10QSB 1 universal10qsb.txt QUARTERLY REPORT U.S. SECURITIES AND EXCHANGE COMMISSION Washington D.C. 20549 FORM 10-QSB [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: June 30, 2004 ------------------ [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____________ TO _________ Commission file number: 000-30405 Universal Communication Systems, Inc. ---------------------------------------- (Exact name of small business issuer as specified in its charter) Nevada 4812 860887822 (State or jurisdiction (Primary Standard Industrial (IRS Employer of incorporation Identification No.) Classification or organization) Code No.) 407 Lincoln Rd, Suite 12F Miami Beach, FL 33139 ----------------------- (Address of principal executive offices) (305) 672-6344 (Issuer's telephone number) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------ ------ State the number of shares outstanding of each of the issuer's classes of common equity as of the latest practicable date. Class Outstanding as of July 30, 2004 ----- ----------------------------------- Common Stock, $.001 par value 200,265,556 Transitional Small Business Disclosure Format: Yes No X -------- --------- TABLE OF CONTENTS PART I FINANCIAL INFORMATION Page ---- Item 1. Consolidated Financial Statements: Consolidated Balance Sheet - June 30, 2004 and September 30, 2003 3 Consolidated Statements of Operations for the three months and nine months Ended June 30, 2004 and 2003 4 Consolidated Statements of Cash Flows for the nine months Ended June 30, 2004 and 2003 5 Notes to the Consolidated Financial Statements June 30, 2004 6 Item 2. Management's Discussion and Analysis or Plan of Operations 7 Item 3. Evaluation Of Disclosure Controls And Procedures 10 PART II OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 11 Item 7. Signatures 12 Certifications 12 2 Part I. FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS
Universal Communication Systems, Inc. Condensed Consolidated Balance Sheets June 30, September 30, 2004 2003 ------------ ------------ (unaudited) ASSETS Current Assets: Cash & cash equivalents $ 128,047 $ 144,682 Accounts receivable, net 115,876 105,859 Due from officer (net) -- -- Note and other receivable 338,180 116,782 Inventory, finished goods 67,136 4,900 Prepaid expenses 10,875 35,185 ------------ ------------ Total Current Assets 660,114 407,408 ------------ ------------ Property, Plant and Equipment Furniture and equipment 340,452 64,838 Less: Accumulated depreciation 30,906 21,579 ------------ ------------ Total Fixed Assets, Net 309,546 43,259 ------------ ------------ Other Assets: Patents 606,714 606,714 Deposits 54,856 4,600 ------------ ------------ Total Other Assets 661,570 611,314 ------------ ------------ Total Assets $ 1,631,230 $ 1,061,981 ============ ============ LIABILITIES AND STOCKHOLDERS' DEFICIT Current Liabilities: Bank overdraft advance $ 82,053 $ 25,721 Accounts payable 309,731 195,538 Accrued expenses 591,868 360,805 Notes payable 60,000 344,746 Liabilities of discontinued operations 946,794 946,794 Due to related parties 39,326 93,308 Due to officer 379,323 11,363 ------------ ------------ Total Current Liabilities 2,409,095 1,978,280 Long-term Liabilities: Convertible debentures 2,468,193 4,446,996 ------------ ------------ Total Liabilities 4,877,288 6,425,276 ------------ ------------ Commitments and Contingencies -- -- ------------ ------------ Stockholders' Deficit: Series A 8% Cumulative Convertible Preferred stock, par value $.001 per share, 10,000,000 shares authorized, 30,000 issued and outstanding 30 -- Common stock, par value $.001 per share, 800,000,000 shares authorized, 155,346,216 and 81,223,000 shares issued and outstanding 155,346 81,223 Additional paid-in capital 31,056,676 26,482,580 Accumulated deficit (34,364,610) (31,833,598) Account receivable stockholder (93,500) (93,500) ------------ ------------ Total Stockholders' Deficit (3,246,058) (5,363,295) ------------ ------------ Total Liabilities and Stockholders' Deficit $ 1,631,230 $ 1,061,981 ============ ============
See notes to condensed consolidated financial statements. 3
Universal Communication Systems, Inc. Condensed Consolidated Statements of Operations UNAUDITED Three Months Ended June 30, Nine Months Ended June 30, ---------------------------- -------------------------- 2004 2003 2004 2003 ---------- -------- ---------- --------- Revenue and other income $ 220,529 $ - $ 449,856 $ - Cost of goods sold 250,051 - 275,221 - ---------- --------- --------- --------- Gross profit (29,522) - 177,635 - Operating expenses Sales and marketing 213,275 - 904,015 - Product development 33,324 - 159,228 - General and administrative 498,019 503,609 1,373,676 917,660 Write down of Assets - - - 26,397 ---------- --------- --------- --------- Operating (loss) (774,140) (503,609) (2,259,284) (944,057) Interest expense (42,456) (51,886) (266,728) (152,836) ---------- --------- --------- --------- Net loss $ (816,596) $(555,495) $(2,526,012) $(1,096,893) Dividend on Preferred Stock 5,000 - 5,000 ---------- --------- --------- --------- Net Loss Applicable to Common Shares $ (821,596) $(555,495) $(2,531,012) $(1,096,893) ========== ========= ========= ========= Basic and diluted loss per share $ (0.01) $ (0.02) $ (0.02) $ (0.08) ========== ========= ========= ========= Number of shares used in computing basic and diluted loss per share 151,069,803 29,813,878 119,866,510 14,457,539 =========== ========== =========== ===========
See notes to condensed consolidated financial statements. 4
