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, 2004
------------------
[ ] 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 12F
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 May 01, 2003
----- -----------------------------------
Common Stock, $.001 par value 166,423,685
Transitional Small Business Disclosure Format: Yes [ ] No [X]
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION Page
----
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheet - March 31, 2004 and
September 30, 2003 3
Consolidated Statements of Operations for the three months
and six months Ended March 31, 2004 and 2003 4
Consolidated Statements of Cash Flows for the three months
and six months Ended March 31, 2004 and 2003 5
Notes to the Consolidated Financial Statements
March 31, 2004 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 1 Legal Proceeding 18
Item 6. Exhibits and Reports on Form 8-K 19
Item 7. Signatures 20
Certifications
2
Part I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Universal Communication Systems, Inc.
Condensed Consolidated Balance Sheets
March 31, September 30,
2004 2003
---- ----
(unaudited) (see note 1)
------------ ------------
Assets
Current Assets:
Cash & cash equivalents $ 73,748 $ 144,682
Accounts receivable, net 560,905 105,859
Other receivable 216,486 --
Note receivable 122,585 116,782
Inventory 55,901 4,900
Prepaid expenses 40,735 35,185
------------ ------------
Total Current Assets 1,070,360 407,408
------------ ------------
Fixed Assets:
Furniture and Equipment 283,186 65,786
Less: Accumulated depreciation & amortization (25,020) (22,527)
------------ ------------
Total Fixed Assets 258,166 43,259
------------ ------------
Investment in unconsolidated subsidiaries, net
of impairment -- --
Other Assets:
Intangibles 656,650 606,714
Deposits 48,206 4,600
------------ ------------
Total Other Assets 704,856 611,314
------------ ------------
Total Assets $ 2,033,382 $ 1,061,981
============ ============
Liabilities and Stockholders' Deficit
Current Liabilities:
Notes payable $ 360,000 $ 344,746
Line of credit 60,546 25,721
Accounts payable, trade 1,655,313 1,142,332
Accrued expenses 497,425 180,489
Due to officer -- 11,368
Due to other related parties 43,129 93,308
------------ ------------
Total Current Liabilities 2,616,413 1,797,964
Long Term Liabilities:
Convertible debentures, net of current maturities 2,627,144 4,446,996
------------ ------------
Total Long Term Liabilities 2,627,144 4,446,996
------------ ------------
Total Liabilities 5,243,557 6,244,960
------------ ------------
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, 135,712,667 issued
and outstanding 135,712 76,911
Additional paid-in capital 29,613,302 26,126,640
Accumulated deficit (33,025,987) (31,453,282)
Capital stock subscriptions 66,798 66,752
------------ ------------
Total Stockholders' Deficit (3,210,175) (5,182,979)
------------ ------------
Total Liabilities and Stockholders' Deficit .. $ 2,033,382 $ 1,061,981
============ ============
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,
------------------------------ ------------------------------
2004 2003 2004 2003
------------- ------------- ------------- -------------
Revenue and other income $ 718,506 $ -- $ 895,782 $ --
Cost of goods sold (478,599) -- (493,171) --
------------- ------------- ------------- -------------
Gross profit 239,907 -- 402,611 --
Operating expenses
Sales and marketing 446,258 -- 690,907 --
Product development 30,000 -- 125,904 --
General and administrative 408,937 234,153 905,473 414,051
Write down of Assets -- 26,397 -- 26,397
------------- ------------- ------------- -------------
Operating (loss) (645,288) (260,550) (1,319,673) (440,448)
Interest expense (35,106) (51,062) (74,969) (100,949)
------------- ------------- ------------- -------------
Net loss $ (680,394) $ (311,612) $ (1,394,642) $ (541,397)
============= ============= ============= =============
Basic and diluted loss per
share $ (0.01) $ (0.04) $ (0.01) $ (0.06)
============= ============= ============= =============
Number of shares used in
computing basic and diluted
loss per share 122,444,801 8,799,258 104,350,118 9,248,228
============= ============= ============= =============
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,
2004 2003
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $(1,394,642) $ (541,397)
Adjustments to reconcile net loss from operations
to net cash used by operating activities:
Other comprehensive (loss) -- --
Common stock issued for services 637,159 253,229
Depreciation and amortization expense 4,639 2,845
Interest payable added to principal of
debentures and notes 93,699 94,269
Loss on write down of assets -- 26,397
Changes in operating assets and liabilities:
Trade receivables (528,756) --
Prepaid and other (40,900) (14,490)
Inventory (51,001) --
Other receivables (117,626) --
Accrued Expenses 195,502 --
Accounts payable es 513,981 (2,313)
Other 17,069 --
----------- -----------
Net Cash (Used) by Operating Activities (670,876) (181,460)
----------- -----------
CASH FLOWS FROM INVESTING
ACTIVITIES:
(Increase) Decrease in due from related entities (150,679) 7,800
Purchase of Property and Equipment (219,546) --
Increase in other assets - deposits (40,209) --
----------- -----------
Net Cash (Used) by Investing Activities (410,434) 7,800
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on bank credit line 65,373 --
Proceeds from note payable 71,795 60,000
Sale of common stock 872,709 10,000
Advances from related parties -- 107,728
Other -- --
----------- -----------
Net Cash Provided by Financing Activities 1,009,877 177,728
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (71,433) 4,068
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 144,682 874
----------- -----------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 73,249 $ 4,942
=========== ===========
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 $ 93,699 $ 94,269
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, 2003.
