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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
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ...................to .......................
Commission file number................................
SERVICE SYSTEMS INTERNATIONAL, LTD.
Name of Small Business Issuer in Its Charter
NEVADA 88-0263701
State of Incorporation I.R.S. Employer
Identification No.
2800 INGLETON AVE.,
BURNABY, B.C., CANADA V5C 6G7
Address of Principal Executive Offices Zip code
604-541-1700
Issuer's Telephone Number
Securities registered under Section 12(b) of the Act:
NONE
Securities registered under Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $0.001 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 / /
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The issuers revenues for its most recent fiscal year were $24,118
The aggregate market value of the voting and non voting common equity held by
non-affiliates of the issuer computed by reference to the price at which the
common equity was sold, or the average bid and asked price of such common
equity, on December 11, 1997 was $0.5975. The number of shares outstanding
of the issuer's only class of Common Stock, $.001 par value, was 5,350,591
on December 11, 1997.
Transitional Small Business Disclosure Format (check one): Yes / / No /x/
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THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH THE
COMPANY'S FINANCIAL STATEMENTS AND NOTES THERETO. INFORMATION DISCUSSED HEREIN
MAY INCLUDE FORWARD-LOOKING STATEMENTS REGARDING FUTURE EVENTS OR THE FINANCIAL
PERFORMANCE OF THE COMPANY, AND IS SUBJECT TO A NUMBER OF RISKS AND OTHER
FACTORS WHICH COULD CAUSE THE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE
CONTAINED IN ANY FORWARD LOOKING STATEMENTS. AMONG SUCH FACTORS ARE: GENERAL
BUSINESS AND ECONOMIC CONDITIONS; CUSTOMER ACCEPTANCE AND DEMAND FOR THE
COMPANY'S PRODUCTS; THE COMPANY'S OVERALL ABILITY TO DESIGN, TEST AND INTRODUCE
NEW PRODUCTS ON A TIMELY BASIS; THE NATURE OF THE MARKETS ADDRESSED BY THE
COMPANY'S PRODUCTS; AND OTHER RISK FACTORS LISTED FORM TIME TO TIME IN DOCUMENTS
FILED BY THE COMPANY WITH THE SEC.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
Vancouver-based Service Systems International Ltd., through its
majority-held subsidiary UV Systems Technology, Inc. ("UVS"), is the
manufacturer and marketer of state of the art ultraviolet disinfection systems
for wastewater. The Company is committed to a legacy of a healthy planet for
future generations through the development and commercialization of superior,
cost-effective, environmentally friendly, ultraviolet-based water treatment
systems. Through UVS, the Company holds two United States patents and five
international patents on various components of its Ultra Guard -TM- ultraviolet
disinfection system, including the flow reactor chamber and discharge weir.
The Company's executive offices are located at 2800 Ingleton Avenue,
Burnaby, B.C., Canada V5C 6G7, and its telephone number is (604) 451-1069. Its
facsimile number is (604) 451-1072. References in this document to the "Company"
include its consolidated majority-owned subsidiary, UVS, unless the context
otherwise requires. ULTRA GUARD- Registered Trademark - and the Company's "WAVY
LINES & DESIGNS" logo are registered trademarks of the Company. All other
trademarks or tradenames referred to in this document are the property of their
respective owners. All monetary figures in the document are in United States
dollars unless otherwise indicated. Canadian dollars are indicated as "C$.
COMPANY BACKGROUND
Incorporated in Nevada in August 1990, the Company was inactive until it
was acquired in July, 1995 by eight Canadian and European individuals. The
investors intended to develop the Company into the United States marketing arm
for UVS' Ultra Guard systems. UVS was incorporated in 1993 in British
Columbia. The Company issued 1,600,000 shares of its restricted common stock
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("Common Stock") to certain individual stockholders, including an officer of the
Company, as reimbursement of cash advanced by them to others for expenses
related to the acquisition.
In furtherance of the Company's marketing objective, the Company entered
into an oral agreement, subsequently supported by a written agreement dated
September 21, 1995, for marketing rights for the Ultra Guard system in eight
Western states. Thereafter, in July 1996, the Company entered into a funding
agreement with UVS pursuant to which the Company supplied 50% of UVS'
operating capital for a six-month period during which the two companies
structured an agreement to complete an acquisition by the Company of UVS.
During the period August 1996 through December 7, 1996, the Company acquired
50.69% of the outstanding UVS common stock, from two principals and certain
minority shareholders. On December 6, 1996, UVS, the Company, the two former
majority shareholders of UVS and the two remaining minority shareholders of
UVS, Working Opportunity Fund ("WOF") and MDS Ventures Pacific, Inc. ("MDS")
entered into an agreement, subsequently amended, for the Company to acquire
the remaining 49.31% of outstanding UVS common stock and retire or convert
the MDS and WOF preferred stock, contingent on securing additional financing
by September 15, 1997. The agreement was amended on November 24, 1997 to
extend the time for securing financing to January 15, 1997. The agreement
provides, INTER ALIA, that, (a) the Company will raise at least C$2,000,000
in equity financing for UVS, (b) each of WOF and MDS will convert half of
their UVS preferred stock to secured debentures, to be redeemed from each of
them by UVS at the rate of C$25,000 per month, or fully redeemed at UVS'
option (in which case, WOF and MDS may convert the outstanding balance into
Company Common Stock at a rate of C$2.00 principal amount per share), (c) the
remaining 50% of UVS preferred stock held by WOF and MDS will be converted
into 500,000 shares of Company Common Stock, (d) additional loan amounts owed
to WOF and MDS ($454,815 plus interest or $101,825 as of August 31, 1997)
will be repaid out of the financing or may be converted by WOF and MDS into
Company Common Stock at the rate of C$2.00 per share, (e) all shares of
Company Common Stock issued will carry a detachable warrant certificate
entitling the holder to purchase, during a four-year period from issuance of
the Common Stock, one Common Share for each share issued, at a price of
C$2.00 per share, (f) as long as the secured debentures are outstanding, each
of WOF and MDS may appoint one Director to the Company's Board of Directors,
(g) the UVS common stock held by WOF and MDS will be transferred to the
Company when the financing has occurred and the additional loan amounts have
been repaid to WOF and MDS, (h) the Company will ensure that the issued
Common Stock will be or become free-trading, and (i) if financing is not
obtained, the Company will forfeit any
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funds advanced by the Company to UVS (which, as of August 31, 1997, the fiscal
year end, were $630,078).
INDUSTRY BACKGROUND
The treatment of municipal wastewater and drinking water to eliminate
contaminants injurious to health and the environment is a worldwide concern. In
1995, the world spent an estimated $335 billion for the purification of
drinking water, wastewater treatment and treatment of industrial process
water and fluids. By 2000, world spending for drinking water purification
and municipal wastewater treatment only is estimated to reach $300 billion
per year (plus another $200 billion for industrial treatment needs). In 1984
a United States Environmental Protection Agency survey reported that 15,378
municipal treatment plants were in operation in the United States and
projected the number to increase to approximately 21,000 by the year 2000. Of
these 15,378 operating in 1984, some of which had either limited or no
disinfection, only 107 utilized, or were being constructed and designed for,
UV treatment. Many of the existing plants identified in 1984 will require
upgrading, retrofitting or replacement to meet new United States
environmental standards, at an estimated cost of more than $180 billion.
These, together with the new treatment plants projected to be built,
represent the United States municipal wastewater treatment market for the UV
treatment industry.
Typical municipal treatment plants begin the treatment of effluent by
settling or filtering out solid wastes. Thereafter, the water must be
disinfected. Of the five major factors used to evaluate a disinfection system,
four factors, effectiveness, use cost, practicality, and pilot study
requirements, relate to the disinfection process itself. The fifth factor,
potential adverse effects, relates to the effect of the disinfectant on the
environment. Currently, the majority of treatment systems in the United States
use chlorination. Other treatment alternatives include, INTER ALIA, ozonation
and ultraviolet light.
The use of chlorination can raise significant environmental concerns.
According to a 1986 U.S. Environmental Protection Agency study, MUNICIPAL
WASTEWATER DISINFECTION, because of the toxicity of chlorine residuals at low
levels and the relatively high limit of detection of chlorine residual test
procedures, control of chlorine-induced toxicity in the receiving stream is
difficult. Environmental factors such as temperature, pH, alkalinity,
suspended solids, chemical oxygen demand and nitrogen containing compounds
influence the effectiveness of chlorine disinfection. Adverse environmental
impact can include the toxicity of residual chlorine to wildlife and the
formation of potentially toxic
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halogenated organic compounds. Many treatment plants use sulfur dioxide to
dechlorinate treated water. This reduces the amount of toxic residuals, but
probably does not affect halogenated organics and adds its own negative effect
in the receiving water. Transportation of chlorine raises additional concerns
because it is extremely volatile and hazardous and is, therefore, difficult to
transport safely. In many states, regulations require that all personnel in a
treatment facility which uses chlorine be trained in correct handling and safety
procedures.
Ozone, an unstable gas, is an extremely reactive oxidant and a very
effective bactericide and virucide which is thought to be beneficial to the
environment. However, in some instances, mutagenic and/or carcinogenic
compounds have resulted from ozone's use. Ozone treatment can be expensive;
ozone must be generated on-site in an expensive process, the ozonation process
is relatively complex to operate and maintain, and the equipment costs are high.
According to a recent study, ULTRAVIOLET DISINFECTION IN MUNICIPAL WATER
AND WASTEWATER, the number of UV disinfection systems in the United States will
increase from about 1,000 to about 3,000 between 1995 and 2000 and the market
will increase from $20 million annually to $100 million annually in the same
time period. By the year 2010, half of municipal disinfection systems are
expected to use technologies other than chlorine, and use of chlorine will be
almost eliminated by 2025. About 56% of chlorine alternative installations are
forecast to be UV systems.
Ultraviolet (UV) light treatment is a non-chemical process the
effectiveness of which as a bactericide and virucide has been well-established.
Radiation at a wavelength of 254 nm penetrates the cell wall and is absorbed by
the cellular nucleic acids, preventing replication of the cell. Because UV is
non-chemical, no toxic residues are produced. UV systems are simple to operate
and maintain, have almost no adverse environmental impact, and have minimal
space requirements. UV is a cost-effective alternative to chlorination and
ozonation.
The installation of UV disinfection systems has been slowed by the large
number of low pressure, low intensity ultraviolet lamps required in larger
treatment plants, the need to develop better cleaning methods for the UV
lamps used in the systems, the cost of power consumption (because of the
large numbers of lamps) and the labor cost of annual replacement of the
lamps, and a reduction in disinfection performance which can result from high
suspended solids concentrations, color, turbidity, and soluble organic matter
which reduce the ability of the ultraviolet light to penetrate the fluid (the
transmittance of the fluid). The Company believes that
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a UV system such as provided by the Company which deals with these issues will
greatly enhance the marketing opportunities for UV systems as a result of the
desire for treatment systems which are environmentally friendly, cost-effective
and efficient.
SERVICE SYSTEM'S STRATEGY
The Company is committed to a legacy of a healthy planet for future
generations through the development and commercialization of superior,
cost-effective, environmentally friendly, UV-based water treatment systems.
The Company's objective is to become a leading supplier of UV disinfection
systems for municipal wastewater and, eventually, for industrial process
water and potable water. The Company believes that sensitivity to the
environmental effects of current widely-used chlorine treatment and the
corresponding need for superior, environmentally friendly, efficient, and
cost-effective systems for water disinfection around the world provide
numerous opportunities for the Company to expand the scope of its activity,
utilizing its state of the art, proprietary UV technology. Key elements of
the Company's strategy are:
TECHNOLOGICAL SUPERIORITY. The Company currently holds patents on the UV
lamps, flow control module and flow-balanced weir, components which are used
in its treatment system. The system also features several proprietary
features which address and correct the perceived problems with respect to
cleaning of lamps and variation of intensity for reduction of power
consumption and for treatment of different degrees of pollution. The Company
intends to improve continuously its UV systems through technological
development in response to the expanding needs and applications of the water
and wastewater treatment industry.
