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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
For the Fiscal year Ended August 31, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ...................to .......................
Commission file number 000-21753
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
604-451-1069
Issuer's Telephone Number
Securities registered under Section 12(b) of the Exchange 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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Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation 405 is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendments to this Form 10-KSB (X)
The issuer's revenues for its most recent fiscal year were $202,894.
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 November 20, 1998 was $0.0825. The number of shares outstanding of
the issuer's only class of Common Stock, $.001 par value, was 12,662,988 on
November 23, 1998.
Transitional Small Business Disclosure Format (check one): Yes / / No /X/
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 FROM TIME TO TIME IN
DOCUMENTS FILED BY THE COMPANY WITH THE SEC INCLUDING THOSE DISCUSSED UNDER
"RISK FACTORS" BELOW.
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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. We are 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, we hold two United States patents and five
international patents on various components of our ultraviolet disinfection
system, including the flow reactor chamber and flow-balanced discharge weir.
Our executive offices are located at 2800 Ingleton Avenue, Burnaby, B.C.,
Canada V5C6G7. The telephone number is (604) 451-1069 and the facsimile
number is (604) 451-1072. References in this document to "we," "us," "our,"
and "the company" include UVS
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unless the context otherwise requires. ULTRA GUARD-TM- and "WAVY LINES &
DESIGNS" logo are our registered trademarks. Any other trademarks or trade
names referred to in this document are the property of their respective
owners. All monetary figures in the document are in United States dollars
except Canadian dollars which are indicated as "C$."
COMPANY BACKGROUND
Our company, Service Systems International Ltd. was incorporated in Nevada in
August 1990 and was inactive until it was acquired in July 1995 by eight
Canadian and European individuals. The investors' intent was to develop the
company into the United States marketing arm of UV Systems Technology Inc.,
which was incorporated in British Columbia, Canada, in 1993. Our company
issued 1,600,000 shares of its restricted common stock ("Common Stock") to
certain individual stockholders and one of our officers, as repayment of cash
paid to others for expenses related to the acquisition.
In an effort to further advance our marketing objective we entered into an
oral agreement with UV Systems Technology Inc., for marketing rights for the
Ultra Guard-TM- system in eight Western states. This oral agreement was
subsequently supported by a written agreement dated September 21, 1995. In
July 1996 we entered into a funding agreement with UVS. Under the funding
agreement, we supplied 50% of UVS' operating funds for a six-month period.
During this period we structured an agreement with two principals and certain
minority shareholders and exchanged common stock to acquire 50.69% of UVS. We
also entered into an agreement with the owners of the balance of the common
stock (Working Opportunity Fund and MDS Ventures Pacific, Inc., 49.39%) to
complete the purchase of UVS. Under this agreement we were required to fully
fund the operations of UVS, and if we were successful in raising C$2.0
million of operating capital, the remaining common stock of UVS would have
been purchased. The operating funds advanced by us would be forfeited if the
agreement was not concluded. This agreement was extended a number of times
through to July 15, 1998, after which it was allowed to lapse. A subsequent
agreement (discussed in Management Discussions) converted the funds loaned to
UVS into Class X shares of UVS.
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. 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) by year 2000.
A United States Environmental Protection Agency survey in 1984 reported that
15,378 municipal treatment plants were in
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operation in the United States and projected the number to increase to
approximately 21,000 by the year 2000. Of the 15,378 plants operating in
1984, only 107 were using or were being constructed and designed for UV
treatment. Some of these 15,378 plants had limited or no disinfection. Many
of the existing plants identified in 1984 will be required to upgrade or be
replaced to meet new United States environmental standards. This is an
estimated cost of more than $180 billion. Together with the new treatment
plants projected to be built, this represents the United States municipal
wastewater treatment market for the ultraviolet treatment industry.
Treatment of municipal wastewater begins by settling or filtering out solid
wastes and removing chemicals, minerals, etc. After this treatment the
effluent must be disinfected before being discharged into a body of water.
Five major factors are used to decide which method of disinfection will be
used. The first four are: performance, operating cost, safety of method
selected, and verification by pilot study. These relate to the disinfection
process itself. The fifth factor is potential adverse effects of the
disinfectant on the environment. Currently, the majority of treatment systems
in the United States use chlorination. Other treatment alternatives include
ozonation and ultraviolet light.
The chlorination process can raise significant environmental concerns. As
reported in a 1986 U.S. Environmental Protection Agency study, MUNICIPAL
WASTEWATER DISINFECTION, even low chlorine residual levels are very difficult
to control in receiving streams. The waste stream is influenced by factors
such as temperature, pH, alkalinity, suspended solids, chemical oxygen demand
and nitrogen-containing compounds. All of these factors influence the
effectiveness of chlorine disinfection. The environmental impact includes the
toxicity of residual chlorine to plant and wildlife and the formation of
potentially toxic halogenated organic compounds. Many treatment plants use
sulfur dioxide to remove the chlorine from the treated water. This reduces
the chlorine residual, but probably does not affect halogenated organic
compounds, and adds its own negative effect in the receiving water. Chlorine
is extremely volatile, therefore its safe transportation is difficult. Many
state regulations require that a facility using chlorine treatment train its
personnel in correct handling and safety procedures.
Ozone, an unstable gas, is very effective as a bactericide and virucide.
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 1996 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
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installations are forecast to be UV systems.
Ultraviolet (UV) light treatment is a non-chemical process, which is very
effective as a bactericide and virucide. Ultraviolet light radiation at a
wavelength of 254 nanometers (nm) penetrates the cell wall and is absorbed by
the bacteria's nucleic acids. This prevents the replication of the cell.
Because UV is non-chemical, no toxic residues are produced. UV systems are
simple to operate and maintain, have no known adverse environmental impact,
and need minimal space. UV is a cost-effective alternative to chlorination
and ozonation.
Installations of UV disinfection systems has been slowed by a number of
factors. UV system lamps become fouled and require frequent cleaning. UV
equipment using low-pressure, low- intensity ultraviolet lamps require a
large number of lamps when used in large treatment plants. UV lamps need to
be replaced about once a year. Large numbers of lamps equals: 1) high
cleaning and replacement labor costs, 2) high power cost, and 3) high lamp
replacement costs. Reduction in disinfection performance occurs due to
contaminants such as high suspended solids, color, turbidity, and soluble
organic matter in the effluent. These contaminants affect the transmittance
of the fluid and reduce ability of the ultraviolet light to penetrate the
fluid.
We believe that a UV system as provided by our company deals with these
issues and will greatly enhance the marketing opportunities for UV systems.
Our UV system is environmentally friendly, efficient in operation and cost
effective.
SERVICE SYSTEMS' STRATEGY
Our 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.
Our objective is to become a leading supplier of UV disinfection systems for
municipal wastewater and, eventually, for industrial process water and
potable water. We believe that the current widespread use of chlorine as the
treatment method does not address its environmental effects. There is a need
for a superior, cost-effective system for water disinfection around the
world. Our UV system answers these needs. It is state of the art,
proprietary, environmentally friendly, efficient, and provides numerous
opportunities for us to expand the scope of our activity beyond municipal
wastewater.
Key elements of the Company's strategy are:
Technological Superiority
We currently hold patents on UV lamps, the flow control reactor module and
the flow-balanced weir. These components are used in our treatment system.
The system also includes several proprietary features which include, 1)
automatic lamp cleaning to deal with the problem of lamp fouling, 1)
automatic variability of lamp intensity to match effluent flow
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to reduce power consumption, and 3) automatic variability of lamp intensity
to treat varied transmission. We intend to continue technological development
as a response to the changing needs and applications of the water and
wastewater treatment industry.
Expansion of Product Lines
Our UV technology can be applied to many treatment needs. After successful
penetration of the wastewater disinfection market and financial success, we
intend to expand our business into disinfection of industrial process water.
Other business segments which show growth potential currently and for the
future are potable water disinfection, other fluids disinfection and air
disinfection.
Process water disinfection is required in industries such as breweries, soft
drink producers, pharmaceutical, pulp and paper production, agriculture,
aquaculture, and marine life systems. Potable water treatment is needed for
drinking water from a normal municipal supply, bottled water and for disaster
relief. Disinfection is also needed in bottled and packaged juices and other
fluids.
Enhancement and Expansion of Marketing Efforts
Our product is marketed through a representatives' network in North America
and in selected countries of the world. This network needs and continues to
be expanded so that we have at least one representative in each of the United
States. This process will continue both in the United States and in other
selected countries of the world until full customer support is achieved. When
and if the opportunity arises, we intend 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 and disinfection systems is expanding. With the
compact and adaptable nature of our treatment system, its patented and
proprietary technology, and the full-size production demonstration units
(PDU's), we believe we have a good potential to expand into the international
market. It is our intention to pursue this market aggressively.
OUR COMPANY'S PRODUCT
Our company manufactures and markets its UV disinfection system under its
registered trademark, Ultra Guard-Registered Trademark-. The Ultra Guard-TM-
system incorporates,1) patented low-pressure, high-intensity, high-efficiency
UV lamps, 2) infinitely variable ultraviolet lamp controllers,3) patented
high-performance reactor module, 4) patented
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flow-balanced weirs, and 5) automatic quartz sheath cleaning system. The new
mechanical cleaning system has been developed and has been introduced into
the marketplace by demonstration on our full scale demonstration systems.
Currently our product is used primarily for municipal wastewater
disinfection. The UV system has been adapted for treatment of process and
wastewater from industry, where it is currently being applied in the
semi-conductor industry. Other applications include treatment of potable
water, juices and other bottled products, and agriculture and aquaculture
water treatment.
UV disinfection systems have none of the safety issues with which
chlorination systems must deal. UV has 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 UV systems, after solid materials are removed, the effluent is
directed through banks of low-pressure, low-intensity or medium-pressure,
high-intensity UV light producing mercury vapor arc lamps. In order to
disinfect a liquid, the UV energy within the 240 - 280 nm wave band must be
directed into the liquid at a minimum intensity level. As the lamp emits
radiation and the fluid distance from the lamp increases, the intensity is
reduced. 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. Like competing UV systems, our Ultra Guard-TM-
system also exposes fluid to UV light for a time sufficient to damage the
reproductive ability of the microorganisms. However, in the Ultra Guard
disinfection process, fluid to be disinfected, 1) passes through a diffuser
plate to even the flow, 2) passes through our patented flow reactor module
which surrounds the UV lamp, and 3) leaves the disinfection channel through
our patented flow-balanced discharge weir.
As effluent enters the disinfection channel, uneven fluid pressure creates
variances in the flow rate among the top, middle and bottom layers of
effluent. As a result of uneven fluid pressure, flow velocity varies. The
result is varying rates of disinfection as these uneven flows pass the UV
lamps. In our UV system, the diffuser plate (a perforated plate) intercepts
the incoming fluid and mixes the varying velocity layers. This ensures
uniform column flow before the fluid enters the patented flow reaction
chamber and permits the lamp intensity to be set for a consistent,
predictable fluid flow rate.
After passing through the diffuser screen, the fluid enters our Ultra Guard
patented flow reactor module. The Company's competitors' straight-through
systems require repeated and continuous exposure to multiple banks of UV
lights. In our UV system, the fluid oscillates as it moves through the
reactor module. This ensures that all influent receives maximum exposure to
the UV light from a single lamp. The reactor module provides an additional
benefit. In other UV systems, slow fluid flow velocity through the lamps and
higher temperatures permit buildup of sedimentary deposit which reduces the
efficiency of their systems. Our reactor module is designed to cause the
fluid to pass closer to the UV light at high velocities, reducing
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sedimentary deposit (fouling) on the quartz sleeve which houses the UV lamp.
