10-K 1 pawnbroker10k.txt PAWNBROKER.COM 10K (12/31/2001) SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 -------------------------------------------------------------------------------- FORM 10-K |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2001 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______________ to ______________ Commission file number: 000-27215 PAWNBROKER.COM, INC. (Exact name of registrant as specified in its charter) DELAWARE 33-0794473 (Jurisdiction of incorporation (I.R.S. Employer Identification No.) or organization) 85 Keystone, Suite H Reno, Nevada 89503 (Address of principal executive offices) Registrant's telephone number: (775) 332-5048 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered ------------------- ----------------------------------------- None None Securities registered pursuant to Section 12(g) of the Act: common stock, with $0.0001 par value Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Aggregate market value of the Registrant's Common Shares held by non-affiliates as of March 28, 2002 was approximately $243,000, based on the closing price of the Registrant's commons stock on the NASD Over the Counter Bulletin Board of $0.10 per share. The number of shares of the Registrant's Common Shares outstanding as of March 28, 2002 was 5,027,870. PAWNBROKER.COM, INC. 2001 ANNUAL REPORT ON FORM 10-K TABLE OF CONTENTS NOTE REGARDING FORWARD LOOKING STATEMENTS.....................................i Part I........................................................................1 Item 1: BUSINESS..........................................................1 Item 2: PROPERTIES........................................................19 Item 3. LEGAL PROCEEDINGS.................................................19 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...............19 Part II.......................................................................20 Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS...............................................20 Item 6. SELECTED FINANCIAL DATA...........................................22 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.........................................25 Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK........29 Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.......................29 Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE..........................................50 PART III......................................................................50 Item 10. EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES...................50 Item 11. EXECUTIVE COMPENSATION............................................51 Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT....55 Item 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS..............56 PART IV.......................................................................56 Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K..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 our actual results or achievements to be materially different from any of our future results or achievements expressed or implied by such forward-looking statements. Such factors include, but are not limited to the following: our limited operating history; our history of losses; our lack of adequate working capital to fund its operations; risks related to our ability to continue as a going concern; need for additional capital; risks involving new product development; risk related to developing a financial services business; credit risk related to lending money to pawnbrokers; risk related to developing a market for cash card services in the pawnbroker industry; competition; management of growth and integration; risks of technological change; our dependence on key personnel, marketing relationships with pawnshops and third party suppliers; government regulation of the financial services, cash cards and the pawn industry; economic and political factors; and the other risks and uncertainties described under "Description of Business - Risk Factors" in this annual report. 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". You should not place undue reliance on forward looking statements. We do not intend to update forward looking statements contained in this report. References to "Company," "Registrant," "our," "us," and "we," refer to Pawnbroker.com Inc. and its subsidiaries. ii Part I Item 1: BUSINESS OVERVIEW We, Pawnbroker.com Inc., are a development stage company with no revenues from our operations. We have never generated any profits. We developed and launched a web site that provided online customers a method to search for and buy merchandise from the inventories of pawnshops. Our web site experienced very limited success and we generated no material revenues from our operations. We terminated facilitating transactions on our web site and suspended our business operations on March 1, 2001 after we failed to generate sufficient user support. We are in the process of restructuring our business and developing a new business plan and strategy under which we intend to provide financial services by offering secured loans to pawnbrokers and to offer pawnbrokers industry specific products and services. During the past 12 months, we have been developing a business plan, attempting to restructure our liabilities, and pursuing opportunities to raise financing to fund the development of our planned business and our working capital requirements. We currently do not have sufficient working capital to finance our planned business strategy and may not be able to continue as a going concern. As of December 31, 2001, we had a working capital deficiency of $493,912. In their independent auditor's report dated March 15, 2002, Davidson & Company, Chartered Accountants, 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 intend to address this going concern issue by restructuring our liabilities and by raising capital through equity, debt or convertible securities financing. We are currently seeking financing by presenting our business plan to potential investors. If we are unable to raise additional financing, we anticipate we will not be able to continue as a going concern. We were incorporated in Delaware in February 1998. On June 14, 1999, we acquired all of the issued and outstanding shares of Pawnbroker.com Inc., a Nevada corporation, and for the purposes of implementing a business strategy of developing a web site to list and offer for sale the merchandise of independent pawnshops throughout North America. Prior to our acquisition of the Nevada corporation we had no assets, liabilities, revenues or expenses. We began the process of incorporating Pawnbroker Financial Services Inc., a Delaware corporation, for the purposes of operating our planned financial and revenue generating products and services to pawnbrokers. Due to our inability to raise sufficient financing, we have delayed our implementation of our financial services offerings. Effective August 1, 2001, we completed a 10 (old)-for- 1 (new) reverse split of our issued and outstanding common stock and reduced our authorized share capital to consist of 50,000,000 shares of common stock and 10,000,000 shares of preferred stock, each with a par value of $0.0001 per share. At July 31, 2001, we had 50,803,567 shares 1 of common stock issued and outstanding, and after giving effect to the reverse split, we had approximately 5,080,357 shares of common stock issued and outstanding. All share information contained in this annual report gives effect to the reverse split. As at March 28, 2002, we had 5,027,870 shares of common stock issued and outstanding. Subsequent to December 31, 2001, we entered into an independent service organization agreement, under which we have agreed to market cash card systems to pawnbrokers. We are in the process of developing our marketing strategy to market the cash cards and expect to begin actively implementing our marketing program during the third quarter of 2002, assuming sufficient financing is available. We cannot assure you our marketing efforts will be successful or that we will generate any significant revenue from the sale of cash cards. Neither we nor any of our subsidiaries are currently subject to any bankruptcy, receivership or similar proceedings at the date of this report. Our headquarters are located at 85 Keystone, Suite H, Reno, Nevada, 89503, and our telephone number is (775) 332-5048. Our web site address is www.pawnbroker.com. The information on our web site is not a part of this annual report. Our Business We completed the initial development of the software and technology related to our business and began the beta test of our web site in December 1999. During the course of developing our web site and marketing strategy, we presented Pawnbroker.com to several hundred pawnshops at conventions and tradeshows and received oral expressions of interest or requests for additional information from approximately 3,500 pawnshops about our plan to facilitate transactions between pawnshops and consumers through our web site. Based on information provided to us by pawnshops, our goal was to have a total of up to 2,000 participating member pawnshops offering an average of 475 items each by December 2000. In June 2000, we launched the commercial version of Pawnbroker.com. Pawnbroker.com featured items of merchandise from the inventories of pawnshops, including merchandise such as jewelry, consumer electronics, tools, collectibles, coins, cameras and musical instruments. Several hundred pawnshops expressed an interest in posting merchandise for sale on our web site. We experienced difficulties in offering sufficient supplies of inventory as pawnbrokers failed to post the merchandise they indicated that they would be interested in posting. We entered into a strategic relationship with a major chain of pawnshops in an effort to increase our inventory, but were unable to post such inventory on our web site in a timely manner. We failed to generate any material revenues from our operations. Based in part on the condition of the capital markets, we were unable to obtain additional financing on acceptable terms to fund our marketing efforts and our working capital requirements. We began to consolidate and restructure our operations to conserve working capital by 2 closing our technical development and support facility in Philadelphia and our business office in California, and laying off all of our technical development and support staff. During the fourth quarter 2000 and the first quarter of 2001, we experienced technical difficulties maintaining our web site and were unable to continue to provide technical support to our customers because of lack of working capital. As a result, we further consolidated our operations and we terminated facilitating transactions on our web site and suspended our business operations on March 1, 2001, to concentrate our efforts on developing our financial and revenue generating products and services. During 2001, we began negotiating with creditors to restructure our outstanding liabilities in order to allow us to raise additional capital to fund our business plan. On May 11, 2001, we entered into agreements with three note holders to convert $1,500,000 owed to them into shares of our common stock at $0.05 per share. The market price of our common stock as quoted on the NASD Over-the-Counter Bulletin Board was $0.15 on May 11, 2001. Under the terms of these agreements, we issued 3,000,000 shares of our common stock to the following note holders: 2,000,000 shares to BWI Avionics Ltd., 600,000 shares to Granite Communications Inc., and 400,000 shares to Eurogrowth Investments Ltd. After giving effect to the issuance, we had 4,765,750 shares of common stock issued and outstanding, resulting in a substantial dilution to our shareholders. Effective August 1, 2001, we completed a 10 (old)-for- 1 (new) reverse split of our issued and outstanding common stock and reduced our authorized share capital to consist of 50,000,000 shares of common stock and 10,000,000 shares of preferred stock, each with a par value of $0.0001 per share. At July 31, 2001, we had 50,803,567 pre-split shares of common stock issued and outstanding, and after giving effect to the reverse split, we had approximately 5,080,357 shares of common stock issued and outstanding. All share information contained in this annual report gives effect to the reverse split. As at March 28, 2002, we had 5,027,870 shares of common stock issued and outstanding. Our Business Strategy As part of our initial business strategy, we developed a two-part initial phase implementation plan to bring two primary business offerings to the pawnbroker industry; Financial Services and Revenue Products. Since suspending our website services, we have focused our efforts on developing a business plan to offer financial services and revenue generating product lines to pawnbrokers. These offerings are anticipated to include: Financial Services: We intend to provide qualified pawnbrokers with secured loans in amounts between $50,000 to $1,000,000, including one-time loans, revolving loans, lines of credit and consolidation loans. Revenue Products: Our revenue products are expected to include the following: cash cards; product and service discounts offered through provider alliances 3 customer loyalty enhancement products; and leasing services. Under the terms of an Independent Service Organization Agreement entered into with Alpha Financial Solutions, L.L.C., we act as an independent contractor in marketing a stored value cash card system to the pawnbroker industry. The cash card system is anticipated to allow pawnbrokers to issue cash cards to their customers, which will allow such customers to use the cash cards in the following types of transactions: Automated Teller Machine ("ATM") Services. Cardholders may use cash cards at any ATM that bears the network logo that appears on the back of the cash card to make cash withdrawals or to inquire about the amount of funds available to them. Merchant Point-of-Sale ("POS") Services. Cardholders may use cash cards to purchase goods and services at any retail or other establishment that participate in the cash card networks. Funds Transfer Services. Cardholders may use cash cards to transfer any amount of their available funds in card-to-card transfers. Long Distance Telephone Services. Cardholders may use cash cards to make long distance telephone calls through a designated telecommunications service provider. Cardholders are able to have the pawnbrokers add additional value to the Cards. We believe that pawnbrokers will issue the cash card in loan transactions to customers who desire the convenience of a cash card. We intend to begin marketing the cash card systems in the third quarter of 2002. We anticipate that the cash card will create of variety of revenue opportunities for pawnbrokers, including product sales revenues, residual income opportunities, additional penetration into the stored value market as new related services and technologies are developed. In the future, we may offer pawnbrokers other revenue generating products and services, including: o Payroll Services o Leasing Programs o Insurance Services o Bookkeeping Services To date, we have been unable to raise financing to implement our financial services business and there can be no assurance that we will be able to raise such financing as planned or that our financial services, if offered, will generate sufficient revenues to become profitable. As of December 31, 2001, we had cash and cash equivalents of $26,615 and a working capital deficit of $493,912, which including current liabilities of approximately 4 $520,527. We are in the process of seeking sufficient financing to implement our business strategy and to meet our work capital requirements. Our ability to raise additional financing will be contingent on our ability to successfully market and generate revenues from our cash card systems offerings We estimate that we will require financing of approximately $400,000 to implement the initial phase of our cash card marketing strategy. We estimate that we will require financing of between $3,000,000 to $9,000,000 to implement the initial phase of our Financial Services business strategy. We intend to use approximately $2,000,000 of the proceeds of such financing, if any, to complete the following related to our Financial Services business strategy: o Complete the research related to the demand for reliable credit by the pawn industry; o Identify the top seven states for a targeted roll out of our financial services; o Research regulatory compliance issues related to lending rates, licensing requirements, perfecting security interests in assets and other regulatory issues in each targeted state; o Develop the documentation and required procedures to facilitate loans to pawnbrokers; o Market and promote our financial services to pawnbrokers in the targeted states; o Fund the initial loan products and services to pawnbrokers in the target market (based on credit ratings and rankings); and o Identify viable target markets for additional roll outs. Based on responses to a mail survey conducted in December 2000, pawnbrokers located in the top seven states (based on demand for loans) indicated that they would be interested in obtaining loans in the aggregate amount of approximately $23.5 million as approximately follows: Texas - $5.5 million, California - $4.65 million, Minnesota - $4.6 million, Florida - $3.25 million, Georgia - $1.95 million, Colorado - $1.8 million and Kansas $1.8 million. We cannot assure you that demands for loans will be as indicated in this preliminary survey or that we will raise sufficient financing to be able to offer our financial services. We intend to compete in the highly competitive financial services industry. We will compete against companies that have substantially greater financial, technical and other resources than us. Several competitors already have established web sites, brand names, strategic relationships and other web sites and user loyalty, all of which create a competitive advantage over us. We have not yet begun the process of determining the regulatory requirements for conducting our proposed financial services business and we do not currently have sufficient working capital to implement our planned business strategy. During 2000 and 2001, several Internet related companies have failed or been acquired by larger competitors. Competitive pressures, lack of adequate financing and failure to gain market acceptance are some of the factors that have caused such 5 companies to fail. We face these same challenges, and we cannot guarantee that we will be able to compete effectively or that we will obtain sufficient financing to develop a commercially viable business. Our ability to implement our proposed business plan is subject to obtaining adequate financing. We currently do not have sufficient financing to continue as a going concern; however, based on our discussions with potential investors, we believe that we can raise additional financing if we are able to restructure our liabilities. We may arrange to convert a significant portion of our debt into equity, which based on the current market price of our common stock, would result in significant dilution to existing shareholders. In addition, to implement our business plan we anticipate that we will enter into financing arrangements in which we issue equity, debt, convertible securities or a combination of these. Such financing arrangements are anticipated to result in additional dilution to our existing shareholders. We cannot assure you that we will be able to restructure our liabilities or that we will successfully obtain additional financing. If we are unsuccessful at either of these, we will not be able to continue as a going concern and we may be required to liquidate our company or declare bankruptcy. 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. The economics of the pawnbroker industry are straightforward and uncomplicated. Pawnbrokers primary business is as lenders, who earn a significant portion of their revenue from pawn transactions, secure collateralized promissory loans (backed by gold, diamonds, jewelry, and other merchandise). Collateralized transactions offer pawnbrokers high returns through interest income. Prevailing loan rates at pawnshops in the United States vary from state to state. Pawnbrokers make more than 50 million loans annually at state regulated interest rates of 60%- 360% per annum. The pawn industry is driven by loans, not by the sale of forfeited collateral. According to the National Pawnbrokers Association, between 70% to 80% of all items pawned are redeemed. Based on management's experience, we believe that several characteristics of the traditional pawnshop industry have created inefficiencies in the industry. Pawnbrokers must make significant investments in credit capital to make loans available to consumers and may be limited in the number of loans they make or the aggregate value of such 6 loans. Based on our discussions with pawnbrokers, we believe that many do not use banks or traditional commercial financing institutions for the purposes of obtaining capital to make loans to consumers. We believe that there are a number of factors that make traditional commercial financing unattractive to pawnbrokers, including: o consumer loans by pawnbrokers are not structured to provide secured financing for traditional commercial lenders; o commercial lenders do not thoroughly understand the needs of pawnbroker industry and may be hesitant to extend credit to pawnbrokers; o the pawnbroker industry consists of primarily smaller family-owned businesses that may not qualify for commercial lines of credit; o pawnbrokers loans are generally short-term loans and traditional lenders may not have loan programs to meet the needs of pawnbrokers; o pawnbrokers may perceive documentation and lending guidelines of traditional lenders overly burdensome; and o commercial lenders have not targeted or developed products for the pawnbroker industry. We believe that pawnbrokers can benefit from a source of funds to increase their loan portfolios and profitability. Our understanding of and contacts in the pawnbroker industry may provide us with opportunities to effectively market our Financial Services and Revenue Products to meet the growing needs of the pawnbroker industry. We intend to capitalize on the opportunity to provide financial services to this market niche. We also intend to provide the industry with revenue generating product opportunities to enhance pawnshop profitability. Competition We intend to compete with a number of other companies with substantially greater financial, technical and human resources than us. Many of these competitors are larger than us and most have access to capital at a lower cost. We believe that the finance charge rate and availability of capital will be two of the primary competitive factors in penetrating the financial services market targeted at pawnbrokers. We believe that consumer acceptance, transaction costs, cash card uses, and pawnbroker adoption are the primary competitive factors in penetrating the cash card market. From time to time, we anticipate that our competitors may seek to compete aggressively on the basis of pricing, and we may be unable to enter a targeted geographical market to the extent we are not willing to match competitor pricing. We anticipate that we may compete against independent finance companies, banks and thrift institutions, credit unions, industrial banks, credit card issuers and/or mortgage companies. In addition to traditional commercial lenders, we anticipate that we may compete against non-bank competitors that specialize in making commercial loans. We believe that our primary competition may be community banks and smaller independent finance companies that service smaller independent businesses. 7 Some competitors have substantial local market positions; others are part of large, diversified organizations. Because of their longstanding insured deposit base, many banks that we intend to compete with are able to offer financial services on very competitive terms. We believe, based on our management's experience in the pawnbroker industry, that the primary competitive factors in the commercial finance business targeted at pawnbrokers are price, product quality, risk management, new account marketing, understanding the needs of pawnbrokers, offering loan programs targeted to meet the needs of the pawnbroker industry and retention of customers through emphasis on superior customer service. In addition, we believe that innovation is necessary to effectively compete and penetrate the market. We intend to offer financing services targeted at the pawnbroker industry, including enhanced customer service, specialization in certain types of loan packages and on-line application and documentation processes. We intend to design our transactions to be simple, flexible and customer responsive. Financial services is one of the more prominent industries that has taken advantage of the Internet. The information potential of the Internet and the potential lower costs associated with conducting business electronically underlie the success of financial services Web sites. We believe that businesses will become more willing to conduct financial transactions online, including lending transactions, as Internet use increases, Internet brands are established and concerns about security and privacy are alleviated. We also believe that pending federal and state legislation authorizing the use of electronic signatures will expedite the use of online commercial transactions, if such legislation is adopted. The Pawnbroker Financial Services We intend to become a provider of financial services to pawnbrokers. We anticipate that our financial services will permit pawnbrokers to increase their loan volume to the consumers they serve. Our management team has extensive knowledge of the pawnbroker industry. We intend to offer financing products that are tailored to meet the unique needs of the pawnbroker industry. We intend to provide qualified pawnbrokers with secured loans in amounts between $50,000 to $1,000,000, including: o short term loans of one year or less, o revolving loans, o possessory collateralized loans, o lines of credit, and o consolidation loans. We anticipate that we will charge interest on these loans ranging from 12% to more than 24%, depending on the nature of the loan and fluctuations in interest rates in the market. We intend to charge loan origination and processing fees in amounts that will 8 be determined. We intend initially to extend these loans from financing we obtain from investors. We will not make consumer loans. A Loan Transaction with Pawnbroker Each participating pawnbroker who submits a loan application will be required to complete a credit application and to provide us financial statements and consent to conduct a credit and background check. We intend to use outside credit reporting agencies to conduct a credit screening. We will form a Loan Approval Board, consisting of the management team and selected advisors from the credit and pawn industries. On-site screenings will be made to give each applicant a credit rating prior to making any lending decisions. Our lending decisions are anticipated to be based on several factors, including (i) credit worthiness, (ii) past financial performance, (iii) quality of the pawnbroker's business plans, (iv) history of loan revenues and profitability, (iv) quality of management, (v) market size and growth potential, (vi) length of time as licensed pawnbrokers, (vii) structure of ownership, and (viii) personal guarantees of principals. Pawnbrokers that accept loans from us will be required to complete documentation necessary to grant us a security interest in the pawnbroker's inventory, accounts and assets and a personal guarantee to secure payment of the loan. We intend to conduct periodic evaluations and random onsite inspections, including reviews of financial statements, of pawnbrokers that participate in our loan programs. We initially intend to offer loans to pawnbrokers in a limited number of states. Based on our preliminary survey of pawnbrokers, we believe that the initial roll out of our financial services will be in Texas, California, Minnesota, Florida, Georgia, Colorado and Kansas. We have not completed the regulatory review necessary to determine the regulatory, licensing and other requirements for offering financial services in these states. In addition, we have not completed any due diligence of pawnbrokers in those states that have expressed an interest in borrowing funds from us. We are in the process of seeking financing to implement this part our business strategy. Regulatory Environment We have not conducted the research necessary to determine applicable regulatory and licensing requirements of our proposed financial service offerings. Although we believe that most jurisdictions do not regulate commercial finance transactions, certain jurisdictions may require us to be licensed as a lender or financier and impose certain requirements related to limitations on interest rates and other charges, adequate disclosure of certain contract terms and limitations on certain collection practices and creditor remedies. We anticipate that our financial services offerings will be subject to regulation in most of the states in which we offer financial services, and we will likely be required to obtain governmental licensing or approval before commencing business. In addition, we will also be required to comply with certain provisions of the Equal Credit Opportunity Act of 1974, as amended, which are applicable to commercial loans. It is not possible to forecast the nature of future legislation, regulations, judicial decisions, 9 orders or regulatory interpretations or their impact on our future business, financial condition or prospects. 