in the Agreements and upon the documents, instruments and certificates submitted to us. Based upon and subject to the foregoing and further subject to the qualifications set forth below, we are of the opinion that: 1. The Acquiror is a corporation duly incorporated and validly existing under the laws of the State of Delaware. The Acquiror is in good standing with respect to the filing of annual reports with the Secretary of State for the State of Delaware. 2. The Acquiror has all requisite corporate power and authority to enter into and to perform its obligations under the Agreement as amended by the Addendum. 3. The execution and delivery of the Agreement and the Addendum by the Acquiror, and the performance of its obligations thereunder, have been duly authorized by all necessary corporate action on the part of the Acquiror. 4. The execution and delivery of and the performance by the Acquiror of the Acquiror's obligations under the Agreement, as amended by the Addendum, will not conflict with the Certificate of Incorporation or Bylaws of the Acquiror. 5. As of May 14, 1999, the authorized capital stock of the Acquiror consisted of seventy million (70,000,000) shares, which are divided twenty million (20,000,000) Preferred shares with a par value of $0.00001 and fifty million (50,000,000) Common shares with a par value of $0.00001. 6. The Common stock of the Acquiror to be issued to the Shareholders have been duly authorized and, upon issuance, delivery and receipt of the consideration as described in the Agreement, will be validly issued, fully paid and non-assessable. We do not express any opinions in this letter concerning any laws other than the General Corporation Law of the State of Delaware and the federal laws of the United States of America. We express no opinion regarding any federal or state securities laws. The opinions expressed above are rendered as of the date of this letter, without any obligation to update this letter or otherwise to advise you or any other person or entity of any matters (including, but not limited to, any subsequently enacted, published or reported laws, rules, regulations or judicial decisions having retroactive effect) which may come to our attention after the date of this letter, even though matters may affect a legal analysis or conclusion, or factual information in this opinion letter. This opinion letter is furnished to you solely for your use in connection with the transactions contemplated by the Agreement. This opinion letter may not be used or relied upon by you for any other purpose, and may not be used or relied upon by any other person or entity for any purpose, in each case without our prior written consent. Very truly yours, -2- PAWNBROKER.COM, INC. (formerly DIGITAL SIGN CORPORATION) Secretary's Certificate ----------------------- The undersigned, _________, being the Secretary of PAWNBROKER.COM, INC. (formerly DIGITAL SIGN CORPORATION), a Delaware corporation (the "Corporation"), provides this Certificate in connection with the acquisition of all of the issued and outstanding shares of Pawnbroker.com, Inc., a Nevada corporation ("Pawnbroker"), from Joseph Schlader, Cheryl Schlader and William Galine (collectively the "Shareholders"), pursuant to an Agreement and Plan of Reorganization by and among the Acquiror, Pawnbroker and the Shareholders effective as of the 14th day of May, 1999 (the "Agreement"), as amended by Addendum effective as of the 11th day of June, 1999. The undersigned understands that the law firm of Dorsey & Whitney LLP will be relying upon this Certificate in issuing its opinion letter with respect to the transactions. The undersigned DOES HEREBY CERTIFY that: 1. Attached hereto as Exhibit A is a true and correct copy of the authorizing resolutions duly and unanimously adopted by the Board of Directors of the Corporation on __________. Such resolutions have not been amended, modified or revoked and are in full force and effect on the date of this Certificate. 2. There has been no amendment or other modification to the Certificate of Incorporation of the Corporation since __________ and such Certificate of Incorporation, as therefore amended, are in full force and effect on the date of this Certificate. 3. Attached hereto as Exhibit B is a true, correct and complete copy of the Bylaws of the Corporation, including any and all amendments thereto, and such Bylaws are in full force and effect on the date of this Certificate. IN WITNESS WHEREOF, the undersigned has executed this Certificate on June ___, 1999. -------------------------------------- -------------------, Secretary -3- PAWNBROKER.COM, INC. (formerly DIGITAL SIGN CORPORATION) CERTIFICATE OF INCUMBENCY AND SIGNATURE OF OFFICERS The undersigned, __________, the _________ of Pawnbroker.com, Inc. (formerly Digital Sign Corporation) a Delaware corporation (the "Corporation"), does hereby certify that each person named below is a duly elected and appointed officer of the Corporation holding the position set forth opposite the name of each person, and that the signature set forth opposite the name of each person below is the genuine signature of said officer: Name Office Signature - ---- ------ --------- - ------------------ President ----------------------- - ------------------ Secretary ----------------------- - ------------------ Treasurer ----------------------- IN WITNESS WHEREOF, the undersigned has signed this certificate as of this ____ day of June, 1999. --------------------------------- The undersigned, ____________, the Secretary of the Corporation, does hereby certify that ____________ is, and has been at all times material hereto, the duly elected and qualified President of the Corporation and that the signature written above in the foregoing certificate is his genuine signature. IN WITNESS WHEREOF, the undersigned has signed this certificate as of this ____ day of June, 1999. -------------------------------------- -------------------, Secretary -4- PAWNBROKER.COM, INC. (formerly DIGITAL SIGN CORPORATION) President's Certificate ----------------------- The undersigned, _________, being the President of PAWNBROKER.COM, INC. (formerly DIGITAL SIGN CORPORATION), a Delaware corporation (the "Corporation "), provides this Certificate in connection with the acquisition of all of the issued and outstanding shares of Pawnbroker.com, Inc., a Nevada corporation ("Pawnbroker"), from Joseph Schlader, Cheryl Schlader and William Galine (collectively the "Shareholders"), pursuant to an Agreement and Plan of Reorganization by and among the Acquiror, Pawnbroker and the Shareholders effective as of the 14th day of May, 1999 (the "Agreement"), as amended by Addendum effective as of the 11th day of June, 1999. The undersigned understands that the law firm of Dorsey & Whitney LLP will be relying upon this Certificate in issuing its opinion letter with respect to the transactions. The undersigned DOES HEREBY CERTIFY that: 1. The representations and warranties of the Corporation set forth in the Agreement and Plan of Reorganization, as amended, are true and correct on the date of this Certificate. IN WITNESS WHEREOF, the undersigned has executed this Certificate on June ___, 1999. -------------------------------------- -------------------, President -5- SCHEDULE G Certificate of Confirmation --------------------------- Pursuant to subparagraph 6.1(e) of the Agreement and Plan of Reorganization made effective as of the 14 day of May, 1999 (the "Agreement"), as amended by the Addendum thereto made effective as of the 11 day of June 1999 (the "Addendum"), between Joseph Schlader, Cheryl Schlader and William Galine (individually, a "Shareholder"), Pawnbroker.com, Inc. (a Nevada company) ("Pawnbroker") and Pawnbroker.com, Inc. (formerly Digital Sign Corporation, a Delaware company) (the "Acquiror"), the undersigned Shareholder hereby confirms to the Acquiror that the representations and warranties of Pawnbroker and the Shareholders contained in the Agreement or contained in any certificates or documents delivered by it pursuant to the Agreement are true and correct in every respect as of the Time of Closing of the Agreement, being 11:00 o'clock a.m. local time in Vancouver, B.C. on the 23rd day of June, 1999. Dated at ---, this 23rd day of June, 1999. -------------------------------------- ------------------------ SCHEDULE H Certificate of Confirmation --------------------------- Pursuant to subparagraph 6.2(d) of the Agreement and Plan of Reorganization made effective as of the 14 day of May, 1999 (the "Agreement"), as amended by the Addendum thereto made effective as of the 11 day of June 1999 (the "Addendum"), between Joseph Schlader, Cheryl Schlader and William Galine (collectively the "Shareholders"), Pawnbroker.com, Inc. (a Nevada company) and Pawnbroker.com, Inc. (formerly Digital Sign Corporation, a Delaware company) (the "Acquiror"), the Acquiror confirms to the Shareholders that the representations and warranties of the Acquiror contained in the Agreement or contained in any certificates or documents delivered by it pursuant to the Agreement are true and correct in every respect as of the Time of Closing of the Agreement, being 11:00 o'clock a.m. local time in Vancouver, B.C. on the 23rd day of June, 1999. Dated at Vancouver, British Columbia, this 23rd day of June, 1999. PAWNBROKER.COM, INC. (formerly Digital Sign Corporation) Per: --------------------------------- --------------------, Director EX-3.1 6 CERTIFICATE OF INCORPORATION OF DIGITAL SIGN CORP. EXHIBIT 3.1 STATE OF DELAWARE SECRETARY OF STATE DIVISION OF CORPORATIONS FILED 09:00 AM 02/13/1998 981059025 - 2857263 CERTIFICATE OF INCORPORATION OF DIGITAL SIGN CORPORATION --------- The undersigned, a natural person, for the purpose of organizing a corporation for conducting the business and promoting the purposes hereinafter stated, under the provisions and subject to the requirements of the laws of the State of Delaware (particularly Chapter 1, Title 8 of the Delaware Code and the acts amendatory thereof and supplemental thereto, and known, identified, and referred to as the "General Corporation Law of the State of Delaware"), hereby certifies that: FIRST: The name of the corporation (hereinafter called the "corporation") is DIGITAL SIGN CORPORATION. SECOND: The address, including street, number, city, and county, of the registered office of the corporation in the State of Delaware is 1013 Centre Road, City of Wilmington 19805, County of New Castle; and the name of the registered agent of the corporation in the State of Delaware at such address is Corporation Service Company. THIRD: The purpose of the corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware. FOURTH: The total number of shares of all classes of stock which the corporation shall have authority to issue is seventy million, which are divided into twenty million Preferred shares of a par value of one-one thousandth of a cent ($0.00001) each and fifty million Common shares of a par value of one-one thousandth of a cent ($0.00001) each. Subject to the provisions of Section 151 of the General Corporation Law of the State of Delaware, authority is expressly granted to the Board of Directors of the corporation to issue the Preferred shares of the corporation, from time to time, in one or more series and to fix the number of shares to be included in each series, the distinctive serial designation, the rate or rates of preferential cumulative, non-participating dividends payable in cash annually, semi-annually, or quarterly, the times of payment of and the dates from which such dividends shall be cumulative, the price or prices at which the same may be redeemed, which shall be not less than the par value thereof, plus arrearages, if any, the notice of redemption, the amount and terms of any sinking or purchase fund, if any, for the purchase or redemption thereof, provided such sinking fund is payable only out of funds legally available therefor, the -1- terms, conditions, rights, privileges, and other provisions, if any, respecting the conversion of any or all series of Preferred shares into Common shares, and the preferential amount or amounts which shall be paid to the holders thereof in the event of the liquidation, dissolution, or winding up of the corporation, whether voluntary or involuntary, which shall be not less than the par value thereof, plus arrearages, if any. Whenever full dividends as aforesaid upon all shares of all series of Preferred shares which are issued and outstanding for all past annual dividend periods shall have been paid, without interest, and whenever full dividends upon said shares as aforesaid for the then current annual dividend period shall have been declared and either paid or a sum sufficient for the payment thereof set aside in full, without interest, the Board of Directors may declare, set aside, or pay additional cash dividends, and/or may declare, set aside or pay stock dividends of the authorized but unissued Common shares of the corporation and/or its treasury Common shares, if any, and/or may make distributions of bonds or property of the corporation, including the shares or bonds of other corporations. The holders of record of the issued and outstanding Common shares shall be entitled in respect of said Common shares exclusively to receive any such additional cash dividends which may be declared and/or any such distributions which may be made, each issued and outstanding Common share entitling the holder of record thereof to receive an equal proportion of said dividends and/or distributions. Any reference to "distributions" in this paragraph contained shall not be deemed to include any distributions made in connection with any liquidation, dissolution, or winding up of the corporation, whether voluntary or involuntary; nor shall any such reference to "distributions" in relation to issued and outstanding shares be deemed to limit, curtail, or divest the authority of the Board of Directors to make any proper distributions, including distributions of authorized but unissued Common shares, in relation to its treasury Common shares, if any. Each issued and outstanding Common share shall entitle the holder thereof to full voting power. Except as any provision of law may otherwise require, no share of any series of Preferred shares shall entitle the holder thereof to any voting power, to participate in any meeting of stockholders, or to have notice of any meeting of stockholders. No holder of any of the shares of the stock of the corporation, whether now or hereafter authorized and issued, shall be entitled as of right to purchase or subscribe for any unissued stock of any class, or any additional shares of any class to be issued by reason of any increase of the authorized capital stock of any class of the corporation, or bonds, certificates of indebtedness, debentures, or other securities convertible into stock of any class of the corporation, or carrying any right to purchase stock of any class of the corporation, but any such unissued stock or any such additional authorized issue of any stock or of other securities convertible into stock, or carrying any right to purchase stock, may be issued and disposed of pursuant to resolution of the Board of Directors to such persons, firms, corporations, or associations, and upon such terms, as may be deemed advisable by the Board of Directors in the exercise of its discretion. -2- FIFTH: The name and the mailing address of the incorporator are as follows: NAME MAILING ADDRESS ---- --------------- EDWARD F. MYERS 505 CAMINO ELEVADO BONITA, CALIFORNIA 91902 SIXTH: The corporation is to have perpetual existence. SEVENTH: Whenever a compromise or arrangement is proposed between this corporation and its creditors or any class of them and/or between this corporation and its stockholders or any class of them, any court of equitable jurisdiction within the State of Delaware may, on the application in a summary way of this corporation or of any creditor or stockholder thereof or on the application of any receiver or receivers appointed for this corporation under ss. 291 of Title 8 of the Delaware Code or on the application of trustees in dissolution or of any receiver or receivers appointed for this corporation under ss. 279 of Title 8 of the Delaware Code order a meeting of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this corporation, as the case may be, to be summoned in such manner as the said court directs. If a majority in number representing three fourths in value of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this corporation, as the case may be, agree to any compromise or arrangement and to any reorganization of this corporation as consequence of such compromise or arrangement, the said compromise or arrangement and the said reorganization shall, if sanctioned by the court to which the said application has been made, be binding on all the creditors or class of creditors, and/or on all the stockholders or class of stockholders, of this corporation, as the case may be, and also on this corporation. EIGHTH: For the management of the business and for the conduct of the affairs of the corporation, and in further definition, limitation, and regulation of the powers of the corporation and of its directors and of its stockholders or any class thereof, as the case may be, it is further provided: 1. The management of the business and the conduct of the affairs of the corporation shall be vested in its Board of Directors. The number of directors which shall constitute the whole Board of Directors shall be fixed by, or in the manner provided in, the Bylaws. The phrase "whole Board" and the phrase "total number of directors" shall be deemed to have the same meaning, to wit, the total number of directors which the corporation would have if there were no vacancies. No election of directors need be by written ballot. 2. After the original or other Bylaws of the corporation have been adopted, amended, or repealed, as the case may be, in accordance with the provisions of ss. 109 of the General Corporation Law of the State of Delaware, and, after the corporation has received any payment for any of its stock, the power to adopt, amend, or repeal the Bylaws of the corporation may be -3- exercised by the Board of Directors of the corporation; provided, however, that any provision for the classification of directors of the corporation for staggered terms pursuant to the provisions of subsection (d) of ss. 141 of the General Corporation Law of the State of Delaware shall be set forth in an initial Bylaw or in a Bylaw adopted by the stockholders entitled to vote of the corporation unless provisions for such classification shall be set forth in this certificate of incorporation. 3. Whenever the corporation shall be authorized to issue only one class of stock, each outstanding share shall entitle the holder thereof to notice of, and the right to vote at, any meeting of stockholders. Whenever the corporation shall be authorized to issue more than one class of stock, no outstanding share of any class of stock which is denied voting power under the provisions of the certificate of incorporation shall entitle the holder thereof to the right to vote at any meeting of stockholders except as the provisions of paragraph (2) of subsection (b) of ss. 242 of the General Corporation Law of the State of Delaware shall otherwise require; provided, that no share of any such class which is otherwise denied voting power shall entitle the holder thereof to vote upon the increase or decrease in the number of authorized shares of said class. NINTH: The personal liability of the directors of the corporation is hereby eliminated to the fullest extent permitted by the provisions of paragraph (7) of subsection (b) of ss. 102 of the General Corporation Law of the State of Delaware, as the same may be amended and supplemented. TENTH: The corporation shall, to the fullest extent permitted by the provisions of ss. 145 of the General Corporation Law of the State of Delaware, as the same may be amended and supplemented, indemnify any and all persons whom it shall have power to indemnify under said section from and against any and all of the expenses, liabilities, or other matters referred to in or covered by said section, and the indemnification provided for herein shall not be deemed exclusive of any other rights to which those indemnified may be entitled under any Bylaw, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a director, officer, employee, or agent and shall inure to the benefit of the heirs, executors, and administrators of such a person. -4- ELEVENTH: From time to time any of the provisions of this certificate of incorporation may be amended, altered, or repealed, and other provisions authorized by the laws of the State of Delaware at the time in force may be added or inserted in the manner and at the time prescribed by said laws, and all rights at any time conferred upon the stockholders of the corporation by this certificate of incorporation are granted subject to the provisions of this Article ELEVENTH. Signed on February 10, 1998 /s/ Edward F. Myers ---------------------------------------- EDWARD F. MYERS, Incorporator -5- EX-3.2 7 CERTIFICATE OF AMENDMENT EXHIBIT 3.2 CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION OF DIGITAL SIGN CORPORATION Pursuant to Section 242 of the Delaware Corporation Law, Digital Sign Corporation, a Delaware corporation (the "Corporation"), DOES HEREBY CERTIFY: FIRST: That the Board of Directors of the Corporation, acting by consent in lieu of a special meeting, duly adopted resolutions on the 9 day of June, 1999, setting forth proposed amendments to the Certificate of Incorporation of the Corporation, declaring said amendments to be advisable and recommending approval of such amendment by the shareholders of the Corporation. The resolutions setting forth the proposed amendments are as follows: RESOLVED that, upon shareholder approval, the Certificate of Incorporation of the Corporation be amended to change the name of the Corporation to PAWNBROKER.COM, INC. by amending the FIRST paragraph as follows: FIRST: The name of the corporation (hereafter called the corporation) is PAWNBROKER.COM, INC. RESOLVED that, upon approval of a majority of the shareholders of the Corporation, the Certificate of Incorporation of the Corporation be amended by adding the following paragraph: TWELFTH: The 38,499,000 shares of issued and outstanding common shares of the Corporation, with a par value of $0.00001, either issued and outstanding or held by the Corporation as treasury stock, immediately prior to June 10, 1999 at 5:00 P.M. (Eastern Standard Time) shall be automatically reclassified and changed (without any further act) into 9,624,750 fully-paid and non-assessable shares of Common Stock of the Corporation, with a par value of $0.00001, without increasing or decreasing the amount of stated capital or paid in surplus of the Corporation, provided that no fractional shares shall be issued. The fractional share interests that occur as a result of the foregoing reclassification and change shall be conglomerated by the transfer agent of the company and the shares resulting form such conglomeration shall be sold by the transfer agent and the net proceeds received from such sale shall be allocated and distributed among the holders of such fractional interests in shares as their interests appear. 1 SECOND: A majority of the shareholders of the Corporation, acting by consent in lieu of a special meeting, duly authorized and adopted this Certificate of Amendment to the Certificate of Incorporation of the Corporation and written notice of the adoption of the amendment has been given as provided in Section 228 of the General Corporation Law of the State of Delaware to every shareholder entitled to such notice. THIRD: Said resolution was duly adopted in accordance with the provisions of Section 242 of the Delaware General Corporation Law. FOURTH: The capital of the Corporation will not be reduced by reason of such amendment. DATED this 9th day of June, 1999. By: /s/ Doug McLeod ------------------------------------ Doug McLeod Title: President City of Tokyo ) ) ss. Country of Japan ) On June 9, 1999, personally appeared before me, a Consul of Canada, Doug McLeod, President of the Corporation, who acknowledged that he executed the above instrument. /s/ R.P. Abrahamber ---------------------------------------- Signature of Notary Counsul of Canada Tokyo, Japan 2 EX-3.3 8 BYLAWS OF DIGITAL SIGN CORPORATION EXHIBIT 3.3 BYLAWS OF DIGITAL SIGN CORPORATION (a Delaware corporation) ------------ ARTICLE I STOCKHOLDERS 1. CERTIFICATES REPRESENTING STOCK. Certificates representing stock in the corporation shall be signed by, or in the name of, the corporation by the Chairman or Vice-Chairman of the Board of Directors, if any, or by the President or a Vice-President and by the Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary of the corporation. Any or all the signatures on any such certificate may be a facsimile. In case any officer, transfer agent, or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent, or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if he were such officer, transfer agent, or registrar at the date of issue. Whenever the corporation shall be authorized to issue more than one class of stock or more than one series of any class of stock, and whenever the corporation shall issue any shares of its stock as partly paid stock, the certificates representing shares of any such class or series or of any such partly paid stock shall set forth thereon the statements prescribed by the General Corporation Law. Any restrictions on the transfer or registration of transfer of any shares of stock of any class or series shall be noted conspicuously on the certificate representing such shares. The corporation may issue a new certificate of stock or uncertificated shares in place of any certificate theretofore issued by it, alleged to have been lost, stolen, or destroyed, and the Board of Directors may require the owner of the lost, stolen, or destroyed certificate, or his legal representative, to give the corporation a bond sufficient to indemnify the corporation against any claim that may be made against it on account of the alleged loss, theft, or destruction of any such certificate or the issuance of any such new certificate or uncertificated shares. 