U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 1
to
Form 10-SB
General Form For Registration of Securities of Small Business Issuers
Under Section 12(b) or (g) of the Securities Exchange Act of 1934
EWRX INTERNET SYSTEMS INC.
(Name of Small Business Issuer in its charter)
NEVADA 980117139
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
#301-543 Granville Street
Vancouver, BC Canada V6C 1X8
--------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Issuer's Telephone Number: 604-669-6079
Securities to be registered under Section 12(b) of the Act:
None
Securities to be registered under Section 12(g) of the Act:
Common Stock
(Title of class)
<PAGE>
TABLE OF CONTENTS
Page
----
Part 1 Item 1 Description of Business 1
Item 2 Management's Discussion and Analysis and
Results of Operation 13
Item 3 Description of Property 18
Item 4 Security Ownership of Certain Beneficial Owners
and Management 19
Item 5 Directors, Executive Officers, Promoters
and Control Persons 20
Item 6 Executive Compensation 24
Item 7 Certain Relationships and Related Transactions 25
Item 8 Description of Securities 26
Part 2 Item 1 Market Price and Dividends of the Registrant's
Common Equity and Other Shareholder Matters 26
Item 2 Legal Proceedings 27
Item 3 Changes in and Disagreement with Accountants 27
Item 4 Recent Sales of Unregistered Securities 28
Item 5 Indemnification of Directors and Officers 29
Part F/S Financial Statements 29
Part 3 Exhibit Index 30
Signatures 31
i
<PAGE>
FORWARD LOOKING STATEMENTS
WHEN USED IN THIS REGISTRATION STATEMENT, THE WORDS "EXPECT, "ANTICIPATE,"
"INTEND," "PLAN," BELIEVE," "SEEK," AND "ESTIMATE" OR SIMILAR EXPRESSIONS ARE
INTENDED TO IDENTIFY SUCH FORWARD-LOOKING STATEMENTS. HOWEVER, THIS REGISTRATION
STATEMENT ALSO CONTAINS OTHER FORWARD-LOOKING STATEMENTS. FORWARD-LOOKING
STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND ARE SUBJECT TO CERTAIN
RISKS, UNCERTAINTIES AND ASSUMPTIONS, INCLUDING, BUT NOT LIMITED TO, THE
FOLLOWING RISK FACTORS, WHICH COULD CAUSE THE COMPANY'S FUTURE RESULTS AND STOCK
VALUES TO DIFFER MATERIALLY FROM THOSE EXPRESSED IN ANY FORWARD-LOOKING
STATEMENT MADE BY OR ON BEHALF OF THE COMPANY. MANY SUCH FACTORS ARE BEYOND THE
COMPANY'S ABILITY TO CONTROL OR PREDICT. READERS ARE CAUTIONED NOT TO PUT UNDUE
RELIANCE ON FORWARD-LOOKING STATEMENTS. THE COMPANY DISCLAIMS ANY INTENT OR
OBLIGATION TO UPDATE PUBLICLY ANY AND ALL FORWARD-LOOKING STATEMENTS, WHETHER AS
RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE.
ITEM 1. DESCRIPTION OF BUSINESS
Corporate Background
- --------------------
EWRX Internet Systems Inc. (the "Company", "Registrant" or "EWRX") is a
publicly traded company. Its primary businesses are destination community
Websites, electronic commerce projects ("e-commerce") and Website development
focused in the Specialty Automotive Aftermarket defined below. EWRX was
incorporated in the State of Nevada on June 25, 1997. The shares of the Common
Stock of the Company currently trade on the OTC Bulletin Board under the trading
symbol "EWRX." The Website of the Company is ewrx.com and the logo of the
Company is "ewrx.com, Where the Net Works". The corporate office of EWRX is
located at #301-543 Granville Street, Vancouver, BC, Canada V6C 1X8 and its
telephone and fax numbers are (604) 669-6079 and (604) 669-6042.
Prior to 1999, the Company's sole business was in the resource sector and
the Company held certain mineral interests in the Ukraine. The interests were
held in a joint venture with a private Ukrainian company in the development and
production of marketing industrial garnets for abrasive applications. Due to
poor market conditions and the uncertainty of financing the development of
mineral properties located in Ukraine, the Company elected to abandon these
mineral interests in the fourth quarter of 1998.
In the first quarter of 1999, the Company made the strategic decision to
change its business direction. In particular, the Company implemented a new
business strategy to acquire, finance and operate Internet related companies
that either have existing Websites or Websites that are under development and
are capable of operating profitably. The Company believes that the substantial
growth in Internet commerce activities in recent years, when combined with
carefully selected acquisition and development opportunities, represents a
significant business opportunity. Effective May 14, 1999, shareholders approved
changing the name of the Company from Europa Resources Inc. to EWRX Internet
Systems Inc. (pronounced "e-works").
1
<PAGE>
Corporate Objective
- -------------------
The corporate objective of EWRX is to provide on the Internet services for
users within the Specialty Automotive Aftermarket with a online community where
customers can interact, acquire relevant information and have easier access to
the goods and services that are part of the Specialty Automotive Aftermarket
community.
The Specialty Automotive Aftermarket is defined as the market consisting of
automotive products added to a vehicle by choice and not need. This market
includes products to enhance the appearance, performance and enjoyment of
vehicles and excludes other products such as oil filters, sparkplugs and other
maintenance and repair items. The products sold in the market also include
customizing parts, apparel, scale models, repair books and instructions,
insurance, financing and travel services.
When evaluating the Specialty Automotive Aftermarket, EWRX found a growing
but fragmented industry made up of a large number of smaller markets that
together service millions of people who have a high degree of interest in the
products and services within this market. This market is estimated to be $20
billion per year according to SEMA (Specialty Automotive Equipment Marketing
Association), the largest automotive trade association in the world in its 1998
Market Report.
Acquisition of Classic Car Source and North Fork Publishing
- -----------------------------------------------------------
During the second quarter of 1999, the Company completed the first
acquisition as part of its new Internet-related business strategy. EWRX acquired
100% of the shares of Common Stock of Classic Car Source, Incorporated ("Classic
Car") and 100% of the shares of Common Stock of North Fork Publishing
Incorporated ("North Fork") by issuing 1.45 million shares of Common Stock of
the Company and paying $200,000 in cash. These companies were previously held
privately under common control by the principals of Classic Car and North Fork.
EWRX owns two Internet websites, Classicar.com and ClassicTruckshop.com,
("EWRX Websites") two of the larger destination Internet websites for classic
vehicle enthusiasts. Combined, the two sites average 7.5 million hits and 2.5
million page views per month. The sites contain more than 3,500 pages of content
and 93 chat groups and messages boards that are supervised by more than 30
volunteers across the United States. Users can share technical tips, information
and stories with other enthusiasts, classified advertising, monthly e-mail,
newsletters, buying and selling of parts and other products and services.
North Fork Webwrx, a Website developer provides design and consulting
services to clients in the Specialty Automotive Aftermarket. North Fork develops
and services over 70 websites and adds Website development capability to EWRX.
North Fork provides custom software and Website design services, Internet
database services and custom e-commerce software solutions to a variety of
businesses seeking to maximize the use of the Internet. North Fork provides
technical support services to Classic Car. Typically, North Fork retains the
ownership and rights to proprietary software and related systems that are
developed in conjunction with custom projects. The developed software is also
available to other users in the Internet business.
Business Objectives
- -------------------
EWRX's primary objective is to capture a portion of the $20 billion a year
Specialty Automotive Aftermarket in the next twelve months. (Reference is SEMA's
1998 Market Report.)
2
<PAGE>
To achieve the primary objective, EWRX has several short-term and
medium-term business objectives which must be completed.
1) Raise $3 million or more in capital for the immediate requirements in 1999-
2000.
EWRX intends to raise $3 million through a private placement in 1999
to be used for the re-development and re-programming of the Classicar.com
and Classictruckshop.com Websites, promotion of the EWRX Websites and to
increase the shareholder base of the Company. As of this date, $850,000 has
been raised by the Company towards this goal. See Item 2 - Management's
Discussion and Analysis and Results of Operation.
2) Complete the re-development and re-programming of Classicar.com and
Classictruckshop.com by the fourth quarter of 1999.
This work will be accomplished in conjunction with the contract with
Xceed and includes full development of e-commerce capabilities preparing
the sites for the 21st Century. As of November 2, 1999, the Company had
completed a major portion of this work.
3) Complete the development of MotorWrx.com in the first quarter of 2000.
MotorWrx.com provides a single gateway on the Internet to the EWRX
group of Websites located within the portal. EWRX intends MotorWrx.com to
be one of the largest single destination sites for the Specialty Automotive
Aftermarket on the Internet and it is planned to provide a single point
entry for automotive enthusiasts in the worldwide market.
4) Complete the development of BigBadCatalog.com, the major EWRX electronic
catalog, by mid 2000.
This work will be part of the Xceed contract for development and
programming. See Strategic Alliances and Affiliations. EWRX will be
integrating digitized standard printed catalogs for a large number of parts
manufacturers and distributors into BigBadCatalog.com. This will create a
centralized point where automotive parts can be purchased directly from
manufacturers and distributors.
5) Complete additional acquisitions, joint ventures and/or strategic alliances
of major Website-related companies by year-end 2000.
EWRX has identified and is in initial discussions and negotiations
with other Specialty Automotive Aftermarket Website companies that may be
potential acquisitions, joint venture partners or with whom to form
strategic alliances. The focus of these relationships will be to create or
acquire content-related Website communities for various aspects of the
Specialty Automotive Aftermarket. These communities are accessed through
the MotorWrx.com portal and will provide additional revenue streams.
6) Increase brand awareness for the EWRX, Motorwrx.com, ClassicCar.com,
Classictruckshop.com and related Websites and brands.
EWRX has initiated a program to significantly increase overall brand
awareness of the various EWRX Websites through a national program with
co-sponsors and significant advertising effort. In addition EWRX is
participating as a major exhibitor and speaker at the November 1999 SEMA
show in Las Vegas.
3
<PAGE>
7) Raise $25 million in capital for acquisitions, development of Websites and
e-commerce, advancement of Website development services and working
capital.
EWRX anticipates the undertaking of an offering in the public market
in the first half of 2000. The Company also anticipates that this offering
would be paralleled by an offering in Europe on an European exchange such
as the Frankfurt or London exchanges. No assurance can be given that any
such offering shall occur.
8) North Fork WebWrx Projects:
North Fork Webwrx is a leading Internet solutions provider serving the
Specialty Automotive Aftermarket with high-end web site design, Internet
database programming, custom e-commerce applications and strategic Internet
marketing consulting. With public acceptance of the Internet surging, and
business to business commerce revolutionizing the traditional distribution
system, EWRX believes North Fork is well positioned for several years of
Internet development services.
North Fork has revenue-producing projects for a variety of clients in
the following areas:
Website development. This range of service represents the largest
revenue stream and includes the design, development, and maintenance
of a wide range of business to business commerce sites, Intranet
(internal business communications) and large-scale consumer sites.
Online advertising. North Fork will continue to develop banner ads and
other online advertising projects for Classicar.com and
classictruck.com as well as the new sites within the motorwrx.com
portal (light-truck, off-road, racing, custom, etc.). In addition to
these sites demanding banner ads, there are other opportunities North
Fork is prepared for:
1. Online advertising. Banner ad development, banner placements and
other online advertising projects for other parties.
4
<PAGE>
2. Market consulting. North Fork will continue to develop market
consulting, such as Internet launch strategies, site development
analysis and Internet marketing plans.
3. Web site hosting. North Fork currently hosts over 70 web sites
for classic car and classic truck related businesses and
organizations.
4. Special projects. North Fork has developed proprietary software
for high-end grocery kiosks and intends to generate more revenue
by distributing this software to a large chain grocery and a high
traffic consumer portal site.
The redevelopment and reprogramming of Classicar.com and
Classictruckshop.com, including graphic development and programming for
Classictruckshop.com, are being done in-house. As the content type and
programming capabilities for Classictruckshop.com and Classicar.com are
similar, the Company uses the programming developed for Classicar.com to
run features on Classictruckshop.com.
BigBadCatalog.com - The Company will create some in-house programming
for parts applications. The majority of the programming will come from
information provided by an identified automotive parts wholesaler.
Motorwrx.com - The Motorwrx.com website is a directory to the other
content sites. There is no programming required for Motorwrx.com outside of
the existing programming already in development or in place for the content
sites. Some graphic design is required and is underway.
The estimated cost of certain improvements is:
Estimated Costs
Through Year 2000 Graphic Redevelopment Programming
----------------- --------------------- -----------
Classicar.com $65,000 $30,000
Classictruckship.com $45,000 $25,000
BigBadCaralog.com $75,000 $200,000
MotorWrx.com $10,000 $0
Other Proposed
Internet Sites $65,000 $85,000
Off-road, rod and custom restoration sites may be joint ventured or
acquired. The costs of these is projected to be approximately $1.6 million.
However, no such sites are under negoriation at this time.
5
<PAGE>
Strategic Alliances and Affiliations
- ------------------------------------
Xceed, Inc.
In July 1999, EWRX signed a consulting agreement with Xceed, Inc., a
world leading Internet architect and e-commerce solution provider. Under
the terms of the agreement, Xceed was appointed as the Company's Internet
consultant and co-developer in connection with the redevelopment and
re-programming of EWRX Websites. The Company expects to have its Websites'
e-commerce operational in the fourth quarter of 1999. The EWRX affiliation
with Xceed will provide an accelerated development of its Websites and
enhance the visibility of EWRX on the Internet marketplace.
As part of the business relationship with Xceed, it may make an equity
ownership in the Company. Further, EWRX expects to build a partnership with
Xceed including business contacts and association among Xceed , EWRX and
their other Internet clients.
Data Return Inc.
Data Return of Dallas-Ft. Worth, an Internet hosting facility has
provided Website hosting to EWRX, its subsidiaries and many of its clients
since January 1998. Data Return manages a remote data center with more than
350 Compaq ProLiant systems running the Microsoft Windows NT Server network
operating system. Data Return hosts business-critical Websites for
individual companies as well as for Internet service providers (ISPs),
Website developers, and telecommunications carriers. The firm's staff
consists of Microsoft-certified and Compaq-certified professionals.
All equipment is housed in multiple data centers in Dallas-Fort Worth
and connected to the Internet via a multi-backbone network with local
access to seven Tier-1 backbone providers. In layman's terms, this means
that Data Return provides seven redundant connectors to provide service
continuity. Further, Data Return utilizes two backup diesel generator
systems to supplement conventional power sources in the event of loss of
primary power.
Specialty Equipment Marketing Association (SEMA)
Since 1996, EWRX subsidiaries have been members of The Specialty
Equipment Marketing Association, the largest automotive aftermarket trade
association in the world. Dan Jondron, President of Classicar.com and North
Fork WebWrx, has been SEMA's primary instructor for Internet marketing
related topics since that time. At SEMA's request, EWRX has provided a
detailed proposal to construct what will become the primary
business-to-business Internet site for SEMA's 3,500 member companies.
Selection is in progress for this proposal and North Fork Webwrx is among
two other companies on the list for consideration for this project.
Markets and Marketing Plan
- --------------------------
Market Overview - Specialty Automotive Aftermarket
All references in this section are from SEMA's 1998 Market Report
The Specialty Automotive Aftermarket is made up of a large number of
smaller markets, with their own interests, products and services. This market is
strictly driven by buyers seeking specific products and services related to the
hobby aspects of vehicles as opposed to transportation and maintenance.
6
<PAGE>
Because of market fragmentation and because the Internet is new to the
Specialty Automotive Industry, the public has not been exposed to the wide
variety of goods and services available to it from this market.
Despite the fragmented market, it is a growing market. In 1997, the retail
sales of the Specialty Automotive Aftermarket, were $19.3 billion dollars and
the market has grown 57.4% since 1990, at a compounded annual growth rate of 8%
per year.
The consumers who make up this industry are predominately younger to middle
aged men. Over 55% are under the age of 44, and enjoy higher education and
higher income levels than the general population. On average these consumers own
2.9 vehicles and are willing to spend a significant amount of money
($1,000-$5,000 a year depending on the market niche) to improve the appearance
and performance of their vehicles
In general, the Market can be divided into three main segments.
