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, 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.
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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 12F
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 July 30, 2004
----- -----------------------------------
Common Stock, $.001 par value 200,265,556
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 - June 30, 2004 and
September 30, 2003 3
Consolidated Statements of Operations for the three months
and nine months Ended June 30, 2004 and 2003 4
Consolidated Statements of Cash Flows for the
nine months Ended June 30, 2004 and 2003 5
Notes to the Consolidated Financial Statements
June 30, 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 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
June 30, September 30,
2004 2003
------------ ------------
(unaudited)
ASSETS
Current Assets:
Cash & cash equivalents $ 128,047 $ 144,682
Accounts receivable, net 115,876 105,859
Due from officer (net) -- --
Note and other receivable 338,180 116,782
Inventory, finished goods 67,136 4,900
Prepaid expenses 10,875 35,185
------------ ------------
Total Current Assets 660,114 407,408
------------ ------------
Property, Plant and Equipment
Furniture and equipment 340,452 64,838
Less: Accumulated depreciation 30,906 21,579
------------ ------------
Total Fixed Assets, Net 309,546 43,259
------------ ------------
Other Assets:
Patents 606,714 606,714
Deposits 54,856 4,600
------------ ------------
Total Other Assets 661,570 611,314
------------ ------------
Total Assets $ 1,631,230 $ 1,061,981
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Bank overdraft advance $ 82,053 $ 25,721
Accounts payable 309,731 195,538
Accrued expenses 591,868 360,805
Notes payable 60,000 344,746
Liabilities of discontinued operations 946,794 946,794
Due to related parties 39,326 93,308
Due to officer 379,323 11,363
------------ ------------
Total Current Liabilities 2,409,095 1,978,280
Long-term Liabilities:
Convertible debentures 2,468,193 4,446,996
------------ ------------
Total Liabilities 4,877,288 6,425,276
------------ ------------
Commitments and Contingencies -- --
------------ ------------
Stockholders' Deficit:
Series A 8% Cumulative Convertible Preferred stock,
par value $.001 per share,
10,000,000 shares authorized,
30,000 issued and outstanding 30 --
Common stock, par value $.001 per share,
800,000,000 shares authorized,
155,346,216 and 81,223,000
shares issued and outstanding 155,346 81,223
Additional paid-in capital 31,056,676 26,482,580
Accumulated deficit (34,364,610) (31,833,598)
Account receivable stockholder (93,500) (93,500)
------------ ------------
Total Stockholders' Deficit (3,246,058) (5,363,295)
------------ ------------
Total Liabilities and
Stockholders' Deficit $ 1,631,230 $ 1,061,981
============ ============
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,
---------------------------- --------------------------
2004 2003 2004 2003
---------- -------- ---------- ---------
Revenue and other income $ 220,529 $ - $ 449,856 $ -
Cost of goods sold 250,051 - 275,221 -
---------- --------- --------- ---------
Gross profit (29,522) - 177,635 -
Operating expenses
Sales and marketing 213,275 - 904,015 -
Product development 33,324 - 159,228 -
General and administrative 498,019 503,609 1,373,676 917,660
Write down of Assets - - - 26,397
---------- --------- --------- ---------
Operating (loss) (774,140) (503,609) (2,259,284) (944,057)
Interest expense (42,456) (51,886) (266,728) (152,836)
---------- --------- --------- ---------
Net loss $ (816,596) $(555,495) $(2,526,012) $(1,096,893)
Dividend on Preferred Stock 5,000 - 5,000
---------- --------- --------- ---------
Net Loss Applicable to Common Shares $ (821,596) $(555,495) $(2,531,012) $(1,096,893)
========== ========= ========= =========
Basic and diluted loss per
share $ (0.01) $ (0.02) $ (0.02) $ (0.08)
========== ========= ========= =========
Number of shares used in
computing basic and diluted
loss per share 151,069,803 29,813,878 119,866,510 14,457,539
=========== ========== =========== ===========
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 2003
------------------ -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (2,526,012) $ (1,096,893)
Adjustments to reconcile net loss from operations
to net cash used by operating activities:
Common stock issued for services 1,006,828 686,898
Depreciation and amortization expense 9,217 4,267
Interest payable added to principal of
debentures and notes 63,979 119,027
Interest accretion 15,254 22,881
Loss on write down of assets - 26,397
Changes in operating assets and liabilities:
