-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JQurWz34JeIwJ1tyfca+UxK1dNRfz7eKtC6Hx8S9P0/toXnMKrNMyvVzYXt6dRoN Zfn/QFfzkoUvZjPC544coA== 0001116502-05-000071.txt : 20050113 0001116502-05-000071.hdr.sgml : 20050113 20050113172428 ACCESSION NUMBER: 0001116502-05-000071 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20040930 FILED AS OF DATE: 20050113 DATE AS OF CHANGE: 20050113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNIVERSAL COMMUNICATION SYSTEMS INC CENTRAL INDEX KEY: 0001098207 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813] IRS NUMBER: 860887822 STATE OF INCORPORATION: NV FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10KSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-30405 FILM NUMBER: 05528885 BUSINESS ADDRESS: STREET 1: 407 LINCOLN ROAD STREET 2: SUITE 6K CITY: MIAMI STATE: FL ZIP: 33139 BUSINESS PHONE: 5108396100 MAIL ADDRESS: STREET 1: 407 LINCOLN ROAD STREET 2: SUITE 6K CITY: MIAMI STATE: FL ZIP: 33139 FORMER COMPANY: FORMER CONFORMED NAME: WORLD WIDE WIRELESS COMMUNICATIONS INC DATE OF NAME CHANGE: 20000124 10KSB 1 universal-10ksb.txt ANNUAL REPORT U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-KSB [x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended September 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. ---------------------------------------- (Name of small business issuer in its charter) Nevada 860887822 ------ --------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 407 Lincoln Road, Ste 12F, Miami Beach, Florida 33139 - ------------------------------------------- ----- (Address of principal executive offices) (Zip Code) Issuer's telephone number: (305) 672-6344 Name of each exchange on which registered: OTC Bulletin Board under the trading symbol UCSY Securities registered under Section 12(b) of the Act: None Securities registered under Section 12(g) of the Exchange Act: Common Stock, $.001 par value per share (Title of class) 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 [ ] No [X]. Check if disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10KSB. [ ] Issuer's revenues for its most recent fiscal year: $375,007 Aggregate market value of voting stock held by non-affiliates of the issuer as of December 30, 2004: $9,308,315 State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date. 236,426,863 shares of common stock as of December 30, 2004. Documents incorporated by reference: None. Transitional Small Business Disclosure Format: Yes [ ] No [X] Universal Communication Systems, Inc. Index to Annual Report on Form 10-KSB For The Fiscal Year Ended September 30, 2004 Page ITEM 1. DESCRIPTION OF BUSINESS.............................................3 ITEM 2. DESCRIPTION OF PROPERTY............................................ 9 ITEM 3. LEGAL MATTERS...................................................... 9 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................10 ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS...........11 ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS.........15 ITEM 7. FINANCIAL STATEMENTS...............................................19 ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.............. ..........................19 ITEM 8A. CONTROLS AND PROCEDURES...........................................19 ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT ...............20 ITEM 10. EXECUTIVE COMPENSATION.............................................22 ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.....23 ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.....................24 ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K...................................24 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.............................26 SIGNATURES....................................................................27 -2- PART I Introductory Statement - ---------------------- All statements contained herein that are not historical facts, including but not limited to, statements regarding the Company's current business strategy, the Company's projected sources and uses of cash, and the Company's plans for future development and operations, are based upon current expectations. These statements are forward-looking in nature and involve a number of risks and uncertainties. Actual results may differ materially. Among the factors that could cause actual results to differ materially are the following: the availability of sufficient capital to finance our business plans on terms satisfactory to us; competitive factors; changes in labor, equipment and capital costs; changes in regulations affecting our business; future acquisitions or strategic partnerships; general business and economic conditions; and factors described from time to time in the reports filed by us with the Securities and Exchange Commission. Readers are cautioned not to place undue reliance on any such forward-looking statements, which statements are made pursuant to the Private Litigation Reform Act of 1995 and, as a result, are pertinent only as of the date made. All of the share price information presented herein has been adjusted to reflect the 1 for 1,000 reverse split of our outstanding common stock effective August 23, 2002. ITEM 1. DESCRIPTION OF BUSINESS Introduction For the past two fiscal years we have had minimal revenues. We have a history of losses, and an accumulated shareholder deficit of $35,376,531. Because of our recurring losses, our independent auditors have expressed doubt as to our ability to continue as a going concern. 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, although our subsidiary has a checking account overdraft facility, 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. 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. -3- 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., ("Solar Style") a wholly owned Israeli subsidiary. 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. We are focusing our sales efforts in the European, African, Middle Eastern and Asian government and industrial markets for AirWater and Millenium product and service offerings. Solar One is targeting the North American and European consumer markets. We have discontinued, effective January, 2003, our previous telecommunication and wireless broad band business activities to focus on the water extraction and photovoltaic technology. History In February of 1997, Worldwide Wireless, Inc., a Nevada corporation, was formed to coordinate the operations of TSI Technologies, Inc., a Nevada corporation, and National Micro Vision Systems, Inc., a Nevada corporation. Its purpose was to complete the development of its patented advanced distributed wireless telephone and network designs and to finance, manufacture, and market these units and systems. TSI Technologies, Inc. was the research and development company formed for the purpose of creating and developing the distributed wireless call processing system. National Micro Vision Systems, Inc. was formed to operate a network of wireless Internet sites. In April of 1998, Worldwide Wireless, Inc., TSI Technologies, Inc. and National Micro Vision Systems, Inc. acquired Upland Properties, Inc., a Nevada corporation, for stock and transferred their assets to Upland Properties, Inc. Upland Properties, Inc. then changed its name to World Wide Wireless Communications, Inc. and began trading on the OTC Bulletin Board (OTC:BB)under the symbol WLGS. On February 10, 2000 we acquired all of the shares of Digital Way, S.A., a Peruvian telecommunications company. In June of 2001, we received a notice of default from the sellers of Digital Way, claiming a breach of the terms of our purchase agreement. On May 10, 2002, we executed a settlement agreement with those sellers. Under the terms of the agreement, we re-aligned the stock ownership of Digital Way, by returning 73% of the common shares owned by us to the former owners. In addition, we retained a 50% interest in the first $6.2 million of equity value of Digital Way, in the event of a sale or other disposition. Any value beyond the first $6.2 million will be divided based on shareholdings. Our chairman, Michael Zwebner, remains on the Board of Directors of Digital Way, S. A., however he has not actively participated in the affairs of the company. The settlement agreement fully cancels all debts, claims and counter claims between us and the sellers, and allows for future co-operation in the ongoing development or sale of Digital Way. Although we have reached this settlement, management of Digital Way has not provided the necessary financial information for Digital Way to be included in our financial reporting, and the results of the Company's investment in Digital Way is unclear at this time. The Company has fully impaired this investment. Management continues to seek a third party buyer for our 27% interest in Digital Way SA. On November 1, 2001, current management took control of the company. During the fiscal year ended September 30, 2002, we moved our offices from Oakland, -4- California to Miami Beach, Florida and changed our name to Universal Communication Systems, Inc. We then changed our symbol to UCSI. Following our one for one thousand reverse stock split on August 23, 2002, our symbol was changed to UCSY. In January, 2003, we identified a new business venture, abandoned the telecommunication and wireless business and adopted a new business plan. We formed a wholly owned subsidiary, AirWater Corporation, whose purpose and mission is to design, build and market machines that produce drinkable water from the air. The first step in the endeavor was to obtain licensing rights to the technology. To that end, we acquired the rights to four patents by an agreement dated March 24, 2003, relating to this technology from J. J. Reidy Company of Holden, Massachusetts. AirWater Patents Corporation was formed to hold our acquired licensed patent rights. Under the terms of the agreement, we paid $300,000, and we are obligated to pay, for a one year period, 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. 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. On April 30, 2003 we executed a letter of intent to acquire CinemaElectric, Inc., a Los Angeles based multimedia messaging service company for a purchase price of $10 million. On August 12th, 2003, and by mutual agreement, we withdrew from this Letter Of Intent. We withdrew our letter of intent so that Brenex Oil Corporation could issue their letter of intent to acquire CinemaElectric, Inc., which they did on August 12, 2003. We received 10% of the entity resulting from the acquisition of CinemaElectric by Brenex Oil Corporation. We completed an agreement to purchase all of the stock of Millennium on September 29, 2003. As part of the Millenium acquisition, we acquired 50% of Solar Style, Ltd. On April 30, 2004, we acquired the remaining 50% of Solar Style for 500,000 shares of common stock and warrants exercisable for two years, for 1 million shares at a price of $0.10 per share. Solar Style is an inactive Israeli company that holds certain rights to manufacture and market solar power products. In connection with the Millenium / Solar Style acquisitions, a new U. S. subsidiary, Solar One Corporation, was formed to market solar power products and systems. 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. Our strategy Under the auspices of new management, we have made considerable progress in restructuring prior obligations and removing debt. We have concentrated our activities, as previously mentioned, on the AirWater product and the photo voltaic product lines. We have withdrawn from the wireless internet market, -5- disposed of assets for cash and we continue our negotiations with creditors to compromise, extend, convert and/or forgive debt owed by the company prior to the new management. 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 2004, we have embarked on a worldwide sales and marketing program, focusing on the markets listed above. AirWater technology and competition 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. Our reasoning is as follows: o The bottled water market is approximately a $7.1+ billion marketplace with projected growth in excess of 10% per year. Its cost to the consumer, inconvenience and logistical aggravation and the fluctuation in the quality of the water make bottled water vulnerable to an alternative, AirWater products for example, which is cheaper per gallon on the order of 1-2 kW per gallon, has consistent quality and is convenient. o It is the easiest model to take to market thus maximizing its exposure. o It would be readily accepted by foreign customers, where size is often very important. o It would create a very lucrative aftermarket sector for serviceable parts such as water filters, containers and ultra-violet light bulbs. We believe that the global market for AirWater machines is largely untapped and undeveloped. The AirWater technology and system is very new, and much of the initial sales efforts that we are currently engaged in are dedicated to education, and the detailed explanation of the machines, the built in safety systems and their general operation. Operational safety and computer managed user maintenance is built into every AirWater system by the use of a patented, inexpensive, programmable chip. The water filtration industry is reliant upon voluntary user discipline in the important issue of safety, and the periodic changing of the machine filters. The AirWater system knows when an air filter needs cleaning, or is missing, when the UV bulb becomes ineffective, when the water filter needs changing and if the user accidentally tries to use an expired water filter. The AirWater system will not operate if any of those factors exist and displays to the user the reason on a small electronic display panel. Management further believes that there are a number of specific market segments that the AirWater products can be introduced to and marketed to. First is the home consumer product market, to which the company is addressing a Small Office / Home Office ("SOHO") styled product. Next is the commercial -6- market, for such users as small hospitals, local field clinics, small farms, factories and so on. And then there is the larger customer such as International Aid Agencies, Governments, The United Nations, The Red Cross, Local Towns and Villages, and Military Forces worldwide all in areas and countries where water is scarce, or difficult to transport. At this time, the company is aware of very limited competition. The company has identified Electric Gas & Technologies Inc, a Dallas Texas based company, and World Wide Water Inc., of Los Angeles California as competitors. In addition, the company has seen a similar product sold in the US Market, made or offered for sale by Liquid Air Inc, based in California. Almost in all cases, these companies are in various stages of "start up" mode, having been in the Water from Air business less than a few years, and are just starting to offer machines to customers. As a result of a settlement from litigation instituted by Electric Gas & Technologies, Inc., we have acquired the assets and rights to their technology with respect to water from air processes. See Item 3 - Legal Matters for additional information. 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. Following our acquisition in 2003, Millennium's management focused on re- organizing the company. This included moving to new offices, purchasing new computer systems, and the addition of several key positions including operations officer, marketing manager and regional marketing manager. Millennium is also conducting educational seminars for potential clients, by targeting architects, elected officials and military personnel. 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. Solar Style Inc. USA, ("Solar") formed as part of Solar One, Inc. with offices in Baltimore, is the basis of the planned North American Distribution network of the Solar Style (Israel) product line. Solar is offering PV Solar Chargers for a wide range of products, including Laptop computers, Palms, Walkmans and Discmans, 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. -7- 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. Solar's value proposition spans two levels: The practical and the environmental. On the practical level, Solar's products enable consumers to use their mobile devices without having to worry about plugs and connectors. On the Environmental level, in today's "green-aware" world, where environmental concerns have come to be very important to consumers, Solar offers mobile device users a reliable environmentally friendly power source. We are in the process of establishing distribution and sales channels for the existing products. We continue research and development of improvements on existing and creation of new products, concurrent with ongoing sales. There are two methods of distribution for Solar's products and technology, both of which are being pursued at various levels: A "traditional" manufacturer-distributor value chain, by which it will have control over manufacturing and distribution, and sell its products through large distributors. A licensing option, limited by time and dependant on results, by which its involvement at the manufacturing stage will be minimal (just enough to preserve unique knowledge and enable further product development), while distribution, promotion, and sales management are left to a licensee/business partner. Patents/Intellectual Property We currently hold a patent for our distributed wireless call processing system. As we have exited this business, we are looking to license this technology to a third party developer in order to potentially create a royalty stream of income. However, we cannot guarantee that we will enter into such an agreement. We also hold the exclusive global patent and licensing rights to four air to water patents under an agreement with J.J. Reidy Company, relating to atmospheric extraction of water and its purification process. These patents, numbered: 05106512-00, 05149446-00, 05203989-00, and 05366705-00, were issued by the US Government Patent Office. Two of these licenses were issued in 1992 and the other two in 1993 respectively. These patents relate to the Air Water Products not only in the USA, but in countries covered by the PCT global agreements. The Patent Cooperation Treaty (PCT) simplifies and reduces the cost of obtaining international patent protection and facilitates public access to a wealth of technical information relating to inventions. By filing