The reduction of fouling permits the lamps to continue to operate at peak
efficiency for longer periods of time. When fouling does occur, our
mechanical cleaner, incorporated into the reactor module, automatically
cleans the quartz sleeve. The combination of reduced sedimentation and
resultant fouling, and the automatic cleaning system, directly addresses one
of the major concerns about the use of UV disinfection systems. We believe
that our advanced method of fouling reduction will contribute to our UV
systems' acceptance.
As the effluent leaves the reactor module, it discharges from the disinfection
channel through the patented flow-balanced weir. Most other UV systems use
conventional counterbalanced flap gates to control flow through the
disinfection channel. Counterbalanced weirs which are incorrectly adjusted
can cause the fluid to surge, exposing the UV lamp to air and reducing system
efficiency. The Ultra Guard-TM- patented flow-balanced weir is based on the
principle of atmospheric pressure equalization. It will maintain correct
channel depth without moving gates, valves, special sensors or other methods
requiring operator involvement. Our UV lamp remains fully submerged even
during periods when there is zero flow at the wastewater plant.
The flow volume into the disinfection system is measured by a flow meter
mounted in the effluent channel, in front of the disinfection system. A UV
transmission monitor calculates the transmission of the effluent and provides
continuous readings of the effluent transmission quality. These readings are
fed to our system microprocessor control where they are used to select
appropriate power intensity settings for UV lamps. In multichannel
installations, we can provide powered channel gates to direct the flow,
control the number of modules in operation, or take a channel off-line for
routine maintenance or lamp replacement during periods of low flow. Using
data from the system-mounted UV monitors reading each UV lamp intensity, UV
output for each lamp can be increased to compensate for unusual quartz sheath
fouling and lamp aging.
In our UV system we use our patented low-pressure, high-intensity,
high-efficiency UV lamps. These lamps emit high-intensity light to penetrate
murky effluent and reduce fecal coliform or other pathogen counts to design
specification levels. These lamps operate at 40-60% of the electrical power
consumed in low-pressure, low-intensity lamps and 12 to 20% of the electrical
power used in medium-pressure lamps. Our Ultra Guard-TM- system also requires
up to 90% fewer lamps than most other low-pressure, low-intensity lamp
systems. Medium-pressure lamp systems take 3 - 5 medium-pressure lamps to
equal one of our lamps. Replacement downtime for lamps is minimized because
the lamps can be replaced quickly from above while the lamp module remains in
the channel.
Our UV disinfection system has a compact size. Increasing the capacity can be
easily accomplished by adding channels and lamps in parallel or in series. In
applications of more- turbid-than-normal effluent or where more stringent
effluent discharge regulations must be met, a second lamp module immediately
behind the first may be installed. We have designed the UV system to
disinfect wastewater treatment plant flows up to any size. Systems can be
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customized to suit specific site conditions and discharge requirements. Our
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. Typically a system requires one lamp for every 0.5 million
gallons of wastewater disinfected.
CUSTOMERS
Our customers to date have been municipal wastewater treatment facilities,
and semi-conductor plants sold to/through our Japanese agent. Ultra Guard-TM-
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 a 12-lamp system, designed to treat a 580-cubic-meters-per- hour peak
flow. The system initially experienced premature lamp burnout due to an
incorrectly wired lamp controller. This problem has been corrected. The
second Ultra Guard-TM-system was supplied in August 1995 for Chilliwack,
British Columbia, Canada, and is a 12-lamp system designed to disinfect an
effluent 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 UV system, we were unable to
treat the flow with the size of the UV system installed. We have mutually
agreed to cancel and reverse the sale and have an agreement with the customer
to continue using the site as a facility to test new equipment and
components. As of August 31, 1998, we had delivered 20 one-lamp systems to
our Japanese distributor for applications in the semi-conductor industry.
We completed delivery and test of our PDU at a wastewater treatment plant,
testing for the cities of Rosemere and Lorraine, Quebec, in October 1997. In
December 1997, we were preselected as the supplier for the disinfection
system at that location. The purchase order for this project was received in
June 1998, and work on the UV equipment is in process. The project is
scheduled for completion in May 1999.
In February 1998 an order was received for a 6-lamp UV system for Hamilton,
Alabama. We have scheduled this system to be delivered in early December 1998.
We are actively bidding on many sites in the United States, Canada and
internationally, and have responded to project inquiries which are valued in
excess of $140.0 million. Our experience shows us that PDU testing is a means
of advertising and proving the capabilities of our UV system, by showing it
in a real situation. When a PDU test is requested, we verify that the
location has had budget approval to install a UV system. At sites where we
have demonstrated our PDU, we have had a high rate of success, both from PDU
performance and from sales potential.
PDU testing was conducted and completed at Peterborough, Ontario, in
September 1998. Excellent results were obtained. A request for proposal for a
UV system for that City is expected to be issued in early 1999. Assuming that
a proposal from us we expect to submit is accepted, we expect that UV system
to comprise 40 lamps at a
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value of about C$900,000. Testing for the County of Los Angeles, California,
is scheduled to start November 1998. The test is to provide verification of
our UV system's capability to comply with State of California Title 22
Guidelines. Approval to these Guidelines is a prerequisite in California to
acceptance of a UV system in water reclamation/reuse.
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SALES AND MARKETING
Our Ultra GuardTM UV system is marketed both domestically and internationally by
two marketing employees with specialized training in wastewater disinfection,
and through a network of distributors and representatives. As of August 31,
1998, UVS had 34 distributors and representatives, 25 in North America and 9
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 our
Ultra GuardTM UV system and sell these 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
while in attendance at international exhibitions. In March 1998, we exhibited at
Globe Foundation Exhibition held in Vancouver, Canada. As well, we exhibited at
the Water Environment Federation, Disinfection 98 held in April 1998 in
Baltimore, Maryland, and at WEFTEC '98 in Orlando, Florida, in October 1998.
We expect that our sales will be to diverse wastewater treatment plants,
primarily in the United States and Canada, and world-wide, and therefore,
other than for initial sales, no one customer is 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. Our UV product target sales are to communities of
all population sizes. As part of our sales effort, we have in production
seven production demonstration units. Of these, two are complete and we use
them for demonstration at wastewater plants. Of the other five units,2 on
which deposits have been received, will be sent to agents for pilot
demonstration purposes. The other three will be held in their current level
of completion until needed by other agents or distributors or by us for
demonstrations. PDU's are fully functional Ultra GuardTM systems with all of
the patented components, and are available for in situ testing at wastewater
plants. 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 our technicians. If necessary, the staff
of the treatment site or the site design engineer's staff operates the PDU.
Our company accesses marketing opportunities through, 1) published articles in
trade publications which are directed to wastewater treatment, 2) the marketing
efforts of our distributors and representatives, 3) presentation of technical
papers at industry meetings, and 4) meetings with design engineers and others
involved in treatment plant design. Videotapes and brochures are available for
potential customers and for use by distributors and representatives. Sales
opportunities for our UV wastewater treatment systems are made available through
requests for proposal received from public entities, and contractor and
engineering firms acting for public entities. These opportunities are for
systems designed in response to specific wastewater plant criteria. We actively
respond to requests for proposal in the United States and throughout the world
and normally will provide two to four quotations per week. As of August 31,
1998, we had four requests awaiting response.
COMPETITION
Our company competes with other producers of UV equipment and other water
treatment technologies, many of which are more established and have
significantly greater resources. Other major technologies currently in use
include chlorination, chlorination with dechlorination using sulfur dioxide,
sodium hypochlorite, and ozonation. Competitive factors include system
effectiveness, safety regulation costs, operational cost, practicality of
application, pilot study requirements and potential adverse environmental
effects.
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Of all of the disinfection technologies in use, including UV, the most prevalent
is chlorination (or chlorination with de-chlorination using sulfur dioxide). The
most predominant treatment modality in municipal wastewater and industrial
process water systems in the United States and world-wide, is the chlorine-based
system. However, because of environmental concerns, and more recently safety
concerns, we expect the use of chlorine to decrease significantly over the next
three decades. Section 112(r) of the EPA Clean Air Act has recently been revised
to address safety issues of citizens in the surrounding area of wastewater
plants using hazardous chemicals, including chlorine. A risk-management plan
must be in place by June 21, 1999. Some states already require a state-level
equivalent of the plan, and the Occupational Safety and Health Administration
also requires a process safety management program. An industry survey has
forecast that over half of chlorine alternative installations will be UV by
2010. See "INDUSTRY BACKGROUND."
Competition with our company's primary business of wastewater and process water
treatment is primarily with producers using chlorination disinfection systems
and with other UV system manufacturers. While we also compete with ozonation
systems, ozonation is more commonly used for drinking water purification.
Our UV competitors and their estimated respective share of the North American
market in wastewater and process water are, 1) Trojan Technologies Inc., 60%,
2) PCI-Wedeco, 8%, 3) IDI Industries, Inc. 10%, 4) Aquionics, Inc. 6%, 5)
Capital Controls. Inc, 6%, and 6) Others,10%. Trojan Technologies Inc.
focuses on UV applications for use in the sewage wastewater industry. They
are the largest producer of a product (the medium-pressure lamp UV4000) which
directly competes with the Ultra GuardTM UV system. Trojan has projected its
sales for its 1998 fiscal year to be about C$65.0 million. We believe,
however, that our systems are technologically superior to Trojan's. Aquionics
competes primarily in the potable water and process industrial water sector.
IDI, PCI-Wedeco and Capital Controls sell UV systems of the low-pressure,
low-intensity type. PCI-Wedeco has recently introduced medium
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pressure lamp systems comparable to the Trojan UV4000. As compared to
competing systems, our systems are more compact and use less land area,
consume 40 to 60% less electrical power than used in low-pressure,
low-intensity systems and 80 to 90% less electrical power than used in
Trojan's UV4000. These factors equal lower life-cycle operating costs. Our
systems can treat very poor quality effluents, have better hydraulic
performance, have automated lamp cleaning and can be demonstrated using a
full-scale, single-lamp unit (our production demonstration unit). Combining
all these factors, we believe we can provide a substantially better quality
effluent discharge in terms of total faecal coliform or E. COLI
concentrations at a reduced capital and operating cost.
PATENTS AND TRADEMARKS
Key components of the Ultra GuardTM systems are patent protected in the
United States and International Patent Protection Treaty Countries. Patents
cover the UV sterilizer system reactor module and the flow-balanced weir, as
well as patents on the UV lamp technology in the United States and Canada.
Patents on the lamps expire before the year 2000, but due to the technology
and cost involved in manufacturing the lamp and the compatible electronics
needed to operate the lamps, we believe that the expiration of the patents
should not materially affect the Company's business. With the patents we hold
on other key components in the Ultra Guard system, we think that competing
systems, even if they use the Company's lamps, would operate at about 50% of
the capability of our system. The patents on the other patented key
components were recently issued in the United States and will extend into the
year 2018.
We also hold registered trademarks on "ULTRA GUARD" and on its "wavy lines and
design" logo in the United States and Canada.
REGULATORY MATTERS
Our business and manufacturing are conducted from British Columbia, Canada.
We are not subject to any special regulatory requirements above those which
are 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. These
regulations must be complied with by the wastewater treatment plant. In 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 request for proposal (bidding process) any
regulations are passed on to our company in the system design requirements.
These requests for proposal detail the specifications for the system,
including the effectiveness required to meet any regulatory requirements.
Compliance with microbiological discharge standards is determined by
subsequent operation of the wastewater treatment plant and is generally the
responsibility of the plant, unless our treatment system failed to comply
with specifications for some reason (a problem that we take great effort to
avoid). It is possible that through the inaccuracy or inadequacy of request
for proposal specifications and if, our
14
<PAGE>
potential liability has not been indemnified, we could become liable to third
parties for environmental problems. We could be required to comply with
future direct regulation by future laws or regulations (including
environmental laws). In these cases, our business and operations could be
materially and/or adversely affected.