(Increase) in accounts receivable (222,726) -
(Increase) in inventory (62,236) -
(Increase) in prepaid and other (25,946) (38,365)
Increase in accounts payable and accrued expenses 340,256 22,824
Increase in cash overdraft 56,332 -
------------------ -----------------
Net Cash (Used) by Operating Activities (1,345,054) (252,964)
------------------ -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment (275,504) (3,303)
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Net Cash (Used) by Investing Activities (275,504) (3,303)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Notes Receivable (8,689) (34,500)
Proceeds from sale of Preferred Stock 300,000 -
Proceeds from note payable - 70,000
Sale of common stock 1,298,639 192,942
Common Stock subscription proceeds - 334,475
Payment of note payable (300,000) -
Increase in due to related parties, net 313,973 -
------------------ -----------------
Net Cash Provided by Financing Activities 1,603,923 475,674
------------------ -----------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (16,635) 219,407
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 144,682 874
------------------ -----------------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $128,047 $220,281
================== =================
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 $ 63,979 $119,027
Debentures converted to common stock $2,042,782 $407,638
Preferred stock dividend accrued $ 5,000 -
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 currently focusing its operations on the design,
manufacture and sale of water production and generation systems
along with solar power systems.
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 as such, there is
substantial doubt as to the Company's ability to continue as a
going concern. 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 nine months ended June 30, 2004 and 2003, common
stock equivalents have been excluded from the aforementioned
computations as their effect would be anti-dilutive.
NOTE 4 - PREFERRED STOCK
On April 19, 2004, the Company sold 30,000 shares of Series A 8%
Convertible Preferred Stock and Warrants to purchase 4,545,455
shares of common stock for which it received net proceeds of
$300,000. The Series A Convertible Preferred Stock, with a face
value of $300,000, is convertible into common stock at $0.033 per
share. The Warrants are exercisable at $0.05 per share until
April 19, 2009.
Preferred stock dividends related to the Series A 8% Convertible
Preferred Stock amounted to $5,000 for the period April 19, 2004
to June 30, 2004. As of June 30, 2004, the total amount of unpaid
and undeclared dividends was $5,000.
6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Except for historical information contained herein, the statements in this
report (including without limitation, statements indicating that the Company
"expects," "estimates," anticipates," or "believes" and all other statements
concerning future financial results, product offerings, proposed acquisitions or
combinations or other events that have not yet occurred) are forward-looking
statements that are made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995, Section 21E of the Securities Exchange
Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as
amended. Forward-looking statements involve known and unknown factors, risks and
uncertainties which may cause our actual results in future periods to differ
materially from forecasted results. Forward looking statements are all based on
current expectations, and we assume no obligation to update this information.
RISK FACTORS
For the past two fiscal years we have had minimal revenues. We have a history of
losses, and an accumulated shareholder deficit of $34,364,610. Because of our
recurring losses, our independent auditors have expressed doubt as to our
ability to continue as a going concern.
We will require additional capital in the short term to remain a going
concern.
We will require substantial short term outside investment on a continuing
basis to finance our current operations and any limited capital expenditures
identified to protect existing investments. Our revenues for the foreseeable
future may not be sufficient to attain profitability. Since inception, we have
generated little revenue and have incurred substantial expenditures. We expect
to continue to experience losses from operations while we develop the Air -
Water and photo voltaic businesses. 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. Although one of our subsidiaries has a
bank account overdraft facility, 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.
