10KSB 1 ucsy-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, 2003 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________________ to __________________ Commission file number: 000-30405 Universal Communication Systems, Inc. ---------------------------------------- (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) 407 Lincoln Road, Ste 6K, Miami Beach, Florida 33139 ------------------------------------------------ ----- (Address of former 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 [X] No [ ]. 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: $0 Aggregate market value of voting stock held by non-affiliates of the issuer as of December 30, 2002: $5,670,640 State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date. 103,123,070 shares of common stock as of December 30, 2003. 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, 2003 Page ITEM 1. DESCRIPTION OF BUSINESS.............................................3 ITEM 2. DESCRIPTION OF PROPERTY.............................................6 ITEM 3. LEGAL MATTERS.......................................................7 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................7 ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS............8 ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS.........11 ITEM 7. FINANCIAL STATEMENTS...............................................16 ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.............. ..........................16 ITEM 8A. CONTROLS AND PROCEDURES...........................................16 ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT ...............17 ITEM 10. EXECUTIVE COMPENSATION.............................................19 ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.....19 ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.....................20 ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K...................................21 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.............................22 SIGNATURES....................................................................23 -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 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. During the fiscal year ended September 30, 2002, we moved our offices from Oakland, California to Miami Beach, Florida and changed our name to Universal Communication Systems, Inc. We then changed our OTC:BB symbol to UCSI (and after our one-to-one-thousand reverse stock split, to UCSY). -3- On November 1, 2001, we changed management. On March 21, 2003, we acquired exclusive worldwide rights to patents held by J.J. Reidy & Co., relating to water production/generation system. In connection with this activity, two subsidiaries were formed, AirWater Corporation, to produce and market the system and AirWater Patents Corporation, to hold our licensed patent rights. We completed an agreement to purchase all of the stock of Millennium Electric T.O.U. Ltd., ("Millenium") an Israeli company, on September 29, 2003. Millenium specializes in development and installation of solar power systems worldwide. In connection with the Millenium acquisition, a new U. S. subsidiary, Solar One Corporation, was formed to market solar power products and systems. We are currently focusing our operations on the design, manufacture and sale of water production and generation systems along with solar power systems. Our strategy We will require short-term outside investment on a continuing basis to finance our current operations and capital expenditures. If we do not obtain short term financing we may not be able to continue as a viable concern. We do not have a bank line of credit and there can be no assurance that any required or desired financing will be available through bank borrowings, debt, or equity offerings, or otherwise, on acceptable terms. If future financing requirements are satisfied through the issuance of equity securities, investors may experience significant dilution in the net book value per share of common stock. Under the auspices of new management, we have made considerable progress in restructuring prior obligations and removing debt. We have actively engaged in a number of efforts to revise our business plan to develop new revenue sources and direction for the Company. We have minimized our participation in the wireless internet market, disposed of assets for cash and we continue our negotiations with creditors to compromise, extend, convert and/or forgive debt prior to the new management. 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. 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 is now actively seeking a third party buyer for our 23% interest in Digital Way SA. -4- Although we initiated negotiations with businesses in Puerto Rico and Portugal in 1999, no further negotiations or affiliations are currently pending in those areas. On July 20, 2001, WSI, Inc., a Puerto Rican corporation, and its principal officer and shareholder Howard Hager, filed suit against the Company in the U.S. District Court in Puerto Rico for breach of contract and damages in the amount of $4,675,000. The claims arise out of an alleged agreement on the part of the Company to acquire WSI and provide it with substantial financing. A default judgment was entered in WSI's favor. On November 26, 2002 a settlement agreement was reached with Mr. Hager and the trustee in bankruptcy for WSI. Under the agreement, we issued $200,000 in value of shares of common stock. In addition to the stock, $50,000 was paid to the trustee of WSI and a two year consulting contract, valued at $120,000, was executed with Mr. Hager. The settlement had a total cost of $370,000. 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. Under the proposed transaction, we will receive 10% of the entity resulting from the acquisition of CinemaElectric by Brenex Oil Corporation. Our Board of Directors is evaluating distributing these shares to our shareholders. Early in 2003, we identified a new business venture 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 four patents by agreement dated March 24, 2003, relating to this technology from J. J. Reidy Company of Holden, Massachusettes. Under the terms of the agreement, we paid $400,000, and we are obligated to pay a royalty payment of between 5 to 7.5% on all sales of equipment which uses the patented technology. Of $400,000, the company paid $100,000 in cash, and the balance of $300,000 was settled by the issuance of restricted common shares. From March 2003 through August 2003, we entered into various consulting, marketing and sales agreements with several international entities, in the US, France, Brazil and Israel. 