U.S. SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended: December 31, 2002
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[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____________ TO _________
Commission file number: 000-30405
Universal Communication Systems, Inc.
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(Exact name of small business issuer as specified in its charter)
Nevada 4812 860887822
(State or jurisdiction (Primary Standard Industrial (IRS Employer
of incorporation Identification No.) Classification
or organization) Code No.)
MICHAEL J. ZWEBNER
407 Lincoln Rd, Suite 6K
Miami Beach, FL 33139
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(Address of principal executive offices)
(305) 672-6344
(Issuer's telephone number)
(Issuer's former telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
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State the number of shares outstanding of each of the issuer's classes of common
equity as of the latest practicable date.
Class Outstanding as of February 14, 2003
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Common Stock, $.001 par value 10,117,517
Transitional Small Business Disclosure Format: Yes No X
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TABLE OF CONTENTS
PART I FINANCIAL INFORMATION Page
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Item 1. Consolidated Financial Statements:
Balance Sheet - September 30, 2002 and
December 31, 2002 3
Statement of Operations for the three months
Ended December 31, 2002 and 2001 4
Statement of Cash Flows for the three months
Ended December 31, 2002 and 2001 5
Notes to the Financial Statements
December 31, 2002 6
Item 2. Management's Discussion and Analysis or Plan
of Operations 7
Item 3. Evaluation Of Disclosure Controls And Procedures 9
PART II OTHER INFORMATION
Item 1. Legal Proceedings 10
Item 2. Changes in Securities 11
Item 3. Defaults Upon Senior Securities 11
Item 4. Submission of Matters to Vote of Security Holders 11
Item 5. Other Information 11
Item 6. Exhibits and Reports on Form 8-K 11
Item 7. Signatures 12
2
Part I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Universal Communication Systems, Inc.
Condensed Balance Sheets
December 31, September 30,
2002 2002
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(unaudited) (see note 1)
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Assets
Current Assets:
Cash & cash equivalents $ 273 $ 874
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Total Current Assets 273 874
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Due from related party, net 27,955 35,456
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Fixed Assets:
Equipment 25,259 25,259
Furniture and fixtures 1,917 1,917
Less: Accumulated depreciation & amortization (17,311) (15,889)
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Total Fixed Assets 9,865 11,287
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Investment in Digital Way (Peru), net
of impairment - -
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Other assets 11,250 11,250
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Total Assets $ 49,342 $ 58,867
==================== =====================
Liabilities and Stockholders' Deficit
Current Liabilities:
Current maturities of convertible debentures $ 886,449 $ 886,449
Accounts payable, trade 1,093,019 1,078,941
Accrued expenses 160,724 156,978
Due to related entities 80,564 29,791
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Total Current Liabilities 2,220,756 2,152,159
Long Term Liabilities:
Note Payable 261,864 254,237
Convertible debentures, net of current maturities 4,163,173 4,123,415
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Total Long Term Liabilities 4,425,037 4,377,652
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Total Liabilities 6,645,793 6,529,811
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Commitments and Contingencies - -
Stockholders' Deficit:
Preferred stock, par value $.001 per share,
10,000,000 shares authorized, no shares issued and outstanding
Common stock, par value $.001 per share,
800,000,000 shares authorized, 7,209,155 issued
and outstanding 7,209 5,968
Additional paid-in capital 23,174,585 23,071,546
Accumulated deficit (29,778,245) (29,548,458)
-------------------- ---------------------
Total Stockholders' Deficit (6,596,451) (6,470,944)
-------------------- ---------------------
Total Liabilities and Stockholders' Deficit $ 49,342 $ 58,867
==================== =====================
See notes to condensed financial statements.
3
Universal Communication Systems, Inc.