We are currently focusing our operations on the design, manufacture and
sale of water production and generation systems along with solar power systems.
There are no assurances that this business activity will be successful, that we
will be able to identify and sell to the market and that the market will respond
to our product line.
PLAN OF OPERATION FOR THE NEXT 12 MONTHS
- ----------------------------------------
Our cash position at June 30, 2004 is $128,047. This is only sufficient to
provide coverage for two months of operating cash needs, based on the current
reporting period's negative cash flow from operations. However, our Chairman, in
connection with Port Universal Ltd., a company in which he owns a one third
interest, has agreed to provide funding as needed until our sales activities are
sufficient to cover our cash flow needs. This agreement by our Chairman and Port
Universal is not a binding obligation; we have no assurances that this funding
7
will continue beyond the short term. Further, based on current sales volume and
our projections, we anticipate that by December 31, 2004, our subsidiaries
should have sufficient revenues that we will not require funding from equity
sales.
With the acquisition of Millenium (described later) and the company's new
business focus, we have been able to obtain private placement funding to finance
our activities in these fields. We anticipate continuing to receive operating
funds from private placement sales of our common stock, until such time as
product sales are sufficient to support the organization, however no assurances
can be made that we will be able to find willing investors. We are also relying
upon the same private placement funding to provide the cash required to
consumate the proposed GiroSolar acquisition described later.
Except for the GiroSolar acquisition, described later, we do not have any major
expenditures planned, nor do we anticipate the purchase or sale of plant and /
or significant equipment. Our plan calls for the use of third party contract
manufacturers, thus avoiding the allocation of our resources into manufacturing
operations. We anticipate funding any sizeable orders for either AirWater
equipment or Photovoltaic installations, through deposits and advances from
customers. Subsequent to this reporting period, we have placed a $100,000
deposit with one of our contract manufacturers.
We do not anticipate any substantial change in the number of employees in the
near term for our existing operations.
We have several potential sizeable contracts in the sales process. Should these
contracts be awarded, we will need to raise additional equity or arrange for
financing vehicles to fund those contracts. Any equity raised could result in
dilution of existing shareholders. Additionally, we are uncertain as to the
availability of sufficient financing on acceptable terms.
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.
We also own a U. S. patent on our Distributed Wireless Call Processing System
technology.
We currently have three channels of activity, each conducted by a wholly owned
subsidiary. AirWater Corporation, ("AirWater") a Florida corporation formed in
March, 2003, has been established to design, manufacture (utilizing contract
manufacturing organizations) and market systems that perform water extraction
from air. Millennium Electric T.O.U. Ltd., ("Millenium") an Israeli company,
acquired September, 2003, specializes in the development and installation of
solar power systems worldwide, primarily to government and industrial users.
Solar One, Inc., ("Solar One") a Florida corporation, formed in July, 2003,
manufactures (subcontracted to third parties) and markets portable photovoltaic
cells in leather cases for consumer electronic products. Solar One was formed to
source the manufacturing and to market the product line of photovoltaic consumer
energy panel products designed by Solar Style, Ltd., an Israeli company owned by
us. We have recently combined the technology of the photovoltaic system of
Millenium and the water extraction systems of AirWater and developed a self
powered air water machine.
Airwater's initial action was to obtain licensing rights to the technology. 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 $300,000, and we are obligated to pay a royalty
8
payment of between 5 to 7.5% on all sales of equipment which uses the patented
technology. Of the $300,000, $100,000 was paid in cash, and the balance of
$200,000 was settled by the issuance of restricted common shares.
Beginning in March 2003 we pursued various consulting, marketing and sales
agreements. 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.
Our plan for development of the AirWater and Photovoltaic product lines call for
utilizing outside consultants and agents to assist and/or perform the
manufacturing, marketing, sales and integration of our products to the end
users.
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 to fulfill this technological need of
providing Photo Voltaic (PV) Electric Energy to provide the necessary power for
the air-water system.
