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: June 30, 2003
------------------
[ ] 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.
----------------------------------------
(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
-----------------------
(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 August 11, 2003
----- -----------------------------------
Common Stock, $.001 par value 60,361,871
Transitional Small Business Disclosure Format: Yes [ ] No [X]
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION Page
----
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheet - June 30, 2003 and
September 30, 2002 3
Consolidated Statements of Operations for the three months
and nine months Ended June 30, 2003 and 2002 4
Consolidated Statements of Cash Flows for the
nine months Ended June 30, 2003 and 2002 5
Notes to the Consolidated Financial Statements
June 30, 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 Filed as Exhibits
2
Part I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Universal Communication Systems, Inc.
Condensed Consolidated Balance Sheets
June 30, September 30,
2003 2002
---- ----
(unaudited) (see note 1)
------------ ------------
Assets
Current Assets:
Cash & cash equivalents $ 220,281 $ 874
Notes Receivable 34,648 --
------------ ------------
Total Current Assets 254,929 874
------------ ------------
Due from related party, net 94,759 35,456
------------ ------------
Fixed Assets:
Equipment 25,259 25,259
Furniture and fixtures 1,917 1,917
Less: Accumulated depreciation & amortization (20,156) (15,889)
------------ ------------
Total Fixed Assets 7,019 11,287
------------ ------------
Investment in unconsolidated subsidiaries, net
of impairment -- --
Other assets 49,467 11,250
------------ ------------
Total Assets $ 406,174 $ 58,867
============ ============
Liabilities and Stockholders' Deficit
Current Liabilities:
Current maturities of convertible debentures $ 1,066,449 $ 886,449
Accounts payable, trade 1,070,929 1,078,941
Accrued expenses 187,814 156,978
Due to a related party 28,248 29,791
------------ ------------
Total Current Liabilities 2,353,440 2,152,159
Long Term Liabilities:
Note payable 347,118 254,237
Convertible debentures, net of current maturities 3,644,600 4,123,415
------------ ------------
Total Long Term Liabilities 3,991,718 4,377,652
------------ ------------
Total Liabilities 6,345,158 6,529,811
------------ ------------
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, 39,286,919 issued
and outstanding 39,287 5,968
Stock subscribed and escrow 340,823 --
Additional paid-in capital 24,326,258 23,071,546
Accumulated deficit (30,645,352) (29,548,458)
------------ ------------
Total Stockholders' Deficit (5,938,984) (6,470,944)
------------ ------------
Total Liabilities and Stockholders' Deficit $ 406,174 $ 58,867
============ ============
See notes to condensed consolidated financial statements.
3
Universal Communication Systems, Inc.
Condensed Consolidated Statements of Operations
UNAUDITED
Three Months Ended June 30, Nine Months Ended June 30,
---------------------------- ----------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Revenue $ -- $ -- $ -- $ --
Cost of goods sold -- -- -- --
------------ ------------ ------------ ------------
Gross profit -- -- -- --
Operating expenses 503,609 501,060 917,660 870,194
Write down of Assets -- -- 26,397 205,181
Impairment loss on deposits -- -- -- 197,506
Recovery of deposits -- (68,800) -- (68,800)
------------ ------------ ------------ ------------
Operating (loss) (503,609) (432,260) (944,057) (1,204,081)
Interest expense (51,886) (83,491) (152,836) (246,641)
------------ ------------ ------------ ------------
Net loss $ (555,495) $ (515,751) $ (1,096,893) $ (1,450,722)
============ ============ ============ ============
Basic and diluted loss per
share $ (0.02) $ (2.00) $ (0.08) $ (8.00)
============ ============ ============ ============
Number of shares used in
computing basic and diluted
loss per share 29,813,878 264,104 14,457,539 182,099
============ ============ ============ ============
See notes to condensed consolidated financial statements.
4
Universal Communication Systems, Inc.