1) Specialty Accessories and Appearance, (52.4% market share)
Includes all exterior or interior products that improve either
the comfort or looks of a vehicle.
2) Racing and Performance (22.9% market share)
Includes all products that improve performance and efficiency
(for example: carburetors, spark plugs, drive shafts and other
engine parts).
3) Wheels, tires and suspension components (24.7% market share)
Includes specialty products for wheels such as performance
shocks, struts, specialty high performance tires and brakes.
Out of these three main market segments, there are seven acknowledged and
well defined-sub-markets and one miscellaneous sub-market. These include:
Light-truck Market - parts and services that change the appearance,
performance, and/or handling of light trucks (pickups, vans and sports
utility vehicles).
Racing Market - products for "off-street" professional and amateur racing
or motorsports.
Off-road Market - products designed to modify the appearance, performance
and/or handling of vehicles for use off paved roads.
Restoration Market - products and services used in returning vehicles,
particularly classics, to their original manufactured condition.
7
<PAGE>
Street Performance Market - products for the "muscle car or performance car
market used to change the appearance, performance and/or handling of
vehicles for street use.
Restyling Market - products used to modify the exterior or interior styling
of vehicles after they have left the factory and are not found in other
market categories.
Street Rod and Custom Market - products and services used in the
construction, maintenance, and operation of street rods and customs.
Other Markets - products that do not neatly fit into the seven defined
market segments. Typically electronic or high-tech in nature such as radar
detectors and custom sound systems.
When evaluating the Specialty Automotive Aftermarket, EWRX recognized the
potential the Internet has to provide consumers in this marketplace with better
prices, more selection, greater availability and easier access to products and
services they desire. An industry and market of this size, with little overall
public awareness made up of a large group of viewers characterized as classic
vehicle enthusiasts who have a strong interest in the products and services
within this market, provides the Company with a unique opportunity. This
opportunity is one of establishing brand dominance in this marketplace by
creating an Internet portal through which all the market segments in this
industry enter and congregate.
Competition and Uncertainty of Market Acceptance
- ------------------------------------------------
The traditional marketplace for classic automobiles and related products
and services is well established and includes mail order, retail outlets, direct
customer advertising and private party transfers, all of which makes the market
for the Company's services highly competitive. In addition, many companies and
individuals are engaged in developing e-commerce using the Internet marketplace.
Many such companies have greater financial resources and larger technical staffs
than the Company, which could result in the Company being at a competitive
disadvantage. In addition, companies not currently in direct competition with
the Company may introduce competing products in the future.
Introducing e-commerce based upon the Internet marketplace remains an
emerging industry and is characterized by rapid technological changes and
introductions of new products and services. Demand for and market acceptance of
newly introduced services and products, such as those planned by the Company,
are subject to a high level of uncertainty.
Dependence on Key Customers, Suppliers and Strategic Relationships
- ------------------------------------------------------------------
Until recently, the Company was in the development stage and had no
material or critical customers, the loss of whom would have a material impact on
operations. The Company will endeavor to develop such relationships in the
future. The creation of relationships with key customers, as well as
relationships with key suppliers and others is significant in order to further
the Company's business objectives in the future. No assurance can be given that
such relationships will be created, or that, if created, such relationships will
continue to be beneficial to the Company.
8
<PAGE>
Impact of Technological Change
- ------------------------------
The Internet as a whole is characterized by rapid technological changes,
innovations and frequent new product introductions. The Company's success will
depend to a substantial degree on its ability to design, develop and enhance its
web pages and related services and to successfully market such services and to
attract new customers. This will require the timely selection, development and
marketing of new products or services and enhancements on a cost-effective
basis. There can be no assurance that the Company will achieve these objectives
or that products or technologies developed by others will not render the
Company's web pages, products or technologies noncompetitive. A fundamental
technological change could have a material adverse effect upon the Company.
Governmental Approvals and Regulations
- --------------------------------------
The Company believes that no significant governmental approvals are
necessary for any of its products or services. Further, the Company believes
that compliance with federal, state and local laws or regulations which have
been enacted or adopted to regulate the environment has not had, nor will have,
a material effect upon the Company's capital expenditures, earnings, competitive
or financial position.
A major risk of Internet companies is the unknown but potential regulation
and taxation of Internet activities. The Internet industry is currently
unregulated primarily because it is an international business subject to
self-regulation by its participants who control websites in e-commerce. The
United States government is examining the merits and disadvantages of regulation
of content and taxation of e-commerce in the current year and in future years.
The Company has no way to determine what the action of the United States
government might have on its future activities and related revenues and profits.
Effect of Y2K and Risks of Year 2000 Compliance
- -----------------------------------------------
The Company is dependent on the operation of numerous systems that may be
adversely affected by the Year 2000 problem, including:
- EWRX's internal systems; and
- equipment, software and content supplied to the Company by third-party
vendors that may not be Year 2000 compliant, including outside
providers of Web-hosting services on which the Company is currently
dependent.
9
<PAGE>
Many currently installed computer systems and software products are coded
to accept only two-digit entries in the date code field and cannot distinguish
twenty-first century dates from twentieth century dates. To function properly,
these date-code fields must distinguish twenty-first century dates from
twentieth century dates and, as a result, many companies' software and computer
systems may need to be upgraded or replaced in order to comply with such "Year
2000" requirements.
The Company's future business depends on the successful operation of the
Internet following the commencement of the year 2000. If the Internet is
inaccessible for an appreciable period of time, or if customers and users are
unable to access the Company's sites, its business and revenues could be
materially adversely affected. The Company is also subject to external forces
that might generally affect industry and commerce, such as telecommunications,
utility or transportation company Year 2000 compliance failures, related service
interruptions and the economic impact that such failures have on the Company's
customers and advertisers.
Unlike other businesses, EWRX does not have an installed base of legacy
systems dating back many years. Nonetheless, in order to reduce the risks of the
Year 2000 compliance problem, EWRX has undertaken a two-phase process of
analyzing the impact of the Year 2000 problem. First, it has completed an
initial assessment of its primary internal systems and, based on such assessment
and our knowledge of the specific software and systems, EWRX currently believes
that its systems are Year 2000 compliant in all material respects or can readily
be brought into compliance with the application of corrective software
modifications. In many cases, the Company expects these modifications to be
provided by the vendors of the computer and software products we have installed.
EWRX has not incurred material costs to date in this informal phase of the
assessment process, and currently does not believe that the cost of additional
actions will have a material effect on its results of operations or financial
condition.
Second, EWRX is in the process of performing a further assessment of both
its internal systems and the vendor-supplied items and services it employs to
determine how the Year 2000 problem will affect all aspects of its operations.
EWRX will complete this second phase of its assessment by fourth quarter, 1999.
The further assessment review of the following EWRX systems:
- hardware systems, including servers and systems used for date storage;
- software systems, including applications, development tools and
proprietary code;
10
<PAGE>
- infrastructure systems, including routers, hubs and networks;
- facility systems, including general building functions, security, HVAC
and related operations; and
- the systems of our business partners, including content providers and
internet service providers ("ISP's").
EWRX is conducting its formal assessment of Year 2000 compliance by
gathering information on each aspect of EWRX's systems, reviewing each component
or application for date usage, and examining date representations. As to EWRX's
systems, the results to date of this formal assessment are consistent with the
results of its informal assessment.
With respect to vendor-supplied items and services, EWRX is conducting a
review of product compliance information on such items and services available
online, in vendor literature and through trade group information resources,
contacting its vendors for compliance information, and maintaining documentation
of assessments that have been performed by such vendors or outside sources. To
date, EWRX has received assurances from its third party vendors, Data Return
(Web server), Fairmarket (auction software) and Critical Path (e-mail software)
that their products and services are Year 2000 compliant. Further, such vendors
have received similar assurances regarding Year 2000 compliance from their
vendors. Finally, EWRX has already developed some contingency plans to cover
failure of third party supplier systems. The Company believes that a failure of
Critical Path and Fairmarket systems would not materially affect its operations.
The failure of Data Return's Web server could have an adverse impact on the
Company's operations, but EWRX has both the hardware/software and staff
expertise to service its Website; however, it may take some time for conversion
to the Company's systems during which time the Website may be inoperable.
The further assessment will lead to the creation of a remediation and
contingency plan for achieving Year 2000 compliance. EWRX does not anticipate,
however, undertaking an assessment of the Year 2000 compliance of the Internet
or its underlying telecommunications infrastructure, and will therefore be
unable to predict the impact of Year 2000 issues that might affect the broader
Internet business community, including EWRX.
11
<PAGE>
Based on the completed initial assessment and progress on the further
assessment, EWRX currently believes that its internal systems are or can readily
be made Year 2000 compliant in all material respects. However, it is possible
that these current internal systems contain undetected errors or defects with
Year 2000 date functions. In addition, although the Company does not anticipate
problems, vendor- supplied items and services could contain undetected errors or
defects which, if not corrected, could result in serious unanticipated negative
consequences, including significant downtime for one or more EWRX internet
properties.
Although EWRX is not aware of any material operational issues or costs
associated with preparing its internal systems for the year 2000, and although
it has not incurred material costs to date with respect to the Year 2000
compliance of these internal systems, the occurrence of any of the following
events could materially and adversely affect EWRX's business, results of
operations and financial condition:
- errors and defects are detected after the formal assessment process is
completed;
- third-party equipment, software or content fails to operate properly
with regard to the Year 2000; or
- Web advertisers expend significant resources to correct their current
systems for Year 2000 compliance, resulting in reduced funds available
for Web advertising or sponsorship of Web services.
Employees
- ---------
At November 1, 1999, the Company employed 19 people full time and 11
consultants on a part-time basis.
12
<PAGE>
The future success of the Company depends to a significant extent upon
certain senior management, technical personnel and software development
personnel. The Company also believes that its future success will depend in
large part on its ability to hire and retain highly skilled technical,
managerial and marketing personnel, as well as to attract and retain
replacements for or additions to such personnel in the future. Demand for new,
specially trained and experienced personnel has increased worldwide. The loss of
certain key employees or the Company's inability to attract and retain other
qualified employees could have a material adverse effect on the Company's
business.
Reports to Security Holders
- ---------------------------
The public may read and copy any material files with the SEC at the SEC's
Public Relations Reference Room at 450 Fifth Street, N.W., Washington D.C. 20549
and/or obtain information on the operation of the Public Reference Room by
calling the SEC at 1-800-SEC-0330. In addition, the Company is an electronic
filer and as such, all items filed by the Company with the SEC which contain
reports, proxy and information statements, and other information regarding
issuers that file electronically with the SEC, which site is available at
http://www.sec.gov. The Company also maintains an Internet site which contains
information about the Company.
The site is available at http://www.ewrx.com.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS AND RESULTS OF OPERATION
PLAN OF OPERATION
Revenues and Financing
- ----------------------
The Company has minimal revenues from banner advertising and Website
consulting services from the Classic Car and North Fork operations. It intends
to derive its principal expanded revenues from these same sources and from the
electronic catalog, BigBadCatalog, and from premium memberships on its Websites.
It is anticipated that the Internet and related e-commerce will continue to
become more accessible and that the market opportunities for the Company will
continue to expand in North America and internationally. In order to maintain
sales growth, the Company intends to expand the content and to improve the
services on its Websites and where appropriate add new Websites that are
compatible with the existing Websites, primarily related to the Specialty
Automotive Aftermarket.
13
<PAGE>
The Company has been funded to date through private placements of
approximately $1,600,000 in 1999, to acquire Classic Car and North Fork,
initiate work in these operations and for corporate administrative and sales
costs. In addition to the Harmonic Research Inc. agreement described below the
Company continues to investigate and solicit funding primarily through private
placements of its securities.
Operations for the Next Twelve Months
- -------------------------------------
The Company's intended operations for the next twelve months are set forth
in Item 1 - Business Objectives. It is the intention of the Company to complete
the re-design of its current Websites and implement banner advertising and gift
shop sales programs by the end of 1999. Development of its electronic catalog
will be completed in the first quarter of 2000. The re-design of the Websites
was initiated in June, 1999 and when the redesign is completed, solicitation and
implementation of the premium memberships for the Websites will begin and will
be in place in early 2000. These activities are the principal sources of
expanded revenues for the Company.
The Company believes that revenues anticipated in the next twelve months
and the financing as described in Item 1 - Business Objectives will provide
sufficient cash flow for its operations in that twelve month period, However, no
assurance can be given that the types of revenues projected by the Company or
the financing contemplated by the Company will occur. Additional capital, as
described in CAPITAL RESOURCES below, will be required for significant expansion
of Website capabilities and other Company activities such as additional Websites
and related acquisitions.
CAPITAL RESOURCES
On July 15, 1999, the Company entered into an agreement with Harmonic
Research, Inc. (Harmonic), an investment fund management company to sell by way
of a private placement of units consisting of 50,000 shares of Class A common
stock and one three-year warrant to purchase 50,000 shares of Class A common
stock at an exercise price to be set by the Company during the negotiations with
investors buying the private placement. Harmonic will also provide financial
advisory services. Harmonic compensation includes an initial fee of $15,000 for
the first 90 day period of the Agreement and an additional $15,000 for each
90-day period if the Agreement is extended by the Company. The Company has
granted Harmonic an option to purchase three-year warrants consisting of 300,000
shares of the Company's common stock at $1.00 per share, 150,000 as of July 15,
1999 and an additional 150,000 shares when the initial $500,000 of the financing
is complete. To date that option has not been exercised by Harmonic. The Company
will also pay Harmonic an additional fee for any financing (including the
initial $3,000,000) of 8% of the amount raised by Harmonic as a cash fee and 8%
of any securities related to that financing. Harmonic is also entitled to the
following fees should the Company enter into a merger, consolidation,
reorganization, business combination or acquire another company where Harmonic
was the finder:
14
<PAGE>
10% of the aggregate value of the transaction for the first $2,000,000
of the transaction
8% of the aggregate value of the transaction for the second $2,000,000
of the transaction
6% of the aggregate of the transaction for the third $2,000,000 of the
transaction, and
4% of the aggregate of the transaction remaining value of the
transaction.
Proceeds from the sale of Common Stock will be used to pay offering costs
and to expand the brand recognition of the Company's websites through
advertising and marketing and to fund website redesign that will in turn enhance
the commercial value of Websites as previously discussed. Proceeds will also be
used for general working capital, and general and administrative purposes. To
date, Harmonics has not raised any financing for the Company.
As of October 19, 1999, the Company completed a private placement of one
million units, $0.85 per unit, each unit consisting of one common share and a
non-transferable warrant exercisable at $1.00 for two years from the date of the
subscription. A total of $850,000 was raised in this placement. The private
placement increased the number of fully diluted common shares at this time by
1,000,000 shares to 13,606,689. This placement was not subject to the terms of
the agreement with Harmonic noted above although Harmonic arranged the sale of a
portion of the offering.
The Company had preliminary discussions with third parties to raise up to
$3,000,000 using a combination of shares and warrants at the market price at the
time of subscription. These discussions have been postponed due to the Company's
"E" designation on its trading symbol. Upon acceptance of this registration
statement by the SEC, the Company intends to reopen the discussions and conclude
this financing.
The Company anticipates that its monthly costs are approximately $100,000
and that in mid-2000 there will be sufficient revenue from the operations of its
Websites to pay for corporate overhead, administrative and sales costs. The
funds provided in the $850,000 financing described above are primarily for
on-going development of the Company's Websites and associated business. There
can be no guarantee of funding beyond the recent $850,000 placement or that
future financing efforts will be successful. However, the Company has
successfully funded its activities for more than two years using similar methods
of financing. Management is confident of its ability to continue to finance the
Company until revenue is adequate to provide for all of the Company's expenses.
The Company is dependent upon the proceeds of its proposed offering of
Common Stock to implement its business plan and to finance its working capital
requirements. Should the Company's plans or its assumptions change or prove to
be inaccurate or offering proceeds are insufficient to fund the Company's
operations, the Company would be required to seek additional financing sooner
than anticipated. The Company may determine, depending upon available
opportunities, to seek debt or additional equity financing to fund the cost of
continuing expansion or other acquisitions. To the extent that the Company
incurs indebtedness or issues debt securities, it will be subject to risks
associated with such indebtedness, including interest rate fluctuations,
collateral arrangements and the possibility that cash flows may prove inadequate
15
<PAGE>
to repay such indebtedness. The Company has no current arrangements with respect
to, or sources of, additional financing. There can be no assurance that
additional financing will be available to the Company on commercially reasonable
terms or at all. If the Company is unable to obtain the financing it requires,
its ability to meet its current plans for expansion could be materially
adversely affected.