Universal Communication Systems, Inc. Condensed Consolidated Statement of Cash Flows UNAUDITED For the For the Nine Months Nine Months Ended Ended June 30, June 30, 2003 2003 ------------------ ----------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Loss $ (2,526,012) $ (1,096,893) Adjustments to reconcile net loss from operations to net cash used by operating activities: Common stock issued for services 1,006,828 686,898 Depreciation and amortization expense 9,217 4,267 Interest payable added to principal of debentures and notes 63,979 119,027 Interest accretion 15,254 22,881 Loss on write down of assets - 26,397 Changes in operating assets and liabilities: (Increase) in accounts receivable (222,726) - (Increase) in inventory (62,236) - (Increase) in prepaid and other (25,946) (38,365) Increase in accounts payable and accrued expenses 340,256 22,824 Increase in cash overdraft 56,332 - ------------------ ----------------- Net Cash (Used) by Operating Activities (1,345,054) (252,964) ------------------ ----------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of equipment (275,504) (3,303) ------------------ ----------------- Net Cash (Used) by Investing Activities (275,504) (3,303) ------------------ ----------------- CASH FLOWS FROM FINANCING ACTIVITIES: Notes Receivable (8,689) (34,500) Proceeds from sale of Preferred Stock 300,000 - Proceeds from note payable - 70,000 Sale of common stock 1,298,639 192,942 Common Stock subscription proceeds - 334,475 Payment of note payable (300,000) - Increase in due to related parties, net 313,973 - ------------------ ----------------- Net Cash Provided by Financing Activities 1,603,923 475,674 ------------------ ----------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (16,635) 219,407 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 144,682 874 ------------------ ----------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $128,047 $220,281 ================== ================= SUPPLEMENTAL DISCLOSURES OF CASH: Interest paid $ - $ - Income taxes paid $ - $ - SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES: Interest accrued on debentures, added to the principal of the debentures $ 63,979 $119,027 Debentures converted to common stock $2,042,782 $407,638 Preferred stock dividend accrued $ 5,000 -
See notes to condensed consolidated financial statements. 5 UNIVERSAL COMMUNICATION SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS NOTE 1 - General and Summary of Business and Significant Accounting Policies. Basis of Presentation The accompanying unaudited condensed financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with instructions to Form 10-QSB and Regulation S-B. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete consolidated financial statements included in this Form 10-QSB. The results of operations for any interim period are not necessarily indicative of results for the full year. These statements should be read in conjunction with the audited financial statements and accompanying notes for the year ended September 30, 2003. The balance sheet at September 30, 2003 has been derived from audited financial statements, but does not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. Background The Company is currently focusing its operations on the design, manufacture and sale of water production and generation systems along with solar power systems. Reverse Stock Split The Company completed a one-for-one-thousand reverse stock split on August 23, 2002. All share and per share information reflects this reverse stock split. NOTE 2 - GOING CONCERN AND SIGNIFICANT RISKS AND UNCERTAINTIES The Company's financial statements are prepared using generally accepted accounting principles applicable to a going concern which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The Company has experienced losses since inception, and as such, there is substantial doubt as to the Company's ability to continue as a going concern. The Company is continuing to secure additional capital through sales of common stock through the current operating cycle. There is no assurance that management will be successful in its efforts. NOTE 3 - BASIC AND DILUTED NET LOSS PER SHARE CALCULATION Loss per common share is calculated in accordance with Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share." Basic loss per share is computed by dividing the loss available to common shareholders by the weighted-average number of common shares outstanding. Diluted loss per share is computed similar to basic loss per share, except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. For the nine months ended June 30, 2004 and 2003, common stock equivalents have been excluded from the aforementioned computations as their effect would be anti-dilutive. NOTE 4 - PREFERRED STOCK On April 19, 2004, the Company sold 30,000 shares of Series A 8% Convertible Preferred Stock and Warrants to purchase 4,545,455 shares of common stock for which it received net proceeds of $300,000. The Series A Convertible Preferred Stock, with a face value of $300,000, is convertible into common stock at $0.033 per share. The Warrants are exercisable at $0.05 per share until April 19, 2009. Preferred stock dividends related to the Series A 8% Convertible Preferred Stock amounted to $5,000 for the period April 19, 2004 to June 30, 2004. As of June 30, 2004, the total amount of unpaid and undeclared dividends was $5,000. 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS. CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS Except for historical information contained herein, the statements in this report (including without limitation, statements indicating that the Company "expects," "estimates," anticipates," or "believes" and all other statements concerning future financial results, product offerings, proposed acquisitions or combinations or other events that have not yet occurred) are forward-looking statements that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. Forward-looking statements involve known and unknown factors, risks and uncertainties which may cause our actual results in future periods to differ materially from forecasted results. Forward looking statements are all based on current expectations, and we assume no obligation to update this information. RISK FACTORS For the past two fiscal years we have had minimal revenues. We have a history of losses, and an accumulated shareholder deficit of $34,364,610. Because of our recurring losses, our independent auditors have expressed doubt as to our ability to continue as a going concern. We will require additional capital in the short term to remain a going concern. We will require substantial short term outside investment on a continuing basis to finance our current operations and any limited capital expenditures identified to protect existing investments. Our revenues for the foreseeable future may not be sufficient to attain profitability. Since inception, we have generated little revenue and have incurred substantial expenditures. We expect to continue to experience losses from operations while we develop the Air - Water and photo voltaic businesses. In view