<PAGE>
U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-QSB
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended February 28, 1998
[ ] Transition report Pursuant to Section 13 or 15(d) of the Exchange Act
For the transition period from ______ to ______.
COMMISSION FILE NUMBER 0-21753
SERVICE SYSTEMS INTERNATIONAL, INC.
(Exact Name of Small Business Issuer as Specified in Its Charter)
NEVADA 88-0263701
(State of Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
2800 INGLETON AVENUE, BURNABY, B.C. CANADA V5E SS5
(Address of Principal Executive Offices)
604-451-1069
(Issuer's Telephone Number, Including Area Code)
-------------------------------------------------------
(Former name, former address and former fiscal year, if
changed since last report)
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 report(s), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No
--- ---
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13, or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by court. Yes ___ No ___
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: 7,762,886 as of April 8, 1998
Transitional Small Business Disclosure Format (check one):
Yes No X
--- ---
<PAGE>
INDEX
- --------------------------------------------------------------------------------
PART I FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . . 2
Consolidated Balance Sheets as of February 28, 1998
and 1997 (unaudited). . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Operations for the six months ended
February 28, 1998 and 1997 (unaudited). . . . . . . . . . . . . . . . . . 4
Consolidated Statements of Cash Flows for the six months ended
February 28, 1998 and 1997 (unaudited). . . . . . . . . . . . . . . . . . 5
Notes to the FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . . . . 6 to 8
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITIONS. . . . . . . . . . . . . . 9 to 12
Part II Other Information. . . . . . . . . . . . . . . . . . . . . . . . . .12
Item 1. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . .12
Item 2. CHANGES IN SECURITIES . . . . . . . . . . . . . . . . . . . . . . .12
Item 3. DEFAULTS UPON SENIOR SECURITIES . . . . . . . . . . . . . . . . . .12
Item 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS . . . . . . . .12
Item 5. OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . .12
Item 6. EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . . . . . . . . .12
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13
1
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Part 1. Financial Information
Item 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
2
<PAGE>
Service Systems International, Ltd.
(A Development Stage Company)
Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
(Restated)
February 28, February 28,
1998 1997
ASSETS
<S> <C> <C>
Current assets:
Cash $ 140 $ 6,620
Accounts receivable 63,346 73,519
Inventory 365,880 432,463
Prepaid expenses 84,761 15,933
Held to maturity investment - 220,417
Research credit receivable 238,618 224,220
---------- ----------
Total current assets 752,745 973,172
Loan Receivable 9,500 -
Capital Assets (Note 4) 159,305 196,119
Goodwill - net of amortization (Note 5) 1,819,057 2,304,138
Patents (Note 6) 37,089 31,762
---------- ----------
$2,777,696 $3,505,191
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Cheques issued in excess of funds on deposit $ 3,907 $ -
Accounts payable 147,197 128,389
Accrued liabilities 17,492 9,985
Vacation pay payable 6,931 8,646
Customer deposits 18,727 117,527
Loans owing to related parties 485,111 113,497
Loans payable - minority stockholders of subsidiary 599,160 511,016
---------- ----------
1,278,525 889,060
Long-term Debt (Note 8) 1,469,660 1,469,660
Convertible Debenture (Note 7) 215,139 -
---------- ----------
2,963,324 2,358,720
---------- ----------
Stockholders' equity:
Common stock, $.001 par value,
50,000,000 shares authorized, 7,678,168
and 5,239,338 issued and outstanding
respectively 7,678 5,239
Additional paid-in capital 2,399,086 1,798,956
Deficit accumulated during development stage (2,606,479) (652,937)
Foreign exchange translation adjustment 14,087 (4,787)
---------- ----------
(185,628) 1,146,471
---------- ----------
$2,777,696 $3,505,191
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to financial statements.
3
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Service Systems International, Ltd.
