<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-QSB
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended May 31, 1998
[ ] Transition report Pursuant to Section 13 or 15(d) of the Exchange Act
For the transition period from _____ to _____.
COMMISSION FILE NUMBER 0-21753
SERVICE SYSTEMS INTERNATIONAL, INC.
(Exact Name of Small Business Issuer as Specified in Its Charter)
NEVADA 88-0263701
(State of Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
2800 INGLETON AVENUE, BURNABY, B.C. CANADA V5E 3S5
(Address of Principal Executive Offices)
604-451-1069
(Issuer's Telephone Number, Including Area Code)
______________________________________________
(Former name, former address and former fiscal year, if
changed since last report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such report(s), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No
--- ---
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13, or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by court. Yes __ No __
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: 12,658,935 as of July 6, 1998
Transitional Small Business Disclosure Format (check one):
Yes No X
--- ---
<PAGE>
INDEX
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- --------------------------------------------------------------------------------
PART I FINANCIAL INFORMATION
<TABLE>
<S> <C>
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS. . . . . . . . . . . . . . . 2
Consolidated Balance Sheets as of May 31, 1998
and 1997 (unaudited). . . . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Operations for the nine months ended
May 31, 1998 and 1997 (unaudited) . . . . . . . . . . . . . . . . . 4
Consolidated Statements of Cash Flows for the nine months ended
May 31, 1998 and 1997 (unaudited) . . . . . . . . . . . . . . . . . 5
Notes to the FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . . . . 6 to 8
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITIONS. . . . . . . . . . . . . .9 to 12
Part II Other Information. . . . . . . . . . . . . . . . . . . . . . . 13
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
</TABLE>
1
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Part 1. Financial Information
Item 1. FINANCIAL STATEMENTS (UNAUDITED)
2
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Service Systems International, Ltd.
(A Development Stage Company)
Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
(Restated)
May 31, May 31,
1998 1997
ASSETS
<S> <C> <C>
Current assets:
Cash $ 346 $ 10,084
Accounts receivable 91,530 70,116
Amount due from related parties 207,497 -
Inventory 368,167 421,815
Prepaid expenses 50,173 13,160
Held to maturity investment - 0
Research credit receivable 233,165 237,794
----------- -----------
Total current assets 950,878 752,969
Loan Receivable 9,500 -
Capital Assets (Note 4) 148,066 185,843
Goodwill - net of amortization (Note 5) 1,697,787 2,182,868
Patents (Note 6) 37,564 35,638
----------- -----------
$ 2,843,794 $ 3,157,318
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 167,824 $ 124,274
Accrued liabilities 13,514 11,311
Vacation pay payable 8,077 10,375
Customer deposits 18,299 7,242
Loans payable - others 28,917 0
Loans owing to related parties 288,953 217,945
Loans payable - minority
stockholders of subsidiary 632,814 531,825
----------- -----------
1,158,398 902,972
Long-term Debt (Note 8) 1,469,660 1,469,660
----------- -----------
2,628,058 2,372,632
----------- -----------
Stockholders' equity:
Common stock, $.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 3,218,686 1,848,916
Deficit accumulated during
development stage (3,039,067) (1,063,151)
Foreign exchange translation adjustment 23,454 (6,358)
----------- -----------
215,736 784,686
----------- -----------
$ 2,843,794 $ 3,157,318
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to financial statements.
3
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Service Systems International, Ltd.
(A Development Stage Company)
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
(Restated)
Nine months Nine months
Ended Ended
May 31, 1998 May 31,1997
------------- ------------
<S> <C> <C>
Project Revenue $ 2,787 $ 25,074
----------- ----------
Project costs 2,463 33,912
Manufacturing Costs Not Applied 65,617 24,538
----------- ----------
Gross Profit (Loss) (65,293) (33,376)
----------- ----------
Expenses
General and administrative $ 645,235 $ 238,792
Research and development 82,498 175,532
Selling 163,961 103,707
----------- ----------
891,694 518,031
----------- ----------
Net Loss from Operations Before
Other Items (956,987) (551,407)
Other Items
Amortization of goodwill (Note 5) (363,810) (242,540)
Interest Income - 1,435
Miscellaneous Income - 20,263
Interest expense (78,627) (49,684)
----------- ----------
Net Loss for the period $(1,399,424) $ (821,933)
----------- ----------
----------- ----------
Net Loss per share $ (0.18) $ (0.18)
----------- ----------
----------- ----------
Weighted average shares outstanding 7,992,401 4,656,448
----------- ----------
----------- ----------
</TABLE>
See accompanying notes to financial statements.
