EX-99 3 exhibit99-1.txt Form 8-K/A Exhibit 99-1 INDEPENDENT AUDITOR'S REPORT To the Board of Directors IceWEB Communications, Inc. We have audited the accompanying balance sheets of IceWEB Communications, Inc. as of September 30, 2001 and 2000, the related statements of operations, changes in stockholders' 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 the financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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 IceWEB Communications, Inc. as of September 30, 2001 and 2000, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 14 to the financial statements, the Company has suffered recurring losses from operations and has a net capital deficiency that raises substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 14. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Boca Raton, Florida May 20, 2002 ICEWEB, INC. Statements of Balance Sheets Years Ended September 30, 2001 and 2000 UNAUDITED UNAUDITED 30 Sep 01 30 Sep 00 31 Mar 02 31 Mar 01 --------- --------- --------- --------- ASSETS Current Assets: Cash $15,484 $40,192 $3,825 $350,270 Accounts receivable, 95,211 170,644 42,713 259 net of allowance of $8,500 and $0 Prepaid expenses 1,751 1,488 0 1,333 ------------------------------------------------ Total current assets 112,446 212,324 46,538 351,862 Property and equipment, net $242,420 $72,271 $191,091 $144,591 Other assets: Goodwill, net of $0 $205,665 $0 $179,957 amortization of $257,081 and $51,416 respectively Trademarks, net of 10,435 15,476 9,477 0 amortization of $5,042 and $0 Deposits 1,547 5,750 0 5,750 Due from related parties 107,448 150,000 84,857 141,369 ------------------------------------------------ Total other assets 119,430 376,891 94,334 327,076 Total Assets $474,296 $661,486 $331,963 $823,529 ======== ======== ======== ======== LIABILITIES AND STOCKHOLDERS' DEFICIT Current Liabilities: Accounts payable $106,843 $48,155 $268,225 $1,578 Accrued expenses 55,158 0 0 10,760 Line of credit 399,723 250,501 403,015 195,474 Due to related party 0 34,328 115,000 0 Deferred revenue 41,044 0 5,000 10,000 ------------------------------------------------ Total Liabilities $602,768 $332,984 $791,240 $217,812 Stockholders' deficit: Common stock, par value $.001 $27,720 $25,000 $22,720 $25,000 250,000,000 shares authorized 27,720,500 and 25,000,000 issued and 22,720,500 and 25,000,000 outstanding Treasury stock, 5,000,000 shares (5,000) 0 0 0 Additional paid in capital 1,552,791 1,011,191 1,552,971 1,550,691 Accumulated deficit (1,704,163) (707,689) (2,034,968) (969,974) ------------------------------------------------ Total stockholders' deficit (128,472) 328,502 (459,277) 605,717 Total liabilities and $474,296 $661,486 $331,963 $823,529 stockholders' deficit ======== ======== ======== ======== See accompanying notes to financial statements. 2 ICEWEB, INC. Statements of Operations Years Ended September 30, 2001 and 2000 UNAUDITED UNAUDITED Six Months Six Months Ended Ended 30 Sep 01 30 Sep 00 31 Mar 02 31 Mar 01 --------- --------- --------- --------- Revenues $212,104 $680,799 $138,733 $489 Cost of revenues 214,414 693,078 51,347 8,102 ------------------------------------------------ Gross profit (loss) (2,310) (12,279) 87,386 (7,613) Selling expenses 172,627 34,219 117,963 36,845 General and administrative 766,567 651,176 298,111 218,776 ------------------------------------------------ Loss from operations (941,504) (697,674) (328,688) (263,235) Interest income 1,563 1,116 0 825 Interest expense (16,990) (11,131) 0 0 Loss on disposal on assets (39,543) 0 (2,117) 0 Net loss $(996,474) $(707,689) $(330,805) $(262,409) ========== ========== ========== ========== Weighted average loss per $(.04) $(.04) $(.01) $(.01) share Weighted average shares 22,720,500 25,000,000 22,720,500 26,337,704 See accompanying notes to financial statements. 3 ICEWEB, INC. Statements of Changes in Stockholders' Deficit Years Ended September 30, 2001 and 2000
Common Stock Additional Shares Amount Paid in Accumulated Total capital Deficit ------------ ------ ---------- ----------- --------- Balance at 30 Sep 99 25,000,000 25,000 125,000 0 150,000 Contributed capital 0 0 886,191 0 886,191 Net loss for the year 0 0 0 (707,689) (707,689) Balance at 30 Sep 00 25,000,000 25,000 1,011,191 (707,689) 328,502 Contributed capital 0 0 2,280 0 2,280 Common stock issued for 2,720,500 2,720 539,500 0 542,220 cash Treasury stock (at cost) (5,000,000) (5,000) 0 0 (5,000) Net loss for the year 0 0 0 (996,474) (996,474) Balance at 30 Sep 01 22,720,500 22,720 1,552,971 (1,704,163) (128,472) UNAUDITED Net loss for the period 0 0 0 (330,805) (330,805) thru 31 Mar 02 Balance at 31 Mar 02 22,720,500 22,720 1,552,971 (2,034,968) (459,277) ========== ====== ========= ========== ========