(A Development Stage Company)
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
(Restated)
Six Months Six Months
Ended Ended
FEBRUARY 28, 1998 FEBRUARY 28,1997
----------------- ----------------
<S> <C> <C>
Project Revenue $ 2,799 $ 25,074
---------- ----------
Project costs 2,468 33,919
Manufacturing Costs Not Applied 43,811 13,753
---------- ----------
Gross Profit (Loss) (43,480) (22,598)
---------- ----------
Expenses
General and administrative $ 459,621 $ 132,550
Research and development 61,030 76,650
Selling 100,426 56,556
---------- ----------
621,077 265,756
---------- ----------
Net Loss from Operations Before Other Items (664,557) (288,354)
Other Items
Amortization of goodwill (Note 5) (242,540) (121,270)
Interest Income - 1,435
Miscellaneous Income - 20,263
Interest expense (59,739) (23,793)
---------- ----------
Net Loss for the period $ (966,836) $ (411,719)
---------- ----------
---------- ----------
Net Loss per share $(0.15) $(0.09)
---------- ----------
---------- ----------
Weighted average shares outstanding 6,474,450 4,351,669
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
Service Systems International, Ltd.
(A Development Stage Company)
Consolidated Statemenst of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
(Restated)
Six Months Six Months
Ended Ended
FEBRUARY 28, 1998 February 28, 1997
----------------- -----------------
<S> <C> <C>
Cash Flows to Operating Activities
Net Loss $(966,836) $(411,719)
Adjustments to reconcile net loss to cash
Depreciation 23,917 8,956
Amortization of goodwill (Note 5) 242,540 121,270
Discount on convertible debenture 120,279 -
Change in non-cash working capital items:
(Increase) Decrease in accounts receivable (315) 7,664
(Increase) in inventory (8,872) (25,445)
(Increase) in prepaid expenses (72,211) (4,103)
Decrease (Increase) in research credit receivable 6,173 (13,650)
(Decrease) in accounts payable, accrued liabilities
vacation pay payable and customers' deposits (52,549) (28,525)
---------- ----------
Net Cash Used In Operating Activities (707,874) (345,552)
---------- ----------
Cash Flows (to) from Investing Activities
Capital assets acquired (9,918) (2,776)
Additions to intangible assets (431) (2,145)
(Increase) in loans receivable (9,500) -
Acquisition of subsidiary - 1,537
---------- ----------
Net Cash (Used in) Provided by Investing Activities (19,849) (3,384)
---------- ----------
Cash Flows from (to) Financing Activities
Funds applied against cheques issued
in excess of deposit (4,845) -
Common stock issued 553,518 312,233
Conversion of bonds to shares (507,518) -
(Decrease) in loan payable - other (21,206) -
Increase (decrease) in amounts
owing to related parties 124,558 (33,911)
Increase in loans payable to
minority shareholders of subsidiary 42,520 23,793
Proceeds from convertible debenture 526,110 -
Foreign exchange translation adjustment 14,087 (3,547)
---------- ----------
Net Cash Provided by Financing Activities 727,224 298,568
---------- ----------
Increase (decrease) in cash (499) (50,368)
Cash - beginning of period 639 56,988
---------- ----------
Cash - end of period $ 140 $ 6,620
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to financial statements.
5
<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. On December 1, 1996 the
Company acquired 50.69% of UV Systems Technology Inc. ("UVS"). Through
UVS, the Company manufactures and markets its Ultra Guard -TM-
ultraviolet based patented water treatment system. These products are
sold primarily for municipal waste disinfection, treatment of process
and industrial wastewater, 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.
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 approximates
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.
Foreign currency
i) Translation of foreign currency transactions and balances
Revenue, expenses and non-monetary balance sheet items in foreign
currencies are translated
6
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into US. 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 UVS are translated into US
dollars at the rates of exchange on the balance sheet date.
Non-monetary balance sheet items are translated into US. dollars
at the rate of exchange prevailing on the transaction dates. The
foreign subsidiary's operating results are translated into US
dollars using the average exchange rate for the period with any
translation gain or loss charged to operations as a separate
component of other items.