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Until recently, the Company was a development stage enterprise. Its
principal assets today are its investments in Classic Car and North Fork. From
inception to date, the Company has incurred significant operating losses
resulting in its working capital deficit and stockholders' deficit.
From inception through December 1998, the Company's sole business was in
the resource sector and the Company held certain mineral interests in the
Ukraine. The Company's interests were held in a joint venture as discussed in
Note 2 of Notes to Financial Statements. Through 1998, the Company made payments
and advances to the joint venture that aggregated $662,532. Such payments were
principally funded by sales of common stock from inception through 1998. Due to
poor market conditions and the uncertainty of financing the development of
mineral properties located in Ukraine, the Company elected to abandon these
mineral interests in the fourth quarter of 1998, which represented substantially
all of the Company's assets at that time. As a result, the Company has written
off its entire unrecovered investment in and advances to the joint venture as of
December 31, 1998.
During 1997, 1998 and for the seven months ended July 31, 1999, the Company
did not generate any significant operating revenues. However, with the
completion of the purchase of Classic Car and North Fork, as discussed
previously, the Company has entered the e-commerce marketplace to generate
future revenues. By using proprietary information management software and by
using the Internet as an e-commerce marketplace, Classic Car believes that it
can provide participants with enhanced selection and pricing for automotive
products and services. In return, the Company plans to charge a fee, on a
transaction-by-transaction basis, for all business conducted by third parties
using Classic Car's websites. The Company also expects to generate additional
revenues by selling advertising on its websites to third parties, an historical
source of free or low revenue banner advertising for Classic Car. Further, the
Company expects North Fork to earn increased service revenues by continuing to
provide custom software and website design services, Internet database services
and custom e-commerce software solutions to a variety of businesses seeking to
maximize the use of the Internet. As of November 2, 1999, the Company has
completed the major portion of its Website designs for Classicar.com and
Classictruckshop.com with the re-designed Websites on line. As of November 3,
1999, the Company initiated its banner and advertising program to provide
advertisers with on-line placement capabilities on the Company's Websites.
Expenses, other than the loss from write-off of investment in joint venture
as described above, have been for salaries, including consultants, professional
fees and general office expenses. Operating expenses increased from $611,834 in
the first seven months of 1998 to $922,144 for the comparable period in 1999.
This increase resulted primarily from costs of acquiring and operating Classic
Car Source and North Fork Publishing during June and July, 1999, as well as
increased costs associated with the filing of this registration statement. As
discussed previously, in the first quarter of 1999, the Company made the
strategic decision to change its business focus to acquire, finance and operate
Internet related companies that either have existing websites or websites that
are under development and are capable of operating profitably. The Company
believes that the substantial growth in Internet commerce activities
("e-commerce") in recent years, when combined with carefully selected
acquisition and development opportunities, represents a significant business
opportunity. As the Company funds and develops its business, general and
administrative expenses are expected to increase significantly.
16
<PAGE>
Development Stage Company
- -------------------------
Until recently, the Company was in the development stage and had a limited
operating history upon which an evaluation of its future performance and
prospects could be made. The Company's prospects must be considered in light of
the risks, expenses, delays, problems and difficulties frequently encountered in
the establishment of a new business in an emerging and evolving industry. Since
inception, the Company has generated no significant revenues and has incurred
operating losses resulting in a working capital deficit. Inasmuch as the Company
will continue to have a high level of operating expenses and will be required to
make significant up-front expenditures in connection with the proposed
development of its business, the Company anticipates that losses will continue
for at least the next 12 months or until such time as the Company is able to
generate sufficient revenues to finance its operations and the costs of
continuing expansion. There can be no assurance that the Company will be able to
generate significant revenues or achieve profitable operations.
Need for Additional Financing
- -----------------------------
The Company is dependent upon the proceeds of proposed offerings of Common
Stock to implement its business plan and to finance its working capital
requirements. Should the Company's plans or its assumptions change or prove to
be inaccurate or offering proceeds are insufficient to fund the Company's
operations, the Company would be required to seek additional financing sooner
than anticipated. Should Harmonic not be successful in securing the funds under
the terms of it agreement with EWRX, the Company will be required to find other
means and sources of funds. As of July 31 1999, the Company continues to incur
substantial costs related to its operations and re-development and re-design of
its Websites. Management is confident it will be able to continue raising funds
in the balance of 1999 as it has in the early part of 1999, principally through
private placements. On October 27, 1999, the Company received notice from the
Securities and Exchange Commission that its Form 10 SB filing was effective on
October 30, 1999 subject to responding to comments on that filing. As a fully
reporting Company, management anticipates that additional funding will be more
likely in the balance of 1999.
There can be no assurances given that the Company will be successful in
generating sufficient revenues from its planned activities or in raising
sufficient capital to allow it to continue as going concern which contemplates
the realization of assets and the satisfaction of liabilities in the normal
course of business. These factors can affect the ability of the Company to
implement its general business plan including specific plans to re-design
Websites, to develop an on-line Specialty Automotive Aftermarket equipment
catalog, to implement a banner advertising sales program, to implement gift shop
sales and to implement a premium membership for its Website visitors, the
principal means of revenue generation for the Company's Internet markets.
Effects of Year 2000 Compliance
- -------------------------------
The Company's business is integrally linked to computers, computer software
and the Internet. As such, its future development and business is subject to all
of the risks and costs associated with Year 2000 compliance. The Company does
not anticipate expenditure of substantial sums to achieve Year 2000 compliance.
See Item 1 - Business - Effects of Y2K and Risks of Year 2000 Compliance.
17
<PAGE>
ITEM 3. DESCRIPTION OF PROPERTY
Corporate Offices
- -----------------
Vancouver, British Columbia
The general corporate activities of EWRX are conducted in the Vancouver,
British Columbia office. The principal business office is #301 - 543 Granville
Street, Vancouver, BC, Canada V6C 1X8. These activities include financing,
investor relations, accounting, marketing and general corporate administration.
The Company has six full-time employees in Vancouver.
Bellingham, Washington
The Company's Internet operations are located in the Bellingham, Washington
office. Bellingham is strategically located near Seattle's major technological
and Internet employment base. The principal operations offices for Classic Car
Source , Incorporated and North Fork Publishing Inc. are located at 1200 Harris
Avenue, Suite 104, Bellingham, Washington 98225. The Company believes there are
sufficient technical personnel in this area as required for its business
activities. The activities in Bellingham include Website development and
maintenance, programming and Internet consulting and marketing services. There
are nine full-time employees in Bellingham.
The Company's corporate and operations offices are leased facilities. The
Company's other property consists of office equipment, Website domains and
proprietary software.
Supporting Offices
- ------------------
The Company maintains an executive office in Denver, Colorado. This office
coordinates corporate governance, securities law compliance, legal and auditing
functions.
Trademarks and Domain Sites
- ---------------------------
The Company owns thirty-five (35) Websites domain names and adds new
domains as required with the expansion of its Web activities. Applications for
certain trademarks related to the domain names and the Company's Internet
business is anticipated in 1999. Currently the Company holds no trademarks.
18
<PAGE>
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of June 28, 1999,
regarding the record and beneficial ownership of the Common Stock with respect
to: (i) any individual or group of affiliated individuals or persons owning, of
record or beneficially, five per cent (5%) or more of the outstanding Common
Stock; (ii) the amount of shares of Common Stock owned by each executive officer
and director of the Company; and (iii) the number of shares of Common Stock
owned, of record or beneficially, by the directors of the Company as a group. No
shares of the Preferred Stock are issued and outstanding. Except as otherwise
indicated based upon information provided by such owners, the Company believes
that the beneficial owners listed below, have sole voting and investment power
with respect to such shares.
Shares of $0.001 Par Value
Name Common Stock Beneficially Owned Percent (1)
- ---- ------------------------------- -----------
Ronald C. Davis 1,667,832 (2) 12.99
Director, President &
Chief Executive Officer
2746 Yale Street
Vancouver, British Columbia
V5K 1C3
Richard P. Ott 350,000 (3) 2.69
Director & Treasurer
Vancouver, British Columbia
William R. Wilson 250,000 (4) 1.94
Director & Secretary
410 17th Street, Suite 1375
Denver, CO 80202
Dan Jondron 705,822 (5) 5.50
Director and President,
Classic Car Source, Inc.
1200 Harris Avenue, Suite 104
Bellingham, WA 98225
Carl LaFlamme 152,984 (6) 1.19
Vice President - Marketing
#301 - 543 Granville Street
Vancouver, British Columbia
V6C 1X8
Johnscott Lee 537,123 (7) 4.19
Classic Car Source, Inc.
1200 Harris Avenue, Suite 104
Bellingham, WA 98225
Peter Shepherd 1,459,000 11.53
2236 134th Street
Surrey, British Columbia
V4A 9T9
Directors and Officers as a group 3,588,761 28.50
(six persons)
19
<PAGE>
- ------------------------
(1) In addition to 12,656,689 shares of common stock as of June 28, 1999, the
percentages noted in this section assume that 1,230,000 shares of Common
Stock pursuant to various option to existing management and directors which
may be issued in whole or in part within 60 days of the date of this
Registration Statement.
(2) Includes options to purchase 180,000 shares of Common Stock, which may be
exercised in whole or in part within 60 days of the Registration Statement.
(3) Includes options to purchase 350,000 shares of Common Stock, which may be
exercised in whole or in part within 60 days of the Registration Statement.
(4) Includes options to purchase 250,000 shares of Common Stock, which may be
exercised in whole or in part within 60 days of the Registration Statement.
(5) Includes options to purchase 150,000 shares of Common Stock, which may be
exercised in whole or in part within 60 days of the Registration Statement.
(6) Includes options to purchase 150,000 shares of Common Stock, which may be
exercised in whole or in part within 60 days of the Registration Statement.
(7) Includes options to purchase 150,000 shares of Common Stock, which may be
exercised in whole or in part within 60 days of the Registration Statement.
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS (1)
Directors, officers and key employees of the Company, their respective
positions and ages and the year in which each director was first elected, are
set forth in the following table. Additional information concerning each of
these individuals follows the table:
Director
Name Age Position Since
- ---- --- -------- --------
Officers and Directors
- ----------------------
Ronald C. Davis 48 President, Chief Inception in 1997
Executive Officer
and Director
Richard P. Ott (2) 64 Treasurer and Director December 1997
William R. Wilson (3) 57 Secretary and Director October 1998
Dan Jondron (4) 43 Director, President June 1999
Classic Car Source, Inc.
and North Fork
Publishing Group Inc.
20
<PAGE>
Name Age Position
- ---- --- --------
Other Key Employees
- -------------------
Johnscott Lee (5) 47 Vice President-Technology
Carl LaFlamme 40 Vice President, Marketing
Robert R. Gilmore 47 Acting Chief Financial Officer
- -------------------------
(1) All Directors and Officers serve until their successors are elected.
(2) Mr. Ott provides part-time consulting services to the Company in addition
to his duties as a Director and officer.
(3) Mr. Wilson provides part-time consulting services to the Company in
addition to his duties as a Director and officer.
(4) Mr. Jondron has an Employment Agreement with the Company as President of
Classic Car Source and North Fork Publishing. See Employment and
Change-in-Control Arrangements.
(5) Mr. Lee has an Employment Agreement with the Company as Vice President. See
Employment and Change-in-Control Arrangements
Directors & Senior Officers of EWRX
- -----------------------------------
The four directors of EWRX Internet Systems Inc., Ronald C. Davis, Richard
P. Ott, William R. Wilson and Dan Jondron provide senior management for the
Company.
Mr. Davis, President and Chief Executive Officer, is responsible for
corporate operations, financing, legal, accounting and marketing. Mr. Ott
reviews corporate financing and business plans and participates in due
diligence. Mr. Wilson is responsible for market research, due diligence and
corporate governance. Mr. Jondron is responsible for overseeing the operations
of Classic Car and North Fork WebWrx.com.
21
<PAGE>
RONALD C. DAVIS, President and Chief Executive Officer
Mr. Davis with twenty-five years of corporate experience has headed
two high-technology companies and was the founder of EWRX. His experience
includes extensive work in corporate structure, financing, capital markets
and marketing.
In his career Mr. Davis has either directly been responsible for or
assisted a variety of public companies in the United States and Canada in
the high technology, biotech and industrial sectors. Mr. Davis maintains a
wide network of financial and investor contacts in North America and
Europe. Since 1997, Mr. Davis has been President and Chief Executive
Officer of the Company. From 1994 to 1997, he was a consultant to several
public technology companies.
RICHARD OTT, Director and Corporate Treasurer
Mr. Ott, has been chairman and president of PBK Engineering in
Vancouver, British Columbia, Canada, an international engineering company
active in International and Canadian industrial and resource development
projects. He currently is a director of a public entity and several private
entities and is a specialist in the development of business plans and
financial review of projects. Mr. Ott holds a B.Ap.Sc. from the University
of British Columbia.
From 1994 to present Mr. Ott has been a consultant to several public
and public resource and real estate companies. He serves as a director of
Banro Resource Corporation, a natural resource company listed on the
Toronto OTC (CDN).
WILLIAM R. WILSON, Director and Corporate Secretary
Mr. Wilson has been an executive officer in two public companies in
the United States and is the director of two public companies in Canada.
His specialties include merger and acquisitions, due diligence, marketing
and corporate governance. Mr. Wilson holds a Professional Degree in
Metallurgical Engineering from the Colorado School of Mines and MBA from
the University of Southern California.
Mr. Wilson serves as a director of Banro Resource Corporation and
Sheridan Reserve Incorporated listed on the Toronto OTC (CDN). From 1991 to
1997 he was Chairman of the Board of Gold King Consolidated Inc., traded on
the NASDAQ OTC (BB); from 1996 to 1997 he was Vice President - Operations
for Nevada Manhattan Mining Inc. traded on the NASDAQ OTC (BB); and from
1997 to 1999 he was President of Grant Reserve Corporation. All of the
above are natural resource companies.
22
<PAGE>
DAN JONDRON, Director, & President, Classic Car Source, Inc. and North Fork
Webwrx Inc.
In 1993, Mr. Jondron founded Classicar.com and developed the
associated company Classic Car Source a destination site on the Internet
for classic vehicle enthusiasts. In 1996, he created North Fork Publishing
Group to meet the expanding needs for custom web-to-database programming
and Website development. He added Classictruckshop.com in August of 1998.
Mr. Jondron has 13 years experience in the automotive aftermarket. As
a principal speaker and Internet marketing analyst for the Specialty
Equipment Marketing Association (SEMA), the world's largest automotive
aftermarket trade group, Jondron has been a major speaker at automotive
venues across the United States throughout the last four years.
JOHNSCOTT LEE, Vice President of Technology
Mr. Lee has 25 years of experience in software development and
programming. After earning a BS (1973) and an MS (1975) in Computer Science
from Purdue University, Lee was employed as a consultant and systems
analyst in industries that range from political consulting to radio
engineering. Previously, he held the position of Senior Analyst at FIServe
in Bellevue, Washington. In 1993, he joined Classicar.com and later North
Fork Publishing Group. He created e-commerce Websites for on-line ordering,
user registration, on-line inventory, audio and video, live chat and
bulletin boards. Through North Fork, he developed programs that allowed
databases to tie in directly with inventory, accounting and fulfillment
systems and software that collects marketing information from Website
users. In his position as Vice President of Technology, Mr. Lee oversees
all Information Systems and Information Technology issues.
CARL LAFLAMME, Vice President Marketing
Mr. LaFlamme oversees all advertising, marketing and public relations
for EWRX and its companies. His 20-year career has included advertising and
marketing.
Since 1994 Mr. LaFlamme has been a Marketing and Advertising
Consultant for businesses primarily in the internet industry, where he has
developed marketing strategies, consulted on Website development, and
provided creative development for several companies including EWRX's two
new acquisitions, Classic Car Source and North Fork Publishing Group.