The balance sheet at September 30, 2003 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, 2004 and 2003,
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, 2003 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 is actively searching for a buyer of
the investment in this subsidiary. All investments and advances made to this
subsidiary have been fully reserved through valuation allowances.
Early in 2003, we identified a new business venture and adopted a new
business plan. We formed a wholly owned subsidiary, AirWater Corporation, whose
purpose and mission is to design, build and market machines that produce
drinkable water from the air. The first step in the endeavor was to obtain
licensing rights to the technology.
7
To that end, we acquired four patents by agreement dated March 24,
2003, relating to this technology from J. J. Reidy Company of Holden,
Massachusettes. Under the terms of the agreement, we paid $400,000, and we are
obligated to pay a royalty payment of between 5 to 7.5% on all sales of
equipment which uses the patented technology. Of $400,000, the company paid
$100,000 in cash, and the balance of $300,000 was settled by the issuance of
restricted common shares.
From March 2003 through August 2003, we entered into various
consulting, marketing and sales agreements with several international entities,
in the US, France, Brazil and Israel. The activities covered by these agreements
include, product design, electrical and mechanical engineering, systems
integration, research and development, conceptual designs, global contacts,
mergers and acquisitions, product and company publicity, marketing, sales and
general business consulting.
In certain global areas where electricity and or gas power sources are
either not available or in short supply, there is a need for a power alternative
to conventional sources. As previously mentioned, on September 29, 2003 we
completed the acquisition of Millennium Electric T.O.U., Ltd. to fulfill this
technological need of providing Photo Voltaic (PV) Electric Energy to provide
the necessary power for the air-water system.
This company and its president, Mr. Ami Elazari, operate in the
forefront in the high technology field of solar energy, solar panels, and solar
powered consumer products. The company and Mr. Elazari hold more than 21
international patents relating to both Photo Voltaic ("PV") and solar energy
systems and products. Mr.Ami Elazari MBA, founder, CEO and President of
Millennium Electric TOU Limited, which is a wholly owned subsidiary of UCSY, is
an energetic computer and communications engineer. He is considered a renowned
expert on Solar Energy, and has registered 22 International Patents in the
field. Mr. Elazari has over 30 years of management experience.
Mr. Elazari is Vice Chairman and Director of the Israel Export
Institute Environmental Technology Center; Managing Director of Amitec
Information Industries; Member of ISES Israel and was chairman of ISES 1999
World Solar Exhibition Held in Jerusalem. He is an Energy & Computer engineer
and holdsan MBA with excellence. He is also a member of the Israel Economic
Forum; Vice Chairman of the Israel Export Institute, Environmental Section;
Member of the Marketing Committee of the IEI; Member of the Israel China
Friendship Committee; Member of the Energy in Building Committee T & C Ministry,
and a Member of the Management Committee of the IAAI - Israel Association of
Automotive Industries.
Mr. Elazari / Millennium Electric have for many years been involved in
multi million dollar projects on a world wide basis. The following is a list PV
Solar energy project accomplishments of Mr.Ami Elazari prior to the acquisition
of Millennium Electric by UCSY.
o UNOSOM United Nation forces in Somalia security lighting and office
building solar system: value $ 2.73 m.
o Israeli Ministry of Defense more than 1000 security lights along the
Israeli border with military specs: Value $ 1.3 m.
o Israeli Ministry of Energy - electrification of a animal ranch in the
Israeli desert a 40 kwh system: Value $189,000
o New York Electric Power Authority - a 30kwp system: Value $300,000
o Israel - Ministry of Infrastructure - Kalil Village -PV Solar
Electricity for 31 family houses not connected to the national grid.
Value $ 273,000
o Central PV Solar Energy Systems for hotels and public buildings
worldwide: Value $50 million.
8
o Some 29 Multi Solar Systems (MSS) world wide
o A 10 kw system using innovative two sided PV Solar Panels recently
completed for a fishermen's village in Greece.
o A 30 KW system done recently for hotel and factory in Italy.