of this fact, our auditors have stated in their report for the period ended September 30, 2003 that our ability to meet our future financing requirements, and the success of our future operations, cannot be determined at this time. In order to finance our working capital requirements we are negotiating equity investments, but there can be no assurance that we will obtain the required capital or that it will be obtained on terms favorable to us. If we do not obtain short term financing we may not be able to continue as a viable concern. Although one of our subsidiaries has a bank account overdraft facility, we do not have a bank line of credit and there can be no assurance that any required or desired financing will be available through bank borrowings, debt, or equity offerings, or otherwise, on acceptable terms, if at all. If future financing requirements are satisfied through the issuance of equity securities, investors may experience significant dilution in the net book value per share of common stock. We are currently focusing our operations on the design, manufacture and sale of water production and generation systems along with solar power systems. There are no assurances that this business activity will be successful, that we will be able to identify and sell to the market and that the market will respond to our product line. PLAN OF OPERATION FOR THE NEXT 12 MONTHS ---------------------------------------- Our cash position at June 30, 2004 is $128,047. This is only sufficient to provide coverage for two months of operating cash needs, based on the current reporting period's negative cash flow from operations. However, our Chairman, in connection with Port Universal Ltd., a company in which he owns a one third interest, has agreed to provide funding as needed until our sales activities are sufficient to cover our cash flow needs. This agreement by our Chairman and Port Universal is not a binding obligation; we have no assurances that this funding 7 will continue beyond the short term. Further, based on current sales volume and our projections, we anticipate that by December 31, 2004, our subsidiaries should have sufficient revenues that we will not require funding from equity sales. With the acquisition of Millenium (described later) and the company's new business focus, we have been able to obtain private placement funding to finance our activities in these fields. We anticipate continuing to receive operating funds from private placement sales of our common stock, until such time as product sales are sufficient to support the organization, however no assurances can be made that we will be able to find willing investors. We are also relying upon the same private placement funding to provide the cash required to consumate the proposed GiroSolar acquisition described later. Except for the GiroSolar acquisition, described later, we do not have any major expenditures planned, nor do we anticipate the purchase or sale of plant and / or significant equipment. Our plan calls for the use of third party contract manufacturers, thus avoiding the allocation of our resources into manufacturing operations. We anticipate funding any sizeable orders for either AirWater equipment or Photovoltaic installations, through deposits and advances from customers. Subsequent to this reporting period, we have placed a $100,000 deposit with one of our contract manufacturers. We do not anticipate any substantial change in the number of employees in the near term for our existing operations. We have several potential sizeable contracts in the sales process. Should these contracts be awarded, we will need to raise additional equity or arrange for financing vehicles to fund those contracts. Any equity raised could result in dilution of existing shareholders. Additionally, we are uncertain as to the availability of sufficient financing on acceptable terms. BUSINESS AND ORGANIZATION Universal Communication Systems, Inc. (collectively the "Company", "us" or "we"), prior to 2002, was engaged in activities related to advanced wireless communications, including the acquisition of radio-frequency spectrum internationally. Currently, our activities related to the advanced wireless communications are conducted by our investment in Digital Way, S.A., a Peruvian communication company and former wholly owned subsidiary. We currently hold a twenty seven percent interest in Digital Way, S.A., however, due to a lack of cooperation from their management, our financial results do not include our interest in their activities. Management is actively searching for a buyer of the investment in this subsidiary. All investments and advances made to this subsidiary have been fully reserved through valuation allowances. We also own a U. S. patent on our Distributed Wireless Call Processing System technology. We currently have three channels of activity, each conducted by a wholly owned subsidiary. AirWater Corporation, ("AirWater") a Florida corporation formed in March, 2003, has been established to design, manufacture (utilizing contract manufacturing organizations) and market systems that perform water extraction from air. Millennium Electric T.O.U. Ltd., ("Millenium") an Israeli company, acquired September, 2003, specializes in the development and installation of solar power systems worldwide, primarily to government and industrial users. Solar One, Inc., ("Solar One") a Florida corporation, formed in July, 2003, manufactures (subcontracted to third parties) and markets portable photovoltaic cells in leather cases for consumer electronic products. Solar One was formed to source the manufacturing and to market the product line of photovoltaic consumer energy panel products designed by Solar Style, Ltd., an Israeli company owned by us. We have recently combined the technology of the photovoltaic system of Millenium and the water extraction systems of AirWater and developed a self powered air water machine. Airwater's initial action was to obtain licensing rights to the technology. To that end, we acquired four patents by agreement dated March 24, 2003, relating to this technology from J. J. Reidy Company of Holden, Massachusettes. Under the terms of the agreement, we paid $300,000, and we are obligated to pay a royalty 8 payment of between 5 to 7.5% on all sales of equipment which uses the