EXPANSION OF PRODUCT LINES. The Company's UV technology has the capacity
to be applied to many treatment uses. Subject to adequate financing and
successful penetration of the wastewater disinfection market, the Company's
goal for the next decade is to expand from its current emphasis on wastewater
disinfection to the industrial process water and potable water treatment,
other fluids treatment and air treatment. Process water treatment is
required in industries such as breweries, soft drink producers,
pharmaceutical, pulp and paper production, agri-businesses, fisheries, and
marine life systems. Potable water treatment is needed for drinking water
for normal municipal supply, bottled water and for disaster relief.
Treatment is also needed in bottled and packaged fluids and air conditioning
systems.
ENHANCEMENT AND EXPANSION OF MARKETING EFFORTS. Marketing of
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the Company's UV systems is largely through agents and representatives in
North America and world-wide. To cover more regions and to enhance customer
support, the Company is intending to expand this network and, when and if the
opportunity arises, to acquire firms serving a similar industry.
EXPAND INTERNATIONAL SALES. While awareness of the need for water
disinfection in North America is high, that awareness in other parts of the
world is also beginning to increase and the market for treatment systems is
expanding. Because of the compact and adaptable nature of the Company's
treatment system, its patented and proprietary technology, and its full-size
demonstration units, the Company believes that it has good potential to
expand increasingly into the international market and intends to pursue this
market aggressively.
THE COMPANY'S PRODUCT
Through UVS, the Company manufactures and markets its Ultra Guard UV
water treatment system under its registered trademark, Ultra
Guard-Registered Trademark-. The Ultra Guard system incorporates patented
UVS low-pressure, high intensity, high efficiency UV lamps, infinitely
variable ultraviolet lamp controllers, patented UVS high-performance flow
control modules, patented flow-balanced weirs, and an automatic quartz sheath
cleaning system. A new mechanical cleaning system has been developed and
will be introduced in the near future. Currently used primarily for municipal
wastewater disinfection, the system can also be adapted for treatment of
process and wastewater from industry, where it is currently being applied in
the semi-conductor industry, treatment of potable water, juices and other
bottled products, and agriculture and aquaculture water treatment.
UV disinfection systems have the advantage of being relatively simple to
operate and maintain. UV disinfection is a physical, rather than chemical,
process using UV radiation to permeate bacterial and viral cell walls and
prevent the cells from replicating. In competing systems, after solid
materials are removed, the effluent is directed through banks of low
pressure, low intensity mercury vapor arc lamps producing UV light. In order
to disinfect a liquid, the energy must be directed into the liquid as
efficiently as possible. As the lamp emits radiation and the distance from
the lamp increases, the intensity and the effectiveness of the UV diminishes.
Traditionally, maximum exposure has been obtained by utilizing a very large
number of low pressure, low intensity lamps through which fluid passes.
Murkier fluids require more lamps and closer placement of the lamps in
proximity to one another.
The Company's Ultra Guard system also exposes fluid to UV light for a
time sufficient to damage the microorganisms
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effectively. However, in the Ultra Guard system, fluid passes through a
diffuser plate, which evens the flow, then passes through a patented flow
reaction chamber where the UV lamp is located, and leaves through the
patented flow-balanced discharge weir.
As effluent enters the intake channel, uneven fluid pressure has, in
earlier non-Ultra Guard systems, created variances in the flow rate among the
top, middle and bottom layers of effluent, which may result in varying rates
of disinfection as flow past the UV lamps varies. Ultra Guard's diffuser
screen intercepts the inflow, mixes the layers and ensures uniform column
flow, allowing the lamp intensity to be based on a consistent, predictable
flow rate. A flow-pacing device determines the volume of effluent flowing
toward the disinfection modules. A UV transmission monitor provides
continuous readings of the effluent transmission quality, which are fed to
the system control center where they are analyzed to select appropriate power
settings for UV lamp intensity. In multichannel installations, powered
flow-control gates can be provided to balance the flow, control the number of
modules in operation, or take a channel off-line for routine maintenance or
lamp replacement.
After passing through the diffuser screen and monitors, the fluid
enters the Ultra Guard patented flow-reaction chamber. This process replaces
the Company's competitors' straight-through systems that require repeated and
continuous exposure to multiple banks of UV lights. With the Ultra Guard
system, the fluid oscillation ensures that all influent receives maximum
exposure to the UV light from a single lamp. Also, unlike lamps in other
systems which are exposed to influent and build up sedimentary deposit, the
Ultra Guard chamber is designed to cause the fluid to pass closer to the UV
light at higher velocities. This minimizes sedimentary deposit on the quartz
sleeve, reducing the frequency of cleaning and allowing the lamps to continue
to operate at peak efficiency for longer periods of time. In addition, Ultra
Guard has a mechanical quartz sheath cleaner incorporated into its system
which simplifies and automates the cleaning process. The combination of the
reduced sedimentation and fouling and the automatic cleaning system directly
addresses one of the major concerns about the use of UV disinfection systems.
The Company believes that this advance will significantly aid its marketing
efforts.
The Ultra Guard patented low-pressure, high intensity, high efficiency UV
lamps emit UV light to penetrate murky effluent and reduce fecal coliform
counts to acceptable levels. The lamps operate at 40-60% of the electrical
power used in
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low-pressure, low-intensity lamps and 15 to 60% of the electrical power used
in medium intensity lamps. The Ultra Guard system also requires up to 90%
fewer lamps than most other systems, reducing total electrical consumption
even more. Replacement downtime for lamps is minimized because the lamps can
be replaced quickly from above while the lamp module remains in the channel.
Using data from the in-stream flow sensors and UV monitors, UV output for
each lamp can be increased to compensate for unusual quartz sheath fouling
and lamp aging. Conventional flap gates and imbalanced weirs often cause UV
lamps to be exposed to air, an energy inefficiency. The Ultra Guard patented
flow-balanced weir, based on the principle of atmospheric pressure
equalization, maintains correct channel depth without movable gates, valves,
or other methods requiring operator involvement or special sensors.
The Ultra Guard system has a compact size. Capacity can be easily
increased by expanding the number of channels operating in parallel. For
more turbid than normal influent or more stringent than standard effluent
regulations, a second lamp module immediately behind the first may be
installed. The system can handle flows from 1 gallon to 10 billion gallons
per day. Systems are customized to suit specific site conditions and
discharge requirements. Single lamp systems cost between $8,000 and $15,000;
the cost of systems requiring more lamps is a multiple of that, with volume
discounts available for larger sales. Typical systems require one lamp for
every 0.5 million gallons of wastewater treated.
CUSTOMERS
The Company's customers to date have primarily been municipal wastewater
treatment facilities. Ultra Guard systems have been installed at two
wastewater treatment facilities. The first system was commissioned in
February 1995 in Paraparaumu, New Zealand and has been in operation since
that time. This municipal wastewater treatment system is designed to treat
580 cubic meters per hour peak flow and is a 12 lamp system. Initially, the
system experienced premature lamp burnout in the center sleeve due to a
defective lamp controller. This problem has been corrected. The second Ultra
Guard system was supplied in August 1995 for Chilliwack, British Columbia,
Canada and is a 12 lamp system designed to process a flow of 4.5 million
gallons per day (MGD). Due to excessive flows at the plant, up to 8.6 MGD
being delivered to the system, the Company has agreed to reverse the sale
and is negotiating an agreement with the customer to continue using the site
as a facility to test new equipment and components. As of August 31, 1997,
the Company had delivered 10 systems to its Japanese distributor for
applications in the
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semiconductor industry and had orders for an additional 10 systems.
UVS has agreed to deliver a production demonstration unit ("PDU")
for effluent testing to two sites in Hong Kong and one in Washington State
slated for upgrade to UV disinfection. Testing at the Washington State site
is scheduled to begin in late 1998 and the first Hong Kong site is scheduled
for Spring 1998. The Company actively bids on new sites in the United
States, Canada and internationally. The Company also has a PDU performing
pilot testing in Quebec, Canada.
The Company has been advised that it has been awarded a contract for a
System in Montreal, Canada, to be delivered in fiscal 1998, but has not yet
executed a binding agreement.
SALES AND MARKETING
The Company markets the Ultra Guard system both domestically and
internationally through UVS. UVS markets the system directly, through two
marketing employees with specialized training in wastewater disinfection, and
through a network of distributors and representatives. As of August 31,
1997, UVS had 31 distributors and representatives, 17 in North America and 14
internationally. Distributors purchase systems and components for resale in
a designated territory on an exclusive basis and provide full service to
customers. Some agreements require a distributor to purchase a minimum
amount of product each year. Distributorship agreements are performance
related and usually have a term of one year. Sales representatives act as
agents for UVS to sell UVS systems in designated territories.
Representatives are paid a commission for sales made within their
territories. The usual contract is for a period of one year. The Company,
through UVS, is continuing to recruit distributors and representatives
throughout the world through strategically placed advertisements in
international publications and through attendance at international
exhibitions such as Globe Foundation, which exhibits bi-yearly. UVS is
registered for the exhibition at Vancouver, Canada in March 1998.
As of August 31, 1997, the Company had sold all of its products outside
the United States. It anticipates, however, that its marketing network in
the United States, together with its state of the art technology, will
enhance its opportunities for sales there and that the United States, with
its significant number of publicly-owned treatment works, will become its
primary market. The Company expects that its sales will be to diverse
wastewater treatment plants in the United States and world-wide and,
therefore, other than for initial sales, no one customer is
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likely to account for more than 10% of its sales, averaged over a five-year
period. Because of the size of each project, one project may be expected to
represent more than 10% of sales in any given year. The Company is targeting
communities of all population sizes.
As part of its sales effort, the Company has assembled 7 production
demonstration units ("PDU's"). Of these, one is used by the Company for
research and development, the Company has received deposits from agents for
two more to use as demonstration units, and four are awaiting conversion
from single lamp to two lamp systems. PDU's are fully functional Ultra Guard
systems with all of the patented components and are available for IN SITU
testing. They are compact in size and designed for placement next to an
existing outflow channel. PDU's can accommodate flow rates from 100 to 800
U.S. gallons per minute, about 8% of the average wastewater treatment plant
flow. An inflow pump draws fluid from the existing system discharge at the
flow rate required for testing so that the PDU operates, in effect, as
part of the treatment system. The testing period generally runs from two to
three weeks in duration and is operated by the Company's technicians. In
some instances, the staff of the treatment site or the site design engineer's
staff operates the PDU.
The Company advertises through trade publications directed to wastewater
treatment, the marketing efforts of its distributors and representative,
presentation of technical papers at industry meetings, and meetings with
engineers and others involved in treatment plant design. Video tapes and
brochures are available for potential customers and for use by distributors
and representatives. Many of the marketing opportunities for wastewater
treatment systems are made available through "requests for proposal", from
public entities and contractor and engineering firms acting for public
entities, for systems designed in response to specific criteria. The Company
actively responds to RFP's in the United States and throughout the world. As
of August 31, 1997, the Company had eight responses to RFP's pending. The
Company responds to two to four RFP'S a week.
COMPETITION
The Company competes with producers, many of which are more established
and have significantly greater resources than the Company, of other UV water
treatment systems and of other water treatment technologies. Other major
technologies currently in use include chlorination, chlorination and
dechlorination, and
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ozonation. Competitive factors include effectiveness, use cost,
practicality, pilot study requirements and potential adverse environmental
effects.
Of all of the disinfection technologies, including UV, in use, the most
prevalent is chlorination (or chlorination with dechlorination).
Chlorination has been the predominant treatment modality in municipal
wastewater and industrial process water systems in the United States and
world-wide, are chlorine-based systems. However, because of environmental
concerns, the Company expects the use of chlorine to decrease significantly
over the next three decades. An industry survey has forecasted that over
half of chlorine alternative installations will be UV. See "--INDUSTRY
BACKGROUND."
In the Company's primary business of wastewater and process water
treatment, the Company competes primarily with producers of chlorination
disinfection systems and with other UV system manufacturers. While it also
competes with ozonation systems, ozonation is more commonly used for drinking
water purification.