Millenium and its president, Mr. Ami Elazari, operate in the forefront of the
high technology field of solar energy, solar panels, and solar powered consumer
products. The Company and Mr. Elazari are the holders of more than 21
international patents relating to both Photo Voltaic ("PV") and solar energy
systems and products.
NEW PRODUCTS
In line with our new business plans, AirWater engaged 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.
INTERNATIONAL SALES AND MARKETING
We are focusing our sales efforts in the European, African, Middle Eastern and
Asian government and industrial markets for the AirWater and Millenium product
and service offerings. Solar One is targeting the North American and European
consumer markets. Our sales strategy is to engage independent sales consultants,
who are commission based, and thus create a more extensive marketing and
networking program than that which could be achieved using an employee based
salesforce alone.
Since the company 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. We have received positive feedback from these
demo placements, with an indication of order placements to be forthcoming.
We are concentrating our sales and marketing efforts on making large "country
sized" sales to governments, federal and local authorities, as well as to
international aid agencies. We recognize that because of the complexity of the
product, the sales cycle of the AirWater products and systems are somewhat
longer than was previously projected. However, management remains confident that
sizeable international orders for the machines will occur in 2004 or early 2005.
On December 15, 2003, we signed a memorandum of understanding to effect a
licensing transaction with an Australian Group for the manufacture and or
assembly of AirWater machines and PV Solar Panels in Australia. This transaction
secured a one time technology fee, due to us, of $200,000 with Royalty residuals
of 5 percent on all manufactured and sold products. In early January, 2004, we
received the first installment payment of $10,000 pursuant to this agreement.
The balance is due over the following eighteen months, however, no further
payments have been received since that initial payment.
9
LISTING ON FOREIGN EQUITIES EXCHANGE
On December 1, 2003, the company obtained a listing on the Berlin Exchange in
Germany. The company was allocated a trading symbol UCV. 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. We have been advised that we do not have any regulatory filings in
connection with this listing beyond what is required for our United States
securities filings.
OVERSEAS OFFICES AND STRATEGIC PARTNERSHIPS.
In line with marketing and sales needs of AirWater and PV Solar Products, we
have opened operational offices in Geneva Switzerland and Paris France through
strategic partnerships with existing businesses in those locales. In addition,
we have set up representation in Mexico, Brazil, Morocco, China, and in several
countries in Africa.
Millennium has signed several agreements with strategic partners worldwide:
GiraSolar in Holland, Capsolair in Morocco, 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. The first, Solar
One, Inc., USA, (dba Solar Style, Inc.) for which we have recently opened an
office in Baltimore and are planning to open a warehouse, will form the basis of
the targeted North American distribution network.
RESEARCH & DEVELOPMENT PROJECTS IN PROCESS
Effective January, 2004 to the present, Millennium has been working 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 (USD $102,231).
Second project - "Remote Monitoring for Renewable energy systems". Millennium's
share of the budget for the first six months is 39,713 Euro (USD $32,222).
Third project - "High Efficiency low cost solar cells". Millennium's share in
the budget for the fist six months is 16,965 Euro (USD $13,765).
Fourth project - "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 (USD $3,627).
Fifth project - "Development of an Integrated solar system for Buildings". In
this project Millennium is the coordinator. The budget totals 931,000 Euro (USD
$755,376).
In addition, Millennium received approval for a new "reflect " project as the
coordinator with 908,000 euro (USD $736,715) budgeted for the next 24 months.
10
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 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 - a
leading manufacturer for computerized irrigation systems. This project involves
the development and installation of a PV Solar Energy System that will heat and
cool plant roots in order to boost plant fertility.
GERMAN MARKET AND OTHER WORLDWIDE ACTIVITIES
Millennium recently secured a contract for Millennium Brand PV Solar Panels for
delivery in Germany. More than 300 panels have already been supplied and
delivered to the customer.
