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: March 31, 2003
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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.)
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)
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
------ ------
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 May 01, 2003
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Common Stock, $.001 par value 19,284,204
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:
Consolidated Balance Sheet - March 31, 2003 and
September 30, 2002 3
Consolidated Statements of Operations for the three months
and six months Ended March 31, 2003 and 2002 4
Consolidated Statements of Cash Flows for the three months
and six months Ended March 31, 2003 and 2002 5
Notes to the Consolidated Financial Statements
March 31, 2003 6
Item 2. Management's Discussion and Analysis or Plan
of Operations 7
Item 3. Evaluation Of Disclosure Controls And Procedures 10
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 11
Item 7. Signatures 12
Certifications 12
2
Part I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Universal Communication Systems, Inc.
Condensed Consolidated Balance Sheets
March 31, September 30,
2003 2002
---- ----
(unaudited) (see note 1)
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Assets
Current Assets:
Cash & cash equivalents $ 4,942 $ 874
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Total Current Assets 4,942 874
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Due from related party, net 1,259 35,456
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Fixed Assets:
Equipment 25,259 25,259
Furniture and fixtures 1,917 1,917
Less: Accumulated depreciation & amortization (18,734) (15,889)
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Total Fixed Assets 8,442 11,287
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Investment in unconsolidated subsidiaries, net
of impairment -- --
Other assets 25,740 11,250
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Total Assets $ 40,382 $ 58,867
============ ============
Liabilities and Stockholders' Deficit
Current Liabilities:
Current maturities of convertible debentures $ 946,449 $ 886,449
Accounts payable, trade 1,054,711 1,078,941
Accrued expenses 178,896 156,978
Due to a related party 137,519 29,791
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Total Current Liabilities 2,317,575 2,152,159
Long Term Liabilities:
Note payable 269,491 254,237
Convertible debentures, net of current maturities 4,192,225 4,123,415
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Total Long Term Liabilities 4,461,716 4,377,652
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Total Liabilities 6,779,291 6,529,811
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Commitments and Contingencies -- --
Stockholders' Deficit:
Preferred stock, 10,000,000 shares authorized, no
Shares issued and outstanding
Common stock, par value $.001 per share,
800,000,000 shares authorized, 11,259,780 issued
and outstanding 11,260 5,968
Additional paid-in capital 23,339,687 23,071,546
Accumulated deficit (30,089,856) (29,548,458)
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Total Stockholders' Deficit (6,738,909) (6,470,944)
------------ ------------
Total Liabilities and Stockholders' Deficit $ 40,382 $ 58,867
============ ============
See notes to condensed consolidated financial statements.
3
Universal Communication Systems, Inc.
Condensed Consolidated Statements of Operations
UNAUDITED
Three Months Ended March 31, Six Months Ended March 31,
---------------------------- --------------------------
2003 2002 2003 2002
---------- -------- ---------- ---------
Revenue $ - $ - $ - $ -
Cost of goods sold - - - -
---------- --------- --------- ---------
Gross profit - - - -
Operating expenses 234,153 166,989 414,051 369,134
Write down of Assets 26,397 205,181 26,397 205,181
Impairment loss on deposits - 197,506 - 197,506
---------- --------- --------- ---------
Operating (loss) (260,550) (569,676) (440,448) (771,821)
Interest expense (51,062) (81,520) (100,949) (163,150)
---------- --------- --------- ---------
Net loss $ (311,612) $(651,196) $(541,397) $(934,971)
========== ========= ========= =========
Basic and diluted loss per
share $ (0.04) $ (4.44) $ (0.06) $ (6.22)
========== ========= ========= =========
Number of shares used in
computing basic and diluted
loss per share 8,799,258 146,579 9,248,228 150,294
=========== ========== =========== ===========
See notes to condensed consolidated financial statements.
4
Universal Communication Systems, Inc.
Condensed Consolidated Statement of Cash Flows
UNAUDITED
For the For the
Six Months Six Months
Ended Ended
March 31, March 31,
2003 2002
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $(541,397) $(934,971)
Adjustments to reconcile net loss from operations
to net cash used by operating activities:
Other comprehensive (loss) -- --
Common stock issued for services 253,229 6,000
Depreciation and amortization expense 2,845 18,712
Interest payable added to principal of
debentures and notes 94,269 123,557
Loss on write down of assets 26,397 156,189
Impairment loss -- 197,506
Changes in operating assets and liabilities:
(Increase) decrease in prepaid and other (14,490) 48,991
Increase (decrease) in accounts payable and
accrued expenses (2,313) 229,228
Increase in cash overdraft -- 1,658
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Net Cash (Used) by Operating Activities (181,460) (153,130)
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CASH FLOWS FROM INVESTING
ACTIVITIES:
(Increase) Decrease in due from related entities 7,800 (98,921)
Increase in other assets - deposits -- 4,600
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Net Cash (Used) by Investing Activities 7,800 (103,521)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of senior secured
convertible debentures, net -- 227,770
Proceeds from note payable 60,000 --
Sale of common stock 10,000 40,000
Advances from related parties 107,728 --
Other -- (15,120)
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Net Cash Provided by Financing Activities 177,728 252,650
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 4,068 (4,001)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 874 4,082
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CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 4,942 $ 81
========= =========
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 $ 94,269 $ 123,557
See notes to condensed consolidated 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 $30,089,856 at March 31, 2003. 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 and six months ended March 31, 2003 and 2002,
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 are discussed below and in the Company's other filings with
the Securities and Exchange Commission, and which may cause the Company's actual
results in future periods to differ materially from forecasted results. Forward
looking statements are all based on current expectations, and the Company
assumes 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. Since inception, we have generated
little revenue and have incurred substantial expenditures. We expect to continue
to experience losses from operations while we reorganize our wireless Internet
service system 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. As of this report date, no further action
has occurred on this transaction. We have advanced $1,259 to Card Universal
Corporation, Inc.