Wastewater and process water disinfection system manufacturers with which
the Company competes include, in the United States market, Trojan
Technologies Inc., Wedeco, Infilco-Degremont, Inc., Hanovia/Aquionics, Inc.,
and Fisher-Porter/Elsay Bailey, Inc., estimated to represent, respectively,
50%, 20%, 13%,10% and 7% of the sales in the world-wide market, of which
about 80% are United States-based sales. Trojan focuses on UV applications
for use in the sewage wastewater industry and is the largest producer of the
product (the medium pressure lamp UV4000) which directly competes with the
Company's low pressure, high intensity lamps, and open channel system. The
Company believes, however, that the Company's systems are technologically
superior to Trojan's. Trojan has reported its sales as of its 1996 fiscal
year end to be about C$51.5 million. Hanovia competes primarily in the
potable water European market. Infilco-Degremont, Wedeco and Fisher Porter
sell UV systems of the low pressure, low intensity type and have recently
introduced medium pressure lamp systems comparable to the Trojan UV4000.
Compared to competing systems, the Company's Ultra Guard systems are more
compact and use less land area, consume 40 to 60% of the electrical power
used in low pressure, low intensity systems and 15 to 60% of the electrical
power used in Trojan's UV4000, and, therefore, have lower life-cycle
operating costs. The Company's systems treat very poor quality effluents,
have better hydraulic performance, can be demonstrated using a full-
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scale, single lamp unit, and have an automated lamp cleaning system. All
these factors combined provide, the Company believes, substantially better
quality discharge in terms of total fecal coliform concentrations, and reduce
capital and operating costs compared to competitors.
PATENTS AND TRADEMARKS
The Company, through UVS, holds patents to key components of its Ultra
Guard systems. These include United States and International Patent
Protection Treaty patents on the UV sterilizer system and the weir, as well
as patents on the UV lamp technology in the United States, France, Canada,
the United Kingdom, the Netherlands, Germany, Japan, and Switzerland. The
patents on the lamps expire at various times before the year 2000; however,
due to the technology and cost involved in manufacturing the lamp and the
compatible electronics needed to operate the lamps, the Company believes that
the expiration of the patents should not materially affect the Company's
business. With the patents the Company holds on other key components in the
Ultra Guard system, competing systems, even if they use the Company's lamps,
would operate at about 50% of the treatment capability of the Company's
system. The patents on the other patented key components were recently
issued in the United States and will extend into the year 2018. Some of the
Company's patented technology, such as the flow reaction chamber, was
developed as "work for hire" and, as such, can be subject to claim by the
individual(s) who developed it. The developer of the flow reaction chamber
advised the Company that he believed that the U.S. patent has reverted to him
under the terms of the assignment to the Company. The Company vigorously
denied this assertion, which it believes to be unfounded, and has received no
other communication from the developer. The Company believes that, in any
event, other configurations could be readily used.
In addition, the Company holds registered trademarks on "ULTRAGUARD" and
on its "wavy lines and design" logo in the United States and Canada.
REGULATORY MATTERS
The Company's business and manufacturing are conducted from British
Columbia, Canada and are not subject to any special regulatory requirements
not applicable to manufacturing businesses in general in Canada and the
United States. Environmental regulations that apply to the sewage industry
are specific to the effluent being delivered to the receiving waters and
must be complied with by the wastewater treatment plant. In
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the United States, wastewater and process water treatment plants must comply
with clean water standards set by the Environmental Protection Agency under
the authority of the Clean Water Act and standards set by states and local
communities. Through the RFP process, the regulations are passed on to the
Company in the system design requirements. These RFP's detail specifications
for the system, including the effectiveness required to meet any regulatory
requirements. Compliance with microbiological standards is, however,
determined by subsequent operation of the wastewater treatment plant and is,
unless the Company's treatment system failed to comply with specifications
for some reason (a problem the Company uses great effort to avoid), generally
the responsibility of the plant. However, it is possible that the inaccuracy
or inadequacy of those specifications and the Company's potential liability
if not indemnified, and the possibility that the Company will be required to
comply with future direct regulation of the Company by future laws or
regulations (including environmental laws), could materially adversely affect
the Company's business and operations.
The Company is not aware of any regulations which would adversely affect
its ability to market its systems; the effectiveness of the Company's system
enhances the Company's ability to respond to RFP's complying with the
applicable sections of the stringent regulatory clean water standards.
Because wastewater treatment systems require, in many jurisdictions
including the United States, permits from environmental regulatory agencies,
delays in permitting could cause delays in construction or usage of the
Company's systems by a customer, which, in turn, could have a material
adverse impact on the Company. In addition, many of the Company's customers
will rely on municipal financing for the purchase of the Company's UV
systems. Sales to these customers may be adversely affected by delays in
obtaining, or the unavailability of, such funds caused by budgetary
constraints or the bureaucratic process.
MANUFACTURING
The Company's Ultra Guard systems are assembled at its UVS facility.
Components for the systems are manufactured by a variety of Canadian, United
States and international suppliers. The Company obtains its UV lamps and
controllers for the systems from a sole supplier for each. To ensure against
any interruption of supply should one of these suppliers be unable or
unwilling to provide the parts as required, the Company is in the process of
identifying and arranging for alternative sources for these components.
15
<PAGE>
RESEARCH AND DEVELOPMENT
The Company considers its research and development efforts to be a key
component of its business strategy. As of August 31, 1997, the Company,
including UVS, had six employees, with a combined 75 years of related
experience, collaborating on product development activities. The Company
also used lamp design and computer software consultants to assist in product
development decisions. The Company's current research and development
efforts are focused on alternative sheath cleaning technology, including the
use of ultrasonic methods, and on systems automation. Future efforts will
focus on expanding and developing the Ultra Guard technology and equipment
for applications, such as industrial process water treatment units, in
addition to sewage effluent disinfection. On a combined pro forma basis (see
Note 13 to the Consolidated Financial Statements) assuming the
acquisition of the majority of UVS outstanding common stock had occurred,
the Company's research and development expense in fiscal 1996 was $317,190
and in fiscal 1997 was $380,213.
EMPLOYEES
As of August 31, 1997, Service Systems had one full-time employee, and
UVS had 10 full-time employees. The Service Systems employee was engaged in
management. The UVS employees were engaged in production, design, and
development of the Ultra Guard systems and technology and in office services
for the business. The consultants/employees for the registrant are paid
through its subsidiary, UV Systems.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's executive officers were moved in July 1997 from White Rock,
British Columbia, Canada, into the UVS premises at 2800 Ingleton Avenue,
Burnaby, British Columbia. The Company also leases, on a month-to-month
basis, an office maintained by two consultants in an office complex in
Phoenix, Arizona.
The UVS leased premises have 2,537 square feet of executive offices and
9,088 square feet of manufacturing facilities. The lease term is for a
period of five years, expiring September 2000, with an option to renew for an
additional five-year term. The Company anticipates that these facilities
will be adequate for five years, with a need for additional storage space in
year three.
The Company maintains an insurance plan covering all of its
16
<PAGE>
facilities and contents, as well as general liability insurance in an amount
considered adequate in the industry (although no assurance can be given that
the amount will, in fact, be sufficient should a claim arise).
ITEM 3. LEGAL PROCEEDINGS
The Company knows of no legal proceedings either pending or threatened
against it or its property.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matter to a vote of security holders
during the fourth quarter of the year covered by this report.
PART II
Item 5. Market For Common Equity and Related Stockholder Matters
The Company's Common Stock is traded in the over-the-counter market and
is listed on the Nasdaq Bulletin Board under the symbol "SVSY". The
following table sets forth for the periods indicated the high and low bid
prices of the Company's Common Stock as reported by Nasdaq. The quotations
reflect inter-dealer prices, without retail mark-up, mark-down or commission,
and may not represent actual transactions. The Company's Common Stock
commenced trading on the over-the-counter market in September 1995, before
which there was no market for the securities of the Company.
High Low
---- ---
FISCAL YEAR 1995
Quarter ended November 30, 1994 - __ __
Quarter ended February 28, 1995 - __ __
Quarter ended May 31, 1995 __ __
Quarter ended August 31, 1995 __ __
FISCAL YEAR 1996
Quarter ended November 30, 1995 2.00 .075
Quarter ended February 28, 1996 3.50 1.25
Quarter ended May 31, 1996 3.20 1.6875
Quarter ended August 31, 1996 2.125 1.1875
FISCAL YEAR 1997
Quarter ended November 30, 1996 3.00 1.25
Quarter ended February 28, 1997 2.0625 0.19375
17
<PAGE>
Quarter ended May 31, 1997 3.00 1.125
Quarter ended August 31, 1997 2.060 1.00
As of August 31, 1997, there were approximately 71 holders of record of
the Common Stock.
The Company has never had earnings and has never paid cash dividends on
its Common Stock. The Company intends to retain future earnings, if any, to
provide funds for business operations and, accordingly, does not anticipate
paying any cash dividends on its Common Stock in the foreseeable future.
Since the acquisition of the Company on September 1, 1995, the Company
has issued the following securities in exempt transactions. In all cases,
the securities were issued to sophisticated investors who were given full
access to information about the Company and its business. No discounts or
commissions were paid to any person in connection with these sales.
CHANGE IN CONTROL. The Company was inactive until it was acquired on
September 1, 1995, by eight Canadian and European individuals. The investors
intended to develop the Company into the Unites States marketing arm for UVS'
Ultra Guard systems. The Company issued 1,600,000 shares of its restricted
common stock to certain individual stockholders, including an officer of the
Company, as reimbursement of cash advanced by them to others for expenses
related to the acquisition. See "Company Background." All of these shares
of Common Stock were issued under the exemption provided by Section 4(2) of
the Securities Act of 1933 ("1933 Act") by reason of the sophistication of
the purchasers and/or their relationships to sophisticated and knowledgeable
purchasers.
ACQUISITION OF UVS. During September of 1996, the Company exchanged 274,918
shares of Common Stock with 27 minority holders of the common stock of UVS, a
Canadian company. Thereafter, in December, the Company exchanged 600,000
shares of Common Stock, and issued warrants for a like number of shares
(exercisable at C$2.00 per share), for the UVS common stock held by each of
D. F. Sommerville (then president of UVS) and John R. Gaetz (vice president
of UVS), giving the Company, together with the earlier minority interest
shares acquired, majority ownership of UVS. These shares were issued under
the exemption provided by Section 4(2) of the 1933 Act with representations
from the purchasers as to their investment intent, their access to
information and their sophistication.
18
<PAGE>
OTHER SALES
The Company also made the following cash sales in Canada pursuant to the
exemption afforded by Regulation S before the Company became subject to the
Securities and Exchange Commission reporting requirements:
- -----------------------------------------------------------------------------
Name Date Units Price
- -----------------------------------------------------------------------------
Thomas O'Flynn 9/96 86,000 shares $0.75 per unit
86,000 warrants
common stock
Terry Henning 10/96 20,000 shares $0.75 per unit
20,000 warrants
common stock
Dale/Sharon Gaunt 10/96 20,000 shares $0.75 per unit
20,000 warrants
common stock
Diane Smith 10/96 100,000 shares $0.75 per unit
100,000 warrants
Rocha Holdings Ltd 10/96 25,420 shares $0.75 per unit
25,420 warrants
common stock
Albion Corporation 10/96 20,000 shares $0.75 per unit
20,000 warrants
common stock
Barnaby Investments 10/96 20,000 shares $0.75 per unit
20,000 warrants
common stock
- -----------------------------------------------------------------------------
19
<PAGE>
Service Systems International, Ltd.
(A Development Stage Company)
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS AND FINANCIAL
CONDITION.
The following discussion and analysis should be read in conjunction with
the Company Financial Statements and Notes thereto. Information discussed herein
may include forward-looking statements regarding events or the financial
performance of the Company, and are subject to a number of risks and other
factors which could cause the actual results to differ materially from those
contained in the forward-looking statements. Among such factors are: general
business and economic conditions; customer acceptance and demand for the
Company's products; the Company's overall ability to design, test and introduce
new products on a timely basis; the nature of the markets addressed by the
Company's products; and other risk factors listed from time to time in documents
filed by the Company with the SEC.
BASIS OF PRESENTATION
The financial statements include accounts of the Company, and its 50.7%
owned subsidiary, UVS. As UVS was acquired on December 1, 1996, results of
operations include only the period from December 1, 1996 to August 31, 1997.
Comparative figures only include the accounts of the Company. See Note 3 to the
Consolidated Financial Statements.