During the current reporting period, Millennium experienced some problems in
sourcing sufficient Solar Cells for the manufacture of the PV Solar modules
required under this contract. The shortage of Solar Cells is a world wide
problem, with strong demand for Solar Panels dictating the demand and the
prices. As a result, the company was forced to cut back on production and we
have not been able to supply as many panels as required under existing
contracts. Management expects that the Solar Cells shortage problem will resolve
itself on a global basis, and that full PV Solar Panel production will resume in
the fall.
Millennium is working on a solar desalination project in Heraklion, Crete,
pursuant to one of the EU projects.
After successful completion of the project for the Cross Israel Highway, we have
received a maintenance contract with a monthly revenue stream. In connection
with the highway projects, we are awaiting confirmation for participation in the
next phase of the Cross Israel Highway, which has a value of about $200,000.
Holland - in connection with GiraSolar (Solar Service Buro and Stroomwerk) we
are marketing Solar Panels to the Dutch market.
China - our marketing 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. The estimated value
is about $100,000 per gas station. With 1,000 additional gas stations that
potentially may be outfitted, the overall project could have a value of up to
$100 million dollars. Although we are pursuing this contract, there is no
assurance that we may secure this contract.
Beginning in June of 2003, we have worked to design, research and develop as
well as source the manufacture of our AirWater machines. With completion of our
product line design and reaching manufacturing agreements with third party
contract manufacturers, we are now conducting a worldwide sales and marketing
program. We are employing outside sales agents to achieve better market
penetration.
PRODUCT AND MARKETING STRATEGY
We have chosen to concentrate our sales and marketing efforts on making large
"country sized" sales to governments, federal and local authorities, as well as
to aid agencies globally. We have entered into agreements with sales and
marketing agents in our target countries. We have realized that because of the
complexity of the product, the sales cycle of the AirWater products and systems
are somewhat longer than what was previously anticipated. However, we remain
confident that large "country sized" international orders for our AirWater
machines will be secured through these efforts.
In the process of developing our product line, we have determined that the
longer sales cycle is due mainly to a number of factors, primarily:
11
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 aware 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, industrial and commercial
international standards the potential buyer expects. 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 appropriate machine to all potential markets.
During this reporting period, management traveled to both China and Israel, to
monitor the planning and production of the AirWater machines, and to ensure that
top quality units will be produced for our target customers. Various new
enhancements and modifications, that will positively affect the quality of the
products, were implemented, and management believes that these new changes will
ensure a better sales opportunity and improved sales results.
ACQUISITIONS
GiraSolar
- ---------
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. This Dutch group is
composed of two separate operating subsidiaries, Stroomwerk Energy (SWE) and
Solar Service Buro (SSB).The company is currently doing its due diligence and
legal preparatory work, in anticipation of closing the acquisition.
Solar Style Ltd. (Israel)
- -------------------------
In connection with our acquisition of Millenium on September 29, 2003 as
previously reported, we acquired 50% of Solar Style Ltd. (Israel). On January
29, 2004, we issued 500,000 shares of common stock plus a 2 year warrant to
purchase 1 million additional shares of our common stock at an exercise price of
10 cents per share, for the remaining 50% of Solar Style Ltd. (Israel).
Solar Style Ltd. is in the business of designing, manufacturing and marketing
consumer styled PV solar chargers. The company does not have any sales or
assets, other than product designs and licensing/manufacturing agreements.
Solar Style Ltd., has developed, and is contracting to manufacture and bring 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 charges mobile devices by a small portable photovoltaic solar panel, which
is designed to fit in an elegant leather case for high consumer appeal.
Solar Style manufactures the panels and carrying-cases, which are then assembled
together to be sold as one unit. The panels can be easily plugged into 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.
12
Sales and marketing efforts commenced during this reporting period. The company
has published full page advertisements in major newspapers in several Caribbean
countries and is in the process of appointing distributors. In addition, the
company has sourced alternate manufacturers to ensure a steady and reliable
supply of product for the anticipated growth in sales. We anticipate commencing
product shipments in the following quarter.
