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