MANAGEMENT'S DISCUSSION
The Company is a development stage company which was incorporated in the
State of Nevada in August 1990, and remained inactive until September 1995. The
initiation of the Company's current business was accompanied by a change of
ownership. Through UVS, the Company manufactures and markets its Ultra
Guard-Registered Trademark- ultra violet-based patented water treatment system.
These products are sold primarily for municipal wastewater disinfection;
however, the system can also be adapted for treatment of process and industrial
wastewater ( where it is currently being applied through UVST's Japanese agent)
and for potable water, bottled products and agriculture and aquaculture water
treatment.
In September 1995 the Company initiated a marketing distribution agreement
with UV Systems Technology Inc., a manufacturer of equipment using proprietary
ultraviolet light technology for the microbiological disinfection of
industrial and municipal wastewater. In July 1996 the Company entered into a
funding agreement with UV Systems Technology Inc., (UVS) whereby the Company
provided 50% of UVS' operating cash needs for a six-month period. On December
1, 1996, the Company acquired 50.69% of the common stock of UVS from two
principals and the minority stockholders. On December 6, 1996, the Company
entered into an agreement with the remaining two minority stockholders, Working
Opportunity Fund (EVCC) Ltd. and MDS Ventures Pacific Inc., to acquire the
remaining 49.31% common stock and their preferred stock. The effect of these
transactions when and if completed will be to give the Company 100% ownership of
UVS. See "Item 1. Business".
During the period from December 1, 1996, the majority acquisition date, the
Company has continued with UVS' System development and testing programs. These
programs include the development of both a mechanical and electronic automatic
cleaning system, in addition to its already existing quartz sheath system, to
remove the fouling build-up due to suspended solids prevalent in wastewater.
The program of development on the mechanical cleaner determined that the
20
<PAGE>
method chosen is viable and does perform the function desired. Field testing
of the mechanical wiper cleaning system is currently ongoing at a Production
Demonstration Unit (PDU) test site at Ville de Repentigney near Montreal,
Quebec. The test results concluded that the cleaning system performs above
anticipated levels. Refinements of the mechanical components will continue, to
determine the most reliable and economical parts, but components have been
selected to be used in the first products sold. The temperature control system
for the UVS System was also tested at the Ville de Repentigney test site during
temperatures ranging down to MINUS 8 DEG. Celsius. The test showed that with
temperature control, infinite variable lamp UV output intensity was stable and
controllable. This feature will be included on all future products the benefits
being, instant response to changes in power settings, consistent UV output,
infinite controllability through a full range of UV settings and expected longer
lamp-in-service life. To the Company's knowledge, no other UV equipment
supplier can offer this degree of control of a UV lamp. Development of the
electronic ultrasonic cleaning system is still in process. The supplier of the
ultrasonic equipment, who is partnering with the Company and has provided the
prototype equipment for testing at no cost, delivered the equipment in early
October. The ultrasonic equipment has been installed on a UV module but to date
testing has not commenced.
In March 1997 the Company received an order for a full scale System to
treat one-fifth of a major Eastern Canadian city's sewage effluent. In June,
the client requested that the order be delayed until the end of the current
year disinfection period (Oct 31,1997). No further activity has occurred at
this site pending a meeting to discuss the preparation of the site for the
installation of the full scale system. At this meeting, the parties expect
to determine a final configuration which will allow the use of the
Company's, Ultra Guard-Registered Trademark- UV equipment alongside the
existing Trojan Technologies Inc. equipment. These configuration changes
will adjust the effluent flow to allow for differences between the method of
effluent flow control used by the Company's UV System and that used by the
Trojan UV system. The target date for the planned installation of the
Company's UV system has not yet been determined. On completion of testing
and if testing is successful, the Company expects to negotiate for the four
remaining channels, a total project value estimated at C$2.0 million, as well
as the retrofit of the Trojan equipment at another site of approximately
equal size in the same city, but the Company cannot assure that the
negotiations will be successful.
The Company had been unable to complete testing of the full scale
demonstration system at the City of Chilliwack located in Western Canada due to
excessive flows through the Sewage Treatment Plant (flows near double those
contracted for). The City is unable to fund the increased cost of the UV
equipment required to treat the excessive flows at this time. As a compromise,
the Company agreed to defer and reverse the sale and a deposit of $102,232
was released to the Company. Testing continues at this demonstration site.
During the last quarter of the reporting period and up to date of filing,
negotiation on the future of this site continued without final resolution.
Rework on a project delivered in 1995 by UVS identified a manufacturing
defect in a purchased electrical component. Identification and repair of this
problem have significantly reduced warranty costs at this site. The final work
of providing automatic flow pacing is currently being tested and on successful
completion will fulfill contractual requirements and permit release of final
hold back funds in the amount of C$81,291.
The Company has been advised that it has been awarded a contract for a
System in Montreal, Canada, to be delivered in fiscal 1998, but has not yet
executed a binding agreement.
During the fourth quarter of the reporting period, as the level of research
and development reduced, the Company was able to reduce operating costs by
reducing its workforce in September. In addition, in July the Company moved its
operations into UVS premises. This action reduced overhead costs and permitted
the Company to provide hands on direction to UVS. The total combined workforce,
including subcontracted employees, now stands at 10.
21
<PAGE>
In August 1997 one International Sales Agent, Bio Light, S.A. located in
Santiago, was signed to promote the Company's products in Chile. Since
signing, projects valued in excess of $400,000 have been tendered, although none
has been awarded to date and the Company cannot assure that any will be awarded
to the Company.
Now that the research and development efforts needed to produce a
consistent and reliable UV reactor have been completed, activity in sales and
marketing has been increased with the engagement of a new Vice President - Sales
and Marketing. With the increased effort, orders for two projects, one at
C$127,000 and one at C$402,000, are anticipated to be awarded to the Company by
December 31, 1997, although no assurance can be given that either will, in fact,
be awarded to the Company. The project for C$402,000 in Quebec, Canada, is
currently performing pilot testing with the Company's Production
Demonstration Unit (PDU). The test performance to date has met or exceeded
expectations, and discussions on final equipment details commenced in
November 1997. The Company believes, based on their specifications, that
three projects in North Carolina valued at about $2,000,000 may be ordered by
the end of February 1998. An anticipated project in Hong Kong has been
tendered, and the Company is actively attempting to secure this business,
although no decision has been made. Shipment and billing of the majority of
any of these sales which may be made in fiscal 1998 (which the Company cannot
assure) will not occur until fiscal 1999.
RESULTS OF OPERATIONS FOR THE TWELVE MONTHS ENDED AUGUST 31, 1997
During the twelve-month period ended August 31, 1997, the Company had
revenues of $24,118. Project costs of $75,325 were reported,including
under-recovery of plant overheads amounting $41,431.
During the twelve-month period ended August 31, 1997, operational costs of
$921,510 (including, general and administrative expense of $453,152, research
and development expense of $312,441, and selling expense of $155,917) brought
the Net Loss from Operations Before Other Items for the year to $972,717.
General and administrative expense in fiscal 1997 increased by $211,934 to
$453,152 from $241,218 for fiscal 1996 due to the significant increase in
Company operations resulting from the majority acquisition of UVS. The Net Loss
from Operations Before Other Items, added to the loss from Other Items of
$1,398,425, (primarily due to goodwill in the amount of $363,811 amortized in
the 1997 fiscal year in connection with the UVS acquisition (see Note 4 to the
Consolidated Financial Statements) and $79,463 in interest paid largely on
UVS debt owed to minority shareholders), brought the net loss for the period
to $1,398,425.
LIQUIDITY
The nature of the Company's business may be expected to include a normal
lag time between the incurring of operating expenses and the collection of
contract receivables, which may be expected to be due largely from
governments, if and when sales are made. In addition, the Company is
dependent for sales, other than those to a licensee which is obligated to
purchase agreed upon system components from the Company, on awards of water
treatment system contracts for non-recurring projects. Also, many of the
Company's contracts may be expected to include provision for retainage,
entitling the other party to the contract to withhold, for a given period of
time, a specified portion of the payment until after completion of a project.
For these reasons, among others, the Company may experience periods of
limited working capital and may be expected to require financing for working
capital during those periods.
Because the Company's sales of Ultra Guard systems to governmental
entities may be expected to occur on an intermittent rather than consistent
basis as requests for proposal ("RFP") are issued and awards made, sales on
both an annual and quarterly basis are subject to fluctuations which are
often beyond the Company's control.
In addition, the Company requires and will require financing over and
above its current resources to sustain its operations and expand its
marketing efforts. There can be no assurance that the additional financing
can be timely obtained on terms acceptable to the Company, if at all.
During the twelve months ended August 31, 1997, the Company financed its
operations in part from proceeds of sales of restricted common stock, loans from
related parties and minority shareholders of UVS, and sale of 12% convertible
debentures. Loans from related parties and minority shareholders of UVS
increased in fiscal 1997 by $835,360 to $917,193 from $81,833 due to the
Company's cash flow needs arising out of its significantly increased operations
resulting from its majority acquisition of UVS. In June 1997 the Company signed
an agreement with London Select Enterprises, Ltd. as Broker, to place, in an
offering conducted in compliance with Regulation S, promulgated under the
Securities Act of 1933, up to $750,000 face amount, 12% one year convertible
debentures due July 31, 1998 if not earlier redeemed. Each debenture is being
sold at 80% of face value and is convertible into Common Stock of the Company at
a conversion price of 20% below the closing bid price of the Common Stock
immediately preceding the date of conversion or 20 % below the 5 day average
closing bid price of the Company's Common Stock immediately preceding the
closing date. The Company has the option to place an additional $750,000 on the
same terms. At August 31, 1997 a total face amount of $94,000 was subscribed
for. During the period from August 31, 1997 to October 23, 1997, additional
face amount subscriptions totaling $631,585 were received.
22
<PAGE>
Because the Company expects to have only limited revenues from sales during
fiscal 1998, the Company will continue to depend on receipt of additional funds
through public or private equity or debt sales or other lender financing to fund
expanded marketing operations, general operational expenses, and manufacturing
of products sold, and to complete the purchase of the remaining unowned 49.31%
common stock of UVS. Except as previously indicated, no arrangements are
currently in place to raise funds, although the Company actively continues to
seek sources. Failure to receive these funds may be expected to have a material
adverse effect on the Company.
23
<PAGE>
ITEM 7. CONSOLIDATED FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors' - August 31, 1997. . . . . . . . . . . . . 25
Report of Independent Auditors' - August 31, 1996. . . . . . . . . . . . . 26
Consolidated Balance Sheets as of August 31, 1997 and 1996 . . . . . . . . 27
Consolidated Statements of Operations from September 1, 1995
(Date of Inception) to August 31, 1997 and for the years
ended August 31, 1997 and 1996 . . . . . . . . . . . . . . . . . . . . . . 28
Consolidated Statement of Changes in Stockholder's Equity
Accumulated from September 1, 1995 (Date of Inception)
to August 31, 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Consolidated Statements of Cash Flows Accumulated from
September 1, 1995 (Date of Inception) to August 31, 1997
and for the years ended August 31, 1997 and 1996 . . . . . . . . . . . . 30-31
Notes to the Consolidated Financial Statements . . . . . . . . . . . . . 32-38
24
<PAGE>
REPORT OF INDEPENDENT AUDITORS'
To: Board of Directors and Stockholders
Service Systems International, Ltd.
We have audited the accompanying consolidated balance sheet of Service Systems
International, Ltd. (A Development Stage Company) as of August 31, 1997, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with U.S. generally accepted auditing
standards. 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 by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Service Systems
International, Ltd. (A Development Stage Company) as of August 31, 1997, and the
results of their operations and their cash flows for the year then ended in
conformity with U.S. generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has not generated material revenues or
profitable operations since inception. These factors raise substantial doubt
about the Company's ability to continue as a going concern. Management's plans
in regard to these matters are also discussed in Note 1. These financial
statements do not include any adjustments which might result from the outcome of
this uncertainty.
"Elliott Tulk Pryce Anderson"
Elliott, Tulk, Pryce, Anderson
Chartered Accountants
Vancouver, British Columbia, Canada
November 20, 1997
25
<PAGE>
REPORT OF INDEPENDENT AUDITORS'
Shareholders and Board of Directors
Service Systems International, Ltd.