RESULTS OF OPERATIONS
Three Months and Nine Months Ended June 30, 2004 Compared to the Three Months
and Nine Months Ended June 30, 2003.
Revenues and cost of sales for the three months and nine months ended June 30,
2004 and June 30, 2003 were generated primarily by our subsidiary, Millenium.
Operating expenses for the three months and nine months ended June 30, 2004
amounted to $774,140 and $2,259,284, respectively, compared to $503,609 and
$944,057 for the three months and nine months ended June 30, 2003. For both
periods, these expenses were primarily consultants, professional fees and rents.
The increases of $270,531 and $1,315,227, respectively, were due to marketing
expenses, legal fees, R&D costs and travel expense which was not incurred in the
prior period as a result of the AirWater and Millenium activities new to the
company.
Interest expense decreased $9,430, from $51,886 for the three months ended June
30, 2003, to $42,456 for the three months ended June 30, 2004. For the nine
months ended June 30, 2004 and 2003, interest expense increased $113,892 from
$152,836 to $266,728. The decrease for the three months ended June 30, 2004,
resulted from the conversion by the bondholders of a portion of their debt to
common stock during the period. The increase for the nine months ended June 30,
2004, resulted from an adjustment accrual to the 8% convertible debentures which
was recorded in December, 2003 and the accretion of interest imputed on the
Andrews Corporation note payable, which was paid April 2004.
Net losses for the three months ended June 30, 2004 were $821,596, as compared
with $555,495 for the three months ended June 30, 2003. Net losses for the nine
months ended June 30, 2004 were $2,531,012, as compared with $1,096,893 for the
nine months ended June 30, 2003. The increase in net losses is primarily
attributable to sales and marketing and product development costs incurred in
the current fiscal year which were not incurred in the prior fiscal year.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2004, our cash position was $128,047 compared to $144,682 as of
September 30, 2003. Cash used in operating activities for the nine months ending
June 30, 2004, compared to the nine months ending June 30, 2003 were
$(1,345,054) and $(252,964) respectively. The primary use of these funds
resulted from operating losses and increase in receivables. Cash employed in
investing activities amounted to $(275,504) for the nine months ended June 30,
2004 compared to cash used in investing activities for the nine months ending
June 30, 2003 of ($3,303). The use of funds in investing activities for the
period ending June 30, 2004 resulted from the purchase of equipment. Cash
provided by financing activities for the nine month periods ending June 30, 2004
and 2003 were $1,603,923 and $475,674 respectively. For both periods these
amounts were derived from the sale of our common stock.
As previously reported, we completed the agreement to purchase 100% of the stock
of Millennium Electric T.O.U. Ltd (Millennium), an Israeli company on September
29, 2003. Millenium specializes in the development and installation of solar
power systems to international markets.
Our purchase cost plus net liabilities assumed, resulted in $300,064 of
intangibles in the form of patent costs, for which no impairment has been
13
recognized. No amortization is recorded in the year ended September 30, 2003, or
during the nine months ended June 30, 2004.
Millennium's assets and liabilities are included in our consolidated balance
sheets at September 30, 2003 and June 30, 2004. Millennium's results of
operations are included in our consolidated statements of operations for the
three months and nine months ended June 30, 2004. However, Millennium's results
are not included in our consolidated statements of operations for the three
months and nine months ended June 30, 2003.
