U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 3
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 30
Part 3 Exhibit Index 31
Signatures 32
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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 traded on the OTC Bulletin Board ("OTCBB") under the
trading symbol "EWRX" until October 18, 1999 when they traded under the symbol
"EWRXE". The "E" was added by the National Association of Securities Dealers,
Inc. ("NASD") to reflect the Company's possible inability to meet NASD
requirements for listing on the OTCBB. On November 17, 1999, the NASD removed
the Company's stock from listing on the OTCBB due to its inability to secure SEC
clearance of its disclosures in this Form 10-SB. The Company's stock currently
trades on the "pink sheets" (an informal stock quotation service) under the
symbol "EWRX". The Company intends to seek relisting of its shares on OTCBB as
soon as practicable following clearance of this Form 10-SB. No assurance can be
given that it will be successful in such relisting. 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 for the development and
production and marketing of industrial garnets for abrasive applications
("Garnet Project"). A substantial amount of geological research on the Garnet
Project in Ukraine was conducted in early 1997. Based primarily on the technical
aspects of the property, the Company negotiated the terms of an agreement in
principle in July 1997 to purchase a 49% joint venture interest in the Garnet
Project. The Company finalized its purchase pursuant to a Purchase Agreement
dated October 7, 1997 whereby the Company agreed to pay $300,000 in installments
and issued 2,000,000 restricted common shares. The common shares were valued at
$.01 per share, the price for which the shares were being sold at the time the
Company negotiated the terms of the agreement. The Company paid $40,000 in 1997
and $64,000 in 1998 towards the $300,000 obligation. The Company has been
released from any further obligation as discussed below. From October to
December 1997, the Company also acquired control over 25% of the shares of ISQ,
the other joint venture party, for $204,000, and funded $12,000 in 1997 and
$342,532 in 1998 for development. During the period late 1997 to mid-1998, the
joint venture continued its activities and the Company monitored the operations
of the Joint Venture from North America. Also, a representative of the seller
was elected to the Board of Directors of EWRX pursuant to the negotiated terms
of the Purchase Agreement. However, due to lack of adequate financial
accountability from the Ukrainian company, EWRX was unable to determine until
September, 1998 the poor state of the finance and accounting records of the
joint venture. It was determined that $360,000 (US) of railroad taxes were owed
by the Company's joint venture partner to the local Ukranian government.
Further, it was discovered that there were additional wages owed to employees
and the financial records of the joint venture had been prepared under the rules
written by the previous communist Soviet government which rules were inapposite
to North American accounting principles.
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Coincidentally, during this period (Fall, 1998), the International Monetary
Fund, with which the Company had been working, announced it would terminate
financial support for Russia and the Ukraine. This action led to the Russian and
Ukrainian economies collapse.
These factors prompted Management and the Board of Directors of the Company
to halt further funding of the project and further payments on the remaining
installments of the cash portion of the purchase price. Approximately $682,000
had been funded by the third quarter 1998 pursuant to funding requirements of
the Purchase and Joint Venture Agreements. These funds were primarily used to
fund joint venture costs such as building upgrades, purchase of used equipment,
contract costs and office equipment.
The Company began negotiating with the Seller the return of the 2,000,000
restricted shares which were issued as a substantial part of the purchase price
under the Purchase Agreement for the Ukraine Garnet Project. These negotiations
were successfully concluded and in early 1999 the 2,000,000 shares were
reacquired by the Company for no further consideration and returned to
authorized but unissued status by the Board of Directors. Also, the parties
agreed to terminate the Purchase Agreement and the Joint Venture with no further
liability to the seller, including obtaining a release for the remaining unpaid
purchase price of $196,000. Further, the representative of the seller previously
elected to the EWRX Board, resigned on November 5, 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").
Corporate Objective
- -------------------
The corporate objective of EWRX is to provide 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. There are sub-markets within the specialty
automotive aftermarket. They include classic cars, light trucks, rod and custom,
off-road vehicles, racing, and street performance.
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 (1998 SEMA
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.
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EWRX owns five Internet websites. It's primary websites, Classicar.com and
ClassicTruckshop.com, ("EWRX Websites"), are 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 (previously known as North Fork Publishing), 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 also provides technical support services to the EWRX group
of websites. 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 through leasing 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 eighteen months. (Reference is
SEMA's 1998 Market Report.)
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 placements in
1999-2000 to be used for the re-development and re-programming of the
Classicar.com and Classictruckshop.com Websites and promotion of the
various EWRX Websites. As of this date, approximately $800,000 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 third quarter of 2000.
This work will be accomplished in conjunction with the contract with
Xceed (see Item 1 - Description of Business - Strategic Alliances and
Affiliations) 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. 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.
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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 to
EWRX.
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 has
participated as a major exhibitor and speaker at the November 1999 SEMA
show in Las Vegas.
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 e-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.
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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:
<TABLE>
<CAPTION>
Anticipated
Estimated Costs Date of
Through Year 2000 Graphic Redevelopment Programming Total Improvement*
----------------- --------------------- ----------- -------- ------------
<S> <C> <C> <C> <C>
Classicar.com $65,000 $30,000 $ 95,000 August 1999 to March 2000
Classictruckshop.com $45,000 $25,000 $ 70,000 February 2000 to April 2000
BigBadCatalog.com $75,000 $200,000 $275,000 January 2000 to June 2000
MotorWrx.com $10,000 $0 $ 10,000 February 2000
Other Proposed
Internet Sites $65,000 $85,000 $150,000 January 2000 to June 2000
--------
$600,000
========
</TABLE>
* May change based on the Company's ability to obtain financing for these
projects.
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 negotiation at this time.