We have audited the accompanying consolidated balance sheet of Service Systems
International, Ltd. (a development stage Company) as of August 31, 1996, and the
related statements of operations, stockholders' equity and cash flows for the
year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
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 by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Service Systems International,
Ltd. (a development stage company) as of August 31, 1996, and the results of its
operations, and its cash flows for the year then ended, in conformity with
generally accepted accounting principles.
"Winter, Scheifley & Associates"
Winter, Scheifley & Associates, P.C.
Certified Public Accountants
Englewood, Colorado
March 11, 1997
26
<PAGE>
Service Systems International, Ltd.
(A Development Stage Company)
Consolidated Balance Sheets
August 31, August 31,
1997 1996
(See Note 3)
$ $
Assets
Current Assets
Cash 639 56,988
Accounts receivable 63,031 -
Inventory 357,008 -
Prepaid expenses 12,550 -
Research credit receivable 244,791 -
Stockholder advance - 192
---------- ---------
Total current assets 678,019 57,180
Notes receivable - Affiliate - 125,000
Capital assets (Note 5) 173,304 43,600
Goodwill - net of amortization 2,061,597 -
Patents (Note 6) 36,658 -
---------- ---------
2,949,578 225,780
---------- ---------
---------- ---------
Liabilities and Stockholders' Equity
Current Liabilities
Cheques issued in excess of funds on
deposit 8,752 -
Accounts payable 181,009 -
Accrued liabilities 32,311 -
Vacation pay payable 10,364
Customer deposits 19,212 -
Loan payable - other 21,206 -
Amounts owing to related parties (Note 7) 360,553 81,833
Loans payable - minority stockholders of
subsidiary (Note 8) 556,640 -
---------- ---------
Total current liabilities 1,190,047 81,833
Long-term debt (Note 10) 1,469,660 -
Convertible Debenture (Note 9) 76,268 -
---------- ---------
2,735,975 81,833
---------- ---------
Commitments and Contingencies
(Notes 1, 9, 10 and 11)
Stockholders' Equity
Common stock (Note 11), $.001 par value,
50,000,000 shares authorized,
5,279,338 and 3,348,000 issued
and outstanding respectively 5,279 3,348
Additional paid-in capital 1,847,967 382,344
Deficit Accumulated During The Development Stage (1,639,643) (241,218)
Foreign exchange translation adjustment - (527)
------------ -----------
213,603 143,947
------------ -----------
2,949,578 225,780
(See accompanying notes to financial statements)
27
<PAGE>
Service Systems International, Ltd.
(A Development Stage Company)
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Cumulative from Year to Year to
September 1, 1995 August 31, August 31,
(date of inception) 1997 1996
to August 31, 1997 (Note 3)
$ $ $
<S> <C> <C> <C>
Project Revenue 24,118 24,118 -
Project Costs (75,325) (75,325) -
---------- ---------- --------
Gross Profit (Loss) (51,207) (51,207) -
---------- ---------- --------
Expenses
General and administrative 694,370 453,152 241,218
Research and development 312,441 312,441 -
Selling 155,917 155,917 -
---------- ---------- --------
(1,162,728) (921,510) (241,218)
---------- ---------- --------
Net Loss from Operations Before Other Items (1,213,935) (972,717) (241,218)
Other Items
Amortization of goodwill (363,811) (363,811) -
Foreign exchange translation loss (9,283) (9,283) -
Interest expense (79,463) (79,463) -
Interest income 18,677 18,677 -
Other income 8,172 8,172 -
---------- ---------- --------
Net Loss (1,639,643) (1,398,425) (241,218)
---------- ---------- --------
---------- ---------- --------
Net Loss per share (0.29) (0.08)
---------- --------
---------- --------
Weighted average shares outstanding 4,812,170 3,063,833
---------- --------
---------- --------
</TABLE>
(See accompanying notes to financial statements)
28
<PAGE>
Service Systems International, Ltd.
(A Development Stage Company)
Consolidated Statement of Changes in Stockholders' Equity Accumulated
From September 1, 1995 (Date of Inception) to August 31, 1997
<TABLE>
<CAPTION>
Deficit
Accumulated
Additional During the
Common Paid-in Development
Shares Stock Capital Stage
# $ $ $
<S> <C> <C> <C> <C>
Balance at September 1, 1995 (date of inception) 1,400,000 1,400 (1,400) -
Issuance of stock for expenses:
September, 1995 at $0.05 per share
(Note 11) 1,600,000 1,600 78,400
Issuance of stock in private sales:
October, 1995 at $0.50 per share 20,000 20 9,980
November, 1995 at $0.50 per share 10,000 10 4,990
April, 1996 at $1.33 per share 38,000 38 50,654
June, 1996 at $1.25 per share 44,000 44 54,956
July, 1996 at $0.75 per share 220,000 220 164,780
July, 1996 at $1.25 per share 16,000 16 19,984
Net loss for the year (241,218)
--------- --------- --------- ---------
Balance August 31, 1996 3,348,000 3,348 382,344 (241,218)
Issuance of stock for acquisition of 50.7%
of UV Systems Technology Inc. at a deemed
fair market value of $0.75 per share 1,474,918 1,475 1,104,714
Issuance of stock in private sales:
February, 1997 at $0.75 per share 241,420 241 179,874
April, 1997 at $0.75 per share 175,000 175 131,075
Issuance of stock for conversion of
warrants:
Class "A' warrants converted
May, 1997 at $1.25 per share 40,000 40 49,960
Net loss for the year (1,398,425)
--------- --------- --------- ---------
Balance August 31, 1997 5,279,338 5,279 1,847,967 (1,639,643)
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
(See accompanying notes to financial statements)
29
<PAGE>
Service Systems International, Ltd.
(A Development Stage Company)
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Cumulative from Year to Year to
September 1, 1995 August 31, August 31,
(date of inception) 1997 1996
to August 31, 1997 (Note 3)
$ $ $
<S> <C> <C> <C>
Cash Flows to Operating Activities
Net loss (1,639,643) (1,398,425) (241,218)
Adjustments to reconcile net loss to cash
Amortization of goodwill 363,811 363,811 -
Depreciation 37,176 37,176 -
Foreign exchange translation adjustment - 527 (527)
Stock issued for expenses 80,000 - 80,000
Change in non-cash working capital items
Decrease in accounts receivable 18,152 18,152 -
Decrease in inventory 50,010 50,010 -
(Increase) in prepaid expenses (720) (720) -
(Increase) in research credit receivable (34,221) (34,221) -
(Decrease) in accounts payable, accrued
liabilities, vacation pay payable and
customer deposits (50,676) (50,676) -
---------- ---------- --------
Net Cash Used in Operating Activities (1,176,111) (1,014,366) (161,745)
---------- ---------- --------
Cash Flows (to) from Investing Activities
Acquisition of a subsidiary (Note 4) 1,537 1,537 -
Capital assets acquired (51,781) (8,181) (43,600)
Additions to intangible assets (7,041) (7,041) -
Proceeds from held to maturity
investments maturing 221,357 221,357 -
(Increase) decrease in notes receivable - 125,000 (125,000)
---------- ---------- --------
Net Cash (Used in) Provided by Investing Activities 164,072 332,672 (168,600)
---------- ---------- --------
</TABLE>
(See accompanying notes to financial statements)
30
<PAGE>
Service Systems International, Ltd.
(A Development Stage Company)
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Cumulative from Year to Year to
September 1, 1995 August 31, August 31,
(date of inception) 1997 1996
to August 31, 1997 (Note 3)
$ $ $
<S> <C> <C> <C>
Cash Flows from Financing Activities
Cheques issued in excess of funds on
deposit 8,752 8,752 -
Common stock sold for cash 667,057 361,365 305,692
Increase in loan payable - other 21,206 21,206 -
Increase (decrease) in amounts owing to
related parties 67,107 (14,534) 81,641
Increase in loans payable to minority
shareholders of subsidiary 172,288 172,288 -
Proceeds from convertible debenture 76,268 76,268 -
--------- ------- -------
Net Cash Provided by Financing Activities 1,012,678 625,345 387,333
--------- ------- -------
Increase (decrease) in cash 639 (56,349) 56,988
Cash - beginning of period - 56,988 -
--------- ------- -------
Cash - end of period 639 639 56,988
--------- ------- -------
--------- ------- -------
Non-Cash Financing Activity
The Company issued 1,474,918 shares
at deemed value of $0.75 per share for
acquisition of a subsidiary (See Note 4) 1,106,189 1,106,189 -
--------- ------- -------
--------- ------- -------
Supplemental cash flow information:
Cash paid for interest - - -
Cash paid for income taxes - - -
</TABLE>
(See accompanying notes to financial statements)
31
<PAGE>
Service Systems International, Ltd.
(A Development Stage Company)
Notes to the Consolidated Financial Statements
1. Development Stage Company
The Company is a development stage company which was incorporated in the
State of Nevada in August, 1990 and remained inactive until September 1,
1995. The initiation of the Company's current business was accompanied by a
change of ownership. See Note 4 regarding acquisition of UV Systems
Technology Inc. ("UVST") on December 1, 1996. Through UVST, the Company
manufactures and markets its Ultra Guard -TM- ultra violet based patented
water treatment system. These products are sold primarily for municipal
waste disinfection, treatment of process and industrial waste water, and
for potable water, bottled products and agriculture and aquaculture water
treatment.
In a development stage company, management devotes most of its activities
to establishing a new business. Planned principal activities have not yet
produced significant revenue. The ability of the Company to emerge from the
development stage with respect to its planned principal business activity
is dependent upon its successful efforts to raise additional equity
financing and develop the market for its products.
The Company has raised $457,868 of additional funds subsequent to August
31, 1997 pursuant to completion of a convertible debenture issue. The
Company plans to raise additional funds through private placements or a
public offering.
2. Significant Accounting Policies
Cash and cash equivalents
Cash and cash equivalents include cash on hand, in banks and all highly
liquid investments with a maturity of three months or less when purchased.
Cash equivalents are stated at cost which approximate market.
Fixed assets
Fixed assets are recorded at cost. Depreciation is computed utilizing the
straight-line method using an estimated useful life of five years for all
asset categories.
Revenue recognition
Product sales will be recognized at the time goods are shipped. System and
project revenue will be recognized utilizing the percentage of completion
method which recognizes project revenue and profit during construction
based on expected total profit and estimated progress towards completion
during the reporting period. All related costs are recognized in the period
in which they occur.
Estimates
The preparation of the Company's consolidated financial statements requires
management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual results
could differ from these estimates.
Earnings per share
The earnings per share is computed by dividing the net income (loss) for
the period by the weighted average number of common shares outstanding for
the period. Common stock equivalents are excluded from the computation if
their effect would be anti-dilutive.
Intangible assets
Goodwill on consolidation is amortized to operations over its estimated
useful life of five years. Patent protection costs will be amortized to
operations over their estimated useful lives being expiry of each patent.
32
<PAGE>
2. Significant Accounting Policies (continued)
Foreign currency
i) Translaton of foreign currency transactions and balances
Revenue, expenses and non-monetary balance sheet items in foreign
currencies are translated into U.S. dollars at the rate of exchange
prevailing on the transaction dates. Monetary balance sheet items are
translated at the rate prevailing at the balance sheet date. The
resulting exchange gain or loss is included in general and
administration expenses.
ii) Translation of foreign subsidiary balances
Monetary balance sheet items of UVST are translated into U.S. dollars
at the rates of exchange on the balance sheet date. Non-monetary
balance sheet items are translated into U.S. dollars at the rate of
exchange prevailing on the transaction dates. The foreign subsidiary's
operating results are translated into U.S. dollars using the average
exchange rate for the year with any translation gain or loss charged
to operations as a separate component of other items.
Income taxes
The Company has adopted the provisions of Financial Accounting Standards
Board Statement No. 109 (SFAS 109), Accounting for Income Taxes. SFAS 109
requires that deferred taxes reflect the tax consequences on future years
of differences between the tax bases of assets and liabilities and their
financial reporting amounts. At the date of adoption of SFAS 109, there was
no material effect on the Company's financial statements. As of August 31,
1997 the Company has accumulated net operating losses available to offset
future taxable income as scheduled below:
Fiscal Year of Loss Amount
$ Expiration Date
1996 240,000 2011
1997 202,000 2012
Pursuant to SFAS 109 the Company is required to compute tax asset benefits
for net operating loss carryforwards. Potential benefit of net operating
losses has not been recognized in the financial statements because the
Company cannot be assured that it is more likely than not that it will
utilize the net operating loss carryforwards in future years.