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. In certain global areas where electricity and or gas power sources are either not available or in short supply, there is a need for a power alternative to conventional sources. As previously mentioned, on September 29, 2003 we completed the acquisition of Millennium Electric T.O.U., Ltd. to fulfill this technological need of providing Photo Voltaic (PV) Electric Energy to provide the necessary power for the air-water system. -5- This company and its president, Mr. Ami Elazari, are one of Israel's foremost entities operating in the latest 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. They have for many years been involved in multi million dollar projects on a world wide basis. For the six months prior to year end, we have worked to design, research and develop as well as source the manufacture of our AirWater machines. The result of this search has concluded with manufacturing and licensing agreements with entities in Israel and Brazil, and more recently in Australia. We have now embarked on a worldwide sales and marketing program. On September 17, 2003, we announced that we have entered into a letter of intent to acquire a 51% interest in GiraSOLAR, BV, a Dutch company that operates and specializes in the photo voltaic solar energy industry. This Dutch group is made up of two separate operating subsidiaries, with projected combined sales in excess of $25 million. As of December 30, 2003, both parties are conducting due diligence in connection with this acquisition. Patents/Intellectual Property We currently hold a patent for our distributed wireless call processing system. 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. As previously mentioned, we 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. Further, through our Millenium subsidiary, we own 21 international patents in the photo voltaic solar power and energy system area. Employees As of December 31, 2003, we had no full time employees in the United States. ITEM 2. DESCRIPTION OF PROPERTY We own no real estate. Effective February 1, 2002, we leased a 1400 square foot corporate and administrative office facility at 407 Lincoln Road, Suite 6K, Miami Beach, FL 33139. The lease provides for a three-year term. The lease provided for cancellation with ninety days notice after the first year. On November 1, 2002 we exercised this provision and we currently rent on a month to month basis with the landlord at the same address. On October 1, 2003 we moved our office to suite 12F in the same building. Millenium Electric T.O.U., Ltd., rents administration and manufacturing offices in the Herzliah 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. -6- 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 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 the Company may be subject to further liability. We currently carry the 483 share obligation in our equity under escrowed shares. 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. Their press release stated that we had infringed on their patents. Counsel has advised us that the claims lack substance. On November 24, 2003, the court granted our motion for dismissal due to lack of Texas jurisdiction. ELGT has similar suits filed against other companies in the same industry. We have filed counter claims in the US District Court of Southern Florida, disputing ELGT's claims of patent infringement and as a result of statements made by ELGT, we have filed a claim for $118 million in damages for false, defamatory and libelous statements. Our counter claims and damage lawsuits are still ongoing. 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. -7- 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, 2004 High Low -------- -------- First Quarter $ 0.115 $0.060 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 FISCAL YEAR SEPT 30, 2002 High Low -------- -------- First Quarter $21.000 $5.599 Second Quarter 14.000 2.000 Third Quarter 10.000 0.799 Fourth Quarter 2.700 0.100 -8- 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; 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 telecommunications, Internet and 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 495 holders of record and an estimated 8,000 holders in street name of our common stock as of September 30, 2003. 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. On May 21, 2002, stockholders approved a measure to increase the number of authorized common shares from 300 million to 800 million. -9- 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 April 9 - 11, 2003, we issued 4,253,847 shares of common stock under private placement subscriptions at $0.04 per share, based on the average closing price for the three days prior to April 8, 2002, at a 25 percent discount. 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 April 11, 2003, we issued 575,000 shares of common stock under private placement subscriptions at $0.035 per share. These securities were issued in a transaction exempt from registration under the Securities Act of 1933 in reliance on Sections 4(2) and 4(6) of the Securities Act of 1933. On July 3, 2003, we issued 2,350,043 shares of common stock under private placement subscriptions at prices ranging from $0.028 per share to $0.055 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 July 7, 2003, we issued 1,905,625 shares of common stock under private placement subscriptions at prices ranging from $0.042 per share 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 July 9, 2003, we issued 1,410,647 shares of common stock under private placement subscriptions at prices ranging from $0.042 per share to $0.055 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 July 10, 2003, we issued 525,577 shares of common stock under private placement subscriptions at prices ranging from $0.026 per share 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 July 15, 2003, we issued 714,096 shares of common stock under private placement subscriptions at prices ranging from $0.042 per share 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 July 18, 2003, we issued 2,304,944 shares of common stock under private placement subscriptions at prices ranging from $0.026 per share to $0.055 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 July 23, 2003, we issued 172,591 shares of common stock under private placement subscriptions at prices ranging from $0.05 per share to $0.055 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. -10- On August 13, 2003, we issued 155,000 shares of common stock under a private placement subscription at a price of $0.045 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 August 14, 2003, we issued 1,600,000 shares of common stock under a private placement subscription at a price of $0.10 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 3, 2003, we issued 1,000,000 shares of common stock under a private placement subscription at a price of $0.10 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. 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. New Business Activities and Plan of Operations ---------------------------------------------- We will require short-term outside investment on a continuing basis to finance our current operations and capital expenditures. If we do not obtain short term financing we may not be able to continue as a viable concern. We do not have a bank line of credit and there can be no assurance that any required or desired financing will be available through bank borrowings, debt, or equity offerings, or otherwise, on acceptable terms. If future financing requirements are satisfied through the issuance of equity securities, investors may experience significant dilution in the net book value per share of common stock. During this fiscal year, we identified a new industry sector for us to focus our activities. Since February, 2003 we have pursued the design, manufacture, sale, licensing and distribution of equipment that extracts and purifies water from the atmosphere. The availability and safety of drinking water has become a global problem, in the United States as well as countless other areas of the world. Current attempts to meet this need have created a $7.1+ billion bottled water market, a $60+ Billion point-of-use water treatment industry, and wherever