2. UNCERTIFICATED SHARES. Subject to any conditions imposed by the General Corporation Law, the Board of Directors of the corporation may provide by resolution or resolutions that some or all of any or all classes or series of the stock of the corporation shall -1- be uncertificated shares. Within a reasonable time after the issuance or transfer of any uncertificated shares, the corporation shall send to the registered owner thereof any written notice prescribed by the General Corporation Law. 3. FRACTIONAL SHARE INTERESTS. The corporation may, but shall not be required to, issue fractions of a share. If the corporation does not issue fractions of a share, it shall (1) arrange for the disposition of fractional interests by those entitled thereto, (2) pay in cash the fair value of fractions of a share as of the time when those entitled to receive such fractions are determined, or (3) issue scrip or warrants in registered form (either represented by a certificate or uncertificated) or bearer form (represented by a certificate) which shall entitle the holder to receive a full share upon the surrender of such scrip or warrants aggregating a full share. A certificate for a fractional share or an uncertificated fractional share shall, but scrip or warrants shall not unless otherwise provided therein, entitle the holder to exercise voting rights, to receive dividends thereon, and to participate in any of the assets of the corporation in the event of liquidation. The Board of Directors may cause scrip or warrants to be issued subject to the conditions that they shall become void if not exchanged for certificates representing the full shares or uncertificated full shares before a specified date, or subject to the conditions that the shares for which scrip or warrants are exchangeable may be sold by the corporation and the proceeds thereof distributed to the holders of scrip or warrants, or subject to any other conditions which the Board of Directors may impose. 4. STOCK TRANSFERS. Upon compliance with provisions restricting the transfer or registration of transfer of shares of stock, if any, transfers or registration of transfers of shares of stock of the corporation shall be made only on the stock ledger of the corporation by the registered holder thereof, or by his attorney thereunto authorized by power of attorney duly executed and filed with the Secretary of the corporation or with a transfer agent or a registrar, if any, and, in the case of shares represented by certificates, on surrender of the certificate or certificates for such shares of stock property endorsed and the payment of all taxes due thereon. 5. RECORD DATE FOR STOCKHOLDERS. In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which record date shall not be more than sixty nor less than ten days before the date of such meeting. If no record date is fixed by the Board of Directors, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. In order that the corporation may determine the stockholders entitled to consent to corporate action in writing without a meeting, -2- the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which date shall not be more than ten days after the date upon which the resolution fixing the record date is adopted by the Board of Directors. If no record date has been fixed by the Board of Directors, the record date for determining the stockholders entitled to consent to corporate action in writing without a meeting, when no prior action by the Board of Directors is required by the General Corporation Law, shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the corporation by delivery to its registered office in the State of Delaware, its principal place of business, or an officer or agent of the corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to the corporation's registered office shall be by hand or by certified or registered mail, return receipt requested. If no record date has been fixed by the Board of Directors and prior action by the Board of Directors is required by the General Corporation Law, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting shall be at the close of business on the day on which the Board of Directors adopts the resolution taking such prior action. In order that the corporation may determine the stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights or the stockholders entitled to exercise any rights in respect of any change, conversion, or exchange of stock, or for the purpose of any other lawful action, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted, and which record date shall be not more than sixty days prior to such action. If no record date is fixed, the record date for determining stockholders for any such purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto. 6. MEANING OF CERTAIN TERMS. As used herein in respect of the right to notice of a meeting of stockholders or a waiver thereof or to participate or vote thereat or to consent or dissent in writing in lieu of a meeting, as the case may be, the term "share" or "shares" or "share of stock" or "shares of stock" or "stockholder" or "stockholders" refers to an outstanding share or shares of stock and to a holder or holders of record of outstanding shares of stock when the corporation is authorized to issue only one class of shares of stock, and said reference is also intended to include any outstanding share or shares of stock and any holder or holders of record of outstanding shares of stock of any class upon which or upon whom the certificate of incorporation confers such rights where there are two or more classes or series of shares of stock or upon which or upon whom the General Corporation Law confers such rights notwithstanding that the certificate of incorporation may provide for more than one class or series of shares of stock, one or more of which are limited or denied such rights thereunder; provided, however, that no such right shall vest in the event of an increase or a decrease in the authorized number of shares of stock of any class or series which is otherwise denied voting rights under the provisions of the certificate of incorporation, except as any provision of law may otherwise require. -3- 7. STOCKHOLDER MEETINGS. - TIME. The annual meeting shall be held on the date and at the time fixed, from time to time, by the directors, provided, that the first annual meeting shall be held on a date within thirteen months after the organization of the corporation, and each successive annual meeting shall be held on a date within thirteen months after the date of the preceding annual meeting. A special meeting shall be held on the date and at the time fixed by the directors. - PLACE. Annual meetings and special meetings shall be held at such place, within or without the State of Delaware, as the directors may, from time to time, fix. Whenever the directors shall fail to fix such place, the meeting shall be held at the registered office of the corporation in the State of Delaware. - CALL. Annual meetings and special meetings may be called by the directors or by any officer instructed by the directors to call the meeting. - NOTICE OR WAIVER OF NOTICE. Written notice of all meetings shall be given, stating the place, date, and hour of the meeting and stating the place within the city or other municipality or community at which the list of stockholders of the corporation may be examined. The notice of an annual meeting shall state that the meeting is called for the election of directors and for the transaction of other business which may properly come before the meeting, and shall (if any other action which could be taken at a special meeting is to be taken at such annual meeting) state the purpose or purposes. The notice of a special meeting shall in all instances state the purpose or purposes for which the meeting is called. The notice of any meeting shall also include, or be accompanied by, any additional statements, information, or documents prescribed by the General Corporation Law. Except as otherwise provided by the General Corporation Law, a copy of the notice of any meeting shall be given, personally or by mail, not less than ten days nor more than sixty days before the date of the meeting, unless the lapse of the prescribed period of time shall have been waived, and directed to each stockholder at his record address or at such other address which he may have furnished by request in writing to the Secretary of the corporation. Notice by mail shall be deemed to be given when deposited, with postage thereon prepaid, in the United States Mail. If a meeting is adjourned to another time, not more than thirty days hence, and/or to another place, and if an announcement of the adjourned time and/or place is made at the meeting, it shall not be necessary to give notice of the adjourned meeting unless the directors, after adjournment, fix a new record date for the adjourned meeting. Notice need not be given to any stockholder who submits a written waiver of notice signed by him before or after the time stated therein. Attendance of a stockholder at a meeting of stockholders shall constitute a waiver of notice of such meeting, except when the stockholder attends the meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders need be specified in any written waiver of notice. -4- - STOCKHOLDER LIST. The officer who has charge of the stock ledger of the corporation shall prepare and make, at least ten days before every meeting of stockholders, a complete list of the stockholders, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to the meeting, either at a place within the city or other municipality or community where the meeting is to be held, which place shall be specified in the notice of the meeting, or if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. The stock ledger shall be the only evidence as to who are the stockholders entitled to examine the stock ledger, the list required by this section or the books of the corporation, or to vote at any meeting of stockholders. - CONDUCT OF MEETING. Meetings of the stockholders shall be presided over by one of the following officers in the order of seniority `and if present and acting - the Chairman of the Board, if any, the Vice-Chairman of the Board, if any, the President, a Vice-President, or, if none of the foregoing is in office and present and acting, by a chairman to be chosen by the stockholders. The Secretary of the corporation, or in his absence, an Assistant Secretary, shall act as secretary of every meeting, but if neither the Secretary nor an Assistant Secretary is present the Chairman of the meeting shall appoint a secretary of the meeting. - PROXY REPRESENTATION. Every stockholder may authorize another person or persons to act for him by proxy in all matters in which a stockholder is entitled to participate, whether by waiving notice of any meeting, voting or participating at a meeting, or expressing consent or dissent without a meeting. Every proxy must be signed by the stockholder or by his attorney-in-fact. No proxy shall be voted or acted upon after three years from its date unless such proxy provides for a longer period. A duly executed proxy shall be irrevocable if it states that it is irrevocable and, if, and only as long as, it is coupled with an interest sufficient in law to support an irrevocable power. A proxy may be made irrevocable regardless of whether the interest with which it is coupled is an interest in the stock itself or an interest in the corporation generally. - INSPECTORS. The directors, in advance of any meeting, may, but need not, appoint one or more inspectors of election to act at the meeting or any adjournment thereof. If an inspector or inspectors are not appointed, the person presiding at the meeting may, but need not, appoint one or more inspectors. In case any person who may be appointed as an inspector fails to appear or act, the vacancy may be filled by appointment made by the directors in advance of the meeting or at the meeting by the person presiding thereat. Each inspector, if any, before entering upon the discharge of his duties, shall take and sign an oath faithfully to execute the duties of inspectors at such meeting with strict impartiality and according to the best of his -5- ability. The inspectors, if any, shall determine the number of shares of stock outstanding and the voting power of each, the shares of stock represented at the meeting, the existence of a quorum, the validity and effect of proxies, and shall receive votes, ballots, or consents, hear and determine all challenges and questions arising in connection with the right to vote, count and tabulate all votes, ballots, or consents, determine the result, and do such acts as are proper to conduct the election or vote with fairness to all stockholders. On request of the person presiding at the meeting, the inspector or inspectors, if any, shall make a report in writing of any challenge, question, or matter determined by him or them and execute a certificate of any fact found by him or them. Except as otherwise required by subsection (e) of Section 231 of the General Corporation Law, the provisions of that Section shall not apply to the corporation. - QUORUM. The holders of a majority of the outstanding shares of stock shall constitute a quorum at a meeting of stockholders for the transaction of any business. The stockholders present may adjourn the meeting despite the absence of a quorum. - VOTING. Each share of stock shall entitle the holder thereof to one vote. Directors shall be elected by a plurality of the votes of the shares present in person or represented by proxy at the meeting and entitled to vote on the election of directors. Any other action shall be authorized by a majority of the votes cast except where the General Corporation Law prescribes a different percentage of votes and/or a different exercise of voting power, and except as may be otherwise prescribed by the provisions of the certificate of incorporation and these Bylaws. In the election of directors, and for any other action, voting need not be by ballot. 8. STOCKHOLDER ACTION WITHOUT MEETINGS. Any action required by the General Corporation Law to be taken at any annual or special meeting of stockholders, or any action which may be taken at any annual or special meeting of stockholders, may be taken without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing. Action taken pursuant to this paragraph shall be subject to the provisions of Section 228 of the General Corporation Law. ARTICLE II DIRECTORS 1. FUNCTIONS AND DEFINITION. The business and affairs of the corporation shall be managed by or under the direction of the Board of Directors of the corporation. The Board of Directors shall have the authority to fix the compensation of the -6- members thereof. The use of the phrase "whole board" herein refers to the total number of directors which the corporation would have if there were no vacancies. 2. QUALIFICATIONS AND NUMBER. A director need not be a stockholder, a citizen of the United States, or a resident of the State of Delaware. The initial Board of Directors shall consist of = = persons = =. Thereafter the number of directors constituting the whole board shall be at least one. Subject to the foregoing limitation and except for the first Board of Directors, such number may be fixed from time to time by action of the stockholders or of the directors, or, if the number is not fixed, the number shall be = =. The number of directors may be increased or decreased by action of the stockholders or of the directors. 3. ELECTION AND TERM. The first Board of Directors, unless the members thereof shall have been named in the certificate of incorporation, shall be elected by the incorporator or incorporators and shall hold office until the first annual meeting of stockholders and until their successors are elected and qualified or until their earlier resignation or removal. Any director may resign at any time upon written notice to the corporation. Thereafter, directors who are elected at an annual meeting of stockholders, and directors who are elected in the interim to fill vacancies and newly created directorships, shall hold office until the next annual meeting of stockholders and until their successors are elected and qualified or until their earlier resignation or removal. Except as the General Corporation Law may otherwise require, in the interim between annual meetings of stockholders or of special meetings of stockholders called for the election of directors and/or for the removal of one or more directors and for the filling of any vacancy in that connection, newly created directorships and any vacancies in the Board of Directors, including unfilled vacancies resulting from the removal of directors for cause or without cause, may be filled by the vote of a majority of the remaining directors then in office, although less than a quorum, or by the sole remaining director. 4. MEETINGS. - TIME. Meetings shall be held at such time as the Board shall fix, except that the first meeting of a newly elected Board shall be held as soon after its election as the directors may conveniently assemble. - PLACE. Meetings shall be held at such place within or without the State of Delaware as shall be fixed by the Board. - CALL. No call shall be required for regular meetings for which the time and place have been fixed. Special meetings may be called by or at the direction of the Chairman of the Board, if any, the Vice-Chairman of the Board, if any, of the President, or of a majority of the directors in office. -7- - NOTICE OR ACTUAL OR CONSTRUCTIVE WAIVER. No notice shall be required for regular meetings for which the time and place -have been fixed. Written, oral, or any other mode of notice of the time and place shall be given for special meetings in sufficient time for the convenient assembly of the directors thereat. Notice need not be given to any director or to any member of a committee of directors who submits a written waiver of notice signed by him before or after the time stated therein. Attendance of any such person at a meeting shall constitute a waiver of notice of such meeting, except when he attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the directors need be specified in any written waiver of notice. - QUORUM AND ACTION. A majority of the whole Board shall constitute a quorum except when a vacancy or vacancies prevents such majority, whereupon a majority of the directors in office shall constitute a quorum, provided, that such majority shall constitute at least one-third of the whole Board. A majority of the directors present, whether or not a quorum is present, may adjourn a meeting to another time and place. Except as herein otherwise provided, and except as otherwise provided by the General Corporation Law, the vote of the majority of the directors present at a meeting at which a quorum is present shall be the act of the Board. The quorum and voting provisions herein stated shall not be construed as conflicting with any provisions of the General Corporation Law and these Bylaws which govern a meeting of directors held to fill vacancies and newly created directorships in the Board or action of disinterested directors. Any member or members of the Board of Directors or of any committee designated by the Board, may participate in a meeting of the Board, or any such committee, as the case may be, by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other. - CHAIRMAN OF THE MEETING. The Chairman of the Board, if any and if present and acting, shall preside at all meetings. Otherwise, the Vice-Chairman of the Board, if any and if present and acting, or the President, if present and acting, or any other director chosen by the Board, shall preside. 5. REMOVAL OF DIRECTORS. Except as may otherwise be provided by the General Corporation Law, any director or the entire Board of Directors may be removed, with or without cause, by the holders of a majority of the shares then entitled to vote at an election of directors. 6. COMMITTEES. The Board of Directors may designate one or more committees, each committee to consist of one or more of the directors of the corporation. The Board may designate one or more directors as alternate members of any committee, who may -8- replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of any member of any such committee or committees, the member or members thereof present at any meeting and not disqualified from voting, whether or not such member or members constitute a quorum, may unanimously appoint another -member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. Any such committee, to the extent provided in the resolution of the Board, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the corporation with the exception of any power or authority the delegation of which is prohibited by Section 141 of the General Corporation Law, and may authorize the seal of the corporation to be affixed to all papers which may require it. 7. WRITTEN ACTION. Any action required or permitted to be taken at any meeting of the Board of Directors or any committee thereof may be taken without a meeting if all members of the Board or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board or committee. ARTICLE III OFFICERS The officers of the corporation shall consist of a President, a Secretary, a Treasurer, and, if deemed necessary, expedient, or desirable by the Board of Directors, a Chairman of the Board, a Vice-Chairman of the Board, an Executive Vice-President, one or more other Vice-Presidents, one or more Assistant Secretaries, one or more Assistant Treasurers, and such other officers with such titles as the resolution of the Board of Directors choosing them shall designate. Except as may otherwise be provided in the resolution of the Board of Directors choosing him, no officer other than the Chairman or Vice-Chairman of the Board, if any, need be a director. Any number of offices may be held by the same person, as the directors may determine. Unless otherwise provided in the resolution choosing him, each officer shall be chosen for a term which shall continue until the meeting of the Board of Directors following the next annual meeting of stockholders and until his successor shall have been chosen and qualified. All officers of the corporation shall have such authority and perform such duties in the management and operation of the corporation as shall be prescribed in the resolutions of the Board of Directors designating and choosing such officers and prescribing their authority and duties, and shall have such additional authority and duties as are incident to their office except to the extent that such resolutions may be inconsistent therewith. The Secretary or an Assistant Secretary of the corporation shall record all of the proceedings of all meetings and actions in writing of stockholders, directors, and committees of directors, and shall exercise such additional authority and perform such additional duties as the Board shall assign to him. Any officer may -9- be removed, with or without cause, by the Board of Directors. Any vacancy in any office may be filled by the Board of Directors. ARTICLE IV CORPORATE SEAL The corporate seal shall be in such form as the Board of Directors shall prescribe. ARTICLE V FISCAL YEAR The fiscal year of the corporation shall be fixed, and shall be subject to change, by the Board of Directors. ARTICLE VI CONTROL OVER BYLAWS Subject to the provisions of the certificate of incorporation and the provisions of the General Corporation Law, the power to amend, alter, or repeal these Bylaws and to adopt new Bylaws may be exercised by the Board of Directors or by the stockholders. I HEREBY CERTIFY that the foregoing is a full, true, and correct copy of the Bylaws of a Delaware corporation, as in effect on the date hereof. Dated: Feb. 14, 1998 /s/ Beth N. Myers ---------------------------------------- Secretary of DIGITAL SIGN CORPORATION (SEAL) -10- EX-10.1 9 PRIVATE PLACEMENT SUBSCRIPTION AGREEMENT EXHIBIT 10.1 PRIVATE PLACEMENT SUBSCRIPTION AGREEMENT 1. Purchase and Sale of Shares The undersigned (the "Purchaser"), hereby subscribes for and agrees to purchase - ------- shares (the "Shares") in the capital stock of Digital Signs Corporation, a Delaware corporation (the "Issuer") at a price of US$0.05 per Share to be recorded in the name of the Purchaser at the address set out below. Payment for the Shares is attached. 2.0 Representations, Warranties and Acknowledgments of the Purchaser The Purchaser acknowledges, represents and warrants as of the date of this Agreement that: 2.1 No prospectus has been provided to the Purchaser by the Issuer in connection with the issuance of the Shares and that the Issuer is relying upon an exemption(s) from prospectus requirements of the Securities Act (British Columbia) (the "Act") and the Securities Rules (British Columbia) (the "Rules"). 2.2 The Purchaser recognizes that it is restricted from using most of the remedies available under the Act and Rules. 2.3 The Purchaser may not receive information that might otherwise be required to be provided under the Act and Rules. 2.4 The Issuer is relieved from certain obligations that might otherwise apply under the Act and Rules. 