We are not aware of any regulations which would adversely affect our ability to
market our system. The effectiveness of the Ultra GuardTM UV system enhances our
ability to respond to and comply with the applicable sections of the stringent
regulatory clean water standards included within requests for proposal.
In many jurisdictions, including the United States, because wastewater treatment
systems require permits from environmental regulatory agencies, delays in
permitting could cause delays in construction or usage of the our systems by a
customer. This, in turn, could have a material adverse impact on our business.
In addition, many of our customers will rely on municipal financing for the
purchase of our 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 Ultra GuardTM systems are assembled at our Burnaby facility. Components for
the systems are manufactured by a variety of Canadian, United States and
international suppliers. We obtain our 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, we are continuing the process of identifying and arranging for
alternative sources for these components.
RESEARCH AND DEVELOPMENT
Research and development is considered to be a key component of our business
strategy. As of August 31, 1998, we had 7 employees collaborating on product
manufacturing and development activities, with a combined 85 years of related
experience. We also used lamp design and computer software consultants to
assist in product development decisions. During the current period, our focus
has been on the design and implementation of our previous research and
development efforts. Development of alternative sheath cleaning technology,
including the use of ultrasonic methods, continues, with increased emphasis
on systems automation. Future efforts will focus on expanding and developing
technology and equipment for applications, such as industrial process water
treatment units, in addition to sewage effluent disinfection.
EMPLOYEES
As of August 31, 1998, Service Systems had three part-time employees, and UV
Systems Technology Inc. had 9 full-time employees and 2 part-time employees. The
Service Systems
15
<PAGE>
employees were engaged in management. The UV Systems employees were engaged
in office services, production, design, and manufacturing of the Ultra
GuardTM systems. Any consultants/employees for Service Systems or UV Systems
Technology are paid by the company receiving the service.
RISK FACTORS
AN INVESTMENT IN THE SHARES INVOLVES A HIGH DEGREE OF RISK AND IS SPECULATIVE
IN NATURE. IN ADDITION TO THE OTHER INFORMATION IN THIS REPORT, PROSPECTIVE
INVESTORS SHOULD CONSIDER CAREFULLY THE FOLLOWING RISK FACTORS IN EVALUATING
AN INVESTMENT IN THE COMPANY AND BEFORE PURCHASING ANY SHARES OF THE COMMON
STOCK. THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THE
RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MAY CAUSE
SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED BELOW.
Operating Company Status
Service Systems International, Ltd. has, during this reporting period, the
twelve months ended August 31, 1998, moved for accounting purposes from a
category described as a development stage company into the category described
as an operating company. However, at this early transition we are still
subject to the risks, expenses, problems and difficulties frequently
encountered in the establishment of a manufacturing business, especially in
the continually evolving, intensely competitive wastewater and water
treatment industry. The Company is not profitable and may not become
profitable at any time in the foreseeable future.
Competition
Service Systems competes with well-established water treatment companies,
many of which have financial, technological and marketing resources
significantly greater than those we have available. They may have established
relationships with customers or potential customers that afford them a
competitive advantage. Some of these competitors in the United States market
include Trojan Technologies, Inc., PCI-Wedeco, IDI, Inc., and Aquionics, Inc.
Although we believe that our Ultra GuardTM systems can provide us a
competitive technological advantage, that has yet to be proven. Moreover,
there can be no assurance that our current UV technology may not be rendered
less effective or obsolete by UV and other water treatment technologies
developed by our competitors. We cannot assure that we will be able to
compete effectively in the current or future markets or that competitive
pressures will not adversely affect our business, financial condition or
results of operations.
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<PAGE>
Cash Flow; Fluctuation in Operating Results; Need for Additional Financing
The nature of our 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, we are dependent on sales both to licensees, who are
obligated to purchase agreed-upon system components we provide, and on awards of
water treatment system contracts for non-recurring projects. Many of our
contracts may be expected to include provision for holdback, entitling the other
party to the contract to withhold a specified portion of the payment for a given
period of time until after completion of a project. For these and other reasons,
we may experience periods of limited working capital and may be expected to
require financing for working capital during those periods.
Our 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 our
control. In addition, we will require financing over and above our current
resources to sustain our operations and expand our marketing efforts. We
cannot assure that the additional financing can be obtained on a timely
basis, on terms which are acceptable, or if at all.
Risk of Long-Term, Fixed Price Contracts
In connection with the sale of our wastewater treatment systems, we expect to
enter into performance contracts which can extend for more than a year.
Initially, we are required to bid most of these as fixed-price contracts
incorporating all labor, materials, and other costs which we may incur in
performing the contract. To the extent that we underestimate those costs, or if
the cost of procuring a particular category of materials or services rises
substantially during the course of performance of a large contract, we could
experience reduced profitability or losses.
Governmental Regulation
Our business and manufacturing are conducted from British Columbia, Canada.
We are not subject to any special regulatory requirements above those which
are 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. These
regulations must be complied with by the wastewater treatment plant. In 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 request for proposal (bidding process), any
regulations are passed on to our company in the system design requirements.
These requests for proposal detail the specifications for the system,
including the
17
<PAGE>
effectiveness required to meet any regulatory requirements. Compliance with
microbiological discharge standards is determined by subsequent operation of
the wastewater treatment plant and is generally the responsibility of the
plant, unless our treatment system failed to comply with specifications for
some reason (a problem that we take great effort to avoid). It is possible
that through the inaccuracy or inadequacy of request-for-proposal
specifications and if our potential liability is not indemnified, we could
become liable to third parties for environmental problems. We could be
required to comply with future direct regulation by future laws or
regulations (including environmental laws). In these cases, our business and
operations could be materially and/or adversely affected.
We are not aware of any regulations which would adversely affect our ability to
market our product. The effectiveness of the Ultra GuardTM UV system enhances
our ability to respond to and comply with the applicable sections of the
stringent regulatory clean water standards included within requests for
proposal.
In many jurisdictions, including the United States, because wastewater
treatment systems require permits from environmental regulatory agencies,
delays in permitting could cause delays in construction or usage of the our
systems by a customer. This, in turn, could have a material adverse impact on
our business. In addition, many of our customers will rely on municipal
financing for the purchase of our UV systems. Sales to these customers may be
adversely affected by delays in obtaining, or the unavailability of, funds,
caused by budgetary constraints or the bureaucratic process.
Cost of Installation
We anticipate that Ultra GuardTM systems may be installed as replacement systems
for existing disinfection systems, especially chlorinated systems, which our
company believes will be phased out because of their adverse environmental
impact. This potential business is dependent upon the availability of funding
for municipalities to replace or retrofit existing systems, which cannot be
predicted with any certainty.
Availability of Component Materials
Our systems contain state-of-the-art components. We are dependent upon third
parties for the continuing supply of these components. Two of these components,
the lamps and the controllers, are obtained from sole suppliers. We are in the
process of identifying alternative suppliers for these components; however,
alternate sources with the quality, efficiency and at a price we require may be
difficult to locate. Moreover, suppliers may discontinue or upgrade some of the
components incorporated into our systems. This could require that we redesign a
system to incorporate newer or alternative technology. Although we believe that
we have arranged for an adequate supply of components to meet our short term
requirements, we do not have contracts which would assure availability and
price. Lack of timely availability of components could cause delays in
installation of the Ultra GuardTM system and affect our revenues during certain
periods. As well, this could lead to customer dissatisfaction. Limited
18
<PAGE>
availability of components could also require premium payments for parts to
make installation deadlines, and thus adversely affect our profit margin, or
cause us to increase our inventory of scarce parts and thus adversely affect
our cash flow. There can be no assurance that we will continue to be able to
obtain all of the components we require, or that the price of certain
components in short supply will not materially and adversely affect our
business, financial condition or results of operations.
Dependence on Key Employees
The success of our business is largely dependent upon the President, Ken
Fielding, and the Chief Financial Officer, Secretary and Treasurer, John Gaetz.
No employment agreements are in place with any of these employees, nor do we
carry key man insurance with respect to them. Our continued growth and
prosperity, and our ability to maintain our competitive position and to attract
and service new business, depend to a large extent upon the ability to retain
key employees and to attract additional qualified personnel. Loss of the
services of these employees could have a material adverse effect on our
business. There can be no assurance that we will be able to continue to retain
or attract qualified personnel.
Products Designed for Existing and Anticipated Standards and Guidelines
Our products are developed to meet certain existing and anticipated
environmental, performance and operational standards and guidelines. These
standards and guidelines are continuing to develop and are subject to change.
They have developed and changed primarily in the past 10 years with respect
to acceptable microbiological discharge levels. The Ultra GuardTM wastewater
disinfection technology is state of the art, and the research and development
program will be necessary to continually enhance its capabilities. System
adjustment to new microbial standards is uncomplicated and efficient and can
be accomplished by the addition of UV lamps to a system. Nevertheless, the
possibility exists that an unanticipated change which management does not now
foresee in the standards and guidelines could materially adversely affect the
design, manufacture and sale of our systems.
Product Liability
The Ultra GuardTM systems may be subject to product liability or commercial
warranty claims. Our company does not have product liability insurance. While we
have never been the subject of any such claims, considering the use of our
systems in large-scale municipal and industrial water treatment systems, as well
as the propensity of claimants initially to pursue all possible contributors in
a legal action, the lack or insufficiency of product liability insurance could
materially adversely affect our financial condition and ability to do business.
There can be no assurance that we will be able to obtain coverage, at acceptable
premiums, that will be adequate to protect us from liability.
19
<PAGE>
Intellectual Property Rights
Through UVS, we own patents on our ultraviolet lamp technology, flow reactor
chamber, and discharge weir, and we manufacture and market our products under
those patents. We cannot assure that the issued patents will not be infringed
or that additional patents that we have applied for will be issued. The costs
of prosecuting an infringement suit can be very significant. If an
infringement occurs, we cannot assure that our exclusive rights to the
patented technology can be preserved or that the rights will be protected.
This could have a material adverse effect on our business. It is possible
that we may infringe on patents, trademarks, or copyrights owned by others,
for which licences may not be available. The expenses of defending claims
through the prosecution of infringement actions vary and can be substantial.
Some of our 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
has advised us that he believes that the U.S. patent has reverted to him
under the terms of his assignment. We vigorously deny this assertion and
believe that it is unfounded. Such claims could impede our ability to
configure and sell our UV System.
Potential Dilutive Effect of Outstanding Warrants and Options
In connection with the acquisition of a majority interest in UV Systems
Technology Inc. in December of 1996, we issued 1,474,918 warrants for Common
Stock to the UVS shareholders, exercisable at C$2.00 per share over a period
of four years, as to 1.2 million warrants and $1.50 for two years as to
274,918 warrants. In April of 1996, pursuant to Regulation S ("Regulation S")
under the Securities Act of 1933 ("Securities Act"), we sold 38,000 shares of
Common Stock and 38,000 each of B and C warrants, exercisable at $1.34 and
$2.00 per share, respectively, for a period of two years. In addition, from
July 1996 through February 1997, pursuant to Regulation S, we sold a total of
596,420 shares of Common Stock and 596,420 warrants to purchase Common Stock
(exercisable over a period of two years at an exercise price of $1.25). In
June 1996, we sold in a private placement 60,000 shares of restricted Common
Stock and 60,000 warrants to purchase Common Stock (exercisable over a period
of four years at a price of $2.00 per share). In October 1997 we approved and
registered under the Securities Act an employee and consultant Stock Option
Plan pursuant to which options for up to 1,588,000 shares of the Company's
Common Stock could be issued. As of August 31, 1998, 1,588,000 of the options
have been issued under the Plan; 1,247,000 exercisable at $1.00 and 341,000
exercisable at $0.15. In January 1998 and April 1998, we sold (pursuant to
Section 4(2) of the Securities Act) 1,784,482 shares of Common Stock and
1,784,482 E Warrants to four individuals, exercisable at $0.40. In March 1998
and April 1998 we sold, pursuant to Regulation S, 1,446,281 shares of Common
Stock and 1,446,281 E Warrants exercisable at $0.40. These outstanding
warrants and options could negatively influence our ability to raise
additional equity capital in the future. To the extent that these warrants
and options to purchase Common Stock are exercised, there will be additional
dilution in excess of that resulting from use of common shares in earnings
calculations.