patented technology. Of the $300,000, $100,000 was paid in cash, and the balance of $200,000 was settled by the issuance of restricted common shares. Beginning in March 2003 we pursued various consulting, marketing and sales agreements. The activities covered by these agreements include, product design, electrical and mechanical engineering, systems integration, research and development, conceptual designs, global contacts, mergers and acquisitions, product and company publicity, marketing, sales and general business consulting. Our plan for development of the AirWater and Photovoltaic product lines call for utilizing outside consultants and agents to assist and/or perform the manufacturing, marketing, sales and integration of our products to the end users. In certain global areas where electricity and/or gas power sources are either not available or in short supply, there is a need for a power alternative to conventional sources. As previously mentioned, on September 29, 2003 we completed the acquisition of Millennium to fulfill this technological need of providing Photo Voltaic (PV) Electric Energy to provide the necessary power for the air-water system. Millenium and its president, Mr. Ami Elazari, operate in the forefront of the high technology field of solar energy, solar panels, and solar powered consumer products. The Company and Mr. Elazari are the holders of more than 21 international patents relating to both Photo Voltaic ("PV") and solar energy systems and products. NEW PRODUCTS In line with our new business plans, AirWater engaged engineers and product development experts to both enhance existing technologies, and to develop new systems and applications. In this regard, the company announced on October 23, 2003 that it had developed a new special Multi Head Dispenser Air to Water system for the marine and Boating industry. INTERNATIONAL SALES AND MARKETING We are focusing our sales efforts in the European, African, Middle Eastern and Asian government and industrial markets for the AirWater and Millenium product and service offerings. Solar One is targeting the North American and European consumer markets. Our sales strategy is to engage independent sales consultants, who are commission based, and thus create a more extensive marketing and networking program than that which could be achieved using an employee based salesforce alone. Since the company started marketing AirWater Machines and Systems, we have made inroads into many international markets. Sample machines have been shipped to Mexico, Los Angeles, Huntsville, Brazil, France, Cameroon, Australia, China, Switzerland, Jordan, Iraq, etc. We have received positive feedback from these demo placements, with an indication of order placements to be forthcoming. We are concentrating our sales and marketing efforts on making large "country sized" sales to governments, federal and local authorities, as well as to international aid agencies. We recognize that because of the complexity of the product, the sales cycle of the AirWater products and systems are somewhat longer than was previously projected. However, management remains confident that sizeable international orders for the machines will occur in 2004 or early 2005. On December 15, 2003, we signed a memorandum of understanding to effect a licensing transaction with an Australian Group for the manufacture and or assembly of AirWater machines and PV Solar Panels in Australia. This transaction secured a one time technology fee, due to us, of $200,000 with Royalty residuals of 5 percent on all manufactured and sold products. In early January, 2004, we received the first installment payment of $10,000 pursuant to this agreement. The balance is due over the following eighteen months, however, no further payments have been received since that initial payment. 9 LISTING ON FOREIGN EQUITIES EXCHANGE On December 1, 2003, the company obtained a listing on the Berlin Exchange in Germany. The company was allocated a trading symbol UCV. Subsequent to this, we have engaged the services of the Geneva Group, an entity with expertise in marketing and corporate promotions, to bring to the German investor an awareness of our business, as well as an awareness of our stock listing in the German exchange. We have been advised that we do not have any regulatory filings in connection with this listing beyond what is required for our United States securities filings. OVERSEAS OFFICES AND STRATEGIC PARTNERSHIPS. In line with marketing and sales needs of AirWater and PV Solar Products, we have opened operational offices in Geneva Switzerland and Paris France through strategic partnerships with existing businesses in those locales. In addition, we have set up representation in Mexico, Brazil, Morocco, China, and in several countries in Africa. Millennium has signed several agreements with strategic partners worldwide: GiraSolar in Holland, Capsolair in Morocco, Team Millennium Group in Sydney Australia, Digital Light in Los Angeles, USA, Jumao Photonic in Korea, and with a subsidiary of PetroChina in China. All of these agreements are for selling a combination of know-how and international marketing licenses. We anticipate that these agreements will result in sales through this network in the near future. These agreements are an integral part of Millennium's Strategic vision for creating a group of international satellite companies working under the Universal Communication Systems, Inc. corporate umbrella which is planned will provide a more extensive marketing and buying power program than that which could be achieved by an employee based sales force. Millennium is also in the process, as part of our group of companies, of establishing new entities for the sale of Solar Style products. The first, Solar One, Inc., USA, (dba Solar Style, Inc.) for which we have recently opened an office in Baltimore and are planning to open a warehouse, will form the basis of the targeted North American distribution network. RESEARCH & DEVELOPMENT PROJECTS IN PROCESS Effective January, 2004 to the present, Millennium has been working on 6 projects within the 5th and 6th framework of the European Commission. These projects are: First project - "Development of a solar distillation waste water treatment plant for olive oil mills" in Crete. Millennium's share of the budget for the first year is 126,000 Euro (USD $102,231). Second project - "Remote Monitoring for Renewable energy systems". Millennium's share of the budget for the first six months is 39,713 Euro (USD $32,222). Third project - "High Efficiency low cost solar cells". Millennium's share in the budget for the fist six months is 16,965 Euro (USD $13,765). Fourth project - "Development of Innovated Quality assurance measures to improve the efficiency of solar panel production." Millennium's share in the budget for the first six months is 4,470 Euro (USD $3,627). Fifth project - "Development of an Integrated solar system for Buildings". In this project Millennium is the coordinator. The budget totals 931,000 Euro (USD $755,376). In addition, Millennium received approval for a new "reflect " project as the coordinator with 908,000 euro (USD $736,715) budgeted for the next 24 months. 