23
<PAGE>
ROBERT R. GILMORE, Acting Chief Financial Officer
Mr. Gilmore has joined the EWRX as Chief Financial Officer and is
responsible for all areas of financial reporting. Mr. Gilmore has more than
twenty years of financial experience. He has served as audit partner for
the Denver office of Coopers & Lybrand, and during the last five years he
has served as Chief Financial Officer for Dakota Mining Corporation and as
an independent financial consultant.
There are no family relationships among directors or executive officers.
ITEM 6. EXECUTIVE COMPENSATION
Following is information regarding compensation paid during 1998 and from
inception to December 31, 1998 to the Chief Executive Officer of the Company. No
other director or executive officer received compensation in excess of $100,000
during either fiscal year.
Summary Compensation Table
--------------------------
Long-term Compensation
----------------------
Annual Compensation
---------------------- Restricted
Name and Position Year Salary Bonus Other Stock ($) Options(#)
- ----------------- ---- ------ ----- ----- ---------- ----------
Ronald C. Davis, 1998 $28,000 $0 $0 $0 0
President 1997 $ 0 $0 $ 0 $0 180,000
Chief Executive
Officer &
Director
Mr. Davis was issued 142,000 shares of Common Stock by the Company on
February 22, 1999 as debt repayment at a share price of $0.30 repaying the debt
to Mr. Davis of $42,600.
Aggregated Option Exercises and Fiscal Year-End Option Values
- ----------------------------------------------------------------
There were no exercise of the underlying stock options granted during 1998
by each executive named in the Summary Compensation Table.
24
<PAGE>
Compensation of Directors
- -------------------------
The Company does not currently pay any of its director's fees or any other
compensation for duties performed as directors, other than the options described
in Item 4. Mr. Davis and Mr. Jondron are salaried employees of the company with
Mr. Davis receiving a monthly salary in Canadian dollars equivalent to $6,700
and Mr. Jondron receiving a monthly salary of $7,083. Mr. Ott and Mr. Wilson
perform various consulting duties for the Company. Their services are reimbursed
at consulting fees consistent with similar services provided as consultants to
other companies with businesses comparable to EWRX.
Employment and Change-in-Control Arrangements
- ---------------------------------------------
The Company has employment agreements with Mr. Jondron and Mr. Lee. The
Company does not have an employment agreement with Mr. Davis but the directors
intend to provide to Mr. Davis a contract similar to the one it has with Mr.
Jondron.
Mr. Jondron has an Employment Agreement with the Company as President of
Classic Car Source and North Fork Publishing for three years ending May 4, 2002.
The Agreement contains certain non-compete clauses, benefits and termination
clauses. The Agreement provides for an annual salary of $85,000. The Agreement
has no "golden parachute" clause.
Mr. Lee has an Employment Agreement with the Company as President of
Classic Car Source and North Fork Publishing for three years ending May 4, 2002.
The Agreement contains certain non-compete clauses, benefits and termination
clauses. The Agreement provides for an annual salary of $75,000. The Agreement
has no "golden parachute" clause.
The Company has not re-priced any of the options it has granted since its
incorporation in 1997.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
As of December 31, 1998, $203,241 had been advanced to the Company by
certain shareholders, including the Chief Executive Officer of the Company. Of
the total, $199,203 was settled in the first quarter of 1999 through the
issuance of 664,010 Common Shares of the Company, representing a price of $0.30
per share, which was the approximate fair market value of these restricted
shares on date of issuance.
In connection with the joint venture holding certain mineral interest in
the Ukraine (refer to Item 2 - Management's Discussion and Analysis and Results
of Operations), consulting fees of $21,208 were paid to Mr. Wilson, a Director
of the Company.
There are no other transactions have taken place between the Company and
its directors and/or shareholders other than those disclosed in this
Registration Statement.
25
<PAGE>
ITEM 8. DESCRIPTION OF SECURITIES
Common Stock
- ------------
The Company is authorized to issue 100,000,000 shares of Common Stock with
a par value of $0.001 per share. As of November 1, 1999, there were 13,606,689
shares of Common Stock outstanding and options to purchase an additional
1,600,000 shares of Common Stock at prices from $0.25 to $1.00 per share. The
holders of Common Stock are entitled to one vote for each share held of record
on each matter submitted to a vote of stockholders. There is no cumulative
voting for election of directors. Subject to the prior rights of any series of
Preferred Stock, which may from time to time be outstanding in the future, the
holders of Common Stock are entitled to receive ratably such dividends as may be
declared by the board of directors out of funds legally available therefor, and,
upon the liquidation, dissolution or winding up of the Company, are entitled to
share ratably in all assets remaining after payment of liabilities and payment
of accrued dividends and liquidation preference on the Preferred Stock, if any.
Holders of Common Stock have no preemptive rights and have no rights to convert
their Common Stock into any other securities.
Preferred Stock
- ---------------
The Company is authorized to issue up to 500,000 shares of Preferred Stock
with a par value of $0.01 per share. The Preferred Stock may be issued in one or
more series, the terms of which may be determined at the time of issuance by the
board of Directors, without further action by stockholders, and may include
voting rights (including the right to vote as a series on particular matters),
preferences as to dividends and liquidation, conversion, redemption rights and
sinking fund provisions.
PART 2
ITEM 1. MARKET PRICE AND DIVIDENDS OF THE REGISTRANT'S COMMON EQUITY AND OTHER
SHAREHOLDER MATTERS
The Common Shares of the Company trade on the NASD Over-the-Counter market
under the trading symbol "EWRX." From June 8, 1998 to May 25, 1999, the Common
Shares of the Company traded on the NASD Over-the-Counter market under the
trading symbol "ERRI". The following table sets forth for the period indicated
the high and low sale prices. The quotations below reflect inter-dealer prices,
without retail markup, markdown or commission and may not represent actual
transactions. For current price information, EWRX shareholders are encouraged to
consult publicly available sources.
High Low
---- -----
1999
----
First Quarter $1.38 $0.218
Second Quarter $2.50 $1.125
1998
----
First Quarter (did not trade)
Second Quarter $2.00 $2.00
Third Quarter $2.00 $0.53
Fourth Quarter $0.6875 $0.14
1997 (did not trade in 1997)
----------------------------
26
<PAGE>
At November 1, 1999, the Company had 13,606,689 Common Shares outstanding
and had approximately seventy (70) shareholders of record.
The Company has no fixed dividend policy. The Board of Directors from time
to time having regard to operating results, capital requirements and general
financial condition and requirements will consider dividend distributions. The
Company has paid no dividends at any time. For the foreseeable future, it is
anticipated that the Company will use all available cash flows to finance its
growth and that dividends will not be paid to shareholders.
As of June 28, 1999, there are approximately 60 shareholders of record of
the Company's Common Stock. As of August 27, 1999 there are no shares of the
Company's Common Stock subject to outstanding options or warrants to purchase or
securities convertible into Common Stock of the Company other than that
disclosed under Part I, Item 2.
ITEM 2. LEGAL PROCEEDINGS
The Registrant is not a party to any pending legal proceeding nor is its
property the subject of any pending legal proceeding.
ITEM 3. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS
There have been no disagreements on accounting and financial disclosures
from the inception of the Company through to the date of this Registration
Statement.
On May 4, 1999, the Company's shareholders approved the appointment of
Jackson & Rhodes P.C. as the Company's auditors for the periods ending December
31, 1998 and December 31, 1999.
The Company's audited financial statements for the period ending December
31, 1997 and December 1998 and the un-audited financial statement for the period
May 31, 1999 are a part of this Registration Statement. These statements for the
years ending December 31, 1998 and 1997 were audited by Jackson & Rhodes, as
indicated in their report with respect hereto, and are included in reliance upon
the authority of said firm as experts in giving said report.
27
<PAGE>
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES (1)
In January 1998, the Company delivered certificates covering 9,719,999
shares of Common Stock of the Company to a group of investors representing sales
of shares during the period May 1997 through January 1998 under Rule 504 of
Regulation D as initial capital for the Company. The company received
$655,948.50 for those shares.
In February 1998, the Company issued 120,000 shares of Common Stock of the
Company to a group of investors under Rule 504 of Regulation D as additional
capital for the Company. The company received $180,000 for those shares.
In July 1998, the Company issued 109,367 shares of Common Stock of the
Company to a group of investors under Rule 504 of Regulation D as additional
capital for the Company. The company received $164,051 for those shares.
In February 1999, the Company issued 282,344 shares of Common Stock of the
Company to a group of investors for reduction of debt of $84,703.20 under Rule
504 of Regulation D. At the same time the Company issued 381,666 shares of
Common Stock of the Company to an Mr. Davis, an officer of the Company, for
reduction of debt of $114,500 under Section 4(2) of the Securities Act of 1993.
In February 1999, the Company issued 299,999 shares of Common Stock of the
Company to a group of investors under Rule 504 of Regulation D as additional
capital for the Company. The company received $89,999.70 for those shares.
In March 1999, the Company issued 1,217,600 shares of Common Stock of the
Company to a group of investors under Rule 504 of Regulation D as additional
capital for the Company. The company received $403,660 for those shares.
In March 1999, the Company issued 64,286 shares of Common Stock of the
Company to Harmonic Research, Inc. as a finder's fee under Rule 504 of
Regulation D as additional capital for the Company. The company recorded an
expense for this fee of $22,500.
In April 1999, the Company issued 281,428 shares of Common Stock of the
Company to a group of investors under Rule 504 of Regulation D as additional
capital for the Company. The Company received $196,999 for those shares. The
market price of the common shares of the Company when this private placement was
subscribed ranged from $0.38 to $1.38 during the month of March, 1999, just
prior to the transaction. The pricing of the placement ($0.70) was determined
with reference to the mid range of prices during the prior month with a discount
to reflect the restrictive nature of these securities.
In June 1999, the Company issued 1,450,000 shares of Common Stock of the
Company to the owners of CCI and North Fork as part of the acquisition of all of
the assets of these entities and 150,000 shares of the Common Stock of the
Company to a consultant as a finder's fee for the same acquisition under Section
4(2) of the Securities Act of 1933. The market price of the common shares of the
Company when these transactions took place was $1.35 and the transaction price
was adjusted by 20% ($1.10 per share) to reflect the restricted nature of these
securities.
28
<PAGE>
In June, 1999, the Company issued 130,000 shares of Common Stock of the
Company to two consultants for finder's fees under Section 4(2) of the
Securities Act of 1933. The market price of the common shares of the Company
when these transactions took place was $1.35.
In April and July 1999, the Company agreed with certain investors to
rescind their purchase of 1,600,000 shares of Common Stock of the Company
previously sold under Rule 504 of Regulation D. The market price of the common
shares of the Company ranged from $0.38 to $1.38 during the month of March,
1999, just prior to the return of these shares.
In addition to the above Common Share issuances, in 1997 the Company also
issued two million restricted Common Shares in connection with the acquisition
of its interest in the minerals joint venture in the Ukraine under Rule 504 of
Regulation D. In April 1999, the entire two million Common Share block was
cancelled by the Company in connection with relinquishing its interest in the
joint venture.
- ------------------
(1) The share price of the Company common stock has fluctuated widely since
its inception. The Company issued shares in 1997, 1998 and 1999 with reference
to the prevailing market price when applicable. The initial price of $0.01 was
used for sale of stock to founders, consultants and early-stage financiers of
the Company at a time when the Company's stock did not trade. During this
period, stock was also sold to outside investors at $1.50 in private placement
financing under a Regulation D, Rule 504 filing. A trading market developed in
1998 with the highest price being $2.00 per share; however, because of the
difficulties with the mining joint venture in 1998 as described in Item 1, the
price dropped as low as $.07 per share in late 1998. As the Company changed its
direction from industrial minerals to e-commerce, the price moved up to $0.30 in
early 1999. The Company disclosed all activities related to the Internet
acquisitions and the market price responded in fluctuations from $0.30 to
$2.875. The market price was extremely sensitive during this period to increases
at times the Company announced its fulfillment of business goals and sharp
decreases during selling-off by investors when market conditions and perceptions
were not favorable. During this period of fluctuation, Management endeavored to
complete private placement financing and the two Internet company acquisitions
at the then current market price with appropriate discounting to reflect the
restricted nature of the securities sold. As Management had little control over
the market price, it could only react at any given time as it completed the
financing and the acquisitions.
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Pursuant to its By-laws of the Company, Article VI, the Company has agreed
to indemnify its directors and officers, including payment of expenses as they
are incurred and in advance of the final disposition of any action, suit, or
proceeding. The Company as determined by the Board of Directors may similarly
indemnify employees, agents and other persons.
PART F/S FINANCIAL STATEMENTS
The financial statements for EWRX Internet Systems and Subsidiary for the
seven months ended July 31, 1999 (unaudited) and December 31, 1998 and 1997, the
pro forma consolidated statement of operations for EWRX Internet Systems and
Subsidiary for the seven months ended July 31, 1999, and the financial
statements for Classic Car Source, Incorporated and North Fork Publishing Group,
Inc. for the seven months ended July 31, 1999 (unaudited) and December 31, 1998
and 1997 are presented on the following pages.
29
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
I. EWRX INTERNET SYSTEMS INC. AND SUBSIDIARY
----------------------------------------- Page
----
<S> <C>
Independent Auditors' Report for December 31, 1998 and 1997...................................F-3
Consolidated Balance Sheets at July 31, 1999 (Unaudited) and
December 31, 1998 and 1997...........................................................F-4
Consolidated Statements of Operations For the Seven Months Ended
July 31, 1999 and 1998 (Unaudited), the Year Ended December 31, 1998,
the Period from June 25, 1997 (Date of Inception) to December 31, 1997...............F-5
Consolidated Statements of Changes in Stockholders' Equity (Deficit) For the
Seven Months Ended July 31, 1999 (Unaudited), the Year Ended December
31, 1998 and the Period from June 25, 1997
(Date of Inception) to December 31, 1997.............................................F-6
Consolidated Statements of Cash Flows For the Seven Months Ended
July 31, 1999 and 1998 (Unaudited), the Year Ended December 31, 1998
the Period from June 25, 1997 (Date of Inception) to December 31, 1997...............F-7
Notes to Consolidated Financial Statements....................................................F-8
II. EWRX INTERNET SYSTEMS, INC. AND SUBSIDIARIES
--------------------------------------------
Pro Forma Consolidated Financial Data.........................................................F-20
Pro Forma Consolidated Statements of Operations For the Seven Months Ended
July 31, 1999........................................................................F-21
Pro Forma Consolidated Statements of Operations For the Year Ended
December 31, 1998....................................................................F-22
III. CLASSIC CAR SOURCE, INCORPORATED
--------------------------------
Independent Auditors' Report for December 31, 1998 and 1997...................................F-24
Balance Sheets at July 31, 1999 (Unaudited)
and December 31, 1998 and 1997...........................................................F-25
Statements of Operations for the Seven Months Ended July 31, 1999 and 1998
(Unaudited) and for the Years Ended
December 31, 1998 and 1997...............................................................F-26
Statements of Changes in Stockholders' Equity (Deficit)
for the Seven Months Ended July 31, 1999 (Unaudited)
and the Years Ended December 31, 1998 and 1997...........................................F-27
Statements of Cash Flows for the Seven Months Ended
July 31, 1999 and 1998 (Unaudited) and the Years Ended
December 31, 1998 and 1997...............................................................F-28
Notes to Financial Statements.................................................................F-29
F-1
<PAGE>
INDEX TO FINANCIAL STATEMENTS (Continued)
IV. NORTH FORK PUBLISHING GROUP, INC.
---------------------------------
Independent Auditors' Report for December 31, 1998 and 1997...................................F-33
Balance Sheets at July 31, 1999 (Unaudited)
and December 31, 1998 and 1997...........................................................F-34
Statements of Operations for the Seven Months Ended July 31, 1999 and 1998
(Unaudited) and for the Years Ended
December 31, 1998 and 1997...............................................................F-35
Statements of Changes in Stockholders' Equity (Deficit)
for the Seven Months Ended July 31, 1999 (Unaudited)
and the Years Ended December 31, 1998 and 1997...........................................F-36
Statements of Cash Flows for the Seven Months Ended
July 31, 1999 and 1998 (Unaudited) and the Years Ended
December 31, 1998 and 1997...............................................................F-37
Notes to Financial Statements.................................................................F-38
</TABLE>
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
EWRX Internet Systems Inc.
