U.S. SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended: December 31, 2004
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[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____________ TO _________
Commission file number: 000-30405
Universal Communication Systems, Inc.
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(Exact name of small business issuer as specified in its charter)
Nevada 4812 860887822
(State or jurisdiction (Primary Standard Industrial (IRS Employer
of incorporation Identification No.) Classification
or organization) Code No.)
MICHAEL J. ZWEBNER
407 Lincoln Rd, Suite 12F
Miami Beach, FL 33139
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(Address of principal executive offices)
(305) 672-6344
(Issuer's telephone number)
(Issuer's former telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
------ ------
State the number of shares outstanding of each of the issuer's classes of common
equity as of the latest practicable date.
Class Outstanding as of February 14, 2005
----- -----------------------------------
Common Stock, $.001 par value 250,149,590
Transitional Small Business Disclosure Format: Yes No X
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TABLE OF CONTENTS
PART I FINANCIAL INFORMATION Page
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Item 1. Consolidated Financial Statements:
Balance Sheet - September 30, 2004 and
December 31, 2004 3
Statement of Operations for the three months
Ended December 31, 2004 and 2003 4
Statement of Cash Flows for the three months
Ended December 31, 2004 and 2003 5
Notes to the Financial Statements
December 31, 2004 6
Item 2. Management's Discussion and Analysis or Plan
of Operations 7
Item 3. Evaluation Of Disclosure Controls And Procedures 11
PART II OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 2. Changes in Securities 13
Item 3. Defaults Upon Senior Securities 14
Item 4. Submission of Matters to Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
Item 7. Signatures 16
2
Part I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Universal Communication Systems, Inc. & Subsidiaries
Condensed Consolidated Balance Sheets
December 31 September 30,
2004 2004
------------ ------------
(unaudited)
ASSETS
Current Assets:
Cash & cash equivalents $ 107,073 $ 453,134
Accounts receivable, net 261,329 102,009
Note and other receivable 131,275 128,357
Inventory 128,648 41,994
Prepaid expenses 39,693 65,362
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Total Current Assets 668,018 790,856
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Fixed Assets:
Furniture and equipment 377,541 446,475
Less: Accumulated depreciation 39,339 34,658
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Total Fixed Assets, Net 388,202 411,817
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Other Assets:
Patents 525,914 540,914
Goodwill 30,000 30,000
Deposits 55,420 24,133
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Total Other Assets 611,334 595,047
------------ ------------
Total Assets $ 1,617,554 $ 1,797,720
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Notes payable $ 60,000 $ 60,000
Accounts payable 240,345 254,012
Accrued expenses 932,702 1,201,987
Due to related parties - 31,744
Liabilities of discontinued operations 946,794 946,794
------------ ------------
Total Current Liabilities 2,179,841 2,494,537
Long-term Liabilities:
Convertible debentures 1,849,337 2,060,374
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Total Liabilities 4,029,178 4,554,911
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Commitments and Contingencies -- --
------------ ------------
Stockholders' Deficit:
Preferred stock, par value $.001 per share , 10,000,000 shares
authorized, 55,000 and 30,000 shares
issued and outstanding 55 30
Common stock, par value $.001 per share,
800,000,000 shares authorized, 236,426,863 and 202,900,000
shares issued and outstanding 236,427 202,900
Additional paid-in capital 33,685,120 32,509,910
Accumulated deficit (36,239,726) (35,376,531)
Accounts receivable, shareholder (93,500) (93,500)
------------ ------------
Total Stockholders' Deficit (2,411,624) (2,757,191)
------------ ------------
Total Liabilities and Stockholders' Deficit $ 1,617,554 $ 1,797,720
============ ============
See notes to condensed financial statements.
3
Universal Communication Systems, Inc. & Subsidiaries
Condensed Consolidated Statements of Operations
UNAUDITED
Three Months Three Months
Ended December 31, Ended December 31,
2004 2003
------------- -------------
Revenue and other income $ 501,517 $ 177,276
Cost of goods sold (332,912) (14,572)
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Gross margin 168,605 162,704
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Operating expenses
Sales and Marketing 276,258 229,649
Product Development -- 95,904
General and Administrative 721,642 496,536
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Total Operating Expenses 997,900 822,089
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Operating income (loss) (829,295) (659,385)
Interest income (expense) (79,809) (61,193)
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Net loss $ (909,104) $ (720,578)
============= =============
Basic And Diluted Loss Per
Share $ (0.004) $ (0.008)
============= =============
Basic and Diluted Weighted
Average Shares Outstanding 205,077,089 91,475,396
============= =============
See notes to condensed financial statements.