3. Restatement
Comparative figures of prior periods have been restated to reflect the
change in the accounting policy from full write-off of goodwill on
consolidation to amortizing goodwill on consolidation to operations over
its estimated useful life of five years. In addition, adjustment has been
made to reflect the amount of goodwill as reported for the fiscal year
ending August 31, 1997. The effect of the restatement on prior period
accounts is:
<TABLE>
<S> <C> <C>
Goodwill net of amortization $2,304,138
Inventory 124,793
Accounts receivable (202,850)
Deficit (2,226,081)
</TABLE>
4. Capital Assets
Capital assets are stated at cost less accumulated depreciation.
<TABLE>
<CAPTION>
FEB 28, 1998 FEB 28, 1997
ACCUMULATED NET BOOK NET BOOK
COST DEPRECIATION VALUE VALUE
$ $ $ $
<S> <C> <C> <C> <C>
Computer Equipment 35,936 10,443 25,493 24,097
Computer software 4,071 1,296 2,775 2,769
Display equipment 31,835 12,734 19,101 25,866
Office furniture & Equipment 29,131 10,639 18,492 20,686
Plant jigs, dies, moulds, tools & equipment 121,382 41,745 79,637 103,250
Leasehold improvements 26,724 12,917 13,807 19,451
------- ------ ------- -------
249,079 89,774 159,305 196,119
------- ------ ------- -------
------- ------ ------- -------
Depreciation per class of asset
$ $
Computer equipment 2,872 1,193
Computer software 348 153
Display equipment 3,183 1,617
Office furniture & equipment 2,775 1,293
Plant jigs, dies, moulds, tools & equipment 12,066 3,343
Leasehold improvements 2,673 1,357
------- -------
23,917 8,956
------- -------
------- -------
</TABLE>
7
<PAGE>
5. Goodwill
Goodwill on consolidation for prior periods presented for comparative
purposes has been restated to account for the change in accounting policy
of amortizing to operations over its estimated useful life of five years.
Amortization of $242,540 has been charged to current operations and
comparative figures of $121,270 include only three months from December 1,
1996 to February 28, 1997.
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.
7. Convertible debenture
The Company issued, in previous quarters, 12% Series "A" Senior
Subordinated Convertible Redeemable Debentures due July 31, 1998 having a
face amount of $230,000, bearing interest at 12% per annum payable
quarterly. The Company discounted these debentures by 20% of the face
amount and received net proceeds of $184,000. Interest of $9,917 has been
accrued to February 28, 1998. For placement of the full amount ($631,285)
of convertible debentures, the Agent was issued 66,625 warrants for
shares exercisable at $1.64 per share.
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.
8. Long term debt
UVS issued 2,000 Class "A" preferred shares at C$1,000 per share for a
total of C$2,000,000 (US$1,469,660). The holders of these shares also own
49.31% of UVS. These shares are retractable once sales reach C$10,000,000
and net income reaches C$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, UVS
and UVS's minority stockholders, the Company agreed to raise $2,000,000
(the "Financing") by March 31, 1997 (extended to April 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 payable into common shares of the Company at the rate of C$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 250,000
common shares of the Company. Each common share issued pursuant to this
agreement will include a warrant to acquire an additional share at C$2.00
per share expiring four years after issuance of the common shares.
9. Consolidated financial statements
These interim financial statements include the accounts of the Company, and
its 50.69% owned subsidiary, UVS. As UVS was acquired on December 1, 1996,
results of operations include only Consolidated Statements for the period
from December 1, 1996 to February 28, 1998. Comparative figures for
February 28, 1997 include three months' operations for UVS and six months'
operations for the Company.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATION AND
FINANCIAL CONDITION
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 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 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.
OVERVIEW
The Company is a development stage company that 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 its majority-held subsidiary, UV Systems Technology, Inc.