We have audited the accompanying consolidated balance sheets of EWRX Internet
Systems Inc. and subsidiary as of December 31, 1998 and 1997, and the related
consolidated statements of operations, stockholders' equity (deficit) and cash
flows for the year ended December 31, 1998 and the period from June 25, 1997
(date of inception) to December 31, 1997. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of EWRX
Internet Systems Inc. as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for the year ended December 31, 1998 and the
period from June 25, 1997 (date of inception) to December 31, 1997, in
conformity with generally accepted accounting principles.
As discussed in Note 9 to the consolidated financial statements, certain errors
resulting in an understatement of previously reported net loss and overstatement
of previously reported stockholders' equity as of December 31, 1997 and an
overstatement of net loss in 1998 were discovered by management of the Company
subsequent to the issuance of those financial statements. Accordingly, the
financial statements have been restated to correct the errors.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company's significant operating losses and its working
capital deficit and stockholders' deficit raise substantial doubt about its
ability to continue as a going concern. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
Jackson & Rhodes P.C.
Dallas, Texas
October 29, 1999
F-3
<PAGE>
<TABLE>
<CAPTION>
EWRX INTERNET SYSTEMS INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
Assets
December 31,
July 31, ------------
1999 1998 1997
-------------- ------------ -------------
(Unaudited) (Restated)
<S> <C> <C> <C>
Current assets:
Cash $ 52,963 $ - $ 302,982
Receivables 24,293 6,264 -
Prepaids and other 6,062 1,815 8,963
----------- ----------- -----------
Total current assets 83,318 8,079 311,945
----------- ----------- -----------
Furniture and equipment:
Furniture and equipment 48,905 18,772 14,943
Accumulated depreciation (25,650) (4,948) (1,494)
----------- ----------- -----------
Net furniture and equipment 23,255 13,824 13,449
----------- ----------- -----------
Other assets:
Goodwill, net of amortization of $36,438 (Note 3) 1,959,277
Incorporation costs, net of amortization - - 3,876
----------- ----------- -----------
Total other assets 1,959,277 - 3,876
----------- ----------- -----------
$ 2,065,850 $ 21,903 $ 329,270
=========== =========== ===========
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Bank overdraft $ - $ 2,661 $ -
Accounts payable 115,040 93,731 57,930
Due to shareholders 311,588 203,241 -
----------- ----------- -----------
Total current liabilities 426,628 299,633 57,930
----------- ----------- -----------
Commitments and contingencies (Note 7) - - -
Stockholders' equity (deficit):
Preferred stock, $.01 par value, 500,000 shares authorized,
none issued and outstanding - - -
Common stock, $.001 par value, 100,000,000 shares authorized,
12,606,689, 11,949,366 and 11,719,999 shares issued and outstanding 12,606 11,949 11,720
Additional paid-in capital 3,823,358 1,008,051 664,229
Deficit accumulated during development stage (2,204,050) (1,307,478) (404,609)
Accumulated other comprehensive income 7,308 9,748 -
----------- ----------- -----------
Total stockholders' equity (deficit) 1,639,222 (277,730) 271,340
----------- ----------- -----------
$ 2,065,850 $ 21,903 $ 329,270
=========== =========== ===========
See accompanying notes to consolidated financial statements.
</TABLE>
F-4
<PAGE>
<TABLE>
<CAPTION>
EWRX INTERNET SYSTEMS INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Period from
June 25, 1997
Seven Months Ended Year Ended (Date of Inception)
July 31, December 31, to December 31,
1999 1998 1998 1997
----------- ----------- ------------ -------------------
(Unaudited) (Unaudited) (Restated) (Restated)
<S> <C> <C> <C> <C>
Revenue $ 25,572 $ - $ - $ -
----------- ----------- ----------- -----------
Operating expenses:
Loss from write-off of investment (Note 2) - 271,554 362,532 320,000
Salaries and benefits 269,198 78,202 51,531 -
Consulting, management and professional fees 179,944 50,308 147,173 68,982
Depreciation and amortization 35,265 2,017 4,165 1,846
General and administrative 437,737 209,753 337,468 13,781
----------- ----------- ----------- -----------
Total operating expenses 922,144 611,834 902,869 404,609
----------- ----------- ----------- -----------
Net loss $ (896,572) $ (611,834) $ (902,869) $ (404,609)
=========== =========== =========== ===========
Basic net loss per share $ (0.07) $ (0.05) $ (0.08) $ (0.04)
=========== =========== ========== ===========
Weighted average common shares outstanding 12,556,394 11,789,851 11,856,316 9,662,856
=========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
</TABLE>
F-5
<PAGE>
<TABLE>
<CAPTION>
EWRX INTERNET SYSTEMS INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
For the Seven Month Period Ended July 31, 1999 (Unaudited), the Year Ended
December 31, 1998 and the Period From June 25, 1997 (Date of Inception) to December 31, 1997
Deficit
Accumulated Accumulated
Additional During Other
Common Stock Paid-In Development Comprehensive
Shares Amount Capital Stage Income Total
------------ --------- ------------ ------------- --------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Sale of common stock for cash 9,719,999 $ 9,720 $ 646,229 $ - $ - $ 655,949
Issuance of common stock for
investment (Note 3) 2,000,000 2,000 18,000 - 20,000
Net loss for the period - - - (404,609) - (404,609)
----------- -------- ----------- ------------- --------- -----------
Balance, December 31, 1997 (restated) 11,719,999 11,720 664,229 (404,609) - 271,340
Sale of common stock for cash 229,367 229 343,822 - - 344,051
Net loss - - - (902,869) - (902,869)
Currency translation adjustment - - - - 9,748 9,748
-----------
Comprehensive income (loss) - - - - - (893,121)
----------- -------- ----------- ------------- --------- -----------
Balance, December 31, 1998 11,949,366 11,949 1,008,051 (1,307,478) 9,748 (277,730)
Sale of common stock for cash 1,799,027 1,799 688,860 - - 690,659
Stock issued for finders' fees (Note 6) 130,000 194 (194) - - -
Stock issued on settlement of debt 664,010 664 198,538 - - 199,202
Stock options issued as compensation - - 166,103 - - 166,103
Cancellation of shares (Note 6) (3,600,000) (3,600) 3,600 - - -
Acquisition of CCS and NFPG (Note 3) 1,600,000 1,600 1,758,400 - - 1,760,000
Currency translation adjustment - - - - (2,440) (2,440)
Net loss - - - (896,572) - (896,572)
-----------
Comprehensive income (loss) - - - - - (899,012)
----------- -------- ----------- ------------ --------- -----------
Balance, July 31, 1999
(Unaudited) 12,606,689 $ 12,606 $ 3,823,358 $ (2,204,050) $ 7,308 $ 1,639,222
=========== ======== =========== ============ ========= ===========
See accompanying notes to consolidated financial statements.
</TABLE>
F-6
<PAGE>
<TABLE>
<CAPTION>
EWRX INTERNET SYSTEMS INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Period from
June 25, 1997
Seven Months Ended Year Ended (Date of Inception)
July 31, December 31, to December 31,
1999 1998 1998 1997
------------- ------------ ------------ -------------------
(Unaudited) (Unaudited) (Restated) (Restated)
<S> <C> <C> <C> <C>
Net loss $ (896,572) $ (611,834) $ (902,869) $ (404,609)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation and amortization 38,131 2,017 4,165 1,846
Write-off of investment in joint venture - 271,504 362,532 320,000
Stock options compensation 166,103 - - -
Changes in assets and liabilities:
Receivables (6,263) (5,235) (6,821) -
Prepaid expenses (4,247) 6,979 4,617 (6,432)
Incorporation costs - 458 3,876 (4,228)
Accounts payable (29,954) (54,048) 84,454 13,930
---------- ---------- ---------- ----------
Net cash used in operating activities (732,802) (390,159) (450,046) (79,493)
---------- ---------- ---------- ----------
Cash flows from investing activities:
Investment in and advances to joint venture - (271,504) (406,532) (256,000)
Acquisition of CCS and NFPG, net of cash
acquired (Note 3) (153,798) - - -
Purchase of furniture and equipment (10,694) (1,983) (1,983) (14,943)
---------- ---------- ---------- ----------
Net cash used in investing activities (164,492) (273,487) (408,515) (270,943)
---------- ---------- ---------- ----------
Cash flows from financing activities:
Bank overdraft (2,661) - 2,661 -
Advances from (to) shareholders 264,730 29,952 208,630 (2,531)
Common stock sold for cash 690,659 344,051 344,051 655,949
---------- ---------- ---------- ----------
Net cash provided by financing activities 952,728 374,003 555,342 653,418
---------- ---------- ---------- ----------
Effect of exchange rate changes on cash (2,471) 382 237
---------- ---------- ---------- ----------
Net increase (decrease) in cash 52,963 (289,261) (302,982) 302,982
Cash at beginning of year - 302,982 302,982 -
---------- ---------- ---------- ----------
Cash at end of year $ 52,963 $ 13,721 $ - $ 302,982
========== ========== ========== ==========
Noncash activities:
During the year ended December 31, 1997, the Company issued 2,000,000 shares of common stock in partial payment
for an investment in Granat (see Note 2).
During the period ended July 31, 1999, the Company converted $199,202 of debt into 664,010 shares of common stock.
During the period ended July 31, 1999, the Company issued 1,600,000 shares as partial consideration for the acquisition
of CCS and NFPG (see Note 3).
See accompanying notes to consolidated financial statements.
</TABLE>
F-7
<PAGE>
EWRX INTERNET SYSTEMS INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
Seven Months Ended July 31, 1999 and 1998 (Unaudited),
Year Ended December 31, 1998 and the Period from
June 25, 1997 (Date of Inception) to December 31, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
The Company was incorporated on June 25, 1997 in the State of Nevada. The
consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries, Europa Resources (Canada), Inc., a company
incorporated in British Columbia, Classic Car Source, Incorporated ("CCS")
and North Fork Publishing Group, Inc. ("NFPG") (Note 3). Until its
acquisition of CCS and NFPG in June 1999, the Company was in the
development stage of its existence, devoting its efforts primarily to
raising capital, developing an industrial mineral project in Ukraine,
exploring investment opportunities, and administrative functions. CCS was
established to create a source of on-line publishing of information and
entertainment for classic vehicle collectors. NFPG was established to
provide internet marketing, design and internet database services on a
contract basis to selected clients.
In 1999, the Company changed its name from Europa Resources, Inc. to EWRX
Internet Systems Inc.
GOING CONCERN
The Company's financial statements have been presented on the basis that it
is a going concern, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. The financial
statements do not include any adjustments that might result from the
outcome of this uncertainty. The Company is reporting cumulative net losses
since inception of $2,204,050 as of July 31, 1999. The following is a
summary of management's plan to raise capital and generate additional
operating funds.
Management has filed a Form 10-SB with the Securities and Exchange
Commission ("SEC") in the third quarter of 1999. Management expects to file
an SB-2 registration statement with the SEC in conjunction with a private
placement financing for up to $3,000,000. The number of shares issued as
part of the private placement financing is dependent upon market prices.
The shares issued as part of the private placement will become
non-restricted shares upon Form SB-2 being declared effective by the SEC.
The funds raised through the private placements are intended to be used for
development of the various aspects of the CCS and NFPG businesses and to be
used for general and administrative expenses for the balance of 1999 and in
the first quarter of 2000. Management intends to secure additional funding
in 2000 through a secondary offering. The amount of that offering will be
F-8
<PAGE>
EWRX INTERNET SYSTEMS INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GOING CONCERN (Continued)
dependent upon working capital requirements of the Company for the years
2000-2002 and as developed by management in the fourth quarter 1999.
On July 15, 1999, the Company entered into an agreement with Harmonic
Research, Inc. ("Harmonic"), an investment fund management company to sell,
on a best-efforts basis, by way of private placement units consisting of
50,000 shares of Class A common stock and one three-year warrant to
purchase 50,000 shares of Class A common stock at an exercise price to be
set by the Company during the negotiations with investors buying the
private placement. Harmonic will provide other financial advisory services.
Harmonic compensation includes an initial fee of $15,000 for the first
90-day period of the Agreement and an additional $15,000 for each 90-day
period if the Agreement is extended by the Company. The Company has granted
Harmonic an option to purchase three-year warrants consisting of 300,000
shares of the Company's common stock at $1.00 per share, 150,000 as of July
15, 1999 and an additional 150,000 shares when the initial $500,000 of the
financing is complete. The Company will also pay Harmonic an additional fee
for any financing including the initial $3,000,000 of 8% of the amount
raised by Harmonic as a cash fee and 8% of any securities related to that
financing. Harmonic is also entitled to the following fees should the
Company enter into a merger, consolidation, reorganization, business
combination or acquire another company where Harmonic was the finder:
10% of the aggregate value of the transaction for the first $2,000,000 of
the transaction, 8% of the aggregate value of the transaction for the next
$2,000,000 of the transaction, 6% of the aggregate of the transaction for
the next $2,000,000 of the transaction and 4% of the aggregate of the
transaction for the remaining value of the transaction.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany balances and
transactions are eliminated in consolidation.
USE OF ESTIMATES AND ASSUMPTIONS
Preparation of the Company's financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect certain reported amounts and
disclosures. Accordingly, actual results could differ from those estimates.
F-9
<PAGE>
EWRX INTERNET SYSTEMS INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
CASH AND CASH EQUIVALENTS
The Company considers all liquid investments, with an original maturity of
three months or less when purchased, to be cash equivalents.
FURNITURE AND EQUIPMENT
Furniture and equipment are stated at cost. Depreciation is computed
principally by the straight-line method based on the estimated useful lives
of five to seven years.
FOREIGN CURRENCY TRANSLATION
The financial statements are presented in United States dollars. In
accordance with Statement of Financial Accounting Standards No. 52,
"Foreign Currency Translation," foreign denominated monetary assets and
liabilities are translated to their United States dollar equivalents using
foreign exchange rates which prevailed at the balance sheet date. Revenue
and expenses are translated at average rates of exchange during the year.
Related translation adjustments are reported as a separate component of
stockholders' equity, whereas gains or losses resulting from foreign
currency transactions are included in results of operations.
NET LOSS PER COMMON SHARE
In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings Per Share ("SFAS 128").
SFAS 128 provides a different method of calculating earnings per share than
was formerly used in APB Opinion 15. SFAS 128 provides for the calculation
of basic and diluted earnings per share. Basic earnings per share includes
no dilution and is computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding
for the period. Dilutive earnings per share reflects the potential dilution
of securities that could share in the earnings of the Company. The Company
was required to adopt this standard in the fourth quarter of calendar 1997.
Because the Company's potential dilutive securities are antidilutive, the
accompanying presentation is only of basic loss per share.
F-10
<PAGE>
EWRX INTERNET SYSTEMS INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
STOCK-BASED COMPENSATION
The Company has issued stock options. Compensation costs arising from such
options will be recorded as an expense. The measurement date for
determining compensation costs is the date of the grant. Compensation cost
is the excess, if any, of the market value of the stock at date of grant
over the amount the employee must pay to acquire the stock. The Company
measures compensation costs using the intrinsic value based method of
accounting for stock issued to employees.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes"
("SFAS 109"). The objective of the asset and liability method is to
establish deferred tax assets and liabilities for the temporary differences
between the financial reporting basis and the tax basis of the Company's
assets and liabilities at enacted tax rates expected to be in effect when
such amounts are realized or settled. Under SFAS 109, the effect on
deferred tax assets and liabilities of a change in tax rates is recognized
in income in the period that includes the enactment date.
RECLASSIFICATIONS
Certain items in the accompanying financial statements for the years ended
December 31, 1998 and 1997 have been reclassified from the financial
statements previously issued to more properly reflect certain balances and
transactions.
2. INVESTMENT IN JOINT VENTURE
In October 1997, the Company acquired a 49% interest in the Granat Joint
Venture ("Granat"), a Ukrainian-Canadian joint venture between the Company
and Ivaniv Special Quarry ("ISQ"), an open joint-stock company of the
Ukraine. The Granat interest was purchased from Aurora Pacific Consulting &
Development Corp. ("Aurora") for $300,000 and 2,000,000 restricted (Rule
144) common shares. The common shares were valued at $.01 per share, the
price for which the shares were being sold at the time. The individual who
controlled Aurora later became a director of the Company. Granat was formed
for the purposes of mining, production and marketing of industrial garnets
and related products in the Ukraine. In addition, the Company acquired
control over 25% of the shares of ISQ.