practical, incredibly expensive desalination plants with huge infrastructures and severe geographical restrictions. All of these methods require traditional sources of water and each has inherent weaknesses and disadvantages. Even existing municipal water systems experience repeated shortages and contamination problems. At any given moment the earth's atmosphere contains 4,000 cubic miles of water, which is just .000012% of the 344 million cubic miles of water on earth. Nature maintains this ratio by accelerating or retarding the rates of evaporation and condensation (the Hydrologic Cycle), irrespective of the activities of man. It is the sole source and means of regenerating wholesome water for all forms of life on earth. -11- Man has been extracting water vapor from the air for generations. Most often it is intentional and the water collected is treated as wastewater, such as with dehumidifiers and air conditioners. The common mechanics include traditional refrigerant systems, but other technologies are available such as thermo-electrics (Peltier) and thermo acoustics. While all these technologies are used for extracting water vapor from the air and are common knowledge, the subsequent methods employed to produce potable water from tapping into nature's hydrologic cycle are unique and are patented in the USA and in other nations. The technology used in the AirWater Series of variously sized models is the result of 13 years of research and field-testing and involves many United States and a number of international patents. The AirWater System, regardless of the model size, sterilizes each drop of water within 5-6 seconds of its formation by exposure to ultra-violet light. UV light waves fracture the DNA strands within bacteria, virus, and other microorganisms, which kills them instantly. This sterilized water is then passed through a unique patented 1-micron activated carbon water filter. (The average size of bacteria is 5 microns). This filter removes any possible solid particles, toxic chemicals, volatile organics, and other contaminates as well as any odors, taste, or discoloration. This filtration is followed by a 2nd UV exposure and sterilization. The same bulb bathes the exit port, also patented, in UV light creating a sterile exit. The AirWater System maintains an enclosed sterile environment throughout its water treatment, from the first drop in to the last drop out -- into a water tank or removable container. It is imperative to any marketing success that this water be handled safely and aesthetically, which no other method can do. We have coupled this water extraction system with the photo voltaic systems developed by our wholly owned subsidiary, Millenium Electric T.O.U., Ltd., to create a self sustaining system. Our equipment, by combining these two technologies, has been of great interest to governmental and humanitarian organizations. Further, we have developed a unit specifically aimed at the boating and recreational vehicle industry. Millennium Electric TOU Inc., one of Israel's leading technology companies, is an enterprise focusing on practical applications of solar energy. Millennium is an expert in designing, developing, installing and providing solar energy related products and services. The sophisticated solar energy devices are economical, clean and an environment friendly source of energy/power with a wide variety of practical applications in many fields. Millennium's skills encompass planning, design, construction and installation services and applications not connected to the electric power grid. Millennium's fully computerized systems serve remote housing, villages, street lighting installations, computerized irrigation, communication and various military systems. The company's total system capabilities have been proven in large- scale projects performed for Israel's Ministries of Energy, Housing and Defense. The company's mission is to continue to design and establish solar systems for communities on a worldwide basis, based on the "MSS," a unique patented system that utilizes advanced photovoltaic and storage technology combined with flat-plate solar water -12- collectors to provide electricity and hot air/water and air-conditioning for residential and industrial buildings. Being modular, the average basic system can provide from 1kw up to 100 Megawatt of useful power utilizing solar energy products and services, for a more economical, cleaner, and safer environment. With the acquisition of Millenium and the company's new industry focus, we have been able to obtain private placement funding to finance our activities in these fields. We anticipate continuing to receive operating funds from these private placements until such time as sales are sufficient to support the organization, however no assurances can be made that we will be able to find willing investors. The business of AirWater Corporation is that of extracting (drinkable) water from the air, the manufacturing of the machines and systems that facilitate this, and the global marketing and distribution of the patented technology, systems and products. We will pursue these activities with a focus on large scale government sales of the water from air technology and through Millenium, the sale of the technology and consulting on the implimentation and utilization of Photovoltaic solar systems. Results of Operations --------------------- We did not generate any revenues during fiscal 2003 and 2002. However, our Peruvian subsidiary had revenues which are not reported as a result of a lack of cooperation from our subsidiary's management. On November 1, 2001, we signed a non-binding letter of intent to acquire Hard Disc Cafe, Inc., a privately held Florida corporation which intended to develop and license themed internet cafes. On August 4, 2002, Hard Disc Caf, Inc. ceased all operations. All parties agreed to unwind the transaction. In connection with this transaction, we had advanced a total of $146,154 to Hard Disc Caf, Inc. Of this amount, we received $35,456 and accordingly we recorded a loss of $110,698 on these advances in 2002. General and administrative expenses totaled $1,583,931 in the fiscal year ended September 30, 2003 and $807,033 in the fiscal year ended September 30, 2002. The increase in expenses resulted from activities associated with the entrance into the air-water technology industry. General and administrative expenses for the fiscal years ended September 30, 2003 and 2002 were comprised of the following items: 2003 2002 ---------- ---------- Abandoned acquisitions and fees $ 171,397 $ - Consultants and outside services 659,977 484,843 Depreciation 5,690 22,036 FCC licensing and site expenses - 1,338 Financing costs and fund raising expense 120,804 5,501 Legal expense 228,661 85,059 Miscellaneous and other expenses 67,478 33,568 Professional fees 136,154 91,570 Rent 27,650 37,462 Salaries - 14,614 Travel 72,620 31,042 ---------- ---------- $1,490,431 $ 807,033 ========== ========== Liquidity and Capital Resources ------------------------------- As of September 30, 2003 our total working capital was deficient in the amount of $1,390,556. This represents a $760,729 decrease over our September 30, 2002 deficiency of $2,151,285. Until revenues commence from the sale of our AirWater equipment, we will need to obtain funding from external sources to finance our current operations. We anticipate revenues in the second quarter of fiscal year September 30, 2004. -13- 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 