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 December 31, 2002. Our plan of operation for the fiscal year ending December 31, 2002 is as follows: o Raise additional financing of approximately $400,000 to fund our operations and to implement sales and marketing efforts relating to our Revenue Products business strategy; o Raise additional financing of between $3 million to $9 million to fund our operations and to implement our Financial Services business strategy; o Complete research related to regulatory compliance issues related to lending rates, licensing requirements, perfecting security interests in assets and other regulatory issues in states targeted for our financial services roll out; o Develop the documentation, forms and required procedures to facilitate loans to pawnbrokers; o Market and promote our financial services and cash card systems to pawnbrokers in the targeted states; o Generate revenues through the offering loans to pawnbrokers in the target market (based on credit ratings and rankings); and o Generate revenues through marketing cash card systems to the pawn industry. In order to reduce our cash requirements, we intend to 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. We estimate our cash requirements for the second quarter of 2002 to approximate $75,000; and expect cash requirements for the third and fourth quarters of 2002 to approximate $46,000 per month. We currently do not have sufficient working capital to meet our on-going obligations. As of December 31, 2001, we had cash and cash equivalents of $26,615 and a working capital deficit of $493,912, which includes current liabilities of approximately $520,527. We are in the process of negotiating with our remaining creditors to restructure our debt obligations to them and may enter into arrangements to reduce such obligations by converting such obligations into equity or to settle such obligations for less than the amounts owed. We cannot assure you that we will successfully restructure our outstanding debt or that issuing equity for the settlement of debt will not result in 10 substantial dilution to our existing shareholders. We are also in the process of seeking sufficient financing to implement our business strategy. Our ability to raise additional financing will be contingent on our ability to restructure our liabilities and may require us to restructure our capital structure. We estimate that we will require financing of at least $3,000,000 to implement the initial phase of our Financial Services business strategy, assuming that we are successful in restructuring our liabilities. Our ability to implement our proposed business plan is subject to obtaining adequate financing. We currently do not have sufficient financing to continue as a going concern; however, based on our discussions with potential investors, we believe that we can raise additional financing if we are able to restructure our liabilities. If we are unable to raise additional financing, we will not be able to continue as a going concern and we may be required to liquidate our company or declare bankruptcy. Intellectual Property and Trademarks We do not currently have any material intellectual property or trademarks. In the future, we may rely on a combination of patent, copyright, trademark, service mark and trade secret laws and contractual restrictions to protect our proprietary rights in products and services. We have entered into confidentiality and invention assignment agreements with our employees and contractors, and nondisclosure agreements with third parties with access to our business information and to limit access to and disclosure of our proprietary information. These contractual arrangements and the other steps taken by us to protect our intellectual property may not prevent misappropriation of our technology or deter independent third-party development of similar technologies. Sales & Marketing Strategy We believe that offering financial services targeted to the pawnbroker industry can be a commercially viable business. We intend to use direct selling and direct mail to market our financial services to pawnbrokers that expressed interest in obtaining loans. We also intend to market our Revenue Products to pawnbrokers throughout North America using direct mail advertising, advertising in trade publications and participation in industry trade shows. Employees We currently have four employees, including one administrative employee and three management, marketing and sales employees. Current Transactions During Year Ended December 31, 2001 On May 11, 2001, we entered into agreements with three note holders to convert $1,500,000 owed to them into shares of our common stock at $0.05 per share. The market price of our common stock as quoted on the NASD Over-the-Counter Bulletin Board was $0.15 Davidson's on May 11, 2001. Under the terms of these agreements, we 11 issued 3,000,000 shares of our common stock to the following note holders: 2,000,000 shares to BWI Avionics Ltd., 600,000 shares to Granite Communications Inc., and 400,000 shares to Eurogrowth Investments Ltd. After giving effect to the issuance, we had 4,765,475 shares of common stock issued and outstanding, resulting in a substantial dilution to our shareholders. Effective August 1, 2001, we completed a 10 (old)-for-1 (new) reverse split of our issued and outstanding common stock and reduced our authorized share capital to consist of 50,000,000 shares of common stock and 10,000,000 shares of preferred stock, each with a par value of $0.0001 per share. At July 31, 2001, we had 50,803,567 pre-split shares of common stock issued and outstanding, and after giving effect to the reverse split, we had approximately 5,080,357 shares of common stock issued and outstanding. All share information contained in this quarterly report gives effect to the reverse split. We had 5,027,870 shares of common stock issued and outstanding at March 28, 2002. Our common stock is currently quoted on the National Association of Securities Dealers' over-the-counter bulletin board and trades under the symbol "PBOK". We have not been subject to any bankruptcy, receivership or other similar proceeding. RISK FACTORS We are a development stage company in the process of developing a business plan that is designed to offer financial and revenue generating services to the pawnbroker industry. 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 annual report carefully and consider the following risk factors. BUSINESS RELATED RISKS Our ability to implement our business strategy will depend on the securing of additional operating capital in the amount of $3 million or more during the second quarter of 2002. In their independent auditor's report dated March 15, 2002, Davidson & Co., our auditors, expressed substantial doubt about our ability to continue as a going concern due to our lack of working capital for our planned business activities. We currently do not have sufficient working capital to meet our on-going obligations. As of December 31, 2001, we had cash and cash equivalents of $26,615 Davidson's and a working capital deficit of $493,912, Davidson's which includes current liabilities of approximately $520,527. We are also in the process of seeking sufficient financing to implement our business strategy. Our ability to raise additional financing will be contingent on our ability to restructure our liabilities and may require us to restructure our capital structure. If adequate funds are not available, we will be required to sell or liquidate our business or file bankruptcy. 12 We have a history of losses and anticipate that we will incur additional losses through at least 2001. We have incurred net losses since our inception and anticipate that we will continue to incur losses. Since inception, through December 31, 2001, we incurred cumulative net losses of $10,066,485. During the fiscal year ended December 31, 2001, we incurred losses of approximately $1,024,545. We had no material revenues during the years ended December 31, 2000 and 2001, we consolidated our operations and suspended operation of our web site because of our lack of working capital and our continuing losses. We do not believe that we will generate any sufficient revenues until we raise additional financing to implement our new business strategy of providing financial services to pawnbrokers, if at all. We have a limited operating history and intend to implement a new business plan, which is untested, and makes our commercial viability uncertain. Because we have recently begun operations and we intend to implement a new business strategy, it is difficult to evaluate our business and our prospects. Our revenue and income potential is unproven and our business model has not been fully finalized and we have not completed all of the tasks necessary to offer our financial services or our revenue generating products and services. Our prospects are subject to the risks, expenses and uncertainties frequently encountered by companies in the early stages of development in new and evolving markets for online financial services. These risks include the following: o our ability to maintain and attract funding sources for pawnbroker loans; o our ability to attract and retain qualified personnel; o our ability to make loans that provide a sufficient return on capital to be commercially feasible; and o our ability to anticipate and adapt to the changes in the evolving regulatory environment. We cannot assure you that we will attract pawnbrokers to use our financial services or that we will generate significant revenues in the future. We cannot guarantee we will ever establish a sizeable market share or achieve commercial success. We may be unable to make profitable loans if interest rates fluctuate significantly. Significant fluctuations in interest rates may reduce the number of loans that we make and have a material adverse affect on the revenues we receive in interest and loan fees. Our current business model is based on assumptions that we will be able to earn between 12% and 24% (or more) per year on interest from pawnbrokers in connection with the loans we make. The interest rates that pawnbrokers charge to consumers are limited by state laws and regulations, which may make borrowing money from us unattractive or economically unfeasible. In addition, the United States Federal Reserve Board has lowered the interest rates for funds available to member banks, which is 13 anticipated to generally result in lower interest rates for consumer and commercial loans. Changes in monetary policy that result in lower interest rates charged to pawnbrokers may have an adverse affect on our ability to loan money to pawnbrokers on terms acceptable to us. If we are unable to maintain adequate financing sources, our ability to originate and fund pawnbroker loans will be impaired and our revenues will suffer. Our ability to fund pawnbroker loans depends to a large extent upon our ability to secure financing of between $3 million and $9 million on acceptable terms. We intend to fund most of the loans through funds that we raise in equity, debt or convertible securities financing or through lines of credit that we obtain, if any. We anticipate that we may obtain lines of credit from institutional investors and commercial banks. We anticipate that these financing arrangements will have one-year terms and may be cancelled by the lenders at any time. We have no arrangements with respect to financings or lines of credit. If we are not successful in renewing our borrowings or in arranging new financing with terms as favorable as the terms of our current financing arrangements, we may have to curtail our funding activities, which would reduce our revenue. We anticipate that lines of credit that we obtain, if any, will be subject to financial covenants and other restrictions. If we are unable to operate within the covenants or obtain waivers, all amounts that we owe under the financing arrangements could become immediately payable. The termination of a financing arrangement by a lender, or the acceleration of our debt, would have a significant negative effect on our business. Failure to comply with laws and regulations governing our proposed business operations could have a material adverse effect on our business and results of operations. We have not conducted the research necessary to determine applicable regulatory and licensing requirements of our proposed financial service offerings. Certain jurisdictions may require us to be licensed as a lender or financier and impose certain requirements related to limitations on interest rates and other charges, adequate disclosure of certain contract terms and limitations on certain collection practices and creditor remedies. We anticipate that our financial services offerings will be subject to regulation in most of the states in which we offer financial services, and we will likely be required to obtain governmental licensing or approval before commencing business. In addition, we will also be required to comply with certain provisions of the Equal Credit Opportunity Act of 1974, as amended, which are applicable to commercial loans. It is not possible to forecast the nature of future legislation, regulations, judicial decisions, orders or regulatory interpretations or their impact on our future business, financial condition or prospects. As a company conducting a financial services business through the Internet, we face an additional level of regulatory risk given that most of the laws governing lending transactions have not been substantially revised or updated to fully accommodate 14 electronic commerce. Until these laws, rules and regulations are revised to clarify their applicability to transactions conducted through electronic commerce, any company providing loan-related services through the Internet or other means of electronic commerce will face compliance uncertainty. Our future success depends on the services of our key officers Joseph Schlader, our President and Co-Founder, William Galine, our Vice President, and Steve Fowler, our Director of Business Development and our ability to attract and maintain qualified, experienced personnel. Our future success will depend on Joseph Schlader, William Galine and Steve Fowler. The loss of key personnel could have an adverse effect on our operations. We also intend to hire management with experience in the financial services industry to assist us in implementing our financial services business. Although we have insurance to cover losses that may result from the death of any of our key executives, we cannot assure you that we will be able to replace such key executives in a timely manner, if at all. Competition for qualified employees is intense, and an inability to attract, retain and motivate additional, highly skilled personnel required for expansion of operations and development of technologies could adversely affect our business, financial condition and results of operations. Our ability to retain existing personnel and attract new personnel may also be adversely affected by our financial situation. We cannot assure you that we will be able to retain our existing personnel or attract additional, qualified persons when required and on acceptable terms. The financial services industry is highly competitive, and we cannot assure you that we will be able to compete effectively. We intend to compete with companies and institutions with substantially greater financial, technical and human resources than us. Many of these competitors are larger than us and most have access to capital at a lower cost than. We anticipate that we may compete against independent finance companies, banks and thrift institutions, credit unions, industrial banks, credit card issuers and/or mortgage companies. In addition to traditional commercial lenders, we anticipate that we may compete against non-bank competitors that specialize in making commercial loans. We believe that our primary competition may be community banks and smaller independent finance companies that service smaller independent businesses. Our competitors have established systems for offering financial services and are licensed to provide such services. Many of our competitors offer additional services that we will offer. These competitors, as well as potential entrants into our market, have longer operating histories, larger customer or user bases, greater brand recognition and significantly greater financial, marketing and other resources than we do. Many of these current and potential competitors can devote substantially greater resources to promotion and systems development than we can. We may be unable to effectively compete. 15 If we are unable to successfully develop a network of participating pawnshops that are willing to adhere to our policies, we are unlikely to become profitable. We are currently in the process of developing a network of relationships with participating pawnshops. We cannot guarantee that these relationships will develop, or that they will develop in a satisfactory manner. We anticipate that we will earn revenues from interest and fees charged in connection with our financial services and revenue product offerings. We initially intend to target a fragmented market of small to medium sized pawnshops. We cannot predict if the level of acceptance by pawnshops will support a market for our financial services or revenue products. Our business may be harmed by claims that we have infringed intellectual property rights of others. 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. We cannot assure you that we will be able to successful protect our intellectual property rights or that we will be able 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 products 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. 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 transact business and make loans in accordance with specific guidelines, including the required time periods which pledges of merchandise must be held before they may be sold, reporting and other obligations related to stolen merchandise, the interest rates a pawnshop may charge for loans, restrictions on the type of merchandise that may be pawned, restrictions on who may pawn merchandise and other restrictions that may vary from state to state. Our policies will require that all our participating pawnshops certify that they will adhere to their individual compliance obligations. We cannot guarantee that we will not be subject indirectly to actions arising out of violations by our 16 participating pawnshops. Such action may have a material adverse affect on our business and results of operations. RISK RELATED TO OUR SECURITIES We may be required to sell additional common stock or parties may exercise options, warrants, convertible debentures and convertible notes that may cause dilution of shares. The number of shares of our outstanding common stock held by non-affiliates is large relative to the trading volume of the common stock. Any substantial sale of our common stock or even the possibility of such sales occurring may have an adverse effect on the market price of the common stock. We have reserved up to an additional 800,000 shares of common stock for issuance upon exercise of options under an incentive plan. As of December 31, 2001, we have granted options exercisable to acquire 146,210 shares of our common stock under the plan at exercise prices ranging from $15.30 to $81.30 per share. We issued warrants exercisable to acquire 196,508 shares of common stock. ranging from $20.00 to $67.50 per share. We issued convertible debentures convertible to acquire 808,000 shares of common stock at $.50. 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. In the past, we have negotiated with creditors to restructure our liabilities and we may continue to negotiate with creditors to restructure our liabilities under terms that may cause substantial dilution of your shares. Management believes that restructuring our liabilities is essential to facilitating our ability to raise additional financing to fund our planned business strategy. During the fiscal year ended December 31, 2001, we negotiated with creditors to restructure our outstanding liabilities. On May 11, 2001, we entered into agreements with three note holders to convert $1,500,000 owed to them into shares of our common stock at $0.50 per share (post reverse split). The market price of our common stock as quoted on the NASD Over-the-Counter Bulletin Board was $0.15 (post reverse split) on May 11, 2001. Under the terms of these agreements, we issued 3,000,000 (post reverse split) shares of our common stock to the following note holders: 2,000,000 (post reverse split) shares to BWI Avionics Ltd., 600,000 (post reverse split) shares to Granite Communications Inc., and 400,000 (post reverse split) shares to Eurogrowth Investments Ltd. After giving effect to the issuance, we had 4,765,475 (post reverse split) shares of common stock issued and outstanding, resulting in a substantial dilution to our shareholders. 17 We are in the process of negotiating with our remaining creditors to restructure our debt obligations to them and may enter into arrangements to reduce such obligations by converting such obligations into equity or to settle such obligations for less than the amounts owed. We cannot assure you that we will successfully restructure our outstanding debt or that issuing equity for the settlement of debt will not result in further substantial dilution to our existing shareholders. We intend to raise additional capital to fund our business plan on terms that may result in substantial dilution to our shareholders. We estimate that we will be required to raise additional financing of between $3 million to $9 million to fund our operations and to implement our business strategy. At March 28, 2002, we had 5,027,870 shares of common stock issued and outstanding. Our shares are quoted on the NASD Over-the-Counter Bulletin Board and the closing price of our shares on March 28, 2002 was $.10. Based on the current market price of our common stock, we may not have a sufficient number of common stock authorized for issuance to raise the capital required fund our plan of operation. Such a financing could cause substantial dilution to our current stockholders. We anticipate that we will have to restructure our current issued and outstanding share capital through a reverse-split or other means and our authorized capital to raise additional financing. Broker-dealers may be discouraged from effecting transactions in our shares because they are considered penny stocks and are subject to the penny stock rules. Rules 15g-1 through 15g-9 promulgated under the Exchange Act impose sales practice and disclosure requirements on NASD brokers-dealers who make a market in "a penny stock." A penny stock generally includes any non-NASDAQ equity security that has a market price of less than $5.00 per share. Our shares are quoted on the OTCBB, and the price of our shares ranged from $.05 (low) to $.15 (high) during the year ended December 31, 2001. The closing price of our shares on March 28, 2002 was $.10. 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 18 commissions payable to the broker-dealer and the registered representative and current quotations for the securities. Finally, a broker-dealer is required to send monthly statements disclosing recent price information with respect to the penny stock held in a customer's account and information with respect to the limited market in penny stocks. ITEM 2: PROPERTIES Our headquarters are currently located in a leased facility in Reno, Nevada. The facilities consist of 5,505 square feet. Our annual rent expense under the lease is $96,000. Our leases expire between April 2002 and May 2003. ITEM 3. LEGAL PROCEEDINGS A complaint was filed by Lexis-Nexus ("Plaintiff") on October 15, 2001, in District Court Washoe County, Nevada, naming Pawnbroker.com, a Nevada corporation, as defendant (Case No. CV01-05512). The Plaintiff seeks $9,000 for services and products and $3,000 in attorneys' fees. We have filed an appearance. We dispute the amount owed to the Plaintiff and intend to vigorously defend against the action. There are no other legal proceedings. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS We had no shareholder meetings during the fourth quarter ended December 31, 2001. On July 5, 2001, we held our annual general meeting of shareholders. Shareholders representing 3,721,577 (post reverse-split) of the 5,080,357 (post reverse-split) outstanding shares of the Company as of the record date, May 24, 2001, were represented at the Annual Meeting in person or by proxy. The shares represented at the Annual Meeting constituted 73.25% of the outstanding shares. Our shareholders took the following actions: Election of Board of Directors Our shareholders elected the following persons to serve as members to our board of directors: A. Steven Fowler is elected to serve as a Class A director for an initial term of one (1) year; B. Joseph Schlader is elected to serve as a Class B director for an initial term of two (2) years; and C. William Galine is elected to serve as a Class C director for an initial term of three (3) years. Director For Against Abstain --------------------------------------------------------------------------- Steven Fowler 3,718,952 1,440 1,185 Joseph Schlader 3,718,952 1,440 1,185 William Galine 3,718,952 1,440 1,185 19 Reverse Stock Split Our shareholders approved an amendment to our Certificate of Incorporation to effect a stock combination pursuant to which every ten (10) shares of outstanding of our common stock would be reclassified into one (1) share of common stock. For Against Abstain --- ------- ------- 3,718,062 2,520 995 Share Capital Reduction Our shareholders approved an amendment to our Certificate of Incorporation to decrease the authorized share capital of the Company from 150,000,000 shares (consisting of 100,000,000 shares of common stock and 50,000,000 shares of preferred stock) to 60,000,000 shares (consisting of 50,000,000 shares of common stock and 10,000,000 shares of preferred stock). For Against Abstain --- ------- ------- 3,719,197 1,185 1,195 Appointment of Auditors Our shareholders ratified the selection of Davidson & Company as independent auditors. For Against Abstain --- ------- ------- 3,721,127 450 0 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS PRICE RANGE OF COMMON STOCK On September 17, 1998 our common stock was approved for trading on the National Securities Dealer's Association - over the counter bulletin board under the symbol "DGSG". There was no material market for our common shares prior to March 31, 1999. Our trading symbol was changed to "PBBR" effective June 14, 1999 following the change of our corporate name and to "PBOK" effective August 1, 2001 following the reverse split of our stock. 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 20 forth below reflects inter-dealer prices, without retail mark-up, mark-down or commission and may not reflect actual transactions: OTCBB 2000 High* Low* ---- ----- ---- First Quarter 100.60 93.80 Second Quarter 37.80 3.63 Third Quarter 15.00 13.40 Fourth Quarter 1.40 1.10 2001 ---- First Quarter 1.15 .50 Second Quarter .50 .15 Third Quarter .35 .05 Fourth Quarter .15 .05 * Gives effect to the a 10 (old)-for- 1 (new) reverse split of our issued and outstanding common stock effected on August 1, 2001. The last reported sale prices of our common stock reported by the NASD on following dates were $.08 on December 31, 2001, and $.10 on March 28, 2002. 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. RECENT SALES OF UNREGISTERED SECURITIES During the fiscal year ended December 31, 2001, we issued securities in the following unregistered transactions: On May 11, 2001, we entered into agreements with three note holders to convert $1,500,000 owed to them into shares of our common stock at $0.50 per share (post reverse-split). The market price of our common stock as quoted on the NASD Over-the-Counter Bulletin Board was $0.15 on May 11, 2001 (after giving effect to the reverse-split). Under the terms of these agreements, we issued 30,000,000 shares of our common stock (pre reverse-split) to the following note holders: 2,000,000 shares (post reverse- 21 split) to BWI Avionics Ltd., 600,000 shares (post reverse-split) to Granite Communications Inc., and 400,000 shares (post reverse-split) to Eurogrowth Investments Ltd. BWI Avionics Ltd., Granite Communications Inc., and Eurogrowth Investments Ltd. are non-U.S. persons and the shares were issued outside the United States in reliance upon an exemption from registration available under Regulation S of the Securities Act of 1933, as amended. Since January 1, 2001, we have raised $225,000, in the form of short-term bridge financing as follows: Lender Instrument/Terms Principal Amount ------ ---------------- ---------------- Pacific Pawnbroker Demand promissory note, unsecured, without $20,000 interest Various Parties Promissory note, unsecured, bearing $80,000 interest at 18% per annum, due December 31, 2003 Edward Rumano Promissory note, unsecured, bearing $25,000 interest at 18% per annum, due October 19, 2001 Various Parties Promissory note, unsecured bearing $100,000 interest at 18%, payable on February 21, 2002 ----------- Total $225,000