4
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Service Systems International, Ltd.
(A Development Stage Company)
Consolidated Statement of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
(Restated)
Nine months Nine months
Ended Ended
May 31, 1998 May 31, 1997
------------- ------------
<S> <C> <C>
Cash Flows to Operating Activities
Net Loss $(1,399,424) $(821,933)
Adjustments to reconcile net loss to cash
Depreciation 35,873 17,726
Amortization of goodwill (Note 5) 363,810 242,540
Discount on convertible debenture 145,057 -
Change in non-cash working capital items:
(Increase) Decrease in accounts receivable (235,996) 11,067
(Increase) in inventory (11,159) (14,797)
(Increase) in prepaid expenses (37,623) (1,330)
Decrease (Increase) in research credit
receivable 11,626 (27,224)
Increase in held to maturity investment 218,119
(Decrease) in accounts payable, accrued
liabilities, vacation pay payable and
customers' deposits (35,182) (138,645)
----------- ---------
Net Cash Used In Operating Activities (1,163,018) (514,477)
----------- ---------
Cash Flows (to) from Investing Activities
Capital assets acquired (10,635) (1,270)
Additions to intangible assets (905) (6,021)
(Increase) in loans receivable (9,500) -
Acquisition of subsidiary - 1,537
----------- ---------
Net Cash (Used in) Provided by Investing
Activities (21,040) (5,754)
----------- ---------
Cash Flows from (to) Financing Activities
Funds applied against cheques issued
in excess of deposit (8,752) -
Common stock issued 1,378,103 362,233
Conversion of bonds to shares (Note 7) (745,624) -
Increase in loan payable - other 7,711 -
(Decrease) Increase in amounts
owing to related parties (71,600) 65,455
Increase in loans payable to
minority shareholders of subsidiary 76,174 49,684
Proceeds from convertible debenture 524,299 -
Foreign exchange translation adjustment 23,454 (4,045)
----------- ---------
Net Cash Provided by Financing Activities 1,183,765 473,327
----------- ---------
Increase (decrease) in cash (293) (46,904)
Cash - beginning of period 639 56,988
----------- ---------
Cash - end of period $ 346 $ 10,084
----------- ---------
----------- ---------
</TABLE>
See accompanying notes to financial statements.
5
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Service Systems International, Ltd.
(A Development Stage Company)
Notes to the Consolidated Financial Statements
1. Development Stage Company
The Company is a development stage company which was incorporated in the
State of Nevada in August, 1990 and remained inactive until September 1,
1995. The initiation of the Company's current business was accompanied by
a change of ownership. See Note 4 regarding acquisition of UV Systems
Technology Inc. ("UVS") on December 1, 1996. Through UVS, the Company
manufactures and markets its Ultra Guard -TM- ultraviolet based patented
water treatment system. These products are sold primarily for municipal
waste disinfection, treatment of process and industrial waste water, and
for potable water, bottled products and agriculture and aquaculture water
treatment.
In a development stage company, management devotes most of its activities
to establishing a new business. Planned principal activities have not yet
produced significant revenue. The ability of the Company to emerge from
the development stage with respect to its planned principal business
activity is dependent upon its successful efforts to raise additional
equity financing and develop the market for its products.
2. Significant Accounting Policies
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand, in banks and all highly
liquid investments with a maturity of three months or less when
purchased. Cash equivalents are stated at cost which approximates market.
FIXED ASSETS
Fixed assets are recorded at cost. Depreciation is computed utilizing the
straight-line method using an estimated useful life of five years for all
asset categories.
REVENUE RECOGNITION
Product sales will be recognized at the time goods are shipped. System
and project revenue will be recognized utilizing the percentage of
completion method which recognizes project revenue and profit during
construction based on expected total profit and estimated progress
towards completion during the reporting period. All related costs are
recognized in the period in which they occur.
ESTIMATES
The preparation of the Company's consolidated financial statements
requires management to make estimates and assumptions that affect the
amounts reported in the financial statements and accompanying notes.
Actual results could differ from these estimates.
