10QSB 1 usci-10qsb.txt QUARTERLY REPORT 03-31-2003 U.S. SECURITIES AND EXCHANGE COMMISSION Washington D.C. 20549 FORM 10-QSB [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: March 31, 2003 ------------------ [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____________ TO _________ Commission file number: 000-30405 Universal Communication Systems, Inc. ---------------------------------------- (Exact name of small business issuer as specified in its charter) Nevada 4812 860887822 (State or jurisdiction (Primary Standard Industrial (IRS Employer of incorporation Identification No.) Classification or organization) Code No.) 407 Lincoln Rd, Suite 6K Miami Beach, FL 33139 ----------------------- (Address of principal executive offices) (305) 672-6344 (Issuer's telephone number) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------ ------ State the number of shares outstanding of each of the issuer's classes of common equity as of the latest practicable date. Class Outstanding as of May 01, 2003 ----- ----------------------------------- Common Stock, $.001 par value 19,284,204 Transitional Small Business Disclosure Format: Yes No X -------- --------- TABLE OF CONTENTS PART I FINANCIAL INFORMATION Page ---- Item 1. Consolidated Financial Statements: Consolidated Balance Sheet - March 31, 2003 and September 30, 2002 3 Consolidated Statements of Operations for the three months and six months Ended March 31, 2003 and 2002 4 Consolidated Statements of Cash Flows for the three months and six months Ended March 31, 2003 and 2002 5 Notes to the Consolidated Financial Statements March 31, 2003 6 Item 2. Management's Discussion and Analysis or Plan of Operations 7 Item 3. Evaluation Of Disclosure Controls And Procedures 10 PART II OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 11 Item 7. Signatures 12 Certifications 12 2 Part I. FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS
Universal Communication Systems, Inc. Condensed Consolidated Balance Sheets March 31, September 30, 2003 2002 ---- ---- (unaudited) (see note 1) ----------- ------------ Assets Current Assets: Cash & cash equivalents $ 4,942 $ 874 ------------ ------------ Total Current Assets 4,942 874 ------------ ------------ Due from related party, net 1,259 35,456 ------------ ------------ Fixed Assets: Equipment 25,259 25,259 Furniture and fixtures 1,917 1,917 Less: Accumulated depreciation & amortization (18,734) (15,889) ------------ ------------ Total Fixed Assets 8,442 11,287 ------------ ------------ Investment in unconsolidated subsidiaries, net of impairment -- -- Other assets 25,740 11,250 ------------ ------------ Total Assets $ 40,382 $ 58,867 ============ ============ Liabilities and Stockholders' Deficit Current Liabilities: Current maturities of convertible debentures $ 946,449 $ 886,449 Accounts payable, trade 1,054,711 1,078,941 Accrued expenses 178,896 156,978 Due to a related party 137,519 29,791 ------------ ------------ Total Current Liabilities 2,317,575 2,152,159 Long Term Liabilities: Note payable 269,491 254,237 Convertible debentures, net of current maturities 4,192,225 4,123,415 ------------ ------------ Total Long Term Liabilities 4,461,716 4,377,652 ------------ ------------ Total Liabilities 6,779,291 6,529,811 ------------ ------------ Commitments and Contingencies -- -- Stockholders' Deficit: Preferred stock, 10,000,000 shares authorized, no Shares issued and outstanding Common stock, par value $.001 per share, 800,000,000 shares authorized, 11,259,780 issued and outstanding 11,260 5,968 Additional paid-in capital 23,339,687 23,071,546 Accumulated deficit (30,089,856) (29,548,458) ------------ ------------ Total Stockholders' Deficit (6,738,909) (6,470,944) ------------ ------------ Total Liabilities and Stockholders' Deficit $ 40,382 $ 58,867 ============ ============
See notes to condensed consolidated financial statements. 3
Universal Communication Systems, Inc. Condensed Consolidated Statements of Operations UNAUDITED Three Months Ended March 31, Six Months Ended March 31, ---------------------------- -------------------------- 2003 2002 2003 2002 ---------- -------- ---------- --------- Revenue $ - $ - $ - $ - Cost of goods sold - - - - ---------- --------- --------- --------- Gross profit - - - - Operating expenses 234,153 166,989 414,051 369,134 Write down of Assets 26,397 205,181 26,397 205,181 Impairment loss on deposits - 197,506 - 197,506 ---------- --------- --------- --------- Operating (loss) (260,550) (569,676) (440,448) (771,821) Interest expense (51,062) (81,520) (100,949) (163,150) ---------- --------- --------- --------- Net loss $ (311,612) $(651,196) $(541,397) $(934,971) ========== ========= ========= ========= Basic and diluted loss per share $ (0.04) $ (4.44) $ (0.06) $ (6.22) ========== ========= ========= ========= Number of shares used in computing basic and diluted loss per share 8,799,258 146,579 9,248,228 150,294 =========== ========== =========== ===========
See notes to condensed consolidated financial statements. 4 Universal Communication Systems, Inc. Condensed Consolidated Statement of Cash Flows UNAUDITED