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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.
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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.
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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.
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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.
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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;
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- 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 20 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 other e-commerce opportunities 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 $1,500,000 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. Subject to availability of financing, 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 second quarter of
2000. The re-design of the Websites was initiated in June, 1999 and the redesign
is expected to be completed by mid-2000.
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
As of October 19, 1999, the Company completed a private placement of
945,291 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. Two warrants are required to be exercised in order to purchase one
share of common stock. No fractional shares will be issued. A total of
approximately $800,000 was raised in this placement. The private placement
increased the number of fully diluted common shares at this time by 945,291
shares. 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 has 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. Proceeds from the proposed 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.
14
<PAGE>
The Company's monthly general and administrative costs (e.g. salaries,
rent, corporate expenses) are approximately $100,000. The Company anticipates,
subject to adequate financing, that by mid-2001, there will be sufficient
revenue from the operations of its websites to pay for these costs and related
sales and marketing costs.
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
to repay such indebtedness. The Company has no current arrangements with respect
to additional financing.
There can be no assurances given that the Company will be successful in
generating sufficient revenues from its planned activities or that it can raise
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 other sales programs for its website visitors, the
principal means of revenue generation for the Company's Internet markets.
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 private placement units consisting of common shares and warrants on behalf of
the Company. The initial term of the agreement was for 90 days and is extended
in 90-day increments. The Company did not extend the agreement in October 1999.
Under the initial agreement terms, Harmonic provided financial advisory services
and was paid $15,000. Upon signing the initial agreement, the Company also
granted Harmonic a warrant to purchase 150,000 shares of the Company's common
stock at $1.00 per share for three years. In addition, Harmonic is also entitled
to receive certain fees should the Company enter into a merger, consolidation,
reorganization, business combination or acquire another company where Harmonic
is the finder. No such transaction is under consideration by the Company at this
time.
15
<PAGE>
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 the Granat Joint Venture
("Granat") as discussed in Note 2 of Notes to Financial Statements. The Company
finalized its purchase pursuant to a Purchase Agreement dated October 7, 1997
whereby the Company agreed to pay $300,000 in installments and issued 2,000,000
restricted common shares. The common shares were valued at $.01 per share, the
price for which the shares were being sold at the time the Company negotiated
the terms of the agreement. The Company paid $40,000 in 1997 and $64,000 in 1998
towards the $300,000 obligation. The Company has been released from any further
obligation as discussed below. From October to December 1997, the Company also
acquired control over 25% of the shares of ISQ for $204,000 and funded $12,000
in 1997 and $342,532 in 1998 for development.
Due to the lack of adequate financial accountability from Granat and ISQ,
the Company was unable to control the operations of the entity.
As a result of the inability of the Company to obtain reliable financial
information with which to account for its investment, the Company has written
off the investment in each year as payments were made. Coincidentally, during
this period the Ukrainian and Russian economies experienced a significant
downturn. These factors 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,
including the remaining unpaid purchase price of $196,000. The director of the
Company who controlled Aurora resigned as a director.
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
Expenditures made and liabilities
recognized during 1997 320,000
=========
Written off in 1997 340,000
=========
Expenditures incurred and written off in 1998 $ 342,532
=========
During 1997, 1998 and for the six months ended June 30, 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, the Company 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 the Company's websites. The Company also expects to generate additional
revenues by selling advertising on its websites to third parties. 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. The Company has completed the major portion of
its Website designs for Classicar.com and Classictruckshop.com with the
re-designed Websites on line. The Company has initiated its banner and
advertising program to provide advertisers with on-line placement capabilities
on the Company's Websites. All banner advertising space for January and
February, 2000 has been purchased by a variety of advertisers.
16
<PAGE>
Salaries and benefits increased in the first six months of 1999 when
compared to the same period in 1998 primarily as a result of increases in
personnel in 1999 in anticipation of commencing e-commerce operating activities
as a result of the acquisition of Classic Car Source and North Fork completed in
June 1999. Such costs for the year ended December 1998 when compared to the
period from inception (June 1997) to December 1997 increased due primarily to
management of the now terminated mineral joint venture in the Ukraine as
discussed elsewhere in this registration statement.
Consulting, management and professional fees are primarily accounting and
legal expenses. Increases in these expenses in the six months ended June 30,
1999 when compared to the same period in 1998 are a result of costs incurred
relating to the acquisition of Classic Car Source and North Fork. Such costs for
the year ended December 1998 when compared to the period from inception (June
1997) to December 1997 increased due to a full year versus partial year and
related primarily to management of the now terminated mineral joint venture in
the Ukraine as discussed elsewhere in this registration statement.
Increases in depreciation and amortization in the six months ended June 30,
1999 when compared to the same period in 1998 are a result of the commencement
in June 1999 of amortization of goodwill recognized in connection with the
acquisition of Classic Car Source and North Fork.
General and administrative expenses decreased in the first six months of
1999 compared to the same period in 1998 and were a result of reductions in
front office staff upon termination of the mineral joint venture in the fourth
quarter of 1998. In the year ended December 1998, such expenses related
primarily to administration of the now terminated mineral joint venture in the
Ukraine discussed elsewhere in this registration statement whereas 1999 expenses
were minimal pending the acquisition of Classic Car Source and North Fork which
was completed in June 1999. In 1997 such costs were minimal.
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 June 30 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. The Company's Form 10-SB filing became effective on October
30, 1999. Henceforth, the Company will be subject to the reporting requirements
of the Securities Exchange Act of 1934.
17
<PAGE>
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.
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.
