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, 2005
------------------
[ ] 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
-----------------------
(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, 2006
----- -----------------------------------
Common Stock, $.001 par value 338,359,064
Transitional Small Business Disclosure Format: Yes [ ] No [X]
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION Page
----
Item 1. Consolidated Financial Statements:
Balance Sheet - September 30, 2005 and
December 31, 2005 3
Statement of Operations for the three months
Ended December 31, 2005 and 2004 4
Statement of Cash Flows for the three months
Ended December 31, 2005 and 2004 5
Notes to the Financial Statements
December 31, 2005 7
Item 2. Management's Discussion and Analysis or Plan
of Operations 9
Item 3. Evaluation Of Disclosure Controls And Procedures 17
PART II OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities 21
Item 3. Defaults Upon Senior Securities 21
Item 4. Submission of Matters to Vote of Security Holders 21
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 21
Item 7. Signatures 22
2
Part I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Universal Communication Systems, Inc. & Subsidiaries
Condensed Consolidated Balance Sheets
December 31 September 30,
2005 2005
(unaudited)
------------ ------------
ASSETS
Current Assets:
Cash & cash equivalents $ 142,097 $ 313,992
Accounts receivable, net 226,099 254,621
Note and other receivable 142,818 139,900
Inventory 288,903 150,251
Prepaid expenses 77,867 75,209
------------ ------------
Total Current Assets 877,785 933,973
------------ ------------
Fixed Assets:
Furniture and equipment 99,366 92,341
Less: Accumulated depreciation 54,221 51,675
------------ ------------
Total Fixed Assets, Net 45,145 40,666
------------ ------------
Other Assets:
Patents 463,614 479,074
Goodwill 30,000 30,000
Deposits 43,085 27,979
------------ ------------
Total Other Assets 536,699 537,053
------------ ------------
Total Assets $ 1,459,629 $ 1,511,692
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Notes payable $ 182,398 $ 218,554
Accounts payable 239,149 290,410
Accrued expenses 1,161,682 870,400
Due to related parties - 87,893
Liabilities of discontinued operations 946,794 946,794
------------ ------------
Total Current Liabilities 2,530,023 2,414,051
Long-term Liabilities:
Convertible debentures 1,808,280 1,550,239
------------ ------------
Total Liabilities 4,338,303 3,964,290
------------ ------------
Commitments and Contingencies -- --
------------ ------------
Stockholders' Deficit:
Preferred stock, par value $.001 per share,
10,000,000 shares authorized, 90,000 shares
Issued and outstanding 90 90
Common stock, par value $.001 per share,
800,000,000 shares authorized, 314,242,257 and
306,069,950 shares issued and outstanding 314,243 306,070
Additional paid-in capital 36,786,065 36,550,987
Accumulated deficit (39,885,571) (39,216,245)
Accounts receivable, shareholder (93,500) (93,500)
------------ ------------
Total Stockholders' Deficit (2,878,674) (2,452,598)
------------ ------------
Total Liabilities and Stockholders' Deficit $ 1,459,629 $ 1,511,692
============ ============
See notes to condensed consolidated financial statements.
3
Universal Communication Systems, Inc. & Subsidiaries
Condensed Consolidated Statements of Operations
UNAUDITED
Three Months Three Months
Ended December 31, Ended December 31,
2005 2004
------------------ -------------------
Revenue and other income $ 677,904 $ 501,517
Cost of goods sold (642,879) (332,912)
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Gross margin 35,026 168,605
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Operating expenses
Sales and Marketing 97,273 276,258
General and Administrative 559,069 721,642
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Total Operating Expenses 656,342 997,900
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Operating loss (621,316) (829,295)
Interest income 2,955 2,918
Less: Interest expense (32,817) (71,636)
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Other Expense, net (29,862) (68,718)
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Net Loss (651,179) (898,014)
Dividends on preferred stock (18,148) (11,090)
------------------ -------------------
Net Loss available to common stockholders $ (669,327) $ (909,104)
================== ===================
Basic And Diluted Loss Per
Share $ (0.002) $ (0.004)
================== ===================
Basic and Diluted Weighted
Average Shares Outstanding 310,553,674 205,077,089
================== ===================
See notes to condensed consolidated financial statements.