4
Universal Communication Systems, Inc. and Subsidiaries
Condensed Statement of Cash Flows
UNAUDITED
For the For the
Three Months Three Months
Ended Ended
December 31, December 31,
2004 2003
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $(909,104) $(720,578)
Adjustments to reconcile net loss from operations
to net cash used by operating activities:
Depreciation and amortization expense 19,681 1,796
Interest payable added to principal of
debentures 31,966 55,395
Interest added to principal of note payable -- 7,627
Stock issued for services 170,000 241,764
Stock issued for contract settlement 197,478
Accrued interest on note receivable (2,918) --
Changes in operating assets and liabilities:
(Increase) in prepaid and other 5,619 (3,879)
Decrease in accounts receivable (159,320) 68,873
(Increase) in note receivable -- (222,429)
(Increase) in inventory (12,115) (16,425)
Increase in note payable -- 7,627
Increase in line of credit -- 15,941
Increase (Decrease) in accrued expenses (148,567) 131,998
Increase (Decrease) in accounts payable (13,666) 29,744
Other 4,472 (14,606)
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Net Cash (Used) by Operating Activities (827,712) (417,152)
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CASH FLOWS FROM INVESTING
ACTIVITIES:
Decrease in advances from related parties -- (33,394)
Purchase of fixed assets (5,605) (84,065)
Other -- (33,504)
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Net Cash (Used) by Investing Activities (5,605) (150,963)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of common stock 269,000 584,037
Proceeds from the issuance of preferred stock 250,000 --
Decrease in due from related parties (31,744) (43,043)
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Net Cash Provided by Financing Activities 487,256 540,994)
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NET (DECREASE) IN CASH AND CASH EQUIVALENTS (346,061) (27,121)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 453,134 144,682
--------- ---------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 107,073 $ 117,561
========= =========
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 $ 31,966 $ 55,395
Interest accrued on the note payable, added
to the principal of the note $ -- $ 7,627
Dividends accrued on preferred stock $ 7,667 --
Debentures converted to capital stock $ 519,738 $ 560,000
See notes to condensed financial statements.
5
Universal Communication Systems, Inc. and Subsidiaries
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, 2004.
The balance sheet at September 30, 2004 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 three months ended December 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 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 $35,330,622. 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 photovoltaic businesses. In view of this fact, our auditors have
stated in their report for the period ended September 30, 2004 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 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 December 31, 2004 is $107,073. 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
will continue beyond the short term.
We have been able to obtain private placement funding to finance our activities
over the past few years. We anticipate continuing to receive operating funds
from these private placements until such time as sales are sufficient to support
the organization, however no assurances can be made that we will be able to find
willing investors.
7
We do not have any major expenditures planned, nor do we anticipate the purchase
or sale of plant and / or significant equipment. Our operation employs 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.
We do not anticipate any significant changes in the number of employees in the
near term for our existing operations.
To fund existing contracts and several potential sizeable contracts in the sales
process, 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.
To date, separate from the research and development costs, we have incurred only
minor production costs as we have only produced prototypes.
BUSINESS AND ORGANIZATION
Universal Communication Systems, Inc. (collectively the "Company", "us" or
"we"), prior to 2003, 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 only by our investment in Digital Way, S.A., a
Peruvian communication company and former wholly owned subsidiary. We currently
hold a twenty seven percent interest in Digital Way, S.A., however, due to a
lack of cooperation from their management, our financial results do not include
our interest in their activities.
We currently have four channels of activity, each conducted by a wholly owned
subsidiary. Air Water 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 Style, Inc. USA and Solar One, Inc., (collectively, "Solar") both Florida
corporations with offices in Baltimore, Maryland, manufacture (subcontracted to
third parties) and market portable photovoltaic cells in leather cases for
consumer electronic products. Solar was formed to source the manufacturing and
to market the product line of photovoltaic consumer energy panel products
designed by Solar Style, Ltd., a wholly owned Israeli subsidiary. Solar is
offering PV Solar Chargers for a wide range of products, including Solar
Chargers for Laptop computers, "Palm" devices, portable CD players, as well as a
wide range of cellular phones. Additionally, we have recently combined the
technology of the photovoltaic system of Millenium and the water extraction
systems of Air Water and developed a self powered air water machine. Lastly, we
have recently become involved in the marketing of a pilotless reconnaissance
aircraft product, manufactured by BlueBird Aeronautical Company. This is
explained further in "NEW BUSINESS SEGMENT" below.