For the For the Six Months Six Months Ended Ended March 31, March 31, 2003 2002 ----------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Loss $(541,397) $(934,971) Adjustments to reconcile net loss from operations to net cash used by operating activities: Other comprehensive (loss) -- -- Common stock issued for services 253,229 6,000 Depreciation and amortization expense 2,845 18,712 Interest payable added to principal of debentures and notes 94,269 123,557 Loss on write down of assets 26,397 156,189 Impairment loss -- 197,506 Changes in operating assets and liabilities: (Increase) decrease in prepaid and other (14,490) 48,991 Increase (decrease) in accounts payable and accrued expenses (2,313) 229,228 Increase in cash overdraft -- 1,658 --------- --------- Net Cash (Used) by Operating Activities (181,460) (153,130) --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: (Increase) Decrease in due from related entities 7,800 (98,921) Increase in other assets - deposits -- 4,600 --------- --------- Net Cash (Used) by Investing Activities 7,800 (103,521) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from the issuance of senior secured convertible debentures, net -- 227,770 Proceeds from note payable 60,000 -- Sale of common stock 10,000 40,000 Advances from related parties 107,728 -- Other -- (15,120) --------- --------- Net Cash Provided by Financing Activities 177,728 252,650 --------- --------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 4,068 (4,001) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 874 4,082 --------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,942 $ 81 ========= ========= 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 $ 94,269 $ 123,557
See notes to condensed consolidated financial statements. 5 UNIVERSAL COMMUNICATION SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS NOTE 1 - General and Summary of Business and Significant Accounting Policies. Basis of Presentation The accompanying unaudited condensed financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with instructions to Form 10-QSB and Regulation S-B. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete consolidated financial statements included in this Form 10-QSB. The results of operations for any interim period are not necessarily indicative of results for the full year. These statements should be read in conjunction with the audited financial statements and accompanying notes for the year ended September 30, 2002. The balance sheet at September 30, 2002 has been derived from audited financial statements, but does not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. Background The Company is actively engaged in efforts to revise its business plan, de-emphasize participation in the wireless internet market, and seek new business activities. Reverse Stock Split The Company completed a one-for-one-thousand reverse stock split on August 23, 2002. All share and per share information reflects this reverse stock split. NOTE 2 - GOING CONCERN AND SIGNIFICANT RISKS AND UNCERTAINTIES The Company's financial statements are prepared using generally accepted accounting principles applicable to a going concern which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The Company has experienced losses since inception, and had an accumulated deficit of $30,089,856 at March 31, 2003. Net losses are expected for the foreseeable future. As such, there is substantial doubt as to the Company's ability to continue as a going concern. Management is considering alternatives to its business strategy, including modifications of its business plan and possible sale or licensing of certain assets. Simultaneously, the Company is continuing to secure additional capital through sales of common stock through the current operating cycle. There is no assurance that management will be successful in its efforts. NOTE 3 - BASIC AND DILUTED NET LOSS PER SHARE CALCULATION Loss per common share is calculated in accordance with Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share." Basic loss per share is computed by dividing the loss available to common shareholders by the weighted-average number of common shares outstanding. Diluted loss per share is computed similar to basic loss per share, except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. For the three and six months ended March 31, 2003 and 2002, common stock equivalents have been excluded from the aforementioned computations as their effect would be anti-dilutive. 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS. CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS Except for historical information contained herein, the statements in this report (including without limitation, statements indicating that the Company "expects," "estimates," anticipates," or "believes" and all other statements concerning future financial results, product offerings, proposed acquisitions or combinations or other events that have not yet occurred) are forward-looking statements that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. Forward-looking statements involve known and unknown factors, risks and Uncertainties, which are discussed below and in the Company's other filings with the Securities and Exchange Commission, and which may cause the Company's actual results in future periods to differ materially from forecasted results. Forward looking statements are all based on current expectations, and the Company assumes no obligation to update this information. RISK FACTORS We will require additional capital in the short term to remain a going concern. We will require substantial short term outside investment on a continuing basis to finance our current operations and any limited capital expenditures identified to protect existing investments. Since inception, we have generated little revenue and have incurred substantial expenditures. We expect to continue to experience losses from operations while we reorganize our wireless Internet service system and possibly