4
Universal Communication Systems, Inc. and Subsidiaries
Condensed Consolidated Statement of Cash Flows
UNAUDITED
For the For the
Three Months Three Months
Ended Ended
December 31, December 31,
2005 2004
------------------ -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (651,179) $ (909,104)
Adjustments to reconcile net loss from operations
to net cash used by operating activities:
Depreciation and amortization expense 21,195 19,681
Interest payable added to principal of
debentures 8,041 31,966
Stock issued for services 112,250 170,000
Stock issued for contract settlement - 197,478
Accrued interest on note receivable - (2,918)
Loss on abandoned assets 1,591 -
Changes in operating assets and liabilities:
Prepaid and other (2,657) (5,619)
Accounts receivable 28,522 (159,320)
Note receivable (2,918) -
Inventory (138,652) (12,115)
Deposits (15,106) -
Accrued expenses 273,134 (148,567)
Accounts payable (51,261) (13,666)
Decrease in due to related parties (87,893) (31,744)
Other - 4,472
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Net Cash (Used) by Operating Activities (504,934) (859,456)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets (11,805) (5,605)
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Net Cash (Used) by Investing Activities (11,805) (5,605)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds of short term notes 5,054 -
Proceeds from the sale of convertible debentures 250,000 -
Repayment of notes payable (41,210) -
Proceeds from deposits on and payments for the
issuance of common stock 131,000 269,000
Proceeds from the issuance of preferred stock - 250,000
------------------ -----------------
Net Cash Provided by Financing Activities 344,844 519,000
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NET (DECREASE) IN CASH AND CASH EQUIVALENTS (171,894) (346,061)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 313,992 453,134
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CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 142,098 $ 107,073
================== =================
SUPPLEMENTAL DISCLOSURES OF CASH:
Interest paid $ - $ -
Income taxes paid $ - $ -
5
Universal Communication Systems, Inc. and Subsidiaries
Condensed Consolidated Statement of Cash Flows (Continued)
UNAUDITED
For the For the
Three Months Three Months
Ended Ended
December 31, December 31,
2005 2004
------------------ -----------------
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Interest accrued on debentures, added to
the principal of the debentures $ 8,041 $ 31,966
Dividends accrued on preferred stock $ 18,148 7,667
Debentures converted to capital stock $ - $ 519,738
See notes to condensed consolidated financial statements.
6
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 consolidated 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. In the opinion
of management these financial statements include all adjustments (consisting of
normal recurring adjustments) that are considered necessary for a fair
presentation of financial position, results of operations and cash flows for the
interim period. 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, 2005.
The balance sheet at September 30, 2005 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.
The preparation of financial statements in conformity with U.S. GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could vary from those
estimates.
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
7
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, 2005 and
2004, common stock equivalents have been excluded from the aforementioned
computations as their effect would be anti-dilutive.
NOTE 4 - SEGMENT INFORMATION
The Company's business segments involve the manufacturing and sale of the
following:
- Millennium: Large scale solar installations - Non USA - Solar One: Large
scale solar installations - USA - Solar Style: portable solar chargers for
consumer electronics - AirWater: equipment for the extraction of water
from air - Corporate: management and administrative services
Profit (Loss) Depreciation
Segment Net Sales from Operations & Amortization Assets
- --------------- --------- --------------- -------------- ----------
Millennium $ 3,567 $ (102,457) $ 9,615 $ 522,167
Solar One (USA) 560,245 9,800 - -
Solar Style 41,128 (114,470) 1,862 189,731
AirWater 72,964 (51,329) - 292,160
Corporate - (362,860) 9,718 455,571
--------- --------------- -------------- ----------
Total $ 677,904 $ (621,316) $ 21,195 $1,459,629
Note 5 - BUSINESS COMBINATIONS
Atmospheric Water Technologies, Inc. became a subsidiary of Universal
Communication Systems, Inc. following a settlement of litigation with Electric
Gas & Technologies, Inc. in November 2004.
NOTE 6 - CONVERTIBLE SECURITIES
The Company has issued certain convertible securities, which are subject to
revaluation under Emerging Issues Task Force Consensus ("EITF") 00-19. These
securities are currently reflected on the Company's Statements of Condition at
face value, and the calculations required by EITF 00-19 for potential
revaluation have not been made. The Company is currently making those
computations.
8
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
We have a history of losses, and an accumulated shareholder deficit of
$39,885,571. 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, 2005 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.