20
<PAGE>
As of August 31, 1998, the Company had 7,026,101 vested warrants and options
outstanding.
21
<PAGE>
Limited Public Float; Trading; Volatility of Stock Price
Our company's Common Stock is traded on the Bulletin Board, on the over the
counter market. While a public market currently exists for our Common Stock,
trading of relatively small blocks of stock can have a significant impact on
the price at which the stock is traded. In addition, the over-the-counter
market has experienced, and is likely to experience in the future,
significant price and volume fluctuations which could adversely affect the
market price of the Common Stock without regard to our company's operating
performance. We believe factors such as quarterly fluctuations in financial
results, announcements of new technologies impacting our systems,
announcements by competitors or changes in securities analysts'
recommendations may cause the market price to fluctuate, perhaps
substantially. These fluctuations, as well as general economic conditions,
such as recessions or high interest rates, may adversely affect the market
price of our Stock.
Shares Eligible for Future Sale
Future sales by existing shareholders could adversely affect the prevailing
market price of the Common Stock. We have 12,662,988 shares of Common Stock
outstanding. Of these shares, approximately 10,278,506 are now eligible for
sale in the public market without restriction pursuant to Rule 144(k) or
Regulation S under the Securities Act.
Absence of Dividends
Since its inception, we have not paid cash dividends on our Common Stock. It
is our intention to retain future earnings, if any, to provide funds for
business operations. Accordingly, we do not anticipate paying any cash
dividends on our Common Stock in the foreseeable future.
22
<PAGE>
ITEM 2. DESCRIPTION OF PROPERTY
Service Systems' executive offices were moved in July 1997 from White Rock,
British Columbia, Canada, into the UV Systems premises at 2800 Ingleton
Avenue, Burnaby, British Columbia. The UV Systems 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. We anticipate
that these facilities will be adequate for five years, with a need for
additional storage space in year three. Insurance policies covering all of
our facilities and contents are in place, 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
We know of no legal proceedings either pending or threatened against our
company 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 fiscal year covered by this report.
23
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Service Systems' Common Stock is traded in the over-the-counter market and is
listed on the Bulletin Board under the symbol "SVSY". The following table
sets forth for the periods indicated the high and low bid prices of our
Common Stock as reported by the Bulletin Board. The quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission, and may
not represent actual transactions. We commenced trading Common Stock on the
over-the-counter market in September 1995. Before that date there was no
market for our securities.
<TABLE>
<CAPTION>
High Low
------ -------
<S> <C> <C>
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 0.075
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
Quarter ended May 31, 1997 3.00 1.125
Quarter ended August 31, 1997 2.060 1.00
FISCAL YEAR 1998
Quarter ended November 30, 1997 1.562 0.625
Quarter ended February 28, 1998 0.687 0.281
Quarter ended May 31, 1998 0.375 0.170
Quarter ended August 31, 1998 0.187 0.10
</TABLE>
As of August 31, 1998, there were approximately 71 holders of record of the
Common Stock.
Service Systems has never had profits and has never paid cash dividends on
its Common
24
<PAGE>
Stock. We intend to retain future earnings, if any, to provide funds for
business operations and, accordingly, we do not anticipate paying any cash
dividends on our Common Stock in the foreseeable future.
OTHER SALES
25
<PAGE>
During the 1998 fiscal year, Service Systems made the following cash sales,
conversion of debentures and settlement of debt in offshore transactions
pursuant to the exemption afforded by Regulation S.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------
Name Date Units Price per unit
- ---- ---- ----- --------------
<S> <C> <C> <C>
M Revaj 9/97 34,485 shares $0.8368
M Revaj 9/97 40,821 shares $0.935
M Revaj 10/97 31,959 shares $1.005
A Morishita 12/97 180,699 shares $0.179
Kerrington Corp 12/97 788,792 shares $0.179
Bruno Udenio 12/97 100,287 shares $0.2026
Bruno Udenio 12/97 90,626 shares $0.2559
M Revaj 1/98 80,511 shares $0.2697
M Revaj 1/98 80,602 shares $0.259
Primecap Mgmt Ltd. 4/98 261,715 shares $0.1269
M Revaj 4/98 188,464 shares $0.1271
Zooley Services Ltd. 1/98 626,875 shares $0.2039
Primecap Mgmt Ltd. 4/98 781,250 shares $0.1272
Bank August Roth 1/98 143,173 shares $0.1782
Bruno Udenio 4/98 80,771 shares $0.2591
Zooley Services Ltd. 4/98 523,320 shares $0.1266
G Rodrigues 1/98 100,000 shares $0.23
R Nimrod 1/98 100,000 shares $0.23
P Colak 3/98 8,000 shares $0.18
Elco Bank 4/98 618,800 shares $0.20
618,800 warrants
D K Smith 4/98 53,919 shares $0.20
Guy Holeksa 4/98 21,402 shares $0.20
Carmel International 4/98 280,481 shares $0.12
280,481 warrants
Kerrington Corp 4/98 92,000 shares $0.30
92,000 warrants
Collingham 4/98 455,000 shares $0.12
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------
Name Date Units Price per unit
- ---- ---- ----- --------------
<S> <C> <C> <C>
455,000 warrants
J Fletcher 4/98 35,216 shares $0.20
</TABLE>
During the 1998 fiscal year, Service Systems made the following sales in
settlement of debt, in Canada. 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.
<TABLE>
<CAPTION>
- --------------------------------------------------------------
Name Date Units Price per unit
- ---- ---- ----- --------------
<S> <C> <C> <C>
K Fielding 4/98 1,243,445 shares $0.20
1,243,445 warrants
J R Gaetz 4/98 341,037 shares $0.20
341,037 warrants
</TABLE>
27
<PAGE>
SERVICE SYSTEMS INTERNATIONAL, LTD.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS AND FINANCIAL
CONDITION.
The following discussion and analysis should be read in conjunction with our
Financial Statements and the Notes attached. Information discussed in this
report may include forward-looking statements regarding events or our
financial performance 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, 1)
general business and economic conditions, 2) customer acceptance and demand
for our products, 3) our overall ability to design, test and introduce new
products on a timely basis, 4) the nature of the markets addressed by our
products, and, 5) other risk factors listed from time to time in documents
filed by our company with the SEC. See "PART I. Item 1. DESCRIPTION OF
BUSINESS -- RISK FACTORS" above.
BASIS OF PRESENTATION
The financial statements include accounts of Service Systems International
Ltd. and its 50.7% owned subsidiary, UVS. As UVS was acquired on Dec 1, 1996,
results of fiscal 1997 operations include only the period from December 1,
1996 to August 31, 1997. Therefore, comparative figures presented represent
the 12-months ended August 31, 1998 and the 9-month period ended December 1,
1996 to August 31, 1997.
MANAGEMENT'S DISCUSSION
During the fiscal period ended August 31, 1998, Service Systems International
Ltd. moved from being designated for accounting purposes as a development
stage company to designation as a full operating company.
Our company was incorporated in the State of Nevada in August 1990, and
remained inactive until September 1995. The initiation of the current
business was accompanied by a change of ownership (see "Company Background").
Through UVS, Service Systems manufactures and markets its Ultra Guard-TM-
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 by our Japanese agent and for potable water, bottled
products, and agriculture and aquaculture water treatment.
In September 1995 Service Systems 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 Service Systems entered
into a funding agreement with UV Systems Technology Inc., (UVS) whereby
Service Systems provided 50% of UVS' operating cash needs for a
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<PAGE>
six-month period. On December 1, 1996, Service Systems acquired 50.7% of the
common stock of UVS from two principals and the minority stockholders. On
December 6, 1996, Service Systems entered into an agreement with the
remaining two minority stockholders, Working Opportunity Fund (EVCC) Ltd.
(WOF) and MDS Ventures Pacific Inc. (MDS), to acquire the remaining 49.3%
common stock and their preferred stock (Purchase Agreement). Any funds
advanced under this agreement would be forfeit should Service Systems be
unsuccessful in raising C$2.0 million. In June 1998, this agreement was not
renewed as Service Systems was unable to raise the C$2.0 million required to
complete the transaction. WOF agreed to loan UVS additional funds (see details
following) and agreed to allow conversion of the funds advanced under the
Purchase Agreement.
In June 1998, UVS entered an interim agreement with WOF (Agreement) to
provide C$900,000 of additional funding and to reduce debt by requiring MDS
and Service Systems to convert their loans receivable into Class "X"
non-voting UVS Preferred shares, retractable by the holder only if there is a
sale or IPO which values the equity of UVS, including the Class "A" preferred
shares, but excluding the Class "X" Preferred shares at C$20.0 million. If
not retracted within 4 years from the closing date of this Agreement, the
Class "X" Preferred shares will be redeemable by UVS for C$1.00.
The effect of this Agreement, with regard to Service Systems, is to 1)
forgive $155,322 accrued interest on its existing current loans receivable,
and 2) convert its existing 20% per annum loan receivable of US$820,771 into
Class "X" Preferred shares.
The effect of this Agreement, with regard to MDS, is to 1) forgive $87,422
accrued interest on its existing current loans receivable, 2) reduce its
common shares percentage from 24.7 % to 12.32%, 3) reduce its Class "A"
Preferred shares from C$1,000,000 to $0 by transfer of C$500,000 to WOF and
by converting C$500,000 to Class "X" Preferred shares, and 4) to convert its
existing 20% per annum loan receivable, $174,752 into a long-term loan, with
a term of 5 years, interest at 10% per annum, compounded annually, with
interest accruing for 18 months and payable monthly thereafter.
The effect of this agreement, with regard to WOF, is to 1) forgive $110,826
accrued interest on its existing current loan receivable, 2) provide a new
five (5) year long-term loan to UVS in the amount of C$0.9 million, interest
at 10 % per annum, compounded annually, interest payable monthly, 3) increase
its Class "A" preferred shares from C$1,000,000 to C$1,500,000 due to the
C$500,000 transfer received from MDS, and 4) convert its existing 20% per
annum loans receivable of $227,669 into a long-term loan, with a term of 5
years, interest at 10% per annum, compounded annually, with interest accrued
for 18 months, and payable monthly thereafter.
During the period from December 1, 1996 to September 30, 1997 ("First
Business Period"), Service Systems continued with UVS' system development and
testing programs. These programs included the development of both a
mechanical and electronic automatic quartz sheath cleaning system, to
29
<PAGE>
remove the fouling build-up due to suspended solids and chemical prevalent in
wastewater. The program of development on the mechanical cleaner determined
that the method chosen was viable and performs the function desired.