year ended September 30, 2003 and 2002 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 negotiating 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, 2003 and 2002, we received equity investments and advances of $1,054,577 and $383,291 respectively. These investments and advances were in the form of issuance of our common stock in various private placements. -14- 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, 2003 that our ability to meet our future financing requirements, and the success of our future operations, cannot be determined at this time. In order to finance our working capital requirements we are negotiating 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. -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. -15- -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. Other Matters ------------- Subsequent to September 30, 2003, a majority of the debenture holders have tentatively agreed to convert their holdings into shares of common stock at various amounts and under various terms. It is our intention to reach agreements with the debenture holders in order to equitize the outstanding debentures and associated interest on those debentures. 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. -16- 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, 2003 are as follows:
Name Age Position Period of Service ----- --- -------- ----------------- Michael J. Zwebner...... 51 Chairman of the Board November 2001-present and CEO Curtis Orgil........... 51 CFO and Director November 2001-present Ramsey Sweis............ 37 Director May 1998-present Alexander Walker, Jr. .. 76 Director November 2001-present Ami R. Elazari.......... 51 Director October 2003-present
Certain biographical information concerning the Directors and executive officers of the Company as of December 30, 2003 is set forth below. Such information was furnished by them to the Company. Michael Zwebner has served as a Director since November, 2001 and is the Chairman of the Board of Directors. He is the founder of Talk Visual Corporation and has served as a Director and its Chairman of the Board of Directors since September, 1998 until March, 2002. Mr. Zwebner is the President of Card Universal Corporation, a privately held Florida corporation which we have issued a letter of intent to acquire. 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. Mr. Walker 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. Orgil 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. Orgil 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. Orgil was on its National Industry Teams for Qualified Retirement Plans and Agribusiness. Since 1995, he has been a principal with Bartig, Basler & Ray, CPA's, Inc., a regional accounting firm with headquarters in Sacramento, -17- 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 operates a financial services company. 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. Director Compensation Directors do not have a plan of compensation for serving as directors, except that the following common stock grants were issued for the fiscal year ended September 30, 2003: Number of Shares Name Granted --------------- --------------- Alex Walker, Jr. 500,000 - for legal services Curtis Orgil 200,000 - for financial services 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, 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. -18- Compliance with Section 16(a) of the Securities Exchange Act of 1934 Section 16(a) of the Securities Exchange Act of 1934 requires our Company's officers and directors, and persons who own more than 10% of a registered class of our Company's equity securities, to file reports of ownership and changes in ownership with respect to the securities of our Company with the SEC and to furnish copies of these reports to our Company. We believe that during fiscal year 2003, Alex Walker, Ramsey Sweis and Curtis Orgil have not filed the required Form 4s. ITEM 10. EXECUTIVE COMPENSATION Employment Agreements There are no employment agreements in force at September 30, 2003. The Company entered into a three year consulting agreement with Overseas Communications Limited on November 2, 2001, for the management and business advisory services provided by Mr. Michael Zwebner, Chairman and CEO of the Company. The Agreement calls for annual payments of $240,000, payable in cash or the Company's common stock. For the fiscal year ended September 30, 2003, the Company paid $80,000 in cash and issued 2,574,883 shares of common stock under this agreement. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information regarding beneficial ownership of our common stock as of December 30, 2003, by: o each person who is known by us to own beneficially more than 5% of the outstanding shares of our common stock; o each of our directors; and o all our directors and executive officers as a group. Applicable ownership is based on 106,123,070 shares of common stock outstanding as of December 30, 2003. Beneficial ownership is determined in accordance with the rules of the SEC. Shares of common stock subject to options or warrants that are presently exercisable or exercisable within 60 days of December 30, 2003 are deemed outstanding for the purpose of computing the percentage ownership of the person or entity holding options or warrants, but are not treated as outstanding for the purpose of computing the percentage ownership of any other person or entity. The persons listed below have sole voting and investment power with respect to all shares of common stock shown as being beneficially owned by them, subject to community property laws, where applicable. The number of shares column in the table includes shares issuable upon exercise of options and warrants exercisable within 60 days of December 30, 2003. The number of options -19- and warrants exercisable within 60 days of December 30, 2003 are listed in the shares issuable upon exercise of options or warrants column. The address of all directors and officers is care of Universal Communication Systems, Inc., 407 Lincoln Road, Suite 12F, Miami Beach, Florida 33139.
Shares Issuable Name of Named Executive Officer, Number of Percentage Upon Exercise of Director, or Beneficial Owner Shares Ownership Options or Warrants ------------------------------ ------ --------- ------------------- Michael J. Zwebner (3) 4,977,910 (1) 4.7% 0 Alexander Walker, Jr. (3) 557,000 * 0 Ramsey Sweis (3) 1,723,970 1.6% 500,000 Curtis Orgil (3) 251,000 * 0 Ami R. Elazari (3) 2,200,000 2.1% Executive Officers and Directors 9,709,880 9.1% as a Group - 5 individuals Endeavour Capital 10,506,184 9.9% 7,992,654 (2) c/o Endeavour Advisors, Ltd. P.O.B. 57116 Jerusalem 91570