9
PLAN OF OPERATION FOR THE NEXT 12 MONTHS
- ----------------------------------------
Our cash position at December 31, 2005 is $142,097. This is only sufficient to
provide coverage for four months of operating cash needs, based on the current
reporting period's negative cash flow from operations. However, our Chairman, in
connection with a number of foreign corporate entities in which he holds an
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 the
foreign entities 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.
We do not have any major expenditures planned beyond inventory purchases for
national distribution contracts in our Solar Style subsidiary. We do not
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.
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 have determined that a divestiture of our
interest in Digital Way, S. A. would be appropriate as a result of the current
lack of cooperation of their management. In connection with this position, we
have executed an "Option to Purchase" Agreement with one of the principals of
Digital Way, S.A. This agreement will expire if the buyer does not exercise the
purchase rights granted by April, 2006.
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
10
Electric T.O.U. Ltd., ("Millennium") 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., a Florida corporation, is a wholly owned subsidiary formed to
market PV Solar panels and associated products.
Solar Style, Inc., a Florida corporation and wholly owned subsidiary, was formed
in July, 2003. Solar Style manufactures (subcontracted to third parties) and
markets portable photovoltaic cells in leather and plastic cases for consumer
electronic products. Solar Style 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. We have transferred the
intellectual property rights and technology rights from Solar Style, Ltd.,
(Israel) to Solar Style, Inc., (USA).
We formed AirWater Patents, Inc. to hold 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
agreement, we paid $300,000, and we were obligated to pay, for a one-year
period, a monthly advance royalty payment of $10,000 per month. These advance
royalty payments were completed on October 31, 2004, and thereafter a royalty
payment of between 5 to 7.5% on all sales of equipment which uses the patented
technology. Of the $300,000 purchase price, the company paid $100,000 in cash,
and the balance of $200,000 was settled by issuing 4,000,000 restricted common
shares. The total payment under the agreement was valued at $420,000. In January
2005, we received a termination notice from J. J. Reidy & Company, Inc., the
patent holders, indicating that the License Agreement that was entered into as
described above, was breached. We have filed an action in the US District Court
for the Southern District in Florida in response and we do not anticipate an
impact on our revenue or operations from this dispute. Pending resolution of the
issues, no royalty or other payments are being made.
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 calls
for utilizing outside consultants and agents to assist and/or perform the
manufacturing, marketing, sales and integration of our products to the end
users.
We completed an agreement to purchase all of the stock of Millennium on
September 29, 2003. As part of the Millennium acquisition, we acquired 50% of
Solar Style, Ltd., an Israeli company. On April 30, 2004, we acquired the
remaining 50% of Solar Style, Ltd. for 500,000 shares of common stock and
warrants exercisable for two years and 1 million shares of common stock valued
at a price of $0.10 per share. Solar Style, Ltd. is inactive but holds certain
rights to manufacture and market solar power products. In connection with the
Millennium / Solar Style acquisitions, a U. S. subsidiary, Solar Style, Inc.,
was formed to market solar power products and systems. The manufacturing and
marketing rights as well as all intellectual property, technical know how and
all associated technologies of Solar Style, Ltd in Israel have been transferred
to Solar Style, Inc. in the United States.
Millennium 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. Millennium and Mr. Elazari are the holders of more than 21
international patents relating to both Photo Voltaic ("PV") and solar energy
systems and products.
11
OUR STRATEGY AND DEVELOPMENTS
We are focusing our sales efforts in the European, African, Middle Eastern and
Asian government and industrial markets for the AirWater and Millennium product
and service offerings. Solar 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
sales force alone.
AirWater Corp
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, sales consummated during 2005
have supported our methodology and accordingly we have reworked our projections
based on our experience.
Since March of 2003, we have worked to design, research and develop as well as
source the manufacture of our AirWater machines. We have successfully sourced
the manufacturing of our machines. In 2005, we have embarked on a worldwide
sales and marketing program, focusing on the markets listed above.
The applications for the AirWater system technology are extensive. It is our
belief that the initial product should be the model that offers the easiest
entry into the marketplace, gains the quickest exposure, and generates a
substantial cash flow. To this end, we believe that a residential
5-gallon-per-day model would best fit this goal.
We believe that as the AirWater products and Systems become more engrained in
the global marketplace, and are more publicized and accepted, there will be
additional companies entering this industry, thus creating increased
competition. We further believe that our patents and intellectual property
rights will place us at a competitive advantage.