AirWater's initial action was to obtain licensing rights to the technology. To
that end, we formed AirWater Patents, Inc. who currently holds the acquired four
patents we received under an agreement dated March 24, 2003, relating to this
technology, from J. J. Reidy & Company, Inc. of Holden, Massachusetts. Under
the terms of the global marketing and licensing agreement, we paid $100,000 in
cash and 4 million shares of restricted common stock, along with an advance of
$10,000 per month for a twelve month period against royalties. The royalty
advance payments concluded October 31, 2004. We are still obligated to pay a
royalty payment of between 5 to 7.5% on all sales of equipment which uses the
patented technology. The total payment under the agreement was valued at
$420,000.
8
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 photovoltaic ("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 PV and solar energy systems and products.
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 USA, Brazil, Morocco, France, Cameroon,
Australia, China, Holland, Jordan, Turkey, Iraq, Saudi Arabia, Emirates, Sri
Lanka, India, Thailand, South Africa, Kenya, etc. We have received positive
feedback from almost all of these demo placements, with order placements
expected shortly.
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 2005.
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. 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.
In line with marketing and sales needs of AirWater and PV Solar Products, we
have opened operational and sales offices in Geneva Switzerland and Paris France
through strategic partnerships with existing businesses in those locale. In
addition, we have set up representation in Australia, Mexico, Brazil, Sri Lanka,
Morocco, China, and in several countries in Africa. As previously described,
Solar has set up offices in Baltimore, Maryland for the sales and marketing of
Solar Products and Systems.
9
NEW BUSINESS SEGMENT
- --------------------
In late December, we established a "Security Products Division" upon completing
the negotiation for international marketing rights for a range of unmanned
aerial vehicles ("UAV") or Pilotless Planes and related technologies.
With the growing global need for high-tech security-related products, we see an
opportunity to get involved in that industry. Through our marketing partners
E.T.I , Electro Tech International Ltd (www.e-t-i.co.il), we were introduced to
BlueBird Aero Systems Limited (www.bluebird-uav.com), designers and
manufacturers of a unique range of UAV Pilotless Planes. Their products are
perfectly suited for use with the US Military, Law Enforcement Agencies, INS,
DEA and other US and worldwide government agencies whom we are currently
approaching for our AirWater products. A marketing and product brochure is now
available on our web site.
SUBSEQUENT EVENTS
- -----------------
During January 2005, AirWater received an order for 140 Air Water Machines for
Australia, an order for 270 Air Water machines for Sri Lanka and an order for
120 machines for a US customer in Texas. These AirWater SOHO styled machines are
currently being made in our contracted production facilities in China and will
be shipped to the destinations in sealed containers. We anticipate these orders
will be manufactured and delivered to the customers during the next quarter.
This activity is evidence that our sales programs enacted during the previous 6
months are showing and will show positive results.
On December 26th 2004, a Tsunami Disaster occurred in South East Asia, which
affected many countries. Among the affected countries were India, Sri Lanka and
Thailand. We announced that we would donate 20 AirWater machines of various
sizes to the affected countries / areas. Working with other International Aid
Agencies and other third parties, we shipped out a number of machines to these
territories. During the course of January and early February, we have continued
to send out additional machines. As of February 13, 2005, we have sent a total
of 4 machines to Thailand, 13 machines to Sri Lanka, and 1 machine to India. In
addition, recognizing the need for bottles or containers for the victims to
collect the water in, we purchased 12,500 plastic "jerry cans" and we have
shipped them to Sri Lanka, for free distribution. We have born the cost of
shipping the donated machines and the costs of the containers as part of our
contribution to the relief efforts. We are continuing our efforts to deploy our
product to save lives.
We have also set up an online Charity Fund for donations from the public for the
benefit of the victims of the Tsunami Disaster in South East Asia. Please visit
www.ucsy.com for further information. The company, our chairman Michael J.