Despite its majority ownership in the project, the Company was unable to
control the operations of the entity. Therefore, the Company endeavored to
account for the investment under the equity method. The Company discovered
F-11
<PAGE>
EWRX INTERNET SYSTEMS INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
2. INVESTMENT IN JOINT VENTURE (Continued)
that, due to the remoteness of the operation and the lack of accounting
sophistication of the operators, the Company was unable to obtain required
information in order to monitor its investment and account for the
investment under the equity method. These problems, along with a
significant downturn in the Ukrainian and Russian economies, eventually
caused the Company to relinquish its interest in Granat and ISQ to Aurora
in return for the 2,000,000 restricted common shares and a release from any
ongoing obligations under the original purchase agreement. The director of
the Company who controlled Aurora resigned as a director. As a result of
the lack of information with which to account for its investment, the
Company has written off the investment in each year as the payments were
made. During 1998 and 1997, the Company issued stock and made cash payments
toward the purchase of its interest in Granat, the purchase of ISQ shares
and advances to Granat as follows:
2,000,000 common shares issued $ 20,000
Cash payments made during 1997 300,532
-----------
Write off in 1997 $ 320,000
===========
Cash payments made and written off during 1998 $ 362,532
===========
3. ACQUISITIONS
The Company entered into an agreement dated April 11, 1999, to acquire all
the issued and outstanding shares of CCS and NFPG. CCS is a privately held,
state of Washington-based company which owns two websites, Classicar.com
and Classictruckshop.com, both of which are destination class websites on
the Internet. NFPG is an affiliated, privately held, state of
Washington-based company which provides website design and Internet
consulting services. The Company paid $133,333 cash plus 1,000,000
restricted common shares for CCS and $66,667 cash plus 450,000 restricted
common shares for NFPG and 150,000 common shares as a finder's fee. The
above transactions closed on June 15, 1999.
The transaction was accounted for as a purchase. Accordingly, the Company's
financial statements for the seven months ended July 31, 1999 include the
operations of CCS and NFPG from the date of acquisition (June 15, 1999).
Under purchase accounting, the total purchase price was allocated to the
tangible and intangible assets and liabilities of the acquirees based upon
their respective estimated fair values as of the closing date based upon
valuations and other analyses. The estimated purchase price and adjustments
to the historical book value of the acquirees was as follows:
F-12
<PAGE>
EWRX INTERNET SYSTEMS INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
3. ACQUISITIONS (Continued)
Purchase price, based on value
of common stock issued plus cash paid $ 1,960,000
Fair value of net liabilities acquired 17,345
-----------
Purchase price in excess of net liabilities
acquired $ 1,977,345
===========
Goodwill $ 1,977,345
===========
The common stock issued was valued based on the market price of the
securities over a reasonable period of time before and after the companies
reached an agreement on the purchase price and the proposed transaction was
announced in June 1999. The market price was discounted by 20% due to the
restrictions (Rule 144) on the securities and their thin market.
The following unaudited pro forma consolidated information for the seven
months ended July 31, 1999 and the year ended December 31, 1998 gives
effect to the transaction as if it had occurred at the beginning of each
period. The unaudited pro forma consolidated information is presented for
informational purposes only and is not necessarily indicative of the
results of operations that would have been achieved had the transaction
been completed as of the beginning of that year, nor are they indicative of
the Company's future results of operations.
Period Ended Year Ended
July 31, December 31,
1999 1998
------------------- -----------------
Revenues $ 95,354 $ 241,184
Net loss $ (1,130,864) $ (1,243,006)
Net loss per common share $ (0.08) $ (0.09)
Goodwill is being amortized over ten years. Amortization amounted to
$32,956 for the period ended July 31, 1999.
F-13
<PAGE>
EWRX INTERNET SYSTEMS INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
4. RELATED PARTY TRANSACTIONS
As of July 31, 1999 and December 31, 1998, $311,588 and $203,241,
respectively, had been advanced to the Company by certain shareholders.
During the year ended December 31, 1998, and the seven months ended July
31, 1999, the following amounts were paid to directors and former directors
of the Company.
Period Ended July 31, December 31,
1999 1998 1998
--------- -------- ------------
Management fees and salaries $ 104,344 $ 38,426 $ 52,057
Consulting fees on the Granat project 37,984 22,500 21,208
Expense reimbursements 34,969 12,674 22,139
--------- -------- --------
$ 177,297 $ 73,600 $ 95,404
========= ======== ========
5. INCOME TAXES
There were no temporary differences between the Company's tax and financial
bases, except for the Company's net operating loss carryforwards amounting
to approximately $2,150,000, $1,250,000 and $400,000 at July 31, 1999 and
December 31, 1998 and 1997, respectively. These carryforwards will expire,
if not utilized, in 2012-2014.
The Company has deferred tax assets amounting to approximately $731,000,
425,000 and $135,000 at July 31, 1999, and December 31, 1998 and 1997,
respectively, related to the net operating loss carryovers. The realization
of the benefits from these deferred tax assets appears uncertain due to
recurring net losses. Accordingly, a valuation allowance has been recorded
which offsets the deferred tax assets at the end of each period.
6. CAPITAL STOCK
Subsequent to December 31, 1998, the 2,000,000 shares issued to Aurora
(Note 3) were returned to the Company and cancelled. An additional
1,600,000 shares issued to individuals in 1997 for cash ($.01 per share)
were also returned to the Company subsequent to December 31, 1998 and
cancelled (see Note 9).
During the period ended July 31, 1999, the Company issued 130,000 common
shares to two individuals for their assistance in raising funds in a
private placement of shares.
F-14
<PAGE>
EWRX INTERNET SYSTEMS INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
6. CAPITAL STOCK (Continued)
The Company has issued compensatory stock options to employees and
directors. A summary of the status of stock options is set forth below:
<TABLE>
<CAPTION>
Period Ended Year Ended Period Ended
July 31, 1999 December 31, 1998 December 31, 1997
-------------------------- ---------------------- ------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Stock Options Shares Price Shares Price Shares Price
------------- ----------- --------- ---------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning or period 500,000 $ 0.25 500,000 $ 0.25 - $ -
Granted 1,250,000 $ 0.62 - $ - 500,000 $ 0.25
Exercised - $ - - $ - - $ -
Forfeited/expired - $ - - $ - - $ -
---------- -------- ---------
Outstanding, end of period 1,750,000 $ 0.52 500,000 $ 0.25 500,000 $ 0.25
========== ======== =========
Options exercisable, end of period 1,750,000 $ 0.52 500,000 $ 0.25 500,000 $ 0.25
========== ======== =========
</TABLE>
Fair value for the stock underlying stock options was determined using
information available from other stock sale transactions at or near the
grant date. In management's opinion, these transactions between willing
parties included the best information available at the time of grant to
estimate the market value of the common stock of the Company. These fair
values were used to determine the compensatory components of the stock
options granted during the year ended December 31, 1997 and the seven
months ended July 31, 1999.
Compensation costs for employee options are recognized as an expense in an
amount equal to the excess of the fair market value of the stock at the
date of measurement over the amount the employee must pay. The measurement
date is generally the grant date. Under this method, compensation expense
amounted to $119,250 for the seven months ended July 31, 1999. There is no
future compensation expense to be recorded in subsequent periods as of July
31, 1999. Using the fair value method, the fair value of each option grant
is estimated on the date of grant using the Black-Scholes option pricing
model with the following weighted-average assumptions used for grants in
1999: dividend yield of 0.0 percent; expected volatility of 157 percent;
risk free interest rates of 4.5 percent; expected lives of one year. The
Company recorded an additional $46,853 in compensation expense during the
seven months ended July 31, 1999 under FASB Statement 123 for options
issued to non-employees. Using the fair value method of FASB Statement 123
would have had no effect on the Company's net loss for 1997, as the fair
value of the options issued was nominal. Using the fair value method of
FASB Statement 123, net loss and net loss per common share for the seven
months ended July 31, 1999 would have been $(1,047,105) and $(.08),
respectively.
F-15
<PAGE>
EWRX INTERNET SYSTEMS INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
7. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
The Company leases office space under an operating lease which expires
December 31, 1999. Future minimum rental commitments for 1999 amount to
$13,000. Rent expense for the seven months ended July 31, 1999 and 1998 and
the years ended December 31, 1998 and 1997 amounted to $23,168, $32,823,
$43,542 and $1,450, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of SFAS No. 107,
Disclosures about Fair Value of Financial Instruments. The estimated fair
value amounts have been determined by the Company, using available market
information and appropriate valuation methodologies. The fair value of
financial instruments classified as current assets or liabilities including
cash and cash equivalents and notes and accounts payable approximate
carrying value due to the short-term maturity of the instruments.
CONCENTRATION OF CREDIT RISK
The Company invests its cash and certificates of deposit primarily in
deposits with major banks. Certain deposits, at times, are in excess of
federally insured limits. The Company has not incurred losses related to
its cash.
UNCERTAINTY DUE TO THE YEAR 2000 ISSUE
The Year 2000 issue arises because many computerized systems use two digits
rather than four to identify a year. Date-sensitive systems may recognize
the year 2000 as 1900 or some other date, resulting in errors when
information using year 2000 dates is processed. In addition, similar
problems may arise in some systems which use certain dates in 1999 to
represent something other than a date. The effects of the Year 2000 issue
may be experienced before, on, or after January 1, 2000 and, if not
addressed, the impact on operations and financial reporting may range from
minor errors to significant systems failure which could impact the
Company's ability to conduct normal business operations. It is not possible
to be certain that all aspects of the Year 2000 issue affecting the Company
will be fully resolved.
F-16
<PAGE>
EWRX INTERNET SYSTEMS INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
7. COMMITMENTS AND CONTINGENCIES (Continued)
EMPLOYMENT AGREEMENTS
The Company has employment agreements with two officers. Each agreement is
for three years beginning May 4, 1999 and contains certain non-compete
clauses, benefits, and termination clauses. The agreements provide for
aggregate salaries for the two officers of $160,000 annually.
8. NEW ACCOUNTING PRONOUNCEMENTS
SFAS 129
Statement of Financial Accounting Standards No. 129, Disclosure of
Information about Capital Structure ("SFAS 129"), effective for periods
ending after December 15, 1997, establishes standards for disclosing
information about an entity's capital structure. SFAS 129 requires
disclosure of the pertinent rights and privileges of various securities
outstanding (stock, options, warrants, preferred stock, debt and
participating rights) including dividend and liquidation preferences,
participant rights, call prices and dates, conversion or exercise prices
and redemption requirements. Adoption of SFAS 129 has had no effect on the
Company as it currently discloses the information specified.
SFAS 130
In June 1997, the Financial Accounting Standards Board issued two new
disclosure standards. Results of operations and financial position are
unaffected by implementation of these new standar Statement of Financial
Accounting Standards (SFAS) 130, "Reporting Comprehensive Income",
establishes standards for reporting and display of comprehensive income,
its components and accumulated balances. Comprehensive income is defined to
include all changes in equity except those resulting from investments by
owners and distributions to owners. Among other disclosures, SFAS 130
requires that all items that are required to be recognized under current
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. The Company has reflected its foreign currency
translation adjustment as other comprehensive income in the accompanying
consolidated statement of changes in stockholders' equity.
SFAS 131
SFAS 131, "Disclosure about Segments of a Business Enterprise", establishes
standards for the way that public enterprises report information about
operating segments in annual financial statements and requires reporting of
selected information about operating segments in interim financial
statements issued to the public. It also establishes standards for
disclosures regarding products and services, geographic areas and major
customers. SFAS 131 defines operating segments as components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how
to allocate resources and in assessing performance. This accounting
F-17
<PAGE>
EWRX INTERNET SYSTEMS INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
8. NEW ACCOUNTING PRONOUNCEMENTS (Continued)
SFAS 131 (Continued)
pronouncement has had no effect on the Company's financial statements for
the periods presented. The Company will consider its effect on the
consolidated financial statements in the future as a result of the
acquisitions described in Note 7.
SFAS 132
Statement of Financial Accounting Standards (SFAS) 132, "Employers'
Disclosure about Pensions and Other Postretirement Benefits," revises
standards for disclosures regarding pensions and other postretirement
benefits. It also requires additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate financial
analysis. This statement does not change the measurement or recognition of
the pension and other postretirement plans. The financial statements are
unaffected by implementation of this new standard.
SFAS 133
Statement of Financial Accounting Standards (SFAS) 133, "Accounting for
Derivative Instruments and Hedging Activities," establishes accounting and
reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, (collectively referred
to as derivatives) and for hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the statement
of financial position and measure those instruments at fair value. If
certain conditions are met, a derivative may be specifically designated as
(a) a hedge of the exposure to changes in the fair value of a recognized
asset or liability or an unrecognized firm commitment, (b) a hedge of the
exposure to variable cash flows of a forecasted transaction, or (c) a hedge
of the foreign currency exposure of a net investment in a foreign
operation, an unrecognized firm commitment, an available-for sale security,
or a foreign-currency-denominated forecasted transaction. Because the
Company has no derivatives, this accounting pronouncement has no effect on
the Company's financial statements.
F-18
<PAGE>
EWRX INTERNET SYSTEMS INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
9. RESTATEMENT
Certain errors resulting in an understatement of previously reported net
loss and overstatement of previously reported stockholders' equity as of
December 31, 1997 and an overstatement of net loss for 1998 was discovered
by management of the Company subsequent to the issuance of those financial
statements. Accordingly, the financial statements have been restated to
correct the errors. The errors discovered related to the Company's
investment in Granat (Note 2). In the previously issued financial
statements, the Company failed to account for the issuance and subsequent
rescission of 2,000,000 common shares issued in the acquisition of the
joint venture. The Company also failed to write off its investment in
Granat until the decision was made to abandon the project in 1998. In the
accompanying financial statements, the investment has been written off as
funds were invested, since the Company did not have accurate information
with which to account for its investment. Following is a summary of the
effects of the restatement of the 1997 and 1998 financial statements:
1998 1997
---- ----
Increase (decrease) in:
Stockholders' equity $ - $(300,000)
--------- ---------
Net loss $ 300,000 $(320,000)
--------- ---------
Net loss per common share $ 0.07 $ (0.02)
--------- ---------
F-19
<PAGE>
EWRX INTERNET SYSTEMS, INC. AND SUBSIDIARIES
Pro Forma Consolidated Financial Data
The unaudited pro forma consolidated statement of operations for the year ended
December 31, 1998 and the seven-month period ended July 31, 1999 (the "pro forma
statements of operations") have been prepared to illustrate the estimated effect
of the acquisition by EWRX Internet Systems, Inc. ("EWRX") of 100% of the
outstanding common stock of Classic Car Source, Inc. ("Classic Car") and North
Fork Publishing Group, Inc. ("North Fork"). The three companies have entered
into an agreement to merge, dated April 11, 1999. EWRX has paid $133,333 in cash
plus 1,000,000 restricted common shares for Classic Car and $66,667 in cash and
450,000 restricted common shares for North Fork and 150,000 common shares as a
finder's fee. The transactions closed on June 15, 1999. The pro forma statements
do not reflect any anticipated cost savings from the acquisitions, or any
synergies that are anticipated to result from the combination, and there can be
no assurance that any such cost savings or synergies will occur. The pro forma
statements of operations give pro forma effect to the acquisition as if it had
occurred at the beginning of each period. The pro forma statements of operations
do not purport to be indicative of the results of operations of the Company that
would have actually been obtained had such transaction been completed as of the
assumed dates and for the periods presented, or which may be obtained in the
future. The pro forma adjustments are described in the accompanying notes and
are based upon available information and certain assumptions that the Company
believes are reasonable. The pro forma statements of operations should be read
in conjunction with the separate historical consolidated financial statements of
each company and the notes thereto.
A preliminary allocation of the purchase price has been made to major categories
of assets and liabilities in the accompanying pro forma statements of operations
based on available information. The actual allocation of purchase price and the
resulting effect on income from operations may differ significantly from the pro
forma amounts included herein. These pro forma adjustments represent the
Company's preliminary determination of purchase accounting adjustments and are
based upon available information and certain assumptions that the Company
believes to be reasonable. Consequently, the amounts reflected in the pro forma
statements of operations are subject to change, and the final amounts may differ
substantially.