On March 24, 2003 we announced the formation of AirWater Corporation,as a
wholly owned subsidiary.
AirWater Corp. will operate in the new field of high tech water extraction
from air, and to that end, has acquired international manufacturing and
marketing licenses, as well as patent and copyright rights from J.J. Reidy &
Co., Inc. of Holden, Mass. J.J. Reidy & Co., Inc. is the registered patent
holders of 4 separate patents covering the concept, with others pending in many
foreign countries.
Under the terms of the agreement, the company will issue 4 million common
shares, restricted under SEC rule 144, as well as make a one time cash payment
of $100,000 to J.J. Reidy & Co., Inc. In addition, the company has agreed to
enter into a royalty agreement with J.J. Reidy & Co., Inc.
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.
SUBSEQUENT EVENTS
On April 30, 2003 we announced the signing of a Letter of Intent to acquire
CinemaElectric, Inc., a Los Angeles based Multimedia Messaging Service company
for a purchase price of $10 million.
8
RESULTS OF OPERATIONS
Three Months and Six Months Ended March 31, 2003 Compared to the Three
Months and Six Months Ended March 31, 2002.
There were no revenues or cost of sales for the three months and six months
ended March 31, 2003 and March 31, 2002.
Operating expenses for the three months and six months ended March 31, 2003
amounted to $234,153 and $414,051, respectively, compared to $166,989 and
$369,134 for the three months and six months ended March 31, 2002. For both
periods, these expenses were primarily consultants, professional fees and rents.
Write down of assets in the amount of $26,397 for the three and six months
ended March 31, 2003 resulted from the recognition of little or no value in the
assets received in payment of the balance of advances to Hard Disc Cafe, Inc.
Hard Disc Cafe, Inc. has ceased all operations and distributed its remaining
assets to us in satisfaction of advances outstanding. Write down of assets in
the amount of $205,181 for the three months and six months ended March 31, 2002
and impairment losses in the amount of $197,506 for those same periods resulted
from management's decision to abandon pursuit of foreign ventures entered into
by prior management.
Interest expense decreased $30,458, from $81,520 for the three months ended
March 31, 2002, to $51,062 for the three months ended March 31, 2003. For the
six months ended March 31, 2003 and 2002, interest expense decreased $62,201
from $163,150 to $100,949, respectively. The decrease resulted from the
conversion by the bondholders of a portion of their debt to common stock during
the fiscal year ended September 30, 2002.
Net losses for the three months ended March 31, 2003 were $311,612, as
compared with $651,196 for the three months ended March 31, 2002. Net losses for
the six months ended March 31, 2003 were $541,397, as compared with $934,971 for
the six months ended March 31, 2002. The decrease in net losses is primarily
attributable to lower write off of assets and no impairment losses in the
current period.
LIQUIDITY AND CAPITAL RESOURCES
On March 31, 2003, our cash position was $4,942 compared to $874 as of
September 30, 2002. During the six months ended March 31, 2003, $60,000 was
received from a 12% note payable, $107,728 from advances from related parties
and $10,000 was received from a subscription for our common stock. These funds
were used to pay the cash operating expenses for the six month period ended
March 31, 2003.
While management restructures the Company, current operating cash is being
provided by loans and the sale of common stock. The working capital deficit at
March 31, 2003 amounted to $2,312,633. Management is attempting to reduce this
deficit through arrangements with creditors. If we do not make satisfactory
arrangements with 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
Within 90 days prior to the filing of this quarterly report, the Company's
Chief Executive Officer and its Chief Financial Officer evaluated the Company's
disclosure controls and procedures as required pursuant to Rule 13a-14 under the
Securities and Exchange Act of 1934, as amended. 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 this
evaluation, the Chief Executive Officer and Chief Financial Officer determined
that such controls and procedures are effective in timely alerting them to
material information relating to the Company required to be included in the
Company's periodic SEC filings. There were no significant changes in internal
controls that could significantly affect the disclosure controls and procedures
since the date of the evaluation.
9
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) The following exhibits are included herewith:
EXHIBIT NO. DOCUMENT
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Exhibit 99.1 Certification of Chief Executive Officer
Exhibit 99.2 Certification of Chief Financial Officer
(b) The Company filed the following reports on Form 8-K during the quarter for
which this form is filed:
none.
10
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: May 15, 2003 UNIVERSAL COMMUNICATION SYSTEMS, INC.
/s/ MICHAEL J. ZWEBNER
----------------------------
Michael J. Zwebner
Chief Executive Officer, Chairman of the Board
11
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 March 31, 2003
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.
Dated: May 15, 2003 /s/ Michael Zwebner
-------------------------
Michael Zwebner
Chief Executive Officer
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 March 31, 2003
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.
Dated: May 15, 2003 /s/ Curtis Orgil
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Curtis Orgil
Chief Financial Officer
13