------------------------------------------- * Less than 1% (1) Includes 23 shares beneficially held by Overseas Communications Limited, 534,014 shares beneficially held by Overseas Development Holdings Limited and 204,167 shares beneficially held by Port Universal. (2) Represents shares convertible under convertible debentures held, but not more than 9.9% of total outstanding, as per provision of debentures. (3) The address of each such person is c/o the Company, 407 Lincoln Rd., Ste 12F, Miami Beach, FL 33139 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, 2003, we incurred fees aggregating $6,963 to Nevada Agency and Trust Company. In addition, 500,000 shares of common stock were issued to Mr. Walker as payment for legal services. -20- Curtis Orgil, a Director and the Chief Financial Officer of our company, received 200,000 shares of common stock for his financial services. On June 12, 2002, the Company entered into a non-binding letter of intent to acquire Card Universal Corporation ("CUC"), a privately held development stage Florida corporation in the business of providing and marketing prepaid "Stored Money Cards." The acquisition value is estimated at $3 million, subject to a third party independent valuation. Michael Zwebner, our Chairman and CEO is the president and a major stockholder of CUC. CUC has ceased its development activities, is currently inactive, and the acquisition has been abandoned. 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. (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. 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. ------------------ (i) Filed with the registration statement on Form SB-2 with the Securities and Exchange Commission on May 31, 2000. -21- (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. (b) The following Form 8-K was filed during the fourth quarter. September 29, 2003, Item 2. Acquisition or Disposition of Assets. Reporting the completion of the acquisition of Millenium Electric T.O.U., Ltd, pursuant to a stock purchase agreement dated August 22, 2003. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES Pursuant to SEC Release No. 33-8183 (as corrected by Release No. 33-8183A), the disclosure requirements of this Item are not effective until our Annual Report on Form 10-KSB for our first fiscal year ending after December 15, 2003. -22- 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, 2004. 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, 2004:
Signature Title Date --------- ----- ---- /s/ MICHAEL J. ZWEBNER Director, Chief Executive Officer, January 13, 2004 ---------------------- and Chairman of the Board (Principal Michael J. Zwebner Financial and Accounting Officer) /s/ ALEXANDER WALKER JR Director and Secretary January 13, 2004 ----------------------- Alexander Walker, Jr. /s/ RAMSEY SWEIS Director January 13, 2004 ----------------------- Ramsey Sweis /s/ CURTIS ORGIL Director and Chief Financial Officer January 13, 2004 ----------------------- Curtis Orgil /s/ AMI R. ELAZARI Director January 13, 2004 ----------------------- Ami R. Elazari
-23- __________________________________________________ UNIVERSAL COMMUNICATION SYSTEMS, INC. __________________________________________________ REPORT ON AUDIT OF FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2003 ______________________________________ REUBEN E. PRICE & COMPANY PUBLIC ACCOUNTANCY CORPORATION UNIVERSAL COMMUNICATION SYSTEMS, INC. ___________________________ CONTENTS PAGE ---- FINANCIAL STATEMENTS: Report of Independent Auditor F-2 Consolidated Balance Sheet as of September 30, 2003 F-3 Consolidated Statements of Operations for the Years Ended September 30, 2003 and 2002 F-4 Consolidated Statements of Stockholders' Deficit for the Years Ended September 30, 2003 and 2002 F-5 Consolidated Statements of Cash Flows for the Years Ended September 30, 2003 and 2002 F-6 - F-7 Notes to Consolidated Financial Statements F-8 - F-22 F-1
REUBEN E. PRICE & CO. REUBEN E. PRICE, C.P.A. (1904-1986) PUBLIC ACCOUNTANCY CORPORATION MEMBERS ------ FOUNDED 1942 AMERICAN INSTITUTE OF RICHARD A. PRICE, C.P.A. CERTIFIED PUBLIC ACCOUNTANTS 703 MARKET STREET SAN FRANCISCO, CA 94103 SECURITIES AND EXCHANGE -------- COMMISSION PRACTICE SECTION (415) 982-3556 OF THE AMERICAN INSTITUTE OF FAX (415) 957-1178 CERTIFIED PUBLIC ACCOUNTANTS ------ CALIFORNIA SOCIETY OF CERTIFIED PUBLIC ACCOUNTANTS
INDEPENDENT AUDITOR'S REPORT Board of Directors Universal Communication Systems, Inc. We have audited the accompanying consolidated balance sheet of Universal Communication Systems, Inc. and subsidiaries (the Company), as of September 30, 2003, and the related consolidated statements of operations, stockholders' deficit and cash flows, for the years ended September 30, 2003 and 2002. 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 auditing standards generally accepted in the 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, 2003 and the results of their operations and their cash flows for the years ended September 30, 2003 and 2002, in conformity with accounting principles generally accepted in the United States. 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 has suffered recurring losses that raise substantial doubt about its ability to continue as a 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. January 12, 2004 F-2 Part I. FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS UNIVERSAL COMMUNICATION SYSTEMS, INC. & SUBSIDIARIES Consolidated Balance Sheet September 30, 2003 ------------ ASSETS Current Assets: Cash & cash equivalents $ 144,682 Accounts receivable, net 105,859 Note receivable 116,782 Inventory 4,900 Prepaid expenses 35,185 ------------ Total Current Assets 407,408 ------------ Fixed Assets: Furniture and equipment 65,786 Less: Accumulated depreciation 22,527 ------------ Total Fixed Assets, Net 43,259 ------------ Other Assets: Intangibles 606,714 Deposits 4,600 ------------ Total Other Assets 611,314 ------------ Total Assets $ 1,061,981 ============ LIABILITIES AND STOCKHOLDERS' DEFICIT Current Liabilities: Notes payable $ 344,746 Line of credit 25,721 Accounts payable 1,142,332 Accrued expenses 180,489 Due to officer 11,368 Due to other related parties 93,308 ------------ Total Current Liabilities 1,797,964 Long-term Liabilities: Convertible debentures 4,446,996 ------------ Total Liabilities 6,244,960 ------------ Commitments and Contingencies -- ------------ Stockholders' Deficit: Preferred stock, par value $.001 per share , 10,000,000 shares authorized, no shares Issued and outstanding -- Common stock, par value $.001 per share, 800,000,000 shares authorized, 76,911,053 shares issued and outstanding 76,911 Additional paid-in capital 26,126,640 Accumulated deficit (31,453,282 Capital stock subscriptions 66,752 ------------ Total Stockholders' Deficit (5,182,979) ------------ Total Liabilities and Stockholders' Deficit $ 1,061,981 ============ The accompanying notes are an integral part of these financial statements. F-3 UNIVERSAL COMMUNICATION SYSTEMS, INC. & SUBSIDIARIES Consolidated Statements of Operations
For the Year Ended September 30, 2003 2002 ------------ ------------ Operating Expenses: Sales and marketing $ 151,804 $ -- Product development 62,333 -- General and administrative 1,490,431 807,033 Impairment losses -- 128,706 ------------ ------------ Total Operating Expenses 1,704,568 935,739 ------------ ------------ Other Income / (Expense): Interest and dividend income -- -- Interest (expense) (200,256) (334,953) ------------ ------------ Total Other Expense (200,256) (334,953) ------------ ------------ Net Loss $ (1,904,824) $ (1,270,692) ============ ============ Basic and Diluted Net Loss per Common Share $ (0.07) $ (5.54) ============ ============ Basic and Diluted Weighted Average Shares Outstanding 26,758,511 229,239 ============ ============
The accompanying notes are an integral part of these financial statements. F-4 UNIVERSAL COMMUNICATIONS SYSTEMS, INC. & SUBSIDIARIES Statements of Stockholders' Deficit For the Years Ended September 30, 2003 and 2002