The components of the net deferred tax asset, the statutory tax rate, the
effective tax rate and the elected amount of the valuation allowance are
scheduled below:
1997 1996
$ $
Net Operating Loss 202,000 240,000
Statutory Tax Rate 22,500 + 39% 22,500 + 39%
in excess of in excess of
$100,000 $100,000
Effective Tax Rate - -
Deferred Tax Asset 62,000 77,000
Valuation Allowanc (62,000) (77,000)
------------- -------------
Net Deferred Tax Asset - -
------------- -------------
------------- -------------
33
<PAGE>
2. Significant Accounting Policies
Income taxes (continued)
The Company's Canadian subsidiary has Canadian tax losses of $1,600,000 to
offset future Canadian taxable income. These losses expire as follows:
$
2002 100,000
2003 400,000
2004 1,100,000
3. Consolidated financial statements
These financial statements include the accounts of the Company, and its
50.7% owned subsidiary, UVST. As UVST was acquired on December 1, 1996,
results of operations include only the period from December 1, 1996 to
August 31, 1997. Comparative figures only include the accounts of the
Company. See Note 13 regarding unaudited pro forma combined statement of
operations.
4. Business acquisition
On December 1, 1996, the Company acquired 50.7% of UVST. See Note 1
regarding nature of its business. The acquisition was accounted for using
the purchase method of accounting for business combinations. The Company
issued 1,474,918 common shares at a deemed fair market value of $0.75 per
share. The Company assumed net liabilities of $1,319,219. The excess of the
purchase price over the fair market value of net tangible liabilities
assumed, totalling $2,425,408, was allocated to goodwill. Details of
liabilities assumed and assets acquired are as follows:
$ $
(i) Share consideration
Additional paid in capital 1,104,714
Capital stock (1,474,918 at $.001) 1,475 1,106,189
--------- ---------
(ii) Net book value of liabilties assumed
Liabilities assumed
Current liabilities
Accounts payable 144,036
Accrued liabilities 25,296
Vacation pay payable 6,213
Customer deposits 118,027
Loans from directors and officers 293,446
Loans from minority shareholders 384,352
---------
971,370
Long-term debt
Preferred stock of subsidiary 1,469,660 2,441,030
---------
Assets acquired
Held to maturity investment (221,357)
Accounts receivable (81,183)
Inventory (407,018)
Prepaid expense (11,830)
Research tax credit receivable (210,570)
Capital assets (158,699)
Patent protection costs (29,617) (1,120,274)
---------
Cash received in the combination (1,537)
---------
Net book value of liabilities assumed 1,319,219
---------
(iii) Excess of cost over book value 2,425,408
---------
---------
34
<PAGE>
4. Business acquisition (continued)
The Company has recognized no minority interest on acquisition as UVST had
a negative tangible book value and thus had no interest in underlying net
assets.
The excess of cost over book values was allocated 100% to goodwill as there
were no other fair market value adjustments to non-monetary assets.
Goodwill has been capitalized and is being amortized over its estimated
useful life of five years. Amortization of $363,811 has been charged to
operations during fiscal 1997.
5. Capital assets
Capital assets are stated at cost less accumulated depreciation.
<TABLE>
<CAPTION>
1997 1996
Accumulated Net Book Net Book
Cost Depreciation Value Value
$ $ $ $
<S> <C> <C> <C> <C>
Computer equipment 28,725 7,571 21,154 -
Computer software 3,477 948 2,529 -
Display equipment 31,836 9,551 22,285 -
Office furniture and equipment 27,735 7,865 19,870 -
Plant jigs, dies, moulds, tools and
equipment 120,666 29,680 90,986 43,600
Leasehold improvements 26,724 10,244 16,480 -
------- ------ ------- ------
239,163 65,859 173,304 43,600
------- ------ ------- ------
------- ------ ------- ------
Depreciation per class of asset:
$ $
Computer equipment 4,047 -
Computer software 498 -
Display equipment 4,775 -
Office furniture and equipment 4,047 -
Plant jigs, dies, moulds, tools and
equipment 19,801 -
Leasehold improvements 4,009 -
------- ------
37,176 -
------- ------
------- ------
</TABLE>
6. Patents
Intangible assets represent legal costs associated with registering and
protecting certain patents and trademarks associated with the Ultra
Guard-TM- System. These costs will be amortized when the Company completes
its pilot plant testing and completion of certain modifications and
improvements to the Ultra Guard-TM- System. Components of the Ultra
Guard-TM- System were patented in the United States on April 12, 1996.
Applications have been made for patent protection under the International
Patent Protection Treaty covering up to 40 countries.
35
<PAGE>
7. Amounts owing to related parties
1997 1996
$ $
(a) Amounts owing to a shareholder, due on demand,
unsecured and non-interest bearing. 123,760 81,833
(b) Amounts owing to two directors, due on demand,
unsecured, bearing interest at Canadian Imperial Bank
of Commerce prime rate. Interest of $1,612 has been
accrued to August 31, 1997. 236,794 -
------- -----
360,553 81,833
------- -----
------- -----
8. Loans payable - minority shareholders of subsidiary
Minority shareholders of UVST have advanced to UVST $454,815 (Cnd$631,196).
These advances bear interest at 20% per annum calculated on a daily basis.
Interest of $101,825 has been accrued to date. Interest expense accrued for
the period December 1, 1996 to August 31, 1997 amounted to $76,803. An
amount of Cnd$483,000 of the above loans are secured by a General Security
Agreement and due on demand.
9. Convertible debenture
As at August 31, 1997 the Company issued 12% Series "A" Senior Subordinated
Convertible Redeemable Debentures due July 31, 1998 having a face amount of
$94,000, bearing interest at 12% per annum payable quarterly. The Company
discounted these debentures by 20% of the face amount and received net
proceeds of $75,200. A $6,000 commission was paid. Interest of $1,048 has
been accrued to August 31, 1997. The Agent will also receive 5,000 warrants
exercisable into shares at $1.80 per share. See Subsequent Events Note 12.
These debentures are convertible into common stock at the option of the
holder, at the lower of (a) 20% below the closing bid price the business
day immediately preceding notice of conversion or (b) 20% below the five
day average closing bid price of the Company's stock immediately preceding
the closing. The Company can redeem the debentures at 120% of the face
amount to the extent conversion has not occurred. If the debentures are
not converted prior to maturity the Company has the option to prepay and
then the holder has the option to accept the cash or convert at the five
day closing price prior to conversion.
10. Long term debt
UVST issued 2,000 Class "A" preferred shares at Cnd$1,000 per share for a
total of Cnd$2,000,000 (US$1,469,660). The holders of these shares also own
49.3% of UVST. These shares are retractable once sales reach Cnd$10,000,000
and net income reaches Cnd$1,000,000. All preferred shares are to be
redeemed by June 30, 1999.
Pursuant to an agreement dated December 6, 1996 between the Company, UVST
and UVST's minority stockholders, the Company agreed to raise $2,000,000
(the "Financing") by March 31, 1997 (extended to January 15, 1998). Within
30 days of the Financing the minority stockholders will each convert up to
one-half of their Class "A" preferred shares to secured debentures. The
minority stockholders may also convert, at their option, up to one-half of
the loans, referred to in Note 8, into common shares of the Company at the
rate of Cnd$2.00 per share. The Company will repay the loans from the
Financing except to the extent converted. Within 30 days of the Financing
the minority stockholders will exchange one-half of their preferred shares
for 250,00 common shares of the Company. Each common share issued pursuant
to this agreement will include a warrant to acquire an additional share at
Cnd$2.00 per share expiring four years after issuance of the common shares.
36
<PAGE>
11. Common stock
(a) Previous sales during fiscal 1996
The Company issued shares of common stock without registration under
the Securities Act of 1933. Although the Company believes that the
sales did not involve a public offering of its securities and that the
Company did comply with the "safe harbor" exemptions from registration
under section 4(2), it could be liable for rescission of the sales if
such exemptions were found not to apply. The Company has not received
a request for rescission of shares nor does it believe that it is
probable that its shareholders would pursue rescission nor prevail if
such action were undertaken.
(b) Shares issued for expenses
The Company issued 1,600,000 shares of its restricted common stock to
certain individual stockholders, including an officer of the Company,
as reimbursement of cash advanced by them to others for expenses
related to the merger. The expenses of the merger ($80,000) was
charged to operations during fiscal, 1996.
(c) Warrants outstanding as at August 31, 1997:
Exercise
Price
Class # $ Expiry Date
"A" 361,420 1.25 February 25, 1999 (40,000
exercised on May 12, 1997)
"A" 60,000 2.00 March 18, 2001
"A" 75,000 1.25 April 9, 1999
"A" 160,000 1.25 May 13, 1999
----------
656,420
"B" 38,000 1.34 March 24, 1999
"C" 38,000 2.00 March 24, 1999
"D" 274,918 1.50 May 2, 1999
"D" 1,200,000 Cnd2.00 May 2, 2001
----------
2,207,338
----------
----------
The Class "A" warrants are redeemable by the Company at $.001 per
share.
(d) Employee stock option plan
On August 21, 1997 employees were granted stock options to acquire
1,277,000 shares at $1.00 per share expiring August 21, 2000. The
price of the Company's stock in the public market on that date was
$1.00.
The common stock underlying the options was registered with the
Securities Exchange Commission on October 6, 1997.
The Company has adopted Financial Accounting Standards Board Statement
No. 123 to account for its employee stock option plan. The fair value,
as at the grant date of August 21, 1997, is nil, using existing models
to provide a measure of fair market value. The weighted average
remaining contractual life of options outstanding issued under the
Plan is three years at August 31, 1997.
12. Subsequent Events
Subsequent to August 31, 1997 the Company has:
(a) issued 29,426 shares at $0.8496 and 51,667 shares at $0.90 pursuant to
conversion of the convertible debenture with a face amount of $62,500.
(b) completed the 12% Series A Senior Subordinated Convertible Debenture
issue. The face amount of the additional debentures issued totals
$631,585 and net proceeds of $505,268 was received. An agent raised
$395,000 of the $631,585 face amount and a commission of $47,400 was
paid and 39,500 warrants will be issued to acquire additional shares.
Net additional proceeds totalled $457,868.
37
<PAGE>
13. Pro Forma Combined Statement of Operations (Unaudited)
The following statements of operations represents a combination of the
statements of operations of Service Systems International, Ltd. and UV
Systems Technology Inc. on the assumption that the purchase occurred on
September 1, 1995.
<TABLE>
<CAPTION>
Cumulative from Year to Year to
September 1, 1995 August 31, August 31,
(date of inception) 1997 1996
to August 31, 1997
$ $ $
<S> <C> <C> <C>
Project Revenue (Note (a) below) 218,368 24,118 194,250
Projects Costs (236,940) (75,325) (161,615)
---------- ---------- ----------
Gross Profit (loss) (18,572) (51,207) 32,635
---------- ---------- ----------
Expenses
General and administrative 912,784 495,881 416,903
Research and development 697,403 380,213 317,190
Selling 570,263 223,914 346,349
---------- ---------- ----------
(2,180,450) (1,100,008) (1,080,442)
---------- ---------- ----------
Net Loss from Operations Before Other Items (2,199,022) (1,151,215) (1,047,807)
Other Items
Foreign exchange translation loss (9,283) (9,283) -
Amortization of goodwill (Note (b) below) (567,400) (283,700) (283,700)
Interest expense (103,599) (94,520) (9,079)
Interest income 21,487 3,419 18,068
Other income 7,676 7,676 -
---------- ---------- ----------
Net Loss (2,850,141) (1,527,623) (1,322,518)
---------- ---------- ----------
---------- ---------- ----------
Net Loss per share (0.30) (0.29)
---------- ----------
---------- ----------
Weighted average shares outstanding 5,180,900 4,538,750
---------- ----------
---------- ----------
</TABLE>
Note (a) Prior to the Company acquiring UVST, UVST reversed project revenue of
$202,850 and cost of sales of $124,793 relating to the sale of a
system to the City of Chilliwack, B.C., Canada. The Company was
unable to complete testing of the system and the City of Chilliwack
could not fund the additional cost of equipment to treat excessive
flows of water.