Zwebner and Mr. Mohamed Hadid of Los Angeles, CA, have announced that each are
donating $25,000 to this fund.
In addition, Millennium Electric, a subsidiary of UCSY, has donated 1,000
portable Solar Chargers to International Aid Workers, spread out all over the
disaster areas. These Solar Chargers are ideal for re-charging mobile /
cellphones and other digital electronic machines in areas where there is little
if any electric power.
RESULTS OF OPERATIONS
Three Months Ended December 31, 2004 Compared to the Three Months Ended December
31, 2003.
Revenues and cost of sales for the three months ended December 31, 2004
were earned primarily by our subsidiaries, Millenium and AirWater.
Operating expenses for the three months ended December 31, 2004 amounted to
$997,900 compared to $822,089 for the three months ended December 31, 2003.
These expenses were primarily consultants, professional fees and rents. As the
AirWater product is no longer in its initial development stage, we did not incur
the product development costs in this period as compared to the prior period.
10
Net losses for the three months ended December 31, 2004 were ($909,104), as
compared with ($720,578) for the three months ended December 31, 2003.
We completed the agreement to purchase 100% of the stock of Millennium on
September 29, 2003. Terms included an initial transfer of 5 million shares of
our common stock, valued at $250,000, with options for the sellers to purchase
an additional 22 million shares at various exercise prices, ranging from $0.05
to $0.39 per share, to be granted under various conditions related to certain
future events and future performance standards for Millennium. 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 recognized.
LIQUIDITY AND CAPITAL RESOURCES
On December 31, 2004 the Company had cash and cash equivalents of $107,073
compared with $453,134 as of September 30, 2004. This represents a cash decrease
of $346,061 from the cash position at September 30, 2004. This decrease resulted
primarily from cash used in operations in the amount of $827,712. We received
proceeds from the sale of preferred shares of stock and funds received in
private placements of our common stock in the amount of $519,000.
We are almost entirely dependent on equity investments at this time and
recognize that without these investments we would not be able to continue as a
going concern. As noted above, cash used in operations for the three months
ended December 31, 2004 was $827,712. We have had negative cash flows from
operations in the past and do not anticipate that revenues will contribute
substantially to our cash flows in the short term. We do not have sufficient
resources to meet current obligations without continuing equity investments.
Prior financing arrangements, as disclosed in our SB-2 filed March 15, 2001, are
no longer in effect. We must obtain approval from our current debenture holders
to place additional debt against our assets. There are no assurances that we
would be able to secure that approval, if we did have the opportunity to secure
additional debt. We are attempting to negotiate with trade creditors to convert
existing obligations, including any accrued interest, to common stock in
satisfaction of those obligations. We have received agreement from our current
debenture holders to convert their existing debt to equity, but there are no
requirements for the debt holders to adhere to that consent.
During the three months ended December 31, 2004, we received equity investments
of $519,000. These investments were in the form of issuance of our common stock
in various private placements totaling $269,000 and the sale of preferred 8%
cumulative shares of stock for a total of $250,000. These proceeds were used to
fund our operating deficit and equipment purchases.
While management builds the AirWater and photovoltaic businesses, current
operating cash is being provided by the sale of common stock under private
placements. There was a working capital deficit at December 31, 2004 in the
amount of $1,511,823. Management is attempting to reduce this deficit through
arrangements with creditors and infusion of equity investments. We have reached
favorable agreements with a number of the creditors, but have not had the
resources to satisfy the obligation under the revised debt. If we do not make
satisfactory arrangements with all of the creditors or obtain short term
financing, we may not be able to continue as a viable concern.
We do not have any off-balance sheet arrangements.
ITEM 3. EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Under the supervision and with the participation of our Chief Executive Officer,
Mr. Michael J. Zwebner and Chief Financial Officer, Mr. Curtis Orgill, we
carried out an evaluation of the effectiveness of our disclosure controls and
procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as of December 31, 2004 (the "Evaluation
Date"). Based on that evaluation, our Chief Executive Officer and Chief
Financial Officer have concluded that as of the Evaluation Date, our disclosure
controls and procedures were effective to provide reasonable assurance that the
information required to be disclosed in our reports filed or furnished under the
Exchange Act are recorded, processed, summarized and reported, within the
periods specified in the SEC's rules and forms. We believe that a controls
system, no matter how well designed and operated, cannot provide absolute
assurance that the objectives of the controls system are met, and no evaluation
of controls can provide absolute assurance that all control issues and instances
of fraud, if any, within a company have been detected.