EARNINGS PER SHARE
The earnings per share is computed by dividing the net income (loss) for
the period by the weighted average number of common shares outstanding
for the period. Common stock equivalents are excluded from the
computation if their effect would be anti-dilutive.
INTANGIBLE ASSETS
Goodwill on consolidation is amortized to operations over its estimated
useful life of five years. Patent protection costs will be amortized to
operations over their estimated useful lives being expiry of each patent.
6
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2. Significant Accounting Policies (continued)
FOREIGN CURRENCY
i) Translation of foreign currency transactions and balances:
Revenue, expenses and non-monetary balance sheet items in foreign
currencies are translated into US dollars at the rate of exchange
prevailing on the transaction dates. Monetary balance sheet items are
translated at the rate prevailing at the balance sheet date. The
resulting exchange gain or loss is included in general and
administration expenses.
ii) Translation of foreign subsidiary balances:
Monetary balance sheet items of UVS are translated into US dollars at
the rates of exchange on the balance sheet date. Non-monetary balance
sheet items are translated into US. dollars at the rate of exchange
prevailing on the transaction dates. The foreign subsidiary's
operating results are translated into US dollars using the average
exchange rate for the year with any translation gain or loss charged
to operations as a separate component of other items.
3. Restatement
Comparative figures of prior periods have been restated to reflect the
change in the accounting policy from full write-off of goodwill on
consolidation to amortizing goodwill on consolidation to operations over
its estimated useful life of five years. Adjustment has been made to
reflect the amount of goodwill as reported for the fiscal year ending
August 31, 1997. In addition, a reclassification was made from common
stock to paid-in capital in the amount of $49,960. The effect of the
restatement on prior period accounts is:
Goodwill net of amortization $2,182,868
Inventory 124,793
Accounts receivable (202,850)
Deficit (2,104,811)
Common stock (49,960)
Additional paid-in capital 49,960
4. Capital assets
<TABLE>
<CAPTION>
MAY 31, 1998 MAY 31, 1997
ACCUMULATED NET BOOK NET BOOK
COST DEPRECIATION VALUE VALUE
$ $ $ $
<S> <C> <C> <C> <C>
Computer Equipment 35,902 11,879 24,023 22,953
Computer software 4,824 1,470 3,354 3,017
Display equipment 31,835 14,326 17,509 23,996
Office furniture &
Equipment 29,131 12,025 17,106 19,192
Plant jigs, dies,
moulds, tools &
equipment 121,382 47,779 73,603 98,781
Leasehold
improvements 26,724 14,253 12,471 17,905
------- ------- ------- -------
249,798 101,732 148,066 185,843
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
Depreciation per class of asset
$ $
Computer equipment 4,308 2,361
Computer software 522 302
Display equipment 4,775 3,199
Office furniture & equipment 4,160 2,559
Plant jigs, dies, moulds, tools
& equipment 18,099 6,619
Leasehold improvements 4,009 2,685
35,873 17,726
------- -------
------- -------
</TABLE>
7
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5. Goodwill
Goodwill on consolidation for prior periods presented for comparative
purposes has been restated to account for the change in accounting policy
of amortizing to operations over its estimated useful life of five years.
Amortization of $363,810 has been charged to current operations and
comparative figures of $242,540 include only six months from December 1,
1996 to May 31, 1997.
6. Patents
Intangible assets represent legal costs associated with registering and
protecting certain patents and trademarks associated with the Ultra
Guard-TM- System. These costs will be amortized when the Company completes
its pilot plant testing and completion of certain modifications and
improvements to the Ultra Guard-TM- System. Components of the Ultra
Guard-TM- System were patented in the United States on April 12, 1996.
Applications have been made for patent protection under the International
Patent Protection Treaty covering up to 40 countries.
7. Convertible debenture
The Company issued, in previous quarters, 12% Series "A" Senior
Subordinated Convertible Redeemable Debentures due July 31, 1998, bearing
interest at 12% per annum payable quarterly. The Company discounted these
debentures by 20% of the face amount. To May 31, 1998, interest of $20,339
has been paid. For placement of the full amount ($745,624) of convertible
debentures, less discount of $145,057, the Agent was issued 66,625 warrants
for shares exercisable at $1.64 per share.
8. Long term debt
UVS issued 2,000 Class "A" preferred shares at C$1,000 per share for a
total of C$2,000,000 (US$1,469,660). The holders of these shares also own
49.31% of UVS. These shares are retractable once sales reach C$10,000,000
and net income reaches C$1,000,000. All preferred shares are to be redeemed
by June 30, 1999.