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 seven 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 Webwrx 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 thirteen 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
1776 Lincoln Street, Suite 900
Denver, CO 80203
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 acting Chief Financial Officer and
to date has provided the Company with certain financial advice primarily in
connection with the acquisition of Classic Car Source and North Fork. The
Company expects Mr. Gilmore's role to increase in the future to extend to
accounting and financial reporting matters. Mr. Gilmore has more than
twenty years of financial experience. He has served as audit manager 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 13,551,980
(including 945,291 shares issued in the placement of approximately $800,000 in
October, 1999) 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 pink sheets under the trading
symbol "EWRX." See Item 1 - Description of Business. 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 13,551,980 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 six
months period ended June 30, 1999 and June 30, 1998 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
Reconciliation of Share Issuances (reacquisitions) by Year:
<TABLE>
<CAPTION>
Date Price Number Common Additional Exemption
Month Year Consideration per Share (1) of Shares Stock Paid-in Capital Rule 504 Rule 506 Section 4(2)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
June 1997 Cash $0.01 7,745,000 (2) 7,745 $ 69,705 7,745,000
3rd Qtr 1997 Cash $0.01 1,600,000 (3) 1,600 14,400 1,600,000
4th Qtr 1997 Cash $1.50 374,999 (2) 375 562,124 374,999
Oct. 1997 Acquisition of
Joint Venture
Interest $0.01 2,000,000 (4) 2,000 18,000 2,000,000
----------------------------------------
Balance, December 31, 1997 11,719,999 11,720 664,229
May 1998 Cash $1.50 109,367 109 163,943 109,367
July 1998 Cash $1.50 120,000 120 179,880 120,000
----------------------------------------
Balance, December 31, 1998 11,949,366 11,949 1,008,051
Feb. 1999 Debt settlement $0.30 664,010 (5) 664 198,538 282,344 381,666
Feb. 1999 Cash $0.30 299,999 300 89,700 299,999
March 1999 Cash, net of
finders'
fee of 64,286
shares $0.35 1,281,886 (6) 1,282 402,378 1,281,886
April 1999 Cash $0.70 281,428 (7) 281 196,719 281,428
April 1999 Reacquisition of
shares** $0.001 (1,600,000)(8) (1,600) 1,600 (1,600,000)
April 1999 Reacquisition of
shares** $0.001 (2,000,000)(9) (2,000) 2,000 (2,000,000)
June 1999 Finder's fee $0.001 130,000 (10) 130 (130) 130,000
June 1999 Investment in
Classic Car
& North Fork $1.10 1,600,000 (11) 1,600 1,758,400 1,600,000
June 1999 Stock options
issued as
compensation 161,189
---------------------------------------------------------------------------------
Balance, June 30, 1999 12,606,689 12,606 3,818,444
Sept. 1999 Cash $0.85 945,291 (12) 945 802,552 945,291
---------------------------------------------------------------------------------
Balance, October 31, 1999 13,551,980 13,551 4,620,996 10,495,023 945,291 2,111,666
=================================================================================
</TABLE>
- ----------------
** These shares have been reacquired by the Company at no cost to it and
subsequently returned to authorized and unissued common stock.
(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.
Subsequently, and after an agreement in principle had been reached to
acquire the Garnet Project in the Ukraine at about the same it was closed,
stock was sold to family, friends and business associates 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.
28
<PAGE>
(2) Represents shares issued to persons during 1997. Some certificates were
issued in January, 1998 for shares sold in 1997.
(3) These shares were sold to certain key businessmen at the $.01 share price
at which shares were sold to early investors in the Company in 1997. 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. There was an expectation that the persons to whom
these shares were sold would assist the Company in its business in the
future. Since it was expected that the future consideration/assistance to
the Company would be an essential part of the total consideration for the
issuance of the shares, the certificates were held by the Company under
Nevada law pending performance by the recipients of such consideration.
These persons did not assist the Company in its business endeavors in a
satisfactory manner, and with the change of focus of the Company from
mining to Internet services, it became apparent to the Company that the
future services would not be forthcoming. In April and June, 1999, the
Company mutually agreed with these parties to rescind the transaction and
reacquire the shares for no cash payment and to return them to authorized
but unissued status.
(4) Represents 2,000,000 shares issued to a corporation for a 49% interest in a
Ukranian garnet mining joint venture. The Company negotiated the terms of
the agreement in July 1997 when the Company's stock was selling for $0.01.
The Purchase Agreement was finalized in October 1997. See, Item
1-Description of Business.
(5) Includes 142,000 shares issued to Ronald Davis, an officer and director of
EWRX, and 239,666 shares issued to his wife for debt reduction of $42,600
and $71,900 respectively.
(6) Includes 64,286 shares issued as a finder's fee under Rule 504.
(7) 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.
(8) 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
sold at $0.01 each previously sold under Rule 504 of Regulation D.
(9) In April 1999, the entire two million Common Share block of shares issued
in 1997 to a foreign national company for mineral properties in the Ukraine
was reacquired by the Company in connection with relinquishing its interest
in the joint venture covering such properties. The shares were returned to
authorized but unissued status.
(10) 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.
(11) 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 reduced by approximately 20% to $1.10 per
share.
(12) Represents units consisting of one share of Common Stock and one-half
warrant sold for $0.85 per unit to accredited investors in an September,
1999 placement yielding approximately $800,000 to the Company. See, Item 2
- Management's Discussion and Analysis and Results of Operations - Capital
Resources for a description of the terms of the warrants.
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.