Accumulated Common Stock Additional Other --------------------------- Paid-in Accumulated Comprehensive Total Shares Amount Capital Deficit Income Deficit ------------ ------------ ------------ ------------ ------------ ------------ Balance, September 30, 2001 137,993 $ 137 $ 19,713,954 $(28,158,732) $ (119,034) $ (8,563,675) Eliminate foreign currency adjustment -- -- -- (19,034) 119,034 -- ============ Capital Stock Subscriptions ------------- Common stock issued in private Placement between $3.00 and $5.00 per share 45,254 45 173,455 -- -- 173,500 Conversion of debentures for common stock between $0.50 and $4.00 per share 4,898,636 4899 2,611,537 -- -- 2,616,436 Common stock issued for services at $0.20 and $15.00 per share 584,011 584 572,903 -- -- 573,487 One for one thousand reverse Split, Fractional shares Adjustment 2,096 3 (3) -- -- -- Common stock issued in escrow to secure debt 300,000 300 (300) -- -- -- Net loss for the fiscal year Ended, September 30, 2002 -- -- -- (1,270,692) -- (1,270,692) ------------ ------------ ------------ ------------ ------------ ------------ 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. 253 and $1.000 per share 18,430,211 18,430 1,036,147 -- -- 1,054,577 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 16,008,770 16,009 888,386 -- -- 904,395 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 4,017,451 4,017 (4,017) -- -- -- Capital stock subscription deposits -- -- -- -- 160,252 160,252 Receivable for stock issued -- -- -- -- (93,500) (93,500) Net loss for the fiscal year ended, September 30, 2003 -- -- -- (1,904,824) -- (1,904,824) ------------ ------------ ------------ ------------ ------------ ------------ Balance, September 30, 2003 76,911,055 $ 76,911 $ 26,126,640 $(31,453,282) $ 66,752 $ (5,182,979) ============ ============ ============ ============ ============ ============
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, 2003 2002 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Loss $(1,904,824) $(1,270,692) Adjustments to reconcile net loss from operations to net cash used by operating activities: Common stock issued for services 904,395 573,485 Impairment loss -- 128,706 Depreciation and amortization expense 6,638 22,036 Interest payable added to principal of debentures 154,197 246,341 Interest payable added to principal of note payable 30,509 -- Loss on write down of assets -- 190,066 Changes in operating assets and liabilities: (Increase) in inventory (4,900) 48,991 (Increase) in accounts receivable (105,859) -- (Increase) in prepaid and other (85,249) (4,600) Increase (Decrease) in accrued expenses and accounts payable 86,902 (343,459) ----------- ----------- Net Cash (Used) by Operating Activities (918,191) (409,126) ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of patent rights (100,000) -- Purchase of fixed assets (38,610) (1,917) Note receivable (116,782) -- (Increase) Decrease in advances to related parties 35,456 (35,456) ----------- ----------- Net Cash (Used) by Investing Activities (219,936) (37,373) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds of short term notes 60,000 -- Proceeds of line of credit 25,721 -- Proceeds from the issuance of senior secured convertible debentures, net -- 240,000 Proceeds from issuance of common stock 1,054,577 173,500 Proceeds of capital stock subscriptions 160,252 -- Increase (Decrease) in advances from related parties (18,615) 29,791 ----------- ----------- Net Cash Provided by Financing Activities 1,281,935 443,291 ----------- ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 143,808 (3,208) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 874 4,082 ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 144,682 $ 874 =========== ===========
The accompanying notes are an integral part of these financial statements. F-6 UNIVERSAL COMMUNICATION SYSTEMS, INC. & SUBSIDIARIES Consolidated Statements of Cash Flows
For the Year Ended September 30, 2003 2002 ---------- ---------- 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 $ 154,197 $ 246,341 Interest accrued on note payable added to the principal of the note $ 30,509 $ -- Debentures converted to capital stock $ 717,065 $2,616,436 Capital stock issued in acquisition of subsidiary $ 250,000 $ -- Capital stock issued in acquisition of patent rights $ 200,000 $ --
The accompanying notes are an integral part of these financial statements. F-7 Universal Communication Systems, Inc. and Subsidiaries Notes to the Consolidated Financial Statements September 30, 2003 NOTE 1 - BACKGROUND, ACQUISITIONS AND SUBSIDIARIES Background ---------- The Company and its subsidiaries are actively engaged in developing and marketing solar energy systems, and 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, and Solar One Inc, as well as majority-owned Solar Style Ltd. 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. The investment is fully impaired. Hard Disc Cafe, Inc. -------------------- On November 1, 2001, The Company signed a non-binding letter of intent to acquire Hard Disc Cafe, Inc., a privately held Florida corporation wholly owned by an officer of the Company. It intended to develop and license themed internet cafes. During 2002, it ceased all operations. All parties agreed to unwind the transaction. In connection with this transaction, the Company had advanced a total of $146,154 to Hard Disc Cafe, Inc. Of this amount, the Company received $35,456 and accordingly it recorded a loss of $110,698 on these advances in 2002. 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. It was developing the business of providing and marketing prepaid "Stored Money Cards". CUC has ceased its development activities, is currently inactive, and the acquisition has been abandoned. 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 is yet to be received. F-8 Universal Communication Systems, Inc. and Subsidiaries Notes to the Consolidated Financial Statements September 30, 2003 NOTE 1 - BACKGROUND, ACQUISITIONS AND SUBSIDIARIES (continued) AirWater systems ---------------- On March 21, 2003, the Company licensed exclusive 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 Intangibles. 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, for which no impairment has been recognized. No amortization is recorded in the year ended September 30, 2003. A new wholly-owned US subsidiary, Solar One, Inc, was created by the Company to market the solar systems. As of September 30, 2003, it was inactive, with no assets or liabilities. 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, stockholders' deficit, or cash flows. F-9 Universal Communication Systems, Inc. and Subsidiaries Notes to the Consolidated Financial Statements September 30, 2003 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: For the years ended September 30: 2003 2002 ----------- ----------- Revenues $ 162,066 $ 136,814 Expenses 2,096,736 1,364,838 ----------- ----------- Net (Loss) $(1,934,670) $(1,228,024) =========== =========== Basic & Diluted Loss per Share $ (0.07) $ (5.36) =========== =========== NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Reverse Stock Split ------------------- The Company completed a one-for-one-thousand reverse stock split on August 23, 2002. All share and per share information reflects this reverse stock split. 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 cost. 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". The effect of outstanding stock options and warrants has been excluded from the dilutive computation, as their inclusion would be anti-dilutive. 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 has been excluded from the dilutive computation, as their inclusion would be anti-dilutive. F-10 Universal Communication Systems, Inc. and Subsidiaries Notes to the Consolidated Financial Statements September 30, 2003 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Fiscal Year Ended September 30, 2003 2002 ---- ---- Net loss $ (1,998,324) $(1,270,692) ============== =========== Weighted average number of common shares 26,758,511 229,239 ============== =========== Basic and diluted loss per share $ (0.07) $ (5.54) ============== ===========