We have issued 18% convertible debentures, due December 31, 2003, convertible into 808,000 shares of common stock. These convertible debentures were issued to accredited investors in private placements in reliance upon an exemption from registration available under Rule 506 of Regulation D under the Securities Act of 1933, as amended. Joseph Schlader, our President and a director, is the President and a controlling shareholder of Pacific Pawnbroker. William Galine, our Vice President and a director, is a former officer and shareholder of Pacific Pawnbroker. ITEM 6. SELECTED FINANCIAL DATA The following table sets forth selected financial data regarding our consolidated operating results and financial position. The data has been derived from our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States ("US GAAP"). See "Management's Discussion and Analysis of Financial Condition and Results of Operation." The following selected financial data is qualified in our entirety by, and should be read in conjunction with, the consolidated financial statements and notes thereto included elsewhere in this annual report. 22 Cumulative Amounts From Period From Period from February 5, Year ended April 1, April 1, 1999 to December 31, 2000 to 1999 to Year Ended December 31, 2001 December 31, December 31, March 31, 2000 2000* 1999* 2000 --------------------------------------------------------------------------------------------------------------- (Unaudited) OPERATING EXPENSES Amortization $ 646,471 $ 183,879 $ 356,608 $ 151,026 $ 105,984 General and administrative 8,766,463 635,841 3,573,649 1,747,355 4,556,973 Stock-based compensation 378,685 - 285,068 - 93,617 -------------- ------------ ------------- ------------- ------------ 9,791,619 819,720 4,215,325 1,898,381 4,756,574 -------------- ------------ ------------- ------------- ------------ OTHER ITEM Interest expense 191,758 146,936 - - Interest income (80,078) (26,430) (37,747) (50,465) Loss of Disposal of Capital 176,983 176,983 Assets Write-Off of Capital Assets 70,674 70,674 -------------- ------------ ------------- ------------- ------------ 359,337 289,296 120,506 (37,747) (50,465) -------------- ------------ ------------- ------------- ------------ Loss for the period $(9,041.940) $(1,024,545) $ (4,335,831) $ (1,860,634) $(4,706,109) Basic and diluted loss per common share (Note 3) - $ (0.25) $ (0.24) $ (0.13) $ (0.31) ================================================================================================================= Weighted average number of shares of common stock outstanding - 4,178,454 1,823,291 1,486,645 1,522,029 =================================================================================================================