In addition, Millennium has participated in the following European
Commission's Projects and Joint Ventures.
o European Programs Solar dist EURO 890,000
o European Programs Helasolar EURO 900,000
o European Programs Morse EURO 300,000
o European Programs Multisolar EURO 931,000
o European Programs Solar Power EURO 900,000
o European Programs Eureka EURO 3.5 million
MILLENNIUM ELECTRIC TOU LIMITED
- -------------------------------
In the first two quarters following our acquisition, Millennium
Electric's management has primarily focused on re-organizing itself. This
included moving to new offices, purchasing new computer systems, the addition of
seven new personnel for key positions such as operations officer, marketing
manager, regional marketing manager etc. which of course has influenced the
increased company budgets, and increased spending on salaries and marketing
programs. Millennium has completed several important tasks such as conducting
educational days for potential clients including but not limited to architects,
mayors, military personnel etc. which it is planned will bring about increased
sales in the quarters and years to come.
STRATEGIC PARTNERSHIP AGREEMENT WORLDWIDE:
- ------------------------------------------
During this period, Millennium has signed several agreements several
with strategic partners worldwide: GiraSolar in Holland, Capsolair in Morrocco,
Team Millennium Group in Sydney Australia, Digital Light in Los Angeles, USA,
Jumao Photonic in Korea, and with a subsidiary of PetroChina in China. All of
these agreements are for selling a combination of know-how and international
marketing licenses. We anticipate that these agreements will result in sales
through this network in the near future.
These agreements are an integral part of Millennium's Strategic vision
for creating a group of international satellite companies working under the
Universal Communication Systems, Inc. corporate umbrella which is planned will
provide a more extensive marketing and buying power program than that which
could be achieved by an employee based sales force.
Millennium is also in the process, as part of our group of companies,
of establishing new entities for the sale of Solar Style products: Solar Style
Inc. USA where new local offices in Baltimore as well as a new company warehouse
will form the basis of the planned North American Distribution network.
RESEARCH & DEVELOPMENT PROJECTS HELD BY MILLENNIUM
- --------------------------------------------------
During this January to current period, Millennium has continued to work
on 6 projects within the 5th and 6th framework of the European commission. These
projects are:
First project - "Development of a solar distillation waste water
treatment plant for olive oil "mills" in Crete. Millennium's share of the budget
for the first year is 126,000 Euro.
The second project we are partnered in is "Remote Monitoring for
Renewable energy systems". Millennium's share of the budget for the first six
months is 39,713 Euro.
9
The third project we are involved in is "High Efficiency low cost solar
cells". Millennium's share in the budget for the fist six months is 16,965 Euro.
The fourth project we are partnered in is "Development of Innovated
Quality assurance measures to improve the efficiency of solar panel production".
Millennium's share in the budget for the first six months is 4,470 Euro.
Finally, the fifth project we are involved in is the "Development of an
Integrated solar system for Buildings". In this project Millennium is the
coordinator so we will receive most of the budget which totals of 931,000 Euro.
In addition, Millennium received approval for a new "reflect " project
as the coordinator with 908,000 euro budget for the next 24 months.
Millenium has developed, manufactured and sold a Solar Powered Gasoline
Pump to the Israeli Army which will be used for tanks and armored personnel
carriers. Another project which our engineers are working on, is PV Solar
Powered Traffic Lights for the municipality of Herzelia.
The company also recently signed an R&D agreement with the Netafim
Company - one of the largest companies for computerized irrigation systems in
the world for the development and installation of a PV Solar Energy System that
will heat and cool plant roots in order to boost plant fertility.
MILLENNIUM'S $15 MILLION CONTRACT FOR THE GERMAN MARKET AND OTHER WORLDWIDE
- ---------------------------------------------------------------------------
ORDERS
- ------
Millennium recently secured a $15 Million Contract for Millennium Brand
PV Solar Panels for Germany with a firm commencing order for $7 Million. More
than 300 panels have already been supplied and delivered to the customer.
Millennium is currently negotiating with 7 additional strategic clients
and shortly expects to have signed agreements with most of them. These include a
hospital, for a contract worth $500,000, - a hotel contract worth, $250,000, and
a plastics factory for $700,000. A combined T.O.U.-Multi Solar System will be
installed in all these places. In addition, the company is in completion of all
necessary requirements for 4 MSS systems to the U.S. and one for Brazil. During
the coming month, Millennium will complete a solar desalination project in
Heraklion, Crete, pursuant to one of the EU projects.
After successful completion of the TPR project for the Cross Israel
Highway, we have informally received a maintenance contract that will have
revenues of about 50,000 Israeli sheckles per month. In this regard, we are
awaiting confirmation for participation in the next phase of the Cross Israel
Highway , project valued at $200,000.