There have not been any changes in our internal control over financial reporting
during the fiscal quarter ended December 31, 2004 that have materially affected,
or are reasonably likely to materially affect, our internal control over
financial reporting.
11
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 463 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 the debenture and accrued
interest have 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 December 31, 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. 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 November 24, 2004, a settlement agreement was reached calling for:
1) a stipulation for the entry of a "Consent Judgment" in favor of our
subsidiary, Airwater Corporation and UCSY, jointly, and against Atmospheric
Water Technology, Inc. ("AWT") in the amount of $5 million,
2) the payment by ELGT of the amount of $25,000 in cash to us, and
3) the issuance of 150,000 shares of ELGT's restricted common stock
("Shares"). These shares are restricted from transfer or sale for a one year
period. ELGT has a right to purchase those shares from us for a one year period
from the agreement date at a price of $0.50 per share. In the event ELGT does
not exercise its right of purchase, upon the expiration of the one year period
the shares will become free trading and unrestricted. The 150,000 shares of
ELGT's common stock represents 2.1 percent of ELGT's total outstanding common
stock. At December 31, 2004, the stock had not been received and accordingly, no
value has been recorded for the stock in the current period financial
statements.
Further agreed, was that after the stipulation for the entry of the "Consent
Judgment" has been executed by the parties, ELGT is to assign to us all of
ELGT's equity ownership interest (i.e. shares of stock or otherwise) in AWT.
This includes all ELGT and AWT's right, title and interest in U.S. Patent No.
4,255,937 and all enhancements thereto, and all ELGT and AWT's right, title and
interest to the copyright and trademarks describing the technology in the U.S.
Patent, and the Trademark known as "Watermaker", and all ELGT and AWT's right,
title and interest in U.S. Patent No. 5,553,459. This transfer to UCSY and
AirWater is equal to 92% of the outstanding stock (controlling interest) of AWT
and includes all of the US and Global business, as well as all the appertaining
Patents, Trademarks and Licenses.
12
Finally, all parties agreed that each side shall bear its own costs and
attorney's fees.
In June 2004, the company filed a lawsuit in Miami District Court against Lycos,
Inc, and its parent Terra Networks, Inc, and a business segment, Raging Bull,
for $300 million. The law suit relates to charges for commercial fraud,
Cyberstalking and illegal use of the company's commercial name and logo. As of
December 31, 2004, the litigation continues in Miami Federal Court.
In a related but separate action, We filed a civil "RICO" (Racketeering
Influenced Criminal Organization) lawsuit in the circuit court for the 11th
Judicial Circuit, Miami-Dade County, Florida against a number of related
defendants including RipOffReport.com, BadBusinessBureau.com et al., seeking
money damages for our losses as a victim of the defendants' "RICO" conduct and
for other improper activities. The lawsuit names a number of defendants who have
and are continuing to allegedly operate a Criminal Racketeering Enterprise
against our organization and our directors and staff, as well as unnamed John
Does 1-25.
Our lawsuit alleges that the defendants associated in a Racketeering Enterprise
and conducted or participated, directly or indirectly, in such enterprise
through a pattern of racketeering activity consisting of a scheme to defraud,
lure, obtain, extort monies by means of fraud, misrepresentation, pretenses, and
material omissions through false and misleading practices, and to defame and
violate our legal rights through a pattern of criminal activity or a pattern of
racketeering activity including the use of telecommunications, mail, wire
communications as prescribed by 18 U.S.C. Sec. 1341 and Sec. 1343, 18 U.S.C.
Sec. 1962, and F.S. Sec. mail fraud, wire fraud. This case is still pending in
the court.
On January 14, 2005 we filed a law suit against Turner Broadcasting System,
Inc., Cable News Network, Inc. "CNN" and Wolf Blitzer for $100 million. The law
suit has been filed in United States District Court for the Southern District Of
Florida. The law suit has been brought for defamation under Florida law. This
case is still pending in the court.