10 Millenium has developed, manufactured and sold a Solar Powered Gasoline Pump to the Israeli Army which will be used for tanks and armored personnel carriers. Another project our engineers are working on, is PV Solar Powered Traffic Lights for the municipality of Herzelia. The company also recently signed an R&D agreement with the Netafim Company - a leading manufacturer for computerized irrigation systems. This project involves the development and installation of a PV Solar Energy System that will heat and cool plant roots in order to boost plant fertility. GERMAN MARKET AND OTHER WORLDWIDE ACTIVITIES Millennium recently secured a contract for Millennium Brand PV Solar Panels for delivery in Germany. More than 300 panels have already been supplied and delivered to the customer. During the current reporting period, Millennium experienced some problems in sourcing sufficient Solar Cells for the manufacture of the PV Solar modules required under this contract. The shortage of Solar Cells is a world wide problem, with strong demand for Solar Panels dictating the demand and the prices. As a result, the company was forced to cut back on production and we have not been able to supply as many panels as required under existing contracts. Management expects that the Solar Cells shortage problem will resolve itself on a global basis, and that full PV Solar Panel production will resume in the fall. Millennium is working on a solar desalination project in Heraklion, Crete, pursuant to one of the EU projects. After successful completion of the project for the Cross Israel Highway, we have received a maintenance contract with a monthly revenue stream. In connection with the highway projects, we are awaiting confirmation for participation in the next phase of the Cross Israel Highway, which has a value of about $200,000. Holland - in connection with GiraSolar (Solar Service Buro and Stroomwerk) we are marketing Solar Panels to the Dutch market. China - our marketing efforts have resulted in an OEM agreement for local manufacture of PV Solar Panels under the exclusive brand name of "Millennium Electric" and a joint venture agreement to PhotoVoltaic "Solarize" the first two PetroChina gas stations, one in Beijing and one in Shanghai. The estimated value is about $100,000 per gas station. With 1,000 additional gas stations that potentially may be outfitted, the overall project could have a value of up to $100 million dollars. Although we are pursuing this contract, there is no assurance that we may secure this contract. Beginning in June of 2003, we have worked to design, research and develop as well as source the manufacture of our AirWater machines. With completion of our product line design and reaching manufacturing agreements with third party contract manufacturers, we are now conducting a worldwide sales and marketing program. We are employing outside sales agents to achieve better market penetration. PRODUCT AND MARKETING STRATEGY We have chosen to concentrate our sales and marketing efforts on making large "country sized" sales to governments, federal and local authorities, as well as to aid agencies globally. We have entered into agreements with sales and marketing agents in our target countries. We have realized that because of the complexity of the product, the sales cycle of the AirWater products and systems are somewhat longer than what was previously anticipated. However, we remain confident that large "country sized" international orders for our AirWater machines will be secured through these efforts. In the process of developing our product line, we have determined that the longer sales cycle is due mainly to a number of factors, primarily: 11 1) We are still developing the products based on existing research we are performing and feedback we receive from potential users; 2) Improve the efficiency, and both lower the purchase costs, as well as running costs of the air to water systems; 3) the company needs to develop, build, and perfect customer friendly machines; and 4) the company is at all times aware of the need for the safety factor. In this regard, we have conducted testing of machine models with the relevant government agencies responsible for the quality, industrial and commercial international standards the potential buyer expects. This process is both expensive and time consuming. Management remains very confident that in the short term, we will overcome the obstacles presented by these issues and be able to offer the appropriate machine to all potential markets. During this reporting period, management traveled to both China and Israel, to monitor the planning and production of the AirWater machines, and to ensure that top quality units will be produced for our target customers. Various new enhancements and modifications, that will positively affect the quality of the products, were implemented, and management believes that these new changes will ensure a better sales opportunity and improved sales results. ACQUISITIONS GiraSolar --------- On September 17, 2003, we announced that we have entered into a letter of intent to acquire a 51% interest in GiraSOLAR, BV, a Dutch company that operates and specializes in the photo voltaic solar energy industry. This Dutch group is composed of two separate operating subsidiaries, Stroomwerk Energy (SWE) and Solar Service Buro (SSB).The company is currently doing its due diligence and legal preparatory work, in anticipation of closing the