In Holland - after completion of the acquisition of GiraSolar (Solar
Service Buro and Stroomwerk) we are starting to receive the first orders for
Solar Panels for the Dutch market. The orders will have an approximate value 6
million Euro ( about $7.5 million)
In China - following three recent business trips, our efforts have
resulted in an OEM agreement for local manufacture of PV Solar Panels under the
exclusive brand name of "Millennium Electric" and a joint venture agreement to
PhotoVoltaic "Solarize" the first two PetroChina gas stations, one in Beijing
and one in Shanghai. Approximate project value: $100,000 per gas station. The
agreement also calls for the installation of at least 1,000 additional Gas
Stations, with an overall project value of some $100 million dollars.
Since June of 2003, we have worked to design, research and develop as
well as source the manufacture of our AirWater machines. The result of this
search has concluded with manufacturing and licensing agreements with entities
in Israel and Brazil, and more recently in Australia. We have now embarked on a
worldwide sales and marketing program. The company has signed marketing and
distribution agreements with several third party companies and sales have
10
commenced in a wide range of countries, including Turkey, Dubai, Emirates,
Cameroon, Niger, Kenya, etc. As the final products have only recently been
produced, and certification and approvals are still in process, the sales cycle
has been slow in uptake, but management believes that substantial sales will be
achieved in 2004, with major market penetration scheduled for the year 2005
based on the current trend of our sales pipeline and length of sales cycle.
CHINA:
In February 2004, management visited China with a view to source a
Chinese manufacturer of both parts and units of possible Air to Water machines.
Management was successful in this regard, and has since contracted 2 separate
Chinese manufacturers. The company invested substantial time, energy and
resources as well as substantial sums in developing unique and exclusive models
of Air Water SOHO machines for the companies use. Subsequent to March 31, 2004,
we have commissioned and purchased the first 60 sample machines, all of which
have been sent out to countries around the world for marketing purposes. The
distribution of these new samples has brought new orders for machines from
several countries. Management remains very positive about future sales of the
SOHO style (home and office) Air Water machines.
During these visits to Shanghai China, we were introduced to top
officials of a company that is a subsidiary of PetroChina, the 3rd largest
company in China. As a result of ongoing negotiations, the company has
successfully reached a joint venture agreement with the Chinese Group.
The business contemplated with them involves 2 separate divisions.
1) Joint Co-operations with regards the sale and marketing of Air
Water machines.
2) Co-operation in developing sales and installations of PV Solar
Systems in China.
Furthermore, agreement has been reached to develop the first 2 PV Solar
Powered Gas Stations. In a program called "Solarization". These 2 stations are
in China, one located in Shanghai and one in Beijing. The company has recently
surveyed the sites, and a final financial proposal is being submitted to the
Chinese Group for final approval.
According to the contract entered into with the group, assuming a
successful completion of the installation and ongoing workings of the first 2
stations, the group will contract the company to proceed and roll out the
project of Solarization to 1,000 further Gas Stations. The potential value of
this contract is about $100 million. Management of Millenium continues to work
with its Chinese associates to achieve this goal.
NEW PRODUCTS
In line with our new business plans, AirWater contracted engineers and
product development experts to both enhance existing technologies, and to
develop new systems and applications.
In this regard, the company announced on October 23, 2003, that it had
developed a new special Multi Head Dispenser Air-to-Water system for the marine
and Boating industry. We are pleased to report that we recently completed
development of a new Water making Unit called BASE 1, which was built off of our
Multi Head Dispenser design and is specifically made and perfected for the
boating Industry.
The first 200 machines have been ordered, and delivery is expected in
July 2004. Management plans a North American marketing campaign, with a view to
bringing this new exclusive product to market. Specifically, the company has
sourced an entity in Boston USA, that will be marketing the machines to the
boating industry.
11
INTERNATIONAL SALES AND MARKETING
As a result of marketing and sales efforts, the company secured an
invitation issued by the Government of Gabon in Africa, to attend meetings in
the capital Libreville, in order to explore the possibility of setting up a
local manufacturing and or assembly plant there for local production of AirWater
machines. Negotiations continue in this regard.
Since the date of that invitation, the company's executive met with the
Foreign Minister of Gabon at a company show in Frankfurt Germany, and displayed
and explained the company's Air Water machines, as well as offer a range of
Solar Powered Products that the company felt were needed in Gabon. The Minister
showed great interest, and again invited the company officials to visit his
country in order to further continue discussions and negotiations. We are
scheduled to visit Gabon in July 2004.