Condensed Statements of Operations
UNAUDITED
Three Months Three Months
Ended December 31, Ended December 31,
2002 2001
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Revenue $ - $ -
Cost of goods sold - -
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Gross profit - -
Operating expenses 179,899 202,145
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Operating income (loss) (179,899) (202,145)
Interest income (expense) (49,888) (81,630)
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Net loss $ (229,787) $ (283,775)
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Basic And Diluted Loss Per
Share $ (0.034) $ (0.002)
================== ===================
Basic and Diluted Weighted
Average Shares Outstanding 6,835,651 137,531
================== ===================
See notes to condensed financial statements.
4
Universal Communication Systems, Inc.
Condensed Statement of Cash Flows
UNAUDITED
For the For the
Three Months Three Months
Ended Ended
December 31, December 31,
2002 2001
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (229,787) $ (283,775)
Adjustments to reconcile net loss from operations
to net cash used by operating activities:
Depreciation and amortization expense 1,422 15,548
Interest payable added to principal of
debentures 39,758 123,557
Interest added to principal of note payable 7,627 -
Stock issued for services 104,280 -
Changes in operating assets and liabilities:
(Increase) decrease in prepaid and other - -
Decrease in accounts receivable - -
(Decrease) in accrued expenses 3,746 (1,016,485)
Increase in accounts payable 14,077 1,004,381
Increase in due to related entities 50,775 94,933
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Net Cash (Used) by Operating Activities (8,102) (61,841)
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CASH FLOWS FROM INVESTING
ACTIVITIES:
Decrease in advances from related parties 7,501 -
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Net Cash (Used) by Investing Activities 7,501 -
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of senior secured
convertible debentures - 60,000
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Net Cash Provided by Financing Activities - 60,000
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NET (DECREASE) IN CASH AND CASH EQUIVALENTS (601) (1,841)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 874 4,082
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CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 273 $ 2,241
================== =================
SUPPLEMENTAL DISCLOSURES OF CASH:
Interest paid $ - $ -
Income taxes paid $ - $ -
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Interest accrued on debentures, added to
the principal of the debentures $ 39,758 $ $123,557
See notes to condensed financial statements.
5
Universal Communication Systems, Inc.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - General and Summary of Business and Significant Accounting Policies.
Basis of Presentation
The accompanying unaudited condensed financial statements have
been prepared in accordance with U.S. generally accepted
accounting principles for interim financial information and with
instructions to Form 10-QSB and Regulation S-B. Accordingly, they
do not include all of the information and footnotes required by
U.S. generally accepted accounting principles for complete
consolidated financial statements included in this Form 10-QSB.
The results of operations for any interim period are not
necessarily indicative of results for the full year. These
statements should be read in conjunction with the audited
financial statements and accompanying notes for the year ended
September 30, 2002
The balance sheet at September 30, 2002 has been derived from
audited financial statements, but does not include all of the
information and footnotes required by U.S. generally accepted
accounting principles for complete financial statements.
Background
The Company is actively engaged in efforts to revise its business
plan, de-emphasize participation in the wireless internet market,
and seek new business activities.
Reverse Stock Split
The Company completed a one-for-one-thousand reverse stock split
on August 23, 2002. All share and per share information reflects
this reverse stock split.
NOTE 2 - GOING CONCERN AND SIGNIFICANT RISKS AND UNCERTAINTIES
The Company's financial statements are prepared using generally
accepted accounting principles applicable to a going concern
which contemplates the realization of assets and liquidation of
liabilities in the normal course of business. The Company has
experienced losses since inception, and had an accumulated
deficit of $29,778,245 at December 31, 2002. Net losses are
expected for the foreseeable future. As such, there is
substantial doubt as to the Company's ability to continue as a
going concern. Management is considering alternatives to its
business strategy, including modifications of its business plan
and possible sale or licensing of certain assets. Simultaneously,
the Company is continuing to secure additional capital through
sales of common stock through the current operating cycle. There
is no assurance that management will be successful in its
efforts.