acquisition. Solar Style Ltd. (Israel) ------------------------- In connection with our acquisition of Millenium on September 29, 2003 as previously reported, we acquired 50% of Solar Style Ltd. (Israel). On January 29, 2004, we issued 500,000 shares of common stock plus a 2 year warrant to purchase 1 million additional shares of our common stock at an exercise price of 10 cents per share, for the remaining 50% of Solar Style Ltd. (Israel). Solar Style Ltd. is in the business of designing, manufacturing and marketing consumer styled PV solar chargers. The company does not have any sales or assets, other than product designs and licensing/manufacturing agreements. Solar Style Ltd., has developed, and is contracting to manufacture and bring to market solar powered products for the portable consumer markets. Solar Style's technology converts solar energy into electricity, and has developed a solution that charges mobile devices by a small portable photovoltaic solar panel, which is designed to fit in an elegant leather case for high consumer appeal. Solar Style manufactures the panels and carrying-cases, which are then assembled together to be sold as one unit. The panels can be easily plugged into solar cells, and charged outdoors by sunlight and indoors by electric light. The photovoltaic cells act as battery chargers allowing a non-dependant use of the mobile device, making batteries / battery- chargers redundant. 12 Sales and marketing efforts commenced during this reporting period. The company has published full page advertisements in major newspapers in several Caribbean countries and is in the process of appointing distributors. In addition, the company has sourced alternate manufacturers to ensure a steady and reliable supply of product for the anticipated growth in sales. We anticipate commencing product shipments in the following quarter. RESULTS OF OPERATIONS Three Months and Nine Months Ended June 30, 2004 Compared to the Three Months and Nine Months Ended June 30, 2003. Revenues and cost of sales for the three months and nine months ended June 30, 2004 and June 30, 2003 were generated primarily by our subsidiary, Millenium. Operating expenses for the three months and nine months ended June 30, 2004 amounted to $774,140 and $2,259,284, respectively, compared to $503,609 and $944,057 for the three months and nine months ended June 30, 2003. For both periods, these expenses were primarily consultants, professional fees and rents. The increases of $270,531 and $1,315,227, respectively, were due to marketing expenses, legal fees, R&D costs and travel expense which was not incurred in the prior period as a result of the AirWater and Millenium activities new to the company. Interest expense decreased $9,430, from $51,886 for the three months ended June 30, 2003, to $42,456 for the three months ended June 30, 2004. For the nine months ended June 30, 2004 and 2003, interest expense increased $113,892 from $152,836 to $266,728. The decrease for the three months ended June 30, 2004, resulted from the conversion by the bondholders of a portion of their debt to common stock during the period. The increase for the nine months ended June 30, 2004, resulted from an adjustment accrual to the 8% convertible debentures which was recorded in December, 2003 and the accretion of interest imputed on the Andrews Corporation note payable, which was paid April 2004. Net losses for the three months ended June 30, 2004 were $821,596, as compared with $555,495 for the three months ended June 30, 2003. Net losses for the nine months ended June 30, 2004 were $2,531,012, as compared with $1,096,893 for the nine months ended June 30, 2003. The increase in net losses is primarily attributable to sales and marketing and product development costs incurred in the current fiscal year which were not incurred in the prior fiscal year. LIQUIDITY AND CAPITAL RESOURCES At June 30, 2004, our cash position was $128,047 compared to $144,682 as of September 30, 2003. Cash used in operating activities for the nine months ending June 30, 2004, compared to the nine months ending June 30, 2003 were $(1,345,054) and $(252,964) respectively. The primary use of these funds resulted from operating losses and increase in receivables. Cash employed in investing activities amounted to $(275,504) for the nine months ended June 30, 2004 compared to cash used in investing activities for the nine months ending June 30, 2003 of ($3,303). The use of funds in investing activities for the period ending June 30, 2004 resulted from the purchase of equipment. Cash provided by financing activities for the nine month periods ending June 30, 2004 and 2003 were $1,603,923 and $475,674 respectively. For both periods these amounts were derived from the sale of our common stock. As previously reported, we completed the agreement to purchase 100% of the stock of Millennium Electric T.O.U. Ltd (Millennium), an Israeli company on September 29, 2003. Millenium specializes in the development and installation of solar power systems to international markets. Our purchase cost plus net liabilities assumed, resulted in $300,064 of intangibles in the form of patent costs, for which no impairment has been 13 recognized. No amortization is recorded in the year ended September 30, 2003, or during the nine months ended June 30, 2004. Millennium's assets and liabilities are included in our consolidated balance sheets at September 30, 2003 and June 30, 2004. Millennium's results of operations are included in our consolidated statements of operations for the three months and nine months ended June 30, 2004. However, Millennium's results are not included in our consolidated statements of operations for the three months and nine months ended June 30, 2003. The following pro forma data is presented on a combined basis, as if Millennium had been acquired as of October 1, 2002:
Three Months Ended June 30, Nine Months Ended June 30, --------------------------- -------------------------- 2004 2003 2004 2003 ----------- ----------- ----------- ----------- Revenues $ 220,529 $ 25,315 $ 449,856 $ 58,867 Expenses 1,037,125 589,094 2,975,868 1,179,435 ----------- ----------- ----------- ----------- Net (Loss) $ (816,596) $ (563,779) $(2,526,012) $(1,120,568) =========== =========== =========== =========== Basic & Diluted Loss per Share $ (0.01) $ (0.02) $ (0.02) $ (0.08) =========== =========== =========== ===========