Field testing of the mechanical wiper cleaning system was concluded during
October and November, 1997, a PDU test site at Ville de Repentigny near
Montreal, Quebec. The test results concluded that the cleaning system did
perform above anticipated levels, and it has now been incorporated into
current products sold. The temperature control system for the UVS System was
also tested at the Ville de Repentigny test site during temperatures ranging
down to minus 8 degrees celsius and up to plus 8 degrees celsius. The test
showed that with temperature control, infinitely variable lamp UV output
intensity was stable and controllable. This feature is now included on all
product sales. The benefits of the temperature control are 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 our knowledge, no other UV equipment supplier can offer this degree of
control of a UV lamp. Development of the electronic ultrasonic cleaning
system has been placed in abeyance pending availability of additional
development funds.
During the last quarter of the 1998 fiscal year, an extendable one year
agreement was reached between UVS and the City of Chilliwack for continued
use of the site as a demonstration site with costs of use being an annual
rental fee of C$500 and incremental power use costs.
Negotiations continue on finalizing a project delivered to New Zealand in
1995 by UVS and release of hold back funds. During the 1998 fiscal year, we
made provisions for a 25% loss of the receivable, reducing the receivable
from C$83,142 to C$62,342.
Marketing activity has increased with the engagement of a new Vice President
- - Sales and Marketing in October, 1997. With the increased effort, we received
orders during the 1998 fiscal year for three projects, 1) Hamilton, Alabama
valued at US$127,000, 2) Rosemere-Lorraine valued at C$390,809, and 3) Nissho
Iwai valued at US$135,314. Shipment and billing of US$202,894 of these sales
are included in the Income Statement for August 31, 1998. The balance will be
billed in fiscal 1999.
In June 1998, UVS received a letter of intent for a UV system valued at
C$605,000 for a project in Eastern Canada. The issuing of a purchase order
for and subsequent delivery of this system is subject to a number of
conditions including the provision that the purchaser receives an order from
the General Contractor for this phase of the project.
In September and October 1998, after the end of the 1998 fiscal year, our
Production Demonstration Unit performed testing at a municipal wastewater
plant in Eastern Canada. Testing was successful and a report which is in
final printing is recommending an Ultra Guard-TM- UV system valued at about
C$900,000 for the site. Additional PDU testing was performed at the City of
Toronto, Humber waste water treatment plant to determine the efficacy of UV
to disinfect wastewater containing levels of iron (Fe) at ranges of 0.3 to
4.0 mg/l. This testing was equally successful and discussions on further
action continue. We think both sales are likely to be made, but we cannot
assure that they will be. In November 1998 a PDU is being shipped to the
County Sanitation Districts of Los Angeles County (the County). The testing
program, which is conducted and
30
<PAGE>
paid for by the County, will test the Ultra Guard-TM- UV system's ability to
disinfect wastewater to Title 22 Guidelines; a stringent test protocol
required as a precursor use of a company's UV product in reuse of wastewater
for agriculture purposes. Additional tests are scheduled for Virginia (2),
North Carolina and Colorado.
RESULTS OF OPERATIONS
GENERAL NOTE: When comparing the year ended August 31, 1998 to the year ended
August 31, 1997, the reader must be aware that the year ending August 31,
1997 includes 12 months of SVSY operations and 9 months of UVS operations for
the period from acquisition, December 1, 1996 to August 31, 1997.
With the volume of sales received during the twelve-month period ended August
31, 1998, we moved from a development stage company to an operating company
for accounting purposes. In this period we had revenues of $202,894. Direct
Project Costs of $98,326 were reported, plus Manufacturing Costs Not Applied
(under-recovery of plant overheads) of $82,577 resulting in a Gross Profit
Margin of $21,991.
During the twelve-month period ended August 31, 1998, operational expenses of
$1,307,547 consisting of 1) selling expense of $225,893, 2) general and
administrative expense of $668,594, 3) research and development expense of
$264,282, 4) amortization of goodwill of $485,081, 5) interest of 90,812, net
of interest income and interest waived, and 6) foreign exchange translation
gain of $245,491, brought the Total Expenses for the year to $1,307,547 as
compared to $1,347,218 in the 1997 fiscal period. The Net Loss in fiscal 1998
totalled $1,285,556 compared to $1,398,425 in fiscal 1997, a decrease in loss
of $112,869.
Selling expenses in 1998 increased by $69,976 to $225,893 from $155,917 for
fiscal 1997 as a result of our hiring a Vice-President, Sales and Marketing.
General and administrative expense in fiscal period ended 1998 increased by
$223,614 to $668,594 from $444,980 for the period ended 1997. The increase is
due primarily to an increase in consulting fees amounting to $158,148 and
$47,400 commission expense on debentures issued. Research and development
expenses in 1998 decreased by $48,159 to $264,282 from $312,441 for fiscal
1997 as a result of our having completed development of the UV system to a
market ready product. A write down of amortization of goodwill in 1998
increased by $121,270 to $485,081 from $363,811 in 1997. Interest, net of
interest income and interest waived, resulted in an income of $90,812 or an
increase of $151,598 from an expense of $60,786 in 1997. Foreign exchange
translation gain increased by $258,978 to $249,695 from a loss of $9,283 due
to the drop in the value of the Canadian dollar.
LIQUIDITY
The nature of our 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
31
<PAGE>
due largely from governments, if and when sales are made. In addition, we are
dependent on sales both to licensees which are obligated to purchase agreed
upon system components we provide and on awards of water treatment system
contracts for non-recurring projects. Many of our contracts may be expected
to include provision for hold back, entitling the other party to the contract
to withhold a specified portion of the payment for a given period of time
until after completion of a project. For these and other reasons, we may
experience periods of limited working capital and may be expected to require
financing for working capital during those periods.
Our 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 our control.
In addition, we will require financing over and above our current resources to
sustain our operations and expand our marketing efforts. There can be no
assurance that the additional financing can be obtained on a timely basis, on
terms which are acceptable or if at all.
During the twelve months ended August 31, 1998, our liquidity improved as a
result of actions taken by management. Accrued interest payable on loans from
related parties and minority shareholders in the amount of $198,248 were waived
by the debt holders. The remaining principal balances of those loans were
transferred from Current Liabilities to Long- term debt. Amounts owing to
related parties were reduced by $265,111, net, and Loans payable - others, were
reduced by $21,206, by converting the debt into Common Stock. These actions
increased and greatly improved the working capital ratio.
We financed our operations during this period, 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. Sale of
restricted common stock amounted to $46,000. Sales of 12% convertible
debentures, all of which were converted to Common Stock, amounted to
$725,285. These 12% convertible debentures were as a result of an agreement
signed with London Select Enterprises, Ltd. as Broker, in June 1997. This
agreement was an offering conducted in compliance with Regulation S,
promulgated under the Securities Act of 1933, to place up to $750,000 face
amount, 12% one year convertible debentures due July 31, 1998 if not earlier
redeemed. Each debenture was sold at 80% of face value and was convertible
into Service Systems Common Stock, 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 Common
Stock immediately preceding the closing date.
We expect that during fiscal 1999, as and if our sales increase, we will
continue to depend on receipt of additional funds through public or private
equity or debt sales or other lender financing to fund the manufacturing of
products sold, and general operational and sales expenses. Except as
previously indicated, no arrangements are currently in place to raise
32
<PAGE>
funds, although we actively continue to seek sources. Failure to receive
these funds may be expected to have a material adverse effect on our company.
YEAR 2000 ISSUE
DESCRIPTION OF THE ISSUE. The Y2K issue refers to the inability of certain date-
sensitive computer chips, software, and systems to recognize a two-digit date
field as belonging to the 21st century. Mistaking "00" for 1900 or any other
incorrect year could result in a system failure or miscalculations causing
disruptions to operations, including manufacturing, a temporary inability to
process transactions, or send invoices, or engage in other normal business
activities. This is a significant issue for most, if not all companies, with far
reaching implications, some of which cannot be anticipated or predicted with any
degree of certainty. The Y2K issue may create unforeseen risks to our company
from its internal computer systems as well as from computer systems of third
parties with which it deals. Failures of our and/or third parties' computer
systems could have a material adverse impact on our ability to conduct its
business.
YEAR 2000 TASK FORCE. We have set up an internal task force comprised of our
Directors of Manufacturing and Engineering to review our products, business
and engineering applications and suppliers and develop contingency plans for
Y2K readiness. This task is to be completed by the end of calendar 1999. The
goal of the task force is to minimize the effect that Y2K issues will have on
the Company and its customers. The Director of Manufacturing will update the
CEO of the Company on its Y2K readiness.
INTERNAL BUSINESS AND ENGINEERING SYSTEMS. The task force has completed a review
of internal computer and is currently reviewing all internal business and
engineering computer systems to ensure that such systems either will be Y2K
ready, or will be modified or replaced by Y2K ready systems. We have already
been assured that our accounting information system installed in 1995 is Y2K
ready as long as we adhere to the supplier's Y2K readiness guidelines. We plan
to simulate and to have tested, in a Y2K environment, our engineering and
business information systems, internal telephone equipment, local networks,
security and sprinkler systems to verify its Y2K readiness by the middle of
fiscal 1999.
SUPPLIERS. Our major suppliers are component parts distributors and contract
manufacturers. Often the Company sources its products and manufacturing services
from multiple, competing vendors. We are conducting a review of these key
suppliers to ensure Y2K readiness of as many vendors as possible and will
initiate communication with all of our key suppliers to determine to what extent
we may be vulnerable due to their failure to be Y2K ready. This communication,
including site visits by our personnel, will be ongoing throughout fiscal 1999.
There can be no assurance that the systems of other companies on which we rely
will be Y2K ready on a timely basis and will not have an adverse effect on our
operations. In instances where we are unable to determine that our vendors have
taken appropriate steps to
33
<PAGE>
minimize disruption due to non-Y2K readiness, we will consider contingency
plans, including moving to identified alternate sources, or developing new
alternate sources.
PRODUCTS. The task force will also assess outside-sourced, computer-based
control systems used within our products to determine if they have the
capability of dealing with the year 2000. Certain of our computer processor
board level products and integrated computer systems utilize computer chips
that include built in operating systems ("BIOS") allowing the computer to
initialize and load software. All current built for delivery computer systems
will be assessed for readiness prior to purchase.
COSTS. We expect the cost of our Y2K assessment, including both incremental
spending and redeployed resources, will not be material. The current assessment
does not include potential costs related to any customer or other claims or the
cost of internal software and hardware replaced in the normal course of
business. This assessment is subject to change. Since there is no uniform
definition of "Y2K readiness" and since all customer situations cannot be
anticipated, particularly those involving third party products, we may see
claims as a result of the Y2K transition. Such claims, if successful, could have
a material adverse impact on future results.
CUSTOMERS. Since our customers all purchase built-to-order systems and our
computer based control systems will be manufactured to be compliant, we believe
that Y2K will not affect customers' decisions to purchase our Ultra Guard-TM- UV
system. However, we cannot predict the impact on us of our customers' lack
of Y2K compliance and any disruptions caused to treatment systems we have
installed because of their non-compliance. Costs and damages related to or
arising from non-compliance could materially adversely affect our revenues or
our business, even though we believe our systems themselves to be compliant.
COST ESTIMATES. We have not been required to incur costs for Y2K remedial
work and have not set aside any contingency fund to deal with any
contingencies which may arise. The costs for Y2K compliance are based on our
best estimates, which were derived from numerous assumptions about future
events, including third-party modification plans and other factors. However,
we cannot guarantee that those estimates will be accurate and actual results
could differ materially from those plans. Specific factors that might cause
material differences include, but are not limited to, the availability and
cost of personnel trained in this area and the ability to identify and
correct all relevent computer codes.
34
<PAGE>
ITEM 7. CONSOLIDATED FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditor's Report..................................................25
Consolidated Balance Sheets as of August 31, 1998 and 1997....................26
Consolidated Statements of Operations for the years ended
August 31, 1998 and 1997.................................................27
Consolidated Statements of Cash Flows for the years ended
August 31, 1998 and 1997.................................................28
Notes to the Consolidated Financial Statements................................29
35
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To: Board of Directors and Stockholders
Service Systems International, Ltd.