Pursuant to an agreement dated December 6, 1996 between the Company, UVS
and UVS's minority stockholders, the Company agreed to raise $2,000,000
(the "Financing") by March 31, 1997 (extended to July 15, 1998). Within 30
days of the Financing the minority stockholders will each convert up to
one-half of their Class "A" preferred shares to secured debentures. The
minority stockholders may also convert, at their option, up to one-half of
the loans payable into common shares of the Company at the rate of C$2.00
per share. The Company will repay the loans from the Financing except to
the extent converted. Within 30 days of the Financing the minority
stockholders will exchange one-half of their preferred shares for 250,000
common shares of the Company. Each common share issued pursuant to this
agreement will include a warrant to acquire an additional share at C$2.00
per share expiring four years after issuance of the common shares.
9. Consolidated financial statements
These interim financial statements include the accounts of the Company, and
its 50.69% owned subsidiary, UVS. As UVS was acquired on December 1, 1996,
results of operations include only Consolidated Statements for the period
from December 1, 1996 to May 31, 1997. Comparative figures include six
months' operations for UVS and nine months' operations for the Company
for May 31, 1997.
8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATION AND
FINANCIAL CONDITION
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH
THE COMPANY'S FINANCIAL STATEMENTS AND NOTES THERETO. INFORMATION DISCUSSED
HEREIN MAY INCLUDE FORWARD-LOOKING STATEMENTS REGARDING EVENTS OR THE
FINANCIAL PERFORMANCE OF THE COMPANY, AND IS SUBJECT TO A NUMBER OF RISKS AND
OTHER FACTORS WHICH COULD CAUSE THE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
THOSE CONTAINED IN THE FORWARD-LOOKING STATEMENTS. AMONG SUCH FACTORS ARE:
GENERAL BUSINESS AND ECONOMIC CONDITIONS; CUSTOMER ACCEPTANCE AND DEMAND FOR
THE COMPANY'S PRODUCTS; THE COMPANY'S OVERALL ABILITY TO DESIGN, TEST AND
INTRODUCE NEW PRODUCTS ON A TIMELY BASIS; THE NATURE OF THE MARKETS ADDRESSED
BY THE COMPANY'S PRODUCTS; AND OTHER RISK FACTORS LISTED FROM TIME TO TIME IN
DOCUMENTS FILED BY THE COMPANY WITH THE SEC.
OVERVIEW
The Company is a development stage company that was incorporated in the
State of Nevada in August 1990, and remained inactive until September 1995.
The initiation of the Company's current business was accompanied by a change
of ownership. Through its majority-held subsidiary, UV Systems Technology,
Inc. ("UVS"), the Company manufactures and markets its Ultra
Guard-TM- ultraviolet-based patented water treatment system. These products
are sold primarily for municipal wastewater disinfection; however, the system
can also be adapted for treatment of process and industrial wastewater (where
it is currently being applied through UVS' Japanese agent) and for potable
water, bottled products and agriculture and aquaculture water treatment.
In September 1995, the Company initiated a marketing distribution
agreement with UVS, a manufacturer of equipment using proprietary ultraviolet
light technology for the microbiological disinfection of industrial and
municipal wastewater. In July 1996, the Company entered into a funding
agreement with UVS whereby the Company provided 50% of UVS' operating cash
needs for a six-month period. On December 1, 1996, the Company acquired
50.69% of the common stock of UVS from two principals and the minority
stockholders. On December 6, 1996, the Company entered into an agreement with
the remaining two minority stockholders, Working Opportunity Fund (EVCC) Ltd.
and MDS Ventures Pacific Inc., to acquire the remaining 49.31% common stock
and their preferred stock. The effect of these transactions when and if
completed will be to give the Company 100% ownership of UVS.
During the period from December 1, 1996, the majority acquisition date,
the Company has continued with UVS' System development and testing programs.
These programs include the development of both a mechanical and electronic
automatic cleaning system, in addition to the Company's already existing
quartz sheath system, to remove the fouling build-up due to suspended solids
prevalent in wastewater. The program of development of the mechanical cleaner
is essentially complete except for on-going component refinements.
Development of the electronic ultrasonic cleaning system continues.