2.5 The Purchaser acknowledges receipt of an Offering Memorandum dated February 20, 1998 (the "Offering Memorandum" - Exhibit A). 2.6 No person has made to the Purchaser any written or oral representations: (a) that any person will resell or repurchase the Shares; (b) that any person will refund the purchase price of the Shares; (c) as to the future price or value of the Shares; (d) that the Shares will be listed and posted for trading on a stock exchange or that application has been made to list and post the Shares for trading on a stock exchange. 2.7 The Shares were not offered or distributed to the Purchaser through an advertisement in printed media of general and regular paid circulation, radio or television. 2.8 The Shares purchased hereby are not qualified for resale in the United States of America and the Purchaser hereby undertakes not to knowingly resell the Shares to any resident or citizen of the United States of America prior to lawful registration or qualification of the Shares or subject to lawful exemptions to these requirements. 2.9 The Purchaser has no knowledge of a "material fact" or "material change", as those terms are defined in the Act, in the affairs of the Issuer that has not been generally disclosed to the public, save knowledge of this particular transaction. Page 2 of 4 2.10 The Purchaser is not a "control person" of the Issuer, as defined in the Act, and will not become a "control person" of the Issuer by virtue of the purchase of the Shares pursuant to this subscription. 2.11 The Purchaser is a: (a) director, senior officer or employee of the Issuer, or a director, senior officer or employee of an affiliate of the Issuer; (b) spouse, parent, brother, sister or child of a director or officer of the Issuer; (c) person already holding shares of the Issuer; (d) spouse, parent, brother, sister or child of a person already holding shares of the Issuer; (e) company, all of the voting securities of which are beneficially owned by any combination of the persons referred to in (a) to (d) above; (f) sophisticated purchaser (as defined in the Offering memorandum). 2.12 The Purchaser has the legal capacity and competence to enter into and execute this agreement and to take all actions required hereunder. 2.13 The representations, warranties and acknowledgments of the Purchaser contained in this Section will survive the Closing (as hereinafter defined). 3.0 Representations, Warranties and Acknowledgments of the Issuer The Issuer acknowledges, represents and warrants as of the date of this Agreement that: 3.1 It is a valid and subsisting corporation duly incorporated and is in good standing under the laws of the jurisdictions in which it is incorporated. 3.2 It is the beneficial owner of the properties, businesses and assets referred to in the Offering Memorandum. 3.3 The Offering Memorandum is, in all material respects, accurate and omits no facts, the omission of which makes items in the Offering Memorandum misleading or incorrect. 3.4 The issuance and sale of the Shares by the Issuer does not and will not conflict with or result in any breach of any of the terms, conditions, or provisions of its constituting documents or any agreements or instruments to which the Issuer is a party. 3.5 This Agreement and the Offering Memorandum have been duly authorized by all necessary corporate action on the part of the Issuer and constitutes a valid and binding obligation of the Issuer upon acceptance of this Agreement by any of the members of its board of directors. Page 3 of 4 3.6 The Shares will, when issued, be fully paid and non-assessable shares of the Issuer and will be issued free and clear of all liens, charges and encumbrances of any kind whatsoever, subject only to the re-sale restrictions under applicable securities laws. 4.0 Undertaking The Purchaser agrees to complete, execute and deliver to the Issuer one of the following: 1. Form 20A (IP) Acknowledge of Individual Purchaser; or 2. Form 20A (NIP) Acknowledge of Purchaser that is not an Individual. 5.0 Hold Period 5.1 The Purchaser further acknowledges that: (a) the Shares to be issued under an exemption from the prospectus and registration requirements of the Act will be subject to a hold period and may not be traded for twelve months from the date that the Issuer becomes a reporting issuer in the Province of British Columbia, unless another statutory exemption can be relied upon or if the Shares are qualified under a prospectus at a later date (the "Expiry Date"): (b) at present, the Issuer is not a reporting issuer in British Columbia; (c) details relating to re-sale restrictions applicable to the Shares are as set out in the Offering Memorandum. 5.2 Within ten (10) days of an initial trade of the Shares by the Purchaser after the Expiry Date, the Purchaser covenants and agrees to file with the Statutory Filing Department of the British Columbia Securities Commission, of #1100-865 Hornby Street, Vancouver, British Columbia, V6Z 2H4, one (1) of the following reports: (a) a report in the form attached hereto as Appendix "A" (the "Initial Trade Report"); or (b) the report required under the laws of the jurisdiction in which the Issuer carries on business or in which the Issuer is incorporated, organized or continued, provided that the report requires substantially the same information as is required in the Initial Trade Report (the "Purchaser's Report"). 5.3 Where the Purchaser has filed an Initial Trade Report or the Purchaser's Report with respect to the Shares, the Purchaser shall not be required to file a further report in respect of additional trades of the Shares acquired on the same date and under the same exemption as the Shares that are the subject of the Initial Trade Report or the Purchaser's Report. 6.0 Closing On or before June 20, 1998, the Issuer will confirm whether or not the within Agreement is acceptable, whereupon the Issuer will deliver to the Purchaser certificate(s) representing the Shares, registered in the name of the Purchaser. Page 4 of 4 7.0 Withdrawal of Subscription and Contractual Rights of Action The contractual rights of action described in the Offering Memorandum in connection with the Offering (as described in the Offering Memorandum) are hereby incorporated by reference in this Agreement and are hereby granted by the Issuer to the Purchaser. 8.0 Miscellaneous 8.1 Time shall be considered to be of the essence for the purposes of this Agreement. 8.2 Except as expressly provided in this Agreement or as set forth in the Offering Memorandum, this Agreement contains the entire agreement between the parties with respect to the Shares and there are no other terms, conditions, representations or warranties whether expressed, implied, or written by statute, by common law, by the Issuer, by the Purchaser or by anyone else. 8.3 The parties to this Agreement may amend this Agreement only in writing and with the consent of each of the parties hereto. 8.4 This Agreement shall enure to the benefit of and shall be binding upon the parties to this Agreement and their respective successors and permitted assigns. 8.5 This Agreement shall be interpreted in accordance with the laws of the Province of British Columbia, Canada. Dated at ------ this ----- day of ----------------------, 1998. - ---------------------------- ---------------------------------------- Witness Subscriber's Signature ---------------------------------------- Name of Subscriber (Please Print) ---------------------------------------- Street Address ---------------------------------------- City, Province, Postal Code ACCEPTED this ----- day of ----------------------, 1998. Ditigal Signs Corporation Per: --------------------------------- Authorized Signatory EX-10.2 10 CONTRIBUTION AGREEMENT EXHIBIT 10.2 CONTRIBUTION AGREEMENT DIGITAL SIGN CORPORATION This Contribution Agreement (the "Agreement") is entered into as of May 19, 1999, by and between Cameron Woodbridge ("Shareholder"), and Digital Sign Corporation, a Delaware corporation ("Company"). A. Shareholder currently holds 1,000,000 shares of the Company's issued and outstanding common shares (the "Common Shares"). B. The Common Shares were issued to Shareholder in consideration for Two Hundred and Fifty Dollars ($250.00) (the "Consideration"). C. Shareholder desires to contribute to the Company the Common Shares in return for the Consideration paid and the Company desires to accept such contribution under the terms and conditions set forth below. NOW, THEREFORE, in consideration of the mutual covenants and agreements herein contained and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Contribution. Shareholder hereby agrees to contribute the Common Shares to the Company for Two Hundred and Fifty Dollars ($250.00) and the Company hereby agrees to accept such contribution by the Shareholder and to pay Shareholder Two Hundred and Fifty Dollars ($250.00) as full consideration for the Common Shares. 2. Governing Law. This Agreement shall be construed and enforced in accordance with the federal laws of the United States and the internal laws of the State of Washington, without regard to the conflicts of law rules of such state. 3. Construction. Whenever the singular number is used in this Agreement and when required by the context, the same shall include the plural and vice versa, and the masculine gender shall include the feminine and neuter genders and vice versa. 4. Headings. The headings in this Agreement are inserted for convenience only and are in no way intended to describe, interpret, define or limit the scope, extent or intent of this Agreement or any provisions hereof. 5. Severability. If any provision of this Agreement or the application thereof to any Person or circumstance shall be invalid, illegal or unenforceable to any extent, the remainder of this Agreement and the application thereof shall not be affected and shall be enforceable to the fullest extent permitted by law. 1 6. Heirs, Successors and Assigns. Each of the covenants, terms, provisions and agreements contained in this Agreement shall be binding upon and inure to the benefit of the parties hereto and, to the extent permitted by this Agreement, their respective heirs, legal representatives, successors and assigns. 7. Creditors. None of the provisions of this Agreement shall be for the benefit of or enforceable by any creditors of the Company. 8. Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original and all of which shall constitute one and the same instrument. Delivery of an executed counterpart of this Agreement via facsimile shall be effective as delivery of a manually executed counterpart of this Agreement. IN WITNESS WHEREOF, the parties have entered into this Agreement as of the day first written above. DIGITAL SIGN CORPORATION By: /s/ Doug McLeod ------------------------------------ Its: President ----------------------------------- SHAREHOLDER /s/ Cameron Woodbridge ---------------------------------------- 2 EX-10.3 11 SUBSCRIPTION AGREEMENT EXHIBIT 10.3 SUBSCRIPTION AGREEMENT THIS AGREEMENT MADE EFFECTIVE AS OF THE 14th DAY OF JUNE, 1999 (the "Effective Date"). BETWEEN: PAWNBROKER.COM, INC. (formerly Digital Sign Corporation) 688 - 6 Ishikawa Kanagawa Japan 252 0815 (the "Company") AND: THE PARTY NAMED AS PURCHASER BELOW (the "Purchaser") WHEREAS: A. The Purchaser wishes to subscribe for 1,300,000 units, where each unit consists of one common share and one-half of one non-transferable share purchase warrant of the Company (the "Securities"); B. It is the intention of the parties to this Agreement that this subscription will be made pursuant to appropriate exemptions (the "Exemptions") from the registration and prospectus or equivalent requirements of all rules, policies, notices, orders and legislation of any kind whatsoever (collectively the "Securities Rules") of all jurisdictions applicable to this subscription; NOW THEREFORE THIS AGREEMENT WITNESSES that in consideration of the mutual covenants and agreements herein contained, the receipt of which is hereby acknowledged, the parties covenant and agree with each other (the "Agreement") as follows: 1. Representations and Warranties of the Purchaser 1.1 The Purchaser represents and warrants to the Company, and acknowledges that the Company is relying on these representations and warranties to, among other things, ensure that it is complying with all of the applicable Securities Rules, that: (a) the Purchaser is purchasing a sufficient number of Securities such that the aggregate acquisition cost to the Purchaser of such Securities is not less than $97,000, if the Purchaser is a resident of British Columbia, Alberta, Manitoba, New Brunswick, Prince Edward Island, Newfoundland or an International Jurisdiction, or $150,000 if the Purchaser is a resident of Saskatchewan, Ontario, Quebec or Nova Scotia, and the Purchaser is: (i) purchasing such Securities as principal for its own account and not for the benefit of any other person; or (ii) deemed to be acting as principal by virtue of it being: A. a trust company or insurer which is authorized to carry on business in B.C. under the Financial Institutions Act (British Columbia) and which is acting as agent or trustee for accounts that are fully managed by it within the meaning of ss. 74(1)(a) of the Securities Act (British Columbia (the "Act") and NIN #97/11 issued by the B.C. Securities Commission (the "Commission"); or B. a portfolio manager within the meaning of ss. 1(1) of the Act which is carrying on business in B.C. and which is registered or exempt from registration under the Act and which is acting as agent for accounts that are fully managed by it within the meaning of ss. 74(1)(b) of the Act and NIN #97/11; or C. a trust company, insurer or portfolio manager within the meaning of BOR #97/4 issued by the Commission which is acting, in the case of a trust company or insurer, as agent or trustee or, in the case of a portfolio manager, as agent, for accounts that are fully managed by it within the meaning of BOR #97/4and NIN #97/11; and the Purchaser is also deemed to be acting as principal under the analogous provisions of any other Securities Rules having application; (b) the Purchaser has not been formed, created, established or incorporated for the purpose of permitting the purchase of the Securities without a prospectus by groups of individuals whose individual share of the aggregate acquisition cost for such Securities is less than $97,000, if the beneficial purchaser is a resident of British Columbia, Alberta, Manitoba, New Brunswick, Prince Edward Island, Newfoundland or an International Jurisdiction, or $150,000 if the beneficial purchaser is a resident of Saskatchewan, Ontario, Quebec or Nova Scotia; (c) the Purchaser is resident of an "International Jurisdiction" (which means a country other than Canada or the United States) and the Purchaser further represents and warrants that: (i) the Purchaser is knowledgeable of, or has been independently advised as to, the applicable Securities Rules of the International Jurisdiction which would apply to this subscription, if there are any; (ii) the Purchaser is purchasing the Securities pursuant to Exemptions under the Securities Rules of that International Jurisdiction or, if such is not applicable, the Purchaser is permitted to purchase the Securities under the applicable Securities Rules of the International Jurisdiction without the need to rely on Exemptions; and -2- (iii) the applicable Securities Rules do not require the Company to make any filings or seek any approvals of any kind whatsoever from any regulatory authority of any kind whatsoever in the International Jurisdiction; and the Purchaser will, if requested by the Company, deliver to the Company a certificate or opinion of local counsel from the International Jurisdiction which will confirm the matters referred to in subparagraphs (ii) and (iii) above to the satisfaction of the Company, acting reasonably; (d) [intentionally left blank] (e) the Purchaser acknowledges that the Company is relying on the Exemptions in order to complete the trade and distribution of the Securities and the Purchaser is aware of the criteria of the Exemptions to be met by the Purchaser, and if applicable, the Purchaser meets those criteria; (f) the Purchaser acknowledges that because this subscription is being made pursuant to the Exemptions: (i) the Purchaser is restricted from using certain of the civil remedies available under the applicable Securities Rules; (ii) the Purchaser may not receive information that might otherwise be required to be provided to the Purchaser under the applicable Securities Rules if the Exemptions were not being used; and (iii) the Company is relieved from certain obligations that would otherwise apply under the applicable Securities Rules if the Exemptions were not being used; (iv) no securities commission, stock exchange or similar regulatory authority has reviewed or passed on the merits of the Securities; (v) there is no government or other insurance covering the Securities; (vi) there are risks associated with the purchase of the Securities; (vii) there are restrictions on the Purchaser's ability to resell the Securities and it is the responsibility of the Purchaser to find out what those restrictions are and to comply with them before selling the Securities. (g) the Securities are not being subscribed for by the Purchaser as a result of any material information about the Company's affairs that has not been publicly disclosed; (h) the offer and sale of these Securities was not accompanied by an advertisement and the Purchaser was not induced to purchase these Securities as a result of any advertisement made by the Company; (i) if the Purchaser is a corporation, the Purchaser is a valid and subsisting corporation, has the necessary corporate capacity and authority to execute and deliver this Agreement and to observe and perform its covenants and obligations hereunder and has taken all necessary corporate action in respect thereof, or, if the Purchaser is a partnership, -3- syndicate, trust or other form of unincorporated organization, the Purchaser has the necessary legal capacity and authority to execute and deliver this Agreement and to observe and perform its covenants and obligations hereunder and has obtained all necessary approvals in respect thereof, and, in either case, upon the Company executing and delivering this Agreement, this Agreement will constitute a legal, valid and binding contract of the Purchaser enforceable against the Purchaser in accordance with its terms and neither the agreement resulting from such acceptance nor the completion of the transactions contemplated hereby conflicts with, or will conflict with, or results, or will result, in a breach or violation of any law applicable to the Purchaser, any constating documents of the Purchaser or any agreement to which the Purchaser is a party or by which the Purchaser is bound; (j) the Purchaser is not, and was not at any time that it purchased the Securities or received an offer to purchase the Securities pursuant to this subscription, a "U.S. Person" as defined in Regulation S under the United States Securities Act of 1933, as amended (the "U.S. Securities Act"), which definition includes, but is not limited to, an individual resident in the United States, an estate or trust of which any executor or administrator or trustee, respectively, is a U.S. person, and any partnership or corporation organized or incorporated under the laws of the United States; (k) the Purchaser did not receive any term sheet, subscription form or other offering materials in connection with this subscription in the United States, and did not execute or deliver any such subscription form or other materials in the United States; (l) no offers of Securities were made by any person to the Purchaser while the Purchaser was in the United States; and (m) the Purchaser is not acquiring Securities, directly or indirectly, for the account or benefit of a U.S. Person or a person in the United States. 1.2 The Company represents and warrants to the Purchaser, and acknowledges that the Purchaser is relying on these representations and warranties in entering into this Agreement, that: (a) the Company is a valid and subsisting corporation duly incorporated and in good standing under the laws of Delaware; (b) the Company is not a reporting issuer in British Columbia and any Securities issued to the Purchaser that are or become subject to the laws of British Columbia will be subject to an indefinite hold period in British Columbia unless an exemption from the registration and prospectus requirements of the Securities Act is available. Such an exemption may not be available; (c) the Company's subsidiaries (the "Subsidiaries"), if any, are valid and subsisting corporations and in good standing under the laws of the jurisdictions in which they were incorporated; (d) the common shares of the Company are eligible for quotation on the N.A.S.D. OTC Bulletin Board ("OTC"); -4- (e) upon their issuance, the Shares (as defined below) will be validly issued and outstanding fully paid and non-assessable common shares of the Company registered as directed by the Purchaser, free and clear of all trade restrictions (except as may be imposed by operation of the applicable Securities Rules) and, except as may be created by the Purchaser, liens, charges or encumbrances of any kind whatsoever; (f) upon their issuance, the Warrants (as defined below) will be validly created, issued and outstanding, registered as directed by the Purchaser, and, upon their issuance, the shares issued on the exercise of the Warrants will be validly issued and outstanding fully paid and non-assessable common shares of the Company registered as directed by the Purchaser, and both will be free and clear of all trade restrictions (except as may be imposed by operation of the applicable Securities Rules) and, except as may be created by the Purchaser, liens, charges or encumbrances of any kind whatsoever; (g) the Company and its Subsidiaries, if any, hold all licences and permits that are required for carrying on their business in the manner in which such business has been carried on and the Company and its Subsidiaries, if any, have the corporate power and capacity to own the assets owned by them and to carry on the business carried on by them and they are duly qualified to carry on business in all jurisdictions in which they carry on business; (h) all prospectuses, exchange offering prospectuses, offering memorandums, filing statements, information circulars, material change reports, shareholder communications, press releases and other disclosure documents of the Company including, but not limited to, financial statements, contain no untrue statement of a material fact as at the date thereof nor do they omit to state a material fact which, at the date thereof, was required to have been stated or was necessary to prevent a statement that was made from being false or misleading in the circumstances in which it was made; (i) to the best of its knowledge, and except as publicly disclosed, there are no material actions, suits, judgments, investigations or proceedings of any kind whatsoever outstanding, pending or threatened against or affecting the Company or its Subsidiaries, if any, at law or in equity or before or by any Federal, Provincial, State, Municipal or other governmental department, commission, board, bureau or agency of any kind whatsoever and, to the best of the Company's knowledge, there is no basis therefor; (j) the Company has good and sufficient right and authority to enter into this Agreement and complete its transactions contemplated under this Agreement on the terms and conditions set forth herein; and (k) to the best of its knowledge, the execution and delivery of this Agreement, the performance of its obligations under this Agreement and the completion of its transactions contemplated under this Agreement will not conflict with, or result in the breach of or the acceleration of any indebtedness under, or constitute default under, the constating documents of the Company or any indenture, mortgage, agreement, lease, licence or other instrument of any kind whatsoever to which the Company is a party or by which it is bound, or any judgment or order of any kind whatsoever of any Court or administrative body of any kind whatsoever by which it is bound. -5- 2. Subscription 2.1 The Purchaser hereby subscribes the subscription funds (the "Subscription Funds") referred to below for and agrees to take up the units (a "Unit" or the "Units") referred to below, where each Unit consists of one common share with a par value of U.S. $0.00001 in the capital stock of the Company (a "Share" or the "Shares") and one-half of one non-transferable share purchase warrant (a "Warrant" or the "Warrants"), at a price of U.S. $2.31 per Unit. Each whole Warrant will entitle the Purchaser to subscribe for one additional common share of the Company at a price of U.S. $2.31 per share at any time up to 5:00 p.m. local time in Vancouver, B.C. on the first anniversary of the Closing Date, and thereafter at a price of U.S. $2.90 per share at any time up to 5:00 p.m. local time on the second anniversary of the Closing Date. 2.2 On or before the 14th day of June, 1999, the Purchaser shall deliver the Subscription Funds for the Securities subscribed for in the form of solicitor's trust cheque, certified cheque, bank draft, money order or wire transfer payable to "Campney & Murphy In Trust" as the solicitors for an on behalf of the Company. The Company will be entitled to use the Subscription Funds immediately upon the issuance of the certificates representing Securities to the Purchaser on the Closing Date. The Purchaser hereby confirms that upon the Company advising Campney & Murphy that it is holding such certificates for immediate delivery to the Purchaser, Campney & Murphy is hereby irrevocably authorized and directed to release and deliver the Subscription Funds, together with any accrued interest thereon, to the Company or for use as directed by the Company without prior notice to, consent of or action by the Purchaser and that Campney & Murphy can rely on this irrevocable direction as if it was a party to this Agreement. 