Condensed Consolidated Statement of Cash Flows
UNAUDITED
For the For the
Nine Months Nine Months
Ended Ended
June 30, June 30,
2003 2002
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $(1,096,893) $(1,450,722)
Adjustments to reconcile net loss from operations
to net cash used by operating activities:
Other comprehensive (loss) -- --
Common stock issued for services 686,898 320,810
Depreciation and amortization expense 4,267 21,876
Interest payable added to principal of
debentures and notes 119,027 207,048
Interest accretion 22,881 --
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 (38,365) 48,991
Increase (decrease) in accounts payable and
accrued expenses 22,824 253,315
Increase in cash overdraft -- 1,658
(Increase) decrease in due to related party (95,043) 40,664
----------- -----------
Net Cash (Used) by Operating Activities (348,007) (204,323)
----------- -----------
CASH FLOWS FROM INVESTING
ACTIVITIES:
(Increase) Decrease in due from related entities 7,800 (112,711)
Increase in other assets - deposits -- 4,600
Other (3,303) --
----------- -----------
Net Cash (Used) by Investing Activities 4,497 (117,311)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Notes Receivable (34,500) --
Proceeds from the issuance of senior secured
convertible debentures, net -- 218,070
Proceeds from note payable 70,000 --
Sale of common stock 192,942 100,000
Common Stock subscription proceeds 334,475
Other -- 1
----------- -----------
Net Cash Provided by Financing Activities 562,917 318,071
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 219,407 (3,563)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 874 4,082
----------- -----------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 220,281 $ 519
=========== ===========
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 $ 119,027 $ 207,048
Debentures converted to common stock $ 407,638 $ 283,500
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 $30,645,352 at June 30, 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. 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 nine
months ended June 30, 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. Management of Digital Way has advised us that
information regarding their business activities will be provided for inclusion
in our fiscal year end financial statements at September 30, 2003.
Digital Way SA recently reached an agreement with YAK Communications
(USA) Inc, by which YAK will invest funds to jointly operate a "Dial Around"
telephony business in Peru, utilizing Digital Way's local business and technical
facilities as well as the Government Telecom Licenses granted to Digital Way SA.
Revenue from this activity is anticpated to occur in the fourth quarter of 2003.
7
We also own a U. S. patent on our Distributed Wireless Call Processing
System technology.
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. are the registered patent
holders of 4 separate patents covering the concept, with others pending applied
for in the United States and in various foreign countries.
Under the terms of the agreement, the company has escrowed 4 million
common shares to be issued, restricted under SEC rule 144, as well as make a
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. The cash
payment was made on July 1, 2003 and the escrowed shares were released at the
same time in execution of the agreement.
In connection with the AirWater business activity, we have entered into
several development, design, sales and marketing, as well as manufacturing
agreements with foreign business entities, primarily in Israel and Brazil. We
are continuing to pursue business arrangements to advance the product and
technology.
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.
With the agreement to market Air Water technology and equipment and the
formation of our Airwater Corporation subsidiary, we anticipate 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 sales commence with our
subsidiary AirWater Corporation, 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.
8
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.
On August 12th, 2003, by mutual agreement with CinemaElectric, we
announced the withdrawal from the Letter Of Intent. The withdrawel of our letter
of intent was to facilitate the execution of a letter of intent by Brennex Oil
Corporation to acquire CinemaElectric Inc. Under the terms of the proposed
acquisition, Brennex Oil Corporation will issue 10% of the acquisition value to
us.
Our Board of Directors has indicated its intention to distribute the
Brennex/CinemaElectric new shares to our registered common share stockholders.
In connection with the Air Water Corporation subsidiary, management
recognized the need for a power solution for the AirWater Machines in certain
global areas where electricity and or gas power sources are are in short supply
or not available. To this end, we have sourced a company involved in the solar
power industry. On June 19, 2003, we announced the signing of a Letter of Intent
to acquire 100% of Millennium Electric TOU Limited and a number of it's
subsidiaries. Millennium Electric is one of Israel's foremost corporations
operating in the latest high tech field of solar energy, solar panels, and solar
powered consumer products. We are in the final phases of our due diligence and
finalization of the definitive agreement.