The Company demonstrates its systems with its Production Demonstration
Units (PDU). The PDU is a two-lamp, full-scale UV system that may be moved to
various Wastewater Treatment Plants (WWTP) which are in the final stage of UV
equipment selection. The PDU will demonstrate the Company's UV systems
ability to treat the effluent at that specific WWTP. Through this process,
the Company demonstrates directly to interested buyers the efficacy and
resultant lower operating costs of its systems compared to other UV suppliers
and anticipates the generation of sales and resultant revenues.
In March 1997, the Company received an order for a full-scale System to
treat one-fifth of a major Eastern Canadian city's sewage effluent. In June,
the client requested that the order be delayed until the end of the current
year disinfection period (October 31, 1997). The client was able to reduce
the period of UV treatment from six months per year to four months per year
using its existing system, which made the economics of replacing the existing
equipment less attractive. At the time of this report there is no further
activity on the project and the Company has moved this project to its
inactive list.
The Company has been unable to complete testing of a full-scale
demonstration system at the City of Chilliwack, located in Western Canada,
due to flows almost twice those contracted for through the sewage treatment
plant. The Company will continue to use this site for demonstration, research
and development; however, ongoing sewage plant modifications have not been
completed and any further equipment research is delayed until late summer,
1998.
During the report period ended November 30, 1997, the Company was
advised that an order will be forthcoming for a project near Montreal,
Province of Quebec, Canada in the revised amount of C$390,809. During this
most recently ended reporting period the purchase order number and document
were received. The project is scheduled for delivery in November 1998. The
Company received the purchase order against strong competition from its major
competitor, Trojan Technologies Inc. of London, Ontario, Canada. As
previously reported this project was pilot tested using the Company's
9
<PAGE>
PDU, and power use monitored by Hydro Quebec, a hydro power producer and
supplier for the Province of Quebec as well as to the Eastern United States.
This monitoring program, as well as other test criteria, provided independent
corroboration that the Company's UV system provided improved performance and
cost-saving to the client.
On April 24, 1998, the Company received a purchase order in the amount
of US$135,314 from its Japanese Licensee covering ultraviolet system
components needed to complete 10 Industrial process water treatment systems.
The project is scheduled to ship in August to be included in the 1998 fiscal
year. The UV systems will be used in various industries including
semiconductor plants, breweries and food processing. This order follows an
initial order of 10 systems which were successfully prototype and Beta site
tested at various locations in Japan. With this second order now received and
verification of the product's ability to work in these industries, the
Company is working to expand sales of this product to this client in Japan as
well as other geographic market areas.
Shipment and billing of the majority of any of these or other sales
which may be made in fiscal 1998 (which the Company cannot assure), other
than the sale to Hamilton, Alabama for a fixed price of $127,000 and the sale
to Japan, will not occur until fiscal 1999.
Marketing of the Company's UV products continues, with bids sent out
during the current quarter amounting to approximately $21 million. On April
19 - 22, the Company presented a paper in Baltimore at Disinfection 98, The
Latest Trends in Wastewater Disinfection: Chlorination vs UV disinfection.
The specific seminar was hosted by the Water Environment Federation at which
the Company showcased the Ultra Guard-TM- benefits to an audience of
engineers, plant owners and City managers. Based on feedback received, as
well as an invitation from the Water Environment Federation to join the
Federation's Disinfection Committee, the Company believes that its
presentations were well received. The Company made many contacts for
application of the Company's UV products, and, as a result of the
presentation, the Company has responded to a number of potential
opportunities.
RESULTS OF OPERATION
GENERAL NOTE. When comparing the nine-month period ended May 31, 1998,
to the period ended May 31,1997, the reader must be aware that the nine
months ended May 31, 1997, includes nine months of SVSY operations and six
months of UVS operations for the period from acquisition, December 1, 1996 to
May 31, 1997. Comparisons of changes in Income and Expense values do not
reflect comparable conditions.
NINE MONTHS ENDED MAY 31, 1998 AND 1997. During the nine months ended
May 31, 1998, the Company had project revenues derived from sales of parts of
$2,787. Project costs and manufacturing costs not applied to projects
amounting to $68,080 resulted in a Gross Loss of $65,293 compared to a Gross
Loss of $33,376 in the nine months period ended May 31, 1997, Manufacturing
costs not applied to projects are made up of allocated overhead amounts not
identified to a specific project.