3. Covenants, Agreements and Acknowledgments 3.1 The Purchaser covenants and agrees with the Company to hold and not sell, transfer or in any manner dispose of the Shares comprising the Units or any shares acquired on the exercise of the Warrants comprising the Units unless the sale, transfer or disposition is made in accordance with all applicable Securities Rules. 3.2 The Purchaser acknowledges and agrees that the Shares comprising the Units and any shares acquired on the exercise of the Warrants comprising the Units will be subject to such trade restrictions as may be imposed by operation of the applicable Securities Rules, and the share certificate or certificates representing the Shares comprising the Units and any shares acquired on the exercise of the Warrants comprising the Units will bear such legends as may be required by the applicable Securities Rules. The Purchaser further acknowledges and agrees that it is the Purchaser's obligation to comply with the trade restrictions in all of the applicable jurisdictions and the Company offers no advice as to those trade restrictions. 3.3 The Purchaser acknowledges that: (a) the Securities have not been registered under the U.S. Securities Act and are "restricted securities" within the meaning of Rule 144 under the U.S. Securities Act and may only be resold in accordance with the provisions of Regulation S under the U.S. Securities Act, pursuant to registration under the U.S. Securities Act, or pursuant to an available exemption from such registration. The Purchaser understands that the Company has no obligation or present intention of filing a registration statement under the U.S. Securities Act in respect of the Securities; -6- (b) hedging transactions involving the Securities may not be conducted unless in compliance with the U.S. Securities Act; (c) there may be material tax consequences to the Purchaser of an acquisition or disposition of Securities. The Company gives no opinion and makes no representation with respect to the tax consequences to the Purchaser under United States, state, local or foreign tax law of the Purchaser's acquisition or disposition of such securities; (d) the certificates evidencing the Securities issued in this subscription will bear a legend in substantially the following form: "THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN AND WILL NOT BE REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "1933 ACT"), OR THE SECURITIES LAWS OF ANY STATE, AND MAY BE OFFERED FOR SALE, SOLD OR OTHERWISE TRANSFERRED OR ASSIGNED ONLY (i) TO THE COMPANY; (ii) OUTSIDE THE UNITED STATES IN ACCORDANCE WITH REGULATION S UNDER THE 1933 ACT; (iii) IN ACCORDANCE WITH RULE 144 UNDER THE 1933 ACT; OR (iv) IN A TRANSACTION THAT IS OTHERWISE EXEMPT FROM REGISTRATION UNDER THE 1933 ACT AND APPLICABLE STATE SECURITIES LAWS, PROVIDED, PRIOR TO ANY SUCH SALE, TRANSFER OR ASSIGNMENT, THE COMPANY SHALL HAVE RECEIVED AN OPINION OF COUNSEL, IN FORM ACCEPTABLE TO THE COMPANY, THAT NO VIOLATION OF SUCH REGISTRATION PROVISIONS WOULD RESULT FROM ANY PROPOSED TRANSFER OR ASSIGNMENT."; (e) the Company is required to refuse to register any transfer of the Securities not made in accordance with the provisions of Regulation S under the U.S. Securities Act, pursuant to registration under the U.S. Securities Act, or pursuant to an available exemption from such registration; and (f) any person who exercises a Warrant will be required to provide to the Company either: (i) written certification that it is not a U.S. Person and that such Warrant is not being exercised within the United States or on behalf of, or for the account or benefit of, a U.S. Person; or (ii) a written opinion of counsel or other evidence satisfactory to the Company to the effect that the Warrants and the common shares issuable on the exercise of the Warrants have been registered under the 1933 Act and applicable state securities laws or are exempt from registration thereunder. 3.4 The Company covenants and agrees with the Purchaser to file any documents necessary to be filed under the applicable Securities Rules with respect to this subscription within the required time. 4. [Intentionally left blank] -7- 5. Closing 5.1 The completion of the subscription contemplated under this Agreement shall occur on or before July 15, 1999 or such later date agreed to in writing by the parties hereto (the "Closing Date") immediately preceding the acquisition by the Company of the issued shares of Pawnbroker.com (a Nevada corporation). The Company shall issue to the Purchaser, no later than the Closing Date, a share certificate or certificates representing the Shares and a warrant certificate or certificates representing the Warrants comprising the Units as provided for below by the Purchaser. Upon the Company advising Campney & Murphy that it is holding such certificates for immediate delivery to the Purchaser, Campney & Murphy is irrevocably authorized and directed by the parties hereto to release and deliver the Subscription Funds, together with any accrued interest thereon, to the Company or for use as directed by the Company without prior notice to, consent of or action by the Purchaser. 6. General 6.1 For the purposes of this Agreement, time is of the essence. 6.2 The parties hereto shall execute and deliver all such further documents and instruments and do all such acts and things as may, either before or after the execution of this Agreement, be reasonably required to carry out the full intent and meaning of this Agreement. 6.3 This Agreement shall be subject to, governed by and construed in accordance with the laws of Delaware. 6.4 This Agreement may not be assigned by either party hereto. 6.5 This Agreement may be signed by the parties in as many counterparts as may be deemed necessary, each of which so signed shall be deemed to be an original, and all such counterparts together shall constitute one and the same instrument. IN WITNESS WHEREOF the parties have executed this written Agreement effective as of the Effective Date. PAWNBROKER.COM, INC. Per: /s/ Doug McLeod -------------------------------- Authorized Signatory -8- TO BE COMPLETED BY THE PURCHASER: A. Name and Address (Note: Cannot be a U.S. Address) The name and address (to establish the Purchaser's jurisdiction of residence for the purpose of determining the applicable Securities Rules) of the purchaser (the "Purchaser") is as follows: Packard Financial Group Inc. -------------------------------------------- Name 11 Old Parham Road P.O. Box 1531 -------------------------------------------- Street Address -------------------------------------------- St. John Antigua -------------------------------------------- Country B. Registration Instructions (Note: Cannot be a U.S. Address) The name and address of the person in whose name the Purchaser's Securities are to be registered is as follows (if the name and address is the same as was inserted in paragraph A above, then insert "N/A"): -------------------------------------------- Name -------------------------------------------- Street Address -------------------------------------------- -------------------------------------------- City and Province -------------------------------------------- Country -------------------------------------------- Postal Code -9- C.Delivery Instructions (Note: Cannot be a U.S. Address) The name and address of the person to whom the certificates representing the Purchaser's Securities referred to in paragraph A above are to be delivered is as follows (if the name and address is the same as was inserted in paragraph A above, then insert "N/A"): -------------------------------------------- Name -------------------------------------------- Street Address -------------------------------------------- -------------------------------------------- City and Province -------------------------------------------- Country -------------------------------------------- Postal Code D. Subscription Amount The minimum is Cdn. $97,000 if the Purchaser is a resident (as per the address inserted in paragraph A above) of British Columbia, Alberta, Manitoba. New Brunswick, Prince Edward Island, Newfoundland or an International Jurisdiction, or Cdn. $150,000 if the Purchaser is a resident of Saskatchewan, Ontario, Quebec or Nova Scotia.: Subscription Funds: U.S. $3,003,000 Number of Units: 1,300,000 Units (where each Unit consists of one share and one-half of one share purchase warrant. Each whole share purchase warrant will entitle the Purchaser to subscribe for one additional common share of the Company on the terms set forth in paragraph 2.1 of this Subscription Agreement). Note: The number of Units must equal the Subscription Funds divided by price of U.S. $2.31 per Unit. TO BE COMPLETED AND SIGNED BY THE PURCHASER: PACKARD FINANCIAL GROUP INC. - ---------------------------------------- Name of the "Purchaser" - use the name inserted in paragraph A above. Per: --------------------------------- Signature of Purchaser --------------------------------- Title (if applicable) -10- EX-10.4 12 SHARE PURCHASE WARRANT EXHIBIT 10.4 650,000 Common Shares Void after Par Value of U.S. $0.00001 June 22, 2001 SHARE PURCHASE WARRANT PAWNBROKER.COM, INC. (the "Company") This is to certify that, for value received, Packard Financial Group Inc. (the "Warrant Holder") of 11 Old Parham Road, P.O. Box 1531, St. John, Bermuda has the right to purchase from the Company, upon and subject to the terms and conditions hereinafter referred to, 650,000 common shares having a par value of U.S.$0.00001 per share (the "Shares") in the capital of the Company. The Shares may be purchased at a price of: 1. U.S. $2.31 per Share at any time up to 5:00 p.m. local time in Blaine, Washington on June 23, 2000 and 2. U.S.$2.90 per Share at any time up to 5:00 p.m. local time in Blaine, Washington on June 22, 2001. The right to purchase the Shares may be exercised in whole or in part, by the Warrant Holder only, at the prices set forth above (the "Exercise Price") within the times set forth above by: (a) completing and executing the Subscription Form attached hereto for the number of the Shares which the Warrant Holder wishes to purchase, in the manner therein indicated; (b) surrendering this Warrant Certificate, together with the completed Subscription Form, to Signature Stock Transfer, Inc., (the "Transfer Agent"); and (c) paying the appropriate Exercise Price, in United States funds, for the number of the Shares of the Company subscribed for, either by certified cheque or bank draft or money order payable to the Company in Blaine, Washington or such other address as the Company may advise by written notice to the address of the Warrant Holder set forth above. Upon surrender and payment, the Company shall issue to the Warrant Holder or to such other person or persons as the Warrant Holder may direct, the number of the Shares subscribed for and will deliver to the Warrant Holder, at the address set forth on the subscription form, a certificate or certificates evidencing the number of the Shares subscribed for. If the Warrant Holder subscribes for a number of Shares which is less than the number of Shares permitted by this warrant, the Company shall forthwith cause to be delivered to the Warrant Holder a further Warrant Certificate in respect of the balance of Shares referred to in this Warrant Certificate not then being subscribed for. In the event of any subdivision of the common shares of the Company (as such common shares are constituted on the date hereof) into a greater number of common shares while this warrant is outstanding, the number of Shares represented by this warrant shall thereafter be deemed to be subdivided in like manner and the Exercise Price adjusted accordingly, and any subscription by the Warrant Holder for Shares hereunder shall be deemed to be a subscription for common shares of the Company as subdivided. In the event of any consolidation of the common shares of the Company (as such common shares are constituted on the date hereof) into a lesser number of common shares while this warrant is outstanding, the number of Shares represented by this warrant shall thereafter be deemed to be consolidated in like manner and the Exercise Price adjusted accordingly, and any subscription by the Warrant Holder for Shares hereunder shall be deemed to be a subscription for common shares of the Company as consolidated. In the event of any capital reorganization or reclassification of the common shares of the Company or the merger or amalgamation of the Company with another corporation at any time while this warrant is outstanding, the Company shall thereafter deliver at the time of purchase of the Shares hereunder the number of common shares the Warrant Holder would have been entitled to receive in respect of the number of the Shares so purchased had the right to purchase been exercised before such capital reorganization or reclassification of the common shares of the Company or the merger or amalgamation of the Company with another corporation. If at any time while this, or any replacement, warrant is outstanding: (a) the Company proposes to pay any dividend of any kind upon its common shares or make any distribution to the holders of its common shares; (b) the Company proposes to offer for subscription pro rata to the holders of its common shares any additional shares of stock of any class or other rights; (c) the Company proposes any capital reorganization or classification of its common shares or the merger or amalgamation of the Company with another corporation; or (d) there is a voluntary or involuntary dissolution, liquidation or winding-up of the Company; The Company shall give to the Warrant Holder at least seven days prior written notice (the "Notice") of the date on which the books of the Company are to close or a record is to be taken for such dividend, distribution or subscription rights, or for determining rights to vote with respect to such reorganization, reclassification, consolidation, merger, amalgamation, dissolution, liquidation or winding-up. The Notice shall specify, in the case of any such dividend, distribution or subscription rights, the date on which holders of common shares of the Company will be entitled to exchange their common shares for securities or other property deliverable upon any reorganization, reclassification, consolidation, merger, amalgamation, sale, dissolution, liquidation or winding-up, as the case may be. Each Notice shall be delivered by hand, addressed to the Warrant Holder at the address of the Warrant Holder set forth above or at such other address as the Warrant Holder may from time to time specify to the Company in writing. The holding of this Warrant Certificate or the Warrants represented hereby does not constitute the Warrant Holder a member of the Company. Nothing contained herein confers any right upon the Warrant Holder or any other person to subscribe for or purchase any Shares of the Company at any time subsequent to 5:00 p.m. local time in Blaine, Washington on June 22, 2001 and from and after such time, this Warrant and all rights hereunder will be void. The Warrants represented by this Warrant Certificate are non-transferable. Any common shares issued pursuant to this Warrant will bear the following legend: -2- "THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN AND WILL NOT BE REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "1933 ACT"), OR THE SECURITIES LAWS OF ANY STATE, AND MAY BE OFFERED FOR SALE, SOLD OR OTHERWISE TRANSFERRED OR ASSIGNED ONLY (i) TO THE COMPANY; (ii) OUTSIDE THE UNITED STATES IN ACCORDANCE WITH REGULATION S UNDER THE 1933 ACT; (iii) IN ACCORDANCE WITH RULE 144 UNDER THE 1933 ACT; OR (iv) IN A TRANSACTION THAT IS OTHERWISE EXEMPT FROM REGISTRATION UNDER THE 1933 ACT AND APPLICABLE STATE SECURITIES LAWS, PROVIDED, PRIOR TO ANY SUCH SALE, TRANSFER OR ASSIGNMENT, THE COMPANY SHALL HAVE RECEIVED AN OPINION OF COUNSEL, IN FORM ACCEPTABLE TO THE COMPANY, THAT NO VIOLATION OF SUCH REGISTRATION PROVISIONS WOULD RESULT FROM ANY PROPOSED TRANSFER OR ASSIGNMENT." Time will be of the essence hereof. This Warrant Certificate is not valid for any purpose until it has been signed by the Company. IN WITNESS WHEREOF, the Company has caused this warrant certificate to be signed by one of its directors as of the 23rd day of June, 1999. PAWNBROKER.COM, INC. Per: /s/ Doug McLeod - ------------------------------- Doug McLeod President & Director -3- SUBSCRIPTION FORM To: Pawnbroker.com, Inc. (the "Company") And to: The directors thereof. Pursuant to the Share Purchase Warrant made the -- day of ------------, 1999, the undersigned hereby subscribes for and agrees to take up * common shares having a par value of U.S.$0.00001 (the "Shares") in the capital of the Company, at a price of U.S. $* per Share for the aggregate sum of $* (the "Subscription Funds"), and encloses herewith a certified cheque, bank draft or money order payable to the Company in full payment of the Shares. The undersigned hereby requests that: (a) the Shares be allotted to the undersigned; (b) the name and address of the undersigned as shown below be entered in the registers of members and allotments of the Company; (c) the Shares be issued to the undersigned as fully paid and non-assessable common shares of the Company; and (d) a share certificate representing the Shares be issued in the name of the undersigned. Dated this ----- day of ---------------, 19--. DIRECTION AS TO REGISTRATION: (Name and address exactly as you wish them to appear on your share certificate and in the register of members.) Full Name(1): ------------------------------------------------------------------ Full Address: ----------------------------------------------------------------- ----------------------------------------------------------------- ----------------------------------------------------------------- ----------------------------------------------------------------- Signature of Subscriber(1): ---------------------------------------------------- Signature of Subscriber(1) guaranteed by: If the name above differs from the name of the Subscriber, then please complete the following guarantee: ----------------------------------------- Authorized Signature Number NOTE: The signature to this subscription form must correspond with the name as recorded on the warrant certificate in every particular without alteration or enlargement or any change whatever. The signature of the person executing this power must be guaranteed in a manner satisfactory to the Company's transfer agent. -1- EX-10.5 13 KEYSTONE LEASE AGREEMENT EXHIBIT 10.5 85 KEYSTONE LEASE 1. PARTIES. This lease, dated for reference purpose only, April 1, 1999, is made by and between The Kowalski Family Trust dated September 6, 1991, herein called Landlord, and Pacific Pawnbrokers, Inc., herein called Tenant. 2. PREMISES. Landlord does hereby lease to Tenant and Tenant hereby leases from Landlord that certain commercial space, herein called Premises, having an area of approximately 1,050 square feet at the address 85 Keystone, Suite "F", Reno, Nevada 89503. Said Lease is subject to the terms, covenants, and conditions herein set forth and the Tenant covenants as a material part of the consideration of this Lease to keep and perform each and all of said terms, covenants, and conditions. 3. TERM. The term of this Lease shall be for three (3) years, commencing on the 15th day of April, 1999, and ending on the 14th day of April, 2002. 4. POSSESSION. 4a. If the Landlord for any reason whatsoever cannot deliver possession of said Premises to the Tenant at the commencement of the term hereof, this Lease shall not be void or voidable, nor shall Landlord be liable to Tenant for any loss or damage resulting therefrom, nor shall the expiration date of the above term be in any way extended, but in that event, all rent shall be abated during the period between the commencement of said term and the time when Landlord delivers possession. 4b. In the event that Landlord shall permit Tenant to occupy the Premises prior to the commencement date of the term, such occupancy shall be subject to all the provisions of this Lease. Said early possession shall not advance the termination date hereinabove provided. 5. RENT. The total rent commitment for the Premises shall be FORTY SEVEN THOUSAND TWO HUNDRED FIFTY DOLLARS ($**47,250.00**), which Tenant agrees shall be payable to Landlord, without prior notice or demand in the amount of ONE THOUSAND THREE HUNDRED TWELVE AND 50/100 DOLLARS($**1,312.50**) on or before the first day of the first full calendar month of the term hereof and a like sum on or before the first day of each and every successive calendar month thereafter during the term hereof, except that the first month's rent shall be paid upon the execution hereof. Rent for any period during the term hereof which is for less than one (1) month shall be a prorated portion of the monthly installment herein, based upon a thirty (30) day month. Said rental shall be paid to Landlord, without deduction or offset in lawful money of the United States of America, which shall be legal tender at the time of payment, at Box 70278, Reno, Nevada 89502, or to such other person or at such other place as Landlord may from time to time designate in writing. 6. SECURITY DEPOSIT. Tenant has deposited with Landlord the sum of ONE THOUSAND THREE HUNDRED TWELVE AND 50/100 DOLLARS ($**1,312.50**). Said sum shall be held by Landlord as security for the faithful performance by Tenant of all the terms, covenants, and conditions of this Lease to be kept and performed by Tenant during the term hereof. If Tenant defaults with respect to any provision of this Lease, including, but not limited to, the provision relating to the payment of rent, Landlord may (but shall not be required to) use, apply or retain all or any part of this security deposit for the payment of any rent or any other sum in default, or for the payment of any amount which Landlord may spend or become obligated to spend by reason of Tenant's default, or to compensate Landlord for any other loss or damage which Landlord may suffer by reason of Tenant's default. If any portion of said deposit is so used or applied, Tenant shall within five (5) days after written demand therefore, deposit cash with Landlord in an amount sufficient to restore the security deposit to its original amount and Tenant's failure to do so shall be a material breach of this Lease. If Tenant shall fully and faithfully perform every provision of this Lease to be performed by it, the security deposit or any balance thereof shall be returned to Tenant (or, at Landlord's option, to the last assignee of Tenant's interest hereunder) at the expiration of the Lease term. In the event of termination of Landlord's Interest in this Lease, Landlord shall transfer said deposit to Landlord's successor in interest. 7. OPERATING EXPENSE ADJUSTMENTS. For the purposes of this Article, the following terms are defined as follows: Base Year: The calendar year in which this Lease term commences (provided, however, that the Base Year shall in no event be earlier than the first full calendar year following the date of initial occupancy by the first occupant of said Building). For the purposes of this Lease the Base Year shall be considered to be 1999. Comparison Year: Each calendar year of the term after the Base Year. Direct Expenses: All direct costs of operation and maintenance, as determined by standard accounting practices, and shall include the following costs by way of illustration, but not limited to: real property taxes and assessments; rent taxes; gross receipt taxes; (whether assessed against the Landlord or assessed against the Tenant and collected by the Landlord, or both); sewer charges; fire, theft, public liability and extended coverage insurance premiums; costs premiums; costs incurred in the management of the Building, accounting fees, security, expenses, utilities; air-conditioning and heating; supplies; materials; equipment; and tools; including maintenance costs, and upkeep of all parking and common areas. ("Direct Expenses" shall not include depreciation on the Building of which the Premises are a part or equipment therein, loan payments, executive salaries or real estate brokers' commissions.) If the Direct Expenses paid or incurred by the Landlord for the Comparison Year on account of the operation or maintenance of the Building of which the Premises are a part are in excess of the Direct Expenses paid or incurred for the Base Year, then the Tenant shall pay 11.8% of the increase. This percentage is that portion of the total rentable area of the Building occupied by the Tenant hereunder. Landlord shall endeavor to give to Tenant on or before the first day of March of each year following the respective Comparison Year a statement of the increase in rent payable by Tenant hereunder, but failure by Landlord to give such statement by said date shall not constitute a waiver by Landlord of its right to require an increase in rent. Upon receipt of the statement for the first Comparison Year, Tenant shall pay in full the total amount of increase due for the first Comparison Year, and in addition for the then current year, the amount of any such increase shall be used as an estimate for said current year and this amount shall be divided into twelve (12) equal monthly installments and Tenant shall pay to Landlord, concurrently with the regular monthly rent payment next due following the receipt of such statement, an amount equal to one (1) monthly installment multiplied by the number of months from January in the calendar year in which said statement is submitted to the month of such payment, both months inclusive. Subsequent installments shall be payable concurrently with the regular monthly rent payments for the balance of that calendar year and shall continue until the next Comparison Year's statement is rendered. If the next or any succeeding Comparison Year results in a greater increase in Direct Expenses, then upon receipt of the statement from the Landlord, Tenant shall pay a lump sum equal to such total increase in Direct Expenses over Base Year, less the total of the monthly installments of estimated increases paid in the previous calendar year for which comparison is then being made to the Base Year; and the estimated monthly installments to be paid for the next year, following said Comparison Year, shall be adjusted to reflect such increase. If in any Comparison Year the Tenant's share of Direct Expenses is less than the preceding year, then upon receipt of Landlord's statement, any overpayment made by Tenant on the monthly installment basis provided above shall be credited towards the next monthly rent falling due and the estimated monthly installments of Direct Expenses to be paid shall be adjusted to reflect such lower Direct Expenses for the most recent Comparison Year. Even though the term has expired and the Tenant vacated the Premises, when the final determination is made of Tenant's share of Direct Expenses for the year in which this lease terminates, Tenant shall immediately pay any increase due over the estimated expenses paid and conversely any overpayment made in the event said expenses decrease shall be immediately rebated by Landlord to Tenant. Notwithstanding anything contained in this Article, the rent payable by Tenant shall in no event be less than the rent specified in Article 5 hereinabove. 