29
<PAGE>
PART F/S FINANCIAL STATEMENTS
The financial statements for EWRX Internet Systems and Subsidiaries for the
six months ended June 30, 1999 (unaudited) and December 31, 1998 and 1997, the
pro forma consolidated statement of operations for EWRX Internet Systems and
Subsidiaries for the six months ended June 30, 1999, and the financial
statements for Classic Car Source, Incorporated and North Fork Publishing Group,
Inc. for the period ended June 14, 1999 (unaudited) and December 31, 1998 and
1997 are presented on the following pages.
30
<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 June 30, 1999 (Unaudited) and
December 31, 1998 and 1997...........................................................F-4
Consolidated Statements of Operations For the Six Months Ended
June 30, 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
Six Months Ended June 30, 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 Six Months Ended
June 30, 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 Six Months Ended
June 30, 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 June 14, 1999 (Unaudited) and December 31, 1998 and 1997....................F-25
Statements of Operations for the Period Ended June 14, 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 Period Ended June 14, 1999 (Unaudited)
and the Years Ended December 31, 1998 and 1997...........................................F-27
Statements of Cash Flows for the Period Ended
June 14, 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 June 14, 1999 (Unaudited)
and December 31, 1998 and 1997...........................................................F-34
Statements of Operations for the Period Ended June 14, 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 Period Ended June 14, 1999 (Unaudited) and the
Years Ended December 31, 1998 and 1997...................................................F-36
Statements of Cash Flows for the Period Ended June 14, 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,
June 30, ------------
1999 1998 1997
-------------- ------------ -------------
(Unaudited) (Restated)
<S> <C> <C> <C>
Current assets:
Cash $ 112,858 $ - $ 302,982
Receivables 16,937 6,264 -
Prepaids and other 5,477 1,815 8,963
----------- ----------- -----------
Total current assets 135,272 8,079 311,945
----------- ----------- -----------
Furniture and equipment:
Furniture and equipment 46,030 18,772 14,943
Accumulated depreciation (22,466) (4,948) (1,494)
----------- ----------- -----------
Net furniture and equipment 23,564 13,824 13,449
----------- ----------- -----------
Other assets:
Goodwill, net of amortization of $33,272 (Note 3) 1,959,593
Incorporation costs, net of amortization - - 3,876
----------- ----------- -----------
Total other assets 1,959,593 - 3,876
----------- ----------- -----------
$ 2,118,429 $ 21,903 $ 329,270
=========== =========== ===========
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Bank overdraft $ - $ 2,661 $ -
Accounts payable 145,789 93,731 13,930
Due to shareholders 55,935 203,241 -
Due to Aurora (Note 2) - - 64,000
----------- ----------- -----------
Total current liabilities 201,724 299,633 77,930
----------- ----------- -----------
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 3,818,444 1,008,051 664,229
Accumulated Deficit (1,910,635) (1,307,478) (424,609)
Accumulated other comprehensive income (loss) (3,710) 9,748 -
----------- ----------- -----------
Total stockholders' equity (deficit) 1,916,705 (277,730) 251,340
----------- ----------- -----------
$ 2,118,429 $ 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
Six Months Ended Year Ended (Date of Inception)
June 30, December 31, to December 31,
1999 1998 1998 1997
----------- ----------- ------------ -------------------
(Unaudited) (Unaudited) (Restated) (Restated)
<S> <C> <C> <C> <C>
Revenue $ 4,993 $ - $ - $ -
----------- ----------- ----------- -----------
Operating expenses:
Loss from write-off of investment (Note 2) - 271,554 342,532 340,000
Salaries and benefits 314,740 46,827 51,531 -
Consulting, management and professional fees 107,518 56,383 147,173 68,982
Depreciation and amortization 35,269 1,729 4,165 1,846
General and administrative 150,633 211,222 337,468 13,781
----------- ----------- ----------- -----------
Total operating expenses 608,150 587,715 882,869 424,609
----------- ----------- ----------- -----------
Net loss $ (603,157) $ (587,715) $ (882,869) $ (424,609)
=========== =========== =========== ===========
Basic net loss per share $ (0.05) $ (0.05) $ (0.07) $ (0.04)
=========== =========== ========== ===========
Weighted average common shares outstanding 12,836,345 11,763,265 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 Six Month Period Ended June 30, 1999 (Unaudited), the Year Ended
December 31, 1998 and the Period From June 25, 1997 (Date of Inception) to December 31, 1997
Accumulated
Additional Other
Common Stock Paid-In Accumulated Comprehensive
Shares Amount Capital Deficit 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 - - - (424,609) - (424,609)
----------- -------- ----------- ------------- --------- -----------
Balance, December 31, 1997 (restated) 11,719,999 11,720 664,229 (424,609) - 251,340
Sale of common stock for cash 229,367 229 343,822 - - 344,051
Net loss - - - (882,869) - (882,869)
Currency translation adjustment - - - - 9,748 9,748
-----------
Comprehensive income (loss) - - - - - (873,121)
----------- -------- ----------- ------------- --------- -----------
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
(inclusive of 64,286 shares issued
as finder's fee) 1,863,313 1,863 688,796 - - 690,659
Stock issued for finders' fees (Note 6) 130,000 130 (130) - - -
Stock issued on settlement of debt 664,010 664 198,538 - - 199,202
Stock options issued as compensation - - 161,189 - - 161,189
Reacquisition 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 - - - - (13,458) (13,458)
Net loss - - - (603,157) - (603,157)
-----------
Comprehensive income (loss) - - - - - (616,615)
----------- -------- ----------- ------------ --------- -----------
Balance, June 30, 1999
(Unaudited) 12,606,689 $ 12,606 $ 3,818,444 $ (1,910,635) $ (3,710) $ 1,916,705
=========== ======== =========== ============ ========= ===========
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
Six Months Ended Year Ended (Date of Inception)
June 30, December 31, to December 31,
1999 1998 1998 1997