one international patent application under the PCT you can simultaneously seek protection for an invention in over one hundred countries, including developing countries throughout the world. The Patent Cooperation Treaty (PCT) has over the past three decades emerged as a major international filing system for seeking patent protection worldwide in a cost effective and efficient manner. In addition, -8- through the dissemination of latest technical information contained in published PCT applications, the PCT system has been actively contributing to the development of science and technology. The company fully intends to utilize the patents and intellectual property rights in its pursuit and ongoing development of the business. Further, through our Millenium subsidiary, we own 21 international patents in the photo voltaic solar power and energy system area. Employees As of September 30, 2004, we had four employees, located in our Millenium office in Israel and one employee in our Maryland office of Solar. Our Miami office is serviced by outside consultants. No employee is represented by a labor union and the company believes its employee relations to be good. ITEM 2. DESCRIPTION OF PROPERTY We own no real estate. Effective June 1, 2004, we leased an 1,800 square foot corporate and administrative office facility at 407 Lincoln Road, Suite 12F, Miami Beach, FL 33139. The lease provides for a three-year term at a monthly rate of $4,375. Solar One, Inc. leases a 1,147 square foot administrative office in Baltimore, Maryland under a lease which commenced December 1, 2003. This lease is for an eighteen month period and expires May 30, 2005. The lease is at a monthly rate of $2,198.42. Millenium Electric T.O.U., Ltd., leases 2,500 square foot administration and manufacturing offices in the Rannana Industrial zone in Israel under a lease which ends in 2005. The minimum remaining payments under this lease are $60,180 for 2004 and $55,165 for 2005. ITEM 3. LEGAL MATTERS 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 -9- 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 have been made in our financial statements, as we believe the receiver's claim is unfounded and the company will prevail. The matter remains unresolved at September 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. We filed a counter claim in the United States District Court, Southern District of Florida, case number 03-22196-Civ-Seitz, disputing ELGT's claims of patent infringement and as a result of statements published in their press releases, we included in our complaint $118 million in damages against both ELGT and its president, Mr. Dan Zimmerman, for their false, defamatory and libelous statements. On November 24, 2004 a settlement agreement was reached calling for: 1. a stipulation for the entry of a "Consent Judgment" in favor of our subsidiary, Airwater Corporation and the Company, jointly, and against Atmospheric Water Technology, Inc. ("AWT") in the amount of $5 million, 2. the payment of the amount of $25,000 in cash, and 3. the issuance of 150,000 shares of ELGT's restricted common stock ("Shares"). Further agreed, was that after the stipulation for the entry of the "Consent Judgment" has been executed by the parties, ELGT is to assign to us all of ELGT's equity ownership interest (i.e. shares of stock or otherwise) in AWT. This includes all ELGT and AWT's right, title and interest in U.S. Patent No. 4,255,937 and all enhancements thereto, and all ELGT and AWT's right, title and interest to the copyright and trademarks describing the technology in the U.S. Patent, and the Trademark known as "Watermaker", and all ELGT and AWT's right, title and interest in U.S. Patent No. 5,553,459. This transfer to the Company and AirWater Corporation is equal to 92% of the outstanding stock (controlling interest) of AWT and includes all of the US and Global business, as well as all the appertaining Patents, Trademarks and Licenses. Finally, all parties agreed that each side shall bear its own costs and attorney's fees. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted during the fourth quarter of the fiscal year covered by this report to a vote of the security holders through the solicitation of proxies or otherwise. -10- PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Prior to April 3, 2002, our common stock was traded on the over the counter Bulletin Board market under the symbol "WLGS". From April 4, 2002 through August 22, 2002 our common stock was traded on the over the counter Bulletin Board market under the symbol "UCSI". From August 23, 2002 to the present, our common stock is trading on the over the counter Bulletin Board market under the symbol "UCSY". The following table sets forth the range of high and low closing bid prices for each period indicated as reported by the National Association of Securities Dealers composite feed or other qualified interdealer quotation medium. The quotations provided reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions. All of the share price information presented below has been adjusted to reflect the 1 for 1,000 reverse split of our outstanding common stock effective August 23, 2002. Price Range for Common Stock - ---------------------------- FISCAL YEAR SEPT 30, 2005 High Low -------- -------- First Quarter $ 0.050 $0.015 FISCAL YEAR SEPT 30, 2004 High Low -------- -------- First Quarter $ 0.115 $0.060 Second Quarter 0.081 $0.045 Third Quarter 0.160 $0.043 Fourth Quarter 0.058 $0.043 FISCAL YEAR SEPT 30, 2003 High Low -------- -------- First Quarter $ 0.170 $0.100 Second Quarter 0.100 0.045 Third Quarter 0.230 0.030 Fourth Quarter 0.115 0.060 Since our shares began trading on the OTC Bulletin Board in 1997, the prices for our shares have fluctuated widely. There may be many factors which may explain these variations, but we believe that the following are some of these factors: o the demand for our common stock; -11- o the number of market makers for our common stock; o developments in the market for broadband Internet access and wireless transmission in particular; and o changes in the performance of the stock market in general. In recent years, the stock market has experienced extreme price and volume fluctuations that have had a substantial effect on the market prices for many emerging growth companies such as ours, which may be unrelated to the operating performances of the specific companies. Companies that have experienced volatility in the market price of their stock have been the object of securities class action litigation. If we become the object of securities class action litigation, it could result in substantial costs and a diversion of our management's attention and resources and have an adverse effect on our business, financial condition and results of operations. In addition, holders of shares of our common stock could suffer substantial losses as a result of fluctuations and declines in the stock price. There are approximately 600 holders of record and an estimated 7,800 holders in street name of our common stock as of September 30, 2004. The trading of our shares is subject to limitations set forth in Rule 15g-9 of the Securities Exchange Act. This rule imposes sales practice requirements on broker-dealers who sell so-called penny stocks to persons other than established customers, accredited investors or institutional investors. Accredited investors are generally defined to include individuals with a net worth in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 together with their spouses during the previous two years and expected annual income of that amount during the current year. For sales of shares to other persons, broker-dealers must make special suitability determinations, and obtain the written consent of the purchaser to the sale prior to consummating the sale and are generally prohibited from making cold-calls or other unsolicited inquiries to purchasers without complying with these rules. These rules may adversely affect the ability of broker-dealers and others to sell our shares or to sell shares in the secondary market. No cash dividends have been declared to date on our Company's common stock. We expect that all earnings, if any, will be retained to finance the growth of our Company and that no cash dividends will be paid for the foreseeable future. -12- On May 21, 2002, stockholders approved a measure to increase the number of authorized common shares from 300 million to 800 million. EQUITY COMPENSATION PLAN INFORMATION - ------------------------------------
Number of Weighted- Number of securities securities to be average exercise remaining available for issued upon price of future issuance under exercise of outstanding equity compensation outstanding options, plans (excluding options, warrants warrants and securities reflected in Plan Category and rights rights column (a)) - ------------------------------------------------------------------------------------------------------------ (a) (b) (c) - ------------------------------------------------------------------------------------------------------------ Equity compensation plans approved by 0 n/a 0 security holders - ------------------------------------------------------------------------------------------------------------ Equity compensation plans not approved by 257,250 $0.095 1,571,175 (1) security holders - ------------------------------------------------------------------------------------------------------------ Total 257,250 $0.095 1,571,175 - ------------------------------------------------------------------------------------------------------------
(1) Pursuant to form S-8, dated 12/23/03. Submitted under plan, 11,000,000 shares, issued, 9,428,825. -13- Description of Equity Compensation Options issued were issued pursuant to the 2001 Stock Option Plan and also provided as motivation and incentives to individuals considered important to the Company's success. The 2001 plan was approved by our board of directors, but not submitted to a vote of stockholders. The total number of options granted and outstanding at September 30, 2004, and the average exercise price and expiration dates for each year are as follows: Total Exercise Year Options Price Expiration Date ---- ------- -------- ----------------- 2001 251,150 $0.095 December 31, 2006 6,100 $602.00 December 31, 2006 -------- Total 257,250 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. On July 14, 2004, we issued 164,340 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 July 27, 2004, we issued 12,375,000 shares of common stock under private placement subscriptions to our Chairman, at prices ranging from $0.025 to $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. On September 13, 2004, we issued 1,998,000 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 December 6, 2004, the Company sold 25,000 shares of Series B 8% Convertible Preferred Stock and Warrants to purchase 16,666,667 shares of common stock for which it received net proceeds of $250,000. The Series B Convertible Preferred Stock, with a face value of $250,000, is convertible into common stock at $0.015 per share. The Warrants are exercisable at $0.03 per share until December 6, 2009. On January 5, 2005, the Company sold 30,000 shares of Series C 8% Convertible Preferred Stock and A, B and C Warrants to purchase 20,000,000 shares of common stock for which it received net proceeds of $300,000. The Series C Convertible Preferred Stock, with a face value of $300,000, is convertible into common stock at $0.03 per share. The A Warrants are exercisable for 10,000,000 shares of common stock at $0.04 per share until January 5, 2010. The B Warrants are exercisable for 5,000,000 shares of common stock at $0.06 per share until January 5, 2010. and the C Warrants are exercisable for 5,000,000 shares of common stock at $0.08 per share until January 5, 2010. Other Securities Transactions - ----------------------------- Pursuant to the April 14, 2000 Securities Purchase Agreement (the 4% convertible debentures) and the March 29, 2001 Securities Purchase Agreement (the 8% Senior -14- Secured Convertible Debentures), the investors converted $337,050 of debentures into 10,000,000 shares of the Company's common stock on various dates between July 29 and September 13, 2004, at various prices ranging from $0.03867 per common share to $0.044 per common share. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS The following should be read in conjunction with the "Risk Factors" and the "Financial Statements" and the Notes thereto. Plan of Operations - ------------------ For the past three fiscal years we have had minimal revenues. We have a history of losses, and an accumulated shareholder deficit of $35,376,531. 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, 2004 that our ability to meet our future financing requirements, and the success of our future operations, cannot be determined at this time. In order to finance our working capital requirements we are negotiating equity investments, but there can be no assurance that we will obtain the required capital or that it will be obtained on terms favorable to us. If we do not obtain short term financing we may not be able to continue as a viable concern. Although one of our subsidiaries has a bank account overdraft facility, we do not have a bank line of credit and there can be no assurance that any required or desired financing will be available through bank borrowings, debt, or equity offerings, or otherwise, on acceptable terms, if at all. If future financing requirements are satisfied through the issuance of equity securities, investors may experience significant dilution in the net book value per share of common stock. We are currently focusing our operations on the 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. -15- PLAN OF OPERATION FOR THE NEXT 12 MONTHS - ---------------------------------------- Our cash position at September 30, 2004 is $453,134. This is only sufficient to provide coverage for three and a half months of operating cash needs, based on the current reporting period's negative cash flow from operations. However, our Chairman, in connection with Port Universal Ltd., a company in which he owns a one third interest, has agreed to provide funding as needed until our sales activities are sufficient to cover our cash flow needs. This agreement by our Chairman and Port Universal is not a binding obligation; we have no assurances that this funding will continue beyond the short term. Further, we anticipate that by December 31, 2005, our subsidiaries will have sufficient revenues that we will not require funding from equity sales. With our focus on the airwater and photo voltaic businesses, 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 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. 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. Results of Operations - --------------------- Revenues and cost of sales for the fiscal year ended September 30, 2004 were earned primarily by our subsidiary, Millenium. Our Peruvian subsidiary had revenues which are not reported as a result of a lack of cooperation from our subsidiary's management. General and administrative expenses totaled $2,832,670 in the fiscal year ended September 30, 2003 and $1,785,431 in the fiscal year ended September 30, 2003. The increase in expenses resulted from activities associated with the entrance into the air-water technology industry. -16- General and administrative expenses for the fiscal years ended September 30, 2004 and 2003 were comprised of the following items: 2004 2003 ---- ---- Abandoned acquisitions and fees $ - $ 171,397 Consultants and outside services 1,114,528 609,977 Depreciation 13,079 5,690 Financing costs and fund raising expense 187,597 120,804 Legal expense 322,482 228,661 Miscellaneous and other expenses 238,456 42,478 Professional fees 245,893 136,154 Rent 78,432 27,650 Salaries 313,458 - Travel 318,745 72,620 Settlement loss - WSI, Inc. - 370,000 ---------- ---------- $2,832,670 $1,785,431 ========== ========== Liquidity and Capital Resources - ------------------------------- As of September 30, 2004 our total working capital was deficient in the amount of $1,610,181. This represents a $219,625 increase over our September 30, 2003 deficiency of $1,390,556. Until substantial revenues commence from the sale of our AirWater equipment, we will need to obtain funding from external sources to finance our current operations. Since we began operations, we have generated minor revenues and have incurred substantial expenditures and operating losses. In view of this fact, our auditors have stated in their report for the fiscal years ended September 30, 2004 and 2003 that there is substantial doubt about our ability to continue as a going concern, dependent upon our ability to meet our future financing requirements, and the success of our future operations, the outcome of which cannot be determined at this time. In order to finance our working capital requirements, we have and continue to negotiate equity investments with several sophisticated investors, but there can be no assurance that we will obtain this capital in the future, 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 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. On June 6, 2003, we defaulted on the January 6, 2003 12% notes in the amount of $60,000, which came due on that date. The holders of the Notes, who also hold a portion of the convertible debentures, did not take action to foreclose on the Notes. These notes have been included in a proposed negotiated settlement whereby the notes and the debentures will be converted into shares of common stock at a fixed conversion price. During the fiscal years ended September 30, 2004 and 2003, we received equity investments and advances of $2,593,452 and $1,214,829 respectively. These investments and advances were in the form of issuance of our common stock in various private placements and the issuance of preferred convertible Series A stock. -17- Risk Factors - ------------ - -We will require additional capital in the short term to remain a going concern We will require short term outside investment on a continuing basis to finance our current operations and any expansion of activities. Since we began operations, we have generated virtually no revenues and have incurred substantial expenditures. We expect to continue to experience losses from operations while we develop our new revenue source, consummate acquisitions and develop other technologies. In view of this fact, our auditors have stated in their report for the period ended September 