NOTE 3 - BASIC AND DILUTED NET LOSS PER SHARE CALCULATION
Loss per common share is calculated in accordance with Statement
of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share." Basic loss per share is computed by dividing the loss
available to common shareholders by the weighted-average number
of common shares outstanding. Diluted loss per share is computed
similar to basic loss per share, except that the denominator is
increased to include the number of additional common shares that
would have been outstanding if the potential common shares had
been issued and if the additional common shares were dilutive.
For the three months ended December 31, 2002 and 2001, common
stock equivalents have been excluded from the aforementioned
computations as their effect would be anti-dilutive.
6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Except for historical information contained herein, the statements in this
report (including without limitation, statements indicating that the Company
"expects," "estimates," anticipates," or "believes" and all other statements
concerning future financial results, product offerings, proposed acquisitions or
combinations or other events that have not yet occurred) are forward-looking
statements that are made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995, Section 21E of the Securities Exchange
Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as
amended. Forward-looking statements involve known and unknown factors, risks and
uncertainties which may cause our actual results in future periods to differ
materially from forecasted results. Forward looking statements are all based on
current expectations, and we assume no obligation to update this information.
RISK FACTORS
We will require additional capital in the short term to remain a going
concern.
We will require substantial short term outside investment on a continuing
basis to finance our current operations and any limited capital expenditures
identified to protect existing investments. Our revenues for the foreseeable
future may not be sufficient to attain profitability. Since inception, we have
generated little revenue and have incurred substantial expenditures. We expect
to continue to experience losses from operations while we identify and execute
alternative business plans and possibly develop other technologies or
activities. In view of this fact, our auditors have stated in their report for
the period ended September 30, 2002 that our ability to meet our future
financing requirements, and the success of our future operations, cannot be
determined at this time. In order to finance our working capital requirements we
are negotiating equity investments, but there can be no assurance that we will
obtain the required capital or that it will be obtained on terms favorable to
us. If we do not obtain short term financing we may not be able to continue as a
viable concern. We do not have a bank line of credit and there can be no
assurance that any required or desired financing will be available through bank
borrowings, debt, or equity offerings, or otherwise, on acceptable terms, if at
all. If future financing requirements are satisfied through the issuance of
equity securities, investors may experience significant dilution in the net book
value per share of common stock.
BUSINESS AND ORGANIZATION
Universal Communication Systems, Inc. (collectively the "Company", "us" or
"we"), prior to 2002, was engaged in activities related to advanced wireless
communications, including the acquisition of radio-frequency spectrum
internationally. Currently, our activities related to the advanced wireless
communications are conducted by our investment in Digital Way, S.A., a Peruvian
communication company and former wholly owned subsidiary. We currently hold a
twenty seven percent interest in Digital Way, S.A., however, due to a lack of
cooperation from their management, our financial results do not include our
interest in their activities.
We also own a U. S. patent on our Distributed Wireless Call Processing
System technology.
7
PROPOSED ACQUISITION
On June 12, 2002, we entered into a letter of intent to acquire Card
Universal Corporation, Inc., a privately held development stage Florida
corporation in the business of providing and marketing prepaid "Stored Money
Cards." Management is currently evaluating its options as to the future plans
for the Company, its operations and assets. The acquisition is subject to the
signing of a definitive agreement, valuation by a third party and to the
availability of appropriate financing.
OUTLOOK
We will require short-term outside investment on a continuing basis to
finance our current operations and capital expenditures. If we do not obtain
short term financing we may not be able to continue as a viable concern. We do
not have a bank line of credit and there can be no assurance that any required
or desired financing will be available through bank borrowings, debt, or equity
offerings, or otherwise, on acceptable terms. If future financing requirements
are satisfied through the issuance of equity securities, investors may
experience significant dilution in the net book value per share of common stock.