See accompanying notes to financial statements 4 ICEWEB, INC. Statements of Cash Flows Years Ended September 30, 2001 and 2000 UNAUDITED UNAUDITED Six Months Six Months Ended Ended 30 Sep 01 30 Sep 00 31 Mar 02 31 Mar 01 --------- --------- --------- --------- Cash flows from operating activities: Net loss $(996,474) $(707,689) $(330,805) $(262,409) Adjustments to reconcile net loss to net cash (used) by operating activities: Depreciation and amortization 111,922 61,032 49,091 41,857 Loss on disposal of assets 39,543 0 2,117 0 Goodwill impairment 154,250 0 0 0 Changes in operating assets and liabilities, net effects from acquisition: (Increase) decrease in: Accounts receivable 75,433 138,178 52,498 170,385 Prepaid expenses (263) 47,502 1,624 279 Deposits 4,203 0 1,548 0 Increase (decrease) in: Accounts payable 58,688 (527,911) 122,346 (46,579) Accrued expenses 55,158 0 (12,705) 10,760 Deferred revenue 41,044 0 (36,044) 10,000 ------------------------------------------------ Net cash (used) by operating (456,496) (988,888) (150,330) (75,707) activities Cash flows from investing activities: Cash paid in acquisition (173,000) 0 0 0 Purchase of property and (102,810) (78,059) (8,921) (72,991) equipment Proceeds from disposal of 10,652 0 10,000 0 property and equipment Purchase of intangibles 0 (15,476) 0 0 ------------------------------------------------ Net cash (used) by investing (265,158) (93,535) 1,079 (72,991) activities Cash flows from financing activities: Proceeds from line of credit 149,222 250,501 0 (55,027) Repayment of long-term debt 0 (192,818) 0 0 Payments to related party (34,328) (150,000) 0 (34,328) Proceeds from related party 42,552 34,328 22,592 8,631 Proceeds from note payable 0 0 115,000 0 Contributed capital 539,500 886,191 0 539,500 ------------------------------------------------ Net cash provided by 696,946 828,202 137,592 458,776 financing activities Net (decrease) increase in cash (24,708) (254,221) (11,659) 310,078 Cash, beginning of year 40,192 294,413 15,484 40,192 Cash, end of year 15,484 40,192 3,825 350,270 Cash paid during the year for 0 11,131 0 11,131 interest See accompanying notes to financial statements. 5 ICEWEB, INC. Financial Statements September 30, 2001 NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS IceWEB Communications, Inc. (the "Company") was originally incorporated in Virginia in March 1996, now incorporated as IceWEB, Inc. in Delaware in September 2001. The Company first operated as a full service provider of computer systems and services to corporate and to the federal government under a General Services Administration (GSA) schedule contract for computer systems and peripherals. In April 2000, the Company officially changed its name to IceWEB Communications, Inc. The Company acquired the assets of Learning Stream, Inc. in June 2001 which coincided with the transition of the Company business model to focus on streaming audio and video, web-casting and digital web animation. In March 2002, the Company executed a reverse merger with Disease Sciences, Inc. and is now trading publicly on the OTC Bulletin Board. Under the agreement, the former business of Disease Sciences will be separated from the post merger company. For accounting purposes, the merger will be treated as a recapitalization of the company. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Cash Equivalents The Company considers all highly-liquid debt instruments with original maturities of three months or less to be cash equivalents. Property and Equipment Property and equipment is recorded at cost and is depreciated using the straight-line method over their estimated useful lives. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates. Revenue Recognition Generally, revenues from sales of products are recognized when products are shipped unless the Company has obligations remaining under sales or licensing agreements, in which case revenue is either deferred until all obligations are satisfied or recognized ratably over the term of the contract. The company uses the Percentage of Completion method to recognize revenue and expense from contracts extending through fiscal quarters. 6 Intangible Assets Trademarks were acquired in September 2000. They are recorded at cost and are amortized using the straight-line method over 5 years. The Company continually reviews its intangible assets to evaluate whether events or changes have occurred that would suggest an impairment of carrying value. An impairment would be recognized when expected future operating cash flows are lower than the carrying value. Advertising Costs Advertising costs are included in selling expenses, and are expensed as incurred. Advertising expense was $5,195 and $12,879 for the years ended September 30, 2001 and 2000, respectively. Unaudited Interim Information The information presented for the six months periods end March 31, 2002 and 2001, has not been audited. In the opinion of management, the