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-11 Universal Communication Systems, Inc. and Subsidiaries Notes to the Consolidated Financial Statements September 30, 2003 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, 2003 and 2002. Comprehensive Income and Foreign Currency Translation ----------------------------------------------------- The Company has adopted FASB Statement No. 130, Reporting Comprehensive Income. 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. The resulting cumulative translation adjustments were recorded as a separate component of stockholders' equity. F-12 Universal Communication Systems, Inc. and Subsidiaries Notes to the Consolidated Financial Statements September 30, 2003 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Recent Accounting Pronouncements -------------------------------- The Company has adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", and SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities-Deferral of the Effective Date of FASB No. 133", in the year ended September 30, 2001. These pronouncements establish methods of accounting for derivative financial instruments and hedging activities related to those instruments as well as other hedging activities. To date, the Company has not entered into any derivative financial instruments or hedging activities. The Financial Accounting Standards Board has established the following new pronouncements, none of which will materially affect the Company: SFAS No. 134, "Accounting for Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise - an amendment of SFAS No. 65 (effective for fiscal quarters beginning after December 15, 1998)," SFAS No. 135, "Rescission of SFAS No. 75 and Technical Corrections (effective for fiscal years ending after December 15, 1999)," SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of SFAS No. 133 - an amendment of SFAS No. 133 (effective June 1999)," SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities - an amendment of SFAS No. 133 (effective for fiscal years beginning after June 15, 2000)," SFAS No. 139, "Rescission of SFAS No. 53 and amendments to SFAS No. 63, 89, and 121 (effective for fiscal years beginning after December 15, 2000)," SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities - a replacement of SFAS No. 125 (effective for certain disclosures for fiscal years ending after December 15, 2000)," SFAS No. 141, "Business Combinations," which eliminates the pooling-of-interests method for business combinations initiated after June 30, 2001, SFAS No. 142, "Goodwill and Other Intangible Assets" (effective for fiscal years beginning after March 15, 2001), which enhances disclosure for these assets subsequent to their acquisition, SFAS No. 143, "Accounting for Asset Retirement Obligations," which is effective for financial statements issued for fiscal years beginning after June 15, 2002. In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," which requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Such costs covered by the standard include lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operation, plant closing, or other exit or disposal activity. SFAS No. 146 replaces the previous accounting guidance provided by the Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 146 is to be Universal Communication Systems, Inc. and Subsidiaries Notes to the Consolidated Financial Statements September 30, 2003 F-13 Universal Communication Systems, Inc. and Subsidiaries Notes to the Consolidated Financial Statements September 30, 2003 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Recent Accounting Pronouncements (continued) -------------------------------------------- applied prospectively to exit or disposal activities initiated after December 31, 2002. The Company does not anticipate that the adoption of SFAS No. 146 will have any effect on the Company's financial statement presentation or disclosures. 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 has experienced losses since inception, and had an accumulated deficit of $31,546,782 at September 30, 2003. Net losses are expected for the foreseeable future. As such, there is substantial doubt as to the Company's ability to continue as a going concern. Management 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 - 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, which provided for the Company to pay $87,375 to the lessor, in the fiscal years ended September 30 1998, 1999, and 2000. Under terms of the settlement agreement, the Company also 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. Management has abandoned the pursuit of these leases and licenses. F-14 Universal Communication Systems, Inc. and Subsidiaries Notes to the Consolidated Financial Statements September 30, 2003 NOTE 4 - COMMITMENTS AND CONTINGENCIES (continued) Litigation (continued) ---------------------- 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 482 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 subject to further liability. As of September 30, 2003, no shares had been issued. Management believes 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 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-15 Universal Communication Systems, Inc. and Subsidiaries Notes to the Consolidated Financial Statements September 30, 2003 NOTE 4 - 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, -------------------- 2004 $ 73,692 2005 68,677 2006 13,512 --------- $ 155,881 ========= Management Agreement -------------------- The Company entered into a three year consulting agreement with Overseas Communications Limited ("Overseas") on November 2, 2001, for the management and business advisory services provided by Mr. Michael Zwebner, 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, 2003 and 2002, the Company paid $51,000 and $20,000 in cash, respectively, and issued 3,160,742 and 365,966 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 is due and payable on April 15, 2004, and is secured by 300,000 shares of the Company's stock. In the event that the $300,000 is not paid when due, and if the security's value does not equal or exceed $300,000 at that time, then the original balance of $1,400,000 will again be due and payable. Because there was no stated interest, $15,254 was calculated as imputed interest, with $284,746 recorded as part of Notes Payable. F-16 Universal Communication Systems, Inc. and Subsidiaries Notes to the Consolidated Financial Statements September 30, 2003 NOTE 4 - COMMITMENTS AND CONTINGENCIES (continued) Consultant Agreements --------------------- In September 2003, the Company entered into two consulting agreements. The remaining contingent obligations on these agreements at September 30, 2003 totals $114,000. NOTE 5 - STOCKHOLDERS EQUITY On May 21, 2002, stockholders approved a measure to increase the number of authorized common shares from 300 million to 800 million, and to authorize 10 million preferred shares. The Company's Board of Directors approved a one-for-one-thousand reverse stock split, effective August 23, 2002. Fractional shares were rounded up to the next share. All share and per share information reflects this reverse stock split. During the fiscal year ended September 30, 2003, the Company sold 18,430,259 shares of its common stock for net cash proceeds of $1,054,577. 