F-20
<PAGE>
<TABLE>
<CAPTION>
EWRX INTERNET SYSTEMS, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
Seven Months Ended July 31, 1999
(Unaudited)
For the Period
Prior to Date of Acquisition
----------------------------
CLASSIC NORTH Pro Forma
EWRX CAR FORK Adjustments Consolidated
---------- ----------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenue $ 25,572 $ 29,959 $ 39,823 $ 95,354
---------- -------- -------- --------- -----------
Operating expenses:
Salaries 269,198 98,173 30,174 397,545
Consulting, management and professional fees 179,944 4,214 15,609 199,767
Depreciation and amortization 35,265 2,364 - (1) 82,389 120,018
General and administrative 437,737 13,617 57,534 508,888
---------- --------- ---------- --------- -----------
Total operating expenses 922,144 118,368 103,317 82,389 1,226,218
---------- --------- ---------- --------- -----------
Net loss $ (896,572) $ (88,409) $ (63,494) $ (82,389) $(1,130,864)
========== ========= ========== ========= ===========
Basic net loss per share $ (0.07) $ (0.08)
========== ===========
Weighted average common shares outstanding 12,556,394 1,600,000 14,156,394
========== ========= ===========
(1)To record additional amortization of goodwill for the period prior to date of acquisition.
</TABLE>
F-21
<PAGE>
<TABLE>
<CAPTION>
EWRX INTERNET SYSTEMS, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31, 1998
(Unaudited)
CLASSIC NORTH Pro Forma
EWRX CAR FORK Adjustments Consolidated
---------- --------- -------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Revenue $ - $ 156,359 $ 84,825 $ - $ 241,184
---------- --------- --------- ---------- -----------
Operating expenses:
Loss from write-off of investment 362,532 - - 362,532
Salaries 51,531 186,118 - 237,649
Consulting, management and professional fees 147,173 744 47,650 195,567
Depreciation and amortization 4,165 5,269 - (1) 197,735 207,169
General 3nd administrative 337,468 55,924 87,881 481,273
---------- --------- -------- ---------- -----------
Total operating expenses 902,869 248,055 135,531 197,735 1,484,190
---------- --------- -------- ---------- -----------
Net loss $ (902,869) $ (91,696) $(50,706) $ (197,735) $(1,243,006)
========== ========= ======== ========== ===========
Basic net loss per share $ (0.08) $ (0.09)
========== ===========
Weighted average common shares outstanding 11,856,316 1,600,000 13,456,316
========== ========== ===========
</TABLE>
(1) To record goodwill amortization for the year.
F-22
<PAGE>
EWRX INTERNET SYSTEMS, INC. AND SUBSIDIARIES
Notes to Pro Forma Consolidated Financial Data
1. The acquisition of Classic Car and North Fork was accounted for under
the purchase method of accounting. EWRX is considered the acquiring
company for accounting purposes under this method and its operations
are considered the historical operations of the reporting entity. Under
purchase accounting, the total purchase price was allocated to the
tangible and intangible assets and liabilities of Classic Car and North
Fork based upon their respective fair values as of the closing date
based upon valuations and other analyses. The estimated purchase price
and preliminary adjustments to the historical book value of Classic Car
and North Fork are as follows:
Purchase price, based on value
of common stock issued plus cash paid $ 1,960,000
Fair value of net liabilities acquired 17,345
-----------
Purchase price in excess of net liabilities
acquired $ 1,977,345
===========
Goodwill $ 1,977,345
===========
2. Depreciation and amortization was increased by $197,735 and $82,389 for
the year ended December 31, 1998 and the seven months ended July 31,
1999, respectively, as a result of the purchase adjustments. Goodwill
is being amortized over its estimated useful life of ten years.
3. The 1,600,000 shares issued in the acquisition have been assumed to be
issued at the beginning of each period presented.
F-23
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Classic Car Source, Incorporated
We have audited the accompanying balance sheets of Classic Car Source,
Incorporated as of December 31, 1998 and 1997, and the related statements of
operations, changes in stockholders' equity (deficit) and cash flows for the
years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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, the financial statements referred to above present fairly, in
all material respects, the financial position of Classic Car Source,
Incorporated as of December 31, 1998 and 1997, and the results of its operations
and its cash flows for the years then ended in conformity with generally
accepted accounting principles.
As discussed in Note 5 to the financial statements, certain errors resulting in
an overstatement of previously reported stockholders' equity as of December 31,
1997 and 1998 were discovered by management of the Company subsequent to the
issuance of those financial statements. Accordingly, the financial statements
have been restated to correct the errors.
Jackson & Rhodes P.C.
Dallas, Texas
July 30, 1999
F-24
<PAGE>
<TABLE>
<CAPTION>
CLASSIC CAR SOURCE, INCORPORATED
BALANCE SHEETS
Assets
December 31,
July 31, -------------------------------
1999 1998 1997
--------------- ------------- -------------
(Unaudited) (Restated) (Restated)
<S> <C> <C> <C>
Current assets:
Cash $ 5,296 $ 4,187 $ 3,068
Accounts receivable 7,687 21,434 8,400
----------- ----------- ------------
Total current assets 12,983 25,621 11,468
----------- ----------- ------------
Property and equipment:
Furniture and fixtures 1,395 1,395 1,395
Computer equipment 18,044 18,044 20,599
----------- ----------- ------------
19,439 19,439 21,994
Less accumulated depreciation (15,837) (14,745) (12,889)
----------- ----------- ------------
Net property and equipment 3,602 4,694 9,105
----------- ----------- ------------
Other assets:
Goodwill, net of amortization of $4,112 and $1,900, respectively 14,888 17,100 -
----------- ----------- ------------
$ 31,473 $ 47,415 $ 20,573
=========== =========== ============
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Accounts payable $ 6,355 $ 39,431 $ 45,434
Accrued liabilities (Note 5) - 369,582 184,791
Due to affiliates 84,878 - -
Due to shareholders 22,293 4,444 1,844
----------- ----------- ------------
Total current liabilities 113,526 413,457 232,069
----------- ----------- ------------
Commitments and contingencies (Note 4) - - -
Stockholders' equity (deficit):
Common stock, no par value, 100,000 shares authorized; 67,019
42,789 and 49,074 shares issued and outstanding 485,919 39,710 102,560
Accumulated deficit (567,972) (405,752) (314,056)
----------- ----------- ------------
Total stockholders' equity (deficit) (82,053) (366,042) (211,496)
----------- ----------- ------------
$ 31,473 $ 47,415 $ 20,573
=========== =========== ============
See accompanying notes to financial statements.
</TABLE>
F-25
<PAGE>
<TABLE>
<CAPTION>
CLASSIC CAR SOURCE, INCORPORATED
STATEMENTS OF OPERATIONS
Seven Months Ended Years Ended
July 31, December 31,
-------------------------------- --------------------------------
1999 1998 1998 1997
----------- ----------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues:
Advertising $ 38,592 $ 41,211 $ 86,021 $ 45,085
Design 1,250 22,950 40,233 28,100
Networking 2,537 12,435 30,105 11,875
---------- --------- --------- ----------
Total revenues 42,379 76,596 156,359 85,060
---------- --------- ---------- ----------
Expenses:
Operating 80,439 30,200 36,440 42,404
General and administrative 124,160 128,228 213,421 249,193
---------- --------- ---------- ----------
Total expenses 204,599 158,428 249,861 291,597
---------- --------- ---------- ----------
Loss from operations (162,220) (81,832) (93,502) (206,537)
Other income - - 1,806 -
---------- --------- ---------- ----------
Net loss $ (162,220) $ (81,832) $ (91,696) $ (206,537)
========== ========= ========== ==========
See accompanying notes to financial statements.
</TABLE>
F-26
<PAGE>
<TABLE>
<CAPTION>
CLASSIC CAR SOURCE, INCORPORATED
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
For the Seven Months Ended July 31, 1999 (Unaudited) and Years Ended
December 31, 1998 and 1997
Common Stock
-------------------------- Accumulated
Shares Amount Deficit Total
--------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Balance, December 31, 1996 47,915 $ 90,970 $ (107,519) $ (16,549)
Common stock issued for services 264 2,640 - 2,640
Common stock issued for contract fee 895 8,950 - 8,950
Net loss - - (206,537) (206,537)
-------- ---------- ---------- ---------
Balance, December 31, 1997 (restated) 49,074 102,560 (314,056) (211,496)
Common stock issued for wages 96 960 - 960
Common stock issued for contract fees 286 2,860 - 2,860
Common stock issued for acquisition 1,900 19,000 - 19,000
Common stock redemptions (8,567) (85,670) (85,670)
Net loss - - (91,696) (91,696)
--------- ---------- ---------- ---------
Balance, December 31, 1998 (restated) 42,789 39,710 (405,752) (366,042)
Common stock issued for accrued liabilities (Note 5) 24,267 446,579 - 446,579
Common stock redemptions (37) (370) - (370)
Net loss - - (162,220) (162,220)
--------- ---------- ---------- ---------
Balance, July 31, 1999 (unaudited) 67,019 $ 485,919 $ (567,972) $ (82,053)
========= ========== ========== =========
See accompanying notes to financial statements.
</TABLE>
F-27
<PAGE>
<TABLE>
<CAPTION>
CLASSIC CAR SOURCE, INCORPORATED
STATEMENTS OF CASH FLOWS
Seven Months Ended Years Ended
July 31, December 31,
--------------------------- ---------------------------
1999 1998 1998 1997
----------- ----------- ----------- ----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net loss $ (162,220) $ (81,832) $ (91,696) $ (206,537)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation and amortization 3,304 3,074 5,269 5,941
Common stock issued for services and fees - 1,999 3,820 11,590
Changes in assets and liabilities:
Accounts receivable 13,747 (1,086) (13,034) (7,050)
Accounts payable (33,076) (2,290) (6,003) (733)
Accrued liabilities 76,997 107,795 184,791 184,791
---------- --------- --------- ----------
Net cash provided by (used in) operating activities (101,248) 27,660 83,147 (11,998)
---------- --------- --------- ----------
Cash flows from investing activities:
Disposal (purchase) of furniture and equipment - - 1,042 (324)
---------- --------- --------- ----------
Cash flows from financing activities:
Affiliate advances 84,878 - - -
Bank overdraft - - - (312)
Shareholder advances 17,849 (28,410) 2,600 15,702
Common stock redemptions (370) - (85,670) -
---------- --------- --------- ----------
Net cash provided by (used in) financing activities 102,357 (28,410) (83,070) 15,390
---------- --------- --------- ----------
Net increase in cash 1,109 (750) 1,119 3,068
Cash at beginning of year 4,187 3,068 3,068 -
---------- --------- --------- ----------
Cash at end of year $ 5,296 $ 2,318 $ 4,187 $ 3,068
========== ========= ========= ==========
Non-cash transactions:
During 1998, the Company acquired Classic Truck Shop for 1,900 shares of common stock valued at
$19,000 (Note 3).
During the period ended July 31, 1999, the Company issued 24,267 shares for $446,579 in accrued liabilities (Note 5).
See accompanying notes to financial statements.
</TABLE>
F-28
<PAGE>
CLASSIC CAR SOURCE, INCORPORATED
Notes to Financial Statements
July 31, 1999 and 1998 (Unaudited) and
December 31, 1998 and 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
The Company was incorporated on March 13, 1996, under the state of
Washington Business Corporation Act. The Company was established to create
a source of on-line publishing of information and entertainment for classic
vehicle collectors.
All of the Company's outstanding common shares and all the outstanding
common shares of North Fork Publishing Group, Inc. ("NFPG"), an affiliated
company, were acquired in June 1999 by EWRX Internet Systems Inc. ("EWRX").
EWRX paid $133,333 cash plus 1,000,000 restricted common shares for the
Company and $66,667 cash plus 450,000 restricted common shares for NFPG and
150,000 common shares as a finder's fee. The above transactions closed on
June 15, 1999.
USE OF ESTIMATES AND ASSUMPTIONS
Preparation of the Company's financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect certain reported amounts and
disclosures. Accordingly, actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all liquid investments, with an original maturity of
three months or less when purchased, to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed
principally by the straight-line method based on the estimated useful lives
of five to seven years.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes"
("SFAS 109"). The objective of the asset and liability method is to
establish deferred tax assets and liabilities for the temporary differences
between the financial reporting basis and the tax basis of the Company's
assets and liabilities at enacted tax rates expected to be in effect when
such amounts are realized or settled. Under SFAS 109, the effect on
deferred tax assets and liabilities of a change in tax rates is recognized
in income in the period that includes the enactment date.
F-29
<PAGE>
CLASSIC CAR SOURCE, INCORPORATED
Notes to Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
RECLASSIFICATIONS
Certain reclassifications have been made in the accompanying financial
statements as of December 31, 1998 and 1997 from those previously issued.
2. RELATED PARTY TRANSACTIONS
As of July 31, 1999, December 31, 1998 and 1997, $22,293, $4,444 and
$1,844, respectively, was due to certain shareholders as a result of net
advances during the periods.
The following amounts were paid to shareholders of the Company:
Periods ended July 31, Years Ended December 31,
1999 1998 1998 1997
-------- -------- -------- --------
Management fees $ 51,390 $ 778 $ 1,200 $ 1,200
Consulting fees 5,785 11,030 19,384 15,583
-------- -------- -------- --------
$ 57,175 $ 11,808 $ 20,584 $ 16,783
======== ======== ======== ========
As of July 31, 1999, the Company was indebted to NFPG and EWRX (see Note 1)
in the aggregate amount of $84,878.
3. ACQUISITION
In July 1998, the Company acquired a sole proprietorship, Classic Truck
Shop Online Magazine ("CTS") for 1,900 shares of common stock valued at
$19,000. The acquisition has been accounted for as a purchase. The entire
purchase price has been assigned to goodwill. Amortization of goodwill
amounted to $1,900 for 1998 and $2,212 for the period ended July 31, 1999.
No pro forma financial information, as if the acquisition had been made as
of the beginning of the year, has been made since operations of CTS were
nominal prior to acquisition.
F-30
<PAGE>
CLASSIC CAR SOURCE, INCORPORATED
Notes to Financial Statements
4. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
The Company leases office space under an operating lease which expires
April 30, 2000. Future minimum rental commitments for the remaining years
amount to $9,803 in 1999 and $4,902 in 2000.
Rent expense amounted to $3,127 and $2,730 for the seven month periods
ended July 31, 1999 and 1998, and $4,290 and $4,155 for the years ended
December 31, 1998 and 1997, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of SFAS No. 107,
Disclosures about Fair Value of Financial Instruments. The estimated fair
value amounts have been determined by the Company using available market
information and appropriate valuation methodologies. The fair value of
financial instruments classified as current assets or liabilities including
cash and cash equivalents and notes and accounts payable approximate
carrying value due to the short-term maturity of the instruments.
CONCENTRATION OF CREDIT RISK
The Company invests its cash and certificates of deposit primarily in
deposits with major banks. Certain deposits, at times, are in excess of
federally insured limits. The Company has not incurred losses related to
its cash.
REVENUE CONCENTRATION
One customer comprised approximately 10% of the Company's revenues in 1998.
UNCERTAINTY DUE TO THE YEAR 2000 ISSUE
The Year 2000 issue arises because many computerized systems use two digits
rather than four to identify a year. Date-sensitive systems may recognize
the year 2000 as 1900 or some other date, resulting in errors when
information using year 2000 dates is processed. In addition, similar
problems may arise in some systems which use certain dates in 1999 to
represent something other than a date. The effects of the Year 2000 issue
may be experienced before, on, or after January 1, 2000 and, if not
addressed, the impact on operations and financial reporting may range from
minor errors to significant systems failure which could impact the
Company's ability to conduct normal business operations. It is not possible
to be certain that all aspects of the Year 2000 issue affecting the Company
will be fully resolved.