develop other technologies or activities. In view of this fact, our auditors have stated in their report for the period ended September 30, 2002 that our ability to meet our future financing requirements, and the success of our future operations, cannot be determined at this time. In order to finance our working capital requirements we are negotiating equity investments, but there can be no assurance that we will obtain the required capital or that it will be obtained on terms favorable to us. If we do not obtain short term financing we may not be able to continue as a viable concern. We do not have a bank line of credit and there can be no assurance that any required or desired financing will be available through bank borrowings, debt, or equity offerings, or otherwise, on acceptable terms, if at all. If future financing requirements are satisfied through the issuance of equity securities, investors may experience significant dilution in the net book value per share of common stock. BUSINESS AND ORGANIZATION Universal Communication Systems, Inc. (collectively the "Company", "us" or "we"), prior to 2002, was engaged in activities related to advanced wireless communications, including the acquisition of radio-frequency spectrum internationally. Currently, our activities related to the advanced wireless communications are conducted by our investment in Digital Way, S.A., a Peruvian communication company and former wholly owned subsidiary. We currently hold a twenty seven percent interest in Digital Way, S.A., however, due to a lack of cooperation from their management, our financial results do not include our interest in their activities. We also own a U. S. patent on our Distributed Wireless Call Processing System technology. 7 PROPOSED ACQUISITION On June 12, 2002, we entered into a letter of intent to acquire Card Universal Corporation, Inc., a privately held development stage Florida corporation in the business of providing and marketing prepaid "Stored Money Cards." Management is currently evaluating its options as to the future plans for the Company, its operations and assets. The acquisition is subject to the signing of a definitive agreement, valuation by a third party and to the availability of appropriate financing. As of this report date, no further action has occurred on this transaction. We have advanced $1,259 to Card Universal Corporation, Inc. On March 24, 2003 we announced the formation of AirWater Corporation,as a wholly owned subsidiary. AirWater Corp. will operate in the new field of high tech water extraction from air, and to that end, has acquired international manufacturing and marketing licenses, as well as patent and copyright rights from J.J. Reidy & Co., Inc. of Holden, Mass. J.J. Reidy & Co., Inc. is the registered patent holders of 4 separate patents covering the concept, with others pending in many foreign countries. Under the terms of the agreement, the company will issue 4 million common shares, restricted under SEC rule 144, as well as make a one time cash payment of $100,000 to J.J. Reidy & Co., Inc. In addition, the company has agreed to enter into a royalty agreement with J.J. Reidy & Co., Inc. OUTLOOK We will require short-term outside investment on a continuing basis to finance our current operations and capital expenditures. If we do not obtain short term financing we may not be able to continue as a viable concern. We do not have a bank line of credit and there can be no assurance that any required or desired financing will be available through bank borrowings, debt, or equity offerings, or otherwise, on acceptable terms. If future financing requirements are satisfied through the issuance of equity securities, investors may experience significant dilution in the net book value per share of common stock. Under the auspices of new management installed November, 2001, we have made considerable progress in restructuring prior obligations and removing debt. We are actively engaged in a number of efforts to revise our business plan to develop new revenue sources and direction for the Company. We plan to de-emphasize our participation in the wireless internet market, sell assets for cash and/or advance our remaining businesses through joint ventures, continue our negotiations with creditors to compromise, extend, convert and/or forgive debt, and seek new businesses that can take advantage of our extensive shareholder base and status as a public company. Management is hopeful that it can continue to reach agreements with vendors and foreign partners to resolve disputes and balances due. Management hopes that once these issues are dealt with and the acquisition of Card Universal Corporation is consummated, this will provide for the financial stability of the Company. No assurances can be made that these events will successfully take place. Management expects to meet minimal operating expenses during this period, through a combination of loans, sale of assets and private placement funds. SUBSEQUENT EVENTS On April 30, 2003 we announced the signing of a Letter of Intent to acquire CinemaElectric, Inc., a Los Angeles based Multimedia Messaging Service company for a purchase price of $10 million. 