The following pro forma data is presented on a combined basis, as if Millennium
had been acquired as of October 1, 2002:
Three Months Ended June 30, Nine Months Ended June 30,
--------------------------- --------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
Revenues $ 220,529 $ 25,315 $ 449,856 $ 58,867
Expenses 1,037,125 589,094 2,975,868 1,179,435
----------- ----------- ----------- -----------
Net (Loss) $ (816,596) $ (563,779) $(2,526,012) $(1,120,568)
=========== =========== =========== ===========
Basic & Diluted
Loss per Share $ (0.01) $ (0.02) $ (0.02) $ (0.08)
=========== =========== =========== ===========
Corporate Funding:
The company chairman, Michael J Zwebner has arranged for substantial funding
from his personal resources and 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 invested over
$500,000 of his funds this reporting period. Mr Zwebner has assured the company
that absent other outside investors, PUC along with his personal investments
will continue to finance the company in its period of growth until the company
and its subsidiaries generate sufficient cash flow from operations to sustain
working capital needs.
While management restructures the Company and builds the water production and
generation systems business along with solar power systems business, 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, other than an overdraft
facility at Millenium, 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.
We do not have any off-balance sheet arrangements.
ITEM 3. EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
As of the end of the period covered by 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 that the principal amount and accrued interest
of the debenture are due. We currently carry the 483 share obligation in our
equity under escrowed shares. No provision for debenture, principal and accrued
interest has been made in our financial statements, as we believe the receiver's
claim is unfounded and the company will prevail. The matter remains unresolved
at June 30, 2004.
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 (identified in the court records as
Federal District Court, Northern District of Texas -- Dallas Division Cause No.
3-03CV-1798-G). Their press release stated that we had infringed on their
patents. Counsel has advised us that their claims lacked substance. On November
24, 2003, the court granted our motion for dismissal due to lack of Texas
jurisdiction. ELGT has similar suits filed against other companies in the same
industry. We filed a counter claim in the United States District Court, Southern
District of Florida, case number 03-22196-Civ-Seitz, disputing ELGT's claims of
patent infringement and as a result of statements published in their press
releases, we included in our complaint $118 million in damages against both ELGT
and its president, Mr. Dan Zimmerman, for their false, defamatory and libelous
statements. On January 24, 2004, we were granted a default judgement against
ELGT and Mr. Zimmerman, as a result of their failure to appear, answer or
respond to the complaint.
With respect to the defamation and libel action, at a hearing in March, 2004,
the Court awarded a Default Judgement against ELGT and Mr. Zimmerman to the
company and requested that the company submit a claim of losses and damages. We
submitted a claim of losses and damages in the amount of $82 million.
In regard to the claimed patent infringement action we filed against ELGT, in
May, 2004, the court ordered all parties to go to mediation in an attempt to
reach a settlement. A trial date has been set by the court in June, 2005. ELGT
has made an offer of settlement, which we have rejected. We are currently
conducting discovery in preparation for mediation scheduled for late September,
2004.
ITEM 2. CHANGES IN SECURITIES.
Sales of Unregistered Securities
- --------------------------------
We have issued and sold unregistered securities that have not previously been
reported as set forth below. An underwriter was not utilized in any of these
15
transactions. The recipients of securities in each transaction represented their
intention to acquire the securities without a view to distribution. All the
issued securities were restricted securities under Rule 144, Reg. D or Reg. S
regulations, and appropriate restrictive legends were affixed to the securities
in each transaction. All sales of securities were to accredited investors in
private placements, and accordingly all of the sales complied with Section 4(2)
as well as 4(6) of the Securities Act of 1933.
On April 1, 2004, we issued 5,000,000 shares of common stock under a private
placement subscription at $0.04 per share. These securities were issued to Port
Universal Ltd., an entity in which the Chairman owns 33.3%, in a transaction
exempt from registration under the Securities Act of 1933 in reliance on
Sections 4(2) and 4(6) of the Securities Act of 1933.
On April 5, 2004, we issued 400,000 shares of common stock under a private
placement subscription at $0.05 per share. These securities were issued in
a transaction exempt from registration under the Securities Act of 1933 in
reliance on Sections 4(2) and 4(6) of the Securities Act of 1933. In connection
with this transaction, we paid a commission of 10% to a third party.