PROJECT REVENUE. During the nine months ended May 31, 1998, project
revenues decreased 89% to $2,787, from $25,074, for the nine-month period
ended May 31, 1997 (the second period of comparison after the acquisition of
UVS). No revenues were booked during the third quarter as production had just
commenced.
GROSS LOSS. For the nine-months ended May 31, 1998, gross loss
increased 96% to $65,293, from $33,376 for the nine-month period ended May
31, 1997 (the first period of comparison after the acquisition of UVS). The
losses were due to the decrease in revenues and the increase in manufacturing
costs not applied to projects.
During the nine months ended May 31, 1998 and 1997 respectively,
operational expenses increased 72% to $891,694 from $518,031 in the
comparable 1997 period (including, general and administrative expense of
$645,235 compared to $278,792, a decrease in research and development cost of
$82,498 compared to $175,532 and selling expense of $163,961 compared to
$103,707), bringing the Net Loss from Operations Before Other Items to
$956,987 compared to $551,407 for the comparable 1997 period. The higher
costs of General and Administrative were as a result of accrued (unpaid)
management fees, discounts on convertible debentures, corporate relations and
legal and accounting fees. Other Items, including amortization of goodwill in
the amount of $363,810 in connection with the UVS acquisition (see Note 3 in
the financial statements identifying the restated write-off of principal) and
Interest Expense in the amount of $78,627, due largely to debt owed to
minority shareholders (accrued and not paid) and interest on convertible
debentures, brought net Loss for the period to $1,399,424, a per share loss
amounting to $0.18.
RESEARCH AND DEVELOPMENT EXPENSES. For the nine months ended May 31, 1998,
research and development expenses decreased 53% to $82,498 from $175,532 for the
comparable 1997 period due to a reduced need to continue the R & D at the
spending level in early 1997. This trend should continue as the base technology
is at a level of full
10
<PAGE>
marketability. During the quarter ended May 31, 1998, the Company entered
into a development and testing program being carried out at McGill
University. This R&D program is intended to demonstrate the effect of the
high intensity UV output of the Company's lamp to penetrate microbiological
included suspended solid contained within sewage effluent as compared to
results from other lamps. Results of a portion of this testing may be
available in the fourth quarter.
SELLING EXPENSES. For the nine months ended May 31, 1998, selling
expenses increased 58% to $163,961 from $103,707 in the 1997 comparable
period reflecting the increased commercialization.
AMORTIZATION OF GOODWILL. For the nine-months ended May 31, 1998,
amortization of goodwill increased to $363,810 from $242,540 for the
comparable 1997 period. Amortization of goodwill is as a result of the
majority acquisition of UVS (see Note 5 in financial statements).
INTEREST EXPENSE. For the nine-months ended May 31, 1998, interest
increased 68% to $78,627, from $46,684 for the comparable 1997 period. This
increase resulted largely from interest payable on UVS debt owed to minority
shareholders and interest on convertible debentures.
NET LOSS FOR THE PERIOD. The Net Loss for the nine months ended May 31,
1998, increased 70% to $1,399,424 from $821,933 for the 1997 comparable
period, due to the increased costs resulting from the majority acquisition of
UVS and the Company's attendant and continuing effort to improve,
commercialize and sell its Ultra Guard-TM- systems.
NET LOSS PER SHARE. For the nine months ended May 31, 1998, net loss per
common share was $0.18 compared to $0.18 for the nine months ended May 31,
1997.
LIQUIDITY
The nature of the Company's business may be expected to include a normal
lag time between the incurring of operating expenses and the collection of
contract accounts receivable, which may be expected to be due largely from
governments, if and when sales are made. In addition, the Company is
dependent for sales, other than those to a licensee that is obligated to
purchase agreed-upon system components from the Company, on awards of water
treatment system contracts for non-recurring projects. Also, many of the
Company's contracts may be expected to include provision for retainage,
entitling the other party to the contract percentage withhold, for a given
period of time, a specified portion of the payment until after completion of
a project. For these reasons, among others, the Company may experience
periods of limited working capital and may be expected to require financing
for working capital during those periods.
Because the Company's sales of Ultra Guard-TM- systems to governmental
entities may be expected to occur on an intermittent rather than consistent
basis as requests for proposal ("RFP") are issued and awards made, sales on
both an annual and quarterly basis are subject to fluctuations which are
often beyond the Company's control.