8 RESULTS OF OPERATIONS Three Months and Six Months Ended March 31, 2003 Compared to the Three Months and Six Months Ended March 31, 2002. There were no revenues or cost of sales for the three months and six months ended March 31, 2003 and March 31, 2002. Operating expenses for the three months and six months ended March 31, 2003 amounted to $234,153 and $414,051, respectively, compared to $166,989 and $369,134 for the three months and six months ended March 31, 2002. For both periods, these expenses were primarily consultants, professional fees and rents. Write down of assets in the amount of $26,397 for the three and six months ended March 31, 2003 resulted from the recognition of little or no value in the assets received in payment of the balance of advances to Hard Disc Cafe, Inc. Hard Disc Cafe, Inc. has ceased all operations and distributed its remaining assets to us in satisfaction of advances outstanding. Write down of assets in the amount of $205,181 for the three months and six months ended March 31, 2002 and impairment losses in the amount of $197,506 for those same periods resulted from management's decision to abandon pursuit of foreign ventures entered into by prior management. Interest expense decreased $30,458, from $81,520 for the three months ended March 31, 2002, to $51,062 for the three months ended March 31, 2003. For the six months ended March 31, 2003 and 2002, interest expense decreased $62,201 from $163,150 to $100,949, respectively. The decrease resulted from the conversion by the bondholders of a portion of their debt to common stock during the fiscal year ended September 30, 2002. Net losses for the three months ended March 31, 2003 were $311,612, as compared with $651,196 for the three months ended March 31, 2002. Net losses for the six months ended March 31, 2003 were $541,397, as compared with $934,971 for the six months ended March 31, 2002. The decrease in net losses is primarily attributable to lower write off of assets and no impairment losses in the current period. LIQUIDITY AND CAPITAL RESOURCES On March 31, 2003, our cash position was $4,942 compared to $874 as of September 30, 2002. During the six months ended March 31, 2003, $60,000 was received from a 12% note payable, $107,728 from advances from related parties and $10,000 was received from a subscription for our common stock. These funds were used to pay the cash operating expenses for the six month period ended March 31, 2003. While management restructures the Company, current operating cash is being provided by loans and the sale of common stock. The working capital deficit at March 31, 2003 amounted to $2,312,633. Management is attempting to reduce this deficit through arrangements with creditors. If we do not make satisfactory arrangements with the creditors or obtain short term financing, we may not be able to continue as a viable concern. We do not have a bank line of credit and there can be no assurance that any required or desired financing will be available through bank borrowings, debt, or equity offerings, or otherwise, on acceptable terms, if at all. If future financing requirements are satisfied through the issuance of equity securities, investors may experience significant dilution in the net book value per share of common stock. ITEM 3. EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES Within 90 days prior to the filing of this quarterly report, the Company's Chief Executive Officer and its Chief Financial Officer evaluated the Company's disclosure controls and procedures as required pursuant to Rule 13a-14 under the Securities and Exchange Act of 1934, as amended. Under rules promulgated by the SEC, disclosure controls and procedures are defined as those "controls or other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports filed or submitted by it under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission's rules and forms." Based on this evaluation, the Chief Executive Officer and Chief Financial Officer determined that such controls and procedures are effective in timely alerting them to material information relating to the Company required to be included in the Company's periodic SEC filings. There were no significant changes in internal controls that could significantly affect the disclosure controls and procedures since the date of the evaluation. 9 PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) The following exhibits are included herewith: EXHIBIT NO. DOCUMENT ----------- -------- Exhibit 99.1 Certification of Chief Executive Officer Exhibit 99.2 Certification of Chief Financial Officer (b) The Company filed the following reports on Form 8-K during the quarter for which this form is filed: none. 10 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: May 15, 2003 UNIVERSAL COMMUNICATION SYSTEMS, INC. /s/ MICHAEL J. ZWEBNER ---------------------------- Michael J. Zwebner Chief Executive Officer, Chairman of the Board 11 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the quarterly report on Form 10-QSB of Universal Communication Systems, Inc. (the "Company") for the period ended March 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned, Michael Zwebner, Chief Executive Officer of the Company, hereby certifies, pursuant to 18 U.S.C. section 1350, that: (1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: May 15, 2003 /s/ Michael Zwebner ------------------------- Michael Zwebner Chief Executive Officer 12 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the quarterly report on Form 10-QSB of Universal Communication Systems, Inc. (the "Company") for the period ended March 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned, Curtis Orgil, Chief Financial Officer of the Company, hereby certifies, pursuant to 18 U.S.C. section 1350, that: (1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: May 15, 2003 /s/ Curtis Orgil ------------------------------ Curtis Orgil Chief Financial Officer 13