------------- ------------ ------------ -------------------
(Unaudited) (Unaudited) (Restated) (Restated)
<S> <C> <C> <C> <C>
Net loss $ (603,157) $ (587,715) $ (882,869) $ (424,609)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation and amortization 35,259 1,729 4,165 1,846
Write-off of investment in joint venture - 271,554 342,532 340,000
Stock options compensation 161,189 - - -
Changes in assets and liabilities:
Receivables 1,093) (3,886) (6,821) -
Prepaid expenses (3,662) 1,891 4,617 (6,432)
Incorporation costs - - 3,876 (4,228)
Accounts payable 33,572 (55,665) 84,454 13,930
---------- ---------- ---------- ----------
Net cash used in operating activities (375,706) (372,092) (450,046) (79,493)
---------- ---------- ---------- ----------
Cash flows from investing activities:
Investment in mineral venture - (64,000) (64,000) (244,000)
Advances to mineral venture - (207,554) (342,532) (12,000)
Acquisition of CCS and NFPG, net of cash
acquired (Note 3) (192,325) - - -
Purchase of furniture and equipment (7,815) (1,983) (1,983) (14,943)
---------- ---------- ---------- ----------
Net cash used in investing activities (200,140) (273,537) (408,515) (270,943)
---------- ---------- ---------- ----------
Cash flows from financing activities:
Bank overdraft (2,661) 0 2,661 0
Advances from (to) shareholders 14,167 14,730 208,630 (2,531)
Common stock sold for cash 690,659 344,051 344,051 655,949
---------- ---------- ---------- ----------
Net cash provided by financing activities 702,165 358,781 555,342 653,418
---------- ---------- ---------- ----------
Effect of exchange rate changes on cash (13,461) 4,367 237
---------- ---------- ---------- ----------
Net increase (decrease) in cash 112,858 (282,481) (302,982) 302,982
Cash at beginning of year - 302,982 302,982 -
---------- ---------- ---------- ----------
Cash at end of year $ 112,858 $ 20,501 $ - $ 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 June 30, 1999, the Company converted $199,202 of debt into 664,010 shares of common stock.
During the period ended June 30, 1999, the Company reacquired a total of 3,600,000 shares of common stock and returned
them to authorized but unisued common stock.
During the period ended June 30, 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
Six Months Ended June 30, 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, EWRX Internet Systems (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 $1,910,635 as of June 30, 1999. The following is a
summary of management's plan to raise capital and generate additional
operating funds.
The Company has 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. Proceeds from the proposed 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.
The Company's monthly general and administrative costs (e.g. salaries,
rent, corporate expenses) are approximately $100,000. The Company
anticipates, subject to adequate financing, that by mid-2001, there will be
sufficient revenue from the operations of its websites to pay for these
costs and related sales and marketing costs.
F-8
<PAGE>
EWRX INTERNET SYSTEMS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GOING CONCERN (Continued)
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 to repay such indebtedness. The
Company has no current arrangements with respect to additional financing.
There can be no assurances given that the Company will be successful in
generating sufficient revenues from its planned activities or that it can
raise sufficient capital to allow it to continue as a 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 other sales programs for its
website visitors, the principal means of revenue generation for the
Company's Internet markets.
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 private placement units consisting of common shares and warrants on
behalf of the Company. The initial term of the agreement was for 90 days
and is extended in 90-day increments. The Company did not extend the
agreement in October 1999. Under the initial agreement terms, Harmonic
provided financial advisory services and was paid $15,000. Upon signing the
initial agreement, the Company also granted Harmonic a warrant to purchase
150,000 shares of the Company's common stock at $1.00 per share for three
years. In addition, Harmonic is also entitled to receive certain fees
should the Company enter into a merger, consolidation, reorganization,
business combination or acquire another company where Harmonic is the
finder. No such transaction is under consideration by the Company at this
time.
Refer to Note 10 - Subsequent Events.
F-9
<PAGE>
EWRX INTERNET SYSTEMS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
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 SUBSIDIARIES
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 July 1997, the Company agreed in principle to acquire 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"). 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.
The Company finalized its purchase pursuant to a Purchase Agreement dated
October 7, 1997 whereby the Company agreed to pay $300,000 in installments
and issued 2,000,000 restricted common shares. The common shares were
valued at $.01 per share, the price for which the shares were being sold at
the time the Company negotiated the terms of the agreement. The Company
paid $40,000 in 1997 and $64,000 in 1998 towards the $300,000 obligation.
The Company has been released from any further obligation as discussed
below. From October to December 1997, the Company also acquired control
over 25% of the shares of ISQ for $204,000 and funded $12,000 in 1997 and
$342,532 in 1998 for development.
Due to the lack of adequate financial accountability from Granat and ISQ,
the Company was unable to control the operations of the entity.
F-11
<PAGE>
EWRX INTERNET SYSTEMS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
2. INVESTMENT IN JOINT VENTURE (Continued)
As a result of the inability of the Company to obtain reliable financial
information with which to account for its investment, the Company has
written off the investment in each year as payments were made.
Coincidentally, during this period the Ukrainian and Russian economies
experienced a significant downturn. These factors 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, including the remaining
unpaid purchase price of $196,000. The director of the Company who
controlled Aurora resigned as a director.