We have audited the accompanying consolidated balance sheets of Service Systems
International, Ltd. as of August 31, 1998 and 1997, and the related consolidated
statements of operations and deficit and cash flows for the years 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 audits.
We conducted our audits 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 audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Service Systems
International, Ltd. as of August 31, 1998 and 1997, and the results of its
operations and its cash flows for the years 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 significant 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"
36
<PAGE>
Chartered Accountants
Vancouver, British Columbia, Canada
November 10, 1998
37
<PAGE>
Service Systems International, Ltd.
Consolidated Balance Sheets
As at August 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
$ $
----------- -----------
<S> <C> <C>
Assets
Current Assets
Cash and short-term investments 207,052 639
Short-term investments - restricted (Note 3) 249,317 -
Accounts receivable 110,957 63,031
Inventory 238,281 357,008
Prepaid expenses 36,175 12,550
Research credit receivable - 244,791
----------- -----------
841,782 678,019
Capital assets (Note 5) 141,397 173,304
Goodwill - net of amortization (Note 4) 1,576,516 2,061,597
Patents and trademarks (Note 6) 92,484 36,658
----------- -----------
2,652,179 2,949,578
----------- -----------
----------- -----------
Liabilities and Stockholders' Equity
Current Liabilities
Cheques issued in excess of funds on deposit - 8,752
Accounts payable 102,823 181,009
Accrued liabilities 14,677 32,311
Vacation pay payable 7,629 10,364
Customer deposits - 19,212
Loan payable - other - 21,206
Amounts owing to related parties (Note 7) 95,442 360,553
Loans payable - minority stockholders of subsidiary (Note 9) - 556,640
----------- -----------
220,571 1,190,047
Long-term debt (Note 9) 2,270,525 1,469,660
Convertible Debentures (Note 8) - 76,268
----------- -----------
2,491,096 2,735,975
----------- -----------
Contingencies (Note 1)
Stockholders' Equity
Common stock (Note 10), $.001 par value,
50,000,000 shares authorized, 12,662,988
and 5,279,338 issued and outstanding respectively 12,663 5,279
Additional paid-in capital 3,073,619 1,847,967
Deficit (2,925,199) (1,639,643)
----------- -----------
----------- -----------
</TABLE>
38
<PAGE>
<TABLE>
<S> <C> <C>
161,083 213,603
----------- -----------
2,652,179 2,949,578
----------- -----------
----------- -----------
</TABLE>
(See accompanying notes to financial statements)
39
<PAGE>
Service Systems International, Ltd.
Consolidated Statements of Operations and Deficit
For the years ended August 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
$ $
----------- -----------
<S> <C> <C>
Project Revenue 202,894 24,118
Project Costs 98,326 40,787
----------- -----------
Gross Profit (Loss) 104,568 (16,669)
Manufacturing Overhead Not Applied 82,577 34,538
----------- -----------
21,991 (51,207)
----------- -----------
Expenses
Selling 225,893 155,917
General and administrative 668,594 444,980
Research and development 264,282 312,441
Amortization of goodwill 485,081 363,811
Interest, net of interest income and interest waived (See Note 9) (90,812) 60,786
Foreign exchange translation (gain) loss (245,491) 9,283
1,307,547 1,347,218
----------- -----------
Net Loss for the year 1,285,556 1,398,425
Deficit - Beginning of year 1,639,643 241,218
----------- -----------
Deficit - End of year 2,925,199 1,639,643
----------- -----------
----------- -----------
$ $
Net Loss per share (0.14) (0.29)
----------- -----------
----------- -----------
# #
Weighted average shares outstanding 9,160,048 4,812,170
----------- -----------
----------- -----------
</TABLE>
40
<PAGE>
(See accompanying notes to financial statements)
41
Service Systems International, Ltd.
Consolidated Statements of Cash Flows
For the years ended August 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
$ $
----------- -----------
<S> <C> <C>
Cash Flows to Operating Activities
Net loss (1,285,556) (1,398,425)
Adjustments to reconcile net loss to cash
Amortization of goodwill 485,081 363,811
Depreciation 49,602 37,176
Foreign exchange translation (gain) loss (245,491) 527
Convertible debenture interest converted into shares 25,980 -
Common stock issued for expenses 42,558 -
Change in non-cash working capital items
(Increase) decrease in accounts receivable (47,926) 18,152
Decrease in inventory 118,727 50,010
(Increase) in prepaid expenses (23,625) (720)
Decrease (increase) in research credit receivable 244,791 (34,221)
(Decrease) in accounts payable, accrued liabilities,
vacation pay payable and customer deposits (117,767) (50,676)
----------- -----------
Net Cash Used in Operating Activities (753,626) (1,014,366)
----------- -----------
Cash Flows (to) from Investing Activities
Acquisition of a subsidiary - 1,537
Acquisition of short-term investment - restricted (249,317) -
Additions to patents and trademarks (55,826) (7,041)
Capital assets acquired (17,695) (8,181)
Proceeds from held to maturity investments maturing - 221,357
Decrease in loans receivable - 125,000
----------- -----------
Net Cash (Used in) Provided by Investing Activities (322,838) 332,672
----------- -----------
Cash Flows from (to) Financing Activities
Cheques issued in excess of funds on deposit (8,752) 8,752
Common stock issued for cash 46,000 361,365
Increase in loans payable - other 75,030 21,206
Increase (decrease) in amounts owing to related parties 51,785 (14,534)
Increase in borrowings from minority shareholders 588,885 172,288
Proceeds from convertible debenture converted to common stock 529,929 76,268
----------- -----------
Net Cash Provided by Financing Activities 1,282,877 625,345
----------- -----------
Increase (Decrease) in Cash and Cash Equivalents 206,413 (56,349)
Cash and Cash Equivalents - Beginning of Year 639 56,988
----------- -----------
Cash and Cash Equivalents - End of Year 207,052 639
----------- -----------
----------- -----------
Non Cash Financing and Investing Activities
3,149,300 common shares were issued to settle
</TABLE>
42
<TABLE>
<S> <C> <C>
debt at prices ranging from $0.12 to $0.30 580,839 -
1,474,918 common shares were issued at $0.75
per share to acquire a business (Note 4) - 1,106,189
----------- -----------
580,839 1,106,189
----------- -----------
----------- -----------
</TABLE>
(See accompanying notes to financial statements)
43
<PAGE>
Service Systems International, Ltd.
Notes to the Consolidated Financial Statements
For the years ended August 31, 1998 and 1997
1. Nature of Operations and Continuance of Business
The Company 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, a Canadian company. Through UVST, the Company manufactures and
markets its Ultra Guard-TM- ultra violet based patented water treatment
system. These products and systems 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.
During fiscal 1998 the Company emerged from a development stage company to
an operating company. Even though its status has changed to an operating
company, the operating activities have not yet produced significant
revenue and the Company has experienced significant losses to date. The
ability of the Company to continue operations is dependent upon its
successful efforts to raise additional equity financing in the long term,
continue developing the market for its products, and/or the attainment of
profitable operations.
Uncertainty Due to the Year 2000 Issue:
The Year 2000 Issue arises because many computerized systems use two
digits rather than four to identify a year. Date-sensitive systems may
recognize the year 2000 as 1900 or some other date, resulting in errors
when information using the year 2000 dates is processed. In addition,
similar problems may arise in some systems which use certain dates in 1999
to represent something other than a date. The effects of the Year 2000
Issue may be experienced before, on, or after January 1, 2000, and, if not
addressed, the impact on operations and financial reporting may range from
minor errors to significant systems failure which could affect an entity's
ability to conduct normal business operations. It is not possible to be
certain that all aspects of the Year 2000 Issue affecting the Company,
including those related to the efforts of customers, suppliers, or other
third parties, will be fully resolved.
2. Significant Accounting Policies
Consolidated financial statements
These financial statements include the accounts of the Company, and its
50.7% owned Canadian subsidiary, UVST. As UVST was acquired on December 1,
1996, results of operations of UVST includes the nine months ended August
31, 1997 and the year ended August 31, 1998.
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.
Goodwill
Goodwill represents the excess of purchase consideration over fair market
value of net identifiable assets acquired, and is amortized on a
straight-line basis over five years. Goodwill is evaluated in each
reporting period to determine if there were events or circumstances which
would indicate inability to recover the carrying amount. Such evaluation
is based on various analyses including discounted cash flows and
profitability projections which necessarily involves management judgement.
44
<PAGE>
Patents and trademarks
Patents and trademarks will be amortized to operations over their
estimated useful lives not exceeding twenty years.
45
<PAGE>
2. Significant Accounting Policies (continued)
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.
Foreign currency
i) Translation 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 included separately in operations.
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, 1998 the Company has accumulated net operating losses available to
offset future taxable income as scheduled below:
<TABLE>
<CAPTION>
Amount
Fiscal Year of Loss $ Expiration Date
------------------- ------- ---------------
<S> <C> <C>
1996 240,000 2011
1997 202,000 2012
1998 650,000 2013
</TABLE>
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.
46
<PAGE>
2. Significant Accounting Policies (continued)
Income taxes (continued)
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:
<TABLE>
<CAPTION>
1998 1997
$ $
------------ -------------
<S> <C> <C>
Net Operating Loss 650,000 202,000
Statutory Tax Rate 113,900 + 34% 22,500 + 39%
in excess of in excess of
$335,000 $100,000
Effective Tax Rate - -
Deferred Tax Asset 221,000 62,000
Valuation Allowance (221,000) (62,000)
------------- ------------
Net Deferred Tax Asset - -
------------- ------------
------------- ------------
</TABLE>
The Company's Canadian subsidiary has Canadian tax losses of $1,294,000 to
offset future Canadian taxable income. These losses expire as follows:
<TABLE>
<CAPTION>
$
-------
<S> <C>
2002 82,000
2003 463,000
2004 558,000
2005 191,000
</TABLE>
3. Restricted Cash
Pursuant to a letter of credit, required under a long-term project to be
completed in fiscal 1999, the Company purchased a Cnd$396,000 face value
Bankers' Acceptance to be held as a bond for the letter of credit.
4. Business Acquisition
On December 1, 1996, the Company acquired 50.7% of the issued and
outstanding common shares of UVST. 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 ($1,106,189). 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:
<TABLE>
<CAPTION>
$ $
--------- ---------
<S> <C> <C>
(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 liabilities 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
</TABLE>
47
<PAGE>
<TABLE>
<CAPTION>
$ $
--------- ---------
<S> <C> <C>
971,370
---------
Long-term debt
Preferred stock of subsidiary 1,469,660 2,441,030
--------- ---------
</TABLE>
48
<PAGE>
4. Business Acquisition (continued)
<TABLE>
<CAPTION>
$ $
--------- -----------
<S> <C> <C>
(ii) Net book value of liabilities assumed (continued)
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)
Patents and trademarks (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
---------
---------
</TABLE>
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 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 $485,081 (1997: $363,811) has
been charged to operations.
5. Capital Assets
Capital assets are stated at cost less accumulated depreciation.