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. Our subsidiary, Millennium, has designed the system to
fulfill this technological need of providing Photo Voltaic (PV) Electric Energy
to provide the necessary power to the air water units.
In 2005, we filled an order for 140 Air Water Machines for our Australian
distributor. We received 50% of the amount of this sale in cash and the balance
as a 30% equity share in the Licensee's company, AIR-WATER INTERNATIONAL PTY
LTD. As of January, 2006, while we have received an acknowledgment and agreement
for the share equity transaction, we have not received the share certificate. We
have included $25,000 in other assets as the estimated value of the equity
shares to be received. Because the transaction is not complete, none of this
company's results of operations are included in the accompanying financial
statements.
During the three month period ended December 31, 2005, we received an order for
340 machines for delivery to Greece. We anticipate delivery of this order in the
second quarter of the 2006 fiscal year.
In May 2005, we announced that we had developed a new, exclusive energy
application utilizing "wind power" technology for energy co-generation for use
with AirWater machines. Recognizing the overall need for large consumption of
(electrical) energy to power all our AirWater machines, and the fact that the
cost of the energy is the
12
single most inhibiting barrier to sales, we have successfully developed a new
energy powering system for AirWater machines by utilizing Air Turbine Powered
Electric Generators (Wind Power). These air propelled turbine systems operating
in combination with AirWater machines can co-generate a substantial amount of
the electrical power needed to produce water from air. We believe that this
represents a new solution for AirWater machines that produce water from air, as
now, as a result of our technological development, from the same air we draw the
energy needed to create the water. We have filed for patent protection for this
unique development.
We have developed a new concept of making ice from water that was extracted from
air. This new machine, named the "AW100 Icemaker," will produce about 100 liters
of water per day and corresponding amounts of ice cubes. During the three months
ended December 31, 2005, we funded the preparation of the molds and finalized
the manufacturing arrangements. Sample production models are expected to ship in
March, 2006, with full production to commence in May 2006.
This product line is to further our unique range of AirWater products and
services. We are able to position an AirWater Icemaker in a location devoid of
water supplies, and produce both water from air, and ice cubes - all
independently.
During the three months ended December 31, 2005, we sold Air Water machines to
customers located in Australia, Oman, and India.
In November 15th, 2005 AirWater Corporation announced that an exclusive
distribution agreement had been signed with WWS, a French Commercial Group.
Under the agreement, they have committed to purchase and distribute a minimum $1
million in value of Air Water Machines, for France and a number of French
Protectorates. We have received various orders for sample machines, and as a
result of these sample shipments, we anticipate receiving the first orders from
this group for a range of Air Water machines during the second quarter of our
fiscal year 2006.
Air Water Fridges and Freezers Inc.
We recently formed Air Water Fridges and Freezers, Inc., a Florida corporation,
to launch a new range of custom designed and developed "Water Making Fridges and
Fridge/Freezers." Recognizing the demands of our customers, and reacting from
feedback from the marketplace, and after more than 6 months of research,
designing and product development, we have successfully built a number of "Water
Making Air Water Fridges and Fridge/Freezers" for global marketing. We have
developed unique systems that allow for the 4 new refrigerators and
fridge/freezers to be "plug and play" home appliances, with each sized model
making from 20 to 50 liters of fresh, clean, clear and pure mineralized drinking
water daily. The freshly produced water, extracted from the air, is stored in a
special water container, located inside, at the bottom of the refrigerator. In
addition, on certain models, the freezer will be able to make ice cubes from the
water which has been extracted from air and stored in the freezer within the
refrigerator. With respect to this process, we have filed several patent
applications. We continue to innovate with new applications for the air to water
business, and feel confident that this new range of water and ice making
refrigerators and fridge-freezers will continue to grow revenues globally.
13
Solar Style, Inc.
Solar is offering PV Solar Chargers for a wide range of products, including
Laptop computers, Palms(TM), Walkmans(TM) and Discmans(TM), as well as a wide
range of cellular phones. The PV Solar Chargers negate the need for consumer
electronic products to be connected to the electric grid, in order to charge or
recharge the appliance. Solar Style (Israel) has a manufacturing agreement with
a Hong Kong firm. The products are targeted at the portable consumer electronic
market.