December 31 December 31 March 31 2001 2000* 1999 2000 ----------------------------------------------------------------------------------------------------- (Unaudited) CONSOLDIATED BALANCE SHEET DATA: Cash and cash equivalent $ 26,615 $ 231,763 $ - $ 424,678 Working capital (493,912) (2,083,210) 80,500 (691,463) Total assets 188,712 908,591 80,500 1,097,486 Total stockholders' equity (815,815) (1,407,136) 80,500 (24,673) (deficit) --------------------------- * Effective December 31, 2000, we changed our year end to December 31. The data reflects the nine-month period ended December 31, 2000 (audited) and December 31, 1999 (unaudited), where applicable.

23 Quarterly Financial Data The following table sets forth certain unaudited statement of operations data for each of the eight quarters beginning January 1, 2000 ending December 31, 2001 The unaudited financial statements have been prepared on the same basis as the audited financial statements contained herein and include all adjustments, consisting only of normal recurring adjustments, that we consider necessary to present fairly this information when read in conjunction with our audited financial statements and the notes thereto appearing elsewhere in this report. In view of our recent change in business strategy and other factors, we believe that quarterly comparisons of its financial results are not necessarily meaningful and should not be relied upon as an indication of future performance. Three month period ended (unaudited) CONSOLIDATED STATEMENT OF OPERATIONS DATA: March 31, June 30, Sept 30, Dec 31, March 31, June 30, Sept 30, Dec 31, 2000 2000 2000 2000 2001 2001 2001 2001 --------------------------------------------------------------------------------------------------------------- Total operating expenses $2,863,203 $2,282,611 $809,242 $823,612 $ (231) $474,674 $ 72,815 $272,462 OTHER ITEM Interest income/(expense) 32,281 5,452 (68,200) (57,758) (291,689) (8,569) (3,165) (12,341) Extraordinary Item (84,471) Loss for the period 2,850,154 2,277,159 877,442 881,370 291,920 483,243 75,980 173,402 Basic and diluted net loss per common share 1.90 1.30 0.50 0.40 0.10 0.11 0.01 0.03 Weighted average number of shares of common stock outstanding 1,500,081 1,756,475 1,818,537 2,203,475 2,077,234 4,547,257 5,047,609 5,047,609

24 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Certain statements and information contained in this Report constitute forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements, or developments in our industry, to differ materially from the anticipated results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, but are not limited to: our limited operating history, history of losses, risks associated with the development of technologies, risks involving the management of growth, risks associated with the Internet, competition, product development risks and risks of technological change, dependence on selected vertical markets and third-party marketing relationships, our ability to protect its intellectual property rights and the other risks and uncertainties detailed in our Securities and Exchange Commission filings. "We," "our," "us" and the "Company" refer to Pawnbroker.com, Inc. and our subsidiaries. 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. On May 17, 2000, we amended our certificate of incorporation to increase our authorized capital; to consist of 150,000,000 shares, including 100,000,000 shares of common stock and 50,000,000 shares of preferred stock. Effective December 31, 2000, we changed our year-end to December 31. As such, the discussion set forth below compares the nine-month period ended December 31, 2000 (audited) with the nine-month period ended December 31, 1999 (unaudited). Effective August 1, 2001, we completed a 10 (old)-for- 1 (new) reverse split of our issued and outstanding common stock and reduced our authorized share capital to consist of 50,000,000 shares of common stock and 10,000,000 shares of preferred stock, each with a par value of $0.0001 per share. At July 31, 2001, we had 50,803,567 shares of common stock issued and outstanding, and after giving effect to the reverse split, we 25 had approximately 5,080,357 shares of common stock issued and outstanding. All share information contained in this quarterly report gives effect to the reverse split. RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED DECEMBER 31, 2000 AND YEAR ENDED DECEMBER 31, 2001 Revenues and Loss. We had no revenues from operations. Our loss for the year ended December 31, 2001 was $1,024,545 compared to $4,335,831 for the nine months ended December 31, 2000. The decrease in our loss resulted from a decrease in our business activities and our efforts to reduce our overhead costs. The loss for the nine months ended December 31, 2000 resulted primarily from costs associated with corporate acquisition expenses, developing our business plan, product development expenses related to the development of our Pawnbroker.com web site and technologies, sales and marketing expenses and administrative expenses. We had no material business during 2001. We anticipate that we will have a loss for 2002. General and Administrative Expenses. General and Administrative expense for the year ended December 31, 2001 was $635,841, compared to $3,573,649 for the nine months ended December 31, 2000. During the quarter ended December 31, 2000, we began consolidating our operations to conserve working capital by closing our Philadelphia development and technical support facilities and our California business office and laying off personnel in those offices. During the first quarter 2001, we laid off all of our personnel, with the exception of four employees, including one administrative employee and three management, marketing and sales employees. General and administrative expenses declined substantially during 2001 as a result of our consolidation efforts and the closing of our Philadelphia and California offices. NINE-MONTH RESULTS OF OPERATIONS FOR THE PERIOD APRIL 1, 1999 TO DECEMBER 31, 1999 (UNAUDITED) AND THE PERIOD APRIL 1, 2000 TO DECEMBER 31, 2000 (AUDITED) Revenues and Loss. We had no revenues from operations. Our loss for nine months ended December 31, 2000 of $4,335,831 compared to the comparable period for the previous year of $1,860,634 was as a result of costs associated with corporate acquisition expenses, developing our business plan, product development expenses related to the development of our Pawnbroker.com web site and technologies, sales and marketing expenses and administrative expenses. Salaries and Payroll. Salaries and wage expenses for nine months ended December 31, 2000 of $1,071,004 compared with the comparable period for the previous year of $321,840. The increase in expense was a result of hiring personal to meet the Company's needs as we attempted to execute our business plan. Specific areas of hiring were product development, sales and marketing and general and administrative. During the quarter ended December 31, 2000, we began consolidating our operations to conserve working capital by closing our Philadelphia development and technical support facilities and our California business office and laying off personnel in those offices. During the first quarter 2001, we laid off all of our personnel, with the exception of four employees, 26 including one administrative employee and three management, marketing and sales employees. As a result, expenses related to salaries and payroll decreased significantly. Contract Services. Outside service expense for nine months ended December 31, 2000 were $310,167 compared with the comparable period in the previous year of $158,868, which consist primarily of investor relations, public relations and market research. Subsequent to December 31, 2000, we suspended our business operations and terminated all our arrangements with contract service providers. Consulting. Consulting expense for nine months ended December 31, 2000 were $163,550 compared with the comparable period in the previous year of $9,709, which consists primarily of assistance related to the evaluation and development of our Internet business strategies, development of a Internet business plan and interim executive personnel. Subsequent to December 31, 2000, we suspended our business operations and terminated all our arrangements with our consultants. Professional Fees. Professional fees for nine months ended December 31, 2000 were $221,075 compared with the comparable period in the previous year of $114,998, which consist primarily of legal and accounting expenses. The increase in expense is attributed to legal and accounting support that accompanied the emergence and growth of our business and expenses related to preparing filings to comply with our Securities and Exchange Commission reporting obligations. However, professional fees may increase if we obtain additional financing to undertake research related to our financial services business and the development of documents, forms and procedures related to such business. Marketing and Related Expense. Marketing and related expenses for nine months ended December 31, 2000 were $485,006 compared with the comparable period in the previous year of $213,635, which consist primarily of creative printing and advertising. General and Administrative. General and administrative related expense for nine months ended December 31, 2000 were $685,061, compared with the comparable period in the previous year of $570,322 which consist of general office, printing, purchased software, recruiting and facility costs. Travel and Related. Travel and related expenses for nine months ended December 31, 2000 were $71,711 compared with the comparable period in the previous year of $205,566, which related to travel for raising capital and business development activities. Liquidity and Capital Resources In their independent auditor's report dated March 15, 2002, Davidson & Co., our auditors, expressed substantial doubt about our ability to continue as a going concern due to our lack of working capital for our planned business activities. We currently do not have sufficient working capital to meet our on-going obligations. As of December 31, 27 2001, we had cash and cash equivalents of $26,615 and a working capital deficit of $493,912 which includes current liabilities of $520,527. During the year ended December 31, 2001, we received no significant revenues from our operations and we used net cash of $913,199. Our use of cash during such period was primarily as a result of expenses related to salary expenses, professional fees and expenses related to general administrative expenses and overhead. We anticipate that our working capital needs will increase during 2002, as we plan to implement our business strategy related to marketing cash cards to pawnbrokers and to launch our financial services product. We will continue to incur losses until we can generate revenues from financings and sales of cash card systems. We do not anticipate we will begin to generate any significant revenues until we can offer our financial services, which is not anticipated to occur until the third or fourth quarter of 2002, assuming sufficient financing is available. On May 11, 2001, we entered into agreements with three note holders to convert $1,500,000 owed to them into shares of our common stock at $0.50 per share (post reverse-split). The market price of our common stock as quoted on the NASD Over-the-Counter Bulletin Board was $0.15 on May 11, 2001 (after giving effect to the reverse-split). Under the terms of these agreements, we issued 30,000,000 shares of our common stock to the following note holders: 2,000,000 shares to BWI Avionics Ltd., 600,000 shares to Granite Communications Inc., and 400,000 shares to Eurogrowth Investments Ltd. BWI Avionics Ltd., Granite Communications Inc., and Eurogrowth Investments Ltd. are non-U.S. persons and the shares were issued outside the United States in reliance upon an exemption from registration available under Regulation S of the Securities Act of 1933, as amended. During 2001, we financed our operations by issuing approximately $404,000 in convertible debentures, due December 31, 2003, and bearing interest at the rate of 18% per annum. We also borrowed $225,000 evidenced by promissory notes as follows: $20,000 promissory note, payable on demand without interest; $80,000 promissory note, payable December 31, 2003, bearing interest at 18% per annum; $25,000 promissory note, payable October 19, 2001 (paid), bearing interest at 18% per annum; and $100,000 promissory note, payable February 21, 2002, bearing interest at 18% per annum. During 2001, we also negotiated with several creditors to recover operating expenses of $156,178 and settle debt resulting in a gain of $84,471. We are in the process of seeking sufficient financing to implement our business strategy. Our ability to raise additional financing will be contingent on our ability to successfully generate revenues from our cash card marketing and financial services business strategies. If adequate funds are not available, we will be required to sell or liquidate our business or file bankruptcy. We estimate that our minimum cash requirements to implement our plan of operation for financial service loan offerings is between approximately $3 million to $9 million, primarily for capital to provide loans to qualified pawnbrokers, expenses related to general over head and administration, regulatory research and licensing, 28 preparing documents, forms and procedures to offer our planned financial services, and costs related to marketing our financial and revenue generating services. We cannot assure you that we will be able to obtain sufficient financing to fund our working capital needs on acceptable terms, if at all. We cannot assure you that our actual expenditures 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: o the costs to complete the regulatory research and obtain licenses to operate our financial services business, o our ability to successfully complete financing transactions with pawnbrokers, the availability of financing on acceptable terms, o reliability of the assumptions of management in estimating cost and timing, competition; and o other factors that may be beyond our control. We cannot assure you that we will generate sufficient revenues from our operations to earn a profit or that our planned service offerings will be commercially successful. Our inability to successful implement our business plan or generate revenues from financial services will have a material adverse affect on our business and results of operations. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We intend to transact our business in United States Dollars, and we anticipate that we will have no material risks resulting from sales commitments, inventory or similar items. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements listed under the heading "(a)(1) Financial Statements" of Item 14 herein, are included immediately following this page. 29 DAVIDSON & COMPANY Chartered Accountants A Partnership of Incorporated Professionals INDEPENDENT AUDITORS' REPORT To the Directors and Stockholders of Pawnbroker.com, Inc. (A Development Stage Company) We have audited the accompanying consolidated balance sheets of Pawnbroker.com, Inc. (A Development Stage Company) as at December 31, 2001 and 2000 and the related consolidated statements of operations, stockholders' deficiency and cash flows for the years ended December 31, 2001 and March 31, 2000, the period from April 1, 2000 to December 31, 2000, the period from February 5, 1999 to March 31, 1999 and the cumulative amounts from February 5, 1999 to December 31, 2001. 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 audits. We conducted our audits 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 audits provide a reasonable basis for our opinion. In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of Pawnbroker.com, Inc. (A Development Stage Company) as at December 31, 2001 and 2000 and the results of its operations and its cash flows for the years ended December 31, 2001 and March 31, 2000, the period from April 1, 2000 to December 31, 2000, the period from February 5, 1999 to March 31, 1999 and the cumulative amounts from February 5, 1999 to December 31, 2001 in conformity with generally accepted accounting principles in the United States of America. The accompanying financial statements have been prepared assuming that Pawnbroker.com, Inc. (A Development Stage Company) 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. "DAVIDSON & COMPANY" Vancouver, Canada Chartered Accountants March 15, 2002 A Member of SC INTERNATIONAL 1200 - 609 Granville Street, P.O. Box 10372, Pacific Centre, Vancouver, BC, Canada, V7Y 1G6 Telephone (604) 687-0947 Fax (604) 687-6172 30 PAWNBROKER.COM, INC. (A Development Stage Company) CONSOLIDATED BALANCE SHEETS AS AT DECEMBER 31 ============================================================= 2001 2000 ---------------------------------------------------------------------- ASSETS Current Cash and cash equivalents $ 26,615 $ 231,763 Prepaid expenses - 754 ------------ -------------- Total current assets 26,615 232,517 Deposits - 1,695 Capital assets (Note 4) 144,736 615,350 Domain name (Note 5) 17,361 59,029 ------------ -------------- Total assets $ 188,712 $ 908,591 ===================================================== ================= - Continued - The accompanying notes are an integral part of these consolidated financial statements. 31 PAWNBROKER.COM, INC. (A Development Stage Company) CONSOLIDATED BALANCE SHEETS AS AT DECEMBER 31 ================================================================================ 2001 2000 ----------------------------------------------------------------------------------------------------- Cont'd... LIABILITIES AND STOCKHOLDERS' DEFICIENCY Current liabilities Accounts payable and accrued liabilities $ 375,527 $ 815,727 Notes payable (Note 6) 145,000 1,500,000 ------------ ----------- Total current liabilities 520,527 2,315,727 Notes payable (Note 6) 80,000 - Convertible notes (Note 7) 404,000 - ------------ ----------- 1,004,527 2,315,727 Stockholders' deficiency Capital stock (Note 8) Authorized 20,000,000 preferred shares with a par value of $0.0001 60,000,000 common shares with a par value of $0.0001 Issued and outstanding December 31, 2001 - 5,027,870 common shares December 31, 2000 - 2,070,357 common shares 503 207 Additional paid-in capital 9,250,167 7,634,597 Deficit accumulated during the development stage (10,066,485) (9,041,940) ------------ ----------- Total stockholders' deficiency (815,815) (1,407,136) ------------ ----------- Total liabilities and stockholders' deficiency $ 188,712 $ 908,591 ======================================================================================================

History and organization of the Company (Note 1) Commitments (Note 12) Subsequent event (Note 14) The accompanying notes are an integral part of these consolidated financial statements. 32 PAWNBROKER.COM, INC. (A Development Stage Company) CONSOLIDATED STATEMENTS OF OPERATIONS ================================================================================ Cumulative Amounts From Period From Period From Period From February 5, April 1, April 1, February 5, 1999 to Year Ended 2000 to 1999 to Year Ended 1999 to December 31, December 31, December 31, December 31, March 31, March 31, 2001 2001 2000 1999 2000 1999 ------------------------------------------------------------------------------------------------------------------------------ (Unaudited) OPERATING EXPENSES Amortization $ 646,471 $ 183,879 $ 356,608 $ 151,026 $ 105,984 $ - General and administrative 8,766,463 635,841 3,573,649 1,747,355 4,556,973 - Stock-based compensation 378,685 - 285,068 - 93,617 - ------------- ------------- ------------- ------------- ------------ ---------- 9,791,619 819,720 4,215,325 1,898,381 4,756,574 - ------------- ------------- ------------- ------------- ------------ ---------- OTHER ITEMS Interest expense 191,758 44,822 146,936 - - - Interest income (80,078) (3,183) (26,430) (37,747) (50,465) - Loss on disposal of capital assets 176,983 176,983 - - - - Write-off of capital assets 70,674 70,674 - - - - ------------- ------------- ------------- ------------- ------------ ---------- 359,337 289,296 120,506 (37,747) (50,465) - ------------- ------------- ------------- ------------- ------------ ---------- Extraordinary item Gain on settlement of debt (84,471) (84,471) - - - - ------------- ------------- ------------- ------------- ------------ ---------- Loss for the period $(10,066,485) $ (1,024,545) $(4,335,831) $ (1,860,634) $(4,706,109) $ - ============================================================================================================================= Basic and diluted loss per common share $ (0.25) $ (2.38) $ (1.25) $ (3.09) $ - ============================================================================================================================= Weighted average number of shares of common stock outstanding 4,178,454 1,823,291 1,486,645 1,522,029 1,124,750 =============================================================================================================================