unaudited interim financial statements include all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the Company's financial position as of March 31, 2002 and 2001, and the results of its operations and its cash flows for the six months ended March 31, 2002 and 2001, and the stockholder's deficit for the six months ended March 31, 2002. Amortization of Goodwill Goodwill represents the amount by which the purchase price of a business acquired exceeds the fair market value of the net assets acquired under the purchase method of accounting. The Company assesses whether its goodwill and other intangible assets are impaired as required by SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets to be Disposed of," based on an evaluation of undiscounted projected cash flows through the remaining amortization period. If an impairment exists, the amount of such impairment is calculated based on the estimated fair value of the asset. The Company determined the goodwill associated with the acquisition of American Computer Systems was impaired and the entire amount of goodwill, $257,081 and accumulated amortization, $102,832 was written off. Recent Accounting Pronouncements On June 29, 2001, the Financial Accounting Standards Board unanimously approved the issuance of Statements of Financial Accounting Standards No. 141, Business Combinations (Statement 141), and No. 142, Goodwill and Other Intangible Assets (Statements 142). Statement 141 eliminates the pooling-of interests method of accounting for business combinations except for qualifying business combinations that were initiated prior to July 1, 2001. Statement 141 changes the criteria to recognize intangible assets apart form goodwill. The requirements of Statement 141 are effective for any business combination accounted for by the purchase method that is completed after June 30, 2001. 7 Under Statement 142, goodwill and indefinite lived intangible assets are no longer amortized but are reviewed annually, or more frequently if impairment indicators arise, for impairment. Identifiable intangible assets will continue to be amortized over their estimated useful lives. Early adoption is permitted for companies with fiscal years beginning after March 15, 2001, provided that their first quarter financial statements have not been issued. The Company plans to adopt Statement 142 beginning January 1, 2002. The adoption of Statement 142 is not expected to have a material impact on the Company's earnings or financial position, since Goodwill was written down to $0 as of September 30, 2001. NOTE 3 - PROPERTY AND EQUIPMENT Property and equipment consist of the following: 2001 2000 ---- ---- Computer equipment $167,266 $75,389 Furniture and fixtures 19,898 2,898 Vehicles 15,737 1,600 Computer software 90,815 0 Leasehold improvements 3,773 2,000 -------- ------- Total property and equipment 297,489 81,887 Less: accumulated depreciation (55,069) (9616) Property and equipment, net $242,420 72,271 Depreciation expense for the years ended September 30, 2001 and 2000 was $55,506 and $9,616, respectively. NOTE 4 - OPERATING LEASES The Company leased facilities in Chantilly, VA for office space and developmental work through May 2001 at a cost of $2,250 per month. From June to September 2001 the Company occupied the Learning Stream office space at Silver Spring, MD; the rental expense was paid by Learning Stream, Inc. They are currently leasing office space in Herndon, VA on a six-month sublease basis for $5,000 per month. Total rental expense for the years ended September 31, 2001 and 2000 was $20,442 and $24,750, respectively. The Company has extended its lease at its current location for 24 months starting May 1, 2002 at an average cost of $6,933 per month. NOTE 5 - ACCOUNTS RECEIVABLE Accounts receivable consist of normal trade receivables. The Company assesses the collectibility of its accounts receivable regularly. Based on this assessment, an allowance against accounts receivable has been established. 8 NOTE 6 - RELATED PARTIES For the year ended September 30, 2001, the company held Notes Receivable from a corporation related through common ownership and separately from a shareholder of the Company. At September 30, 2001 and 2000, the Company had a note receivable from a shareholder of $107,478 and $150,000. This advance is non-interest bearing and due on demand. The company advanced a corporation related through common ownership $4,242 and loaned the related entity $34,328 at September 30, 2001 and September 30, 2000 respectively. The advance is non-interest bearing and due on demand. During the years ended September 30, 2001 and 2000 a shareholder of the corporation contributed capital of $2,280 and $886,191, respectively to help fund operations. NOTE 7 - LONG-TERM DEBT The Company has a line of credit with Merrill Lynch Business Financial Services, Inc. of