Solar Style's technology converts solar energy into electricity in a packaged
solution that recharges mobile electronic devices by a small portable
photovoltaic solar panel, which is specially designed to fit in an elegant
leather case.
Solar manufactures the panels and carrying-cases separately, which are then
assembled and sold as a unit. The panels can easily be plugged in to solar cells
and charged outdoors by sunlight and indoors by electric light. The photo
voltaic cells act as battery chargers allowing a non-dependant use of the mobile
device, making batteries / battery-chargers unnecessary.
In December 2005, we announced the development of a new PV Solar Power Charger,
The Power Pack, which can supply and recharge electric energy to a wide variety
of consumer electronic devices that have power requirements ranging from 3.5 to
24 volts. This new device can charge mobile phones, cameras, name brand
electronic devices, radios, portable game systems and most importantly, laptops
and notebooks; which is a revolutionary breakthrough in state-of-the-art solar
technology. We have commissioned tool making and mold preparation, and we expect
initial deliveries of the new "Power Pack" to occur in the second quarter of our
2006 fiscal year.
We have applied for US, Canada, European and World-Wide Patent Protection for
our new Power Pack PV Solar Charger.
In December 2005, (announced in January 2006) we entered into a distribution
agreement with Tech Data Canada Corporation, a wholly owned subsidiary of Tech
Data Corporation for the entire range of Solar Style's product line. During the
next year we fully expect to roll out all the Solar Charger products to Tech
Data's 6,000 technology resellers in Canada.
Solar Style continues to invest in the development of new products and new
technologies. We will roll out exciting new models of Solar Chargers all
designed to compete in the lucrative consumer electronics global marketplace.
These new products include a range of "combination products", such as Solar
Powered Radios, Solar powered MP3 Players, and Solar powered TV's.
The company expects to announce the new product releases in the second quarter
of fiscal year 2006.
Millennium Electric T.O.U. Ltd.
Millennium's strategic vision for sales is to create a group of international
independent sales consultants to provide a more extensive marketing and
networking program than that which could be achieved by an employee based sales
force.
In October 2005, Millennium announced the first substantial new order from a
customer in the US Market for Millennium Brand Solar Panels. This order has a
value of $2.5 million.
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Additionally, Millennium has received a contract from Pelephone Israel, the
country's leading Cellular Phone company, to build and install the first PV
Solar Powered Cellular relay stations. This is the first of 20 planned
throughout the country to provide Photo Voltaic Solar/Electric power for
cellular phones microwave relay stations along Israel Highway No 2.
Millennium has received an export order for PV Solar Energy Panels valued at
$4.2 million for delivery to Canada. The order will be produced and shipped in
monthly lots over the next 12 months. The contract was secured via HELIOCOL (US)
(www.Heliocol.com), our national distributor for the US market. The order calls
for Carmanah Tech Corp, a leading Canadian PV Solar enterprise, to purchase up
to 100KW in 80 watt panels per month for twelve months, for a total $4.2 million
in value over the term of the contract. The first installment on this order, in
the amount of $420,000, was shipped in January, 2006.
RESULTS OF OPERATIONS
Three Months Ended December 31, 2005 Compared to the Three Months Ended December
31, 2004.
Revenues increased $176,387 from $501,517 for the three months ended December
31, 2004 compared to $677,904 for the three months ended December 31, 2005. Cost
of sales for the three months ended December 31, 2004 were $332,912 or 66.4% of
sales compared to $642,879 or 94.8% of sales for the three months ended December
31, 2005. The increase in cost of sales in 2005 compared to 2004 resulted from
one low margin sale by Solar One, Inc., which represented 82% of revenues for
the period.
Sales and Marketing expenses decreased $178,985 from $276,258 for the three
months ended December 31, 2004 to $97,273 for the three months ended December
31, 2005. Sales and Marketing expenses were composed of the following items:
12/31/05 12/31/04
-------- --------
Consultants $ 71,363 $ 96,245
Printing 1,800 25,780
Sales office - 98,819
Travel 15,670 34,517
Wages and Salaries 8,440 20,897
-------- --------
Total $ 97,273 $276,258
General and Administrative expenses for the three months ended December 31, 2005
amounted to $559,069 compared to $997,900 for the three months ended December
31, 2003. General and Administrative expenses were composed of the following
items:
12/31/05 12/31/04
-------- --------
Bad Debt $ 54,761 $ -
Shareholder Communications 14,376 20,181
Consultants 146,732 220,085
Debt retirement settlement - 172,478
Depreciation and Amortization 21,194 10,250
Legal and Professional 189,951 94,039
Other expenses 47,565 182,279
Rent expense 34,746 22,330
Travel expense 49,744 -
-------- --------
Total $559,069 $721,642
Net losses for the three months ended December 31, 2005 were ($651,179), as
compared with ($898,014) for the three months ended December 31, 2004.