The accompanying notes are an integral part of these consolidated financial statements. 33 PAWNBROKER.COM, INC. (A Development Stage Company) CONSOLIDATED STATEMENTS OF CASH FLOWS ================================================================================ Cumulative Amounts From Period From Period From Period From February 5, April 1, April 1, February 5, 1999 to Year Ended 2000 to 1999 to Year Ended 1999 to December 31, December 31, December 31, December 31, March 31, March 31, 2001 2001 2000 1999 2000 1999 ------------------------------------------------------------------------------------------------------------------------------ (Unaudited) CASH FLOWS FROM OPERATING ACTIVITIES Loss for the period $(10,066,485) $ (1,024,545) $ (4,335,831) $(1,860,634) $(4,706,109) $ - Items not affecting cash: Amortization 646,471 183,879 356,608 151,026 105,984 - Stock-based compensation 378,685 - 285,068 - 93,617 - Loss on disposal of assets 176,983 176,983 - - - - Write-off of capital assets 70,674 70,674 - - - - Recovery of operating expenses (156,178) (156,178) - - - - Gain on settlement of debt (84,471) (84,471) - - - - Interest accrued on notes payable 102,500 44,822 102,500 - - - Wage paid by common stock - - 113,300 - - - Net change in non-cash working capital items: (Increase) decrease in prepaid expenses - (754) 5,264 (3,106) (6,018) - Increase (decrease) in accounts payable and accrued liabilities 1,319,849 (123,609) (408,932) 170,935 1,116,971 - (Increase) decrease in accounts receivable - - - - 80,500 (80,500) ------------- ------------- ------------- ------------ ------------ ----------- Net cash used in operating activities (7,611,972) (913,199) (3,882,023) (1,541,779) (3,315,055) (80,500) ------------- ------------- ------------- ------------ ------------ -----------

- Continued - The accompanying notes are an integral part of these consolidated financial statements. 34 PAWNBROKER.COM, INC. (A Development Stage Company) CONSOLIDATED STATEMENTS OF CASH FLOWS ================================================================================ Cumulative Amounts From Period From Period From Period From February 5, April 1, April 1, February 5, 1999 to Year Ended 2000 to 1999 to Year Ended 1999 to December 31, December 31, December 31, December 31, March 31, March 31, 2001 2001 2000 1999 2000 1999 ------------------------------------------------------------------------------------------------------------------------------ (Unaudited) Cont'd... CASH FLOWS FROM INVESTING ACTIVITIES Purchase of capital assets (1,011,971) - (569,938) (506,048) (442,033) - Purchase of domain name (125,000) - - (125,000) (125,000) - Acquisition of cash on purchase of subsidiary 8,007 - - 8,007 8,007 - Proceeds from disposal of capital assets 80,746 80,746 - - - - (Increase) decrease in deposits (1,695) (1,695) 204,046 (1,313) (205,741) - ------------- ------------- ------------- ------------ ------------ ----------- Net cash provided by (used in)investing activities (1,049,913) 79,051 (365,892) (624,354) (764,767) - ------------- ------------- ------------- ------------ ------------ ----------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of common stock 6,559,500 - 2,055,000 3,003,000 4,504,500 80,500 Proceeds from convertible debenture 404,000 404,000 500,000 - - - Proceeds from notes payable (net) 1,725,000 225,000 1,500,000 - - - ------------- ------------- ------------- ------------ ------------ ----------- Net cash provided by financing activities 8,688,500 629,000 4,055,000 3,003,000 4,504,500 80,500 ------------- ------------- ------------- ------------ ------------ ----------- Change in cash and cash equivalents for the period 26,615 (205,148) (192,915) 836,867 424,678 - Cash and cash equivalents, beginning of period - 231,763 424,678 80,500 - - ------------- ------------- ------------- ------------ ------------ ----------- Cash and cash equivalents, end of period $ 26,615 $ 26,615 $ 231,763 $ 917,367 $ 424,678 $ - ==============================================================================================================================

Supplemental disclosure with respect to cash flows (Note 11) The accompanying notes are an integral part of these consolidated financial statements. 35 PAWNBROKER.COM, INC. (A Development Stage Company) CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIENCY ================================================================================ Deficit Accumulated Common Stock Additional During the Total -------------------------- Paid-in Development Stockholders' Shares Amount Capital Stage Equity ------------------------------------------------------------------------------------------------------------------------------- Balance, February 5, 1999 - $ - $ - $ - $ - Common stock issued for cash 850,000 85 80,415 - 80,500 ----------- ---------- ----------- ------------- ------------ Balance, March 31, 1999 850,000 85 80,415 - 80,500 Capital stock of Pawnbroker.com, Inc. at April 6, 1999 112,475 11 26,257 - 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) 624,000 62 - - 62 Common stock issued for cash 130,000 13 3,002,987 - 3,003,000 Share cancellation (25,000) (3) (247) - (250) Common stock issued on exercise of share purchase warrants 65,000 7 1,501,493 - 1,501,500 Stock-based compensation for options issued to consultants and non-employees - - 93,617 - 93,617 Loss for the year - - - (4,706,109) (4,706,109) ----------- ---------- ----------- ------------- ------------ Balance, March 31, 2000 1,756,475 175 4,681,261 (4,706,109) (24,673) Common stock issued for conversion of convertible debenture 26,882 3 499,997 - 500,000 Common stock issued for cash 100,000 10 1,999,990 - 2,000,000 Common stock issued on exercise of stock options 187,000 19 168,281 - 168,300 Stock-based compensation for options issued to consultants and non-employees - - 285,068 - 285,068 Loss for the period - - - (4,335,831) (4,335,831) ----------- ---------- ----------- ------------- ------------ Balance, December 31, 2000 2,070,357 207 7,634,597 (9,041,940) (1,407,136) Common stock issued on exercise of stock options 10,000 1 8,999 - 9,000 Common stock issued to settle debt 3,000,000 300 1,653,804 - 1,654,104 Share cancellation (52,487) (5) (47,233) - (47,238) Loss for the year - - - (1,024,545) (1,024,545) ----------- ---------- ----------- ------------- ------------ Balance, December 31, 2001 5,027,870 $ 503 $9,250,167 $(10,066,485) $ (815,815) ===============================================================================================================================

The accompanying notes are an integral part of these consolidated financial statements. 36 PAWNBROKER.COM, INC. (A Development Stage Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 ================================================================================ 1. HISTORY AND ORGANIZATION OF THE COMPANY Digital Sign Corporation ("the Company), a Delaware corporation, was incorporated on February 13, 1998. On February 14, 1998, the Company issued 2,500 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 850,000 common shares of the Company. Effective June 14, 1999, the Company acquired all of the issued and outstanding shares of Pawnbroker.com, Inc. (a Nevada corporation), in exchange for 624,000 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 850,000 common shares. As a result of the share exchange, control of the combined companies passed to the former shareholders of Eriko. This type of share exchange has been accounted for as a capital transaction accompanied by a recapitalization of Eriko. Recapitalization accounting results in consolidated financial statements being issued under the name of Pawnbroker.com, Inc., but are considered a continuation of Eriko. As a result, the financial statements present Eriko's results of operations from February 5, 1999 to March 31, 1999 and the consolidated financial position of the companies as at December 31, 2001 and 2000, the results of operations of Eriko for the year ended December 31, 2001, the period from April 1, 2000 to December 31, 2000, the year ended March 31, 2000 and the period from April 1, 1999 to December 31, 1999 and the results of operations of Pawnbroker.com, Inc., (Nevada) and Digital Signs Inc. from their respective dates of acquisition during the year. The number of shares outstanding at December 31, 2001 and 2000 as presented are those of Pawnbroker.com, Inc. The Company is a development stage company. During 2001, the Company changed its business from an on line provider of previously-owned high value merchandise to providing financial services to pawnbrokers. 2. GOING CONCERN The Company's consolidated 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, as shown in the accompanying consolidated financial statements, the Company has sustained substantial losses from operations since inception and has no current source of revenue. In addition, the Company has used, rather than provided, cash in its operations. The Company has utilized all of its available funding. Without realization of additional capital, it would be unlikely for the Company to continue as a going concern. It is management's plan in this regard to obtain additional working capital through equity financings. The Company is in the process of restructuring its business and developing a new business plan and strategy under which it intends to provide financial services by offering secured loans to pawnbrokers and to operate a web site that provides pawnbroker industry specific business-to-business services. The Company is in the process of finalizing a business plan and attempting to restructure its liabilities to allow it to raise financing to fund the development of its planned business and its working capital requirements. Over the next twelve months, the Company plans to raise cash through additional debt and equity financing. The Company currently does not have sufficient working capital to finance its planned business strategy and may be unable to continue as a going concern. 37 PAWNBROKER.COM, INC. (A Development Stage Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 ================================================================================ 2. GOING CONCERN (cont'd...) The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue in existence. On March 1, 2001, the Company terminated facilitating transactions on their website and suspended operations. ==================================================================================== December 31, December 31, 2001 2000 ------------------------------------------------------------------------------------ Deficit accumulated during the development stage $ (10,066,485) $ (9,041,940) Working capital deficiency (493,912) (2,083,210) ====================================================================================

3. SIGNIFICANT ACCOUNTING POLICIES Principles of consolidation These consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Digital Signs, Inc., Eriko Internet Inc. and Pawnbroker.com, Inc. (a Nevada corporation). All significant inter-company balances and transactions have been eliminated upon consolidation. 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 and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the year. Actual results could differ from these estimates. Cash and cash equivalents The Company considers all investments with a maturity of three months or less to be cash equivalents. Loss per share Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share" requires basic and diluted earnings per share to be presented. Basic earnings per share is computed by dividing income available to common shareholders by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share takes into consideration shares of common stock outstanding (computed under basic earnings per share) and potentially dilutive shares of common stock. 38 PAWNBROKER.COM, INC. (A Development Stage Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 ================================================================================ 3. SIGNIFICANT ACCOUNTING POLICIES (cont'd...) Income taxes Income taxes are provided in accordance with SFAS 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 expense (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. Comparative figures Certain comparative figures have been reclassified to conform with the presentation adopted for the current year. Accounting for derivative instruments and hedging activities Effective August 31, 2000, the Company adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended. This statement requires companies to record derivatives on the balance sheet as assets or liabilities at their fair value. In certain circumstances, changes in the value of such derivatives may be required to be recorded as gains or losses. The impact of this statement did not have a material effect on the Company's consolidated financial statements. Recent accounting pronouncements In July 2001, the FASB issued SFAS No. 141, "Business Combinations", and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that the purchase method of accounting be used for all future business combinations and specifies criteria that intangible assets acquired in a business combination must meet to be recognized and reported apart from goodwill. SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS No. 142. SFAS No. 142 will also require that intangible assets with estimable useful lives be amortized over their respective estimated useful lives, and reviewed for impairment in accordance with SFAS No. 121. The Company adopted the provisions of SFAS 141 and SFAS 142 as of July 1, 2001. In July 2001, the FASB issued Statement of Financial Accounting Standards No. 143 ("SFAS 143") "Accounting for Asset Retirement Obligations" that records the fair value of the liability for closure and removal costs associated with the legal obligations upon retirement or removal of any tangible long-lived assets. The initial recognition of the liability will be capitalized as part of the asset cost and depreciated over its estimated useful life. SFAS 143 is required to be adopted effective January 1, 2003. In August 2001, the FASB issued Statement of Financial Accounting Standards No. 144 ("SFAS 144") "Accounting for the Impairment or Disposal of Long-Lived Assets" that supersedes Statement of Financial Accounting Standards No. 121 "Accounting for the Impairment or Disposal of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS 144 is required to be adopted effective January 1, 2002. 39 PAWNBROKER.COM, INC. (A Development Stage Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 ================================================================================ 3. SIGNIFICANT ACCOUNTING POLICIES (cont'd...) Recent accounting pronouncements (cont'd...) The adoption of these new pronouncements is not expected to have a material effect on the Company's financial position or results of operations. Stock-based compensation SFAS 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. The Company accounts for stock-based compensation issued to non-employees in accordance with the provisions of SFAS No. 123 and the Emerging Issues Task Force consensus in Issue No. 96-18 ("EITF 96-18"), "Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring or in Conjunction with Selling, Goods or Services". 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 are recorded at cost less accumulated amortization. The cost of capital assets is amortized using the straight-line method over the following estimated useful lives of the related assets: Furniture and fixtures 5 years Computer equipment 3 years Computer software 1.5 years Leasehold improvements 2 years Domain name The cost of domain name rights is being amortized over 3 years from the date of commencement of operations. 40 PAWNBROKER.COM, INC. (A Development Stage Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 ================================================================================ 3. SIGNIFICANT ACCOUNTING POLICIES (cont'd...) 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 advertising in the period in which the advertising space or airtime is used. Financial instruments The Company's financial instruments consists of cash and cash equivalents, accounts payable and accrued liabilities and notes payable. Unless otherwise noted, it is management's opinion that the Company is not exposed to significant interest, currency or credit risks arising from these financial instruments. The fair value of these financial instruments approximate their carry values, unless otherwise noted. 4. CAPITAL ASSETS ========================================================================================================== 2001 2000 ------------------------------------- -------------------------------------- Accumulated Net Accumulated Net Cost Amortization Book Value Cost Amortization Book Value ---------------------------------------------------------------------------------------------------------- Furniture and fixtures $ 64,970 $ (30,533) $ 34,437 $ 64,970 $ (17,538) $ 47,432 Computer equipment 224,994 (116,578) 108,416 666,629 (163,643) 502,986 Computer software 275,381 (275,381) - 275,381 (214,315) 61,066 Leasehold improvements 4,990 (3,107) 1,883 4,990 (1,124) 3,866 ---------- ------------- ---------- ----------- ------------ --------- $ 570,335 $ (425,599) $ 144,736 $1,011,970 $ (396,620) $ 615,350 ==========================================================================================================

5. DOMAIN NAME ======================================================================== 2001 2000 ---------------------------------------- ---------------- -------------- Domain name $ 125,000 $ 125,000 Less: Accumulated amortization (107,639) (65,971) -------------- ------------ $ 17,361 $ 59,029 ======================================================================== 41 PAWNBROKER.COM, INC. (A Development Stage Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 ================================================================================ 6. NOTES PAYABLE =========================================================================================================== 2001 2000 ----------------------------------------------------------------------------------------------------------- Line of credit from BWI Avionics Ltd., bearing interest at 12% per annum, due and payable on May 1, 2001. The note is personally guaranteed by two directors of the Company up to $500,000 each. During the year, the Company converted the debt into 2,000,000 common shares of the Company. $ - $ 1,000,000 Promissory note from Granite Communications Inc., bearing interest at 10% per annum, payable on July 15, 2001. During the year, the Company converted the debt into 600,000 common shares of the Company. - 300,000 Loan payable from Eurogrowth Investments Ltd., bearing interest at 12% per annum, payable on July 15, 2001. During the year, the Company converted the debt into 400,000 common shares of the Company. - 200,000 Promissory note from Pacific Pawnbroker, non-interest bearing, unsecured and payable on demand. 20,000 - Promissory note from various parties, bearing interest at 18% per annum, unsecured, and payable on December 31, 2003. 80,000 - Promissory note, bearing interest at 18% per annum, unsecured, and payable on October 19, 2001 (repaid subsequent to year end). 25,000 - Promissory note, bearing interest at 18% per annum, unsecured, and payable on February 21, 2002. 100,000 - ------------ ------------ 225,000 $ 1,500,000 Less: current portion (1,500,000) ------------ ------------ (145,000) $ 80,000 $ - ===========================================================================================================

7. CONVERTIBLE NOTES =========================================================================================================== 2001 2000 ----------------------------------------------------------------------------------------------------------- Convertible debentures from various parties, bearing interest at 18% per annum, unsecured, and payable on December 31, 2003, convertible into 808,000 common shares of the Company. 404,000 $ - ===========================================================================================================