8. USE. Tenant shall use the premises for general office purposes and shall not use or permit the Premises to be used for any other purpose without prior written consent of Landlord. Tenant shall not do or permit anything to be done in or about the Premises nor bring or keep anything therein which will in any way increase the existing rate of or affect any fire or other insurance upon the Building or any of its contents, or cause cancellation of any of the insurance policies covering said Building or any part thereof or any of its contents. Tenants shall not do or permit anything to be done in or about the Premises which will in any way obstruct or interfere with the rights of other tenants or occupants of the Building or injure or annoy them or use or allow the Premises to be used for any improper, immoral, unlawful or objectionable purpose, nor shall Tenant cause, maintain or permit any nuisance in, on or about the Premises. Tenant shall not commit nor suffer to be committed any waste in or upon the Premises. 9. COMPLIANCE WITH THE LAW. Tenant shall not use the Premises or permit anything to be done in or about the Premises which will in any way conflict with any law, statue, ordinance or governmental rule or regulation now in force or which may hereafter be enacted or promulgated. Tenant shall, at its sole cost and expense, promptly comply with all laws, statues, ordinances and governmental rules, regulations or requirements now in force or which may hereafter be in force, and with the requirement of any board of fire insurance underwriters or other similar bodies now or hereafter constituted, relating to or affecting the conditions, use or occupancy of the Premises, excluding structural changes not related to or affected by Tenant's improvements or acts. The judgment of any court of competent jurisdiction or the admission of Tenant in any action against Tenant, whether Landlord be a party thereto or not, that Tenant has violated any law, statute, ordinance or governmental rule, regulation or requirement, shall be conclusive of that fact as between the Landlord and Tenant. 10. ALTERATIONS AND ADDITIONS. Tenant shall not make or suffer to be made any alterations, additions or improvements to or of the Premises or any part thereof without written consent of Landlord first had and obtained and any alterations, additions or improvements to or of said Premises, including, but not limited to, wall covering, paneling and built-in cabinet work, but excepting movable furniture and trade fixtures, shall on the expiration of the term become a part of the realty and belong to the Landlord and shall be surrendered with the Premises. In the event that Landlord consents to the making of any alterations, additions or improvements to the Premises by Tenant, the same shall be made by Tenant at Tenant's sole cost and expense, and any contractor or person selected by Tenant to make the same must first be approved of in writing by the Landlord. Upon the expiration or sooner termination of the term hereof, Tenant shall, upon written demand of Landlord, given at least thirty (30) days prior to the end of the term, at Tenant's sole cost and expense, forthwith and with all due diligence remove any alterations, additions or improvements made by Tenant, designated by Landlord to be removed, and Tenant shall, forthwith and with all due diligence at its sole cost and expense, repair any damage to the Premises caused by such removal. 11. REPAIRS 11a. By taking possession of the Premises, Tenant shall be deemed to have accepted the Premises as being in good, sanitary order, condition and repair. Tenant shall, at Tenant's sole cost and expense, keep the Premises and every part thereof in good condition and repair, damage thereto from causes beyond the reasonable control of Tenant and ordinary wear and tear excepted. Tenant shall upon the expiration or sooner termination of this Lease hereof surrender the Premises to the Landlord in good condition, ordinary wear and tear and damage from causes beyond the reasonable control of Tenant excepted. Except as specifically provided in an addendum, if any, to this Lease, Landlord shall have no obligation whatsoever to alter, remodel, improve, repair, decorate or paint the Premises or any part thereof and the parties hereto affirm that Landlord has made no representations to Tenant respecting the condition of the Premises or the building except as specifically herein set forth. 11b. Notwithstanding the provisions of Article 11a hereinabove, Landlord shall repair and maintain the structural portions of the Building, including the basic plumbing and electrical systems installed or furnished by Landlord, unless such maintenance and repairs are caused in part or in whole by the act, neglect, fault or omission of any duty by the Tenant, its agents, servants, employees or invitees, in which case Tenant shall pay to Landlord the reasonable cost of such maintenance and repairs. Landlord shall not be liable for any failure to make any such repairs or to perform any maintenance unless such failure shall persist for an unreasonable time after written notice of the need of such repairs or maintenance is given to Landlord by Tenant. Except as provided in Article 21 hereof, there shall be no abatement of rent and no liability of Landlord by reason of any injury to or interference with Tenant's business arising from the making of any repairs, alterations or improvements in or to any portion of the Building or the Premises, or in or to fixtures, appurtenances and equipment therein. Tenant waives the right to make repairs at Landlord's expense under any law, statute or ordinance now or hereafter in effect. 12. LIENS. Tenant shall keep the Premises and the property in which the Premises are situated free from any liens arising out of any work performed, materials furnished or obligations incurred by Tenant. Landlord may require, at Landlord's sole option, that Tenant shall provide to Landlord, at Tenant's sole cost and expense, a Page 1 of 4 85 KEYSTONE Initials: JS ---- lien and completion bond in an amount equal to one and one-half (1-1/2) times any and all estimated costs of any improvements, additions, or alterations in the Premises, to insure Landlord against any liability for mechanic's and materialmen's liens and to insure completion of the work. 13. ASSIGNMENT AND SUBLETTING. Tenant shall not either voluntarily or by operation of law, assign, transfer, mortgage, pledge, hypothecate or encumber this Lease or any interest therein, and shall not sublet the said Premises or any part thereof, or nay right or privilege appurtenant thereto, or suffer any other person (the employees, agents, servants and invitees of Tenant excepted) to occupy or use the said Premises, or any portion thereof, without the written consent of Landlord first had and obtained, which consent shall not be unreasonably withheld, and a consent to one assignment, subletting, occupation or use by any other person shall not be deemed to be a consent to any subsequent assignment, subletting, occupation or use by another person. Any such assignment or subletting without such consent shall be void, and shall, at the option of the Landlord, constitute a default under this Lease. Lessor shall be entitled to receive any additional rent paid by a sub lessee over and above the amount of rent specified herein to be paid by Lessee. 14. HOLD HARMLESS. Tenant shall indemnify and hold harmless Landlord against and from any and all claims arising from Tenant's use of the Premises for the conduct of its business or from any activity, work or other thing done, permitted or suffered by the Tenant in or about the Building, and shall further indemnify and hold harmless Landlord against and from any and all claims arising from any breach or default in the performance of any obligation on Tenant's part to be performed under the terms of this Lease, or arising from any act or negligence of the Tenant, or any officer, agent, employee, guest, or invitee of Tenant, and from and against all costs, attorney's fees, expenses and liabilities incurred in or about any such claim or any action or proceeding brought thereon, and, in any case, action or proceeding brought against Landlord by reason of any such claim. Tenant, upon notice from Landlord, shall defend the same at Tenant's expense by counsel reasonably satisfactory to Landlord. Tenant as material part of the consideration to the Landlord hereby assumes all risk of damage to property or injury to persons, in, upon or about the Premises, from any cause other than Landlord's negligence, and Tenant hereby waives all claims in respect thereof against Landlord. Landlord or its agents shall not be liable for any damage to property entrusted to employees of the Building, nor for loss or damage to any property by theft or otherwise, nor for any injury or damage to persons or property resulting from fire, explosion, falling plaster, steam, gas, electricity, water or rain which may leak from any part of the Building or from the pipes, appliances or plumbing works therein or from the roof, street or subsurface or from any other place resulting from dampness or any other cause whatsoever, unless caused by or due to the negligence of Landlord, its agents, servants or employees. Landlord or its agents shall not be liable for interference with the lights or other incorporeal hereditament, loss of business by Tenant, nor shall Landlord be liable for any latent defect in the Premises or in the Building. Tenant shall give prompt notice to Landlord in case of fire or accidents in the Premises or in the Building or of defects therein or in the fixtures or equipment. 15. SUBROGATION. As long as their respective insurers so permit, Landlord and Tenant hereby mutually waive their respective rights of recovery against each other for any loss insured by fire, extended coverage and other property insurance policies existing for the benefit of the respective parties each party shall obtain any special endorsements, if required by their insurer to evidence compliance with the aforementioned waiver. 16. LIABILITY INSURANCE. Tenant shall, at Tenant's expense, obtain and keep in force during the term of this Lease a policy of comprehensive public liability insurance insuring Landlord and Tenant against any liability arising out of the ownership, use, occupancy or maintenance of the Premises and all areas appurtenant thereto. The limit of said insurance shall not, however, limit the liability of the Tenant hereunder. Tenant may carry said insurance under a blanket policy, providing, however, said insurance by Tenant shall have a Landlord's protective liability endorsement attached thereto. If Tenant shall fail to procure and maintain said insurance, Landlord may, but shall not be required to, procure and maintain same, but at the expense of Tenant. Insurance required hereunder, shall be in companies rated A+, AAA or better in "Best's Insurance Guide". Tenant shall deliver to Landlord prior to occupancy of the Premises copies of policies of liability insurance required herein or certificates evidencing the existence and amounts of such insurance with loss payable clauses satisfactory to Landlord. No policy shall be cancelable or subject to reduction of coverage except after ten (10) days' prior written notice to Landlord. 17. SERVICES AND UTILITIES. Provided that tenant is not in default hereunder, Landlord agrees to furnish to the Premises during reasonable hours of generally recognized business days, to be determined by Landlord at his sole discretion, and subject to the rules and regulations of the Building which the Premises are a part, electricity for normal lighting and fractional horsepower office machines, heat and air conditioning required in Landlord's judgment for the comfortable use and occupation of the Premises, and janitorial service. Landlord shall also maintain and keep lighted the common areas, common entries and toilet rooms in the Building of which the Premises are a part. Landlord shall not be liable for, and Tenant shall not be entitled to any reduction of rental by reason of Landlord's failure to furnish any of the foregoing when such failure is caused by accident, breakage, repairs, strike, lockouts or other labor disturbances or labor disputes of any character, or by any other cause, similar or dissimilar, beyond the reasonable control of Landlord. Landlord shall not be liable under any circumstances for a loss of or injury to property, however occurring, through or in connection with or incidental to failure to furnish any of the foregoing. Wherever heat generating machines or equipment are used in the Premises which affect the temperature otherwise maintained by the air conditioning system, Landlord reserves the right to install supplementary air conditioning units in the Premises and the cost of installation, and the cost of operation and maintenance thereof shall be paid by Tenant to Landlord upon demand by Landlord. Tenant will not, without consent of Landlord, use any apparatus or device in the Premises, including, but not without limitation thereto, electronic data processing machines, punch card machines, and machines using in excess of 120 volts, which will in any way increase the amount of electricity usually furnished or supplied for the use of the Premises as general office space, nor connect with electric current except through existing electrical outlets in the Premises, any apparatus or devise for the purpose of using electric current if Tenant shall require water or electric current in excess of that usually furnished or supplied for the use of the Premises as general office space. Tenant shall first procure the written consent of Landlord who may refuse, to the use thereof and Landlord may cause a water meter or electrical current meter to be installed in the Premises, so as to measure the amount of water and electric current consumed for any such use. The cost of any such meters and of installation, maintenance and repair thereof shall be paid for by the Tenant and Tenant agrees to pay to Landlord promptly upon demand therefore by Landlord for all such water and electric current consumed as shown by said meters, at the rates charged for such services by the local public utility furnishing the same, plus any additional expense incurred in keeping account of the water and electric current so consumed. If a separate meter is not installed, such excess cost for such water and electric current will be established by an estimate made by a utility company or electrical engineer. 18. PROPERTY TAXES. Tenant shall pay, or cause to be paid, before delinquency, any and all taxes levied or assessed and which become payable during the term hereof upon all Tenant's leasehold improvements, equipment, furniture, fixtures and personal property located in the Premises, except that which has been paid for by Landlord, and is the standard of the Building. In the event any or all of the Tenant's leasehold improvements, equipment, furniture, fixtures and personal property shall be assessed and taxed with the Building, Tenant shall pay to Landlord its share of such taxes within ten (10) days after delivery to Tenant by Landlord of a statement in writing setting forth the amount of such taxes applicable to Tenant's property. 19. RULES AND REGULATIONS. Tenant shall faithfully observe and comply with the rules and regulations that Landlord shall from time to time promulgate. Landlord reserves the right from time to time to make reasonable modifications to said rules. The additions and modifications to those rules shall be binding upon Tenant upon delivery of a copy of them to Tenant. Landlord shall not be responsible to Tenant for the nonperformance of any said rules by any other tenants or occupants. 20. HOLDING OVER. If Tenant remains in possession of the Premises or any part thereof after the expiration of the term hereof, with the express written consent of Landlord such occupancy shall be a tenancy from month to month at a rental in the amount of the last monthly rental, plus all other charges payable hereunder and upon all the terms hereof applicable to a month to month tenancy. 21. ENTRY BY LANDLORD. Landlord reserves and shall at any and all times have the right to enter the Premises, inspect the same, supply any service to be provided by Landlord to Tenant hereunder, to submit said Premises to prospective purchasers or tenants, to post notices of non-responsibility, and to alter, improve or repair the Premises and any portion of the Building of which the Premises are a part that Landlord may deem necessary or desirable, without abatement of rent and may for that purpose erect scaffolding and other necessary structures where reasonably required by the character of the work to be performed, always providing that the entrance to the Premises shall not be blocked thereby, and further providing that the business of the Tenant shall not be interfered with unreasonably. Tenant hereby waives any claims for damages or for any injury or inconvenience to or interference with Tenant's business, any loss of occupancy or quiet employment of the Premises, and any other loss occasioned thereby. For each of the aforesaid purposes, Landlord shall at all times have and retain a key with which to unlock all the doors in, upon and about the Premises, excluding Tenant's vaults, safes and files, and Landlord shall have the right to use any and all means which Landlord may deem proper to open said doors in an emergency in order to obtain entry to the Premises without liability to Tenant except for any failure to exercise due care for Tenant's property. Any entry to the Premises obtained by Landlord by any of said means or otherwise shall not under any circumstances be construed or deemed to be a forcible or unlawful entry into, or a detainer of, the Premises, or an eviction of Tenant from the Premises or any portion thereof. 22. RECONSTRUCTION. In the event the Premises of the Building of which the Premises are a part are damaged by fire or other perils covered by extended coverage insurance, Landlord agrees to forthwith repair the same, and this Lease shall remain in full force and effect, except that Tenant shall be entitled to proportionate reduction of the rent while such repairs are being made, such proportionate reduction to be based upon the extent to which the making of such repairs shall materially interfere with the business carried on by the Tenant in the Premises. If the damage is due to the fault or neglect of Tenant or its employees, there shall be no abatement of rent. In the event the Premises or the Building of which the Premises are a part are damaged as a result of any cause other than the perils covered by fire and extended coverage Insurance, the Landlord shall forthwith repair the same, provided the extent of the destruction be less than ten percent(10%) of the then full replacement cost of the Premises or the Building of which the Premises are a part. In the event the destruction of the Premises or the Building is to an extent greater than ten percent(10%) of the full replacement cost, the Landlord shall have the option (1) to repair or restore such damage, this Lease continuing in full force and effect but the rent to be proportionately reduced as hereinabove in the Article provided, or (2) give notice to Tenant at any time within sixty (60) days after such damage terminating this Lease as of the date specified in such notice, which date shall be no less then thirty (30) and not more than sixty (60) days after the giving of such notice. In the event of giving such notice, this Lease shall expire and all interest of the Tenant in the Premises shall terminate on the date so specified in such notice and the rent, reduced by a proportionate amount based upon the extent, if any, to which such damage materially interfered with the business carried on by the Tenant in the Premises, shall be paid up to date of said such termination. Notwithstanding anything to the contrary contained in the Article, Landlord shall not have any obligation whatsoever to repair, reconstruct or restore the Premises when the damage resulting from any casualty covered under this Article occurs during the last twelve (12) months of the term of this Lease or any extension thereof. Landlord shall not be required to repair any injury or damage by fire or other cause, or to make any repairs or replacements of any panels, decoration, office fixtures, railings, floor covering, partitions, or any other property installed in the Premises by Tenant. The Tenant shall not be entitled to any compensation or damages from Landlord for loss of the use of the whole or any part of the Premises, Tenant's personal property or any inconvenience or annoyance occasioned by such damage, repair, reconstruction or restoration. 23. DEFAULT. The occurrence of any one or more of the following events shall constitute a default and breach of this Lease by Tenant: 23a.The vacating or abandonment of the Premises by Tenant. 23b. The failure by Tenant to make any payment of rent or any other payment required to be made by Tenant hereunder, as and when due, where such failure shall continue for a period of three (3) days after written notice thereof by Landlord to Tenant. 23c.The failure by Tenant to observe or perform any of the covenants, conditions or provisions of this Lease to be observed or performed by the Tenant, other than described in Article 23b. above, where such failure shall continue for a period of thirty (30) days after written notice thereof by Landlord to Tenant provided, however, that if the nature of Tenant's default is such that more than thirty (30) days are reasonably required for its cure, then Tenant shall not be deemed to be in default if Tenant commences such cure within said thirty (30) day period and thereafter diligently prosecutes such cure to completion. 23d. The making by Tenant of any general assignment or general arrangement for the benefit of creditors; or the filing by or against Tenant of a petition to have Tenant adjudged bankrupt, or a petition or reorganization or arrangement under any law relating to bankruptcy (unless, in the case of a petition filed against Tenant, the same is dismissed within sixty (60) days) or the appointment of a trustee or a receiver to take possession of substantially all of Tenant's assets located at the Premises or of Tenant's interest in this Lease, where possession is not restored to Tenant within thirty (30) days of the attachment, execution or other judicial seizure of substantially all of Tenant's assets located at the Premises or of Tenant's interest in this Lease, where such seizure is not discharged in thirty (30) days. Page 2 of 4 85 KEYSTONE Initials: JS ---- 24. REMEDIES IN DEFAULT. In the event of any such material default or breach by Tenant, Landlord may at any time thereafter, with or without notice or demand and without limiting Landlord in the exercise of a right or remedy which Landlord may have by reason of such default or breach: 24a. Terminate Tenant's right to possession of the Premises by any lawful means. In which case this Lease shall terminate and Tenant shall immediately surrender possession of the Premises to Landlord. In such event Landlord shall be entitled to recover from Tenant all damages incurred by Landlord by reason of Tenant's default including, but not limited to, the cost of recovering possession of the Premises; expenses of reletting, including necessary renovation and alteration of the Premises, reasonable attorney's fees, any real estate commission actually paid; the worth at the time of award by the court having jurisdiction thereof of the amount by which the unpaid rent for the balance of the term after the time of such award exceeds the amount of such rental loss for the same period that Tenant proves could be reasonably avoided; that portion of the leasing commission paid by Landlord and applicable to the unexpired term of this Lease. Unpaid installments of rent or other sums shall bear interest from the date due at the rate of eighteen percent(18%) per annum. In the event Tenant shall have abandoned the Premises, Landlord shall have the option of (a) taking possession of the premises and recovering from Tenant the amount specified in this paragraph, or (b) proceeding under the provisions of the following Article 24b. 24b. Maintain Tenant's right to possession, in which case this Lease shall continue in effect whether or not Tenant shall have abandoned the Premises. In such event Landlord shall be entitled to enforce all of Landlord's rights and remedies under this Lease, including the right to recover the rent as it becomes due hereunder. 