("UVS"), the Company manufactures and markets its Ultra Guard-TM-
ultraviolet-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 UVS' 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 UVS, a manufacturer of equipment using proprietary ultra violet light
technology for the microbiological disinfection of industrial and municipal
wastewater. In July 1996, the Company entered into a funding agreement with 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.
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 the Company's already existing quartz sheath
system, to remove the fouling build-up due to suspended solids prevalent in
wastewater. The program of development of the mechanical cleaner is essentially
completed except for on-going component refinements. Development of the
electronic ultrasonic cleaning system continues. The supplier of the ultrasonic
equipment, which is partnering with the Company and has provided the prototype
equipment for testing at no cost, delivered the equipment during the first
quarter of fiscal 1998. This equipment has been installed on a UV module and
testing has started at the Chilliwack test site and is being evaluated against
the mechanical wiper system so that the effectiveness of each system as to
performance and operating cost may be compared. The Company is assessing
whether the ultrasonic cleaning system can provide equivalent or better
performance than the mechanical cleaning system. Reducing mechanical components
and moving parts is anticipated to enhance UVS system preference over other UV
systems as a result of reduced maintenance and operating cost to the client.
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 (October 31, 1997). During discussions held in November
1997, the client indicated its interest in proceeding with the project.
Subsequent information provided by the client indicated that it has been able to
reduce the period of UV treatment from six months per year to four months per
year, which will make the economic of replacing the existing equipment less
attractive. A revised proposal, which addressed previous problems, has been
presented. The Company cannot be assured that the client will accept the revised
proposal, that testing, if the proposal is accepted, will be successful, or that
even if testing is successful, negotiations for the total project, valued at
approximately C$2 million, will result in award of the project to the Company.
The Company has been unable to complete testing of a full-scale
demonstration system at the City of Chilliwack, located in western Canada, due
to flows almost twice those contracted for through the sewage treatment plant.
The Company continues to use this site for demonstration, research and
development; however ongoing sewage plant modifications have stalled further
equipment tests until late summer.
9
<PAGE>
During the report period ended November 30, 1997, the Company was advised
that an order will be forthcoming for a project in Montreal, Quebec Province,
Canada, in the revised amount of C$390,809. As of February 28, 1998, the order
had not been received, although the request for proposal (RFP) for the sewage
plant, which included the UV system, closed on March 18, 1998. The Company
believes that award for this project is imminent because the Company's UV System
price was placed into the RFP and no alternative UV supplier was permitted to
quote. This project was pilot tested using the Company's production
demonstration unit at which power monitoring and systems efficiencies were
demonstrated and showed the UV System provided significant performance and
cost-saving potential over an alternative system.
Shipment and billing of the majority of any of these or other sales which
may be made in fiscal 1998 (which the Company cannot assure), other than the
sale to Hamilton, Alabama, for a fixed price of $127,000 will not occur until
fiscal 1999.
Sales and marketing of the Company's UV products continue, with bids sent
out during the current quarter amounting to approximately $26 million. During
this period the Company displayed its products at Globe 98, an exhibition
directed to new technologies in the environmental field, attended by over 400
delegates and 10,000 international visitors. At this exhibition, the Company
was able to showcase the Ultra Guard-TM- benefits to a focused audience,
including engineers, plant owners and City managers. The Company believes that
its presentations were well received and many contacts were made for application
of the Company's UV products. As a result of the presentations at Globe 98, the
Company has responded to a number of potential opportunities.
RESULTS OF OPERATION
GENERAL NOTE. When comparing the Six Months period Ended February 28, 1998
to the period ended February 28,1997, the reader must be aware that the six
months ended February 28, 1997 includes six months of SVSY operations and three
months of UVS operations for the period from acquisition, December 1, 1996 to
February 28, 1997. Comparisons of changes in Income and Expense values do not
reflect comparable conditions.