42 PAWNBROKER.COM, INC. (A Development Stage Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 ================================================================================ 8. CAPITAL STOCK On April 6, 1999, Pawnbroker acquired all the issued and outstanding share capital of Eriko Internet Inc. As consideration, Pawnbroker issued 850,000 common shares for cash proceeds of $80,500. On May 19, 1999, a shareholder of Pawnbroker surrendered 25,000 shares of common stock which were initially issued as part of the total shares issued for the acquisition of Eriko Internet Inc. Capital stock and contributed surplus have been reduced by $1 and $249 respectively to eliminate the values initially recorded on issuance. On June 14, 1999, Pawnbroker acquired all of the issued and outstanding share capital of Pawnbroker.com, Inc., a Nevada Corporation. As consideration, Pawnbroker issued 624,000 common shares at a deemed value of $62, equal to the par value of the shares issued. On June 23, 1999, the Company issued 130,000 units through a private placement at a price of $23.10 per unit, for total proceeds of $3,003,000. Each unit consisted of one common share and one-half of a share purchase warrant. One full share purchase warrant entitled the holder to acquire one additional common share at a price of $23.10 per share until September 23, 2000 and at a price of $29.00 per share until September 23, 2001. These share purchase warrants were exercised during the year ended March 31, 2000 for total proceeds of $1,501,500. On August 17, 2000, the Company issued 100,000 units through a private placement at a price of $20.00 per unit, for total proceeds of $2,000,000. Each unit consisted of one common share and one non-transferable share purchase warrant. One purchase warrant entitles the holder to acquire one additional common share at a price of $30.00 per share until August 10, 2001. On September 7, 2000, the Company converted the 9% convertible debenture in the aggregate principal amount of $500,000 into 26,882 common shares of the Company at a price of $18.60 per share. In December, 2000, the Company issued 187,000 common shares upon exercise of stock options at a price of $0.90 per share. On January 30, 2001, the Company issued 10,000 common shares upon exercise of stock options at a price of $0.90 per share. On April 17, 2001, the company issued 3,000,000 common shares of the Company to settle notes payable in the amount of $1,500,000 plus accrued interest of $154,104. On August 1, 2001, the Company consolidated its capital stock on a 10:1 basis. All capital stock numbers and per share amounts have been restated to reflect this consolidation. On August 3, 2001, a shareholder of Pawnbroker surrendered 52,487 shares of common stock which were initially issued by exercise of stock options. Capital stock and contributed surplus have reduced by $5 and $47,233, respectively, to eliminate the value initially recorded on issuance. The Company has formed a Stock Option Plan ("Plan") under which it may grant stock options to employees and officers to acquire up to a total of 800,000 shares of the Company's common stock, at a price to be determined by the Plan administrator. 43 PAWNBROKER.COM, INC. (A Development Stage Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 ================================================================================ 9. STOCK OPTIONS AND WARRANTS At December 31, 2001, incentive stock options were outstanding enabling the optionee to acquire the following number of common shares: ============================================================================================================== Number Exercise of Shares Price Expiry Date -------------------------------------------------------------------------------------------------------------- 25,000 $ 67.50 November 1, 2002 15,000 67.50 3 years from the date when the Company receives a specified amount of financing in private or public offerings after November 1, 1999. 8,200 67.50 September 1, 2002 93,010 45.00 - 81.30 3 years from the initial vesting dates of the stock options, over periods ranging from September 13, 2002 to March 15, 2003. 5,000 15.30 September 25, 2003 ==============================================================================================================

The following warrants enabling the holders to acquire the following number of common shares were outstanding at December 31, 2001: ====================================================== Number Exercise of Shares Price Expiry Date ------------------------------------------------------ 7,200 $ 67.50 May 10, 2003 5,882 48.90 June 7, 2003 33,426 35.90 July 7, 2003 150,000 20.00 October 11, 2005 ====================================================== 10. STOCK BASED COMPENSATION EXPENSE SFAS 123, "Accounting for Stock-Based Compensation", encourages but does not require companies to record compensation cost for stock-based employee compensation plans at fair value. The Company has chosen to account for stock-based compensation using Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees". Accordingly, compensation cost for stock options is measured as the excess, if any, of quoted market price of the Company's stock at the date of grant over the option price. The Company accounts for stock issued to non-employees in accordance with the provisions of SFAS 123 and the Emerging Issues Task Force consensus in Issue No. 96-18, "Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring or in Conjunction with Selling, Goods or Services". 44 PAWNBROKER.COM, INC. (A Development Stage Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 ================================================================================ 10. STOCK BASED COMPENSATION EXPENSE (cont'd...) Following is a summary of the stock option activity: ========================================================================= Weighted Average Number Exercise of Shares Price ------------------------------------------------------------------------- Outstanding at March 31, 1999 - $ - Granted 40,000 67.50 Forfeited - - Exercised - - --------- Outstanding at March 31, 2000 40,000 67.50 Granted 499,667 40.90 Forfeited (193,557) 71.00 Exercised (187,000) 0.90 --------- Outstanding at December 31, 2000 159,110 77.40 Forfeited (2,900) 52.30 Exercised (10,000) 0.90 --------- Outstanding at December 31, 2001 146,210 67.40 ========================================================================= Following is a summary of the status of options outstanding at December 31, 2001: ========================================================================================= Outstanding Options Exercisable Options ------------------------------------ ------------------------ Weighted Average Weighted Weighted Remaining Average Average Contractual Exercise Exercise Exercise Price Number Life Price Number Price ----------------------------------------------------------------------------------------- $ 67.50 40,000 0.82 $ 67.50 25,000 $ 67.50 45.00 - 81.30 93,010 0.81 67.10 49,437 65.60 67.50 8,200 0.66 67.50 5,466 67.50 15.30 5,000 1.73 15.30 2,083 15.30 =========================================================================================

45 PAWNBROKER.COM, INC. (A Development Stage Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 ================================================================================ 10. STOCK BASED COMPENSATION EXPENSE (cont'd...) Compensation The Company has granted 53,200 options to consultants and non-employees which are accounted for under SFAS 123 and EITF 96-18. Accordingly, using the Black-Scholes option pricing model, the options are marked to fair value through charges to operations as stock-based compensation. Stock-based compensation recognized during the year ended December 31, 2001 was $Nil (December 31, 2000 - $285,068; March 31, 2000 - $93,617; December 31, 1999 - $Nil; March 31, 1999 - $Nil). The Company has 93,010 options granted to employees outstanding at December 31, 2001. These options are accounted for using Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees". Had compensation expense relating these options been recognized on the basis of fair value pursuant to Statement of Financial Accounting Standard No. 123, net loss and loss per share would have been adjusted as follows: ===================================================================================================================== Period From Period From Period From April 1, April 1, February 5, Year Ended 2000 to 1999 to Year Ended 1999 to December 31, December 31, December 31, March 31, March 31, 2001 2000 1999 2000 1999 --------------------------------------------------------------------------------------------------------------------- (Unaudited) Loss for the period As reported $ (1,024,545) $ (4,335,831) $ (1,860,634) $ (4,706,109) $ - =============== ================ ================ =============== ================ Pro-forma $ (1,024,545) $ (7,978,011) $ (1,860,634) $ (4,706,109) $ - =============== ================ ================ =============== ================ Basic and diluted loss per share As reported $ (0.25) $ (0.24) $ (0.13) $ (0.31) $ - =============== ================ ================ =============== ================ Pro-forma $ (0.25) $ (0.44) $ (0.13) $ (0.31) $ - =====================================================================================================================

The fair value of each option granted is estimated using the Black-Scholes Model. The assumptions used in calculating fair values are as follows: ===================================================================================================================== Period From Period From Period From April 1, April 1, February 5, Year Ended 2000 to 1999 to Year Ended 1999 to December 31, December 31, December 31, March 31, March 31, 2001 2000 1999 2000 1999 --------------------------------------------------------------------------------------------------------------------- (Unaudited) Risk-free interest rate - 6.51% - 5.94% - Expected life of the options - 3 years - 1 year - Expected volatility - 161.15% - 32% - Expected dividend yield - - - - =====================================================================================================================

46 PAWNBROKER.COM, INC. (A Development Stage Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 ================================================================================ 11. SUPPLEMENTAL DISCLOSURE WITH RESPECT TO CASH FLOWS ============================================================================================================== Period From Period From Period From April 1, April 1, February 5, Year Ended 2000 to 1999 to Year Ended 1999 to December 31, December 31, December 31, March 31, March 31, 2001 2000 1999 2000 1999 -------------------------------------------------------------------------------------------------------------- (Unaudited) Cash paid for income taxes $ - $ - $ - $ - $ - Cash paid for interest - 44,436 - - - ==============================================================================================================

Non-cash investing and financing transactions during the period from January 1, 2001 to December 31, 2001 were as follows: a) During the period, employee stock options were exercised to acquire 10,000 shares of common stock at a price of $0.90 per share in exchange for settlement of accounts payable totalling $9,000. b) During the period, the Company converted notes payable in the amount of $1,500,000 plus accrued interest of $154,104 into 3,000,000 common shares of the Company. c) During the period, 52,487 common shares of the Company were returned to treasury in exchange for a receivable of $47,238. Non-cash investing and financing transactions during the period from April 1, 2000 to December 31, 2000 were as follows: a) During the period, employee stock options were exercised to acquire 1,258,889 common shares at a price of $0.09 per share to settle outstanding wages in the amount of $113,300. Non-cash investing and financing transactions during the period from April 1, 1999 to December 31, 1999 (unaudited) were as follows: a) The Company issued 8,500,000 shares of common stock at a deemed value of $3,007 to acquired 100% of the outstanding shares of Eriko. b) The Company issued 6,240,000 shares of common stock at a deemed value of $62 to acquire 100% of the outstanding shares of Pawnbroker-Nevada. c) The Company received 250,000 shares of common stock for cancellation at a deemed value of $250. Non-cash investing and financing transactions during the year ended March 31, 2000 were as follows: a) The Company issued 8,500,000 shares of common stock at a deemed value of $3,007 to acquire 100% of the outstanding shares of Eriko. b) The Company issued 6,240,000 shares of common stock at a deemed value of $62 to acquire 100% of the outstanding shares of Pawnbroker-Nevada. 47 PAWNBROKER.COM, INC. (A Development Stage Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 ================================================================================ 11. SUPPLEMENTAL DISCLOSURE WITH RESPECT TO CASH FLOWS (cont'd...) c) The Company received 250,000 shares of common stock for cancellation at a deemed value of $250. There were no non-cash investing and financing transactions during the period from February 5, 1999 to March 31, 1999. 12. COMMITMENTS The Company leases office and production premises and certain office equipment pursuant to operating leases which expire in 2003 and 2004: Future annual lease payments are as follows: 2002 $ 109,173 2003 18,565 2004 2,038 13. INCOME TAXES Subject to certain restrictions, the Company has certain operating losses available to reduce taxable income of future years. Future tax benefits which may arise as a result of these losses and resource deductions have not been recognized in these financial statements. The Company has not recorded potential future income tax benefits of $3,422,605 in operating losses which, if unutilized, expire as follows: 2019 $ 1,898,381 2020 7,143,559 2021 1,024,545 --------------- $ 10,066,485 A reconciliation of the U.S. statutory federal income tax rate to the effective rate is as follows: ======================================================================================================================= Period From Period From Period From April 1, April 1, February 5, Year Ended 2000 to 1999 to Year Ended 1999 to December 31, December 31, December 31, March 31, March 31, 2001 2000 1999 2000 1999 ----------------------------------------------------------------------------------------------------------------------- (Unaudited) U.S. federal statutory graduated rate 34.00% 34.00% 34.00% 34.00% 34.00% State income tax rate, net of federal benefit 7.00% 7.00% 7.00% 7.00% 7.00% Net operating loss for which no tax benefit is currently available (41.00)% (41.00)% (41.00)% (41.00)% (41.00)% ------------ ---------- ---------- --------- ---------- 0.00% 0.00% 0.00% 0.00% 0.00% =======================================================================================================================

48 PAWNBROKER.COM, INC. (A Development Stage Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 ================================================================================ 13. INCOME TAXES (cont'd...) The Company's total deferred tax asset as of December 31 is as follows: =================================================================================== 2001 2000 ----------------------------------------------------------------------------------- Tax benefit of net operating loss carryforward $ 3,422,605 $ 3,074,260 Valuation allowance (3,422,605) (3,074,260) ------------ ----------- $ - $ - ===================================================================================

At December 31, 2001, deferred taxes consisted of a net tax asset of $3,422,605 due to operating loss carryforwards of $10,066,485 which was fully allowed for in the valuation allowance of $3,422,605. The valuation allowance offsets the net deferred asset for which there is no assurance of recovery. The valuation allowance will be evaluated at the end of each period, considering positive and negative evidence about whether the asset will be realized. At that time, the allowance will either be increased or reduced; reduction could result in the complete elimination of the allowance if positive evidence indicates that the value of the deferred tax asset is no longer impaired and the allowance is no longer required. 14. SUBSEQUENT EVENT Subsequent to year end, the Company obtained bridge loans in the amount of $40,000 from various parties, evidenced by convertible debentures, bearing interest at 18% per annum, and payable on December 31, 2003. 49 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES Members of the Board of Directors are elected by our shareholders. Our executive officers are appointed by and serve at the pleasure of our Board of Directors. As at December 31, 2001, the following persons were our directors and executive officers: Principal occupation and if not at present an Name and present elected director, occupation during the preceding office held Director/officer since five years --------------------------------------------------------------------------------------------------------- Joseph Schlader June 1999 Pawnbroker Executive - Director, Pacific Pawnbrokers Chairman, President and from 1981 to present. Director (1)(2) William Galine June 1999 Pawnbroker Executive - Secretary and Treasurer, Vice-President and Director, Pacific Pawnbrokers from 1984 to present. Director(1)(3) Steven Fowler(4) July 2001 Pawnbroker.com, Inc. Director of Business Development April 2000 to present; owned and operated a chain of pawnshops in Anchorage, Alaska from 1986 to 1998. --------------------------------------------------------------------------------------------------------- (1) Member of our audit committee. (2) Joseph Schlader was elected July 5, 2001 to serve as a Class B director for an initial term of two (2) years. (3) William Galine was elected July 5, 2001 to serve as a Class C director for an initial term of three (3) years. (4) Steven Fowler was elected July 5, 2001 to serve as a Class A director for an initial term of one (1) year.