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
Expenditures made and liabilities
recognized during 1997 320,000
=========
Written off in 1997 340,000
=========
Expenditures incurred and written off in 1998 $ 342,532
=========
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 six months ended June 30, 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. The excess
purchase price over the identifiable assets and liabilities has been
allocated entirely to goodwill as the Company was unable to obtain
meaningful valuations for other intangible assets. 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 SUBSIDIARIES
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 of assets 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 six
months ended June 30, 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
June 30, December 31,
1999 1998
------------------- -----------------
Revenues $ 74,776 $ 241,184
Net loss $ (924,674) $ (1,442,743)
Net loss per common share $ (0.06) $ (0.11)
Goodwill is being amortized over five years. Amortization amounted to
$32,956 for the period ended June 30, 1999.
F-13
<PAGE>
EWRX INTERNET SYSTEMS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
4. RELATED PARTY TRANSACTIONS
As of June 30, 1999 and December 31, 1998, $55,935 and $203,241,
respectively, had been advanced to the Company by certain shareholders.
During the year ended December 31, 1998, and the six months ended June 30,
1999, the following amounts were paid to directors and former directors of
the Company.
Period Ended June 30, December 31,
1999 1998 1998
--------- -------- ------------
Management fees and salaries $ 87,212 $ 26,741 $ 52,057
Consulting fees on the Granat project 35,850 19,500 21,208
Expense reimbursements 25,310 9,176 22,139
--------- -------- --------
$ 148,372 $ 55,417 $ 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 June 30, 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 $725,000,
425,000 and $135,000 at June 30, 1999, and December 31, 1998 and 1997,
respectively, related to the net operating loss carryovers. The realization
of the benefits from these deferred tax assets appears uncertain due to
recurring net losses. Accordingly, a valuation allowance has been recorded
which offsets the deferred tax assets at the end of each period.
6. CAPITAL STOCK
Subsequent to December 31, 1998, the 2,000,000 shares issued to Aurora
(Note 3) were reacquired by the Company. An additional 1,600,000 shares
issued to individuals in 1997 for cash ($.01 per share) and future services
were also reacquired by the Company subsequent to December 31, 1998 (see
Note 9). All of these shares were reacquired at no cost to the Company and
returned to authorized and unissued common stock.
During the period ended June 30, 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 SUBSIDIARIES
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
June 30, 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 1,100,000 $ 0.57 - $ - 500,000 $ 0.25
Exercised - $ - - $ - - $ -
Forfeited/expired - $ - - $ - - $ -
---------- -------- ---------
Outstanding, end of period 1,600,000 $ 0.47 500,000 $ 0.25 500,000 $ 0.25
========== ======== =========
Options exercisable, end of period 1,600,000 $ 0.47 500,000 $ 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 six months
ended June 30, 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 six months ended June 30, 1999. There is no
future compensation expense to be recorded in subsequent periods as of June
30, 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 145 percent;
risk free interest rates of 4.5 percent; expected lives of one year. The
Company recorded an additional $41,939 in compensation expense during the
six months ended June 30, 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 six months
ended June 30, 1999 would have been $(741,473) and $(.06), respectively.
F-15
<PAGE>
EWRX INTERNET SYSTEMS INC. AND SUBSIDIARIES
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 six months ended June 30, 1999 and 1998 and
the years ended December 31, 1998 and 1997 amounted to $18,567, $31,687,
$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 SUBSIDIARIES
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 standard 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
F-17
<PAGE>
EWRX INTERNET SYSTEMS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
8. NEW ACCOUNTING PRONOUNCEMENTS (Continued)
SFAS 131 (Continued)
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
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 3.
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 SUBSIDIARIES
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 $ - $(320,000)
--------- ---------
Net loss $ 320,000 $(340,000)
--------- ---------
Net loss per common share $ 0.03 $ (0.04)
--------- ---------
10. SUBSEQUENT EVENTS
In September, 1999 the Company completed a financing of 945,291 common
shares at $0.85 per share for total proceeds of $803,497.
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 six month period ended June 30, 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
Six Months Ended June 30, 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 $ 4,993 $ 29,960 $ 39,823 $ 74,776
---------- -------- -------- --------- ----------
Operating expenses:
Salaries 314,740 98,174 61,749 474,663
Consulting, management and professional fees 107,518 4,214 15,609 127,341
Depreciation and amortization 35,259 2,365 - (1) $ 164,780 202,404
General and administrative 150,633 18,450 25,959 195,042
---------- --------- ---------- --------- ----------
Total operating expenses 608,150 123,203 103,317 164,780 999,450
---------- --------- ---------- --------- ----------
Net loss $ (603,157) $ (93,243) $ (63,494) $(164,780) $ (924,674)
========== ========= ========== ========= ==========
Basic net loss per share $ (0.05) $ (0.06)
========== ==========
Weighted average common shares outstanding 12,836,345 1,600,000 14,436,345
========== ========= ==========
(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 342,532 - - 342,532
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) 395,472 404,906
General and administrative 337,468 55,924 87,881 481,273
---------- --------- -------- ---------- -----------
Total operating expenses 882,869 248,055 135,531 395,472 1,661,927
---------- --------- -------- ---------- -----------
Net loss $ (882,869) $ (91,696) $(50,706) $ (395,472) $(1,420,743)
========== ========= ======== ========== ===========
Basic net loss per share $ (0.07) $ (0.11)
========== ===========
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 of assets acquired $ 1,977,345
===========
Goodwill $ 1,977,345
===========
2. Depreciation and amortization was increased by $395,472 and $164,780 for
the year ended December 31, 1998 and the six months ended June 30, 1999,
respectively, as a result of the purchase adjustments. Goodwill is being
amortized over its estimated useful life of five 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,
June 14, -------------------------------
1999 1998 1997
--------------- ------------- -------------
(Unaudited) (Restated) (Restated)
<S> <C> <C> <C>
Current assets:
Cash $ 25,665 $ 4,187 $ 3,068
Accounts receivable 8,581 21,434 8,400
----------- ----------- ------------
Total current assets 34,246 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 (15,527) (14,745) (12,889)
----------- ----------- ------------
Net property and equipment 3,912 4,694 9,105
----------- ----------- ------------
Other assets:
Goodwill, net of amortization of $3,482 and $1,900, respectively 15,515 17,100 -
----------- ----------- ------------
$ 53,676 $ 47,415 $ 20,573
=========== =========== ============
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Accounts payable $ 36,816 $ 39,431 $ 45,434
Accrued liabilities (Note 5) - 369,582 184,791
Due to affiliates 25,614 - -
Due to shareholders 4,322 4,444 1,844
----------- ----------- ------------
Total current liabilities 66,752 413,457 232,069
----------- ----------- ------------
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 (498,995) (405,752) (314,056)
----------- ----------- ------------
Total stockholders' equity (deficit) (13,076) (366,042) (211,496)
----------- ----------- ------------
$ 53,676 $ 47,415 $ 20,573
=========== =========== ============
See accompanying notes to financial statements.