Since we started marketing AirWater Machines and Systems, we have made
inroads into many international markets. Sample machines have been shipped to
Mexico, Los Angeles, Huntsville, Brazil, France, Cameroon, Australia, China,
Switzerland, Jordan, Iraq, etc. Several orders for machines have been secured,
and more are expected. We have continued to emphasize our marketing efforts on a
worldwide basis, and to develop sales in several markets. We have secured
orders, albeit small ones from many new customers, and have shipped more sample
machines to destinations all over the world. These new small machines are
manufactured for the company in China under contract with a local manufacturer.
Management has chosen to concentrate the sales and marketing efforts on
making large "country sized" sales to governments, federal and local
authorities, as well as to aid agencies the world over. We have entered into
numerous agreements with sales and marketing corporations, agencies and local
entities, based throughout the world. We have realized that because of the
complexity of the product, the sales cycle of the Air Water products and systems
are somewhat longer that was previously expected. However, management remains
confident that large international orders for the machines will be secured in
2004.
In the course of this process, we continue to work with many
international companies, organizations and officials. Substantial progress has
been made, and discussions and negotiations continue. Management now realizes
that for all these large potential sales, the `'sales cycle" is substantially
longer than what was originally anticipated. This is due mainly to a number of
factors, primarily:
1) We are still developing the products based on existing
research we are performing and feedback we receive from
potential users;
2) Improve the efficiency, and both lower the purchase costs, as
well as running costs of the air to water systems;
3) the company needs to develop, build, and perfect customer
friendly machines; and
4) the company is at all times wary of the need for the safety
factor.
In this regard, we have conducted testing of machine models with the
relevant government agencies responsible for the quality and industrial and
commercial international standards. This process is both expensive and time
consuming. Management remains very confident that in the short term, we will
overcome the obstacles presented by these issues and be able to offer the
perfect machine to all potential markets.
NEW PRODUCT - "LIFESAVER"
We have previously announced the company's newest product, the
LIFESAVER, the world's first PV Solar Energy powered AirWater Machine.
Recognizing the lack of adequate electric or other power in certain areas of the
world that have shown serious interest in the AirWater machines, the company has
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developed a system wherein the AirWater Machine will operate solely from
Electric Energy generated by PV Solar Panels. We are producing new promotional
literature, along with sales and marketing brochures. Following completion of
technical and safety testing of the product and system, sales of this unique
product will commence in our third quarter of our fiscal year. Subsequent to
March 31, 2004, the first machine was produced by our contracted manufacturer in
early April, was tested and achieved very positive results. Several Governments
have expressed strong interest in this machine, and management continues to work
with them in promoting sales of the machine.
As part of our ongoing product development and production, we have
secured an agreement with local manufacturers of De-Humidifiers and Air
Conditioners in Sao Paulo Brazil. Currently under a joint agreement with the
Brazilians, the first prototypes have been produced. We continue to work to
develop and perfect a range of Air Water Machines of various sizes, and we
continue to jointly develop with our contracted manufacturers in Israel, China,
Australia and Brazil.
The agreements with these manufactures given their locations, will
allow the company to offer faster and more efficient sales and deliveries. We
have sourced and are working with 2 manufacturers in China. Both of these
Chinese companies have assisted us in developing various models and different
sized Air Water machines. We have invested in the design, creation and
production of Molds and unique new parts for the final production of new and
better Air Water machines.
OVERSEAS LICENSES
In our previous filing, management reported that "On November 20, 2003,
Millennium Electric TOU Limited, a wholly owned subsidiary of UCSY, entered into
a memorandum of understanding and Licensing Agreement with a local Brazilian
company Heliotek, to license the manufacture of Multi Solar System Photo Voltaic
Solar Panels in that country.. The License calls for a one time license payment
of $200,000 with Royalty residuals of between 5 and 10 percent on all
manufactured and sold products. Negotiations continue in this regard. It is
expected that the conclusion of this agreement will be done by end of Quarter 1
of fiscal year ending September, 2004, with revenues flowing in Quarter two."
Management now reports that the company did not succeed in its negotiations with
Heliotek, and both companies mutually withdrew and cancelled the all memorandum
of understandings
On December 15, 2003, we entered into a licensing transaction with an
Australian Group for the manufacture and or assembly of AirWater machines and PV
Solar Panels in Australia. This transaction, as with the Brazilian agreement,
secured a one time license payment of $200,000 with Royalty residuals of between
5 and 10 percent on all manufactured and sold products. Negotiations continue in
this regard. Included in this period's revenues, is the first installment
payment of $10,000 received in January, pursuant to this agreement.
In February 2004, at the request and order of the Australian Licensee,
we shipped Air Water machines and a wide array of Solar Panels and solar
products to Sydney. In March 2004, management attended the formal launch of the
Australian operation in Sydney. The event was well covered by the local press,
including television and newspaper as well as radio coverage on a national
basis. We are now working closely with the Australian Licensee, and it is our
belief that this local operation will continue to develop and grow in their
market.