24c.Pursue any other remedy now or hereafter available to Landlord under the laws or judicial decision of the State of Nevada. 25. EMINENT DOMAIN. If more than twenty-five percent(25%) of the Premises shall be taken or appropriated by any public or quasi-public authority under the power of eminent domain, either party hereto shall have the right, at its option, to terminate this Lease, and Landlord shall be entitled to any and all income, rent, award, or any interest therein whatsoever which may be paid or made in connection with such public or quasi-public use or purpose, and Tenant shall have no claim against Landlord for the value of any unexpired term of this Lease. If either less than or more than twenty-five percent(25%) of the Premises is taken, and neither party elects to terminate as herein provided, the rental thereafter to be paid shall be equitably reduced. If any part of the Building other than the Premises may be so taken or appropriated, Landlord shall have the right at its option to terminate this Lease and shall be entitled to the entire award as above provided. 26. OFFSET STATEMENT. Tenant shall at any time and from time to time upon not less than ten (10) days' prior written notice from Landlord execute, acknowledge and deliver to Landlord a statement in writing, (a) certifying that this Lease is unmodified and in full force and effect (or, if modified, stating the nature of such medication and certifying that this Lease as so modified, is in full force and effect), and the date which the rental and other charges are paid in advance, if any and (b) acknowledging that there are not, to Tenant's knowledge, any uncured defaults on the part of the Landlord hereunder, or specifying such defaults if any are claimed. Any such statement may be relied upon by an prospective purchaser or encumbrancer of all or any portion of the real property of which the Premises are a part. 27. PARKING. Tenant shall have the right to use in common with other tenants or occupants of the Building the parking facilities of the Building, subject to rules and regulations which may be established by Landlord. 28. AUTHORITY OF PARTIES. Corporate Authority. If Tenant is a corporation, each individual executing this Lease on behalf of said corporation represents and warrants that he is duly authorized to execute and deliver this Lease on behalf of said corporation, in accordance with a duly adopted resolution of the board of directors of said corporation or in accordance with the by-laws of said corporation, and that this Lease is binding upon said corporation in accordance with its terms. 29. GENERAL PROVISIONS. (i) Plats and Riders. Clauses, plats and riders, if any, signed by the Landlord and the Tenant and endorsed on or affixed to this Lease are a part hereof. (ii)Waiver. The waiver by Landlord of any term, covenant or condition herein contained shall not be deemed to be a waiver of such term, covenant or condition on any subsequent breach of the same or any other term, covenant or condition herein contained. The subsequent acceptance of rent hereunder by Landlord shall not be deemed to be a waiver of any preceding breach by Tenant of any term, covenant or condition of this Lease, other than the failure of the Tenant to pay the particular rent so accepted, regardless of Landlord's knowledge of such preceding breach at the time of the acceptance of such rent. (iii) Notices. All notices and demands which may or are to be required or permitted to be given by either party to the other hereunder shall be in writing. All notices and demands by the Landlord to the Tenant shall be sent by United States Mail, postage prepaid, addressed to the Tenant at the Premises, or to such other place as Tenant may from time to time designate in a notice to the Landlord. All notices and demands by the Tenant to the Landlord shall be sent by United States Mail, postage prepaid, addressed to John and Barbara Kowalski, C/O Nevada Commercial Group, Box 70278, Reno, Nevada 89510, or to such other person or place as the Landlord may from time to time designate in a notice to the Tenant. (iv)Joint Obligation. If there is more than one Tenant, the obligations hereunder imposed upon Tenants shall be joint and several. (v) Marginal Headings. The marginal headings and Article titles to the Articles of this Lease are not part of this Lease and shall have no effect upon the construction or interpretation of any part hereof. (vi)Time. Time is of the essence of this Lease and each and all of its provisions in which performance is a factor. (vii) Successors and Assigns. The covenants and conditions herein contained, subject to the provisions as to assignment, apply to and bind the heirs, successors, executors, administrators and assigns of the parties hereto. (viii) Recordation. Neither Landlord nor Tenant shall record this Lease or a short form memorandum hereof without the prior written consent of the other party. (ix)Quiet Possession. Upon Tenant paying the rent reserved hereunder and observing and performing all of the covenants, conditions and provisions on Tenant's part to be observed and performed hereunder, Tenant shall have quiet possession of the Premises for the entire term hereof, subject to all the provisions of this Lease. (x) Late Charges. Tenant hereby acknowledges that the late payment by Tenant to Landlord of rent or other sums due hereunder will cause Landlord to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. Such costs include, but are not limited to, processing and accounting charges, and late charges which may be imposed upon Landlord by terms of any mortgage or trust deed covering the Premises. Accordingly, if any installment of rent or of a sum due from Tenant shall not be received by Landlord or Landlord's designee by the 10th day of the calendar month in which it is due, then Tenant shall pay to Landlord a late charge equal to eighteen percent(18%) of such overdue amount. The parties hereby agree that such late charges represent a fair and reasonable estimate of the cost that Landlord will incur by reason of the late payment by Tenant. Acceptance of such late charges by the Landlord shall in no event constitute a waiver of Tenant's default with respect to such overdue amount, nor prevent Landlord from exercising any of the other rights and remedies granted hereunder. (xi)Prior Agreements. This Lease contains all of the agreements of the parties hereto with respect to any matter covered or mentioned in this Lease, and no prior agreements or understanding pertaining to any such matters shall be effective for any purpose. No provision of this Lease may be amended or added to except by an agreement in writing signed by the parties hereto or their respective successors in interest. This Lease shall not be effective or binding on any party until fully executed by both parties hereto. (xii) Inability to Perform. This Lease and the obligations of the Tenant hereunder shall not be affected or impaired because the Landlord is unable to fulfill any of its obligations hereunder or is delayed in doing so, if such inability or delay is caused by reason of strike, labor troubles, acts of God, or any other cause beyond the reasonable control of the Landlord. (xiii) Attorneys' Fees. In the event of any action or proceeding brought by either party against the other under this Lease the prevailing party shall be entitled to recover all costs and expenses including the fees of its attorneys in such action or proceeding in such amount as the court may adjudge reasonable as attorneys' fees. (xiv) Sale of Premises by Landlord. In the event of any sale of the Building, Landlord shall be and is hereby entirely freed and relieved of all liability under any and all of its covenants and obligations contained in or derived from this Lease arising out of any act, occurrence or omission occurring after the consummation of such sale, and the purchaser, at such sale or any subsequent sale of the Premises shall be deemed, without any further agreement between the parties or their successors in interest or between the parties and any such purchaser, to have assumed and agreed to carry out any and all of the covenants and obligations of the Landlord under this Lease. (xv)Subordination, Attornment. Upon request of the Landlord, Tenant will in writing subordinate its rights hereunder to the lien of any first mortgage, or first deed of trust to any bank, insurance company or other lending institution, now or hereafter in force against the land and Building of which the Premises are a part, and upon any building hereafter placed upon the land of which the Premise are a part, and to all advances made or hereafter to be made upon the security thereof. In the event any proceedings are brought for foreclosure, or in the event of the exercise of the power of sale under any mortgage or deed of trust made by the Landlord covering the Premises, the Tenant shall attorn to the purchaser upon any such foreclosure or sale and recognize such purchaser as the Landlord under this Lease. The provision of the Article to the contrary notwithstanding, and so long as Tenant is not in default hereunder, this Lease shall remain in full force and effect for the full term hereof. (xvi) Name. Tenant shall not use the name of the Building or of the development in which the Building is situated for any purpose other than as an address of the business to be conducted by the Tenant in the Premises. (xvii) Separability. Any provision of this Lease which shall prove to be invalid, void or illegal, shall in no way affect, impair or invalidate any other provision hereof and such other provision shall remain in full force and effect. (xviii) Cumulative Remedies. No remedy or election hereunder shall be deemed exclusive but shall, wherever possible, be cumulative with all other remedies at law or in equity. (xix) Choice of Law. This Lease shall be governed by the laws of the State of Nevada. (xx) Signs and Auctions. Tenant shall not place any sign upon the Premises or Building or conduct any auction thereon without Landlord's prior written consent. 30. RENTAL ESCALATION. On the "Adjustment Date", which is the Commencement Date plus the "Adjustment Period", the monthly rental, hereinabove established, shall be adjusted every twelve (12) months (Adjustment Period) after the Commencement Date of this Lease based on the percentage increases in the U.S. Department of Labor Consumer's Price Index for U.S. City Average All Urban Consumers, All items, as measured over the period of time beginning two (2) months prior to the Commencement Date and continuing through two (2) months prior to the Adjustment Date. Subsequent adjustments shall be based upon the increase in the CPI over that period of time beginning two (2) months prior to the previous adjustment date and continuing through two (2) months prior to the next "Adjustment Date". However, in no event shall the monthly rental or total rental be less than the amount of monthly and total rental set forth herein. 31. BROKER REPRESENTATION/PARTICIPATION. Landlord and Tenant acknowledge that Grubb & Ellis/ Nevada Commercial Group represents Landlord exclusively and that Premier Properties represents Tenant exclusively. 32. MISCELLANEOUS. 1) Tenant shall have the right to acquire additional adjacent suite consisting of approximately 578 SF no later than January 1, 2000. 2) Landlord agrees to clean and deliver the Premises to Tenant on or about April 2, 1999. 33. NOTICES. In connection with any notices to be sent to Tenant under the Lease, such notice shall not be effective and shall not be deemed to have been received by Tenant unless, in addition to the copy to be sent to Tenant at the Premises, a copy is sent to and received by: ---------------------------------. The parties hereto have executed this Lease at the place and on the dates specified immediately adjacent to their signatures. No representation or recommendation is made as to the legal sufficiency, legal effect, or tax consequences of this Lease or the transactions relating thereto. Address: 85 Keystone, Suite "F" TENANT: Reno, NV 89503 PACIFIC PAWNBROKERS, INC. Date: -------------- By: /s/ Joseph Schader ------------------------------------ Page 3 of 4 85 KEYSTONE Initials: JS ---- Its: ----------------------------------- Address: P.O. Box 70278 LANDLORD: Reno, NV 89502 THE KOWALSKI FAMILY TRUST DATED SEPTEMBER 6, 1991 Date: -------------- By: ------------------------------------ John Kowalski, Trustee The Kowalski Family Trust Dated September 6, 1991 By: ------------------------------------ Barbara Kowalski, Trustee and Property Manager The Kowalski Family Trust Dated September 6, 1991 Page 4 of 4 85 KEYSTONE Initials: JS ---- RULES AND REGULATIONS 1. No sign, placard, picture, advertisement, name or notice shall be inscribed, displayed, printed or affixed on or to any part of the outside or inside of the Building without the written consent of Landlord first had and obtained, and Landlord shall have the right to remove any such sign, placard, picture, advertisement, name or notice without notice to and at the expense of Tenant. Only approved signs or lettering on doors shall be printed, painted, affixed or inscribed at the expense of Tenant by a person approved of by Landlord. Tenant shall not place anything or allow anything to be placed near the glass of any window, door, partition or wall which may appear unsightly from outside the Premises provided, however, that Landlord may furnish and install a Building standard window covering at all exterior windows. Tenant shall not without prior written consent of Landlord cause or otherwise sunscreen any window. 2. The sidewalks, halls, passages, exits, entrances, elevators and stairways shall not be obstructed by any of the tenants or used by them for any purpose other than for ingress and egress from their respective Premises. 3. Tenant shall not alter any lock or install any new or additional locks or any bolts on any doors or windows of the Premises. 4. The toilet rooms, urinals, wash bowls and other apparatus shall not be used for any purpose other than that for which they were constructed and no foreign substance of any kind whatsoever shall be thrown therein and the expense of any breakage, stoppage or damage resulting from the violation of this rule shall be borne by the Tenant who, or whose employees or invitees, shall have caused it. 5. Tenant shall not overload the floor of the premises or in any way deface the Premises or any part thereof. 6. No furniture, freight or equipment of any kind shall be brought into the Building without the prior notice to Landlord and all moving of the same into or out of the Building shall be done at such time and in such manner as Landlord shall designate. Landlord shall have the right to prescribe the weight, size and position of all safes and other heavy equipment brought into the Building and also the times and manner of moving the same in and out of the Building. Safes or other heavy objects shall, if considered necessary by Landlord, stand on supports of such thickness as is necessary to properly distribute the weight. Landlord will not be responsible for loss of or damage to any such safe or property from any cause and all damage done to the Building by moving or maintaining any such safe or other property shall be repaired at the expense of Tenant. 7. Tenant shall not use, keep or permit to be used or kept any foul or noxious gas or substance in the Premises, or permit or suffer the Premises to be occupied or used in a manner offensive or objectionable to the Landlord or other occupants of the Building by reason of noise, odors and/or vibrations, or interfere in any way with other tenants or those have business therein, nor shall any animals or birds be brought in or kept in or about the Premises or the Building. 8. No cooking shall be done or permitted by any Tenant on the Premises, nor shall the Premises be used for the storage of merchandise, for washing clothes, for lodging, or for any improper objectionable or immoral purposes. 9. Tenant shall not use or keep in the Premises or the Building any kerosene, gasoline or inflammable or combustible fluid or material, or use any method of heating or air conditioning other than that supplied by Landlord. 10. Landlord will direct electricians as to where and how telephone and telegraph wires are to be introduced. No boring or cutting for wires will be allowed without the consent of the Landlord. The location of telephones, call boxes and other office equipment affixed to the Premises shall be subject to the approval of Landlord. 11. On Saturdays, Sundays, legal holidays, and on other days between the hours of 6:00 P.M. and 8:00 A.M. the following day, access to the Building or to the halls, corridors, elevators or stairways in the Building or to the Premises may be refused unless the person seeking access is known to the person of employee of the Building in charge and has a pass or is properly identified. The Landlord shall in no case be liable for damages for any error with regard to the admission to or exclusion from the Building of any person. In case of invasion, mob, riot, public excitement, or other commotion, the Landlord reserves the right to prevent access to the Building during the continuance of the same by closing the doors or otherwise, for the safety of the tenants and protection of property in the Building and the Building. 12. Landlord reserves the right to exclude or expel from the Building any person who, in the judgment of Landlord, is intoxicated or under the influence of liquor or drugs. or who shall in any manner do any act in violation of any of the rules and regulations of the Building. 13. No vending machine of any description shall be installed, maintained or operated upon the Premises without the written consent of the Landlord. 14. Landlord shall have the right, exercisable without notice and without liability to Tenant, to change the name and street address of the Building of which the Premises are a part. 15. Tenant shall not disturb, solicit, or canvass any occupant of the Building and shall cooperate to prevent same. 16. Without written consent of Landlord. Tenant shall not use the name of the Building in connection with or in promotion or advertising the business of Tenant except as Tenant's address. 17. Landlord shall have the right to control and operate the public portions of the Building and the public facilities, and heating and air conditioning, as well as facilities furnished for the common use of the tenants in such manner as it deems best for the benefit of the tenants generally. 18. All entrance doors in the Premises shall be left locked when the Premises are not in use, and all doors opening to public corridors shall be kept closed except for normal ingress and egress from the Premises. EX-10.6 14 DESIGN AND DEVELOPMENT AGREEMENT EXHIBIT 10.6 DESIGN AND DEVELOPMENT AGREEMENT This DEVELOPMENT ASSISTANCE AGREEMENT (this "Agreement"), dated - --------------, 1999, is made and entered into by and between PAWNBROKER.COM., a Nevada corporation (hereinafter referred to as "Pawnbroker"), and BANSHEE, INC., a Nevada corporation (hereinafter referred to as "Banshee"). Banshee and Pawnbroker, intending to be legally bound, hereby agree as follows: Section 1 GENERAL This Agreement sets forth the terms and conditions under which (1) Banshee agrees to complete the Project (as defined herein below), and (2) Pawnbroker agrees to provide the Assistance Resources (as defined herein below) to help Banshee accomplish the Project. The Project consists of two broad phase items described below. Section 2 THE PROJECT Banshee agrees to complete the following Project: 2.1 Work to Be Completed. Item 1) Design and development of a web site with Oracle backend database, design and implementation of Pawnbroker.Com network technology; and Item 2) Design and development of a compact disk ("CD"), containing multimedia sales presentation, software and tutorial. 2.2 Completion Criteria. Pawnbroker may make a reasonable determination that each milestone is complete, based on standard industry products. Milestone No. Work/Items to be Completed Completion Date - ------------- -------------------------- --------------- 1. 1) Design Phase 07/02 1) Hardware Require 04/29 2) Network Topo 05/18 3) Website 06/08 i) Browser 04/27 ii) 2D Page Layout 05/26 1 Milestone No. Work/Items to be Completed Completion Date - ------------- -------------------------- --------------- iii) 3D Page Layout 06/08 4) Oracle 07/02 i) Schema 06/28 2) Production 08/24 1) WAN Complete 06/29 2) Website i) Site Server 07/09 ii) COM Server 07/13 iii) TRANS Server 07/16 iv) DHTML 07/21 v) JAVA 08/24 3) 3rd party Integration 08/09 4) Database 08/11 i) Widget 07/12 ii) Subscriber 07/14 iii) Buyer Tables 07/19 iv) Law Enforcement 07/21 v) Widget 07/26 vi) Schema 07/28 vii) AP/AR 08/11 3) Alpha Phase 08/23 1) Bug Scrub 08/20 2) Demo 08/23 4) Beta Phase 09/01 1) Final Bug 08/30 2) System Attack 09/01 5) Site Online II CD-ROM - Milestones to be decided upon 06/24 completion of Design Phase 2 Completion of a Milestone shall occur when Banshee demonstrates to Pawnbroker that the Work and/or Items to Be Completed for such Milestone meet the Completion Criteria and Pawnbroker has delivered Banshee's signed, written certification that such Completion Criteria are met. Completion of the Project shall occur upon completion of all Milestones. 2.3 Compliance. Banshee warrants that (1) it owns all intellectual property rights comprised by the Items to Be Completed or otherwise needed for it to conduct the Project and perform its obligations under this Agreement, or has the authority to do so without infringing the rights of any third party or creating any financial obligation to any third party, and (2) the completion of the Project and the Banshee's performance of its obligations under this Agreement will be in compliance with all applicable governmental laws, statutes, ordinances, administrative orders, rules, and regulations. 2.4. Progress Reviews. Banshee shall permit Pawnbroker to conduct progress reviews at Banshee's place of business at reasonable times and upon reasonable notice. Section 3 PAWNBROKER ASSISTANCE Pawnbroker shall provide the following Assistance Resources to Banshee, and Banshee agrees to use and apply the Assistance Resources solely to complete the Project. 3.1 Funds. Pawnbroker agrees to provide Banshee with funding, to be used solely to complete the Project, on the following basis: Amount Date - ------ ---- $100,000.00 Upon initial funding $100,000.00 07/15/99 $45,000.00 Upon completion of Project TOTAL VALUE: $245,000.00 Cash 3.2 Cumulative Value. The Cumulative Value of Assistance Resources shall equal the value specified in Section 3.1 hereof for each item provided by Pawnbroker, including applicable interest and other related charges. 3.3 Delays. If Pawnbroker fails to provide assets or delays in providing items required in a timely manner, the Project time will slip by the same amount of time. This paragraph will not 3 severe the obligations of either party pursuant to this agreement. Section 4 FURTHER ASSURANCES 4.1 Ownership. Upon completion, the project will be owned by Pawnbroker. 4.2 Maintenance. Maintenance is further defined in a separate service agreement entered into between Banshee and Pawnbroker. Banshee will provide support for sixty (60) days upon delivery. 4.3 Demonstration Copies. Banshee shall provide Pawnbroker with one (1) copy of a demonstration version of all the Product components in executable form, accompanied by demonstration instructions, for use by Pawnbroker in its discretion. 4.4 Training. Banshee shall provide Pawnbroker with reasonable amounts of training for Pawnbroker personnel and marketing assistance with respect to complementary products that may be offered by Pawnbroker. Such training shall be provided without charge for the first thirty (30) days of training sessions attended by up to two (2) people, and thereafter shall be subject to Banshee's standard charges or as provided for in a separate agreement entered into between Banshee and Pawnbroker. 