The following is a brief biographical information on each of the officers and directors of listed: Joseph Schlader, Chairman, President and Director - Age 48 Joseph Schlader, who played a central role in the formation of the Pawnbroker.com (Nevada), was appointed our President and a director in June 1999. Schlader has over eighteen years experience in the pawnbroking industry. In 1981, Schlader founded Pacific Pawnbrokers in Sparks, Nevada. Since that time, Pacific Pawnbrokers has expanded its operations to four stores located in the Reno and Lake Tahoe areas. Schlader is also a graduate of the Gemological Institute of America and a member in the National Pawnbrokers' Association. William Galine, Vice-President and Director - Age 50 William Galine joined the Company as Vice-President and director in June 1999. Galine has worked in the pawn industry for the from 1984 to 1999 expanding Pacific Pawnbrokers' operations. Currently, Galine is the Secretary-Treasurer of the Nevada Pawnbrokers' Association and a member of the National Pawnbrokers' Association. Steven R. Fowler, Director of Business Development and Director - Age 45 Steven Fowler has been the Director of Business Development of Pawnbroker.com since April 2000 and directly oversees all extensions of credit made by the Company. Prior to becoming the Company's Director of Business Development, Mr. Fowler served as an advisor to the Company from September 1999 to April 2000. Mr. Fowler's experience includes experience in collateralized lending. Prior to joining Pawnbroker.com Mr. Fowler operated a mediation and negotiation business in Tuscan, Arizona. Mr. Fowler owned and operated a chain of pawnshops in Anchorage, Alaska from 1986 to 1998. Mr. Fowler is a current member of the National Pawnbrokers Association Board of Trustees. He is a former Director and member of the Board of Governors of the National Pawnbrokers Association, founder of the Anchorage Area Pawnbrokers Association, and past President of the Alaska Pawnbrokers Association. 50 DIRECTOR'S COMPENSATION Our Directors do not receive any stated salary for their services as directors or members of committees of the Board of Directors, but by resolution of the Board, a fixed fee and expenses of attendance may be allowed for attendance at each meeting. Directors may also serve our company in other capacities as an officer, agent or otherwise, and may receive compensation for their services in such other capacity. On May 3, 2000, our shareholders approved and we amended our bylaws to create a classified or staggered board of directors, which consists of three classes of directors as follows: o Class A directors serve for an initial term of one (1) year and their successor will be elected at the next annual meeting for a term of three (3) years; o Class B directors serve for an initial term of two (2) years and their successor will be elected at the annual meeting follow the expiration of their term for a term of three (3) years; and o Class C directors serve for a full term of three (3) years and their successor will be elected at the expiration of their term for a term of three (3) years. Under the amendment to the Bylaws, vacancies and newly created directorships may be filled by a majority of the remaining directors or by a majority of the shareholders, constituting a quorum at an annual or special meeting of the shareholders, and such director shall hold office until their successor is elected and qualified at the next annual meeting or until their earlier resignation or removal. Other Information 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 our 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. SEC Filings. Section 16(a) of the Securities Exchange Act of 1934 requires the Company's officers, directors and 10 percent shareholders to file reports of ownership and changes in ownership with the Securities and Exchange Commission. Officers, directors and 10 percent shareholders are required by Commission regulations to furnish the Company with all Section 16(a) reports they file. Based on information available to the Company, all Section 16(a) reports were filed on a timely manner. ITEM 11. EXECUTIVE COMPENSATION The table below shows, for the last three completed fiscal years ended December 31, 2001, 2000 and 1999, compensation paid to Pawnbroker.com's Chief Executive Officer and the four most highly paid executive officers serving at December 31, 2001 whose total annual compensation exceeded or is expected to exceed $100,000. These officers are referred to as the "Named Executive Officers." 51 Summary Compensation Table Annual Compensation Long Term Compensation(7) --------------------------------------- ----------------------------------------------- Awards Payouts ------------------------ -------------------- Name and Principal Position Year(1) Salary Bonus Other Restricted Securities LTIP(2) All Other (US$) ($) Annual Stock Underlying Payouts Compensa- Compen- Award(s) Options/ ($) tion($) sation($) ($) SARs(#) --------------------------------------------------------------------------------------------------------------------------- Joseph Schlader (2) 2001 112,892 -- -- -- -- -- -- 2000(1) 90,000 -- 5,400 -- 250,000 -- -- 1999 -- -- -- -- -- -- -- William Galine (3) 2001 91,753 -- -- -- -- -- -- 2000(1) 75,000 -- 5,400 -- 125,000 -- -- 1999 -- -- -- -- -- -- -- Steven Fowler(4) 2001 60,597 -- -- -- -- -- -- 2000(1) 61,000 -- -- -- -- -- -- 1999 -- -- -- -- -- -- -- Neil McElwee(5) 2001 -- -- -- -- -- -- 2000(1) 116,923 -- 3,600 -- 782,590 -- -- 1999 -- -- -- -- -- -- -- Greigory Park (6) 2001 -- -- -- -- -- -- -- 2000(1) 111,346 -- 5,400 -- 800,000 -- -- --------------------------------------------------------------------------------------------------------------------------- (1) Years ended March 31, 2000. The Company changed its year-end to December 31, effective December 31, 2000 (2) President from June 14, 1999 to present (3) Senior Vice-President from June 14, 1999 to present (4) Director of Business Development from August 2000 to present (5) CEO from September 12, 1999 to August 8, 2000 (6) CFO from March 9, 2000 to January 31, 2001 (7) Long-term incentive plan. We have no LTIP.

Employment Contracts On June 14, 1999, we entered into an employment agreement with Joseph Schlader, our President, for a term of three years beginning June 14, 1999 and ending June 14, 2002, provided that we may terminate Mr. Schlader's employment upon (i) three months written notice during the first year of his employment, (ii) six months notice during the second or third year of employment or (iii) at an time during his employment for cause, including conviction for criminal acts, committing acts gross negligence or breach of the employment agreement. Mr. Schlader agreed to serve full time as our President. We agreed to pay Mr. Schlader a salary of $90,000 per year increasing by 12% per year. We also agreed to grant Mr. Schlader options to acquire up to 250,000 shares of our common stock at $6.75 per share under our stock option plan vesting over 3 years. On June 14, 1999, we entered into an employment agreement with William Galine, our Vice President, for a term of three years beginning June 14, 1999 and ending June 14, 2002, provided that we may terminate Mr. Galine's employment upon (i) three months written notice during the first year of his employment, (ii) six months notice during the second or third year of employment or (iii) at an time during his employment for cause, including conviction for criminal acts, committing acts gross negligence or breach of the employment agreement. Mr. Galine agreed to serve full time as our Vice President. We agreed to pay Mr. Galine a salary of $75,000 per year increasing by 12% per year. We also agreed to grant Mr. Galine options to acquire up to 125,000 shares of our common stock at $6.75 per share under our stock option plan vesting over 3 years. On September 12, 1999, we entered into an employment agreement with Neil McElwee, our Chief Executive Officer, for a term of three years beginning September 12, 1999 and ending September 12, 2002, provided that we may terminate Mr. McElwee's employment upon (i) three months written notice during the first year of his employment, (ii) six months notice during the second or third year of employment or (iii) at an time during his employment for cause, including conviction for criminal acts, committing acts gross negligence or breach of the employment agreement. Mr. McElwee agreed to serve full time as our Chief Executive Officer. We agreed to pay Mr. McElwee a salary of $200,000 per year increasing by 12% per year. We also agreed to grant Mr. McElwee options to acquire up to 782,590 shares of our common stock at $6.75 per share under our stock option plan vesting over 3 years, and bonus options exercisable to acquire up to 1% of our issued and outstanding shares of common stock following each year of his employment. Mr. McElwee was terminated on August 10, 2000. We have received a claim from Neil McElwee, our former Chief Executive Officer, for breach of contract and wrongful termination in connection with our termination of Mr. McElwee for cause. Mr. McElwee was seeking damages in the amount of $150,000. We settled all claims for $35,000 payable in 3 installments commencing May 15, 2001. We hired Mr. Park as our Chief Financial Officer on March 9, 2000. We did not have an employment agreement with Mr. Park. Mr. Park's employment ended on January 31, 2001, 52 Option Grants The following table sets forth information regarding stock option grants to our President and four most highly compensated executive officers during the year ended December 31, 2000. The potential realizable value is calculated based on the assumption that the common stock appreciates at the annual rate shown, compounded annually, from the date of grant until the expiry of the term of the option. These numbers are calculated based on SEC requirements and do not reflect our projection or estimate of future stock price growth. Potential realizable values are computed by: o multiplying the number of shares of common stock subject to a given option by the exercise price; o assuming that the aggregate stock value derived from that calculation compounds at the annual 5% or 10% rate shown in the table for the entire term of the option; and o subtracting from that result the aggregate option exercise price. Option Grants in Last Fiscal Year Ended December 31, 2001 Individual Grants Potential Realized Value at Assumed Annual Rates of Stock Price Appreciation for Option Term ----------------------------------------------------------------------------------------------------------- (a) (b) (c) (d) (e) (f) (g) Name Number of % of Total Exercise Expiration 5% ($) 10% ($) Securities Options or Base Date Underlying Granted to Price Options Employees ($/Sh)(2)) Granted (#) in Fiscal Year(1) ----------------------------------------------------------------------------------------------------------- Joseph Schlader nil -- -- -- -- -- William Galine nil -- -- -- -- -- Steven Fowler nil -- -- -- -- --

Option Exercises The following table sets forth details of each exercise of stock options during the financial year ended December 31, 2001 by any of the Named Executive Officers, and the financial year-end value of unexercised options on an aggregate basis. Aggregated Options Exercised during the Financial Year Ended December 31, 2001 and Financial Year-End Option Values ----------------------------------------------------------------------------------------------------------------- Name Securities Aggregate Unexercised Options Value of Unexercised Acquired on Value At FY-End (#) in the Money-Options Exercise (#) Realized ($) Exercisable/ at FY-End (1) Unexercisable (3) ($) Exercisable/ Unexercisable (2) ----------------------------------------------------------------------------------------------------------------- Joseph Schlader 0 0 12,500 (exercisable) Nil (exercisable) 12,500 (unexercisable) Nil (unexercisable) William Galine 0 0 6,250 (exercisable) Nil (exercisable) 6,250 (unexercisable) Nil (unexercisable) Steven Fowler 0 0 nil n/a ----------------------------------------------------------------------------------------------------------------- (1) Based on NASD OTCBB closing price on the date of exercise. (2) In-the-money options are those where the market value of the underlying securities at the fiscal year-end exceeds the exercise price of the options. The closing price of the Company's shares on December 31, 2001, being the last day the Company's shares traded during 2001 on the NASD Over the Counter Bulletin Board, was $.08. (3) Includes Options to purchase common shares within 60 days after December 31, 2001

53 Compensation of Advisory Council Members Advisory Council Members do not currently receive cash compensation from Pawnbroker.com for their services as members of the Board of Directors, although they may be reimbursed for certain expenses in connection with attendance at council member meetings and for their efforts as council members. From time to time, certain of our council members have received grants of options to purchase shares of our common stock pursuant to the 1999 Stock Option Plan. As of December 31, 2001, we granted options exercisable to acquire a total of 8,200 shares of our common stock to members of our Advisory Council. During our fiscal year ended December 31, 2001, the Board of Directors was responsible for establishing compensation policy and administering the compensation programs of our executive officers. The amount of compensation paid by Pawnbroker.com to each of its directors and officers and the terms of those persons' employment is determined solely by the Board of Directors, except as otherwise noted below. We believe that the compensation paid to our directors and officers is fair to Pawnbroker.com. In the past, our board of directors has negotiated all executive salaries on behalf of Pawnbroker.com. Our Board of Directors believes that the use of direct stock awards is at times appropriate for employees, and in the future intends to use direct stock awards to reward outstanding service or to attract and retain individuals with exceptional talent and credentials. The use of stock options and other awards is intended to strengthen the alignment of interests of executive officers and other key employees with those of our stockholders. Stock Option Plan On October 28, 1999, our Board of Directors and a majority of our stockholders approved the 1999 Stock Option Plan. The Plan was amended on May 3, 2000, at a special meeting of our shareholders. The Plan provides for the grant of incentive stock options and non-qualified options to purchase up to 800,000 shares of common stock to officers, directors, employees, and other qualified persons selected by the Plan Administrator (which currently is the Board of Directors). The Plan is intended to help attract and retain key employees and any other persons that may be selected by the Plan Administrator and to give them an equity incentive to achieve our objectives. Incentive stock options may be granted to any individual who, at the time of grant, is an employee of Pawnbroker.com or any subsidiary. Non-qualified stock options may be granted to employees and other persons selected by the Plan Administrator. The Plan Administrator uses its discretion to fix the exercise price for options, subject to certain minimum exercise prices in the case of incentive stock options. Options will not be exercisable until they vest according to a vesting schedule specified by the Plan Administrator at the time of grant of the option. Options are non-transferable except by will or the laws of descent and distribution. With certain exceptions, vested but unexercised options terminate on the earlier of: o the expiry of the option term specified by the Plan Administrator at the date of grant (generally 10 years; or, with respect to incentive stock options granted to greater-than 10% shareholders, a maximum of five years); o the date an optionee's employment or contractual relationship with Pawnbroker.com or any subsidiary is terminated for cause; o the expiry of three months from the date an optionee's employment or contractual relationship with Pawnbroker.com or any subsidiary is terminated for any reason, other than cause, death or disability; or o the expiry of one year from the date of death of an optionee or cessation of an optionee's employment or contractual relationship by death or disability. Unless accelerated in accordance with the Plan, unvested options terminate immediately on termination of employment of the optionee by Pawnbroker.com for any reason whatsoever, including death or disability. 54 Performance Graph Set forth below is a graph comparing the cumulative total return to stockholders on the Company's common stock with the cumulative total return of the Nasdaq Composite Index for the period beginning on March 31, 1999 (the date the Company began to be actively traded on the OTCBB), and the years ended on December 31, 1999, 2000 and 2001. [Performance Graph] March 30, December 31, December 31, December 31, 1999 2000 2000 2001 -------------------------------------------------------------------------------- The Neptune Society, Inc. $100 $212 $5.76 $0.53 Nasdaq Composite Index $100 $100 $100 $100 The total return on the common stock and the Nasdaq Composite Index assumes the value of the investment was $100 on March 31, 1999, and that all dividends were reinvested, although dividends have not been declared on the Company's common stock. Return information is historical and not necessarily indicative of future performance. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Beneficial Ownership at December 31, 2001 The following table sets forth certain information concerning the number of shares of our common stock owned beneficially as of December 31, 2001 (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. ------------------------------------------------------------------------------------------------------------------ Name and Address of Amount and Nature of Title of Class Beneficial Owner Beneficial Ownership Percentage of Class(1) ------------------------------------------------------------------------------------------------------------------ William Galine, 1,312,010(2) 26.06% 85 Keystone, Suite B Common Stock Reno, Nevada 89503 Cheryl Schlader(3) 1,330,740(3) 26.4% 85 Keystone, Suite B Common Stock Reno, Nevada 89503 Joseph Schlader 1,330,740(4)(5) 26.4% 85 Keystone, Suite B Common Stock Reno, Nevada 89503 Steven Fowler nil * 85 Keystone, Suite B Common Stock Reno, Nevada 89503 Officers and Directors as 2,642,750(6) 52.37% Common Stock a Group ------------------------------------------------------------------------------------------------------------------ 5% Shareholders ------------------------------------------------------------------------------------------------------------------ Granite Communications Inc. 600,000 11.93% Tropicana Plaza, Temple Common Stock Building, Providenciales, Turks and Caicos Islands, BWI Eurogrowth Investments Ltd. 400,000 7.96% The Sea Meadow House, Common Stock Blackburn Highway, Roadtown, Tortola, British Virgin Islands, BVI ------------------------------------------------------------------------------------------------------------------ (1) Based on an aggregate of 5,027,870 shares outstanding as of December 31, 2001. (2) Includes 1,305,760 shares and 6,250 shares acquirable upon the exercise of options within sixty days of December 31, 2001. (3) Joseph Schlader and Cheryl Schlader are husband and wife. As such, each would be deemed to be the beneficial owner the other's shares. Includes 1,159,120 shares of common stock owned by Joseph Schlader. (4) Joseph Schlader and Cheryl Schlader are husband and wife. As such, each would be deemed to be the beneficial owner the other's shares. Includes 159,120 shares of common stock owned by Cheryl Schlader. (5) Includes 12,500 shares acquirable upon the exercise of options within sixty days of December 31, 2001. (6) Includes 18,750 shares acquirable upon the exercise of vested stock options as of December 31, 2001. * Less than 1%.