LISTING ON FOREIGN EQUITIES EXCHANGE
On December 1, 2003, our stock was listed on the Berlin Exchange in
Germany. Our stock trades under the symbol UCV. By the end of December, no
trading had yet been generated in this new market. Subsequent to this, we have
engaged the services of the Geneva Group, an entity with expertise in marketing
and corporate promotions, to bring to the German investor an awareness of our
business, as well as an awareness of our stock listing in the German exchange.
Following the activities in promoting itself in the German Market, our stock's
trading commenced on the Berlin Exchange in mid February, and has maintained
active trading since.
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Subsequent to March 31, 2004, our stock has been listed on the
Frankfurt Exchange. Management is also investigating possible listings on the
Sydney Exchange as well as a possible listing on the Hong Kong equity markets.
OVERSEAS OFFICES.
In line with marketing and sales needs of AirWater and PV Solar
Products, we have opened operational offices in Geneva Switzerland and Paris
France. In addition, we have set up representation in Mexico, Brazil, Morocco,
China, and in several countries in Africa. Further, through our subsidiary Solar
One Corporation, we have set up offices in Baltimore, Maryland for the sales and
marketing of Solar Products and Systems.
ACQUISITIONS
On September 17, 2003, we announced that we have entered into a letter
of intent to acquire a 51% interest in GiraSOLAR, BV, a Dutch company that
operates and specializes in the photo voltaic solar energy industry. We executed
a Share Purchase Agreement (SPA) on March 25th 2004. This Dutch group is
composed of three separate operating subsidiaries, 2 local Dutch subsidiaries:
Stroomwerk Energy BV (SWE) and Solar Service Buro BV (SSB) and a newly
established Turkish subsidiary GiraSolar Turkey Ltd..
The Dutch companies have been in the PhotoVoltaic Solar Energy business
for many years, i.e. SWE 22 years and SSB 6 years, and have established
themselves as leading local companies in this fast growing industry, mainly
operating in The Netherlands, Luxembourg, Germany and Belgium. GiraSolar Turkey
was established in the spring of 2004 and aims to set up PV Solar Energy
operations in Turkey.
It is a condition precedent to this SPA Agreement, that it is subject
to the successful acquisition by Girasolar of a majority share of respectively
65% and 85% in Stroomwerk Energy BV and Solar Service Buro BV,AND 51% of
Girasolar Turkey Limited. The agreement calls for the exchange of stock between
the companies. Under the agreement we may, at any time within 36 months after
March 25th, 2004, opt to acquire the remaining shares in the subsidiaries of
Girasolar as listed above.
In light of the need for Girasolar to complete internal accounting and
audit proceedures and the submission of final audit documents, as well as the
finalization of audits for the closing, the company and the Management and the
directors of GiraSolar BV have agreed to defer the final closing date for the
contemplated transaction untill a date to be agreed in Summer 2004. Year end
audited financial statements of Stroomwerk Energy BV (SWE), reported sales
revenues of 24 million Euro with net profits of over 800,000 Euro. During the
month of April the company issued 12 million shares as part of the acquisition
costs, and placed these shares into escrow with the company's attorney in
Amsterdam Holland. It is contemplated that upon the closure of this transaction,
these shares plus additional shares that will be issued, will be released to the
directors / shareholders of GiraSolar BV.
SOLAR STYLE INC - Consumer Products Division
Subsequent to March 31, 2004, we completed the acquisition of the
remaining 50% equity of Solar Style Ltd from the remaining shareholder. In this
regard, the company has formed a new subsidiary, Solar Style Inc (USA) to roll
out Solar Style Inc.'s new range of PV Solar Chargers.
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Solar Style Inc, is offering PV Solar Chargers for a wide range of
products, including Laptop computers, Palms, Walkmans and Discmans, as well as a
wide range of cellular phones.
The PV Solar Chargers negate the need for consumer electronic products
to be connected to the electric grid, in order to charge or recharge the
appliance.
Solar Style Inc., has developed, and is manufacturing and bringing to
market Solar Powered products for the portable consumer markets. Solar Style's
technology converts solar energy into electricity, and has developed a solution
that lets mobile devices be charged by portable photovoltaic small Solar Panels,
which are especially designed to fit in elegant leather cases.
Solar Style manufactures the panels and carrying-cases, which are then
assembled together to be sold as one unit. The panels can easily be plugged to
Solar Cells, and charged outdoors by sunlight and indoors by electric light. The
photovoltaic cells act as battery chargers allowing a non-dependant use of the
mobile device, making batteries / battery-chargers redundant.