30, 2004 that our ability to meet our future financing requirements, and the success of our future operations, cannot be determined at this time. In order to finance our working capital requirements we are negotiating existing equity investments and new investments, but there can be no assurance that we will obtain this 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 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 dependent on the services of key individuals and the loss of any of these individuals could significantly affect our ability to operate our business - -We may be unable to protect our intellectual property rights Our success depends in part on our ability to protect our proprietary technologies. We rely on a combination of patent, copyright and trademark laws, trade secrets and confidentiality and other contractual provisions to establish and protect our proprietary rights. We have received one patent from the United States Patent and Trademark Office pertaining to the distributed wireless call processing system and may file for additional patents in the future. However, our patents may not be of sufficient scope or strength, others may independently develop similar technologies or products, duplicate any of our products or design around our patents, and the patents may not provide us competitive advantages. Litigation, which could result in substantial costs and diversion of effort by us, may also be necessary to enforce any patents issued or licensed to us or to determine the scope and validity of third-party proprietary rights. Any such litigation, regardless of outcome, could be expensive and time consuming, and adverse determinations in any such litigation could seriously harm our business. -18- - -We may not be able to successfully market and develop the air from water systems required by the market we are focusing our sales efforts on. Governments and humanitarian organizations are subject to political influences which can change without notice. Needs, as defined by these groups, may also change. If we cannot design, build and modify the systems to meet with these changes, our marketing efforts may not be productive. - -Other risk issues We have pursued, are currently pursuing and, in the future may pursue, new technologies and businesses internally and through acquisitions and combinations which involve significant risks. Any such acquisition or combination may involve, among other things, the issuance of equity securities, the payment of cash, the incurrence of contingent liabilities and the amortization of expenses related to goodwill and other intangible assets, and transaction costs, which have adversely affected, or may adversely affect, our business' results of operations and financial condition. Our ability to integrate and organize any new businesses and/or products, whether internally developed or obtained by acquisition or combination, will likely require significant expansion of our operations. There is no assurance that we will have or be able to obtain the necessary resources to satisfactorily effect such expansion, and the failure to do so could have a material adverse effect on our business, financial condition and results of operations. In addition future acquisitions and or combinations by the Company involve risks of, among other things, entering markets or segments in which we have no or limited prior experience, the potential loss of key employees of the acquired company and/or difficulty, delay or failure in the integration of the operations, management, personnel and business of any such new business with our business and operating and financial difficulties of any new or newly combined operations, any of which could have a materially adverse effect on our business, financial condition and results of operations. Moreover, there can be no assurance that the anticipated benefits of any specific acquisition or of any internally developed new business segment or business combination will be realized. ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See Index to Financial Statements on page F-1. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS There have been no changes in or disagreements with our independent auditors regarding accounting and financial disclosure required to be reported under this item. ITEM 8A. CONTROLS AND PROCEDURES Our management carried out an evaluation pursuant to Rule 13a-15 of the Securities Exchange Act of 1934, as amended, under the supervision and with the participation of our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Report. Based upon that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in reports that we file or furnish under the Exchange Act are recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. During the period covered by this report on Form 10-KSB, there has been no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. -19- PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT Our executive officers and directors and their ages as of December 30, 2004 are as follows:
Name Age Position Period of Service - ----- --- -------- ----------------- Michael J. Zwebner...... 52 Chairman of the Board November 2001-present and CEO Curtis Orgil........... 52 CFO and Director November 2001-present Ramsey Sweis............ 38 Director May 1998-present Alexander Walker, Jr. .. 77 Director November 2001-present Ami R. Elazari.......... 52 Director October 2003-present
MICHAEL ZWEBNER has served as a Director since November, 2001 and is the Chairman of the Board of Directors. He is the founder of TVC Telecom, Inc. (formerly Talk Visual Corporation) and has served as a Director and its Chairman of the Board of Directors from September, 1998 until March, 2003. From 1974 to 1986, Mr. Zwebner founded and ran a travel and tourism company and a charter airline, specializing in the areas of air charter travel, wholesale ticketing and general business and tourist travel. From 1986 to 1990, Mr. Zwebner owned and operated several real estate companies as well as managed a chain of five family restaurants and related catering services in England. From 1991 to 1997, Mr. Zwebner founded and served as Vice-President of Cardcall International Holdings Inc. (USA) and Operating Manager of Cardcall (UK) Ltd. for which he designed and developed telecommunications and marketing concepts and organized the prepaid phone card operations. Mr. Zwebner also coordinated corporate finance activities for Cardcall. In February of 1997, Mr. Zwebner negotiated and secured the sale/merger of the Cardcall Group to a publicly-held entity based in Connecticut. In addition, in February of 1988, Mr. Zwebner negotiated the creation of a multi-million dollar joint venture between Cardcaller Canada Inc. and Datawave Systems Inc. of Vancouver, Canada. ALEX WALKER, JR. has served as a Director of the Company since November, 2001. Mr. Walker has served as Chairman of the Board of the Nevada Agency and Trust Company in Reno, Nevada, a licensed and registered trust company and transfer agent in business since 1903. He received his B.A. from Waynesburg College in 1950 and his J.D. from the University of Pittsburgh School of Law in 1952. From 1956 to date, he has maintained a private practice as an attorney. CURTIS A. ORGILL has served as a Director of the Company since November, 2001. He received his Bachelor of Science degree in 1974 from Brigham Young University. He worked for Deloitte Haskins & Sells in Salt Lake City, Utah. Later he transferred to Reno, Nevada where he helped establish their new office. While in Reno, Mr. Orgill was the Partner-in-Charge of the tax department there and was the senior tax partner in the state of Nevada. While with Deloitte, Mr. Orgill was on its National Industry Teams for Qualified Retirement Plans and Agribusiness. Since 1995, he has been a principal with -20- Bartig, Basler & Ray, CPA's, Inc., a regional accounting firm with headquarters in Sacramento, California. He is the treasurer of the Northern Nevada International Center and of the BYU Management Society of Northern Nevada. He has chaired the Taxation Committee for the Nevada Society of Certified Public Accountants. He is a former treasurer and board member of the Nevada Museum of Art, the American Lung Association of Reno, the Economic Development Authority of Western Nevada, and the Northern Nevada Development Authority. He was a founding board member of the Nevada World Trade Council and was a member of the Advisory Council for the University of Nevada, Reno College of Business. RAMSEY SWEIS has served as a Director since May, 1998. He has had extensive experience in management and in the product design industry. He has been a leader and developer of high performance teams by enabling, training and motivating team members. In the recent past he has provided computer and engineering services to General Motors and Chrysler Corporation. In connection with those activities Mr. Sweis has developed designs between engineering, prototype models, tooling and vendor sources. Mr. Sweis resides in Roseville, Michigan. He currently serves as a Program Manager for Hanke Training & Design of Clawson, Michigan. From 1997 to 1999 Mr. Sweis served as a designer for Computer and Engineering Services of Auburn Hills, Michigan. From 1991 to 1997, Mr. Sweis was a design leader for Megatech Engineering of Warren, Michigan, contracted to General Motors of Warren, Michigan. AMI R. ELAZARI has served as a Director since August 26, 2003. He is the founder, President and CEO of Millennium Electric T.O.U. Ltd. He is a Lt. Col. (Res.) in the Israeli army and served in the IDF Intelligence special unit. Mr. Elazari is an energy and computer engineer and holds a BA in Psychology and an MBA with honors. He is the Vice Chairman of the Israel Export Institute Environmental Technology Center and the Vice Chairman of the Israel Export Institute Start-Up Company Center. Mr. Elazari is an internationally renowned energy expert on solar energy. He represents Israel in the IEA and holds a number of world patents in his name, mainly in renewable energy. Between 1990- 1995 Mr. Elazari managed Amitec Energy and Computer Industries, from 1995-1999 he managed the PV division of Chromagen Solar Systems. He is a member of the Israeli Financial forum, High tech forum and has published numerous articles in his field of expertise. During the fiscal year ended September 30, 2004 the Board of Directors of the Company met one time. The Board members, during their term in fiscal year 2004, attended all of the meetings of the Board of Directors and meetings of any committees of the Board of Directors on which such person served which were held during the time that such person served. Director Compensation The Company has no standard arrangements pursuant to which directors of the Company are compensated for any services provided as a director. Limitation of Liability and Indemnification Matters Our Bylaws provide that we may indemnify any director, officer, agent or employee against all expenses and liabilities, including counsel fees, -21- reasonably incurred by or imposed upon them in connection with any proceeding in which they may become involved by reason of their being or having been a director, officer, employee or agent of our Company. Moreover, our Bylaws provide that we shall have the right to purchase and maintain insurance on behalf of any such persons whether or not we would have the power to indemnify such person against the liability insured against. Insofar as indemnification may be afforded for liabilities arising under the Securities Act, we have been informed that, in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable. Compliance with Section 16(a) of the Securities Exchange Act of 1934 - -------------------------------------------------------------------- Section 16(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), requires the Company's directors and executive officers, and persons who own more than ten percent of the Company's Common Stock, to file with the Securities and Exchange Commission initial reports of ownership and reports of changes in ownership of Common Stock. Officers, directors and greater than ten percent stockholders are required by Securities and Exchange Commission regulations to furnish the Company with copies of all Section 16(a) forms they file. To the Company's knowledge, based solely on a review of the copies of such reports furnished to the Company and representations that no other reports were required, during the fiscal year ended September 30, 2004, we believe that Ami Elazari has not filed the required Form 4. ITEM 10. EXECUTIVE COMPENSATION The following table sets forth certain summary information concerning compensation paid or accrued by the Company on behalf of the Chief Executive Officer. No other executive officers of the Company have total annual salary and bonus for fiscal year 2004 which exceeded $100,000, with respect to services rendered by such persons to the Company and its subsidiaries for each of the fiscal years ended September 30, 2004, 2003 and 2002.
Long-Term Compensation Other Annual Awards Salary Compensation ---Securities--- Name and Principal Position(6) Year ($) ($) Underlying Options(#) - --------------------------- ---- ------ ------------ ---------------------- Michael J. Zwebner (1) 2004 $240,000(2) -0- -0- Chairman of the Board 2003 $240,000(3) -0- -0- of Directors, CEO 2002 $240,000(4) -0- -0-
- ----------- (1) Mr. Zwebner works under a contract with Overseas Communications, Ltd. (2) For the fiscal year ended September 30, 2004, this amount was paid $135,000 in cash and the Company issued 1,316,666 shares of common stock. (3) For the fiscal year ended September 30, 2003, this amount was paid $80,000 in cash and the Company issued 3,160,742 shares of common stock. (4) For the fiscal year ended September 30, 2002, this amount was paid with common stock in the amount of 378,578 shares. -22- AGGREGATED OPTION EXERCISES IN FISCAL 2004 AND VALUE OF OPTIONS AT SEPTEMBER 30, 2004 The following tables set forth certain information with respect to the Company's Chief Executive Officer concerning unexercised stock options held as of September 30, 2004.
Individual Grants Percent of Number of Total Securities options Underlying granted to Exercise Options employees Price Expiration Granted in Fiscal 2004 ($/Share) Date ------- ------------ --------- ---- - - NONE
Aggregated Options/ SAR Exercises at September 30, 2004 ------------------------------------------------------- Number of Securities Underlying Value of Unexercised In- Shares Acquired Unexercised Options/SARS at the-Money Options/ SARS at or Exercised September 30, 2004 September 30, 2004 (#) ($) Exercisable/Unexercisable Exercisable/Unexercisable - - NONE
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth, as of December 30, 2004, the number and percentage of shares of Common Stock beneficially owned (as defined in Rule 13d-3 adopted under the Exchange Act) by (a) all persons known to the Company to own beneficially more than 5% of any class of voting security of the Company, (b) each of the Company's directors, (c) the Company's Chief Executive Officer and (d) all directors and executive officers of the Company as a group.
Name of Named Executive Officer, Number of Percentage Upon Exercise of Director, or Beneficial Owner Shares Ownership Options or Warrants - ------------------------------ ------ --------- ------------------- Michael J. Zwebner (3) 28,777,609 (1) 12.2% 0 Alexander Walker, Jr. (3) 557,000 * 0 Ramsey Sweis (3) 1,723,970 * 500,000 Curtis Orgil (3) 251,000 * 0 Ami R. Elazari (3) 4,980,159 2.1% Executive Officers and Directors 36,289,738 15.3% as a Group - 5 individuals Endeavour Capital 23,406,259 9.9% 22,474,453 (2) c/o Endeavour Advisors, Ltd. P.O.B. 57116 Jerusalem 91570 Alpha Capital Aktiengesellschaft 16,886,713(4) 7.1% 10,470,236 (2) Pradafant 7, Furstentums 9490, Vaduz, Liechtenstein Port Universal Ltd. 13,970,832 5.9% c/o Mizrahi Bank 78 Hayarkon Street Tel Aviv Israel Esquire Trade & Finance, Inc. 13,513,093 5.7% Trident Chambers, Road Town Tortola, British Virgin Islands