4.5 Marketing Rights. Banshee acknowledges that Pawnbroker will market the Product to the public. For example, the web site will be accessed by the public and access will be places as intended by the design. In addition, Pawnbroker will mass produce and mail the CD at its own expense. Both parties may market the product and advertise, as is beneficial to each party's respective business, and as is consistent with that party's respective rights under this agreement. Section 5 LICENSE Pawnbroker hereby grants Banshee broad, exclusive and transferable license to the Project, its components, related discoveries, designs and technologies. Pawnbroker shall not permit the Project, or any part thereof to be disclosed to others, except as intended by this agreement. The Project shall be trademarked and labeled with appropriate copyright notices. Pawnbroker's obligations under this paragraph survive any termination of this agreement. Section 6 ADMINISTRATION 6.1 Principal Contacts. Pawnbroker and Banshee each designate by name the following to 4 serve as principal contact for purposes of the Project and this Agreement. Banshee: Jason Pratt Carson Valley Business Park 2561 Business Parkway, Unit B Minden, NV 89423 Pawnbroker: Joe Schlader ---------------------------------------- ---------------------------------------- 6.2 Costs and Charges. Except as expressly provided in this Agreement, Banshee shall not be entitled to any payment, cost reimbursement, or other assistance or compensation from Pawnbroker for the Project, the preparation of the Items to Be Completed, or the commitments made hereunder. Except as otherwise specified in this Agreement, each party shall bear all its own expenses incurred in rendering performance, including facilities, work space, computers and computer time, utilities, management, clerical, reproduction services, supplies, and the like. 6.3 Termination. This Agreement may be terminated only 1. By Pawnbroker for its convenience, provided that, if termination results in the loss of any Assistance Resources and the Project is consequently not completed, Pawnbroker shall forfeit any right to repayment or compensation; 2. By Pawnbroker upon the default of Banshee or Banshee's failure to complete the Project by at least 11/01/99; or 3. By mutual agreement of the parties. 6.4 Limitations. Neither party shall be entitled to indirect, incidental, or consequential damages, including lost profits based on any breach or default under this Agreement. In no event shall Pawnbroker be liable under this Agreement to Banshee, its successors, and assigns for damages exceeding the amounts payable and as yet unpaid by Pawnbroker under this Agreement. 6.5 Freedom of Action. Nothing in this Agreement shall be construed to prohibit or restrict either party from independently developing or acquiring and marketing materials and/or programs that are competitive with the Product. 6.6 Independent Contractor. Banshee is and shall remain an independent contractor with respect to all Work. Neither Banshee nor any employee of Banshee shall be considered an employee or agent of Pawnbroker for any purpose. 6.7 No Assignment. Banshee may not sell, transfer, assign, or subcontract any right or obligation set forth in this Agreement, without the prior written consent of Pawnbroker. Any act in derogation of the foregoing shall be null and void. 5 6.8 Governing Law. The validity, construction, and performance of this Agreement will be governed by the substantive law of the State of Nevada. 6.9 Amendments in Writing. No amendment, modification, or waiver of any provision of this Agreement shall be effective unless it is set forth in a writing that refers to the provisions so affected and is executed by an authorized representative of the party accepting any such waiver, or, in the case of an amendment or modification, by authorized representatives of both parties. No failure or delay by either party in exercising any right, power, or remedy will operate as a waiver of any such right, power, or remedy. 6.10 Entire Understanding. PAWNBROKER AND BANSHEE ACKNOWLEDGE THAT NOTHING IN THIS AGREEMENT, EXPRESS OR IMPLIED, IS INTENDED TO CONFER UPON ANY PERSON OR ENTITY, ANY RIGHTS, REMEDIES, OBLIGATIONS, OR LIABILITIES UNDER OR BY REASON OF THE TERMS OF THIS AGREEMENT. BANSHEE REPRESENTS AND WARRANTS THAT, IN ENTERING INTO THIS AGREEMENT, IT DOES NOT AND WILL NOT RELY ON ANY PROMISES, INDUCEMENTS, OR REPRESENTATIONS MADE BY PAWNBROKER WITH RESPECT TO THE SUBJECT MATTER OF THIS AGREEMENT, NOR ON THE EXPECTATION OF ANY OTHER BUSINESS DEALINGS WITH PAWNBROKER, NOW OR IN THE FUTURE, AND THAT PAWNBROKER HAS GIVEN NO ASSURANCE AND HAS UNDERTAKEN NO RESPONSIBILITY WITH RESPECT TO ANY PROMOTION OR MARKETING OF THE PRODUCT OR ANY PORTION OR COMBINATION THEREOF WITH OTHER MATERIALS, DEVICES, OR SERVICES. ///// ///// ///// ///// IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective authorized representatives. ACCEPTED AND AGREED TO: ACCEPTED AND AGREED TO: BANSHEE, INC. PAWNBROKER.COM By: ----------------------------- By: /s/ Joseph Schader ------------------------------- Title: -------------------------- Title: President ---------------------------- 6 EX-10.7 15 CONSULTING AGREEMENT EXHIBIT 10.7 DATED: June 25, 1999 PAWNBROKER.COM, INC. - and - IRG INVESTOR RELATIONS GROUP LTD. THIS CONSULTING AGREEMENT made as of the 25th day of June 1999. BETWEEN: PAWNBROKER.COM, INC. of 85 Keystone, Suite F Reno, Nevada 89503 (hereinafter referred to as the "Corporation") OF THE FIRST PART IRG INVESTOR RELATIONS GROUP LTD. of 4th Floor, 1286 Homer Street Vancouver, B.C. V6B 2Y5 (hereinafter referred to as the "Consultant") OF THE SECOND PART WHEREAS the Corporation wishes to retain the Consultant for its business and the Consultant has agreed to provide such services to the Corporation. NOW THEREFORE THIS AGREEMENT WITNESSETH that in consideration of the mutual covenants and agreements herein contained and for other good and valuable consideration, it is hereby agreed by and between the parties as follows: ARTICLE 1 Definitions 1.1 For the purpose of this Agreement, "Consulting Services" shall mean the corporate and investor relations services relating to the business, products, and services of the Corporation to be provided by the Consultant, and in particular but without restricting the generality of the foregoing, includes arranging broker and analyst meetings, contacts, arranging attendance or representation of the Corporation at conferences of analysts and, subject to the control and direction of the Corporation, preparing corporate and product related materials for distribution to brokers, analysts, and investment advisers, and distributing same to brokers, analysts and investment advisors. The Consultant shall provide such materials to individuals upon request and the Corporation agrees to provide the Consultant with sufficient materials to fulfil these requests and to defray all attendant costs. 1.2 The terms "subsidiaries", "associates" and "affiliated corporations" as used in this Agreement shall have the meanings ascribed thereto in the Company Act of British Columbia. ARTICLE 2 Engagement of the Consultant and Its Duties 2.1 The Corporation hereby engages the services of the Consultant and the Consultant hereby accepts the engagement of its services by the Corporation, subject to the terms and conditions hereinafter contained and subject to obtaining the necessary regulatory approval hereto. 2.2 The Consultant shall provide the Consulting Services to the Corporation in such manner as the Corporation and the Consultant may reasonably agree, and shall devote such of its time as is necessary to properly render the Consulting Services to the Corporation, and all its effort, skills, attention and energies during that time to the performance of its duties as herein set forth. 2.3 The Corporation acknowledges that it is aware of the Consultant's many outside activities, duties and financial interests and agrees that the performance of such activities and duties and involvement of such financial interests will not be construed as a breach of this Agreement, provided that the Consultant provides the Consulting Services on a basis which does not impair the activities and business interests of either the Corporation or the Consultant. 2.4 In providing the Consulting Services, the Consultant will be relying upon information received from the Corporation, and will so disclose this fact in all communications. The Corporation agrees to provide the Consultant with such information, financial records, documents and product information as may facilitate the performance of the Consulting Services by the Consultant. 2.5 In the event of any misstatements, misrepresentations or omissions in information as provided by the Corporation to the Consultant and as utilized by the Consultant in the performance of the Consulting Services that may result in liability to the Consultant, the Corporation agrees to indemnify and save harmless the Consultant against any such claims or liabilities. 2.6 The Consultant agrees that it will perform the Consulting Services in accordance with all applicable laws including, but not limited to the Securities Exchange Commission Acts of 1933 and 1934, its rules and regulations, and the rules and policies of the NASD Stock Quotation Service and the NASDAQ STOCK EXCHANGE as applicable. 2.7 The Consultant agrees to indemnify and save the Corporation harmless with respect to any claim, suit, proceedings or judgement, whether regulatory or of a court of competent jurisdiction arising from any breach of the Agreement by the Consultant. 2.8 The term of this Agreement shall be for a period of one (1) year commencing on the 1st day of July 1999 and with an option for an additional year at terms and conditions as mutually agreed upon. The indemnities provided herein at sections 2.5 and 2.7 will survive the termination of this Agreement. 2.9 Notwithstanding section 2.8, either party may terminate this Agreement by providing the other party with at least 30 days written notice. 2.10 The Consultant shall at all times be an independent contractor and not the servant or agent of the Corporation. No partnership, joint venture or agency will be created or will be deemed to be created by this Agreement or by any action of the parties under this Agreement. The Consultant is not an agent, servant or employee of the Corporation, nor shall it represent itself to have any such relationship with the Corporation. The Consultant shall be an independent contractor with control over the manner and means of its performance. Neither the Consultant nor its employees or agents shall be entitled to rights or privileges applicable to employees of the Corporation including, but not limited to, liability insurance, group insurance, pension plans, holiday paid vacation and other benefit plans which may be available from time to time between the Corporation and its employees. 2.11 The Consultant shall be responsible for the management of its employees and without limiting the generality of the foregoing, shall be responsible for payment to the proper authorities of all unemployment insurance premiums, Canada Pension Plan contributions, Worker's Compensation premiums and all other employment expenses for all of the Consultant's employees. The Consultant shall be responsible for deduction and remittance of all income tax due from itself and its employees. ARTICLE 3 Compensation 3.1 The Corporation agrees to pay the Consultant, in consideration of the provision by the Consultant of the Consulting Services to the Corporation, the sum of twenty thousand (US$20,000) United States Dollars per month with the first month's fee due and payable upon execution of this Agreement. Thereafter, the monthly fee of US$20,000 is payable in advance of the month in which services are to be rendered. 3.2 The Corporation further agrees to pay the Consultant the sum of one hundred thousand ($100,000) United States Dollars upon execution of this Agreement. It is agreed that the payment represent an advance towards expenses to be incurred pursuant to the public relations program including reasonable disbursements which will include travel and accommodation expenses, printing and mailing costs, long-distance charges, outside services, and all other out-of-pocket expenses incurred by the Consultant in the performance of its obligations pursuant to this Agreement, provided that the Consultant will not incur any single expenditure that exceeds US$5,000 without obtaining the prior written consent of the Corporation. The Consultant agrees to provide the Corporation with support documentation for the disbursements and expenses incurred where procurable. A monthly accounting will be provided of the expenses incurred and paid from the advance. Any amount of the advance not utilized is fully refundable net of any unreimbursed costs at the termination of this Agreement. 3.3 The Corporation agrees to grant to the Consultant, or its designate, upon terms and conditions as determined by the various Regulatory Authorities governing the Corporation, the sole and exclusive right and option to purchase all or any part of four hundred thousand (400,000) common shares of its capital as fully paid and non-assessable shares, exercisable at the market price post reverse split on the first day of trading of the newly consolidated shares for a period of one year from the date of execution of this Agreement. 3.4 250,000 options are exercisable at any time during the term of this Agreement and shall vest immediately. 150,000 shares shall vest in equal amounts of 50,000 at such time that the Corporation successfully obtains financing in increments of $5,000,000 such that the total option of 150,000 shares shall vest once the Corporation successfully obtains funding in the amount of $15,000,000. 3.5 The Corporation shall cause to be filed, as soon as practicable, a Registration Statement on Form S-8 or a demand registration statement under Form S-3 as applicable, to ensure that the shares to be issued under the provisions of this Option shall be freely tradable. ARTICLE 4 Confidentiality 4.1 The Consultant will not, directly or indirectly, use, disseminate, disclose, communicate, divulge, reveal, publish, use for its own benefit, copy, make notes of, input into a computer data base or preserve in any way any confidential information relating to the Corporation or its subsidiaries, associates or affiliated corporations whether during the term of this Agreement or thereafter, unless it first received written permission to do so from an authorized officer of the Corporation. 4.2 For the purposes of this Agreement, "confidential information" is information disclosed to or acquired by the Consultant relating to the business of the Corporation, or its subsidiaries, associates or affiliated corporations, their projects or the personal affairs of their directors, officers and shareholders, including information developed or gathered by the Consultant which has not been approved by the Corporation for public dissemination. Confidential information does not include information in the public domain, information released from the provisions of this Agreement by written authorization of an authorized officer of the Corporation, information which is part of the general skill and knowledge of the Consultant and does not relate specifically to the business of the Corporation, and information which is authorized by the Corporation to be disclosed in the ordinary course or is required by law or applicable regulatory policy to be disclosed. ARTICLE 5 Miscellaneous 5.1 Any notice required or permitted to be given hereunder shall be given by hand delivery, facsimile transmission or by registered mail, postage prepaid, addressed to the parties at their respective addresses as previously set forth and any such notices given by hand delivery or by facsimile transmission shall be deemed to have been received on the date of delivery or transmission and if given by prepaid registered mail, shall be deemed to have been received on the third business day immediately following the date of mailing. The parties shall be entitled to give notice of changes of addresses from time to time in the manner hereinbefore provided for the giving of notice. 5.2 Time shall be the essence of this Agreement. 5.3 The provisions of this Agreement shall inure to the benefit of and be binding upon the Corporation and the Consultant and their respective successors and assigns. This Agreement shall not be assignable by the Consultant. 5.4 This Agreement constitutes the entire agreement between the parties hereto pertaining to the subject matter hereof and supersedes all prior and contemporaneous agreements, understandings, negotiations and discussions, whether oral or written, of the parties hereto in connection with the subject matter hereof. No supplement, modification, waiver or termination of this Agreement shall be binding, unless executed in writing by the parties to be bound thereby. 5.5 This Agreement shall be governed by the laws of British Columbia and Nevada. IN WITNESS WHEREOF this Agreement has been executed by the parties. ) PAWNBROKER.COM, INC. ) ) ) Per: /s/ Joseph Schader ) ) Authorized Signatory ) ) ) IRG INVESTOR RELATIONS GROUP LTD. ) ) ) Per: ) ) Authorized Signatory EX-10.8 16 1999 STOCK OPTION PLAN EXHIBIT 10.8 PAWNBROKER.COM, Inc. 1999 STOCK OPTION PLAN This 1999 Stock Option Plan (the "Plan") provides for the grant of options to acquire shares of common stock, $0.00001 par value (the "Common Stock"), of Pawnbroker.com, Inc., a Delaware corporation (the "Company"). Stock options granted under this Plan that qualify under Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), are referred to in this Plan as "Incentive Stock Options." Incentive Stock Options and stock options that do not qualify under Section 422 of the Code ("Non-Qualified Stock Options") granted under this Plan are referred to collectively as "Options." 1. PURPOSES. The purposes of this Plan are to retain the services of valued key employees and consultants of the Company and such other persons as the Plan Administrator shall select in accordance with Section 3 below, to encourage such persons to acquire a greater proprietary interest in the Company, thereby strengthening their incentive to achieve the objectives of the shareholders of the Company, and to serve as an aid and inducement in the hiring of new employees and to provide an equity incentive to consultants and other persons selected by the Plan Administrator. 2. ADMINISTRATION. This Plan shall be administered initially by the Board of Directors of the Company (the "Board"), except that the Board may, in its discretion, establish a committee composed of two (2) or more members of the Board or two (2) or more other persons to administer the Plan, which committee (the "Committee") may be an executive, compensation or other committee, including a separate committee especially created for this purpose. The Committee shall have the powers and authority vested in the Board hereunder (including the power and authority to interpret any provision of the Plan or of any Option). The members of any such Committee shall serve at the pleasure of the Board. A majority of the members of the Committee shall constitute a quorum, and all actions of the Committee shall be taken by a majority of the members present. Any action may be taken by a written instrument signed by all of the members of the Committee and any action so taken shall be fully effective as if it had been taken at a meeting. The Board or, if applicable, the Committee is referred to herein as the "Plan Administrator." The Plan shall be administered by the Board or by the Committee which, for the purposes hereof, shall be composed of two (2) or more members of the Board who are "Non-Employee Directors" (as defined below), and, as applicable, outside directors. The term "outside director" shall have the meaning assigned to it under Section 162(m) of the Code (as amended from time to time) and the regulations (or any successor regulations) promulgated thereunder ("Section 162(m) of the Code"). The term "Non-Employee Director" shall have the meaning assigned to it under Rule 16b-3 (as amended from time to time) promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act") or any successor rule or regulatory requirement. Subject to the provisions of this Plan, and with a view to effecting its purpose, the Plan Administrator shall have sole authority, in its absolute discretion, to (i) construe and interpret this Plan; (ii) define the terms used in the Plan; (iii) prescribe, amend and rescind the rules and regulations relating to this Plan; (iv) correct any defect, supply any omission or reconcile any inconsistency in this Plan; (v) grant Options under this Plan; (vi) determine the individuals to whom Options shall be granted under this Plan and whether the Option is an Incentive Stock Option or a Non-Qualified Stock Option; (vii) determine the time or times at which Options shall be granted under this Plan; (viii) determine the number of shares of Common Stock subject to each Option, the exercise price of each Option, the duration of each Option and the times at which each Option shall become exercisable; (ix) determine all other terms and conditions of the Options; and (x) make all other determinations and interpretations necessary and advisable for the administration of the Plan. All decisions, determinations and interpretations made by the Plan -1- Administrator shall be binding and conclusive on all participants in the Plan and on their legal representatives, heirs and beneficiaries. The Board or, if applicable, the Committee may delegate to one or more executive officers of the Company the authority to grant Options under this Plan to employees of the Company who, on the Date of Grant, are not subject to Section 16 of the Exchange Act with respect to the Common Stock ("Non-Insiders"), and are not "covered employees" as such term is defined for purposes of Section 162(m) of the Code ("Non-Covered Employees"), and in connection therewith the authority to determine: (i) the number of shares of Common Stock subject to such Options; (ii) the duration of the Option; (iii) the vesting schedule for determining the times at which such Option shall become exercisable; and (iv) all other terms and conditions of such Options. The exercise price for any Option granted by action of an executive officer or officers pursuant to such delegation of authority shall not be less than the fair market value per share of the Common Stock on the Date of Grant. Unless expressly approved in advance by the Board or the Committee, such delegation of authority shall not include the authority to accelerate vesting, extend the period for exercise or otherwise alter the terms of outstanding Options. The term "Plan Administrator" when used in any provision of this Plan other than Sections 2, 5(f), 5(m), and 11 shall be deemed to refer to the Board or the Committee, as the case may be, and an executive officer who has been authorized to grant Options pursuant thereto, insofar as such provisions may be applied to persons that are Non-Insiders and Non-Covered Employees and Options granted to such persons. 3. ELIGIBILITY. Incentive Stock Options may be granted to any individual who, at the time the Option is granted, is an employee of the Company or any Related Corporation (as defined below) ("Employees"). Non-Qualified Stock Options may be granted to Employees and to such other persons other than directors who are not Employees as the Plan Administrator shall select. Options may be granted in substitution for outstanding Options of another corporation in connection with the merger, consolidation, acquisition of property or stock or other reorganization between such other corporation and the Company or any subsidiary of the Company. Options also may be granted in exchange for outstanding Options. Any person to whom an Option is granted under this Plan is referred to as an "Optionee." Any person who is the owner of an Option is referred to as a "Holder." As used in this Plan, the term "Related Corporation" shall mean any corporation (other than the Company) that is a "Parent Corporation" of the Company or "Subsidiary Corporation" of the Company, as those terms are defined in Sections 424(e) and 424(f), respectively, of the Code (or any successor provisions) and the regulations thereunder (as amended from time to time). 4. STOCK. The Plan Administrator is authorized to grant Options to acquire up to a total of two million (2,000,000) shares of the Company's authorized but unissued, or reacquired, Common Stock. The number of shares with respect to which Options may be granted hereunder is subject to adjustment as set forth in Section 5(m) hereof. In the event that any outstanding Option expires or is terminated for any reason, the shares of Common Stock allocable to the unexercised portion of such Option may again be subject to an Option granted to the same Optionee or to a different person eligible under Section 3 of this Plan; provided however, that any canceled Options will be counted against the maximum number of shares with respect to which Options may be granted to any particular person as set forth in Section 3 hereof. 