Solar Style's value proposition spans two levels:
The practical and the environmental. On the practical level, Solar
Style's products enable people to use their mobile devices without having to
worry about plugs and connectors. On the Environmental level, in today's
"green-aware" world, where environmental concerns have come to be very important
to consumers, Solar Style offers mobile device users a reliable environmentally
friendly power source.
Solar Style's product line includes mobile phone, laptop, PDA, and CD
player cases, with a choice of connectors. The company plans to establish
distribution and sale channels for its products, and to continue research and
development of existing and new products, concurrent to ongoing sales. It is
already in the process of various negotiations regarding its products, and is
considering two basic modes of operation:
A "traditional" manufacturer-distributor value chain, by which it will
have control over manufacturing and distribution, and sell its products through
large distributors.
A licensing option, limited by time and dependant on results, by which
its involvement at the manufacturing stage will be minimal (just enough to
preserve unique knowledge and enable further product development), while
distribution, promotion, and sales management are left to a licensee /business
partner.
Solar Style will choose its preferred course of action according to
potential partnerships and customers. Its initial product line has already been
developed. Initial marketing activities are in process. So once negotiations are
finalized and funding is secured, it can start operations. This business plan is
geared towards the first option, by which the company will act as the
manufacturer, selling its products through large distributor channels.
This business and the distribution of the PV Solar chargers is to be
run out of Solar Style's new offices in Baltimore MD. Initially, the company is
enacting a national mail out of a special product awareness brochure, to all
Cellular and Electric Products distributors and stores. Thereafter, the company
plans to start direct marketing of the range of Solar Chargers to distributors
all across North America and Canada.
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.
Although our Israeli subsidiary has a credit line of $100,000, Universal
Communication Systems, Inc. does not have a bank line of credit and there can be
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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.
Corporate Funding:
The company chairman, Michael J Zwebner has arranged for substantial
funding from an entity that he owns 33% of and controls: Port Universal
Corp.("PUC") This entity has invested in excess of $600,000 cash into the
company for a growing equity position. Mr Zwebner has assured the company that
PUC will continue to finance the company in Its period of growth, and until the
companies and its subsidiaries become profitable in their own rights.
RESULTS OF OPERATIONS
Three Months and Six Months Ended March 31, 2002 Compared to the Three
Months and Six Months Ended March 31, 2001.
Revenues and cost of sales for the three months and six months ended
March 31, 2003 and March 31, 2002 earned and incurred primarily by our
subsidiary, Millenium Electric T. O. U. Revenues, by source and company, were
composed of the following:
3 months ended 6 months ended
December 31, 2003 March 31, 2004
----------------- --------------
Universal Communication:
Product Sales $ - $ 13,410
Fees - 10,000
------------ ------------
Total for Universal - 23,410
------------ ------------
Millenium Electric T.O.U.:
Product Sales 42,649 737,745
Other - grants 134,627 134,627
------------ ------------
Total for Millenium 177,276 872,372
------------ ------------
Total $ 177,276 $ 895,782
Concentration of risk - at March 31, 2004, Millenium Electric had one
customer who represented 57% of accounts receivable at $483,865 and 76% of sales
at $558,771. The loss of this customer or uncollectibilty of the receivable from
this customer would have a material adverse impact on the financial condition of
Millenium Electric T.O.U.
Operating expenses for the three months and six months ended March 31,
2003 amounted to $645,288 and $1,319,673, respectively, compared to $234,153 and
$414,051 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.
Consulting services purchased during the three months ended December
31, 2003 amounted to $510,772 and during the six months ended March 31, 2004,
amounted to $845,321. Of these amounts, $254,250 and $397,060 were paid to
related parties, respectively. The company has no employees and relies entirely
on consultants to perform all services.
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Interest expense decreased $15,956 from $35,106 for the three months
ended March 31, 2004, to $51,062 for the three months ended March 31, 2003. For
the six months ended March 31, 2004 and 2003, interest expense decreased $25,988
from $100,949 to $74,969 respectively. The decrease resulted from the conversion
by the bondholders of a portion of their debt to common stock during both
periods.
Net losses for the three months ended March 31, 2004 were $680,394, as
compared with $311,612 for the three months ended March 31, 2003. Net losses for
the six months ended March 31, 2004 were $1,394,642, as compared with $541,397
for the three months ended March 31, 2003. The increases in net losses are
primarily attributable to increased marketing and consulting activities with
respect to the air water product lines.