<TABLE>
<CAPTION>
1998 1997
Accumulated Net Book Net Book
Cost Depreciation Value Value
$ $ $ $
------- ------- ------ ------
<S> <C> <C> <C> <C>
Computer equipment 35,147 13,958 21,189 21,154
Computer software 5,033 1,799 3,234 2,529
Display equipment 31,836 15,918 15,918 22,285
Office furniture and equipment 29,157 13,555 15,602 19,870
Plant jigs, dies, moulds, tools and equipment 128,962 54,643 74,319 90,986
Leasehold improvements 26,724 15,589 11,135 16,480
------- ------ ------ ------
256,859 115,462 141,397 173,304
======= ======= ======= =======
</TABLE>
Depreciation per class of asset:
<TABLE>
<CAPTION>
1998 1997
$ $
------ ------
<S> <C> <C>
Computer equipment 6,387 4,047
Computer software 851 498
Display equipment 6,367 4,775
Office furniture and equipment 5,690 4,047
Plant jigs, dies, moulds, tools and equipment 24,963 19,801
Leasehold improvements 5,345 4,009
------ ------
49,603 37,177
------ ------
------ ------
</TABLE>
49
<PAGE>
6. Patents and Trademarks
Patents and trademarks represent legal costs associated with designing,
registering and protecting certain patents and trademarks associated with
the Ultra Guard-TM- System. These costs will be amortized not exceeding
twenty years starting September 1, 1998. 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 13 European countries.
7. Amounts Owing to Related Parties
<TABLE>
<CAPTION>
1998 1997
$ $
------ -------
<S> <C> <C>
(a) Amounts owing to a shareholder, due on demand,
unsecured and non-interest bearing. - 123,760
(b) Amounts owing to two directors, due on demand,
unsecured and non-interest bearing. 95,442 236,793
------ -------
95,442 360,553
------ -------
------ -------
</TABLE>
8. Convertible Debentures
During fiscal 1997 and 1998, the Company issued 12% Series "A" Senior
Subordinated Convertible Redeemable Debentures ("Debentures") due July 31,
1998 having a face amount of $725,285, bearing interest at 12% per annum,
payable quarterly. The Company discounted these Debentures by 20% of the
face amount and received net proceeds of $580,228. A $53,400 commission
was paid and expensed. Interest of $25,980 was accrued to the date of
conversion. The Agent will also receive 40,532 warrants exercisable into
common stock at $1.80 per share.
These Debentures were converted into common stock during the year. Face
value of $725,285 plus accrued interest of $25,980 less 20% discount of
$145,067, totalling $606,198 was converted into 4,034,350 common stock.
9. Long-term Debt (See Subsequent Events)
Prior to fiscal 1998, UVST issued 2,000 Class "A" Preferred Shares at
Cnd$1,000 per share for proceeds of Cnd$2,000,000 (US$1,275,104). The
holders of these shares also own 49.3% of the common shares of UVST
("minority shareholders"). Class "A" Preferred Shares are retractable once
sales reach Cnd$10,000,000 and net income reaches Cnd$1,000,000 and are to
be redeemed by June 30, 2000.
During fiscal 1997, minority shareholders advanced Cnd$631,000 to UVST.
Interest accrued to June 29, 1998, at 20% per annum, totalled Cnd$280,000.
Pursuant to an interim refinancing agreement ("the Agreement"), dated June
29, 1998, all accrued interest was waived. The principal repayment of
Cnd$631,000 has been deferred to June 29, 2003 and interest at 10% accrues
until December 29, 2000, after which, is paid monthly. The Company waived
interest of Cnd$217,000 accrued on its loan to UVST of Cnd$1,287,000.
Under the Agreement one of the minority shareholders advanced Cnd$909,000
to UVST. This advance is secured by a subordinated debenture on all of
UVST's assets, bears interest at 10%, payable monthly, is due in 2003, and
ranks ahead of the minority shareholder loans and Class "A" Preferred
Shares.
50
<PAGE>
10. Common Stock
<TABLE>
<CAPTION> Additional
Common Paid-in
Shares Stock Capital
# $ $
---------- ---------- ----------
<S> <C> <C> <C>
Balance September 1, 1995 (date of inception) 1,400,000 1,400 (1,400)
Issuance of stock for expenses at $0.05 per share 1,600,000 1,600 78,400
Issuance of stock for cash in private sales:
$0.50 per share 30,000 30 14,970
$0.75 per share 220,000 220 164,780
$1.25 per share 60,000 60 74,940
$1.33 per share 38,000 38 50,654
Balance August 31, 1996 3,348,000 3,348 382,344
---------- ---------- ----------
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 for cash in private sales at $0.75 per share 416,420 416 310,949
Issuance of stock for conversion of warrants:
Class "A' warrants converted May, 1997 at
$1.25 per share 40,000 40 49,960
Balance August 31, 1997 5,279,338 5,279 1,847,967
---------- ---------- ----------
Issuance of stock for conversion of convertible
debentures at prices ranging from $0.13 to $1.00 4,034,350 4,034 602,163
Issuance of stock for cash in private sales at $0.23 per share 200,000 200 45,800
Issuance of stock to settle debt at prices ranging from
$0.12 to $0.30 3,149,300 3,150 577,689
Balance August 31, 1998 12,662,988 12,663 3,073,619
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
(a) Warrants outstanding as at August 31, 1998:
<TABLE>
<CAPTION>
Exercise
Price
Class # $ Expiry Date
----- ---------- ---- -----------------
<S> <C> <C> <C>
"A" 361,420 1.25 February 25, 1999
"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
"E" 3,030,763 0.40 April 28, 2000
"E" 200,000 0.40 December 31, 2000
----------
5,438,101
----------
----------
</TABLE>
The Class "A" warrants are redeemable by the Company at $.001 per
share.
51
<PAGE>
10. Common Stock (continued)
(b) Employee Stock Option Plan
On August 21, 1997 employees were granted stock options to acquire
1,247,000 shares at $1.00 per share expiring August 21, 2000. On
April 15, 1998 two directors and an employee were granted stock
options to acquire 341,000 shares at $0.15 per share expiring April
15, 2001. The quoted price of the Company's common stock on the
grant dates approximated the grant prices.
The common stock underlying the Employee Stock Option Plan 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 dates of August 21, 1997 and April
15, 1998, were nil, using existing models to provide a measure of
fair market value. The weighted average remaining contractual life
of options outstanding is two years at August 31, 1998.
11. Segmented Information
The business of the Company is carried on in one industry segment (See
Note 1).
The Company operates in two geographic segments as follows:
<TABLE>
<CAPTION>
1998 1997
--------------------------------- --------------------------------
United United
Canada States Total Canada States Total
$ $ $ $ $ $
<S> <C> <C> <C> <C> <C> <C>
Project Revenue - unaffiliated 202,894 - 202,894 24,118 - 24,118
--------------------------------------------------------------------------------------------------------------
Inter-area sales - - - - - -
--------------------------------------------------------------------------------------------------------------
Operating loss (578,380) (707,176) (1,285,556) (758,454) (639,971) (1,398,425)
--------------------------------------------------------------------------------------------------------------
Identifiable assets 931,575 51,604 983,179 806,357 44,966 851,323
Goodwill and patents 92,484 1,576,516 1,669,000 36,658 2,061,597 2,098,255
--------------------------------------------------------------------------------------------------------------
Total assets 1,024,059 1,628,120 2,652,179 843,015 2,106,563 2,949,578
--------------------------------------------------------------------------------------------------------------
</TABLE>
Revenue from projects exported from Canada to other countries amounted
to $202,894 (1997: $24,118).
12. Comparative Figures
Certain of the prior year's figures have been reclassified to conform
with the current year's presentation.
13. Subsequent Events
Subsequent to August 31, 1998, the Company's subsidiary, UVST, completed
its debt and share restructuring subject to completion of documentation
and regulatory approval. Class "X" non-voting Preferred Shares will be a
new class of shares added to the authorized capital stock of UVST. 500
Class "A" Preferred Shares, representing 50% of the Class "A" preferred
shares held by one of UVST's minority shareholders, will be replaced
with 500,000 Class "X" non-voting Preferred Shares retractable at
Cnd$1.00 per share. The Company's loan to UVST of Cnd$1,287,000 will be
transferred into 1,287,379 Class "X" Preferred Shares retractable at
Cnd$1.00 per share. These Class "X" Preferred Shares will be retractable
by the holders only if there is a sale of UVST or an initial public
offering of its securities which values UVST, excluding Class X
Preferred Shares, at Cnd$20 million. If not retracted by June 29, 2002
the Class X Preferred Shares will be redeemable by UVST for Cnd$1 in
total.
52
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The Executive Officers and Directors of the Company are as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
Name Age Position
- ------------------------------------------------------------------------------
<S> <C> <C>
Kenneth E. Fielding 48 Director, President, and President of UV
Systems Technology, Inc.
JohnR. Gaetz 58 Director, Secretary-Treasurer and Vice-
President of Finance (CFO)
</TABLE>
Kenneth E. Fielding has served as a Director and President of Service Systems
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 inactive industrial electrical construction contractor
which until January 1996 provided electrical systems for schools, hospitals,
institutions, warehouses, restaurants and commercial installations. Mr.
Fielding is devoting his full time to management and operations of Service
Systems. In addition to the administrative position with our 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 from 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 shareholders meeting. We have 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 our company. However, in accordance with Nevada law, the
Company has provided in Article XI
53
<PAGE>
of its Articles of Incorporation (i) that contracts and acts 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 our 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, 1998 we 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 their amendments, furnished
under Rule 16a-3(a) of the Securities Exchange Act of 1934 during our most
recent fiscal year and written representations from persons required to file
those Forms, all Directors and Officers filed all 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
year ended August 31, 1998, to the Chief Executive Officer and each of the
Company's other Executive Officers whose total compensation exceeded $100,000
(together, "Named Executive Officers"). Information for fiscal years prior to
August 31, 1997, have been omitted, the Company having been inactive until
its acquisition in July 1995 (see "Company Background").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g) (h)
Restricted Securities All
Name and Other Annual Stock Underlying LTIP Other
Principal Compensation Award(s) Options Payouts Compensation
Position Year Salary ($) Bonus ($) ($) (SARs) ($) ($) ($)
- --------- ---- ---------- --------- ------------ ---------- ---------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Kenneth E. Fielding 1996 0 0 0 0 0 0
President, CEO 1997 84,000 0 0 0 200,000 0 0
and President of 1998 49,442 0 0 0 150,500 0 0
UVS Inc. 1998 40,112 accrued
</TABLE>
54
<PAGE>
The following table sets forth information with respect to the individual
grants of stock options made during the fiscal year ended August 31, 1998, to
each of our Named Executive Officers:
OPTION GRANTS IN LAST FISCAL YEAR
(INDIVIDUAL GRANTS)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Number of Percent of
Shares of Total
Common Stock Options
Underlying Granted to
Options Employees Exercise of
Granted in Fiscal Base Price Expiration
Name (#) Year ($/Sh) Date
(A) (b) (c) (d) (e)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Kenneth E. Fielding, 150,500 44.0 $0.15 4/15/2001
President, CEO and
President of UVS
- ------------------------------------------------------------------------------------------------------
</TABLE>
These options were granted pursuant to our 1997 Stock Option Plan.
See "Certain Relationships and Related Transactions" for information on
non-compensatory options granted to persons some of whom are Executive
Officers.
COMPENSATION OF DIRECTORS
We do not compensate Directors for their service as such, although we do
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
We have no employment agreements with our Executive Officers, nor do we have
agreements respecting termination of employment or change-in-control. We
expect to enter into employment agreements with Executive Officers in the
foreseeable future, but have not begun negotiation of those agreements. Mr.
Fielding and Mr. Gaetz are the only Executive Officers receiving
compensation. Mr. Fielding's compensation was $89,555 in total, of which
$19,445 was paid and $70,110 was accrued and Mr. Gaetz's compensation was
$89,555, in total, of which $50,994 was paid and $38,561 was 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, 1998, of (i) each person known to
own beneficially more than
55
<PAGE>
5% of our 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.