Under the auspices of new management installed November, 2001, we have made
considerable progress in restructuring prior obligations and removing debt. We
are actively engaged in a number of efforts to revise our business plan to
develop new revenue sources and direction for the Company. We plan to
de-emphasize our participation in the wireless internet market, sell assets for
cash and/or advance our remaining businesses through joint ventures, continue
our negotiations with creditors to compromise, extend, convert and/or forgive
debt, and seek new businesses that can take advantage of our extensive
shareholder base and status as a public company.
Management is hopeful that it can continue to reach agreements with vendors
and foreign partners to resolve disputes and balances due. Management hopes that
once these issues are dealt with and the acquisition of Card Universal
Corporation is consummated, this will provide for the financial stability of the
Company. No assurances can be made that these events will successfully take
place. Management expects to meet minimal operating expenses during this period,
through a combination of loans, sale of assets and private placement funds.
RESULTS OF OPERATIONS
Three Months Ended December 31, 2002 Compared to the Three Months Ended December
31, 2001.
There were no revenues or cost of sales for the three months ended December
31, 2002 and 2001.
Operating expenses for the three months ended December 31, 2002 amounted to
$179,899 compared to $202,145 for the three months ended December 31, 2001.
These expenses were primarily consultants, professional fees and rents.
Net losses for the three months ended December 31, 2002 were $229,788, as
compared with $283,775 for the three months ended December 31, 2001.
8
LIQUIDITY AND CAPITAL RESOURCES
On December 31, 2002, the Company had cash and cash equivalents of $273
compared with $874 as of September 30, 2002. During the three months ended
December 31, 2002, $7,501 was received from the sale of assets securing advances
made to the Hard Disc Cafe, Inc. and $46,500 was advanced by the Chairman of the
Company, Michael Zwebner. These funds were used to pay the cash operating
expenses for the three month period ended December 31, 2002.
While management restructures the Company, current operating cash is being
provided by loans from related entities and the Chairman of the Company. The
working capital deficit at December 31, 2001 amounted to $1,595,898. Management
is attempting to reduce this deficit through arrangements with creditors. We
have reached favorable agreements with a number of the creditors, but have not
had the resources to satisfy the obligation under the revised debt. If we do not
make satisfactory arrangements with all of the creditors or obtain short term
financing, we may not be able to continue as a viable concern. We do not have a
bank line of credit and there can be no assurance that any required or desired
financing will be available through bank borrowings, debt, or equity offerings,
or otherwise, on acceptable terms, if at all. If future financing requirements
are satisfied through the issuance of equity securities, investors may
experience significant dilution in the net book value per share of common stock.
ITEM 3. EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The management of the Company including Mr. Michael J. Zwebner as Chief
Executive Officer and Mr. Curtis Orgil as Chief Financial Officer have evaluated
the Company's disclosure controls and procedures. Under rules promulgated by the
SEC, disclosure controls and procedures are defined as those "controls or other
procedures of an issuer that are designed to ensure that information required to
be disclosed by the issuer in the reports filed or submitted by it under the
Exchange Act is recorded, processed, summarized and reported, within the time
periods specified in the Commission's rules and forms." Based on the evaluation
of the Company's disclosure controls and procedures, it was determined that such
controls and procedures were effective as of January 30, 2003, the date of the
conclusion of the evaluation.
Further, there were no significant changes in the internal controls or in
other factors that could significantly affect these controls after January 30,
2003, the date of the conclusion of the evaluation of disclosure controls and
procedures.
9
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On August 26, 1999, we filed suit against Credit Bancorp, in U.S. District
Court in San Francisco, regarding improprieties on the part of Credit Bancorp
relating to a loan. The case was settled on October 11, 1999. As part of the
settlement agreement, Credit Bancorp agreed to convert the original loans
granted to us to a convertible debenture in the amount of $740,000. On October
11, 1999, we issued a convertible unsecured debenture for $740,000 to Credit
Bancorp in settlement of this obligation. The terms of this convertible
unsecured debenture are 7% interest per annum payable, semiannually on the last
day of February and September, with the principal due September 30, 2002. All
amounts of unpaid principal and accrued interest of this debenture are
convertible at any time at the conversion price of $1,600 per share of
unregistered, restricted shares of our common stock. Credit Bancorp has agreed
to convert principal and accrued interest owing on the debenture into 483 shares
of our common stock.