Corporate Funding: The company chairman, Michael J Zwebner has arranged for substantial funding from his personal resources and from an entity that he owns 33% of and controls: Port Universal Corp.("PUC") This entity has invested in excess of $600,000 cash into the company for a growing equity position. Mr. Zwebner has invested over $500,000 of his funds this reporting period. Mr Zwebner has assured the company that absent other outside investors, PUC along with his personal investments will continue to finance the company in its period of growth until the company and its subsidiaries generate sufficient cash flow from operations to sustain working capital needs. While management restructures the Company and builds the water production and generation systems business along with solar power systems business, current operating cash is being provided by loans and the sale of common stock. Management is attempting to reduce the current working capital deficit through arrangements with creditors. If we do not make satisfactory arrangements with the creditors or obtain short term financing, we may not be able to continue as a viable concern. We do not have a bank line of credit, other than an overdraft facility at Millenium, and there can be no assurance that any required or desired financing will be available through bank borrowings, debt, or equity offerings, or otherwise, on acceptable terms, if at all. If future financing requirements are satisfied through the issuance of equity securities, investors may experience significant dilution in the net book value per share of common stock. We do not have any off-balance sheet arrangements. ITEM 3. EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES As of the end of the period covered by this quarterly report, the Company's Chief Executive Officer and its Chief Financial Officer evaluated the Company's disclosure controls and procedures as required pursuant to Rule 13a-14 under the Securities and Exchange Act of 1934, as amended. Under rules promulgated by the SEC, disclosure controls and procedures are defined as those "controls or other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports filed or submitted by it under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission's rules and forms." Based on this evaluation, the Chief Executive Officer and Chief Financial Officer determined that such controls and procedures are effective in timely alerting them to material information relating to the Company required to be included in the Company's periodic SEC filings. There were no changes in internal controls and procedures since the date of the evaluation. 14 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On August 26, 1999, we filed suit against Credit Bancorp, in U.S. District Court in San Francisco, regarding improprieties on the part of Credit Bancorp relating to a loan. The case was settled on October 11, 1999. As part of the settlement agreement, Credit Bancorp agreed to convert the original loans granted to us to a convertible debenture in the amount of $740,000. On October 11, 1999, we issued a convertible unsecured debenture for $740,000 to Credit Bancorp in settlement of this obligation. The terms of this convertible unsecured debenture are 7% interest per annum payable, semiannually on the last day of February and September, with the principal due September 30, 2002. All amounts of unpaid principal and accrued interest of this debenture are convertible at any time at the conversion price of $1,600 per share of unregistered, restricted shares of our common stock. Credit Bancorp has agreed to convert principal and accrued interest owing on the debenture into 483 shares of our common stock. In November 1999, the SEC filed suit against Credit Bancorp alleging violations of various securities laws in connection with its actions in relation to us and others, and seeking various forms of relief including disgorgement of its illegal gains. A receiver has been appointed to administer the affairs of Credit Bancorp. We have been informed that the appointed receiver denies that such a conversion request was made and that the principal amount and accrued interest of the debenture are due. We currently carry the 483 share obligation in our equity under escrowed shares. No provision for debenture, principal and accrued interest has been made in our financial statements, as we believe the receiver's claim is unfounded and the company will prevail. The matter remains unresolved at June 30, 2004. On August 7, 2003, Electric Gas & Technology of Dallas, Texas ("ELGT"), published a press announcement claiming that a complaint and $60 million lawsuit had been filed in Federal court in Texas (identified in the court records as Federal District Court, Northern District of Texas -- Dallas Division Cause No. 3-03CV-1798-G). Their press release stated that we had infringed on their patents. Counsel has advised us that their claims lacked substance. On November 24, 2003, the court granted our motion for dismissal due to lack of Texas jurisdiction. ELGT has similar suits filed against other companies in the same industry. We filed a counter claim in the United States District Court, Southern District of Florida, case number 03-22196-Civ-Seitz, disputing ELGT's claims of patent infringement and as a result of statements published in their press releases, we included in our complaint $118 million in damages against both ELGT and its president, Mr. Dan Zimmerman, for their false, defamatory and libelous statements. On January 24, 2004, we were granted a default judgement against ELGT and Mr. Zimmerman, as a result of their failure to appear, answer or respond to the complaint. With respect to the defamation and libel action, at a hearing in March, 2004, the Court awarded a Default Judgement against ELGT and Mr. Zimmerman to the company and requested that the company submit a claim of losses and damages. We submitted a claim of losses and damages in the amount of $82 million. In regard to the claimed patent infringement action we filed against ELGT, in May, 2004, the court ordered all parties to go to mediation in an attempt to reach a settlement. A trial date has been set by the court in June, 2005. ELGT has made an offer of settlement, which