F-31
<PAGE>
CLASSIC CAR SOURCE, INCORPORATED
Notes to Financial Statements
5. COMMON STOCK AND RESTATEMENT
During June 1999, the Company issued 24,267 shares to certain employees and
a consultant as compensation for services over the previous 29 months. The
Company has valued the shares at $18.40 each, the fair value at the time of
issue, based on the value of the shares in the EWRX transaction, which
closed on the same day. Management of the Company had agreed to compensate
certain officers and employees over the periods by promising to issue
shares of stock of the Company in the future, representing a certain
percentage of the Company. Because the Company did not keep time records of
its employees with which to determine a fair value of the services rendered
each period, the fair value of the shares, aggregating $446,578, was
allocated to expense on a pro rata basis during the period ended July 31,
1999 and the years ended December 31, 1998 and 1997. In previously issued
financial statements, the Company had reported the accrued amount of the
expenses at December 31, 1998 and 1997 as "stock to be issued" in
stockholders' equity. The Company has restated the accompanying balance
sheets as of December 31, 1998 and 1997 to report the accruals as accrued
liabilities. The restatement has decreased stockholders' equity by $369,582
and $184,791 as of December 31, 1998 and 1997, respectively, from that
previously reported.
6. INCOME TAXES
There were no material temporary differences between the Company's tax and
financial bases, except for the Company's net operating loss carryforwards
amounting to approximately $675,000, $400,000 and $300,000 at July 31, 1999
and December 31, 1998 and 1997, respectively. These carryforwards will
expire, if not utilized, in 2012-2014.
The Company has deferred tax assets amounting to approximately $230,000,
$135,000 and $102,000 at July 31, 1999, December 31, 1998 and 1997,
respectively, related to the net operating carryforwards. The realization
of the benefits from these deferred tax assets appears uncertain due to
recurring net losses. Accordingly, a valuation allowance has been recorded
which offsets the deferred tax assets at the end of each period.
F-32
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
North Fork Publishing Group, Inc.
We have audited the accompanying balance sheets of North Fork Publishing Group,
Inc. as of December 31, 1998 and 1997, and the related statements of operations,
stockholders' equity (deficit) and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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, the financial statements referred to above present fairly, in
all material respects, the financial position of North Fork Publishing Group,
Inc. as of December 31, 1998 and 1997, and the results of its operations and its
cash flows for the years then ended in conformity with generally accepted
accounting principles.
As discussed in Note 3 to the financial statements, certain errors resulting in
an understatement of previously reported stockholders' deficit as of December
31, 1997 and 1998 were discovered by management of the Company subsequent to the
issuance of those financial statements. Accordingly, the financial statements
have been restated to correct the errors.
Jackson & Rhodes P.C.
Dallas, Texas
July 30, 1999
F-33
<PAGE>
<TABLE>
<CAPTION>
NORTH FORK PUBLISHING GROUP, INC.
BALANCE SHEETS
Assets
December 31,
July 31, ---------------------------------
1999 1998 1997
----------- ----------- ------------
(Unaudited) (Restated) (Restated)
<S> <C> <C> <C>
Current assets:
Cash 10,488 $ 11,383 $ 123
Accounts receivable 7,837 13,818 1,850
Due from shareholders - 2,450 950
----------- ----------- -----------
$ 18,325 $ 27,651 $ 2,923
=========== =========== ===========
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Accounts payable $ 1,416 $ - $ 346
Accrued liabilities (Note 3) - 151,560 75,780
Due to shareholders 5,485 - -
Due to affiliates 36,545 - -
----------- ----------- -----------
Total current liabilities 43,446 151,560 76,126
----------- ----------- -----------
Commitments and contingencies (Note 2) - - -
Stockholders' equity (deficit):
Common stock, no par value, 50,000 shares authorized
10,906 and 7,350 shares issued and outstanding 183,869 735 735
Accumulated deficit (208,990) (124,644) (73,938)
----------- ----------- -----------
Total stockholder's equity (deficit) (25,121) (123,909) (73,203)
----------- ----------- -----------
$ 18,325 $ 27,651 $ 2,923
=========== =========== ===========
See accompanying notes to financial statements.
</TABLE>
F-34
<PAGE>
<TABLE>
<CAPTION>
NORTH FORK PUBLISHING GROUP, INC.
STATEMENTS OF OPERATIONS
Seven Months Ended Years Ended
July 31, December 31,
------------------------------ ---------------------------
1999 1998 1998 1997
----------- ----------- ---------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues:
Advertising $ 2,222 $ 918 $ 4,064 $ 55
Networking 5,302 500 10,725 300
Programming 45,451 32,058 70,037 21,350
---------- --------- --------- ---------
Total revenues 52,975 33,476 84,825 21,705
---------- --------- --------- ---------
Expenses:
Operating 62,786 18,509 124,626 94,505
General and administrative 75,935 47,259 10,905 888
---------- --------- --------- ---------
Total expenses 138,721 65,768 135,531 95,393
---------- --------- --------- ---------
Loss from operations (85,746) (32,292) (50,706) (73,688)
Other income 1,400 - - -
---------- --------- --------- ---------
Net loss $ (84,346) $ (32,292) $ (50,706) $ (73,688)
========== ========= ========= =========
See accompanying notes to financial statements.
</TABLE>
F-35
<PAGE>
<TABLE>
<CAPTION>
NORTH FORK PUBLISHING GROUP, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
For the Seven Months Ended July 31, 1999 (Unaudited)
and Years Ended December 31, 1998 and 1997
Common Stock
--------------------------- Accumulated
Shares Amount Deficit Total
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance, December 31, 1996 7,350 $ 735 $ (250) $ 485
Net loss - - (73,688) (73,688)
-------- --------- ---------- ----------
Balance, December 31, 1997 (restated) 7,350 735 (73,938) (73,203)
Net loss - - (50,706) (50,706)
-------- --------- ---------- ----------
Balance, December 31, 1998 (restated) 7,350 735 (124,644) (123,909)
Common stock issued for accrued liabilities (Note 3) 3,556 183,134 - 183,134
Net loss - - (145,528) (145,528)
-------- --------- ---------- ----------
Balance, July 31, 1999 (unaudited) 10,906 $ 183,869 $ (208,990) $ (25,121)
======== ========= ========== =========
See accompanying notes to financial statements.
</TABLE>
F-36
<PAGE>
<TABLE>
<CAPTION>
NORTH FORK PUBLISHING GROUP, INC.
STATEMENTS OF CASH FLOWS
Seven Months Ended Year Ended
July 31, December 31,
-------------------------- -------------------------
1999 1998 1998 1997
----------- ----------- ---------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net loss $ (84,346) $ (32,292) $ (50,706) $ (73,688)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Changes in assets and liabilities:
Accounts receivable 5,981 (11,325) (11,968) (1,850)
Accounts payable 1,416 (346) (346) 346
Accrued liabilities 31,574 44,205 75,780 75,780
---------- ---------- ---------- ----------
Net cash provided by (used in) operating activities (45,375) 242 12,760 588
---------- ---------- ---------- ----------
Cash flows from financing activities:
Advances (to) from affiliates 36,545 - - -
Advances (to) from shareholder 7,935 735 (1,500) (950)
---------- ---------- ---------- ----------
44,480 735 (1,500) (950)
---------- ---------- ---------- ----------
Net increase (decrease) in cash (895) 977 11,260 (362)
Cash at beginning of period 11,383 123 123 485
---------- ---------- ---------- ----------
Cash at end of period $ 10,488 $ 1,100 $ 11,383 $ 123
========== ========== ========== ==========
Noncash transactions:
During June 1999, the Company issued 3,556 shares of common stock for
$183,134 in accrued liabilities (see Note 3).
See accompanying notes to financial statements.
</TABLE>
F-37
<PAGE>
NORTH FORK PUBLISHING GROUP, INC.
Notes to Financial Statements
July 31, 1999 and 1998 (Unaudited) and
December 31, 1998 and 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
The Company was incorporated on March 13, 1996, under the state of
Washington Business Corporation Act. The Company was established to provide
internet marketing, design and internet database services on a contract
basis to selected clients.
All of the Company's outstanding common shares and all the outstanding
common shares of Classic Car Source, Incorporated ("CCS"), an affiliated
company, were acquired in June 1999 by EWRX Internet Systems Inc. ("EWRX").
EWRX paid $133,333 cash plus 1,000,000 restricted common shares for CCS and
$66,667 cash plus 450,000 restricted common shares for the Company and
150,000 common shares as a finder's fee. The above transactions closed on
June 15, 1999.
USE OF ESTIMATES AND ASSUMPTIONS
Preparation of the Company's financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect certain reported amounts and
disclosures. Accordingly, actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all liquid investments, with an original maturity of
three months or less when purchased, to be cash equivalents.
PROPERTY, EQUIPMENT AND DEPRECIATION
Property and equipment are stated at cost. Depreciation is computed
principally by the straight-line method based on the estimated useful lives
of five to seven years.
INCOME TAXES
The Company has elected under the Internal Revenue Code to be an S
Corporation. In lieu of corporate income taxes, the stockholders of the
Company are taxed on their proportionate share of the Company's taxable
income. Accordingly, no provision or liability has been recognized for
federal income tax purposes for those periods as taxes are the personal
responsibility of the Company's stockholders.
F-38
<PAGE>
NORTH FORK PUBLISHING GROUP, INC.
Notes to Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
RECLASSIFICATIONS
Certain reclassifications have been made to the 1997 and 1998 financial
statements from those previously issued.
2. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
The Company leases office space under an operating lease which expires
November 30, 1999. Future minimum rental commitments for the remaining
years amount to $8,811.
Rent expense for the periods ended July 31, 1999 and 1998 amounted to
$6,656 and $390, respectively, and for the year ended December 31, 1998
amounted to $2,643. The Company incurred no rent expense during 1997.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of SFAS No. 107,
Disclosures about Fair Value of Financial Instruments. The estimated fair
value amounts have been determined by the Company, using available market
information and appropriate valuation methodologies. The fair value of
financial instruments classified as current assets or liabilities including
cash and cash equivalents and notes and accounts payable approximate
carrying value due to the short-term maturity of the instruments.
CONCENTRATION OF CREDIT RISK
The Company invests its cash and certificates of deposit primarily in
deposits with major banks.
REVENUE CONCENTRATION
One customer comprised approximately 10% of the Company's revenues in 1998.
F-39
<PAGE>
NORTH FORK PUBLISHING GROUP, INC.
Notes to Financial Statements
2. COMMITMENTS AND CONTINGENCIES (Continued)
UNCERTAINTY DUE TO THE YEAR 2000 ISSUE
The Year 2000 issue arises because many computerized systems use two digits
rather than four to identify a year. Date-sensitive systems may recognize
the year 2000 as 1900 or some other date, resulting in errors when
information using year 2000 dates is processed. In addition, similar
problems may arise in some systems which use certain dates in 1999 to
represent something other than a date. The effects of the Year 2000 issue
may be experienced before, on, or after January 1, 2000 and, if not
addressed, the impact on operations and financial reporting may range from
minor errors to significant systems failure which could impact the
Company's ability to conduct normal business operations. It is not possible
to be certain that all aspects of the Year 2000 issue affecting the Company
will be fully resolved.
3. COMMON STOCK AND RESTATEMENT
During June 1999, the Company issued 3,556 shares to two employees as
compensation for services over the previous 29 months. The Company has
valued the shares at $51.50 each, the fair value at the time of issue,
based on the value of the shares in the EWRX transaction, which closed on
the same day. Management of the Company had agreed to compensate certain
officers and employees over the periods by promising to issue shares of
stock of the Company in the future, representing a certain percentage of
the Company. Because the Company did not keep time records of its employees
with which to determine a fair value of the services rendered each period,
the fair value of the shares, aggregating $183,134, was allocated to
expense on a pro rata basis during the period ended July 31, 1999 and the
years ended December 31, 1998 and 1997. In previously issued financial
statements, the Company had reported the accrued amount of the expenses at
December 31, 1998 and 1997 as "stock to be issued" in stockholders' equity
(deficit). The Company has restated the accompanying balance sheets as of
December 31, 1998 and 1997 to report the accruals as accrued liabilities.
The restatement has increased stockholders' deficit by $151,560 and $75,780
as of December 31, 1998 and 1997, respectively, from that previously
reported.
4. RELATED PARTY TRANSACTIONS
As of July 31, 1999, the Company was indebted to EWRX and CCS in the
aggregate amount of $36,545. The Company paid certain directors of the
Company $36,135 during the period ended July 31, 1999 for wages and
consulting services.
F-40
<PAGE>
PART III
Item 1. INDEX TO EXHIBITS
Exhibit
Number Description
- --------- -----------
2.1 (i) "STOCK PURCHASE AND SALE AGREEMENT" (April 11, 1999)*
2.1 (ii) "MERGER AGREEMENT AND PLAN OF REORGANIZATION" (June 15, 1999)*
2.3 (i) Agreement with Optima Promotions (September 1, 1998)*
2.3 (ii) Agreement with Harmonic Research Inc. (July 12, 1999)*
3.1 Articles of Incorporation of the Registrant. (June 24, 1999)*
3.2 By-laws of the Registrant. (June 25, 1999)*
3.3 Specimen certificate for Common Stock, $0.001 par value.*
3.4 Certificate of Amendment to Articles of Incorporation of the
Registrant. (May 18, 1999)
10.1 (i) Employment agreement with Johnscott Lee. (May 4, 1999)*
10.1 (ii) Employment agreement with Dan Jondron. (May 4, 1999)*
10.4 Letter of Intent - EWRX Internet Systems Inc. & Xceed, Inc.
(July 6, 1999)*
10.5 (i) Stock Option Plan of the Registrant. (August 18, 1999)*
10.5 (ii) Stock Option Agreements (May 6, 1999)*
22.1 (i) Subsidiaries of the Registrant*
22.1 (ii) Company Structure*
24.1 Consent of Independent Auditors*
27 Financial Data Schedule
- --------------------
* Previously filed.
30
<PAGE>
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934, the
registrant caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized.
EWRX INTERNET SYSTEMS, INC.
(Registrant)
November 8, 1999
----------------------------------
(Date)
/s/ Ronald C. Davis
----------------------------------
Ronald C. Davis
Director, President and
Chief Executive Officer
/s/ William R. Wilson
----------------------------------
William R. Wilson
Director and Secretary
31
Certificate of Amendment to Articles of Incorporation
For Profit Nevada Corporations
(Pursuant to NRS 78.385 and 78.390 - After Issuance of Stock)
1. Name of corporation: Europa Resources Inc.
2. The articles have been amended as follows:
Article 1 -- change the name of the corporation from Europa Resources
Inc. to EWRX Internet Systems Inc.
Article 2 -- change the authorized shares of common stock from
50,000,000 to 100,000,000
3. The vote by which the stockholders holding shares in the corporation
entitling them to exercise at least a majority of the voting power, or such
greater proportion of the voting power as may be required in the case of a vote
by classes or series, or as may be required by the provisions of the articles of
incorporation have voted in favor of the amendment is:
Article 1-- 5,437,200 )
) over 50%
Article 2-- 5,434,200 )
4. Signatures:
/s/ Ron Davis /s/ William R. Wilson
- ---------------------------- --------------------------------
President or Vice President Secretary or Assistant Secretary
(acknowledgment required) (acknowledgment not required)
State of: British Columbia
County of: Vancouver
This instrument was acknowledged before me on May 17, 1999, by Ron Davis as
President, as designated to sign this certificate of Europa Resources Inc.
/s/ David N. Harrison
- ------------------------
Notary Public Signature
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S REGISTRATION STATEMENT ON FORM 10-SB AND IS QUALIFIED IN ITS
ENTIRETY TO SUCH REGISTRATION STATEMENT ON FORM 10-SB.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 7-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1999
<PERIOD-END> DEC-31-1998 JUL-31-1999
<CASH> 0 52,963
<SECURITIES> 0 0
<RECEIVABLES> 6,264 24,293
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 8,079 83,318
<PP&E> 18,772 48,905
<DEPRECIATION> 4,948 25,650
<TOTAL-ASSETS> 21,903 2,065,850
<CURRENT-LIABILITIES> 299,633 426,628
<BONDS> 0 0
0 0
0 0
<COMMON> 11,949 12,606
<OTHER-SE> (289,679) 1,626,616
<TOTAL-LIABILITY-AND-EQUITY> 21,903 2,065,850
<SALES> 0 25,572
<TOTAL-REVENUES> 0 25,572
<CGS> 0 0
<TOTAL-COSTS> 902,869 922,144
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (902,869) (896,572)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (902,869) (896,572)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (902,869) (896,572)
<EPS-BASIC> (0.08) (0.07)
<EPS-DILUTED> (0.08) (0.07)
</TABLE>