SIX MONTHS ENDED FEBRUARY 28, 1998 AND 1997. During the six months ended
February 28, 1998, the Company had project revenues of $2,799, derived from
sales of parts. Project costs and manufacturing costs not applied to projects
amounting to $43,811 resulted in a Gross Loss of $43,480 compared to a Gross
Loss of $22,598 in the six months period ended February 28, 1997.
Manufacturing costs not applied to projects are made up of allocated overhead
amounts not identified to a specific project.
PROJECT REVENUE. During the six-months ended February 28, 1998 project
revenues decreased 89% to $2,799, from $25,074, for the six-month period ended
February 28, 1997 (the first period of comparison after the acquisition of UVS).
GROSS LOSS. For the six-months ended February 28, 1998 gross loss
increased 92% to $43,480, from $22,598 for the six-month period ended February
28, 1997 (the first period of comparison after the acquisition of UVS). The
losses were due to the decrease in revenues and the increase in manufacturing
costs not applied to projects.
During the six months ended February 28, 1998 and 1997 respectively,
operational expenses increased 234% to $621,077 from $265,756 in the comparable
1997 period (including, general and administrative expense of $459,621 compared
to $132,550, research and development cost of $61,030 compared to $76,650 and
selling expense of $100,426 compared to $56,556), bringing the Net Loss from
Operations Before Other Items to $664,557 compared to $288,354 for the
comparable 1997 period. The higher costs of General and Administrative were as a
result of accrued (unpaid) management fees, discounts on convertible debentures,
corporate relations and legal and accounting fees. Other Items, including
Amortization of goodwill in the amount of $242,540 in connection with the UVS
acquisition (see Note 3 in the financial statements identifying the restated
write-off of principal) and Interest Expense in the amount of $59,739 paid
largely on UVS debt owed to minority shareholders (accrued and not paid) and
interest on convertible debentures, brought net Loss for the period to $966,836,
a per share loss amounting to $0.15.
RESEARCH AND DEVELOPMENT EXPENSES. For the six months ended February 28,
1998, research and development expenses decreased 26% to $61,030 from $76,650
for the comparable 1997 period due to a reduced need to continue the R & D at
the spending level in early 1997. This trend should continue as the base
technology is at a level of full marketability. During the recent quarter, the
Company entered into a development and testing
10
<PAGE>
program being carried out at McGill University. This R & D program is intended
to demonstrate UVS lamp efficacy compared to other lamp technology. Results of
this testing should be available in the fourth quarter.
SELLING EXPENSES. For the six months ended February 28, 1998, selling
expenses increased 78% to $100,426 from $56,556 in the 1997 comparable period
reflecting the reduced period of UVS activity as noted above.
AMORTIZATION OF GOODWILL. For the six-months ended February 28, 1998,
amortization of goodwill increased to $242,540 from $121,270 for the
comparable 1997 period. Amortization of goodwill is as a result of the
majority acquisition of UVS (see Note 5 in financial statements).
INTEREST EXPENSE. For the six-months ended February 28, 1998, interest
increased 251% to $59,739, from $23,793 for the comparable 1997 period. This
increase resulted largely from interest payable on UVS debt owed to minority
shareholders and interest on convertible debentures.
NET LOSS FOR THE PERIOD. The Net Loss for the six months ended February
28, 1998 increased 230% to $664,557 from $288,354 for the 1997 comparable
period, due to the increased costs resulting from the majority acquisition of
UVS and the Company's attendant and continuing effort to improve,
commercialize and sell its Ultra Guard-TM- systems.
NET LOSS PER SHARE. For the six-months ended February 28, 1998, net loss
per common share was $0.15 compared to $0.09 for the six-months ended February
28, 1997.
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 accounts receivable, 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 that 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 percentage 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-TM- 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, expand its marketing efforts,
and complete the purchase of the remaining non-owned 49.31% of the outstanding
stock of UVS. Additional financing may be in the form of debt or equity
financing, or both. There can be no assurance that the additional financing can
be timely obtained on terms acceptable to the Company, if at all. Failure to
receive these funds may be expected to have a material adverse effect on the
Company and its business.