-23- - ------------------------------------------- * Less than 1% (1) Includes 3,358,823 shares beneficially held by Overseas Communications Limited, 534,014 shares beneficially held by Overseas Development Holdings Limited and 4,656,200 shares beneficially held by Port Universal. (2) Represents shares convertible under the 4%, due April 14, 2005, $1,299,210 and 8%, due March 29, 2005, $386,374 convertible debentures held, but not more than 9.9% of total outstanding, as per the provision of the debentures. (3) The address of each such person is c/o the Company, 407 Lincoln Rd., Ste 12F, Miami Beach, FL 33139 (4) Includes 9,424,242 shares convertible at $0.033 per share under the Series A 8% Cumulative Convertible Preferred Stock, dated April 19, 2004. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Commencing November 1, 2001, we engaged the services of the Chairman Michael Zwebner under a consulting agreement through Overseas Development Holdings Corporation, a foreign corporation. The annual payment is $240,000. Overseas Development Holdings Corporation is 33% owned by our Chairman. Alexander Walker, Jr., a Director and the Secretary of our company, is Chairman of the Board and a shareholder of Nevada Agency and Trust Company, our transfer agent since November 6, 2001. During the fiscal year ended September 30, 2004, we incurred fees aggregating $8,352 to Nevada Agency and Trust Company. ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits ITEM (601) 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. (iv) 3.5 Amendment to Articles of Incorporation. (i) 4.1 Form of Certificate Evidencing shares of Common Stock of Universal Communication Systems, Inc. (i) 4.2 Convertible Unsecured Debenture for $740,000 issued by World Wide Wireless Communications, Inc. to Credit Bancorp. -24- (v) 10.1 Stock Purchase Agreement dated November 30, 1999 Between Infotel Argentina S.A. and Universal Communication Systems, Inc. (v) 10.3 Security Purchase Agreement Among World Wide Wireless Communications, Inc. and the Purchasers Named Therein. (v) 10.4 Registration Rights Agreements Among World Wide Wireless Communications, Inc. and the Purchasers Named Therein. (v) 10.5 Escrow Agreement Among the Purchasers Named Therein, the Representative of the Purchasers and the Escrow Agent. (v) 10.6 Form of Debenture of Universal Communication Systems, Inc. with Respect to the 4% Convertible Debenture Due 2005. (v) 10.7 Form of Warrant to Purchase Shares of World Wide Communications, Inc. Issued in the Offering. (vi) 10.8 Amendment to the Securities Purchase Agreement entered into between World Wide Wireless Communications and the selling shareholders named therein. (ii) 10.9 Second Amendment to the Securities Purchase Agreement entered into between World Wide Wireless Communications and the selling shareholders name therein. (ii) 10.11 World Wide Communications, Inc. Incentive Stock Option Plan (iii) 10.12 Agreement between Overseas Communication Limited and World Wide Wireless Communications, Inc. (vii) 10.13 Stock Purchase Agreement by Universal Communication Systems, Inc. and Ami R. Elazari and Caltan Development, Ltd., dated August 22, 2003. (viii) 10.14 Consulting Agreement - Dorit Elazari (viii) 10.15 Consulting Agreement - Joseph Moore (viii) 10.16 Consulting Agreement - Otzarot Nechasim Vehashkaot, Ltd. 10.17 Certificate of Designation for Series A 8% Cumulative Convertible Preferred Stock 21.1 Subsidiaries 31.1 Certification Pursuant to 18 USC Section 302 for Michael Zwebner. 31.2 Certification Pursuant to 18 USC Section 302 for Curtis Orgil. 32.1 Certification Pursuant to 18 USC Section 1350 as adopted pursuant to Section 906 of Sarbanes- Oxley Act of 2002 for Michael Zwebner. 32.2 Certification Pursuant to 18 USC Section 1350 as adopted pursuant to Section 906 of Sarbanes- Oxley Act of 2002 for Curtis Orgil. -25- - ------------------ (i) Filed with the registration statement on Form SB-2 with the Securities and Exchange Commission on May 31, 2000. (ii) Filed with the registration statement on Form SB-2 with the Securities and Exchange Commission on December 15, 2000. (iii) Filed with Form 10-KSB for the period September 30, 2002. (iv) Filed with Form DEF14A on April 25, 2002. (v) Filed with the registration statement on Form SB-2 with the Securities and Exchange Commission on May 31, 2000. (vi) Filed with Form 10-KSB for the period September 30, 2000. (vii) Filed with Form 8-K on October 14, 2003. (viii) Filed with Form 10-KSB for the period September 30, 2003. (b) The following Form 8-K was filed during the fourth quarter. None ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The following table presents fees for the audits of the Company's annual consolidated financial statements for the fiscal year ended September 30, 2004 and for other services provided by Reuben E. Price, P.A. Audit Fees................................................ $180,000 Audit-Related Fees........................................ -0- Tax Fees.................................................. -0- All Other Fees............................................ -0- -26- SIGNATURES In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on January 13, 2005. Universal Communication Systems, Inc. By: /s/ MICHAEL ZWEBNER ------------------ Michael J. Zwebner Chief Executive Officer In accordance with the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant in the capacities indicated on January 13, 2005:
Signature Title Date - --------- ----- ---- /s/ MICHAEL J. ZWEBNER Director, Chief Executive Officer, January 13, 2005 - ---------------------- and Chairman of the Board (Principal Michael J. Zwebner Financial and Accounting Officer) /s/ ALEXANDER WALKER, JR Director and Secretary January 13, 2005 - ------------------------ Alexander Walker, Jr. /s/ RAMSEY SWEIS Director January 13, 2005 - - --------------------- Ramsey Sweis /s/ CURTIS ORGILL Director and Chief Financial Officer January 13, 2005 - ----------------------- Curtis Orgil /s/ AMI R. ELAZARI Director January 13, 2005 - - --------------------- Ami R. Elazari
-27- -------------------------------------------------- UNIVERSAL COMMUNICATION SYSTEMS, INC. -------------------------------------------------- REPORT ON AUDIT OF FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2004 -------------------------------------- REUBEN E. PRICE & COMPANY PUBLIC ACCOUNTANCY CORPORATION UNIVERSAL COMMUNICATION SYSTEMS, INC. --------------------------- CONTENTS PAGE ---- FINANCIAL STATEMENTS: Report of Independent Auditor F-1 Consolidated Balance Sheet as of September 30, 2004 F-2 Consolidated Statements of Operations for the Years Ended September 30, 2004 and 2003 F-3 Consolidated Statements of Shareholders' Deficit for the Years Ended September 30, 2004 and 2003 F-4 Consolidated Statements of Cash Flows for the Years Ended September 30, 2004 and 2003 F-5 - F-6 Notes to Consolidated Financial Statements F-7 - F-21 ii INDEPENDENT AUDITOR'S REPORT Board of Directors and Shareholders of Universal Communication Systems, Inc. We have audited the accompanying consolidated balance sheet of Universal Communication Systems, Inc. and subsidiaries, as of September 30, 2004, and the related consolidated statements of operations, shareholders' deficit and cash flows, for the years then ended. The consolidated financial statements of Universal Communication Systems, Inc. and subsidiaries are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above, present fairly, in all material respects, the financial position of Universal Communication Systems, Inc. and subsidiaries, as of September 30, 2004 and 2003 and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3, the Company's current liabilities exceed current assets by $1,797,720, nd it has suffered recurring losses that raise substantial doubt about its ability to continue as going concern. Realization of a major portion of the assets is dependent upon the Company's ability to meet its future financing requirements, and the success of future operations, the outcome of which cannot be determined at this time. Management's plans in regard to these matters are also described in Note 3. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Reuben E. Price & Co. San Francisco, California January 13, 2005 F-1 Part I. FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS UNIVERSAL COMMUNICATION SYSTEMS, INC. & SUBSIDIARIES Consolidated Balance Sheet
September 30, 2004 ------------ ASSETS Current Assets: Cash & cash equivalents $ 453,134 Accounts receivable, net of allowances of 0 102,009 Notes receivable 128,357 Inventory, finished goods 41,994 Prepaid expenses 65,362 ------------ Total Current Assets 790,856 ------------ Fixed Assets, Net 411,817 ------------ Other Assets: Patents, net 540,914 Goodwill 30,000 Deposits 24,133 ------------ Total Other Assets 595,047 ------------ Total Assets $ 1,797,720 ============ LIABILITIES AND SHAREHOLDERS' DEFICIT Current Liabilities: Accounts payable, trade $ 254,012 Accrued expenses 1,201,987 Due to related party 31,744 Notes payable 60,000 Liabilities of discontinued operations 946,794 ------------ Total Current Liabilities 2,494,537 Long-term Liabilities: Convertible debentures 2,060,374 ------------ Total Liabilities 4,554,911 ------------ Commitments and Contingencies -- Shareholders' Deficit: Preferred stock, par value $.001 per share , 10,000,000 shares authorized, 30,000 shares issued and outstanding 30 Common stock, par value $.001 per share, 800,000,000 shares authorized, 202,900,000 shares issued and outstanding 202,900 Additional paid-in capital 32,509,910 Accumulated deficit (35,376,531) Accounts receivable, shareholder (93,500) ------------ Total Shareholders' Deficit (2,757,191) ------------ Total Liabilities and Shareholders' Deficit $ 1,797,720 ============
The accompanying notes are an integral part of these financial statements. F-2 UNIVERSAL COMMUNICATION SYSTEMS, INC. & SUBSIDIARIES Consolidated Statements of Operations
For the Year Ended September 30, 2004 2003 ------------ ----------- Revenues $ 375,007 $ -- Cost of Revenues 292,841 -- ------------ ----------- Gross Margin 82,166 -- ------------ ----------- Operating Expenses: Sales and marketing 403,787 151,804 Product development -- 62,333 Amortization of patent rights 75,000 -- General and administrative 2,832,670 1,785,431 ------------ ----------- Total Operating Expenses 3,311,457 1,999,568 ------------ ----------- Other Income & Expense: Interest income 11,575 -- Less: Interest expense 314,217 285,572 ------------ ----------- Total Other Expense 302,642 285,572 ------------ ----------- Net Loss $ 3,531,933 $ 2,285,140 ============ =========== Basic and Diluted Net Loss per Common Share $ 0.03 $ 0.09 ============ =========== Basic and Diluted Weighted Average Shares Outstanding 132,537,737 26,758,511 ============ ===========
The accompanying notes are an integral part of these financial statements. F-3 UNIVERSAL COMMUNICATIONS SYSTEMS, INC. & SUBSIDIARIES Consolidated Statements of Shareholders' Deficit For the Years Ended September 30, 2004 and 2003
Accumulated Common Stock Preferred Additional Other ---------------------- Stock Paid-in Accumulated Comprehensive Total Shares Amount Amount Capital Deficit Income Deficit ----------- -------- --------- ----------- ------------ ------------- ---------- Balance, September 30, 2002 5,967,990 $ 5,968 $-- $23,071,546 $(29,548,458) $-- (6,470,944) Common stock issued in private placements between $0.026 and $1.00 per share 22,742,301 22,742 -- 1,192,087 -- -- 1,214,829 Conversions of debentures for common stock between $0.0253 and $0.1275 per share 23,486,734 23,487 -- 693,578 -- -- 717,065 Common stock issued for services between $0.04 and $ 0.12 per share 18,008,770 18,009 -- 1,086,386 -- -- 1,104,395 Common stock issued for purchase of subsidiary at $.05 per share 5,000,000 5,000 -- 245,000 -- -- 250,000 Common stock issued for non-cash investments in patent rights at of $0.05 per share 4,000,000 4,000 -- 196,000 -- -- 200,000 Common stock issued between $0.033 and $1.00 per share in escrow, not paid 2,017,451 2,017 -- (2,017) -- -- -- Receivable from shareholder (93,500) (93,500) Net loss for the fiscal year ended, September 30, 2003 -- -- -- -- (2,285,140) -- (2,285,140) ----------- -------- --- ----------- ------------ -------- ----------- Balance, September 30, 2003 81,223,246 81,223 -- $26,482,580 $(31,833,598) $(93,500) $(5,363,295) Preferred stock issued in private placement at $10. per share for 30,000 shares -- -- 30 299,970 -- -- 300,000 Common stock issued in private placements between $0.02 and $.06 per share 60,593,464 60,595 -- 2,232,859 -- -- 2,293,454 Common stock issued in payment of note payable 300,000 300 -- 25,634 -- -- 25,934 Conversions of debentures for common stock between $0.0287 and $0.15 per share 43,506,234 43,506 -- 2,432,430 -- -- 2,475,936 Common stock issued for services between $0.040 and $0.11 per share 16,776,309 16,776 -- 1,006,938 -- -- 1,023,714 Common stock issued for purchase of subsidiary at $.06 per share 500,000 500 -- 29,500 -- -- 30,000 Dividends on preferred stock -- -- (11,000) -- (11,000) Net loss for the fiscal year ended, September 30, 2004 -- -- -- -- (3,531,933) -- (3,531,933) ----------- -------- --- ----------- ------------ -------- ---------- Balance, September 30, 2004 202,899,253 $202,900 $30 $32,509,911 $(35,376,531) $(93,500) (2,757,191) =========== ======== === =========== ============ ======== ==========
The accompanying notes are an integral part of these financial statements. F-4 UNIVERSAL COMMUNICATION SYSTEMS, INC. & SUBSIDIARIES Consolidated Statements of Cash Flows
For the Year Ended September 30, 2004 2003 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Loss $(3,531,933) $(2,285,140) Adjustments to reconcile net loss from operations to net cash used by operating activities: Common stock issued for services 1,023,714 1,104,395 Depreciation and amortization expense 88,079 5,690 Interest payable added to principal of debentures 79,330 239,513 Interest payable added to principal of note payable 15,254 30,509 Accrued interest on notes receivable (11,575) -- Changes in operating assets and liabilities: (Increase) Decrease in accounts receivable 3,850 (105,859) (Increase) in inventory (37,094) (4,900) (Increase) Decrease in prepaid and other (39,727) (85,249) Increase (Decrease) in accrued expenses and accounts payable 888,658 181,902 ----------- ----------- Net Cash (Used) by Operating Activities (1,521,444) (919,139) ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of patent rights (9,200) (100,000) Purchase of fixed assets (381,637) (37,662) Note receivable -- (116,782) (Increase) in advances to related parties (11,368) (46,676) ----------- ----------- Net Cash (Used) by Investing Activities (402,205) (301,120) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds of short term notes -- 60,000 Proceeds (repayment) of overdraft facility (25,721) 25,721 Repayment of note payable (274,066) -- Proceeds from issuance of common stock 2,293,452 1,214,829 Proceeds from issuance of preferred stock 300,000 -- Increase (Decrease) in advances from related parties (61,364) 63,517 ----------- ----------- Net Cash Provided by Financing Activities 2,232,101 1,364,067 ----------- ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 308,452 143,808 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 144,682 874 ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 453,134 $ 144,682 =========== ===========
The accompanying notes are an integral part of these financial statements. F-5 UNIVERSAL COMMUNICATION SYSTEMS, INC. & SUBSIDIARIES Consolidated Statements of Cash Flows
For the Year Ended September 30, 2004 2003 ---------- -------- CONTINUED: 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 $ 79,333 $239,852 Interest accrued on note payable added to the principal of the note $ 15,254 $ 30,509 Dividends accrued on preferred stock $ 11,000 Debentures converted to capital stock $2,475,936 $717,065 Capital stock issued in acquisition of subsidiary $ 30,000 $250,000 Capital stock issued in acquisition of patent rights $ -- $200,000 Capital stock issued in payoff of note payable $ 25,934 $ --
The accompanying notes are an integral part of these financial statements. F-6 Universal Communication Systems, Inc. and Subsidiaries Notes to the Consolidated Financial Statements September 30, 2004 NOTE 1 - BACKGROUND, ACQUISITIONS AND SUBSIDIARIES Background - ---------- Universal Communications Systems, Inc. (the Company) and its subsidiaries are actively engaged worldwide in developing and marketing solar energy systems, as well as systems for the extraction of drinkable water from the air. Consolidated subsidiaries include wholly-owned subsidiaries AirWater Corp, AirWater Patents Corp, Millennium Electric T.O.U. Ltd, Solar Style Inc (USA), and Solar One Inc, and Solar Style Ltd., and majority-owned subsidiary Millennium USA. AirWater Systems - ---------------- On March 21, 2003, the Company licensed worldwide rights to patents held by J.J. Reidy & Co, relating to a water production/generation system, for a period of not less than 10 years. In connection with the licensing, the Company created two wholly-owned subsidiaries: AirWater Corp, to produce and market the systems, and AirWater Patents Corp, to hold the Company's licensed patent rights. The Company paid $100,000 cash and 4 million shares of Company stock valued at $200,000. Additionally, the license agreement requires royalty payments of 5-7% of gross water system sales, with minimum royalty payments of $10,000 monthly beginning November 2003. The $300,000 acquisition cost is included in Patents. Millennium Solar Systems - ------------------------ On September 29, 2003, the Company completed an agreement to purchase 100% of the stock of Millennium Electric T.O.U. Ltd (Millennium), an Israeli company specializing in the development and installation of solar power systems worldwide. Terms included an initial transfer of 5 million shares of Company stock, valued at $250,000, with options for the sellers to purchase an additional 22 million shares at various exercise prices, ranging from $0.05 to $0.39 per share, to be granted under various conditions related to certain future events and future Company performance standards. The Company's purchase cost plus net liabilities assumed, resulted in $300,064 of intangibles in the form of patent costs, which is included in Patents. As discussed in Note 12, no amortization or impairment has been recognized. Two new wholly-owned US subsidiaries, Solar One Inc and Solar Style Inc (USA), were created by the Company to market the solar systems. As of September 30, 2003, they were inactive, with no assets or liabilities. For the fiscal year ended September 30, 2004 Solar One Inc. remains inactive. Solar Style Inc. (USA) has leased office space in Baltimore Maryland, and contracted with manufactures to bring to marked solar powered products for the portable consumer market. At this time no units have been sold. Millennium has two subsidiaries: 65%-owned Millennium USA, and 50%- owned Solar Style Ltd. Both are inactive, with no assets or liabilities. The Company purchased the remaining 50% of Solar Style Ltd. from an outside investor for 500,000 shares valued at $30,000. Solar Style LTD was purchase to create a controlling interest, and to obtain sole use of the name Solar Style. The Company, and its wholly owned subsidiary Millennium, now own 100% of Solar Style Ltd. Millennium's assets and liabilities are included in the Company's consolidated balance sheet at September 30, 2003. However, Millennium's results are not included in the Company's consolidated statements of operations, shareholders' deficit, or cash flows for the year ended September 30, 2003. Millennium's results are included in the Company's statements of operations, sharekholders' deficit, and statement of cash flows for the year ended September 30, 2004. F-7 Universal Communication Systems, Inc. and Subsidiaries Notes to the Consolidated Financial Statements September 30, 2004 NOTE 1 - BACKGROUND, ACQUISITIONS AND SUBSIDIARIES (continued) Millennium Solar Systems (continued) - ------------------------------------ The following pro forma data is presented on a combined basis, as if Millennium had been acquired as of October 1, 2001: 2003 ----------- Revenues $ 162,066 Expenses 2,477,052 ----------- Net (Loss) ($2,314,986) =========== Basic & Diluted Loss per Share ($0.09) ===== Hard Disc Cafe, Inc. - -------------------- During fiscal 2002, the Company advanced $147,794 and signed a non- binding letter of intent to acquire Hard Disc Cafe, Inc. (HDC), a Florida corporation, majority-owned by an officer of the Company. HDC intended to develop and license themed internet cafes. During 2002, HDC ceased all operations and returned $10,699 to the Company. As a result, the Company recognized a loss of $26,397 in fiscal 2003. Card Universal Corporation, Inc. - -------------------------------- During fiscal 2003, the Company entered into a non-binding letter of intent to acquire Card Universal Corporation, Inc. (CUC), a