55 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS Joseph Schlader, a director and our President, and William Galine, a director and our Vice President, are directors of Pacific Pawnbrokers. Mr. Galine is also an officer of Pacific Pawnbrokers. Pacific Pawnbrokers has agreed to assist us in testing our Pawnbroker.com software. Pacific Pawnbrokers participated 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 also posted merchandise for sale on our web site. Pacific Pawnbrokers offered and sold merchandise on the same terms as other participating pawnshops. We also acquired the domain names "pawnbroker.com" and "pawnbrokers.com" from Pacific Pawnbrokers for $125,000. We believe that our relationship with Pacific Pawnbrokers is no less favorable to us than an arrangement with other unrelated parties at arms' length. Mr. Schlader and William Galine were founders and promoters of Pawnbroker (Nevada). We acquired Pawnbroker (Nevada) by issuing 6,240,000 shares of our common stock to Mr. Schlader, Cheryl Schlader, and Mr. Galine. These shares were issued at a nominal value of $62, which is equal to the par value of the shares and the book value of the assets of Pawnbroker (Nevada) at the time of the acquisition. Cheryl Schlader is Mr. Schlader's wife. The terms of the acquisition were negotiated, at arm's length, by our management at the time of the acquisition with Mr. Schlader, Ms. Schlader, and Mr. Galine. We were represented by separate counsel. We obtained a one million dollar ($1,000,000) loan from BWI Avionics Ltd. under an oral agreement. The Company issued a note with interest payable at the rate of twelve percent (12%) per annum. The Note is due and payable May 1, 2001, with the option of extending the term upon the agreement of BWI Avionics Ltd., William Galine, and Joseph Schlader. Each of William Galine and Joseph Schlader personally guaranteed $500,000 of the note. The Company drew down the loan for the purpose of purchasing certain equipment. This loan was converted to 20,000,000 pre-split (or 2,000,000 post-split) shares. Under the terms of a Stock Purchase Agreement dated December 21, 2001, Mr. Schlader and William Galine acquired two million (2,000,000) shares of common stock from BWI Avionics Ltd. a total purchase price of US$3,000.00, which was paid in cash. 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. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) 1. Consolidated Financial Statements The following financial statements of the Registrant and the Report of Independent Auditors thereon are included herewith in response to Item 8 above. Page ---- Report of Independent Auditors ......................................30 Consolidated Balance Sheets .........................................31 Consolidated Statements of Operations ...............................33 Consolidated Statements of Cash Flows ...............................34 Consolidated Statements of Changes in Stockholders' Deficiency ......36 Notes to the Consolidated Financial Statements ......................37 56 (2) Financial Statement Schedules All other schedules for which provisions is made in the applicable accounting regulation of the Securities and Exchange Commission have been omitted because the information required to be set forth therein is not applicable or is shown in the Financial Statements or notes thereto. (a) Exhibits. Subject to the rules regarding incorporation by reference, furnish the exhibits as required by Item 601 of Regulation S-K. Except for contracts made in the ordinary course of business, the following are the material contracts that have been entered into by Pawnbroker.com within the two years preceding the date of this annual report: Exhibit Number Description ------ ----------- 2.1(1) Agreement of Reorganization by and between Digital Sign Corporation, Edward F. Meyers III and Digital Signs, Inc. dated February 14, 1998. 2.2(1) Agreement and Plan of Share Exchange by and between Digital Sign Corporation and Eriko Internet, Inc. dated April 4, 1999. 2.3(1) Agreement and Plan of Reorganization by and among Pawnbroker.com, Inc. and Joseph Schlader, Cheryl Schlader and William Galine dated May 14, 1999. 2.4(1) Addendum to Agreement and Plan of Reorganization by and among Pawnbroker.com, Inc. and Joseph Schlader, Cheryl Schlader and William Galine dated June 11, 1999. 3.1(1) Certificate of Incorporation of Digital Sign Corporation filed February 13, 1998. 3.2(1) Certificate of Amendment of Digital Sign Corporation filed June 10, 1999. 3.3(3) Certificate of Amendment of Pawnbroker.com, Inc. filed June 1, 2000. 3.5(1) Bylaws of Digital Sign Corporation. (Previously filed as Exhibit 3.3 to Form 10) 3.6(3) Amended and Restated Bylaws of Pawnbroker.com, Inc. 5.1 Opinion of Dorsey & Whitney LLP 10.1(1) Form of Private Placement Subscription Agreement dated February 1998. 10.2(1) Contribution Agreement by and between Digital Sign Corporation and Cameron Woodbridge dated May 19, 1999. 10.3(1) Subscription Agreement by and between Pawnbroker.com, Inc. and Packard Financial Group Inc. dated June 14, 1999 10.4(1) Form of Share Purchase Warrant issued to Packard Financial Group Inc. on June 14, 1999 10.5(1) 85 Keystone Lease Agreement by and between Pawnbroker.com, Inc. and The Kowalski Family Trust dated April 1, 1999 10.6(1) Design and Development Agreement by and between Pawnbroker.com, Inc. and Banshee, Inc. dated April 26, 1999 10.7(1) Consulting Agreement by and between Pawnbroker.com, Inc. and IRG Investor Relations dated June 25, 1999 57 Exhibit Number Description ------ ----------- 10.8(2) Lease Agreement by and between Pawnbroker.com, Inc. and Don Pearlman Joint Venture Six dated December 2, 1999 10.9(2) Employment Agreement by and between Pawnbroker.com, Inc. and Neil McElwee effective September 13, 1999 10.10(2) Employment Agreement by and between Pawnbroker.com, Inc. and Joseph Schlader effective June 13, 1999 10.11(2) Employment Agreement by and between Pawnbroker.com, Inc. and William Galine effective June 13, 1999 10.12(2) Employment Agreement by and between Pawnbroker.com, Inc. and Vahid Rafizadeh 10.13(2) Severance and Release Agreement by and between Pawnbroker.com, Inc. and Daniel McElwee effective May 18, 2000 10.14(2) Letter Agreement by and between Pawnbroker.com, Inc. and Jefferies & Co., Inc. dated December 1, 1999 10.15(2) 12% Promissory Note in the Principal Amount of $1,000,000 dated April 26, 2000 issued to BWI Avionics, Ltd. 10.16(2) Agreement by and between Pawnbroker.com, Inc. and RedTagOutlet.com, Inc. dated May 10, 2000 10.17(4) Letter Agreement by and between Pawnbroker.com, Inc. and Ladenburg Thalmann & Co. Inc. dated June 7, 2000 10.18(4) Letter Agreement by and between Pawnbroker.com, Inc. and Ladenburg Thalmann & Co. Inc. dated June 7, 2000 10.19(4) Loan Agreement by and between Pawnbroker.com, Inc. and Lamothe Investing Corp. dated June 7, 2000 10.20(4) Registration Rights Agreement by and between Pawnbroker.com, Inc. and Lamothe Investing Corp. dated June 7, 2000 10.21(4) Escrow Agreement related to the Loan Agreement dated June 7, 2000 10.22(4) Form of 9% Convertible Debenture issued to Lamothe Investing Corp. 10.23(4) Form of Warrant issued to Lamothe Investing Corp. 10.29(3) Amended and Restated Stock Option Plan, filed June 1, 2000. 10.30(5) Common Stock Purchase Agreement by and between Pawnbroker.com, Inc. and Gestrow Investments Limited dated July 6, 2000 10.31(5) Registration Rights Agreement by and between Pawnbroker.com, Inc. and Gestrow Investments Limited dated July 6, 2000 10.32(5) Escrow Agreement related to the Common Stock Purchase Agreement dated July 6, 2000 10.33(5) Form of Warrant issued to Gestrow Investments Limited 10.34(5) Form of Warrant issued to Ladenburg Thalmann & Co. Inc. 10.35(5) Letter Agreement dated July 7, 2000 10.36(5) Promissory Note issued to Ladenburg Thalmamm & Co. Inc. 10.37(5) Letter Agreement with Gestrow Investment Limited dated July 19, 2000 58 Exhibit Number Description ------ ----------- 10.38(6) Sales and Fulfillment Agreement dated September 2000, by and between Jewelry Edge and Pawnbroker.com, Inc. (filed as Exhibit 10.1) 10.39(6) Subscription Agreement related to August 11, 2000 unit private placement. (filed as Exhibit 10.2) 10.40(6) Strategic Alliance Agreement, dated October 18, 2000, between First Cash Financial Services, Inc. and Pawnbroker.com, Inc. (filed as Exhibit 10.3) 10.41(6) Form of Warrant issued to First Cash Financial Services, Inc. (filed as Exhibit 10.4) 10.42(6) Strategic Alliance Agreement, dated October 18, 2000, between First Cash Financial Services, Inc. and Pawnbroker.com, Inc. (filed as Exhibit 10.3) 10.43(6) Form of Warrant issued to First Cash Financial Services, Inc. (filed as Exhibit 10.4) 10.44(7) 18% Promissory Note in the Principal Amount of $100,000 dated July 19, 2001 issued to Edward Romano. 10.45(7) Form of Subscription Agreement dated May 11, 2001 - Note Conversion 10.46 Form of 18% Convertible Promissory Notes 10.47 Independent Service Organization Agreement Alpha Cashcard Program dated April 2, 2002 21.1 Subsidiaries of the Registrant 23.1 Consent and Acknowledgement of Davidson & Co. ----------------- (1) Previously filed September 1, 1999 on Form 10. (2) Previously filed October 13, 1999 on Form 10/A. (3) Previously filed on June 1, 2000 on Form 8-K. (4) Previously filed on June 30, 2000 on Form 10-K. (5) Previously filed on July 31, 2000 on Form S-1. (6) Previously filed on November 14, 2000 on Form 10-Q. (7) Previously filed on May 15, on Form 10-K. (b) Reports on Form 8-K No current reports on Form 8-K were filed during the fourth quarter ended December 31, 2001. The following current reports on Form 8-K were filed during the year ended December 31, 2001. July 19, 2001 May 24, 2001 59 SIGNATURES KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints William Galine and Joseph Schlader, as his true and lawful attorney-in-fact and agent with full power of substitution and substitution, for him and in his name, place, and stead, in any and all capacities, to sign any or all amendments to this Annual Report on Form 10-KSB and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, grant unto said attorney-in-fact and agent, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the foregoing as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or his substitutes, may lawfully do or cause to be done by virtue hereof. In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: April 4, 2002 /s/ Joseph Schlader ------------------------------------------ President and Chairman of the Board In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date --------- ----- ---- /s/ Joseph Schlader President and Chairman of April 4, 2002 ------------------------ the Board (Principal Executive Joseph Schlader Officer; Principal Financial Officer and Accounting Officer) /s/ William Galine Vice President and Director April 4, 2002 ------------------------ William Galine /s/ Steven Fowler Director April 4, 2002 ------------------------ Steven Fowler 60 EXHIBIT INDEX Exhibit Number Description ------ ----------- 2.1(1) Agreement of Reorganization by and between Digital Sign Corporation, Edward F. Meyers III and Digital Signs, Inc. dated February 14, 1998. 2.2(1) Agreement and Plan of Share Exchange by and between Digital Sign Corporation and Eriko Internet, Inc. dated April 4, 1999. 2.3(1) Agreement and Plan of Reorganization by and among Pawnbroker.com, Inc. and Joseph Schlader, Cheryl Schlader and William Galine dated May 14, 1999. 2.4(1) Addendum to Agreement and Plan of Reorganization by and among Pawnbroker.com, Inc. and Joseph Schlader, Cheryl Schlader and William Galine dated June 11, 1999. 3.1(1) Certificate of Incorporation of Digital Sign Corporation filed February 13, 1998. 3.2(1) Certificate of Amendment of Digital Sign Corporation filed June 10, 1999. 3.3(3) Certificate of Amendment of Pawnbroker.com, Inc. filed June 1, 2000. 3.5(1) Bylaws of Digital Sign Corporation. (Previously filed as Exhibit 3.3 to Form 10) 3.6(3) Amended and Restated Bylaws of Pawnbroker.com, Inc. 5.1 Opinion of Dorsey & Whitney LLP 10.1(1) Form of Private Placement Subscription Agreement dated February 1998. 10.2(1) Contribution Agreement by and between Digital Sign Corporation and Cameron Woodbridge dated May 19, 1999. 10.3(1) Subscription Agreement by and between Pawnbroker.com, Inc. and Packard Financial Group Inc. dated June 14, 1999 10.4(1) Form of Share Purchase Warrant issued to Packard Financial Group Inc. on June 14, 1999 10.5(1) 85 Keystone Lease Agreement by and between Pawnbroker.com, Inc. and The Kowalski Family Trust dated April 1, 1999 10.6(1) Design and Development Agreement by and between Pawnbroker.com, Inc. and Banshee, Inc. dated April 26, 1999 10.7(1) Consulting Agreement by and between Pawnbroker.com, Inc. and IRG Investor Relations dated June 25, 1999 Exhibit Number Description ------ ----------- 10.8(2) Lease Agreement by and between Pawnbroker.com, Inc. and Don Pearlman Joint Venture Six dated December 2, 1999 10.9(2) Employment Agreement by and between Pawnbroker.com, Inc. and Neil McElwee effective September 13, 1999 10.10(2) Employment Agreement by and between Pawnbroker.com, Inc. and Joseph Schlader effective June 13, 1999 10.11(2) Employment Agreement by and between Pawnbroker.com, Inc. and William Galine effective June 13, 1999 10.12(2) Employment Agreement by and between Pawnbroker.com, Inc. and Vahid Rafizadeh 10.13(2) Severance and Release Agreement by and between Pawnbroker.com, Inc. and Daniel McElwee effective May 18, 2000 10.14(2) Letter Agreement by and between Pawnbroker.com, Inc. and Jefferies & Co., Inc. dated December 1, 1999 10.15(2) 12% Promissory Note in the Principal Amount of $1,000,000 dated April 26, 2000 issued to BWI Avionics, Ltd. 10.16(2) Agreement by and between Pawnbroker.com, Inc. and RedTagOutlet.com, Inc. dated May 10, 2000 10.17(4) Letter Agreement by and between Pawnbroker.com, Inc. and Ladenburg Thalmann & Co. Inc. dated June 7, 2000 10.18(4) Letter Agreement by and between Pawnbroker.com, Inc. and Ladenburg Thalmann & Co. Inc. dated June 7, 2000 10.19(4) Loan Agreement by and between Pawnbroker.com, Inc. and Lamothe Investing Corp. dated June 7, 2000 10.20(4) Registration Rights Agreement by and between Pawnbroker.com, Inc. and Lamothe Investing Corp. dated June 7, 2000 10.21(4) Escrow Agreement related to the Loan Agreement dated June 7, 2000 10.22(4) Form of 9% Convertible Debenture issued to Lamothe Investing Corp. 10.23(4) Form of Warrant issued to Lamothe Investing Corp. 10.29(3) Amended and Restated Stock Option Plan, filed June 1, 2000. 10.30(5) Common Stock Purchase Agreement by and between Pawnbroker.com, Inc. and Gestrow Investments Limited dated July 6, 2000 10.31(5) Registration Rights Agreement by and between Pawnbroker.com, Inc. and Gestrow Investments Limited dated July 6, 2000 10.32(5) Escrow Agreement related to the Common Stock Purchase Agreement dated July 6, 2000 10.33(5) Form of Warrant issued to Gestrow Investments Limited 10.34(5) Form of Warrant issued to Ladenburg Thalmann & Co. Inc. 10.35(5) Letter Agreement dated July 7, 2000 10.36(5) Promissory Note issued to Ladenburg Thalmamm & Co. Inc. 10.37(5) Letter Agreement with Gestrow Investment Limited dated July 19, 2000 Exhibit Number Description ------ ----------- 10.38(6) Sales and Fulfillment Agreement dated September 2000, by and between Jewelry Edge and Pawnbroker.com, Inc. (filed as Exhibit 10.1) 10.39(6) Subscription Agreement related to August 11, 2000 unit private placement. (filed as Exhibit 10.2) 10.40(6) Strategic Alliance Agreement, dated October 18, 2000, between First Cash Financial Services, Inc. and Pawnbroker.com, Inc. (filed as Exhibit 10.3) 10.41(6) Form of Warrant issued to First Cash Financial Services, Inc. (filed as Exhibit 10.4) 10.42(6) Strategic Alliance Agreement, dated October 18, 2000, between First Cash Financial Services, Inc. and Pawnbroker.com, Inc. (filed as Exhibit 10.3) 10.43(6) Form of Warrant issued to First Cash Financial Services, Inc. (filed as Exhibit 10.4) 10.44(7) 18% Promissory Note in the Principal Amount of $100,000 dated July 19, 2001 issued to Edward Romano. 10.45(7) Form of Subscription Agreement dated May 11, 2001 - Note Conversion 10.46 Form of 18% Convertible Promissory Notes 10.47 Independent Service Organization Agreement Alpha Cashcard Program dated April 2, 2002 21.1 Subsidiaries of the Registrant 23.1 Consent and Acknowledgement of Davidson & Co. ----------------- (1) Previously filed September 1, 1999 on Form 10. (2) Previously filed October 13, 1999 on Form 10/A. (3) Previously filed on June 1, 2000 on Form 8-K. (4) Previously filed on June 30, 2000 on Form 10-K. (5) Previously filed on July 31, 2000 on Form S-1. (6) Previously filed on November 14, 2000 on Form 10-Q. (7) Previously filed on May 15, on Form 10-K.

PAWNBROKER COM INC 10-K