we have rejected. We are currently conducting discovery in preparation for mediation scheduled for late September, 2004. ITEM 2. CHANGES IN SECURITIES. Sales of Unregistered Securities -------------------------------- We have issued and sold unregistered securities that have not previously been reported as set forth below. An underwriter was not utilized in any of these 15 transactions. The recipients of securities in each transaction represented their intention to acquire the securities without a view to distribution. All the issued securities were restricted securities under Rule 144, Reg. D or Reg. S regulations, and appropriate restrictive legends were affixed to the securities in each transaction. All sales of securities were to accredited investors in private placements, and accordingly all of the sales complied with Section 4(2) as well as 4(6) of the Securities Act of 1933. On April 1, 2004, we issued 5,000,000 shares of common stock under a private placement subscription at $0.04 per share. These securities were issued to Port Universal Ltd., an entity in which the Chairman owns 33.3%, in a transaction exempt from registration under the Securities Act of 1933 in reliance on Sections 4(2) and 4(6) of the Securities Act of 1933. On April 5, 2004, we issued 400,000 shares of common stock under a private placement subscription at $0.05 per share. These securities were issued in a transaction exempt from registration under the Securities Act of 1933 in reliance on Sections 4(2) and 4(6) of the Securities Act of 1933. In connection with this transaction, we paid a commission of 10% to a third party. On April 8, 2004, we issued 5,000,000 shares of common stock under a private placement subscription at $0.04 per share. These securities were issued in a transaction exempt from registration under the Securities Act of 1933 in reliance on Sections 4(2) and 4(6) of the Securities Act of 1933. On April 19, 2004, we sold, at $10 per share, 30,000 shares of Series A 8% Convertible Preferred Stock and Warrants to purchase 4,545,455 shares of common stock. The Series A 8% Convertible Preferred Stock is convertible into common stock at $0.033 per share. The Warrants are exercisable at $0.05 per share and expire April 19, 2009. On April 25, 2004, we cancelled a certificate in the amount of 2,400,000 shares of our common stock issued in connection with our agreement with Natra Advanced Technologies (1995) Ltd., as part of our cancellation of that agreement. On April 26, 2004, we issued 1,546,710 shares of common stock under private placement subscriptions at $0.05 per share. These securities were issued in transactions exempt from registration under the Securities Act of 1933 in reliance on Sections 4(2) and 4(6) of the Securities Act of 1933. In connection with these transactions, we paid a commission of 10% to a third party. On May 20, 2004, we issued 125,000 shares of common stock at $0.04 per share and 100,000 shares of common stock at $0.05 per share under private placement subscriptions. These securities were issued in transactions exempt from registration under the Securities Act of 1933 in reliance on Sections 4(2) and 4(6) of the Securities Act of 1933. These securities were issued to our Chairman to replace shares or funds he had advanced to the subscription holders. On May 24, 2004, we issued 766,460 shares of common stock under private placement subscriptions at $0.05 per share. These securities were issued in transactions exempt from registration under the Securities Act of 1933 in reliance on Sections 4(2) and 4(6) of the Securities Act of 1933. In connection with these transactions, we paid a commission of 10% to a third party. On June 01, 2004, we issued 218,071 shares of common stock under private placement subscriptions at $0.05 per share. These securities were issued in transactions exempt from registration under the Securities Act of 1933 in reliance on Sections 4(2) and 4(6) of the Securities Act of 1933. In connection with these transactions, we paid a commission of 10% to a third party. 16 Other Securities Transactions ----------------------------- Pursuant to the April 14, 2000 Securities Purchase Agreement (the 4% convertible debentures) and the March 29, 2001 Securities Purchase Agreement (the 8% Senior Secured Convertible Debentures), the investors converted $184,820 of debentures into 4,921,975 shares of the Company's common stock on various dates between April 19 and May 6, 2004, at various prices ranging from $0.033 per common share to $0.0573 per common share. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) The following exhibits are included herewith: EXHIBIT NO. DOCUMENT ----------- -------- (i) 3.1 Articles of Incorporation. (i) 3.2 Amendment to Articles of Incorporation (i) 3.3 Amendment to Articles of Incorporation. (i) 3.4 By-laws. (ii) 3.5 Amendment to Articles of Incorporation. Exhibit 3.5 Certificate of Designation, Series A 8% Cumulative Preferred Stock Exhibit 31.1 Certification of the Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a) Exhibit 31.2 Certification of Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a) Exhibit 32.1 Certification of Periodic Report by the Chief Executive Officer as required by Rule 13a-14(b) or Rule 15d-14(b) and Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350 Exhibit 32.2 Certification of Periodic Report by the Chief Financial Officer as required by Rule 13a-14(b) or Rule 15d-14(b) and Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350 ---------- (i) Filed with the registration statement on Form SB-2 with the Securities and Exchange Commission on May 31, 2000. (ii) Filed with Form DEF14A on April 25, 2002. (b) The Company filed the following reports on Form 8-K during the quarter for which this form is filed: May 3, 2004, Item 5 - Other Events and Regulation FD Disclosure. Notification by the Company's independent certified public accountants that they had not rendered their consent to the filing of their report on the Financial Statements included in the Company's Form 10-KSB for the year ended September 30, 2003. 17 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: August 20, 2004 UNIVERSAL COMMUNICATION SYSTEMS, INC. /s/ MICHAEL J. ZWEBNER ----------------------------------------------- Michael J. Zwebner Chief Executive Officer, Chairman of the Board 18