As a compromise, UVST agreed to defer and reverse the sale and a
deposit of $102,232 was released to the Company. Testing
continues at this demonstration site.
Note (b) Goodwill was determined on the basis of share consideration paid
of $1,106,189 and net book value of liabilities assumed of
$312,310, as at September 1, 1995 for excess consideration paid
of $1,418,499, which would be allocated to goodwill and amortized
over five years.
38
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
As of August 31, 1997, no changes in or disagreements with accountants
existed. However, on October 14, 1997, the Company's Board of Directors
elected to engage, as the principal accountant to audit the Company's
financial statements, the firm of Elliott Tulk Pryce Anderson, Chartered
Accountants, of Vancouver British Columbia, Canada for the Company's fiscal
year ended August 31, 1997. Elliott Tulk Pryce Anderson has audited the
financial statements of UV Systems Technology, Inc., through which the Company
conducts most of its business, for the past two years. The former auditors'
reports in financial statements for either of the last two years did not
contain an adverse opinion or a disclaimer of opinion and was not qualified
or modified as to uncertainty, audit scope, or accounting principles. During
the last two fiscal years and subsequent interim periods through the date of
dismissal there were no disagreements or reportable events with the former
accountants.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The Executive Officers and Directors of the Company are as follows:
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Name Age Position
- -------------------------------------------------------------------------------
Kenneth E. Fielding 47 Director, President, and President of UV
Systems Technology, Inc.
John R. Gaetz 57 Director, Secretary-Treasurer and Vice
President of Finance (CFO)
39
<PAGE>
Kenneth E. Fielding has served as a Director and President of the Company
since June 1995 and as president of UVS since December 1996. He is also, and
has been since 1976, the president of Alliance Installations Electrical
Contractors Ltd., an industrial electrical construction contractor which
until January 1996 provided electrical systems for schools, hospitals,
institutions, warehouses, restaurants and commercial installations, but which
is now inactive as Mr. Fielding has shifted his time to the Company. In
addition to the administrative oversight of the Company, Mr. Fielding has
overall responsibility for UVS as president. Mr. Fielding holds an Electrical
Contractor's license with the Province of British Columbia and a journeyman
electrician designation form the BC Institute of Technology.
John R. Gaetz has served as a Director, Secretary-Treasurer and Chief
Financial Officer since June 15, 1997, and as a director, vice president, and
secretary of UVS since August 1995, positions he held in UVS' predecessor, UV
Waterguard Systems Ltd., since 1990.
BOARD MATTERS
The Board of Directors has no standing committees. The Board of
Directors is responsible for nominating a proposed slate of Directors for
each year to stand for election at the annual meeting of the Company's
shareholders. The Company has no provision for recommendation by
shareholders of nominees for Director.
Members of the Board of Directors, by virtue of their position, owe a
fiduciary duty to the Company. However, in accordance with Nevada law, the
Company has provided in Article XI of its Articles of Incorporation (i) that
contracts and acts of the Company with another corporation are not affected
by the fact that a Director has a pecuniary or other interest in or is a
director or officer of the other corporation and (ii) that a Director may be
a party to or interested in a contract or transaction with the Company if the
interest has been disclosed to the Board or the Board knows of the interest
before a vote is taken on the contract or transaction. As of August 31, 1997
the Company had no such contracts or transactions with any Director or
corporation in which a Director had an interest.
The Executive Officers of the Company are employed full-time by the
Company or its subsidiary, UVS. See "Executive Compensation."
Based solely upon a review of Forms 3 and 4 and amendments
40
<PAGE>
thereto furnished to the Company under Rule 16a-3(a) of the Securities
Exchange Act of 1934 during the Company's most recent fiscal year with
respect to its most recent fiscal year and written representations from
persons required to file those Forms, the following Directors and Officers
have filed late forms: Mr. Ken Fielding and Mr. John Gaetz each filed Form 3
late. Mr. Douglas Sommerville, a beneficial owner of greater than 10%
beneficial of the outstanding Common Stock, filed his Form 3 late. The Forms
3 were filed late because the individuals were unaware, at the time they were
due, of the requirement to file them. All Directors and Officers filed all
other reports required by Section 16(a) of the Act.
Item 10. Executive Compensation
The following table sets forth an overview of compensation for the fiscal
years ended August 31, 1996 and August 31, 1997 to the Company's Chief
Executive Officer and each of the Company's other Executive Officers whose
total compensation exceeded $100,000. Information for prior fiscal years has
been omitted, the Company having been inactive until its acquisition in July
1995 (see "Company Background").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
Name and Year Annual Compensation Long-Term Compensation All Other
Principal --------------------------------------------------------- Compensation
Position Salary Bonus Other Awards Payouts
----------- -----------------
Securities
Underlying
Restricted Options LTIP
Stock SARs Payouts
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Kenneth E. 1996 0 0 0 0 0 0 0
Fielding, 1997 $84,000 0 0 0 200,000 0 0
President,CEO and accrued
President of UVS
Inc.
</TABLE>
The following table sets forth information with respect to the individual
grants of stock options made during the fiscal year ended August 31, 1997 to
each of the Company's named Executive Officers:
OPTION GRANTS IN LAST FISCAL YEAR
(INDIVIDUAL GRANTS)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
Number of Percent of
Shares of Total
Common Stock Options
Underlying Granted to
Options Employees Exercise of
Granted in Fiscal Base Price Expiration
Name (#) Year ($/Sh) Date
(a) (b) (c) (d) (e)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Kenneth E. Fielding, ...... 200,000 27.5 $1.00 8/21/2000
President, CEO and
President of UVS
- ----------------------------------------------------------------------------------------------------
</TABLE>
These options were granted pursuant to the Company's 1997 Stock Option
Plan.
41
<PAGE>
See "Certain Relationships and Related Transactions" for information on
non-compensatory options granted to persons some of whom are Executive
Officers.
COMPENSATION OF DIRECTORS
The Company does not compensate Directors for their service as such,
although it does reimburse reasonable expenses incurred by them in conducting
Company affairs and in attending meetings.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
The Company has no employment agreements with its Executive Officers, nor
does it have agreements respecting termination of employment or
change-in-control. It expects to enter into employment agreements with
Executive Officers in the foreseeable future, but has not begun negotiation
of those agreements. Mr. Fielding and Mr. Gaetz are the only Executive
Officers receiving compensation, although all compensation for fiscal year
1997 has been accrued.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
beneficial ownership of Common Stock, as of August 31, 1997 of (i) each
person known to the Company to own beneficially more than 5% of the Common
Stock, (ii) each Director of the Company, (iii) each of the Company's
Executive Officers, and (iv) all Officers and Directors as a group. Except
as otherwise noted, the Company believes that the persons listed below have
sole investment and voting power with respect to the Common Stock owned by
them.
NAME AND ADDRESS OF SHARES PERCENT OF
BENEFICIAL OWNER(1) BENEFICIALLY OWNED(2) CLASS
- ------------------------------------------------------------
Kenneth E. Fielding 247,057(3) 4.5%
42
<PAGE>
John R. Gaetz 1,472,770(4) 24.1%
Douglas F. Sommerville 1,235,499(5) 21.1%
All officers and directors
as a group 1,719,827(3)(4) 27.3%
- ------------------------------------------------------------
(1) The address for all shareholders is in care of the Company at 2800 Ingleton
Avenue, Burnaby, British Columbia, Canada V5C 6G7.
(2) A person is deemed to be the beneficial owner of securities that can be
acquired by that person within 60 days from the date of this Annual Report
upon exercise of options or warrants. Each beneficial owner's percentage
ownership is determined by assuming that options or warrants that are held by
that person and that are exercisable within 60 days from the date of this
Annual Report have been exercised.
(3) 7,000 of these shares are owed by Mr. Fielding's minor daughter. Also
includes 200,000 shares which Mr. Fielding has the right to acquire at a
price of $1.00 under immediately exercisable options.
(4) Includes 600,000 shares which Mr. Gaetz has the right to acquire at a
price of $1.50 under immediately exercisable warrants, 20,000 shares which
Mr. Gaetz has the right to acquire at a price of $1.25 under immediately
exercisable warrants, 200,000 shares which Mr. Gaetz has the right to acquire
at a price of $1.00 under immediately exercisable options, and 33,770 shares
owned by Mr. Gaetz's wife.
(5) Includes 600,000 shares which Mr. Sommerville has the right to acquire at
a price of $1.50 under immediately exercisable warrants and 45,028 shares
owned by Mr. Sommerville's wife.
43
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In July 1995, the Company was acquired by eight Canadian and European
individuals. The individuals intended to develop the Company into the United
States Marketing arm for UVS' Ultra Guard systems. The Company issued
1,600,000 shares of its restricted common stock to certain individual
stockholders, including an officer of the Company, as reimbursement of cash
advanced by them to others for expenses related to the acquisition. See
"Company Background." Mr. Fielding may be considered to be a promoter of the
Company.
In connection with the acquisition of UVS by the Company in 1996, in
exchange for their UVS shares, Company common stock was issued to: Kenneth
Fielding (a Director and Executive Officer)11,257 shares; John Gaetz (a
Director and Executive Officer), 600,000 shares and 600,00 warrants for
Common Stock; Douglas F. Sommerville (a greater than 5% shareholder),
600,000 shares and 600,000 warrants for Common Stock. In addition, common
stock was issued to adult relatives of Mr. Gaetz: his wife, C.A. Gaetz,
33,700 shares; his brother, F. Gaetz, 901 shares; his brother, J.G. Gaetz,
4,503 shares; and his daughter, L.L. Alentejano, 5,629 shares. Mr.
Sommerville's wife, V.N. Sommerville, also received 45,028 shares.
Since the acquisition of the Company by the investor group in 1995, up to
August 31, 1997, the following Directors, Executive Officers, and greater
than 5% shareholders, have made the following loans to the Company for
additional working capital: J.R. Gaetz, $87,501 and Ken Fielding $149,293.
The loans are payable on demand and bear interest at the CIBC rate.
In July 1996, John Gaetz purchased for cash 20,000 shares of Common stock
and 20,000 warrants for Common Stock in a private offering at a cost of $0.75
per share.
Until June 1, 1997, the Company's executive offices space was sub-leased
from a company of which Charles P. Neild, a Director of the Company until
June 15, 1997, is a partner.
In August 1997, options for 200,000 shares of Common Stock were issued to
each of Kenneth Fielding and John Gaetz. The options, issued under the
Company's 1997 Stock Option Plan, are immediately exercisable at a price of
$1.00 per share, the market price on that date.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of exhibits
Exhibit Number Description Method of Filing
(3)(ii) Bylaws, as amended*
(10)(1) Agreement Between Communate
Urbaine De Quebec and UV
Systems Technology, Inc.
Dated 3/7/97**
(10)(ii) Agreement, as amended, ("Minority
Agreement") Among UV Systems
Technology, Inc., John Gaetz,
Douglas Sommerville, Working
Opportunity Fund, MDS Ventures
Pacific Inc. And Company dated
12/6/96**
(10)(ii)(a) Agreement dated November 24, 1997 Filed Herewith
amending Minority Agreement Electronically
(10)(iii) Agreement between Douglas
Sommerville and Company dated
12/6/96**
(10)(iv) Agreement between John Gaetz
And the Company dated 12/6/96**
(10)(v) Sample Agreement among minority
Shareholders of UV Systems
Technology, Inc. And the Company
each dated 2/28/97**
(10)(vi) Marketing Distribution Agreement
Between UV Systems Technology, Inc.
and the Company*
(10)(vii) Sales Representation Agreement
between UV Systems Technology,
Inc. and "The Representative"*
(10)(viii) Exclusive Distributorship Agreement
Between UV Waterguard Systems, Inc.
and Chiyoda Kohan Co., Ltd, and NIMAC
Corporation.*
(10)(ix) 1997 Stock Option Plan Filed Herewith
Electronically
(21) Subsidiaries of the Corporation: Filed Herewith
UV Systems Technology, Inc., Electronically
incorporated in British Columbia,
Canada
(23)(i) Consent of Elliott Tulk, Filed Herewith
Pryce Anderson Electronically
(27) Financial Data Schedule Filed Herewith
Electronically
- --------
* Incorporated by reference to the Corporation's Form S-8 filed with the
Commission on October 6, 1997.