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 16,008,770 shares of its common stock for services at an aggregate value of $904,395. Stock issued for services was at the reported market price for the shares at the time of issuance. During the fiscal year ended September 30, 2002, the Company sold 45,254 shares of its common stock for net cash proceeds of $173,500. The Company issued 4,898,636 shares of common stock in conversion of outstanding debentures for an aggregate value of $2,616,436. The Company also issued 584,011 shares of its common stock for services at an aggregate value of $573,485. Stock issued for services was at the reported market price for the shares at the time of issuance. F-17 Universal Communication Systems, Inc. and Subsidiaries Notes to the Consolidated Financial Statements September 30, 2003 NOTE 6 - INCOME TAXES A reconciliation between the actual income tax benefit and the federal statutory rate follows:
Fiscal years ended September 30, 2002 2003 Amount % Amount % ------ --- ------ --- Computed income tax benefit at statutory $ 447,000 34 % $ 656,000 34 % rate Tax benefit reserved for doubtful valuation (447,000) (34)% (656,000) (34)% ---------- --------- Income tax benefit None None ---- ----
At September 30, 2002, the Company had a net operating loss carry forward for federal tax purposes of approximately $29,300,000 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: 2002 2003 ---- ---- Net operating loss carryforwards $ 28,000,000 $ 29,300,000 Valuation allowance (28,000,000) (29,300,000) ------------ ------------ Net deferred tax assets None None ==== ==== F-18 Universal Communication Systems, Inc. and Subsidiaries Notes to the Consolidated Financial Statements September 30, 2003 NOTE 7 - 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. Combined transactions in non-employee options for the fiscal years ended September 30, 2003 and 2002 are as follows:
2003 2002 ---- ---- Average Average Number of Exercise Number of Exercise Shares Price Shares Price ------- --------- ------- --------- Options outstanding October 1 251,400 $ 95.00 251,400 $ 95.00 Granted -- -- -- -- Cancelled/Expired 250 95.00 -- -- Exercised 250,000 95.00 -- -- ------- --------- ------- --------- Options outstanding, September 30 1,150 $ 95.00 251,400 $ 95.00 ======= ========= ======= =========
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. F-19 Universal Communication Systems, Inc. and Subsidiaries Notes to the Consolidated Financial Statements September 30, 2003 NOTE 7 - STOCK OPTION PLANS (continued) Combined transactions in employee options for the fiscal years ended September 30, 2003 and 2002 are as follows:
2003 2002 ---- ---- Average Average Number of Exercise Number of Exercise Shares Price Shares Price ----- ---------- ----- ------- Options outstanding October 1 6,300 $ 602.00 6,300 $602.00 Granted 0 0 0 0 Cancelled/Expired 0 0 0 0 Exercised 3,250 602.00 0 0 ----- ---------- ----- ------- Options outstanding, September 30 6,300 $ 602.00 6,300 $318.00 ===== ========== ===== =======
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 2003 or 2002. 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 8 - 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 and preferred stock. On August 10, 2000, the Company agreed with the investors to modify certain terms of the earlier funding agreement. 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. 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. In July 2003, an individual purchased a 4% Convertible Debenture with a principal amount of $100,000 from an existing bondholder. As part of the transaction, the Company issued ti him a new debenture which allows its conversion at any time into 14,000,000 freely transferable shares of the Company's stock. F-20 Universal Communication Systems, Inc. and Subsidiaries Notes to the Consolidated Financial Statements September 30, 2003 NOTE 8 - 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. The maturities of long-term debt are shown in the following table: Due in 2004 -- Due in 2005 4,446,996 ----------- $ 4,446,996 Less current maturities -- ----------- Total long term $ 4,446,996 =========== NOTE 9 - 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 Loan Agreement, Andrew received an initial payment of $100,000 and was scheduled to receive an additional $100,000 each month until the loan was repaid. In addition, the Company issued a Company warrant to purchase no less than 200 and no more than 500 shares of the Company's common stock. The warrants are exercisable until January 24, 2005 at an exercise price of $230 per share. The warrants were issued in lieu of interest, and the Company is required to register the shares underlying the warrants. Further, on July 23, 2001, the Company entered into an agreement with Andrew to resolve all remaining indebtedness. This agreement required the return of all equipment previously shipped to Argentina, most of which has been held in the duty free zone in La Plata, Argentina, as well as some inventory held in the U.S. The equipment in Argentina has not yet been returned to Andrew. The Company has not been able to locate the equipment in Argentina. 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 eighteen months from the date of issue. The note bears no interest and is secured by 300,000 shares of the Company's common stock. The agreement further provides that if the $300,000 is not paid when due, and if the security's value does not equal or exceed $300,000 on the due date, then the settlement will be void and the entire $1,400,000 will again be due. Because there was no stated interest, $15,254 was calculated as imputed interest, with $284,746 recorded as part of Notes Payable. F-21 Universal Communication Systems, Inc. and Subsidiaries Notes to the Consolidated Financial Statements September 30, 2003 NOTE 10 - RELATED PARTY TRANSACTIONS Company CEO Michael Zwebner was the majority shareholder of Hard Disc Cafe, Inc (HDC), with which the Company entered into a letter of intent to acquire HDC, as discussed in Note 3 above. Mr. Zwebner was also the majority shareholder of Card Universal Corporation, Inc., with which the Company entered into a letter of intent to acquire Card Universal, as discussed in Note 3 above. Mr. Zwebner has also advanced certain funds to the Company, of which $11,368 was outstanding to him at September 30, 2003. As noted in Note 4, Mr. Zwebner is also a shareholder of Overseas Communications Limited, with which the Company has a management agreement. During fiscal 2003, the Company paid $6,963 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. Mr. Curt Orgil, the Company's Treasurer and a Director, received 200,000 shares of the Company's stock as compensation for financial services. NOTE 11 - 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 in the fiscal year ended September 30 2003. NOTE 12 - INTANGIBLES Intangibles consist of $300,064 of goodwill allocated to patents, related to the Millennium acquisition (see Note 1), and $306,650 of patent 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 system. NOTE 13 - SUBSEQUENT EVENTS On December 15, 2003, the Company tentatively agreed to acquire 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. F-22