In November 1999, the SEC filed suit against Credit Bancorp alleging
violations of various securities laws in connection with its actions in relation
to us and others, and seeking various forms of relief including disgorgement of
its illegal gains. A receiver has been appointed to administer the affairs of
Credit Bancorp. We have been informed that the appointed receiver denies that
such a conversion request was made and the Company may be subject to further
liability.
The Securities and Exchange Commission commenced an informal inquiry on the
Company in August, 2000. We have voluntarily complied with their requests for
information and we intend to fully cooperate with the inquiry. No further
requests have been made since that date.
In December 1999, we entered into an amended lease agreement regarding a
lease for the license covering Concord, California and the surrounding area. We
have received a Notice of Default from the lessor. The Notice of Default is
based on a requirement in the amended agreement that the balance of the purchase
price for the assignment of the license be paid by December 1, 2000. Our
management has been advised by counsel that payment of the balance of the
purchase price prior to the FCC's consent to the assignment of the license may
constitute a premature assignment in violation of the FCC's rules. The
assignment application has not been filed with the FCC for the FCC to make a
definitive ruling on this issue. At this point, no formal legal action has been
taken by the lessor. We are no longer pursuing the license or the lease of the
facility.
On July 20, 2001, WSI, Inc., a Puerto Rican corporation, and its principal
officer and shareholder Howard Hager, filed suit against the Company in the U.S.
District Court in Puerto Rico for breach of contract and damages in the amount
of $4,675,000. The claims arise out of an alleged agreement on the part of the
Company to acquire WSI and provide it with substantial financing. A default
judgment was entered in WSI's favor. On November 26, 2002 a settlement agreement
was reached with Mr. Hager and the trustee in bankruptcy for WSI. Under the
agreement, we issued $200,000 in value of shares of common stock, which are
restricted from sale for a one-year period. In addition to the stock, $50,000
will be paid to the trustee of WSI in two installments of $25,000 each, and a
two year consulting contract, valued at $120,000, has been signed with Mr.
Hager. The settlement has a total cost of $370,000.
10
ITEM 2. CHANGES IN SECURITIES.
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS.
None
ITEM 5. OTHER INFORMATION.
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) The following exhibits are included herewith:
Exhibit 99.1 Certification fo Chief Executive Officer
Exhibit 99.2 Certification fo Chief Financial Officer
(b) The Company filed the following reports on Form 8-K during the quarter for
which this form is filed:
None
11
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: February 17, 2003 UNIVERSAL COMMUNICATION SYSTEMS, INC.
/s/ MICHAEL J. ZWEBNER
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Michael J. Zwebner
Chief Executive Officer,
Chairman of the Board
12
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the quarterly report on Form 10-QSB of Universal
Communication Systems, Inc. (the "Company") for the period ended December 31,
2002 as filed with the Securities and Exchange Commission on the date hereof
(the "Report"), the undersigned, Michael Zwebner, Chief Executive Officer of the
Company, hereby certifies, pursuant to 18 U.S.C. section 1350, that:
(1) the Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
/s/ Michael Zwebner
Dated: February 17, 2003 ______________________________
Michael Zwebner
Chief Executive Officer
13
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the quarterly report on Form 10-QSB of Universal
Communication Systems, Inc. (the "Company") for the period ended December 31,
2002 as filed with the Securities and Exchange Commission on the date hereof
(the "Report"), the undersigned, Curtis Orgil, Chief Financial Officer of the
Company, hereby certifies, pursuant to 18 U.S.C. section 1350, that:
(1) the Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
/s/ Curtis Orgil
Dated: February 17, 2003 ______________________________
Curtis Orgil
Chief Financial Officer
14