During January, AirWater Patents, Inc., received a Notice Letter from attorneys
acting for J.J. Reidy & Co., Inc., allegedly terminating the Global License
Agreement that was entered into in March 2003, alleging Breach of Contract. The
company has filed an action in Miami Federal Court, seeking Declamatory relief
from the court, determining its rights, status and legal relations as well as
Money Judgment against J&J Reidy Inc. No provision has been made in our
financial statements, as we believe the claim is unfounded and the company will
prevail. The matter remains unresolved at December 31, 2004.
On January 21, 2005, we filed a lawsuit against James Coughlin, internet alias
"IrishJim44," for claims totaling $18 million. The lawsuit has been filed in
Federal Court in the Southern District of Florida. The claims are for defamation
against the company and the chairman Michael Zwebner, as posted on the internet.
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
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.
13
On October 11, 2004, we issued 1,300,000 shares of common stock under private
placement subscriptions at $0.03 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 October 18, 2004, we issued 8,160,000 shares of common stock under private
placement subscriptions at $0.012 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 October 19, 2004, we issued 100,000 shares of common stock under private
placement subscriptions at $0.03 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 October 25, 2004, we issued 15,399,997 shares of common stock under private
placement subscriptions at various prices ranging from $0.026 per share to $0.03
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.
On December 13, 2004, we issued 800,000 shares of common stock under private
placement subscriptions at $0.025 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 December 21, 2004, we issued 2,958,332 shares of common stock under private
placement subscriptions at $0.024 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 December 6, 2004, we sold 25,000 shares of Series B 8% Convertible Preferred
Stock and Warrants to purchase 16,666,667 shares of common stock for which we
received net proceeds of $250,000. The Series B Convertible Preferred Stock,
with a face value of $250,000, is convertible into common stock at $0.015 per
share. The Warrants are exercisable at $0.03 per share until December 6, 2009.
On January 5, 2005, we sold 30,000 shares of Series C 8% Convertible Preferred
Stock and A, B and C Warrants to purchase 20,000,000 shares of common stock for
which we received net proceeds of $300,000. The Series C Convertible Preferred
Stock, with a face value of $300,000, is convertible into common stock at $0.03
per share. The A Warrants are exercisable for 10,000,000 shares of common stock
at $0.04 per share until January 5, 2010. The B Warrants are exercisable for
5,000,000 shares of common stock at $0.06 per share until January 5, 2010. and
the C Warrants are exercisable for 5,000,000 shares of common stock at $0.08 per
share until January 5, 2010.
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 $519,738 of debentures
into 21,867,611 of the Company's common stock on various dates between November
23 and December 30, 2004, at various prices ranging from $0.0192 per common
share to $0.027 per common share.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None
14
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS.
The Company's annual meeting of stockholders was held on November 30, 2004.
The directors elected at the meeting were:
For Withheld
------------ ------------
Curtis A. Orgill 139,760,447 297,034
Ramsey Sweis 139,760,447 297,034
Alexander H. Walker, Jr. 139,760,447 297,034
Michael J. Zwebner 139,760,447 297,034
Ami Elazari 139,760,447 297,034
Ratification of the selection of Reuben E. Price, P.A., as the
Company's independent auditors for the fiscal year ending September
30, 2003:
For Against Withheld
------------ -------------- ------------
131,398,491 2,087,427 1,133,291
The foregoing matters are described in detail in the Company's proxy statement
dated October 29, 2004 for the 2004 Annual Meeting of Stockholders.
ITEM 5. OTHER INFORMATION.
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) The following exhibits are included herewith:
Exhibit 31.1 - Certification of Chief Executive Officer of Universal
Communication Systems, Inc. required by Rule 13a-14(1) or Rule 15d-14(a) of the
Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
Exhibit 31.2 - Certification of Chief Financial Officer of Universal
Communication Systems, Inc. required by Rule 13a-14(1) or Rule 15d-14(a) of the
Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
Exhibit 32.1 - Certification of Chief Executive Officer of Universal
Communication Systems, Inc. pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 and Section 1350 of 18 U.S.C. 63.
Exhibit 32.2 - Certification of Chief Financial Officer of Universal
Communication Systems, Inc. pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 and Section 1350 of 18 U.S.C. 63.
(b) The Company filed the following reports on Form 8-K during the quarter for
which this form is filed:
None
15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: February 17, 2005 UNIVERSAL COMMUNICATION SYSTEMS, INC.
/s/ MICHAEL J. ZWEBNER
----------------------------
Michael J. Zwebner
Chief Executive Officer,
Chairman of the Board
16