up to $500,000. The interest rate charged is based on 30-day commercial paper plus 2.4%. The interest rate was 5.07% and 8.96% as of September 30, 2001 and 2000 respectively. The line of credit is secured by the assets of the Company, and is personally guaranteed by the majority shareholder. The line of credit expired in January 2002 and was converted to a note payable to the majority shareholder. NOTE 8 - SUPPLEMENTAL CASH FLOW INFORMATION Supplementary cash flow information consisted of the following at September 31, 2001 and 2000: 2001 2000 ---- ---- Cash paid during the year for interest $0 $11,131 NOTE 9 - CONCENTRATION OF CREDIT RISK The Company maintains its cash bank deposits at various financial institutions. Accounts at these institutions are insured by the Federal Deposit Insurance Corporation up to $100,000 and the balances, at times, may exceed federally insured limits. At September 30, 2001 and 2000, the balances in each account were below this limit. NOTE 10 - MAJOR CUSTOMERS Sales to three customers represented approximately 54% and 63% of total sales in September 30, 2001 and 2000 respectively. As of September 30, 2001 and 2000, approximately 62% and 90% of the Company's accounts receivable were due from these three customers. 9 NOTE 11 - INCOME TAXES As of September 30, 2001 and 2000, the Company had an unused net operating loss carry forward of approximately $1,507,697 and $700,000 available for use on its future corporate federal tax returns. The Company's evaluation of the tax benefit of its net operating loss carry forward is presented in the following table. The tax amounts have been calculated using the Company's effective income tax rate resulting from the use of graduated rates. Deferred tax asset 2001 2000 ---- ---- Tax benefit of net operating loss carry forward $567,347 265,000 Tax provision of accumulated depreciation (7,599) 1,100 Tax benefit of allowance for doubtful accounts 3,199 0 Tax benefit of accumulated amortization 83,841 0 Less: valuation allowance (646,788) (266,100) -------- -------- Total deferred tax asset $0 $0 Year loss originated Expiring -------------------- -------- 30 Sep 00 2020 30 Sep 01 2021 The utilization of the above loss carry forwards, for federal income tax purposes may be subject to limitation resulting from changes in ownership. NOTE 12 - STOCK OFFERING In July 2000, the Company commenced a stock offering under Regulation D. The offering consisted of 10,000 units at $100 per unit, each unit contained 500 shares of common stock at a price of $0.20 per share. As of September 30, 2000, no common stock had been issued, nor had any funds been received. As of September 2001, approximately $539,500 was received and approximately 2,720,500 shares of common stock had been issued. Each share of common stock that was sold was subsequently issued two warrants for each common share for a total of 5,441,000 warrants. NOTE 13 - ACQUISITION In June 2001, the Company executed an asset purchase agreement to purchase all the assets of Learning Stream, Inc. which is in the same line of business as the Company. The purchase price was $173,000, which approximates the fair value of $72,000 of computer software and $101,000 of computer equipment acquired. The acquisition was accounted for using the purchase method of accounting. The results of operations are included in the financial statements from the date of acquisition. 10 NOTE 14 - LIQUIDITY The accompanying financial statements have been prepared on the basis that the Company will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. However, since inception, the Company's operating and investing activities have used more cash than they have generated. Because of the continued need for substantial amounts of working capital to fund the growth of the business, the Company expects to continue to experience significant negative operating and investing cash flows for the foreseeable future. The Company may need to raise additional capital in the future to meet the operating and investing cash requirements. The Company may not be able to find additional financing, if required, on favorable terms or at all. If additional funds are raised through the issuance of equity, equity-related or debt securities, these securities may have rights, preferences or privileges senior to those of the rights of the common stock, and the stockholders may experience additional dilution to their equity ownership. Since there are no assurances that such financing will be available when and as needed to satisfy current obligations, substantial doubt exists as to whether the Company will continue as a going concern. NOTE 15 - LITIGATION The Company is involved in various claims and lawsuits arising in the normal course of business. At this time, any outcome cannot be estimated and the results may be material to the business. 11