On August 7, 2003, a Dallas Texas based company, Electric Gas &
Technology Inc, (ELGT), issued a press release claiming that they had filed a
complaint / $60 million law suit in Federal Court in Texas, alleging patent
infringement against Universal Communication Systems, Inc., AirWater Corporation
and J&J Reidy, Inc. We have not been served with the complaint. Counsel has
advised us that the claims lack substance. We have issued a press release
refuting the claims made in Electric Gas & Technology's press release, and
notifying them of our intention to defend our patents, but to additionally file
a counterclaim for $100 million for patent infringement and defamation of
character. Management believes the claims of ELGT are frivolous and do not
represent a material threat to the company.
RESULTS OF OPERATIONS
Three Months and Nine Months Ended June 30, 2003 Compared to the Three Months
and Nine Months Ended June 30, 2002.
There were no revenues or cost of sales for the three months and nine
months ended June 30, 2003 and June 30, 2002.
Operating expenses for the three months and nine months ended June 30,
2003 amounted to $503,609 and $944,057, respectively, compared to $432,260 and
$1,204,081 for the three months and nine months ended June 30, 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 nine months ended
June 30, 2003 resulted from the recognition of little or no value in the assets
received in payment of the balance of advances to Hard Disc Caf, Inc. Hard Disc
Caf, 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 nine months ended June 30, 2002 and impairment losses in the
amount of $197,506 for that same period resulted from management's decision to
abandon pursuit of foreign ventures entered into by prior management.
Interest expense decreased $31,605, from $83,491 for the three months
ended June 30, 2002, to $51,886 for the three months ended June 30, 2003. For
the nine months ended June 30, 2003 and 2002, interest expense decreased $93,805
from $246,641 to $152,836, 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.
9
Net losses for the three months ended June 30, 2003 were $555,495, as
compared with $515,751 for the three months ended June 30, 2002. Net losses for
the nine months ended June 30, 2003 were $1,096,893, as compared with $1,450,722
for the nine months ended June 30, 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 June 30, 2003, our cash position was $220,281 compared to $874 as of
September 30, 2002. During the nine months ended June 30, 2003, $60,000 was
received from a 12% note payable, $182,942 from advances from related parties
and $334,475 was received from subscriptions for our common stock. The advances
from related parties were cancelled in exchange for common shares issued. These
funds were used to pay the cash operating expenses for the nine month period
ended June 30, 2003 and a portion is being held for working capital for the next
twelve months. The amounts received in common stock subscription funds are
attributable to recent announcements and activities with respect to our AirWater
Corporation subsidiary.
While management restructures the Company, current operating cash is
being provided by loans and the sale of common stock. Management is attempting
to reduce the current working capital 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.
10
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) The following exhibits are included herewith:
EXHIBIT NO. DOCUMENT
----------- --------
Exhibit 31.1 Certification of the Chief Executive Officer required by Rule
13a-14(a) or Rule 15d-14(a)
Exhibit 31.2 Certification of Chief Financial Officer required by Rule
13a-14(a) or Rule 15d-14(a)
Exhibit 32.1 Certification of Periodic Report by the Chief Executive
Officer as required by Rule 13a-14(b) or Rule 15d-14(b) and
Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C.
Section 1350
Exhibit 32.2 Certification of Periodic Report by the Chief Financial
Officer as required by Rule 13a-14(b) or Rule 15d-14(b) and
Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C.
Section 1350
(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: August 13, 2003 UNIVERSAL COMMUNICATION SYSTEMS, INC.
/s/ MICHAEL J. ZWEBNER
----------------------------
Michael J. Zwebner
Chief Executive Officer, Chairman of the Board
12