<TABLE>
<CAPTION>
NAME AND ADDRESS SHARES PERCENT OF
OF BENEFICIAL BENEFICIALLY CLASS
OWNER (1) OWNED (2)
- ----------------------------------------------------------------------------------
<S> <C> <C>
Kenneth E. Fielding 2,884,447 (3) 19.69%
John R. Gaetz 2,305,354 (4) 15.74%
Douglas F. Sommerville 1,235,499 (5) 8.43%
All officers and directors
as a group 5,189,980 (3)(4) 35.43%
- -----------------------------------------------------------------------------------
</TABLE>
(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) Includes 1) 7,000 shares which are owned by Mr. Fielding's minor
daughter, 2) 200,000 shares at a price of $1.00, and 150,500 shares
which Mr. Fielding has the right to acquire at a price of $0.15 under
immediately exercisable options, 3) 1,243,445 shares purchased during
the fiscal period and, 5) 1,243,445 which Mr. Fielding has the right to
acquire at a price of $0.40 under immediately exercisable E Warrants.
(4) Includes 600,000 shares which Mr. Gaetz has the right to acquire at a
price of C$2.00 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, 150,500 shares which Mr. Gaetz has the right to acquire at a
price of $0.15 under immediately exercisable options, 341,037 shares
which Mr Gaetz purchased during the fiscal period, 341,037 shares which
Mr Gaetz has the right to acquire at a price of $0.40 under immediately
exercisable E Warrants, 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 C$2.00 under immediately exercisable warrants and 45,028
shares owned by Mr. Sommerville's wife.
56
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In July 1995, Service Systems 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-TM- UV system. The Company issued
1,600,000 shares of restricted common stock to these individual stockholders,
including one officer 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 Service Systems acquisition in 1996 of UVS in exchange for
their UVS shares, our 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, the
following Directors, Executive Officers, and greater than 5% shareholders,
have made the loans to us for additional working capital up to August 31,
1998: John R Gaetz, $55,330 and Ken Fielding $40,012. The loans are payable
on demand.
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. In April 1998, John Gaetz purchased for debt settlement 341,037 shares
of Common Stock and 341,037 warrants for Common Stock in a private offering
at a cost of $0.20 per share; the market price on that date was $0.18.
In April 1998, Ken Fielding purchased for cash 1,243,445 shares of Common
stock and 1,243,445 warrants for Common Stock in a private offering at a cost
of $0.20 per share; the market price on that date was $0.18.
In August 1997, options for 200,000 shares of Common Stock were issued to
each of Kenneth Fielding and John Gaetz at an option price of $1.00. In April
1998, options for 150,100 shares of Common Stock were issued to each of
Kenneth Fielding and John Gaetz at an option price of $0.15, the market price
on that date. The options, issued under the Company's 1997 Stock Option Plan,
are immediately exercisable at the prices noted; the market price on August
1997 was $1.00 and on April 1998 was $0.18.
57
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of exhibits
<TABLE>
<CAPTION>
Exhibit Number Description Method of Filing
-------------- ----------- ----------------
<S> <C> <C>
(3)(i) Articles of Incorporation*
(3)(ii) Bylaws, as amended**
(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***
(10)(x) Interim Funding Agreement Filed Herewith
between UVS, MDS and WOF Electronically
(11) Statement Regarding Computation Filed Herewith
of Per Share Earnings Electronically
(21) Subsidiaries of the Corporation: Filed Herewith
UV Systems Technology Inc., Electronically
incorporated in British Columbia,
</TABLE>
58
<PAGE>
<TABLE>
<CAPTION>
Exhibit Number Description Method of Filing
-------------- ----------- ----------------
<S> <C> <C>
Canada
(23)(i) Consent of Elliott Tulk, Filed Herewith
Pryce Anderson Electronically
(27) Financial Data Schedule Filed Herewith
Electronically
</TABLE>
- --------
* Incorporated by reference to the Corporation's Form 10-SB effective
January 17, 1997.
** 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 10K for the fiscal
Year ended August 31, 1997.
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the fourth quarter of
fiscal 1998.
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: November 30, 1998 By: /s/ Kenneth R. Fielding
---------------------------
Ken Fielding, Director
Date: November 30, 1998 By: /s/ John R. Gaetz
---------------------------
John R. Gaetz, Director
59
<PAGE>
Exhibit 10
Interim Funding Agreement
between UVS, MDS and WOF
UV SYSTEMS TECHNOLOGY INC.
TERM SHEET
June 5, 1998
1.0 SHARE STRUCTURE
The purpose of this term sheet is to summarize the principal terms and
conditions of the proposed third round financing of UV Systems Technology Inc.
("UVST" or the "Company") by Working Opportunity Fund (EVCC) Ltd. ("WOF" or the
"Fund"). The contents of this document cannot be conveyed under any
circumstances in any manner whatsoever to anyone other than the Company and its
Directors without the prior written consent of WOF.
This financing is one which will require concessions by all concerned if it is
to become effective and is made on the understanding that other shareholders are
unable to provide further financial support. The intention of the financing is
to help the Company finance operations for approximately 12 months and to
demonstrate that system customers are prepared to accept the Company's
technology. All shareholders may participate on a pro rata basis of this
transaction if they wish.
2.0 PROPOSED INVESTMENT: $900,000
The proposed investment will consist of a demand subordinated debenture on all
of the Company's assets, including but not limited to technology, subject only
to prior conventional chartered bank lending. The loan will bear interest at 10%
compounded annually, payable monthly. The principal amount is due in full five
years and one day from the date of disbursement or upon default. Repayable in
full upon sale of the Company, change of control of the Company, sale of all or
substantially all of the Company's assets or if SSI sells any of its shares in
the Company. Default will consist of late or no payment of interest, default
under any other financial obligation (except payables, may be extended to 60
days), upon action taken against the Company by any creditor or by inability to
meet financial obligations as they come due. Additional conditions of default
may be required as legal documentation proceeds.
3.0 USE OF PROCEEDS
Proceeds will be used to provide working capital for 12 months of operations in
accordance with the Company's cash flow projections. Financing will be staged
and released as the Company meets its budgets. Final terms and conditions of
staging will be defined prior to closing of this financing.
4.0 CONDITIONS PRECEDENT TO CLOSING
The following terms and conditions shall be agreed to and completed prior to or
at closing:
(28) MDS will sell one half of its common shares to WOF for a total of $1.00
and will sell $500,000 of its Class "A" Preferred Shares to WOF for a
total of $1.00.
60
<PAGE>
(29) All Shareholders will waive accrued interest on their shareholder loans.
(30) SSI will convert its shareholder loan (approximately $1,100,000) and MDS
will convert $500,000 of its Class "A" Preferred Shares to Class X
Preferred Shares. These shares will be retractable by the holders only
if there is a sale of the Company or an IPO which values the equity of
the Company, including WOF's Class "A" Preferred Shares, but excluding
the Class X Preferred Shares at $20 million. If not retracted within 4
years from the date of closing of this loan, the Preferred Shares will
be redeemable in full by the Company for $1.00 in total.
(31) Existing shareholder loans from WOF and MDS will rank pari passu behind
the $900,000 loan contemplated herein. Interest will be paid at the
rate of 10%, accruing for the first 18 months from the date of close of
the $900,000 loan. The all due date of the two shareholders loans will
be the same as for the $900,000 loan and default clauses will reflect
those of the $900,000 loan.
(32) Appropriate amendments will be made to the shareholders agreement. MDS
will continue to be entitled to such information as it deems necessary
and may attend Board meetings as an observer. The Fund may appoint 2
members to the Board of Directors SSI will appoint 1, and the Company's
CEO will be on the Board. The fifth member will be an outsider
acceptable to WOF and SSI.
(33) Further shareholders agreement amendments will be required by WOF as
they relate to piggyback, rights of first refusal and other items.
(34) In the event of default under its loans, the Fund will have the right to
sell the Company in its entirely, without the need to enforce its
security.
(35) WOF Board and regulatory approvals.
5.0 CONFIDENTIALITY
No disclosure or announcement, public or otherwise, in respect of this Term
Sheet or the transactions contemplated herein will be made by any party hereto
without the prior agreement of the other party as to timing, content and method,
provided that the obligations herein will not prevent any party from making,
after consultation with the other party, such disclosure as its counsel advises
is required by any applicable legislation. The Fund may issue a post closing
public notice of this transaction.
6.0 OBLIGATION
This Term Sheet is not meant to be legally binding and enforceable except for
Section 4 - Fees and Expenses, and Section 5 - Confidentiality. Until
negotiation and execution of definitive agreements relating to the transactions
contemplated herein, neither party shall be bound to the other for damages for
failure to agree upon formal and final definitive agreements but the Company
will be bound to pay, within 15 days from date of invoice, all of the Funds
expenses as outlined in Section 5 that were incurred in good faith in
expectation of Closing. Notwithstanding the foregoing, following the execution
of this document, the Fund will proceed with its due diligence investigation of
the Company and the parties herein will proceed in good faith toward Closing.
7.0 CLOSING
This transaction shall close no later than June 29, 1998.
This Term Sheet is open for acceptance until June 10, 1998.
Agreed to this 10th day of June, 1998
61
<PAGE>
"Mike Phillips"
- ------------------------------------
Working Opportunity Fund (EVCC) Ltd.
"Ken Fielding"
- ------------------------------------
Service Systems International Ltd.
"J R Gaetz"
- ------------------------------------
UV. Systems Technology Inc.
62
<PAGE>
Exhibit 11
Service Systems International, Ltd.
Computation of Per-Share Income
Treasury Stock Method
As Modified for 20% Test
<TABLE>
<CAPTION>
Year Ended August 31, 1998
--------------------------
<S> <C>
Weighted average number of shares outstanding 9,160,048
-----------
Total common and common equivalent shares 12,662,988
-----------
-----------
Net income (loss) for the period $(1,285,556)
-----------
-----------
Total common and common equivalent shares 12,662,988
-----------
-----------
Loss per common and common equivalent shares $ (0.14)
-----------
-----------
</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.
<PAGE>
Exhibit 21
UV Systems Technology Inc., incorporated in British Columbia, Canada.
63
<PAGE>
Exhibit 23
The Board of Directors
Service Systems International, Ltd.:
We consent to the use of our report dated November 10, 1998 relating to the
cosolidated balance sheets of Service Systems International, Ltd. and
subsidiary as of August 31, 1998 and 1997 and the related consolidated
statements of operations and deficit, and cash flows for the years ended
August 31, 1998 and 1997, which report appears in the August 31, 1998 annual
report on Form 10-KSB of Service Systems International, Ltd.
/s/ ELLIOTT TULK PRYCE ANDERSON
Vancouver, BC, Canada
November 23, 1998
64
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1998
<PERIOD-START> SEP-01-1997
<PERIOD-END> AUG-31-1998
<CASH> 207,052
<SECURITIES> 249,317
<RECEIVABLES> 110,957
<ALLOWANCES> 0
<INVENTORY> 238,281
<CURRENT-ASSETS> 841,782
<PP&E> 141,397
<DEPRECIATION> 49,602
<TOTAL-ASSETS> 2,652,179
<CURRENT-LIABILITIES> 220,571
<BONDS> 0
0
0
<COMMON> 12,663
<OTHER-SE> 3,073,619
<TOTAL-LIABILITY-AND-EQUITY> 2,652,179
<SALES> 202,894
<TOTAL-REVENUES> 202,894
<CGS> 98,326
<TOTAL-COSTS> 180,903
<OTHER-EXPENSES> 1,307,547
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,285,556)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,285,556)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,285,556)
<EPS-PRIMARY> (.14)
<EPS-DILUTED> (.14)
</TABLE>