privately held development stage Florida corporation of which an officer of the Company was CEO and a major shareholder. CUC intended to provide and market prepaid "Stored Money Cards". CUC has ceased its development activities, is currently inactive, and the acquisition has been abandoned. Digital Way, Peru - ----------------- The Company owns 27% of Digital Way, S.A., a Peruvian telecommunications company. The Company treats Digital Way as an unconsolidated investment. Pursuant to APB 18, par 17, absent evidence to the contrary, and investor is presumed to have the ability to significantly influence an investee if it owns 20% or more of the investee's voting stock and the equity method of accounting is required. Because the majority ownership is concentrated among a small group of shareholders who operate Digital Way without regard to the views of Universal and the financial information necessary to apply the equity method of accounting is not being made available, Universal is unable to apply the equity method. Because significant doubt exists as to the recovery from this investment, the investment is fully impaired. CinemaElectric - --------------- During fiscal 2003, the Company agreed to acquire CinemaElectric, a Los Angeles based multimedia messaging service company. On August 12, 2003, the Company released CinemaElectric from the agreement in exchange for 10% of CinemaElectric's stock, which was received in the fiscal year ended September 30, 2004. As of the date of publishing these financial statements, no value could be calculated on the shares of this non- publicly traded company. At such time as a value can be determined, the Company will record the 10% investment in CinemaElectric. F-8 Universal Communication Systems, Inc. and Subsidiaries Notes to the Consolidated Financial Statements September 30, 2004 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation - --------------------------- The consolidated financial statements include the accounts of all majority-owned subsidiaries. Investments in which the Company has the ability to exercise significant influence, but not control, are accounted for by the equity method. All other investments are carried at the lower of cost or fair value. Intercompany transactions are eliminated. Basic and Diluted Net Loss Per Share - ------------------------------------ The calculation of basic and diluted net loss per share is in accordance with Statement of Financial Accounting Standards No. 128, "Earnings Per Share". Net loss per common share, basic and diluted, has been computed using weighted average common shares outstanding. The effect of outstanding stock options and warrants totaling 27,521 in fiscal 2003 and 18,083,131 in 2004 has been excluded from the dilutive computation, as their inclusion would be anti-dilutive. F-9 Universal Communication Systems, Inc. and Subsidiaries Notes to the Consolidated Financial Statements September 30, 2004 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Fiscal Year Ended September 30, 2004 2003 -------------- ------------ Net loss $ (3,531,933) $ (2,285,140) ============== ============ Weighted average number of common shares 132,537,737 26,758,511 ============== ============ Basic and diluted loss per share $ (0.03) $ (0.09) ============== ============ Cash Equivalents - ---------------- The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. Balances in bank accounts may, from time to time, exceed federal insured limits. Inventory - --------- Inventory is stated at the lower of cost (determined using the "first- in, first-out" method) or market. Inventory write-offs are provided to cover risks arising from slow-moving items or obsolescence. Fixed Assets - ------------ Furniture, fixtures and equipment are depreciated over their estimated useful lives of 3 to 15 years, using the straight-line method of depreciation. Long-Lived Assets - ----------------- The Company reviews its long-lived assets on a quarterly basis to determine any impairment in accordance with Statement of Financial Accounting Standards (SFAS) No. 144. This statement provides a single accounting model for long-lived assets to be disposed of and significantly changes the criteria that would have to be met to classify an asset as held-for-sale. Classification as held-for-sale is an important distinction since such assets are not depreciated and are stated at the lower of fair value and carrying amount. This statement also requires expected future operating losses from discontinued operations to be displayed in the period(s) in which the losses are incurred, rather than as of the measurement date as previously required. F-10 Universal Communication Systems, Inc. and Subsidiaries Notes to the Consolidated Financial Statements September 30, 2004 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Estimates - --------- The preparation of financial statements in conformity with generally accepted accounting principles 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 revenues and expenses during the reporting period. Actual results could differ from those estimates. Fair Value of Financial Instruments - ----------------------------------- For cash, cash equivalents, other assets, accounts payable, and accrued expenses, the carrying amounts represent their fair market value. The carrying amount of the debentures payable approximates fair value because of similar current rates at which the Company could borrow funds with consistent remaining maturities. Segment Information - ------------------- The Company adopted Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" (SFAS No. 131) in 1999. This statement establishes standards for the reporting of information about operating segments in annual and interim financial statements and requires restatement of prior year information. The Company has no reportable operating segments for the years ended September 30, 2004 and 2003. All products and services in the current fiscal year, are related to one operating segment, the installation of solar energy products worldwide. Comprehensive Income and Foreign Currency Translation - ----------------------------------------------------- The Company has adopted FASB Statement No. 130, Reporting Comprehensive Income. The Company's foreign subsidiaries transactions are recorded in New Israeli Shekels ("NIS"); however, most of the company's revenues are received in U.S. dollars or linked to the U.S. dollar, and a substantial portion of its costs is incurred in U.S. dollars Accordingly, the Company has determined the U.S. dollar as the currency of its primary economic environment and thus its functional and reporting currency. The financial statements of the Company's foreign subsidiaries are measured using the U.S. dollar as the functional currency. Where there are foreign currency transactions, assets and liabilities are translated at exchange rates as of the balance sheet date and revenues and expenses were translated at average rates of exchange in effect during the year. Any cumulative translation adjustments are recorded as a separate component of shareholders' equity. Revenue Recognition and Trade Accounts Receivable - ------------------------------------------------- The Company's revenues are recognized when contracted services are provided for or products are shipped to unaffiliated customers. The Securities and Exchange Commission's Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition" provides guidance on the application of generally accepted accounting principles to selected revenue recognition issues. The Company has concluded that its revenue recognition policy is appropriate and in accordance with generally accepted accounting principles and SAB No. 101. Trade accounts receivable older than 90 days are considered past due and are subject to write down. Fixed Assets - ------------ Fixed assets are recorded at cost. Additions and improvements are capitalized; these include all material, labor, and engineering costs to design, install or improve the asset. Interest costs on construction projects are also capitalized. These costs are carried as construction in progress until the asset is ready for its intended use, at which time the costs are transferred to land, buildings, or machinery and equipment. Routine repairs and maintenance are expensed as incurred. The cost of plant and equipment is depreciated using the straight-line method over the estimated useful life of the asset. In compliance with SFAS 144, long-lived assets are reviewed for impairment whenever in management's judgment conditions indicate a possible loss. Such impairment tests compare estimated undiscounted cash flows to the recorded value of the asset. If an impairment is indicated, the asset is written down to its fair market value or, if fair market value is not readily determinable, to an estimated fair value based on discounted cash flows. Goodwill - -------- Under SFAS No. 142, Goodwill and Other Intangible Assets, goodwill is now subject only to impairment reviews. A fair-value-based test is applied at the reporting unit level, which is generally one level below the segment level. This test requires various judgments and estimates. A goodwill impairment loss will be recorded for any goodwill that is determined to be impaired. Goodwill is tested for impairment at least annually. Patents - --------------------------- Patents are amortized for their patents life of 15 years. In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, all intangible assets are assessed for impairment whenever events indicate a possible loss. Such an assessment involves estimating undiscounted cash flows over the remaining useful life of the intangible. If the review indicates that undiscounted cash flows are less than the recorded value of the intangible asset, the carrying amount of the intangible is reduced by the estimated cash-flow shortfall on a discounted basis, and a corresponding loss is charged to the Statement of Consolidated Operations. Stock Based Compensation - ------------------------ From time to time the company has compensated key employees with shares of common stock in lieu of salary (see note 12 on related party transactions). Shipping Costs - -------------- The company incurred no significant shipping costs in the current year. Advertising Costs - ----------------- Advertising costs are expensed as incurred. Recent Accounting Pronouncements - -------------------------------- In October 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations" ("SFAS No. 143"). SFAS No. 143 establishes guidelines related to the retirement of tangible F-11 Universal Communication Systems, Inc. and Subsidiaries Notes to the Consolidated Financial Statements September 30, 2004 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Recent Accounting Pronouncements (continued) - -------------------------------------------- long-lived assets of the Company and the associated retirement costs. This statement requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived assets. This statement is effective for financial statements issued for the fiscal years beginning after June 15, 2002 and with earlier application encouraged. The Company adopted SFAS No. 143 and the adoption did not have a material impact on the financial statements of the Company at September 30, 2003. In October 2001, the Financial Accounting Standards Board issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"). SFAS No. 144 replaces SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of." This standard establishes a single accounting model for long-lived assets to be disposed of by sale, including discontinued operations. SFAS No. 144 requires that these long-lived assets be measured at the lower of carrying amount or fair value less cost to sell, whether reported in continuing operations or discontinued operations. This statement is effective beginning for fiscal years after December 15, 2001, with earlier application encouraged. The Company adopted SFAS No. 144 and the adoption did not have a material impact on the financial statements of the Company at September 30, 2003. In April 2002, the Financial Accounting Standards Board issued SFAS No. 145, "Rescission of FASB Statements No. 44, 4 and 64, Amendment of FASB Statement No. 13, and Technical Corrections" ("SFAS No. 145"), which updates, clarifies and simplifies existing accounting pronouncements. FASB No. 4, which required all gains and losses from the extinguishment of debt to be aggregated and, if material, classified as an extraordinary item, net of related tax effect was rescinded. As a result, FASB No. 64, which amended FASB No. 4, was rescinded as it was no longer necessary. SFAS No. 44, "Accounting for Intangible Assets of Motor Carriers", established the accounting requirements for the effects of transition to the provisions of the Motor Carrier Act of 1980. Since the transition has been completed, SFAS No. 44 is no longer necessary and has been rescinded. SFAS No. 145 amended SFAS No. 13 to eliminate an inconsistency between the required accounting for sale- leaseback transactions and the required accounting for certain leases modifications that have economic effects that are similar to sale- leaseback transactions. The Company adopted SFAS No. 145, which has not had a material effect on the Company's financial statements. F-12 Universal Communication Systems, Inc. and Subsidiaries Notes to the Consolidated Financial Statements September 30, 2004 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Recent Accounting Pronouncements (continued) - -------------------------------------------- In June 2002, the Financial Accounting Standards Board issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS No. 146"). SFAS No. 146 addresses significant issues regarding the recognition, measurement, and reporting of costs associated with exit and disposal activities, including restructuring activities. SFAS No. 146 also addresses recognition of certain costs related to terminating a contract that is not a capital lease, costs to consolidate facilities or relocate employees, and termination benefits provided to employees that are involuntarily terminated under the terms of a one-time benefit arrangement that is not an ongoing benefit arrangement or an individual deferred-compensation contract. SFAS No. 146 was issued in June 2002, effective December 31, 2002 with early adoption encouraged. There has been no impact on the Company's financial position or results of operations from adopting SFAS No. 146. In April 2003, the Financial Accounting Standards Board issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities" (hereinafter "SFAS No. 149"). SFAS No. 149 amends and clarifies the accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". This statement is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The adoption of SFAS No. 149 did not have a material impact on the financial position or results of operations of the Company. In May 2003, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity" (hereinafter "SFAS No. 150"). SFAS No. 150 establishes standards for classifying and measuring certain financial instruments with characteristics of both liabilities and equity and requires that those instruments be classified as liabilities in statements of financial position. Previously, many of those instruments were classified as equity. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003 and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The Company has determined that there was no impact on the Company's financial statements from the adoption of this statement. In January 2003, the Financial Accounting Standards Board issued FASB Interpretation No. (FIN)46 "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51" (hereinafter "FIN 46"). FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial F-13 Universal Communication Systems, Inc. and Subsidiaries Notes to the Consolidated Financial Statements September 30, 2004 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Recent Accounting Pronouncements (continued) - -------------------------------------------- interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective for all new variable interest entities created or acquired after January 31, 2003. The provisions of FIN 46 must be applied for the first interim or annual period beginning after June 15, 2003. The Company does not have any entities that require disclosure or new consolidation as a result of adopting the provisions of FIN 46. In November 2002, the Financial Accounting Standards Board issued FIN 45 "Guarantor's Accounting and Disclosure Requirements for Guarantees, including Indirect Guarantees of Indebtedness of Others." FIN 45 requires a company, at the time it issues a guarantee, to recognize an initial liability for the fair value of obligations assumed under the guarantee and elaborates on existing disclosure requirements related to guarantees and warranties. The initial recognition requirements of FIN 45 are effective for guarantees issued or modified after December 31, 2002 and do not have an impact on the financial statements of the Company. The Company does not anticipate issuing any guarantees which would be required to be recognized as a liability under the provisions of FIN 45 and thus does not expect the adoption of this interpretation to have an impact on its results of operations or financial position. Revenues form the sales of products are recognized in accordance with Staff Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements when persuasive evidence of an arrangement exists, delivery of the product has occurred, provided the collection of resulting receivable is probable, the price is fixed or determinable and no significant obligation exists. The Company does not grant right of return. NOTE 3 - 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's current liabilities exceed current assets by nearly $1.704,000, and have experienced losses since inception, and had an accumulated deficit of $35,377,000 at September 30, 2004. 