On April 8, 2004, we issued 5,000,000 shares of common stock under a private
placement subscription at $0.04 per share. These securities were issued in a
transaction exempt from registration under the Securities Act of 1933 in
reliance on Sections 4(2) and 4(6) of the Securities Act of 1933.
On April 19, 2004, we sold, at $10 per share, 30,000 shares of Series A 8%
Convertible Preferred Stock and Warrants to purchase 4,545,455 shares of common
stock. The Series A 8% Convertible Preferred Stock is convertible into common
stock at $0.033 per share. The Warrants are exercisable at $0.05 per share and
expire April 19, 2009.
On April 25, 2004, we cancelled a certificate in the amount of 2,400,000 shares
of our common stock issued in connection with our agreement with Natra Advanced
Technologies (1995) Ltd., as part of our cancellation of that agreement.
On April 26, 2004, we issued 1,546,710 shares of common stock under private
placement subscriptions at $0.05 per share. These securities were issued in
transactions exempt from registration under the Securities Act of 1933 in
reliance on Sections 4(2) and 4(6) of the Securities Act of 1933. In connection
with these transactions, we paid a commission of 10% to a third party.
On May 20, 2004, we issued 125,000 shares of common stock at $0.04 per share and
100,000 shares of common stock at $0.05 per share under private placement
subscriptions. These securities were issued in transactions exempt from
registration under the Securities Act of 1933 in reliance on Sections 4(2) and
4(6) of the Securities Act of 1933. These securities were issued to our Chairman
to replace shares or funds he had advanced to the subscription holders.
On May 24, 2004, we issued 766,460 shares of common stock under private
placement subscriptions at $0.05 per share. These securities were issued in
transactions exempt from registration under the Securities Act of 1933 in
reliance on Sections 4(2) and 4(6) of the Securities Act of 1933. In connection
with these transactions, we paid a commission of 10% to a third party.
On June 01, 2004, we issued 218,071 shares of common stock under private
placement subscriptions at $0.05 per share. These securities were issued in
transactions exempt from registration under the Securities Act of 1933 in
reliance on Sections 4(2) and 4(6) of the Securities Act of 1933. In connection
with these transactions, we paid a commission of 10% to a third party.
16
Other Securities Transactions
- -----------------------------
Pursuant to the April 14, 2000 Securities Purchase Agreement (the 4% convertible
debentures) and the March 29, 2001 Securities Purchase Agreement (the 8% Senior
Secured Convertible Debentures), the investors converted $184,820 of debentures
into 4,921,975 shares of the Company's common stock on various dates between
April 19 and May 6, 2004, at various prices ranging from $0.033 per common share
to $0.0573 per common share.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) The following exhibits are included herewith:
EXHIBIT NO. DOCUMENT
----------- --------
(i) 3.1 Articles of Incorporation.
(i) 3.2 Amendment to Articles of Incorporation
(i) 3.3 Amendment to Articles of Incorporation.
(i) 3.4 By-laws.
(ii) 3.5 Amendment to Articles of Incorporation.
Exhibit 3.5 Certificate of Designation, Series A 8% Cumulative
Preferred Stock
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
- ----------
(i) Filed with the registration statement on Form SB-2 with the Securities and
Exchange Commission on May 31, 2000.
(ii) Filed with Form DEF14A on April 25, 2002.
(b) The Company filed the following reports on Form 8-K during the quarter for
which this form is filed:
May 3, 2004, Item 5 - Other Events and Regulation FD Disclosure.
Notification by the Company's independent certified public accountants
that they had not rendered their consent to the filing of their report on the
Financial Statements included in the Company's Form 10-KSB for the year ended
September 30, 2003.
17
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 20, 2004 UNIVERSAL COMMUNICATION SYSTEMS, INC.
/s/ MICHAEL J. ZWEBNER
-----------------------------------------------
Michael J. Zwebner
Chief Executive Officer, Chairman of the Board
18