15
LIQUIDITY AND CAPITAL RESOURCES
On December 31, 2005 we had cash and cash equivalents of $142,097 compared with
$313,992 as of September 30, 2005. This represents a cash decrease of $171,895
from the cash position at September 30, 2005. This decrease resulted primarily
from cash used in operations in the amount of $504,934. We received proceeds
from the sale of convertible debentures and funds received in private placements
of our common stock in the amount of $381,000. Funds were used in investing
activities in the amount of $11,805 for the purchase of equipment and in
financing activities in the amount of $41,210 for the repayment of notes
payable.
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, 2005 was $504,934. 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, 2005, we received equity investments
of $131,000. These investments were in the form of issuance of our common stock
in various private placements and advance payments on private placements. 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, 2005 in the
amount of $1,652,238. 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.
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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, 2005 (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.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
LYCOS Inc.
In June 2004, we filed a lawsuit in the United States District Court, Southern
District of Florida, against Lycos, Inc, and its parent Terra Networks, Inc, and
a business segment, Raging Bull, for $300 million. The lawsuit relates to
charges for commercial fraud, Cyberstalking and illegal and unauthorized use of
the company's commercial name and logo. The defendants filed various motions to
remove the cases out of Florida to Massachusetts, which the Florida courts
agreed to. As of August 9, 2005, the litigation has now been moved to Boston
Massachusetts where a federal judge has been appointed to this case for further
consideration and trial. In recent hearings, the federal judge has dismissed the
case against LYCOS Inc, citing the Communications Act as reasons for immunity
from legal actions, but has allowed for the case to proceed against the various
John Does, the other defendants in the case. The company is proceeding
accordingly.
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 (case number 05-175-CA-09) against
a number of related defendants including RipOffReport.com, BadBusinessBureau.com
et al., in an action against the defendants under various legal theories for
both substantial monetary damages and injunctive relief arising from malicious
posting and communications made by defendants in an effort to damage the
reputation of our companies.
The defendants are fighting jurisdiction, and the case is still pending in the
court. There has been no substantive progress in this case.
CNN
On January 14, 2005 we filed a law suit in the U.S. District Court, Southern
District of Florida (Miami), (Docket #05-CV-20047), against Turner Broadcasting
System, Inc., Cable News Network, Inc. "CNN" and Wolf Blitzer for $100 million.
The law suit has been brought for defamation under Florida law. CNN attorneys
have contested this case, filed various motions, and the judge closed the case
in March 2005, and recommended sanctions against us. We have however filed
various appeals, and the case is still pending decisions of the higher courts.
Relating to this matter, we issued a press release inviting any shareholder who
had trading losses in our stock during the period November 1, 2001 through the
present, to join in our filing of a class action suit against Lycos, et al.
In early December 2005, the 11th circuit court of appeals ruled against the CNN
Motions, and dismissed the application for sanctions.
J.J. Reidy & Company Inc.
In January 2005, we received a termination notice from J.J. Reidy & Company,
Inc., the AirWater patent holders allegedly terminating the License Agreement
that was entered into in March 2003, alleging Breach of Contract. The company
has filed an action in the U.S. District Court for the Southern District of
Florida (case # 05-20650-CIV-Jordan/Klein), seeking Declaratory relief from the
court, determining its rights, status and legal relations as well as Money
Judgment against J.J. Reidy & Company. Meanwhile, J.J. Reidy & Company had
already made a court filing in Boston, Massachusetts, in December 2004, (even
prior to issuing the notice of termination) in
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an effort to claim jurisdiction. We filed motions with the Boston court
contesting jurisdiction. No provision has been made in our financial statements,
as we believe the claim is unfounded and the company will prevail. Pending
resolution of the court proceedings, we have discontinued royalty or any other
payments to J.J. Reidy & Company, Inc. By recent court ruling, all discovery had
been stayed pending the courts ruling in relation to jurisdiction. The Boston
court recently ruled that it had jurisdiction over the case. The matter is now
continuing in Boston.