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 has modified its business plan and is currently focusing its operations on the design, manufacture and sale of water production and generation systems along with solar power systems. The Company needs to secure additional capital through sales of common stock. There is no assurance that management will be successful in its efforts to raise additional capital. NOTE 4 FIXED ASSETS September 30 2004 2003 -------- ------- Cost: Furniture, fixtures and equipment $ 49,123 $29,686 Office leasehold improvements 4,780 -- Equipment molds 21,000 -- Demonstration equipment Air Water 362,234 25,814 Demonstration equipment Solar One 9,338 9,338 -------- ------- Total 446,475 64,838 -------- ------- Accumulated depreciation and amortization: Furniture, fixtures and equipment 29,979 21,579 Office leasehold improvements 1,304 -- Equipment molds 3,375 -- Demonstration equipment Air Water -- -- Demonstration equipment Solar One -- -- -------- ------- Total accumulated depreciation and amortization 34,658 21,579 -------- ------- Depreciated cost $411,817 $43,259 ======== ======= Depreciation and amortization expense for the fiscal year $ 13,079 $ 5,690 ======== ======= Depreciation of furniture, fixtures and office equipment is computed on the straight-line basis over periods of 3 to 10 years. Leasehold improvements are amortized on the straight-line basis for the period of the space lease. Equipment molds are being depreciated on the straight-line basis for 3 to 5 years. NOTE 5 - COMMITMENTS AND CONTINGENCIES Litigation - ---------- In November 1998, the Company and its predecessor affiliates filed an action against the lessor of its leases for the Concord and San Marcos, California multipoint distribution service channels. Thereafter, the lessor cross-complained against the Company and its predecessors, alleging breach of contract. On December 9, 1999, a settlement agreement was signed. Under terms of the settlement agreement, the Company had an option to purchase the Concord and San Marcos leases for a price of $250,000 each, less lease payments already made. The Company elected to exercise the option to purchase the Concord lease, and the appropriate transfer procedure has been initiated with the U.S. Federal Communications Commission (FCC) which is still pending. The Company believes that under current FCC regulations it is not required to pay the $250,000 purchase price until such time as the FCC has approved the transfer of the license, and has made no payment. Management has abandoned the pursuit of these leases and licenses. During 1999, the Company borrowed $740,000 from Credit Bancorp. Also in 1999, the Company filed suit against Credit Bancorp in US District Court in San Francisco, regarding improprieties. The case was settled in 1999, with the $740,000 loan converting to a $740,000 convertible debenture. In 2000, Credit Bancorp's receiver agreed to convert the debenture into 462 shares of the Company's stock. A new receiver has been appointed to administer the affairs of Credit Bancorp. The Company has been informed that the appointed receiver denies that such a conversion request was made, and the Company may be liable for the principal plus accrued interest. As of September 30, 2003, no shares had been issued. Management believes that the receiver's claim lacks an authoritative basis, and that the resolution of these matters will not have a material effect on the Company's financial statements. On April 19, 2001, the Company was served with a complaint alleging unjust enrichment and a violation of California Business and Professions Code by Broad Horizons, Inc., a Florida corporation. The complaint stems from allegations that the Company improperly received monetary benefits from the Company's intended acquisition of Comunicacoes 100Fio, Ltda, a Brazilian corporation, and the Company's subsequent relations with Luis Cuza, a former vice-president and director of Broad Horizons, Inc., and a former member of the Company's board of directors. The Company denies the allegations and believes that the resolution of this matter will not have a material effect on the Company's financial statements. In fiscal 2003, Electric & Gas Technology Inc (ELGT) filed suit against the Company in Federal District Court in Texas, alleging patent infringement and other claims regarding the Company's AirWater products. This suit was dismissed without prejudice, for venue/jurisdictional reasons. It is not yet clear whether ELGT will re-file in another jurisdiction. The Company has counter-sued ELGT in Federal District Court in Florida for defamation and patent infringement, which case is still pending. Management believes that the resolution of these matters will not have a material effect on the Company's financial statements. F-14 Universal Communication Systems, Inc. and Subsidiaries Notes to the Consolidated Financial Statements September 30, 2004 NOTE 5 - COMMITMENTS AND CONTINGENCIES (continued) Operating Leases - ---------------- During 2003, the Company converted the lease of its Miami executive and administrative offices to a month-to-month basis. The Company's Millennium subsidiary in Israel rents facilities under non-cancelable operating leases for periods ending in 2005, and also leases a car under a 36-month lease commencing October 2003. Future minimum lease payments required under these leases are as follows at September 30, 2003: Fiscal year Ending September 30, -------------------- 2005 $13,512 2006 13,512 ------- $27,024 ======= Management Agreement - -------------------- The Company entered into a three year consulting agreement with Overseas Communications Limited ("Overseas") on November 2, 2001, for Mr. Michael Zwebner to act as Chairman and CEO of the Company. This agreement was extended by one year on November 1, 2004. The Agreement calls for a monthly payment of $20,000, payable in cash or the Company's common stock. For the fiscal years ended September 30, 2004 and 2003, the Company paid $157,000 and $83,000 in cash, respectively, and issued 85,000 and 3,160,742 shares of common stock, respectively, under this agreement. Mr. Zwebner is a shareholder of Overseas. Settlement Agreement - -------------------- As described more fully in Note 9, below, the Company has entered into a settlement agreement with the Andrew Corporation, formerly a major supplier to the Company. The related note payable for $300,000 was fully satisfied with the issuance of 300,000 shares valued at $25,934. Concentrations - -------------- The Company's wholly owned subsidiary Millennium depends on many third- party suppliers and manufacturers for key products and components, contained in our products. For some of these products and components, Millennium may only use a single source supplier, in part due to the lack of alternative sources of supply. If the supply of a key product or component is delayed or curtailed, Millennium's ability to ship the related product or solution in desired quantities and in a timely manner could be adversely affected, possibly resulting in reductions in net sales Consultant Agreements - --------------------- In September 2003, the Company entered into two consulting agreements with two Millennium executives. The remaining contingent obligations on these agreements at September 30, 2003 totals $114,000. The consulting agreements expired in the fiscal year ended September 30, 2004 with no remaining contingent obligations. AirWater Minimum Royalty Payments - --------------------------------- As discussed more fully in Note 1, the Company's license agreement, through its AirWater subsidiary, requires monthly royalty payments of $10,000 per month through October 2013. NOTE 6 NOTES PAYABLE Notes payable consist of a non-interest bearing debt instruments. Interest on these notes has been imputed and accrued at 8%. These notes are past due, but are expected to be paid in full in the coming fiscal year. NOTE 7 - SHAREHOLDERS' EQUITY During the fiscal year ended September 30, 2004, the Company sold 60,593,464 shares of its common stock for net cash proceeds of $2,293,454. The Company issued 43,506,234 shares of common stock in conversion of outstanding debentures for an aggregate value of $2,475,936. The Company also issued 16,776,309 shares of its common stock for services at an aggregate value of $1,023,714. Stock issued for services was at the reported market price for the shares at the time of issuance. The Company issued 500,000 shares valued at $30,000 for the purchase of a 50% equity interest in Solar Style Ltd. (see Note 1). The Company has 100,000,000 of authorized preferred shares. On April 20, 2004 the Company received $300,000 for the issuance 30,000 shares of Series A cumulative, non-participating convertible preferred stock. Holders of the preferred shares are entitled to receive cumulative cash dividends at the annual rate of 8%. Each Preferred shares is convertible at the option of the holder, into shares of common stock. Interest accrued, but not paid on the preferred stock was $11,000 for the year ended September 30, 2004. During the fiscal year ended September 30, 2003, the Company sold 22,742,301 shares of its common stock for net cash proceeds of $1,214,829. The Company issued 23,486,734 shares of common stock in conversion of outstanding debentures for an aggregate value of $717,065. The Company also issued 18,008,770 shares of its common stock for services at an aggregate value of $1,104,395. Stock issued for services was at the reported market price for the shares at the time of issuance. F-15 Universal Communication Systems, Inc. and Subsidiaries Notes to the Consolidated Financial Statements September 30, 2004 NOTE 8 - INCOME TAXES A reconciliation between the actual income tax benefit and the federal statutory rate follows:
Fiscal years ended September 30, 2004 2003 ---------------------- ------------------- Amount % Amount % ------ --- ------ --- Computed income tax benefit at statutory rate $ 1,205,000 34 % $656,000 34 % Tax benefit reserved for doubtful valuation (1,205,000) (34)% (656,000) (34)% ----------- -------- Income tax benefit None None ---- ----
At September 30, 2004 the Company had a net operating loss carry forward for federal tax purposes of approximately $32,832,000 which, if unused to offset future taxable income, will expire between the years 2011 to 2023. A valuation allowance has been recognized to offset the related deferred tax assets due to the uncertainty of realizing any benefit therefrom. Under section 382 of the Internal Revenue Code, the utilization of net operating loss carryforwards is limited after an ownership change, as defined, to an annual amount equal to the market value of the loss corporation's outstanding stock immediately before the date of the ownership change multiplied by the highest Federal long-term tax exempt rate in effect for any month in the 3 calendar month period ending in the calendar month in which the ownership change occurred. Due to the ownership changes as a result of the May 1998 reorganization and subsequent stock issuances, any future realization of the Company's net operating losses will be severely limited. Significant components of the Company's deferred tax assets are as follows: 2004 2003 ----------- ----------- Net operating loss carryforwards $32,832,000 $29,300,000 Valuation allowance (32,832,000) (29,300,000) ---------- ---------- Net deferred tax assets None None ==== ==== It is the intention of the Company to file a consolidated tax return. F-16 Universal Communication Systems, Inc. and Subsidiaries Notes to the Consolidated Financial Statements September 30, 2004 NOTE 9 - STOCK OPTION PLANS Nonstatutory Stock Options - -------------------------- The Company has issued stock options under nonstatutory stock option agreements. The options are granted at the fair market value of the shares at the date the option is granted. The options are granted for a period of 5 years, and are fully exercisable during the term of the option period or within thirty (30) days of the participant's resignation or termination. The range of exercise price is from $1.63 to $0.95. All shares have vested and are exercisable. Combined transactions in non-employee options for the fiscal years ended September 30, 2004 and 2003 are as follows:
2004 2003 -------------------- ------------------- Average Average Number of Exercise Number of Exercise Shares Price Shares Price --------- ------- --------- ------- Options outstanding October 1 1,300 $0.095 251,400 $0.095 Granted -- -- -- -- Expired (250) -- -- -- Exercised -- -- (250,000) .095 ----- ------ -------- ------- Options outstanding, September 30 1,050 $0.095 1,300 $0.095 ===== ====== ======== ======
Incentive Stock Plan - -------------------- The Company adopted an incentive stock plan on August 5, 1998, which was approved by the shareholders on March 1, 2001. The options are granted at the fair market value of the shares at the date that the option is granted. The options are granted for a period of 10 years, and are exercisable after one year from the date of grant, at a vested rate of 20% per year during the term of the option period or within thirty (30) days of the participant's resignation or termination. The number of shares of stock covered by each outstanding option, and the exercise price per share thereof set forth in each such option, shall be proportionately adjusted for any stock split, and or stock dividend. All such options were being treated as non-statutory stock options until the incentive stock plan was approved by the shareholders. There is no range of exercise price, all shares have an exercise price of $0.593. All shares have vested and are exercisable. F-17 Universal Communication Systems, Inc. and Subsidiaries Notes to the Consolidated Financial Statements September 30, 2004 NOTE 9 - STOCK OPTION PLANS (continued) Combined transactions in employee options for the fiscal years ended September 30, 2004 and 2003 are as follows:
2004 2003 -------------------- ------------------- Average Average Number of Exercise Number of Exercise Shares Price Shares Price --------- ------- --------- ------- Options outstanding October 1 6,100 $0.593 6,300 $0.593 Granted 0 0 0 0 Expired (1,650) 0 (200) 0 Exercised 0 0 0 0 ------ ------ ----- ------ Options outstanding, September 30 4,450 $0.593 6,100 $0.593 ====== ====== ===== ======
The Company applies APB Opinion 25 in accounting for its stock compensation plans discussed above. Accordingly, no compensation costs have been recognized for these plans in 2004 or 2003. Had compensation costs been determined on the basis of fair value pursuant to FASB Statement No. 123, no compensation costs would have been recognized inasmuch as no options were granted under these plans. NOTE 10- SECURITIES PURCHASE AGREEMENTS AND DEBENTURES On April 14, 2000, the Company entered into a Securities Purchase Agreement with six investors, for the purchase of investment units, consisting of common stock, common stock purchase warrants, 4% subordinated debentures maturing April 14, 2005, and preferred stock. On August 10, 2000 and again on October 18, 2000, the Company agreed with the investors to modify certain terms of the earlier funding agreement including elimination of the warrants and the preferred stock. The investors acquired $6,720,000 of 4% subordinated debentures. Interest is compounded semi-annually on the aggregate principal amount and is payable upon conversion, redemption or maturity of the debentures. Accumulated accrued interest is payable by increasing the aggregate principal amount of the debentures semi- annually and convertible into common stock of the Company. The debentures are not callable and can be converted into common stock at the option of the Holder at any time. The debentures are convertible generally at 85% of the average per share market value for the 5 consecutive trading days immediately prior to the conversion date. On March 29, 2001, the Company entered into a Senior Secured Convertible Debentures and Warrants Purchase Agreement with several investors. On June 7, 2001 the Company and several investors agreed to amend the March 29, 2001 Senior Secured Convertible Debentures and Warrants Purchase Agreement. The investors agreed to purchase $200,000 principal amount of 8% senior convertible debentures, maturing in February and March 2005. The Company also agreed to issue letter warrants to purchase up to $125,000 divided by 85% of the average of the three lowest bid prices during the 22 trading days prior to June 7, 2001. Interest is computed at 8% per annum on the principal amount, compounded quarterly and is payable upon conversion, redemption or maturity of the debentures. The debentures are convertible generally at 70% of the average of the 3 lowest bid prices during the 22 trading days immediately prior to the conversion date. In July 2003, an individual purchased a 4% Convertible Debenture with a principal amount of $100,000, maturing in 2005, from an existing bondholder. The debenture, as amended, allows its conversion at any time into 2,300,000 freely transferable shares of the Company's stock. F-18 Universal Communication Systems, Inc. and Subsidiaries Notes to the Consolidated Financial Statements September 30, 2004 NOTE 10- SECURITIES PURCHASE AGREEMENTS AND DEBENTURES (continued) Commencing on February 5, 2002 through September 30, 2002, debenture holders exercised their option to convert $2,492,885 of 4% debentures and $123,551 of 8% debentures into 4,898,636 shares of common stock. During the fiscal year ended September 30, 2003, debenture holders exercised their option to convert $717,065 of 4% debentures into 23,486,734 shares of common stock. During the fiscal year ended September 30, 2004, debenture holders exercised their option to convert $1,921,902 of 4% debentures into 28,019,978 shares of common stock and $554,034 of 8% debenture into 15,486,256 shares of common stock. The balance of long-term debentures is shown in the following table. All of the debentures are due in the year 2005. Balance Outstanding September 30, 2004 4% Debenture $1,537,975 8% Debentures 522,399 ---------- Total long term $2,060,374 ========== NOTE 11- SETTLEMENT AGREEMENT AND NOTE PAYABLE On January 14, 2001, the Company entered into a Settlement Agreement with its systems integrator, Andrew Corporation, to repay costs incurred in purchasing their services and equipment in an approximate amount of $1,400,000. Under the Agreement, Andrew received an initial payment of $100,000 and was scheduled to receive and additional $100,000 each month until the loan was repaid. No payments were made. On September 3, 2002, the Company reached a settlement agreement with Andrew Corporation for all amounts due. The Company issued a note in the amount of $300,000 due in April 2004. The note bore no interest and was secured by 300,000 shares of the Company's common stock. The amount due was paid in April 2004,of which, $274,066 was in cash, and the balance with the issuance of 300,000 shares of common stock valued at $25,634. F-19 Universal Communication Systems, Inc. and Subsidiaries Notes to the Consolidated