** Incorporation by reference to the Corporation's Form 10Q for the fiscal
quarter ended February 28, 1997.
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the fourth quarter of
fiscal 1997.
44
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized.
SERVICE SYSTEMS INTERNATIONAL, LTD.
By: /s/ Kenneth R. Fielding
--------------------------------
Kenneth R. Fielding, President
Date: December 15, 1997
<PAGE>
Ex. (10)(ii)(a)
This Agreement dated for reference the 24(th) day of November, 1997.
Among:
UV Systems Technology Inc. Douglas F. Sommerville
2800 Ingleton Avenue 2800 Ingleton Avenue
Burnaby, BC., Burnaby, BC.,
V5C 6G7 V5C 6G7
(the "Company") ("Sommerville")
John R. Gaetz Service Systems International Ltd.
2800 Ingleton Avenue 2800 Ingleton Avenue
Burnaby, BC., Burnaby, BC.,
V5C 6G7 V5C 6G7
("Gaetz") ("SSI")
Working Opportunity Fund (EVCC) Ltd. MDS Ventures Pacific, Inc.
2901 - 1055 West Georgia Street 305 - 555 West 8(th) Avenue
P.O. Box 11170, Royal Centre Vancouver, BC.
Vancouver, BC., V5Z 1C6
V6E 3R5 ("MDS")
("WOF")
This will confirm the agreement of the signatories hereto to amend their
agreement dated December 6, 1996 by changing the dates referred to in
paragraphs 3, 14, 15a), and 15b) of that agreement from March 31, 1997 to
January 15, 1998 on the condition that all other terms and conditions of that
agreement remain in force, MUTATIS MUTANDIS.
This agreement may be executed by facsimile and in counterparts.
1
<PAGE>
UV SYSTEMS TECHNOLOGY INC. DOUGLAS F. SOMMERVILLE
2800 Ingleton Avenue 2800 Ingleton Avenue
Burnaby, BC., Burnaby, BC.,
V5C 6G7 V5C 6G7
Per: /s/ John R. Gaetz Per: /s/ D. F. Sommerville
------------------- -----------------------
VICE PRESIDENT
JOHN R. GAETZ SERVICE SYSTEMS INTERNATIONAL LTD
2800 Ingleton Avenue 2800 Ingleton Avenue
Burnaby, BC., Burnaby, BC.,
V5C 6G7 V5C 6G7
Per: /s/ John R. Gaetz Per: /s/ John R. Gaetz
------------------- -------------------------
SECRETARY - TREASURER
OWEN BIRD MDS VENTURES PACIFIC, INC
305 - 555 West 8(th) Avenue
Vancouver, BC.
V5Z 1C6
Per: /s/ Owen Bird Per: /s/ F. D. D. Scott
------------------- ------------------------
WORKING OPPORTUNITY FUND (EVCC) LTD.
2901 - 1055 West Georgia Street
P.O. Box 11170, Royal Centre
Vancouver, BC.,
V6E 3R5
Per: /s/ [ILLEGIBLE]
--------------------
2
<PAGE>
SERVICE SYSTEMS INTERNATIONAL LTD
1997 STOCK OPTION PLAN
FOR ELIGIBLE PARTICIPANTS
<PAGE>
SERVICE SYSTEMS INTERNATIONAL, LTD.
1997 STOCK OPTION PLAN
FOR ELIGIBLE PARTICIPANTS
I. PURPOSE
The purpose of the 1997 Stock Option Plan (the "Plan") is to promote, through
the award of options for common Stock, the long term success of Service Systems
International, Ltd. by: (i) providing a means through which the Company can
attract and retain specified employees who can contribute materially to that
success and (ii) encouraging stock ownership by those specified employees so
that they may have a proprietary interest in the Company's success.
II. DEFINITIONS
The capitalized words appearing in this Plan are defined as follows:
A. COMMITTEE means the Committee if any, appointed by the Board of
Directors of the Company to administer the Plan, as more fully described in the
Plan.
B. COMMON STOCK means the $0.001 par value common stock of Service
Systems International, Ltd.
C. COMPANY means Service Systems International, Ltd., and any
subsidiaries or parents.
D. ELIGIBLE EMPLOYEE means an employee, director, officer,
consultant or advisor not, insofar as awards under this plan are concerned,
rendering services in connections with the offer and sale of securities in a
capital raising transaction eligible to receive Options under the Plan as
defined elsewhere in the Plan.
E. EFFECTIVE DATE means the date the Plan becomes effective, as
provided in the Plan.
F. ISSUED, when used with respect to Plan Shares, means Common Stock
actually issued and outstanding.
G. OPTION means the right to acquire Common Stock conferred
pursuant to this Plan.
2
<PAGE>
H.. OPTION SHARES means shares of Common Stock which may be acquired
under an Option.
I. OPTIONEE means the individual entitled to acquire Option Shares
under an Option.
J. PLAN means the 1997 Stock Option Plan of the Company.
K. PLAN SHARES means the aggregate amount of Common Stock which may
be purchased pursuant to Options under the Plan.
III. ELIGIBLE PARTICIPANTS
Any one or more of the Company's, Officers, Directors, Consultants,
Sub-Contract ors, advisors, full time employees and part time employees, are
eligible to participate in the Plan.
IV. THE COMMITTEE
The Committee will be ,composed of two or more non-employee Directors,
designated by the Board of Directors of the Company. The Board of Directors or,
if appointed, the Committee will administer the Plan and, from time to time and
in its sole discretion, select from the Eligible Employees those to whom
Options will be granted and the number of Option Shares for each Option.
V. PLAN SHARES
The aggregate number of Plan Shares is 1,588,000. The Company will at
all times during the term of the Plan reserve and keep available a number of
shares of Common Stock sufficient to satisfy the requirements of the Plan and
will pay all fees and expenses necessarily incurred by the Company in connection
with the exercise of Options. The number of Plan Shares will be adjusted if a
reclassification, consolidation or merger should occur, as provided elsewhere in
the Plan. The shares underlying any terminated or expired Options awarded under
the Plan will be added back to the Plan shares available for Options, as if the
Options had not been granted.
VI. TERMS AND CONDITIONS OF OPTIONS
A. TERMS, CONDITIONS AND LIMITATIONS IN ALL OPTIONS.
Except as otherwise provided in the Plan, one or more Options
may be granted to any Eligible Employee. Each Option must be evidenced by a
written stock option agreement between the Company and the Optionee in such
form or forms as the Board of Directors (or if appointed, the Committee) from
time to time may prescribe and an Option will be deemed granted when approved
by the Board of Directors or Committee, if any. Option agreements need not be
identical to each other
3
<PAGE>
but must comply with and be subject to the following terms and conditions:
1. PURCHASE PRICE. The purchase price for an Option Share will
not be less than the fair market value per share of the Common Stock on the date
of grant of the Option. In each case, the fair market value used in
determining the purchase price of an Option Share will be determined in good
faith at the time of grant of the Option by decision of the Board of Directors
(or if appointed, the Committee).
2. EXERCISE. Any Option granted will contain provisions
established by the Board of Directors (or if appointed, the Committee) setting
forth the manner of exercise of the Option.
3. PAYMENT FOR OPTION SHARES. Payment may be made, in the
discretion of the Board of Directors (or if appointed, the Committee), as
determined in good faith by the Board of Directors (or if appointed, the
Committee), in cash or in stock of the Company having a fair market value on the
date of exercise, equal to the price for which the Option Shares may be
purchased.
4. NONTRANSFERABILITY. The terms of any Option granted must
include provisions making the Option nontransferable by the Optionee otherwise
than to an immediate family member, a trust for the benefit of the Optionee or
the Optionee's immediate family, or by will or the laws of descent and
distribution and prohibiting exercise by anyone other than the Optionee (or
permitted transferee) during the Optionee's lifetime. Option Shares which are
issued may be subject to restrictions on transfer.
B. OTHER TERMS.
Any Option granted under the Plan will contain such other and
additional terms, not inconsistent with the terms of the Plan, which are deemed
necessary or desirable by the Board of Directors (or if appointed, the
Committee).
C COMPLIANCE WITH SECURITIES LAWS.
No Option or Option Shares will be issued to an Eligible Employee
or Optionee except in compliance with applicable state and federal securities
laws, and the Company will have no obligation to issue Option Shares under an
Option if compliance with those laws has not been achieved.
VII. RECLASSIFICATION, CONSOLIDATION, MERGER OR EXCHANGE
4
<PAGE>
If and to the extent that the number of Issued shares of Common Stock
is increased or reduced by change in par value, split up, reclassification,
distribution of a dividend payable in Common Stock, or the like, the number of
Plan Shares, Option Shares, and the purchase price per Option Share will be
proportionately adjusted. If the Company is reorganized, consolidated, or
merged, or shares of Common Stock are exchanged, with another corporation (an
"Event"), the Optionee will be entitled to receive options covering shares of
the reorganized, consolidated, or merged company, or shares exchanged, in the
same proportion, at an equivalent price, and subject to the same conditions.
VIII. RIGHTS AS SHAREHOLDER AND EMPLOYEE
No Optionee will have any rights as a Shareholder of the Company with
respect to any Option Shares before the date of issuance to the Optionee of the
certificates for the Option Shares. Neither the Plan nor any Option granted
under the Plan will confer upon an Optionee any right to continue in the
employment of the Company.
IX. EFFECTIVE DATE
The Effective Date of the Plan is the date of its adoption by the
Board of Directors of the Company.
X. TERM OF THE PLAN
The Plan will terminate not later than, and no Options will be granted
after, the tenth anniversary of the Effective Date. The provisions of the Plan
will, however, continue after termination of the Plan to govern all Options
granted under the Plan until the exercise or expiration of the Options. The Plan
may be terminated at any time by the Board of Directors.
XI. CONSTRUCTION
The Plan and Options granted under the Plan will be interpreted and
administered under the laws of the State of Nevada.
XII. INTERPRETATION
All questions of interpretation and application of the Plan and any
Options will be determined solely by the Board of Directors and the
determination of the Board of Directors will be final and binding upon all
parties.
XIII. STOCKHOLDER APPROVAL
5
<PAGE>
If required by applicable law or regulation or any stock exchange or
self-regulatory organization on which the Company's securities are listed this
Plan will be presented for consideration and approval of the shareholders of the
Company at a meeting, special or regular, of the shareholders of the Company. If
approval is necessary and the Plan is not approved by the shareholders, the Plan
shall terminate and all unexercised options granted under it shall be
immediately forfeited.
XIV. AMENDMENT OF PLAN AND OPTIONS
This Plan may be amended or modified by the Board of Directors of
Company without further action by shareholders, except insofar as shareholder
approval of the amendment is required by applicable law or regulation or any
stock exchange or self-regulatory organization on which the Company's securities
are listed, for (i) increasing the maximum number of shares of Common Stock
which may be issued under the Plan (other than increases under Article VII of
the Plan), or (ii) changing the employees or class of employees eligible to
participate in the Plan.
Adopted and approved by resolution of the Board of Directors at Burnaby, BC.,
this 2nd day of June 1997.
- ------------------------
Director
- ------------------------
Director
6
<PAGE>
Exhibit 21
UV Systems Technology Inc., incorporated in British Columbia, Canada.
<PAGE>
The Board of Directors
Service Systems International, Ltd.:
We consent to incorporation by reference in the registration statement (No.
1.333-37203) on Form S-8 of our report dated November 20, 1997, relating to
the consolidated balance sheets of Service Systems International, Ltd. and
subsidiary as of August 31, 1997 and 1996 and the related consolidated
statements of operations, changes in stockholders' equity, and cash flows for
each of the years in the two year period ended August 31, 1997, which report
appears in the August 31, 1997 annual report on Form 10-KSB of Service
Systems International, Ltd.
/s/ ELLIOTT TULK PRYCE ANDERSON
Vancouver, BC, Canada
December 15, 1997
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