</TABLE>
F-25
<PAGE>
<TABLE>
<CAPTION>
CLASSIC CAR SOURCE, INCORPORATED
STATEMENTS OF OPERATIONS
Five and One Half Months Ended Years Ended
June 14, December 31,
-------------------------------- --------------------------------
1999 1998 1998 1997
----------- ----------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues:
Advertising $ 26,173 $ 36,241 $ 86,021 $ 45,085
Design 1,250 15,950 40,233 28,100
Networking 2,537 10,735 30,105 11,875
---------- --------- --------- ----------
Total revenues 29,960 62,926 156,359 85,060
---------- --------- ---------- ----------
Expenses:
Operating 8,729 24,478 36,440 42,404
General and administrative 114,474 108,631 213,421 249,193
---------- --------- ---------- ----------
Total expenses 123,203 133,109 249,861 291,597
---------- --------- ---------- ----------
Loss from operations (93,243) (70,183) (93,502) (206,537)
Other income - - 1,806 -
---------- --------- ---------- ----------
Net loss $ (93,243) $ (70,183) $ (91,696) $ (206,537)
========== ========= ========== ==========
Basic net loss per share $ (1.99) $ (1.51) $ (2.00) $ (4.26)
========== ========= ========== ==========
Weighted average common shares outstanding 46,797 46,455 45,932 48,495
========== ========= ========== ==========
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 Period Ended June 14, 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 - - (93,243) (93,243)
--------- ---------- ---------- ---------
Balance, June 14, 1999 (unaudited) 67,019 $ 485,919 $ (498,995) $ (13,076)
========= ========== ========== =========
See accompanying notes to financial statements.
</TABLE>
F-27
<PAGE>
<TABLE>
<CAPTION>
CLASSIC CAR SOURCE, INCORPORATED
STATEMENTS OF CASH FLOWS
Period Ended Years Ended
June 14, December 31,
--------------------------- ---------------------------
1999 1998 1998 1997
----------- ----------- ----------- ----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net loss $ (93,243) $ (70,183) $ (91,696) $ (206,537)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation and amortization 2,364 2,635 5,269 5,941
Common stock issued for services and fees - 1,829 3,820 11,590
Changes in assets and liabilities:
Accounts receivable 12,853 865 (14,838) (7,050)
Accounts payable (2,615) (1,708) (6,005) (733)
Accrued liabilities 76,997 92,396 184,791 184,791
---------- --------- --------- ----------
Net cash provided by (used in) operating activities (3,644) 25,834 81,341 (11,998)
---------- --------- --------- ----------
Cash flows from investing activities:
Disposal (purchase) of furniture and equipment - - 2,848 (324)
---------- --------- --------- ----------
Cash flows from financing activities:
Affiliate advances 25,614 - - -
Bank overdraft - - - (312)
Shareholder advances (122) (23,336) 2,600 15,702
Common stock redemptions (370) - (85,670) -
---------- --------- --------- ----------
Net cash provided by (used in) financing activities 25,122 (23,336) (83,070) 15,390
---------- --------- --------- ----------
Net increase in cash 21,478 2,498 1,119 3,068
Cash at beginning of year 4,187 3,068 3,068 -
---------- --------- --------- ----------
Cash at end of year $ 25,665 $ 5,566 $ 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 June 14, 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
June 14, 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.
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 has no potential dilutive securities, the accompanying
presentation is only of basic loss per share.
2. RELATED PARTY TRANSACTIONS
As of June 14, 1999, December 31, 1998 and 1997, $21,960, $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:
<TABLE>
<CAPTION>
Periods ended June 14, Years Ended December 31,
1999 1998 1998 1997
------------- ------------- --------------- --------------
<S> <C> <C> <C> <C>
Management fees $ 2,625 $ 668 $ 1,200 $ 1,200
Consulting fees 19,137 9,700 19,384 15,583
------------- ------------- --------------- --------------
$ 21,762 $ 10,368 $ 20,584 $ 16,783
============= ============= =============== ==============
</TABLE>
As of June 14, 1999, the Company was indebted to NFPG and EWRX in the
aggregate amount of $25,614.
F-30
<PAGE>
CLASSIC CAR SOURCE, INCORPORATED
Notes to Financial Statements
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 $1,582 for the period ended June 14, 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.
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 $2,100 and $2,340 for the periods ended June 14,
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.
F-31
<PAGE>
CLASSIC CAR SOURCE, INCORPORATED
Notes to Financial Statements
4. 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.