5. TERMS AND CONDITIONS OF OPTIONS. Each Option granted under this Plan shall be evidenced by a written agreement approved by the Plan Administrator (the "Agreement"). Agreements may contain such provisions, not inconsistent with this Plan, as the -2- Plan Administrator in its discretion may deem advisable. All Options also shall comply with the following requirements: (a) Number of Shares and Type of Option. Each Agreement shall state the number of shares of Common Stock to which it pertains and whether the Option is intended to be an Incentive Stock Option or a Non-Qualified Stock Option. In the absence of action to the contrary by the Plan Administrator in connection with the grant of an Option, all Options shall be Non-Qualified Stock Options. The aggregate fair market value (determined at the Date of Grant, as defined below) of the stock with respect to which Incentive Stock Options are exercisable for the first time by the Optionee during any calendar year (granted under this Plan and all other Incentive Stock Option plans of the Company, a Related Corporation or a predecessor corporation) shall not exceed $100,000, or such other limit as may be prescribed by the Code as it may be amended from time to time. Any portion of an Option which exceeds the annual limit shall not be void but rather shall be a Non-Qualified Stock Option. (b) Date of Grant. Each Agreement shall state the date the Plan Administrator has deemed to be the effective date of the Option for purposes of this Plan (the "Date of Grant"). (c) Option Price. Each Agreement shall state the price per share of Common Stock at which it is exercisable. The exercise price shall be fixed by the Plan Administrator at whatever price the Plan Administrator may determine in the exercise of its sole discretion; provided that the per share exercise price for an Incentive Stock Option or any Option granted to a "covered employee" as such term is defined for purposes of Section 162(m) of the Code ("Covered Employee") shall not be less than the fair market value per share of the Common Stock at the Date of Grant as determined by the Plan Administrator in good faith; provided further, that with respect to Incentive Stock Options granted to greater-than-ten percent (> 10%) shareholders of the Company (as determined with reference to Section 424(d) of the Code), the exercise price per share shall not be less than one hundred ten percent (110%) of the fair market value per share of the Common Stock at the Date of Grant as determined by the Plan Administrator in good faith; and, provided further, that Options granted in substitution for outstanding options of another corporation in connection with the merger, consolidation, acquisition of property or stock or other reorganization involving such other corporation and the Company or any subsidiary of the Company may be granted with an exercise price equal to the exercise price for the substituted option of the other corporation, subject to any adjustment consistent with the terms of the transaction pursuant to which the substitution is to occur. (d) Duration of Options. At the time of the grant of the Option, the Plan Administrator shall designate, subject to paragraph 5(g) below, the expiration date of the Option, which date shall not be later than ten (10) years from the Date of Grant in the case of Incentive Stock Options; provided, that the expiration date of any Incentive Stock Option granted to a greater-than-ten percent ( > 10%) shareholder of the Company (as determined with reference to Section 424(d) of the Code) shall not be later than five (5) years from the Date of Grant. In the absence of action to the contrary by the Plan Administrator in connection with the grant of a particular Option, and except in the case of Incentive Stock Options as described above, all Options granted under this Section 5 shall expire ten (10) years from the Date of Grant. (e) Vesting Schedule. No Option shall be exercisable until it has vested. The vesting schedule for each Option shall be specified by the Plan Administrator at the time of grant of the Option prior to the provision of services with respect to which such Option is granted; provided, that if no vesting schedule is specified at the time of grant, the Option shall vest according to the following schedule: -3- Number of Years Percentage of Total Following Date of Grant Option Vested - ------------------------------------- ---------------------------------- One 20% Two 40% Three 60% Four 80% Five 100% The Plan Administrator may specify a vesting schedule for all or any portion of an Option based on the achievement of performance objectives established in advance of the commencement by the Optionee of services related to the achievement of the performance objectives. Performance objectives shall be expressed in terms of one or more of the following: return on equity, return on assets, share price, market share, sales, earnings per share, costs, net earnings, net worth, inventories, cash and cash equivalents, gross margin or the Company's performance relative to its internal business plan. Performance objectives may be in respect of the performance of the Company as a whole (whether on a consolidated or unconsolidated basis), a Related Corporation, or a subdivision, operating unit, product or product line of either of the foregoing. Performance objectives may be absolute or relative and may be expressed in terms of a progression or a range. An Option that is exercisable (in full or in part) upon the achievement of one or more performance objectives may be exercised only following written notice to the Optionee and the Company by the Plan Administrator that the performance objective has been achieved. (f) Acceleration of Vesting. The vesting of one or more outstanding Options may be accelerated by the Plan Administrator at such times and in such amounts as it shall determine in its sole discretion. (g) Term of Option. Vested Options shall terminate, to the extent not previously exercised, upon the occurrence of the first of the following events: (i) the expiration of the Option, as designated by the Plan Administrator in accordance with Section 5(d) above; (ii) the date of an Optionee's termination of employment or contractual relationship with the Company or any Related Corporation for cause (as determined in the sole discretion of the Plan Administrator); (iii) the expiration of three (3) months from the date of an Optionee's termination of employment or contractual relationship with the Company or any Related Corporation for any reason whatsoever other than cause, death or Disability (as defined below) unless, in the case of a Non-Qualified Stock Option, the exercise period is extended by the Plan Administrator until a date not later than the expiration date of the Option; or (iv) the expiration of one year from termination of an Optionee's employment or contractual relationship by reason of death or Disability (as defined below) unless, in the case of a Non-Qualified Stock Option, the exercise period is extended by the Plan Administrator until a date not later than the expiration date of the Option. Upon the death of an Optionee, any vested Options held by the Optionee shall be exercisable only by the person or persons to whom such Optionee's rights under such Option shall pass by the Optionee's will or by the laws of descent and distribution of the state or county of the Optionee's domicile at the time of death and only until such Options terminate as provided above. For purposes of the Plan, unless otherwise defined in the Agreement, "Disability" shall mean medically determinable physical or mental impairment which has lasted or can be expected to last for a continuous period of not less than twelve (12) months or that can be expected to result in death (within the meaning of Section 22(e)(3) of the Code). The Plan Administrator shall determine whether an Optionee has incurred a Disability on the basis of medical evidence acceptable to the Plan Administrator. Upon making a determination of Disability, the Plan Administrator shall, for purposes of the Plan, determine the date of an Optionee's termination of employment or contractual relationship. -4- Unless accelerated in accordance with Section 5(f) above, unvested Options shall terminate immediately upon termination of employment of the Optionee by the Company for any reason whatsoever, including death or Disability. For purposes of this Plan, transfer of employment between or among the Company and/or any Related Corporation shall not be deemed to constitute a termination of employment with the Company or any Related Corporation. For purposes of this subsection, employment shall be deemed to continue while the Optionee is on military leave, sick leave or other bona fide leave of absence (as determined by the Plan Administrator). The foregoing notwithstanding, employment shall not be deemed to continue beyond the first ninety (90) days of such leave, unless the Optionee's re-employment rights are guaranteed by statute or by contract. (h) Exercise of Options. Options shall be exercisable, in full or in part, at any time after vesting, until termination. If less than all of the shares included in the vested portion of any Option are purchased, the remainder may be purchased at any subsequent time prior to the expiration of the Option term. No portion of any Option for less than One Hundred (100) shares (as adjusted pursuant to Section 5(m) below) may be exercised; provided, that if the vested portion of any Option is less than One Hundred (100) shares, it may be exercised with respect to all shares for which it is vested. Only whole shares may be issued pursuant to an Option, and to the extent that an Option covers less than one (1) share, it is unexercisable. Options or portions thereof may be exercised by giving written notice to the Company, which notice shall specify the number of shares to be purchased, and be accompanied by payment in the amount of the aggregate exercise price for the Common Stock so purchased, which payment shall be in the form specified in Section 5(i) below. The Company shall not be obligated to issue, transfer or deliver a certificate of Common Stock to the Holder of any Option, until provision has been made by the Holder, to the satisfaction of the Company, for the payment of the aggregate exercise price for all shares for which the Option shall have been exercised and for satisfaction of any tax withholding obligations associated with such exercise. During the lifetime of an Optionee, Options are exercisable only by the Optionee or in the case of a Non-Qualified Stock Option, transferee who takes title to such Option in the manner permitted by subsection 5(k) hereof. (i) Payment upon Exercise of Option. Upon the exercise of any Option, the aggregate exercise price shall be paid to the Company in cash or by certified or cashier's check. In addition, the Holder may pay for all or any portion of the aggregate exercise price by complying with one or more of the following alternatives: (1) by delivering to the Company shares of Common Stock previously held by such Holder, or by the Company withholding shares of Common Stock otherwise deliverable pursuant to exercise of the Option, which shares of Common Stock received or withheld shall have a fair market value at the date of exercise (as determined by the Plan Administrator) equal to the aggregate exercise price to be paid by the Optionee upon such exercise; (2) by delivering a properly executed exercise notice together with irrevocable instructions to a broker promptly to sell or margin a sufficient portion of the shares and deliver directly to the Company the amount of sale or margin loan proceeds to pay the exercise price; or (3) by complying with any other payment mechanism approved by the Plan Administrator at the time of exercise. Notwithstanding the foregoing, without the prior written consent of the Plan Administrator, a Holder shall not surrender, or attest to the ownership of, shares of Common Stock in payment of the exercise price if such action would cause the Company to recognize compensation expense (or additional compensation expense) with respect to any option for financial reporting purposes. -5- (j) Rights as a Shareholder. A Holder shall have no rights as a shareholder with respect to any shares covered by an Option until such Holder becomes a record holder of such shares, irrespective of whether such Holder has given notice of exercise. No rights shall accrue to a Holder and no adjustments shall be made on account of dividends (ordinary or extraordinary, whether in cash, securities or other property) or distributions or other rights declared on, or created in, the Common Stock for which the record date is prior to the date the Holder becomes a record holder of the shares of Common Stock covered by the Option, irrespective of whether such Holder has given notice of exercise. (k) Transfer of Option. Options granted under this Plan and the rights and privileges conferred by this Plan may not be transferred, assigned, pledged or hypothecated in any manner (whether by operation of law or otherwise) other than by will, by applicable laws of descent and distribution or (except in the case of an Incentive Stock Option) pursuant to a qualified domestic relations order, and shall not be subject to execution, attachment or similar process; provided however, that any Agreement may provide or be amended to provide that a Non-Qualified Stock Option to which it relates is transferable without payment of consideration to immediate family members of the Optionee or to trusts or partnerships or limited liability companies established exclusively for the benefit of the Optionee and the Optionee's immediate family members. Upon any attempt to transfer, assign, pledge, hypothecate or otherwise dispose of any Option or of any right or privilege conferred by this Plan contrary to the provisions hereof, or upon the sale, levy or any attachment or similar process upon the rights and privileges conferred by this Plan, such Option shall thereupon terminate and become null and void. (l) Securities Regulation and Tax Withholding. (1) Shares shall not be issued with respect to an Option unless the exercise of such Option and the issuance and delivery of such shares shall comply with all relevant provisions of law, including, without limitation, Section 162(m) of the Code, any applicable state securities laws, the Securities Act of 1933, as amended, the Exchange Act, the rules and regulations thereunder and the requirements of any stock exchange or automated inter-dealer quotation system of a registered national securities association upon which such shares may then be listed, and such issuance shall be further subject to the approval of counsel for the Company with respect to such compliance, including the availability of an exemption from registration for the issuance and sale of such shares. The inability of the Company to obtain from any regulatory body the authority deemed by the Company to be necessary for the lawful issuance and sale of any shares under this Plan, or the unavailability of an exemption from registration for the issuance and sale of any shares under this Plan, shall relieve the Company of any liability with respect to the non-issuance or sale of such shares. As a condition to the exercise of an Option, the Plan Administrator may require the Holder to represent and warrant in writing at the time of such exercise that the shares are being purchased only for investment and without any then-present intention to sell or distribute such shares. At the option of the Plan Administrator, a stop-transfer order against such shares may be placed on the stock books and records of the Company, and a legend indicating that the stock may not be pledged, sold or otherwise transferred unless an opinion of counsel is provided stating that such transfer is not in violation of any applicable law or regulation, may be stamped on the certificates representing such shares in order to assure an exemption from registration. The Plan Administrator also may require such other documentation as may from time to time be necessary to comply with federal and state securities laws. (2) The Holder shall pay to the Company by certified or cashier's check, promptly upon exercise of an Option or, if later, the date that the amount of such obligations becomes determinable, all applicable federal, state, local and foreign withholding taxes that the Plan Administrator, in its discretion, determines to result upon exercise of an Option or from a transfer or other disposition of shares of Common Stock acquired upon exercise of an Option or otherwise related to an Option or shares of Common Stock acquired in connection with an Option. Upon approval of the Plan Administrator, a Holder may satisfy such obligation by complying with one or more of the following alternatives selected by the Plan Administrator: -6- (A) by delivering to the Company shares of Common Stock previously held by such Holder or by the Company withholding shares of Common Stock otherwise deliverable pursuant to the exercise of the Option, which shares of Common Stock received or withheld shall have a fair market value at the date of exercise (as determined by the Plan Administrator) equal to any withholding tax obligations arising as a result of such exercise, transfer or other disposition; (B) by executing appropriate loan documents approved by the Plan Administrator by which the Holder borrows funds from the Company to pay any withholding taxes due under this Paragraph 2, with such repayment terms as the Plan Administrator shall select; or (C) by complying with any other payment mechanism approved by the Plan Administrator from time to time. Notwithstanding the foregoing, without the prior written consent of the Plan Administrator, a Holder shall not surrender, or attest to the ownership of, shares of Common Stock in payment of the exercise price if such action would cause the Company to recognize compensation expense (or additional compensation expense) with respect to any option for financial reporting purposes. (3) The issuance, transfer or delivery of certificates of Common Stock pursuant to the exercise of Options may be delayed, at the discretion of the Plan Administrator, until the Plan Administrator is satisfied that the applicable requirements of the federal and state securities laws and the withholding provisions of the Code have been met and that the Holder has paid or otherwise satisfied any withholding tax obligation as described in (2) above. (m) Stock Dividend or Reorganization. (1) If (i) the Company shall at any time be involved in a transaction described in Section 424(a) of the Code (or any successor provision) or any "corporate transaction" described in the regulations thereunder; (ii) the Company shall declare a dividend payable in, or shall subdivide or combine, its Common Stock or (iii) any other event with substantially the same effect shall occur, the Plan Administrator shall, subject to applicable law, with respect to each outstanding Option, proportionately adjust the number of shares of Common Stock subject to such Option and/or the exercise price per share so as to preserve the rights of the Holder substantially proportionate to the rights of the Holder prior to such event, and to the extent that such action shall include an increase or decrease in the number of shares of Common Stock subject to outstanding Options, the number of shares available under Section 4 of this Plan shall automatically be increased or decreased, as the case may be, proportionately, without further action on the part of the Plan Administrator, the Company, the Company's shareholders, or any Holder. (2) In the event that the presently authorized capital stock of the Company is changed into the same number of shares with a different par value, or without par value, the stock resulting from any such change shall be deemed to be Common Stock within the meaning of the Plan, and each Option shall apply to the same number of shares of such new stock as it applied to old shares immediately prior to such change. (3) If the Company shall at any time declare an extraordinary dividend with respect to the Common Stock, whether payable in cash or other property, the Plan Administrator may, subject to applicable law, in the exercise of its sole discretion and with respect to each outstanding Option, proportionately adjust the number of shares of Common Stock subject to such Option and/or adjust the exercise price per share so as to preserve the rights of the Holder substantially proportionate to the rights of the Holder prior to such event, and to the extent that such action shall include an increase or decrease in the number of shares of Common Stock subject to outstanding Options, the number of shares available under Section 4 of this Plan shall automatically be increased or decreased, as the case may be, proportionately, without further action on the part of the Plan Administrator, the Company, the Company's shareholders, or any Holder. -7- (4) The foregoing adjustments in the shares subject to Options shall be made by the Plan Administrator, or by any successor administrator of this Plan, or by the applicable terms of any assumption or substitution document. (5) The grant of an Option shall not affect in any way the right or power of the Company to make adjustments, reclassifications, reorganizations or changes of its capital or business structure, to merge, consolidate or dissolve, to liquidate or to sell or transfer all or any part of its business or assets. 6. EFFECTIVE DATE; TERM. Incentive Stock Options may be granted by the Plan Administrator from time to time on or after the date on which this Plan is adopted (the "Effective Date") through the day immediately preceding the tenth anniversary of the Effective Date. Non-Qualified Stock Options may be granted by the Plan Administrator on or after the Effective Date and until this Plan is terminated by the Board in its sole discretion. Termination of this Plan shall not terminate any Option granted prior to such termination. Any Incentive Stock Options granted by the Plan Administrator prior to the approval of this Plan by the shareholders of the Company in accordance with Section 422 of the Code shall be granted subject to ratification of this Plan by the shareholders of the Company within twelve (12) months before or after the Effective Date. Any Option granted by the Plan Administrator to any Covered Employee prior to the approval of this Plan by the shareholders of the Company in accordance with such Code provision shall be granted subject to ratification of this Plan by the shareholders of the Company within twelve (12) months before or after the Effective Date. If such shareholder ratification is sought and not obtained, all Options granted prior thereto and thereafter shall be considered Non-Qualified Stock Options and any Options granted to Covered Employees will not be eligible for the exclusion set forth in Section 162(m) of the Code with respect to the deductibility by the Company of certain compensation. 7. NO OBLIGATIONS TO EXERCISE OPTION. The grant of an Option shall impose no obligation upon the Optionee to exercise such Option. 8. NO RIGHT TO OPTIONS OR TO EMPLOYMENT. Whether or not any Options are to be granted under this Plan shall be exclusively within the discretion of the Plan Administrator, and nothing contained in this Plan shall be construed as giving any person any right to participate under this Plan. The grant of an Option shall in no way constitute any form of agreement or understanding binding on the Company or any Related Company, express or implied, that the Company or any Related Company will employ or contract with an Optionee for any length of time, nor shall it interfere in any way with the Company's or, where applicable, a Related Company's right to terminate Optionee's employment at any time, which right is hereby reserved. 9. APPLICATION OF FUNDS. The proceeds received by the Company from the sale of Common Stock issued upon the exercise of Options shall be used for general corporate purposes, unless otherwise directed by the Board. 10. INDEMNIFICATION OF PLAN ADMINISTRATOR. In addition to all other rights of indemnification they may have as members of the Board, members of the Plan Administrator shall be indemnified by the Company for all reasonable expenses and liabilities of any type or nature, including attorneys' fees, incurred in connection with any action, suit or proceeding to which they or any of -8- them are a party by reason of, or in connection with, this Plan or any Option granted under this Plan, and against all amounts paid by them in settlement thereof (provided that such settlement is approved by independent legal counsel selected by the Company), except to the extent that such expenses relate to matters for which it is adjudged that such Plan Administrator member is liable for willful misconduct; provided, that within fifteen (15) days after the institution of any such action, suit or proceeding, the Plan Administrator member involved therein shall, in writing, notify the Company of such action, suit or proceeding, so that the Company may have the opportunity to make appropriate arrangements to prosecute or defend the same. 11. AMENDMENT OF PLAN. The Plan Administrator may, at any time, modify, amend or terminate this Plan or modify or amend Options granted under this Plan, including, without limitation, such modifications or amendments as are necessary to maintain compliance with applicable statutes, rules or regulations; provided however, no amendment with respect to an outstanding Option which has the effect of reducing the benefits afforded to the Holder thereof shall be made over the objection of such Holder; further provided, that the events triggering acceleration of vesting of outstanding Options may be modified, expanded or eliminated without the consent of Holders. The Plan Administrator may condition the effectiveness of any such amendment on the receipt of shareholder approval at such time and in such manner as the Plan Administrator may consider necessary for the Company to comply with or to avail the Company and/or the Optionees of the benefits of any securities, tax, market listing or other administrative or regulatory requirement. Without limiting the generality of the foregoing, the Plan Administrator may modify grants to persons who are eligible to receive Options under this Plan who are foreign nationals or employed outside the United States to recognize differences in local law, tax policy or custom. Effective Date: ----------------------- PAWNBROKER.COM, INC. - --------------------------------------- Secretary -9- EX-21.1 17 SUBSIDIARIES OF REGISTRANT EXHIBIT 21.1 SUBSIDIARIES ------------ Eriko Internet Inc., a Washington corporation Pawnbroker.com, Inc., a Nevada corporation Digital Sign, Inc., a California corporation EX-27.1 18 FDS --
5 12-mos Mar-31-1999 Jun-30-1999 2,862,751 0 0 0 0 2,864,564 0 0 3,209,041 326,071 0 0 0 170 3,086,149 3,209,041 0 0 0 200 0 0 0 0 0 0 0 0 0 (203,349) (0.02) (0.02)
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