LIQUIDITY AND CAPITAL RESOURCES
On March 31, 2004, our cash position was $73,249 compared to $4,942 as
of September 30, 2003. Cash used in operating activities for the six month
periods ending March 31, 2004, compared to the six months ending March 31, 2003
were $(670,876) and $(181,460) respectively. The primary use of these funds
resulted from operating losses and increase in receivables. Cash employed in
investing activities amounted to $(410,434) for the six months ended March 31,
2004 compared to cash provided by investing activities for the six months ending
March 31, 2003 of $7,800. The use of funds in investing activities for the
period ending March 31, 2004 resulted from the purchase of fixed assets. Cash
provided by financing activities for the six month periods ending March 31, 2004
and 2003 were $1,009,877 and $177,728 respectively. For the period ending in
2004 this amount was derived from the sale of our common stock. For the period
ending in 2003, the cash provided from financing activities was from advances
received.
While sales are being developed, current operating cash is being
provided by loans and the sale of common stock. The company has had a working
capital deficit for an extensive period of time. If management is unable to
continue raising funds through common stock sales and loans, we may not be able
to continue as a viable concern. Other than the small line of credit held by
Millenium, 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 changes in
internal controls and procedures since the date of the evaluation.
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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.
Attorneys for the receiver of Credit Bancorp have contacted the company
and are still maintaining that they deny the conversion. The company has passed
the matter to company attorney, and contests the claims. The matter remains
unresolved at March 31, 2004.
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 was paid to the trustee of WSI in two installments of $25,000 each, and
a two year consulting contract, valued at $120,000, was signed with Mr. Hager.
The settlement has a total cost of $370,000.
We previously reported that on August 7, 2003, Electric Gas &
Technology of Dallas, Texas ("ELGT"),published a press announcement claiming
that a complaint and $60 million lawsuit had been filed in Federal court in
Texas. Their press release stated that we had infringed on their patents.
Counsel has advised us that the claims lack substance. On November 24, 2003,
Judge Joe Fish of the Federal court Northern District in Texas granted our
motion for dismissal due to lack of Texas jurisdiction.
ELGT has similar suits filed against other companies in the same
industry. We have filed counter claims relating to Patent Infringement in the US
District Court of Southern Florida, disputing ELGT's claims of patent
infringement and as a result of statements made by ELGT, we have filed a
Defamation and Libel claim for $118 million in damages for false, defamatory and
libelous statements. In early December, ELGT issued a false press release in
relation to the ongoing litigation cases. The company responded with its own
press release, detailing factual responses, backed up by official court orders.
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As a result of the failure of ELGT to properly comply with the court
orders, and their failure to file timely responses of substance to the Federal
Court in South Florida, the case of "Defamation & Libel" as filed by UCSY Et Al
against ELGT et al, and its president Mr. Dan Zimmerman, has effectively been
'won', with our company securing a "default order" against all the defendants.
At a hearing on February 12th 2004, the court set a date in early March 2004 for
a hearing on damages, that will form the final judgment against ELGT & Mr. Dan
Zimmerman. In addition, on February 11th 2004, the court dismissed as moot, all
motions to dismiss as filed by ELGT in the patent infringement case. We fully
intend to see all these litigation cases through to the end, and secure fair
justice and compensation for the company. Following additional court hearings in
February and March 2004, ELGT again failed to comply with court orders and
rulings, and the case of "Defamation & Libel" as filed by UCSY Et Al against
ELGT et al, and its president Mr. Dan Zimmerman, the court having previously
awarded UCSY et al, a "default order", now awarded UCSY et al, a "Default
Judgment". The court invited UCSY to submit a claim of losses and damages so
that the court could put a monetary figure to the "default Judgment". The
company submitted a court filing with claims in the amount of $82 million. At
this time, the court has not yet ruled on these final claim amounts. The
litigation relating to Claimed Patent Infringement case continues. Management
has recently received information that certain Public Internet Posters may have
been in touch with ELGT officials and may have conspired with ELGT in the
original Patent lawsuit and Defamation against the company. Management through
the company's attorneys has now commenced discovery and it is expected that all
these issues will be exposed. Management will not hesitate to expand the
investigation, and if it transpires that these Alias Anonymous Internet Posters
were indeed the instigators and conspirators in the Defamation case, the company
will involve the Authorities, including the FBI to further investigate possible
criminal activities., A a subsequent event the court in May has ordered the
parties to go to Mediation in an attempt for settlement. A trial date has been
set by the court for June 2005.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) The following exhibits are included herewith:
31.1 Certification of CEO Pursuant to Section 302 of Sarbanes-Oxley Act of
2002
31.2 Certification of CFO Pursuant to Section 302 of Sarbanes-Oxley Act of
2002
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
(b) The Company filed the following reports on Form 8-K during the quarter for
which this form is filed:
none.
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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 24, 200 UNIVERSAL COMMUNICATION SYSTEMS, INC.
/s/ MICHAEL J. ZWEBNER
--------------
Michael J. Zwebner
Chief Executive Officer, Chairman of the Board
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