James Coughlin
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.
The defendant filed a Motion to dismiss citing lack of jurisdiction in Florida.
In April 2005, the court dismissed the case citing the reason of lack of
personal jurisdiction over the defendant. The company is appealing the decision,
based on new evidence (affidavit of third party) showing the defendant was
employed in Florida and therefore the court should reverse its decision. The
Florida court denied the request for further consideration. We re-filed the
lawsuit in the federal court of San Diego California. The court after hearing
motions to dismiss for lack of jurisdiction and lateness of filing, ruled to
dismiss the case. We filed an appeal, and the matter is currently sub-judice in
the federal appeals court. In January 2006, the court citing a ruling pursuant
to the SLAAP statutes and laws, awarded the defendants attorneys their claimed
costs in this case in the amount of $39,000. The matter is currently subject to
appeal.
OTHER INTERNET DEFENDANTS
We had earlier filed a lawsuit against 2 Internet posters in state court in
Miami Florida claiming the defendants' use of tortious speech to interfere with
the Company's business interests and its business affairs. As a result of the
action, and the failure of either of the 2 defendants to appear in court, we
obtained a default order and subsequently a default judgment. During this
reporting period, one of the defendants appeared in court by phone, and
subjected himself to the court's jurisdiction. He then filed several motions
both to dismiss and to vacate the default judgment and also filed to cancel the
permanent injunction. These motions were denied by the court, but the Permanent
Injunction was altered to be a Temporary Injunction, pending further resolution
of the case. During the proceedings, LYCOS INC filed a motion to insert
themselves into the case as an Intervenor. This was allowed by the Judge.
Further motions by LYCOS to attempt to dismiss both the case and to vacate the
injunction were denied by the court. Numerous motions and countermotions have
been filed and heard, and the injunction against the defendants remains in
place. Depositions and discovery are continuing. As of December 2005, the matter
continues in court.
WEBSKY
On January 9th 2006, we announced our intention for the filing of a lawsuit
against WEBSKY, Inc., founded and run by Douglas Haffer of San Francisco,
California. The lawsuit alleges Fraud, Tortuous Interference with Business
Relationships & Prospective Business Advantage, Restraint of Trade, and Theft of
Corporate Property. The claims as outlined in the lawsuit total $40 million. The
matter was settled in connection with the Haffer actions described below.
19
HAFFER
In June 2005, we were served with a law suit filed in San Francisco state court
claiming $77,000 in back pay due to Douglas Haffer, the previous President of
the company. We have defended the action and issued and filed certain
counter-claims. In a San Mateo court hearing on January 30th 2006, the company
settled the matter with Mr. Haffer. The final terms of the settlement, though
agreed and entered into court, are still sub-judice, with the final closing of
the case to be ratified in court in March 2006. In the opinion of management,
the resolution of this lawsuit is not expected to have a material effect on the
Company's financial position, results of operations, or cash flow.
AQUAIR Inc.
The company filed suit in Superior Court of the State of California, Orange
County, against RG GLOBALLIFESTYLES, INC. AQUAIR INC, and LOU KNICKERBOCKER, an
individual, all of Irvine, California. The lawsuit as filed is for defamation,
intentional interference with prospective economic advantage, and false
advertising. We are seeking damages in excess of $10 million. As of December
2005, this matter is in discovery stages of the litigation. As of February 2006,
after a court appearance, we have agreed to amend the complaint. The matter
continues.
World Wide Water LLC
In February 2006, the company was notified about a complaint by World Wide Water
LLC, of Los Angeles CA, claiming breach of contract and patent infringement
allegations. In 2003, the company and World Wide Water LLC recognizing each
others Patents, had entered into a non-compete and mutual collaboration
agreement, with a specific clause restraining both parties from suing each
other. The company has not yet responded or acknowledged the complaint.
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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.
On October 21, 2005, we issued 1,500,000 shares of common stock under private
placement subscriptions at $0.020 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.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS.
None
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
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: February 21, 2006 UNIVERSAL COMMUNICATION SYSTEMS, INC.
/s/ MICHAEL J. ZWEBNER
----------------------------
Michael J. Zwebner
Chief Executive Officer,
Chairman of the Board
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