Financial Statements September 30, 2004 NOTE 11 - SETTLEMENT AGREEMENT AND NOTE PAYABLE (continued) Because there was no stated interest, $45,763 was calculated as imputed interest, resulting in a stated value of the note payable of $254,237 recorded as part of Notes Payable. Interest expense of $15,254 and $30,509 was computed for the years ended September 30, 2003 and 2004 and was added to the stated value of the note, increasing the stated value at the time of finale payment of the note payable in April 2004 to $300,000. NOTE 12 - RELATED PARTY TRANSACTIONS The Company has a payable to officers of its subsidiary, Millennium, of $31,744. The Company expects to pay in full, all amounts owed to related parties in the next fiscal year. Mr. Zwebner advanced certain funds to the Company, of which $11,368 was outstanding and payable to him at September 30, 2003. Furthermore, Mr. Zwebner assumed a liability owing to the Company from a third party, resulting in an Account Receivable, Shareholder of $93,500. As discussed in Note 12, the Company entered into a three year consulting agreement with Overseas Communications Limited ("Overseas") on November 2, 2001, for Mr. Michael Zwebner to act as Chairman and CEO of the Company. The Agreement calls for a monthly payment of $20,000, payable in cash or the Company's common stock. For the fiscal years ended September 30, 2004 and 2003, the Company paid $135,000 and $80,000 in cash, respectively, and issued 1,316,666 and 3,160,742 shares of common stock, respectively, under this agreement. Mr. Zwebner is a controlling shareholder of Overseas. Additionally, Mr. Zwebner was issued 4,505,000 shares of stock valued at $150,125 for the year ended September 30, 2004 for expenses incurred on behalf of the Company. During the 2004 fiscal year, the Company issued 1,980,167 shares valued at $118,810 to Millennium President Mr. Ami Alizari, as compensation for services. During the 2004 fiscal year, the Company issued 1,165,909 shares valued at $128,250 to the Company's board member, Mr. Ramsey Sweis, as compensation for his services. During the 2004 fiscal year, the Company paid $8,352 to its stock registrar, The Nevada Agency and Trust Company (NATCO). Alexander Walker Jr, the Company's Corporate Secretary and a Director, is the Chairman and a shareholder of NATCO. Mr. Walker also received 500,000 shares of the Company's stock as compensation for legal services in the year ended September 30, 2003. Mr. Curt Orgil, the Company's Treasurer and a Director, received 200,000 shares of the Company's stock as compensation for financial services in the year ended September 30, 2003. NOTE 13- PRODUCT DEVELOPMENT COSTS The Company does not capitalize costs for improvement or refinement of existing products. Product development expenses charged against earnings were $62,333 and $0 in the fiscal years ended September 30, 2003 and September 30, 2004, respectively. The Company has changed its focus from product development to instillation and consulting. F-20 Universal Communication Systems, Inc. and Subsidiaries Notes to the Consolidated Financial Statements September 30, 2004 NOTE 14- PATENTS Intangibles consist of $300,064 of goodwill allocated to patents, related to the Millennium acquisition (see Note 1), and $306,650 of patent and related license costs, $300,000 of which relates to the acquisition of the AirWater patent licenses from J.J. Reidy (also see Note 3), and $6,650 of which relates to the Company's distributed wireless call processing (DWCP) system. No amortization is recognized during fiscal 2003 on the Millennium patents, because they were acquired at the end of the year. For the year ended September 30, 2004 $30,000 in amortization expense was recognized. No amortization is recognized during fiscal 2003 on the AirWater and DWCP patents, because production was limited to retypes and demonstration units. For the year ended September 30, 2004 $45,000 in amortization was recognized. It was determined after as a subsequent event that the DWCP patents were deemed to be fully impaired (see footnote 16 on subsequent events). It is estimated that amortization expense over the next five years will total $375,000. However, with the Company's adoption of SFAS No. 142, intangible assets will be tested for impairment annually, and will be tested for impairment between annual tests if an event occurs that would indicate that the carrying amount may be impaired. The amount of the impairment loss is calculated by the excess of the asset's carrying value over its fair value. Management has analyzed the patents and licenses, and has determined that there is no impairment at this time. Patents are being amortized on a straight-line bases over their 10 year life. NOTE 15 - NOTES RECEIVABLE The Companies investment in notes receivable consists solely of demand notes maturing in less than one year, in the amount of $128,357 and $116,782 for the years ended September 30, 2003 and 2004, respectively. Investments with maturities of less than one year are classified as short-term investments. These investments are carried at cost (which approximates fair value), with an interest rate of 10% per annum. NOTE 16 - SUBSEQUENT EVENTS On December 15, 2003, the Company tentatively agreed to acquire 51% of GiraSOLAR BV, a Dutch holding company with 2 subsidiaries, Stroomwerk Energy and Solar Service Buro, both involved in the photo-voltaic solar industry. The Company is in the process of conducting its due diligence in connection with this proposed acquisition. As part of the agreement to acquire GiraSOLAR, 36,000,000 shares are being held in escrow. If the sale of GiraSOLAR is finalized, the Company shares will become the property of GiraSOLAR shareholders. As of the date of this report, the Company is continuing doing its due diligence and legal preparatory work, in anticipation of closing the acquisition. It was determined after the conclusion of audit field work that patents associated with Companies distributed wireless call processing (DWCP) valued at $6,650 was totally impaired. This intangible asset will be expensed in the first quarter of 2005. F-21 EX-10.17 2 ex1017.txt CERTIFICATE TO SET FORTH DESIGNATIONS EXHIBIT 10.17 CERTIFICATE TO SET FORTH DESIGNATIONS, VOTING POWERS, PREFERENCES, LIMITATIONS, RESTRICTIONS, AND RELATIVE RIGHTS OF SERIES A 8% CUMULATIVE CONVERTIBLE PREFERRED STOCK, $.001 PAR VALUE PER SHARE It is hereby certified that: I. The name of the corporation is Universal Communication Systems, Inc. (the "Corporation"), a Nevada corporation. II. Set forth hereinafter is a statement of the voting powers, preferences, limitations, restrictions, and relative rights of shares of Series A 8% Cumulative Convertible Preferred Stock hereinafter designated as contained in a resolution of the Board of Directors of the Corporation pursuant to a provision of the Articles of Incorporation of the Corporation permitting the issuance of said Series A 8% Cumulative Convertible Preferred Stock by resolution of the Board of Directors: Series A 8% Cumulative Convertible Preferred Stock, $.001 par value. 1. Designation: Number of Shares. The designation of said series of Preferred Stock shall be Series A 8% Cumulative Convertible Preferred Stock (the "Series A Preferred Stock"). The number of shares of Series A Preferred Stock shall be 36,000. Each share of Series A Preferred Stock shall have a stated value equal to $10 (as adjusted for any stock dividends, combinations or splits with respect to such shares) (the "Stated Value"), and $.001 par value. 2. Dividends. (a) The Holders of outstanding shares of Series A Preferred Stock shall be entitled to receive preferential dividends in cash out of any funds of the Corporation legally available at the time for declaration of dividends before any dividend or other distribution will be paid or declared and set apart for payment on any shares of any Common Stock, or other class of stock presently authorized or to be authorized (the Common Stock, and such other stock being hereinafter collectively the "Junior Stock") at the rate of 8% simple interest per annum on the Stated Value per share payable commencing with the period ending December 31, 2004 and semi-annually thereafter. At the Holder's option, however, that dividend payments may be made in additional fully paid and non assessable shares of Series A Preferred Stock at a rate of one share of Series A Preferred Stock for each $10 of such dividend not paid in cash. The issuance of such additional shares shall constitute full payment of such dividends. (b) The dividends on the Series A Preferred Stock at the rates provided above shall be cumulative whether or not earned so that, if at any time full cumulative dividends at the rate aforesaid on all shares of the Series A Preferred Stock then outstanding from the date from and after which dividends thereon are cumulative to the end of the quarterly dividend period next preceding such time shall not have been paid or declared and set apart for payment, or if the full dividend on all such outstanding Series A Preferred Stock for the then current dividend period shall not have been paid or declared and set apart for payment, the amount of the deficiency shall be paid or declared and set apart for payment (but without interest thereon) before any sum shall be set apart for or applied by the Corporation or a subsidiary of the Corporation to the purchase, redemption or other acquisition of the Series A Preferred Stock or any shares of any other class of stock ranking on a parity with the Series A Preferred Stock ("Parity Stock") and before any dividend or 1 other distribution shall be paid or declared and set apart for payment on any Junior Stock and before any sum shall be set aside for or applied to the purchase, redemption or other acquisition of Junior Stock. (c) Dividends on all shares of the Series A Preferred Stock shall begin to accrue and be cumulative from and after the date of issuance thereof. A dividend period shall be deemed to commence on the day following a dividend payment date herein specified and to end on the next succeeding dividend payment date herein specified. 3. Liquidation Rights. (a) Upon the dissolution, liquidation or winding-up of the Corporation, whether voluntary or involuntary, the Holders of the Series A Preferred Stock shall be entitled to receive before any payment or distribution shall be made on the Junior Stock, out of the assets of the Corporation available for distribution to stockholders, the Stated Value per share of Series A Preferred Stock and all accrued and unpaid dividends to and including the date of payment thereof. Upon the payment in full of all amounts due to Holders of the Series A Preferred Stock the Holders of the Common Stock of the Corporation and any other class of Junior Stock shall receive all remaining assets of the Corporation legally available for distribution. If the assets of the Corporation available for distribution to the Holders of the Series A Preferred Stock shall be insufficient to permit payment in full of the amounts payable as aforesaid to the Holders of Series A Preferred Stock upon such liquidation, dissolution or winding-up, whether voluntary or involuntary, then all such assets of the Corporation shall be distributed to the exclusion of the Holders of shares of Junior Stock ratably among the Holders of the Series A Preferred Stock. (b) The purchase or the redemption by the Corporation of all or substantially all the shares of any class of stock, the merger or consolidation of the Corporation with or into any other corporation or corporations or the sale or transfer by the Corporation of all or substantially all of its assets shall be deemed to be a liquidation, dissolution or winding-up of the Corporation for the purposes of this paragraph 3. 4. Conversion into Common Stock. Shares of Series A Preferred Stock shall have the following conversion rights and obligations: (a) Subject to the further provisions of this paragraph 4 each Holder of shares of Series A Preferred Stock shall have the right at any time commencing after the issuance to the Holder of Series A Preferred Stock, to convert such shares into fully paid and non-assessable shares of Common Stock of the Corporation (as defined in paragraph 4(i) below) determined in accordance with the Conversion Price provided in paragraph 4(b) below (the "Conversion Price"). All issued or accrued but unpaid dividends may be converted at the election of the Holder simultaneously with the conversion of principal amount of Stated Value of Series A Preferred Stock being converted. (b) The number of shares of Common Stock issuable upon conversion of each share of Series A Preferred Stock shall equal (i) the sum of (A) the Stated Value per share and (B) at the Holder's election accrued and unpaid dividends on such share, divided by (ii) the Conversion Price. The Conversion Price shall be $0.033. (c) Holder will give notice of its decision to exercise its right to convert the Preferred Stock or part thereof by telecopying an executed and completed Notice of Conversion (a form of which is annexed as EXHIBIT A to the Certificate of Designation) to the Corporation via confirmed telecopier 2 transmission or otherwise pursuant to Section 13(a) of the subscription agreement entered into between Holder and the Corporation ("Subscription Agreement"). The Holder will not be required to surrender the Preferred Stock certificate until the Preferred Stock has been fully converted. Each date on which a Notice of Conversion is telecopied to the Corporation in accordance with the provisions hereof shall be deemed a Conversion Date. The Corporation will itself or cause the Corporation's transfer agent to transmit the Corporation's Common Stock certificates representing the Common Stock issuable upon conversion of the Preferred Stock to the Holder via express courier for receipt by such Holder within five (5) business days after receipt by the Corporation of the Notice of Conversion (the "Delivery Date"). In the event the Common Stock is electronically transferable, then delivery of the Common Stock must be made by electronic transfer provided request for such electronic transfer has been made by the Holder. A Preferred Stock certificate representing the balance of the Preferred Stock not so converted will be provided by the Corporation to the Holder if requested by Holder, provided the Holder has delivered an original Preferred Stock certificate to the Corporation. To the extent that a Holder elects not to surrender Preferred Stock for reissuance upon partial payment or conversion, the Holder hereby indemnifies the Corporation against any and all loss or damage attributable to a third-party claim in an amount in excess of the actual amount of the Stated Value of the Preferred Stock then owned by the Holder. In the case of the exercise of the conversion rights set forth in paragraph 4(a) the conversion privilege shall be deemed to have been exercised and the shares of Common Stock issuable upon such conversion shall be deemed to have been issued upon the date of receipt by the Corporation of the Notice of Conversion. The person or entity entitled to receive Common Stock issuable upon such conversion shall, on the date such conversion privilege is deemed to have been exercised and thereafter, be treated for all purposes as the recordholder of such Common Stock and shall on the same date cease to be treated for any purpose as the record Holder of such shares of Series A Preferred Stock so converted. Upon the conversion of any shares of Series A Preferred Stock no adjustment or payment shall be made with respect to such converted shares on account of any dividend on the Common Stock, except that the Holder of such converted shares shall be entitled to be paid any dividends declared on shares of Common Stock after conversion thereof. The Corporation shall not be required, in connection with any conversion of Series A Preferred Stock, and payment of dividends on Series A Preferred Stock to issue a fraction of a share of its Series A Preferred Stock and shall instead deliver a stock certificate representing the next whole number. The Corporation and Holder may not convert that amount of the Series A Preferred Stock on a Conversion Date in amounts inconsistent with the limitations set forth in the subscription agreement entered into by the Corporation and Holder (or Holder's predecessor) relating to the issuance of the Series A Preferred Stock ("Subscription Agreement") or that would result in the Holder having a beneficial ownership of Common Stock which would be in excess of the sum of (i) the number of shares of Common Stock beneficially owned by the Holder and its affiliates on such Conversion Date, and (ii) the number of shares of Common Stock issuable upon the conversion of the Series A Preferred Stock with respect to which the determination of this proviso is being made on such Conversion Date, which would result in beneficial ownership by the Holder and its affiliates of more than 9.99% of the outstanding shares of Common Stock of the Corporation. For the purposes of the proviso to the immediately preceding sentence, beneficial ownership shall be determined in accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended, and Regulation 13d-3 thereunder. Subject to the foregoing, the Holder shall not be limited to successive exercises which would result in the aggregate issuance of more than 9.99%. The Holder may revoke the conversion limitation described in this Paragraph upon 61 days prior notice to the Corporation. The Holder may allocate which of the equity of the Corporation deemed beneficially owned by the Holder shall be included in the 9.99% amount described above and which shall be allocated to the excess above 9.99%. 