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 June 14,
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 $500,000, $400,000 and $300,000 at June 14, 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 $170,000,
$135,000 and $102,000 at June 14, 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,
June 14, ---------------------------------
1999 1998 1997
----------- ----------- ------------
(Unaudited) (Restated) (Restated)
<S> <C> <C> <C>
Current assets:
Cash 20,537 $ 11,383 $ 123
Accounts receivable 3,185 13,818 1,850
Due from shareholders - 2,450 950
----------- ----------- -----------
$ 23,722 $ 27,651 $ 2,923
=========== =========== ===========
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Accounts payable $ 15,077 $ - $ 346
Accrued liabilities (Note 3) - 151,560 75,780
Due to affiliates 12,914 - -
----------- ----------- -----------
Total current liabilities 27,991 151,560 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 (188,138) (124,644) (73,938)
----------- ----------- -----------
Total stockholder's equity (deficit) (4,269) (123,909) (73,203)
----------- ----------- -----------
$ 23,722 $ 27,651 $ 2,923
=========== =========== ===========
See accompanying notes to financial statements.
</TABLE>
F-34
<PAGE>
<TABLE>
<CAPTION>
NORTH FORK PUBLISHING GROUP, INC.
STATEMENTS OF OPERATIONS
Period Ended Years Ended
June 14, December 31,
------------------------------ ---------------------------
1999 1998 1998 1997
----------- ----------- ---------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues:
Advertising $ 2,222 $ 918 $ 4,064 $ 55
Networking 3,550 140 10,725 300
Programming 34,051 18,708 70,037 21,350
---------- --------- --------- ---------
Total revenues 39,823 19,766 84,825 21,705
---------- --------- --------- ---------
Expenses:
Operating 77,358 45,590 124,626 94,505
General and administrative 25,959 4,605 10,905 888
---------- --------- --------- ---------
Total expenses 103,317 50,195 135,531 95,393
---------- --------- --------- ---------
Net loss $ (63,494) $ (30,429) $ (50,706) $ (73,688)
========== ========= ========= =========
Basic net loss per share $ (7.99) $ (4.14) $ (6.90) $ (10.03)
========== ========= ========== ==========
Weighted average common shares outstanding 7,942 7,350 7,350 7,350
========== ========= ========== ==========
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 Period Ended June 14, 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 - - (63,494) (63,494)
-------- --------- ---------- ----------
Balance, June 14, 1999 (unaudited) 10,906 $ 183,869 $ (188,138) $ (4,269)
======== ========= ========== =========
See accompanying notes to financial statements.
</TABLE>
F-36
<PAGE>
<TABLE>
<CAPTION>
NORTH FORK PUBLISHING GROUP, INC.
STATEMENTS OF CASH FLOWS
Period Ended Year Ended
June 14, December 31,
-------------------------- -------------------------
1999 1998 1998 1997
----------- ----------- ---------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net loss $ (63,494) $ (30,429) $ (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 10,633 (2,850) (11,968) (1,850)
Accounts payable 15,077 (346) (346) 346
Accrued liabilities 31,574 37,890 75,780 75,780
---------- ---------- ---------- ----------
Net cash provided by (used in) operating activities (6,210) 4,265 12,760 588
---------- ---------- ---------- ----------
Cash flows from financing activities:
Advances (to) from affiliates 12,914 - - -
Advances (to) from shareholder 2,450 - (1,500) (950)
---------- ---------- ---------- ----------
15,364 - (1,500) (950)
---------- ---------- ---------- ----------
Net increase (decrease) in cash 9,154 4,265 11,260 (362)
Cash at beginning of period 11,383 123 123 485
---------- ---------- ---------- ----------
Cash at end of period $ 20,537 $ 4,388 $ 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
June 14, 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
During the five and one half month period ended June 14, 1999 and during
the years ended December 31, 1998 and 1997, the Company has elected under
the Internal Revenue Code to be an S Corporation. In lieu of corporate
income taxes, taxable income and losses are allocated to the stockholders
proportionately. 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.
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 has no potential dilutive securities, the accompanying
presentation is only of basic loss per share.
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 June 14, 1999 and 1998 amounted to
$4,628 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.
F-39
<PAGE>
NORTH FORK PUBLISHING GROUP, INC.
Notes to Financial Statements
2. COMMITMENTS AND CONTINGENCIES (Continued)
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.
3. COMMON STOCK AND RESTATEMENT
During June 1999, the Company issued 3,556 shares to an employee and a
consultant 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 June 14,
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 June 14, 1999, the Company was indebted to EWRX and CCS in the
aggregate amount of $12,914.
The Company paid certain directors of the Company $35,385 during the period
ended June 14, 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.
31
<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)
December 23, 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
32
<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 6-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1999
<PERIOD-END> DEC-31-1998 JUN-30-1999
<CASH> 0 112,858
<SECURITIES> 0 0
<RECEIVABLES> 6,264 16,937
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 8,079 135,272
<PP&E> 18,772 46,030
<DEPRECIATION> 4,948 22,466
<TOTAL-ASSETS> 21,903 2,118,429
<CURRENT-LIABILITIES> 299,633 201,724
<BONDS> 0 0
0 0
0 0
<COMMON> 11,949 12,606
<OTHER-SE> (289,679) 1,904,099
<TOTAL-LIABILITY-AND-EQUITY> 21,903 2,118,429
<SALES> 0 4,993
<TOTAL-REVENUES> 0 4,993
<CGS> 0 0
<TOTAL-COSTS> 882,869 608,150
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (882,869) (603,157)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (882,869) (603,157)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (882,869) (603,157)
<EPS-BASIC> (0.07) (.05)
<EPS-DILUTED> (0.07) (.05)
</TABLE>