During the quarter ended November 30, 1997, the Company financed its
operation largely from loans from related parties and shareholders of UVS, and
the sale of 12% convertible debentures. 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 in 12%, one year convertible
debentures due July 31, 1998, if not earlier redeemed. The agreement provided
that each debenture would be sold at 80% of face value and would be convertible
into common stock of the Company at a conversion price of 20% below the closing
bid price of the Company's 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. During the six months ended February
28, 1998, net proceeds in the amount of $505,028 were received from the sale of
the debentures. During the same period, convertible debentures amounting to face
value including interest, $507,518, were converted, at an average conversion per
share price of $0.232, into 2,198,830 shares of common stock. At the end of this
reporting period the balance of convertible debentures and unpaid interest not
converted amounted to $ 239,917.
11
<PAGE>
As part of its expanded marketing effort, the Company is actively seeking
additional sales agents and distributors. During this period one agent, Bio
Light located in Santiago, Chile, was appointed for Chile. The Company
continues to seek additional North American sales agents and international
distributor.
The Company has determined that its internal reporting systems are Year
2000 compliant. Final determination regarding the impact and materiality of
Year 2000 issues pertaining to the Company's products has not been completed,
although the Company does not believe, based upon current anaylsis, they will be
significant.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
None
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS on Form 8-K
(a) Exhibits (exhibit reference numbers refer to Item 601 of
Regulation SB
Exhibit Number Description
(3)(i) Articles of Incorporation
(3)(ii) Bylaws
(11) Statement re: computation
of per share earnings
(27) Financial Data Schedule
(b) Reports on Form 8-K
None
- --------------------
(1) Incorporated by reference to the Registrant's Form 10-SB effective
1/17/97
(2) Incorporated by reference to the Registrant's Form S-8 effective
10/6/97
12
<PAGE>
Signatures
In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, hereunto duly
authorized.
Dated: April 14, 1998
Service Systems International Ltd.
By: /s/ Ken Fielding
-----------------------------
Ken Fielding, President
13
<PAGE>
EXHIBIT 11.1
Service Systems International, Ltd.
Computation of Per-Share Income
Treasury Stock Method
As Modified for 20% Test
<TABLE>
<CAPTION>
Period Ended February 28, 1998
------------------------------
Six Months
----------
<S> <C>
Weighted average number of shares outstanding 6,474,450
-----------
-----------
Total common and common equivalent shares 7,678,168
-----------
-----------
Net income (loss) for the period $ (966,836)
-----------
-----------
Total common and common equivalent shares 7,678,168
-----------
-----------
Loss per common and common equivalent shares $ (0.15)
-----------
-----------
</TABLE>
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.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> AUG-31-1998
<PERIOD-START> SEP-01-1997
<PERIOD-END> FEB-28-1998
<CASH> 140
<SECURITIES> 0
<RECEIVABLES> 63,346
<ALLOWANCES> 0
<INVENTORY> 365,880
<CURRENT-ASSETS> 752,745
<PP&E> 159,305
<DEPRECIATION> 23,917
<TOTAL-ASSETS> 2,777,696
<CURRENT-LIABILITIES> 1,278,525
<BONDS> 215,139
0
0
<COMMON> 7,678
<OTHER-SE> 2,399,086
<TOTAL-LIABILITY-AND-EQUITY> 2,777,696
<SALES> 2,799
<TOTAL-REVENUES> 2,799
<CGS> 2,468
<TOTAL-COSTS> 46,279
<OTHER-EXPENSES> 621,077
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 59,739
<INCOME-PRETAX> (966,836)
<INCOME-TAX> 0
<INCOME-CONTINUING> (966,836)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (966,836)
<EPS-PRIMARY> (.15)
<EPS-DILUTED> (.15)
</TABLE>