3 (d) The Conversion Price determined pursuant to Paragraph 4(b) shall be subject to adjustment from time to time as follows: (i) In case the Corporation shall at any time (A) declare any dividend or distribution on its Common Stock or other securities of the Corporation other than the Series A Preferred Stock, (B) split or subdivide the outstanding Common Stock, (C) combine the outstanding Common Stock into a smaller number of shares, or (D) issue by reclassification of its Common Stock any shares or other securities of the Corporation, then in each such event the Conversion Price shall be adjusted proportionately so that the Holders of Series A Preferred Stock shall be entitled to receive the kind and number of shares or other securities of the Corporation which such Holders would have owned or have been entitled to receive after the happening of any of the events described above had such shares of Series A Preferred Stock been converted immediately prior to the happening of such event (or any record date with respect thereto). Such adjustment shall be made whenever any of the events listed above shall occur. An adjustment made to the Conversion Price pursuant to this paragraph 4(d)(i) shall become effective immediately after the effective date of the event retroactive to the record date, if any, for the event. (ii) For so long as Series A Preferred Stock is outstanding, if the Corporation shall issue any Common Stock except for (i) employee stock options or compensation plans, (ii) as full or partial consideration in connection with any merger, consolidation or purchase of substantially all of the securities or assets of any corporation or other entity, (iii) as has been described in the reports publicly available at the EDGAR website of the Securities and Exchange Commission prior to the first date of issuance of any Series A Preferred Stock, or (iv) conversion of the Series A Preferred Stock or exercise of Common Stock Purchase Warrants issued to the Holder contemporaneously with the Series A Preferred Stock for consideration less than the Conversion Price that would be in effect at the time of such issuance, then, and thereafter successively upon each such issuance, the Conversion Price shall be reduced to such other lower issuance price. For purposes of this adjustment, the issuance of any security or debt instrument of the Corporation carrying the right to convert such security or debt instrument into Common Stock or of any warrant, right or option to purchase Common Stock shall result in an adjustment to the Conversion Price upon the issuance of the above-described security, debt instrument, warrant, right, or option. The reduction of the Conversion Price described in this Section 4(d)(ii) is in addition to any other rights granted or available to the Holder pursuant to agreement with the Corporation, at law, equity or otherwise. (e) (i) In case of any merger of the Corporation with or into any other corporation (other than a merger in which the Corporation is the surviving or continuing corporation and which does not result in any reclassification, conversion, or change of the outstanding shares of Common Stock) then unless the right to convert shares of Series A Preferred Stock shall have terminated, as part of such merger lawful provision shall be made so that Holders of Series A Preferred Stock shall thereafter have the right to convert each share of Series A Preferred Stock into the kind and amount of shares of stock and/or other securities or property receivable upon such merger by a Holder of the number of shares of Common Stock into which such shares of Series A Preferred Stock might have been converted immediately prior to such consolidation or merger. Such provision shall also provide for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in paragraph (d) of this paragraph 4. The foregoing provisions of this paragraph 4(e) shall similarly apply to successive mergers. (ii) In case of any sale or conveyance to another person or entity of the property of the Corporation as an entirety, or substantially as an entirety, in connection with which shares or other securities or cash or other property shall be issuable, distributable, payable, or deliverable for outstanding shares of Common Stock, then, unless the right to 4 convert such shares shall have terminated, lawful provision shall be made so that the Holders of Series A Preferred Stock shall thereafter have the right to convert each share of the Series A Preferred Stock into the kind and amount of shares of stock or other securities or property that shall be issuable, distributable, payable, or deliverable upon such sale or conveyance with respect to each share of Common Stock immediately prior to such conveyance. (f) Whenever the number of shares to be issued upon conversion of the Series A Preferred Stock is required to be adjusted as provided in this paragraph 4, the Corporation shall forthwith compute the adjusted number of shares to be so issued and prepare a certificate setting forth such adjusted conversion amount and the facts upon which such adjustment is based, and such certificate shall forthwith be filed with the Transfer Agent for the Series A Preferred Stock and the Common Stock; and the Corporation shall mail to each Holder of record of Series A Preferred Stock notice of such adjusted conversion price. (g) In case at any time the Corporation shall propose: (i) to pay any dividend or distribution payable in shares upon its Common Stock or make any distribution (other than cash dividends) to the Holders of its Common Stock; or (ii) to offer for subscription to the Holders of its Common Stock any additional shares of any class or any other rights; or (iii) any capital reorganization or reclassification of its shares or the merger of the Corporation with another corporation (other than a merger in which the Corporation is the surviving or continuing corporation and which does not result in any reclassification, conversion, or change of the outstanding shares of Common Stock); or (iv) the voluntary dissolution, liquidation or winding-up of the Corporation; then, and in any one or more of said cases, the Corporation shall cause at least fifteen (15) days prior notice of the date on which (A) the books of the Corporation shall close or a record be taken for such stock dividend, distribution, or subscription rights, or (B) such capital reorganization, reclassification, merger, dissolution, liquidation or winding-up shall take place, as the case may be, to be mailed to the Transfer Agent for the Series A Preferred Stock and for the Common Stock and to the Holders of record of the Series A Preferred Stock. (h) So long as any shares of Series A Preferred Stock shall remain outstanding and the Holders thereof shall have the right to convert the same in accordance with provisions of this paragraph 4 the Corporation shall at all times reserve from the authorized and unissued shares of its Common Stock a sufficient number of shares to provide for such conversions. (i) The term Common Stock as used in this paragraph 4 shall mean the $.001 par value Common Stock of the Corporation as such stock is constituted at the date of issuance thereof or as it may from time to time be changed or shares of stock of any class or other securities and/or property into which the shares of Series A Preferred Stock shall at any time become convertible pursuant to the provisions of this paragraph 4. (j) The Corporation shall pay the amount of any and all issue taxes (but not income taxes) which may be imposed in respect of any issue or delivery of stock upon the conversion of any shares of Series A Preferred Stock, but all transfer taxes and income taxes that may be payable in respect of any change of ownership of Series A Preferred Stock or any rights represented thereby or of stock receivable upon conversion thereof shall be paid by the person or persons surrendering such stock for conversion. 5 (k) In the event a Holder shall elect to convert any shares of Series A Preferred Stock as provided herein, the Corporation may not refuse conversion based on any claim that such Holder or any one associated or affiliated with such Holder has been engaged in any violation of law, or for any other reason unless, an injunction from a court, on notice, restraining and or enjoining conversion of all or part of said shares of Series A Preferred Stock shall have been issued and the Corporation posts a surety bond for the benefit of such Holder in the amount of 150% of the Stated Value of the Series A Preferred Stock and dividends sought to be converted, which is subject to the injunction, which bond shall remain in effect until the completion of arbitration/litigation of the dispute and the proceeds of which shall be payable to such Holder in the event it obtains judgment. (l) In addition to any other rights available to the Holder, if the Corporation fails to deliver to the Holder such certificate or certificates pursuant to Section 4(c) by the Delivery Date and if after the Delivery Date the Holder purchases (in an open market transaction or otherwise) shares of Common Stock to deliver in satisfaction of a sale by such Holder of the Common Stock which the Holder anticipated receiving upon such conversion (a "Buy-In"), then the Corporation shall pay in cash to the Holder (in addition to any remedies available to or elected by the Holder) within five (5) business days of written notice from the Holder, the amount by which (A) the Holder's total purchase price (including brokerage commissions, if any) for the shares of Common Stock so purchased exceeds (B) the aggregate Stated Value of the shares of Series A Preferred Stock for which such conversion was not timely honored, together with interest thereon at a rate of 15% per annum, accruing until such amount and any accrued interest thereon is paid in full (which amount shall be paid as liquidated damages and not as a penalty). For example, if the Holder purchases shares of Common Stock having a total purchase price of $11,000 to cover a Buy-In with respect to an attempted conversion of $10,000 of Stated Value of Series A Preferred Stock, the Corporation shall be required to pay the Holder $1,000, plus interest. The Holder shall provide the Corporation written notice indicating the amounts payable to the Holder in respect of the Buy-In. 5. Voting Rights. The shares of Series A Preferred Stock shall not have voting rights except as described in Section 6 hereof. 6. Restrictions and Limitations. (a) Amendments to Charter. The Corporation shall not amend its certificate of incorporation without the approval by the holders of at least a majority of the then outstanding shares of Series A Preferred Stock if such amendment would: (i) change the relative seniority rights of the holders of Series A Preferred Stock as to the payment of dividends in relation to the holders of any other capital stock of the Corporation, or create any other class or series of capital stock entitled to seniority as to the payment of dividends in relation to the holders of Series A Preferred Stock; (ii) reduce the amount payable to the holders of Series A Preferred Stock upon the voluntary or involuntary liquidation, dissolution or winding up of the Corporation, or change the relative seniority of the liquidation preferences of the holders of Series A Preferred Stock to the rights upon liquidation of the holders of other capital stock of the Corporation, or change the dividend rights of the holders of Series A Preferred Stock; (iii) cancel or modify the conversion rights of the holders of Series A Preferred Stock provided for in Section 4 herein; or (iv) cancel or modify the rights of the holders of the Series A Preferred Stock provided for in this Section 6. 6 7. Event of Default. The occurrence of any of the following events of default ("Event of Default") shall, after the applicable period to cure the Event of Default, cause the dividend rate of 8% described in paragraph 2 hereof to become 15% from and after the occurrence of such event (except in connection with Section 7(i) below) and the Holder shall have the option to require the Corporation to redeem the Series A Preferred Stock held by such Holder by the immediate payment to the Holder by the Corporation of a sum of money equal to the number of shares that would be issuable upon conversion of an amount of Stated Value and accrued dividends designated by the Holder multiplied by the average of the closing ask prices and closing bid prices of the Corporation's Common Stock as reported by Bloomberg L.P. for the principal trading market for the Common Stock for the five trading days preceding the date notice is given by the Holder to the Corporation: (a) The Corporation fails to pay any dividend payment required to be paid pursuant to the terms of paragraph 2 hereof or the failure to timely pay any other sum of money due to the Holder from the Corporation and such failure continues for a period of ten (10) days after written notice to the Corporation from the Holder. (b) The Corporation breaches any material covenant, term or condition of the Subscription Agreement or in this Certificate of Designation, and such breach continues for a period of seven (7) days after written notice to the Corporation from the Holder. (c) Any material representation or warranty of the Corporation made in the Subscription Agreement pursuant to which the Series A Preferred Stock is issued, or in any agreement, statement or certificate given in writing pursuant thereto shall be false or misleading. (d) The Corporation or any of its subsidiaries shall make an assignment of a substantial part of its property or business for the benefit of creditors, or apply for or consent to the appointment of a receiver or trustee for it or for a substantial part of its property or business, or such a receiver or trustee shall otherwise be appointed. (e) Any money judgment, confession of judgment, writ or similar process shall be entered against the Corporation, a subsidiary of the Corporation, or their property or other assets for more than $50,000, and is not vacated, satisfied, bonded or stayed within 45 days. (f) Bankruptcy, insolvency, reorganization or liquidation proceedings or other proceedings for relief under any bankruptcy law or any law for the relief of debtors shall be instituted by or against the Corporation or any of its subsidiaries, and is not dismissed within 45 days. (g) An order entered by a court of competent jurisdiction, or by the Securities and Exchange Commission, or by the National Association of Securities Dealers, preventing purchase and sale transactions in the Corporation's Common Stock. (h) The Corporation's failure to timely deliver Common Stock or a replacement Preferred Stock certificate, if required, to the Holder pursuant to paragraph 4 hereof or the Subscription Agreement. (i) The occurrence of a Non-Registration Event as described in Section 11.4 of the Subscription Agreement. 7 (j) Delisting of the Common Stock from the OTC Bulletin Board ("OTCBB") or such other principal exchange on which the Common Stock is listed for trading; failure to comply with the requirements for continued listing on the OTCBB for a period of three consecutive trading days; or notification from the OTC Bulletin Board or any principal market that the Corporation is not in compliance with the conditions for such continued listing on the OTCBB or other principal market. (k) The Corporation effectuates a reverse split of its common stock without the prior written consent of the Holder. (l) A default by the Corporation of a material term, covenant, warranty or undertaking of any other agreement to which the Corporation and Holder are parties, or the occurrence of a material event of default under any such other agreement, in each case, which is not cured after any required notice and/or cure period. 8. Status of Converted or Redeemed Stock. In case any shares of Series A Preferred Stock shall be redeemed or otherwise repurchased or reacquired, the shares so redeemed, converted, or reacquired shall resume the status of authorized but unissued shares of Preferred Stock and shall no longer be designated as Series A Preferred Stock. Dated: April __, 2004 UNIVERSAL COMMUNICATION SYSTEMS, INC. By:_____________________________________ 8 EX-21 3 ex21.txt SUBSIDIARIES OF REGISTRANT EXHIBIT 21 SUBSIDIARIES OF REGISTRANT Name State Ownership --------------------- -------- --------- Airwater Corporation Florida 100% Airwater Patents Corp Florida 100% Digital Way S. A. Peru 27% Millenium Electric TOU, Ltd. Israel 100% Solar One, Inc. Florida 100% Solar Style, Ltd. Israel 100% Solar Style (USA), Inc. Florida 100% EX-31.1 4 ex311.txt CERTIFICATION Exhibit 31.1 ------------ CERTIFICATION I, Michael J. Zwebner, certify that: 1. I have reviewed this annual report on Form 10-KSB of Universal Communication Systems, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The small business issuer's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and 5. The small business issuer's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting. Date: January 13, 2005 /s/ Michael J. Zwebner ------------------------------------ Michael J. Zwebner Chairman and Chief Executive Officer EX-31.2 5 ex312.txt CERTIFICATION Exhibit 31.2 ------------ CERTIFICATION I, Curtis Orgil, certify that: 1. I have reviewed this annual report on Form 10-KSB of Universal Communication Systems, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The small business issuer's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and 5. The small business issuer's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting. Date: January 13, 2005 /s/ Curtis Orgil ----------------------------------- Curtis Orgil Chief Financial Officer (Principal Financial and Accounting Officer) EX-32.1 6 ex321.txt CERTIFICATION Exhibit 32.1 ------------ Certification pursuant to 18 U.S.C. Section 1350, As adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 The undersigned hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge, the Annual Report on Form 10-KSB for the year ended September 30, 2004 of Universal Communication Systems, Inc. (the "Company") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and that the information contained in such periodic report fairly presents, in all material respects, the financial condition and results of operations of the Company as of, and for, the periods presented in such report. Date: January 13, 2005 /s/ Michael J. Zwebner -------------------------------- Michael J. Zwebner Chairman and Chief Executive Officer EX-32.2 7 ex322.txt CERTIFICATION Exhibit 32.2 ------------ Certification pursuant to 18 U.S.C. Section 1350, As adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 The undersigned hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge, the Annual Report on Form 10-KSB for the year ended September 30, 2004 of Universal Communication Systems, Inc. (the "Company") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and that the information contained in such periodic report fairly presents, in all material respects, the financial condition and results of operations of the Company as of, and for, the periods presented in such report. Date: January 13, 2005 /s/ Curtis Orgil -------------------------------- Curtis Orgil Chief Financial Officer, (Principal Financial and Accounting Officer) -----END PRIVACY-ENHANCED MESSAGE-----