In addition, the Company requires and will require financing over and
above its current resources to sustain its operations, expand its marketing
efforts, and complete the purchase of the remaining non-owned 49.31% of the
outstanding stock of UVS. Additional financing may be in the form of debt or
equity financing, or both. There can be no assurance that the additional
financing can be timely obtained on terms acceptable to the Company, if at
all. Failure to receive these funds may be expected to have a material
adverse effect on the Company and its business.
During the nine months ended May 31, 1998, the Company financed its
operation largely from loans from related parties and shareholders of UVS,
and the sale of 12% convertible debentures. In June 1997, the Company signed
an agreement with London Select Enterprises, Ltd., as broker, to place, in an
offering conducted in compliance with Regulation S, promulgated under the
Securities Act of 1933, up to $750,000 face amount in 12%, one year
convertible debentures due July 31, 1998, if not earlier redeemed. The
agreement provided that each debenture would be sold at 80% of face value and
would be convertible into common stock of the Company at a conversion price
of 20% below the closing bid price of the Company's stock immediately
preceding the date of conversion or 20% below the 5-day average closing bid
price of the Company's common stock immediately preceding the closing date.
During the nine months ended May 31, 1998, all debentures, accrued
interest, and principal outstanding at the end of the previous quarter and
accrued interest to conversion date (the "Debt") were converted into common
shares of the Company. The Debt, amounting to $745,624, was converted, at an
average conversion per share price of $0.1848, into 4,034,350 shares of
common stock. At the end of this reporting period the balance of convertible
debentures and unpaid interest not converted was zero.
11
<PAGE>
As part of its expanded marketing effort, the Company is seeking additional
North American sales agents and distributors.
12
<PAGE>
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
- --------------------------------
[6~ None
ITEM 2. CHANGES IN SECURITIES
- ------------------------------------
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
- ----------------------------------------------
None
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -------------------------------------------------------------------
None
ITEM 5. OTHER INFORMATION
- --------------------------------
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------------
(a) Exhibits (exhibit reference numbers refer to Item 601
of Regulation SB
Exhibit Number Description
(3)(i) Articles of Incorporation 1
(3)(ii) Bylaws 2
(4) Statement re: computation of per
share earnings
(27) Financial Data Schedule
(b) Reports on Form 8-K
On May 7, 1998, the Registrant filed a Form 8-K reflecting the issuance
of the Registrant's Common Stock on April 23, 1998 to two of the Registrant's
employees a total of 75,321 shares for unpaid services valued at $.20 per
share. In addition, on that date the Registrant issued in a Regulation S
transaction, in repayment of loans to the Registrant, to one Canadian
individual, one United Kingdom corporation and three Bahamian corporations
1,481,497 shares of common stock valued at $.20 per share. The four
corporations, in addition to the common stock, were issued warrants to
purchase an additional 1,446,281 shares of common stock at an exercise price
of $.40 per share.
- -----------------------
(1) Incorporated by reference to the Registrant's Form 10-SB effective 1/17/97
(2) Incorporated by reference to the Registrant's Form S-8 effective 10/6/97
13
<PAGE>
Signatures
In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, hereunto duly
authorized.
Dated: July 14, 1998 Service Systems International Ltd.
By: /s/ Ken Fielding
---------------------------------
Ken Fielding, President
14
<PAGE>
Service Systems International, Ltd.
Computation of Per-Share Income
Treasury Stock Method
As Modified for 20% Test
<TABLE>
<CAPTION>
Period Ended May. 31, 1998
--------------------------
Nine Months
-----------
<S> <C>
Weighted average number of shares outstanding 7,992,401
------------
Total common and common equivalent shares 12,662,988
------------
------------
Net income (loss) for the period $ (1,399,424)
------------
------------
Total common and common equivalent shares 12,662,988
------------
------------
Loss per common and common equivalent shares $ (0.18)
------------
------------
</TABLE>
Earnings per share:
The earnings per share is computed by dividing the net income (loss) for the
period by the weighted average number of common shares outstanding for the
period. Common stock equivalents are excluded from the computation if their
effect would be anti-dilutive.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> AUG-31-1998
<PERIOD-START> SEP-01-1997
<PERIOD-END> MAY-31-1998
<CASH> 346
<SECURITIES> 0
<RECEIVABLES> 299,027
<ALLOWANCES> 0
<INVENTORY> 368,167
<CURRENT-ASSETS> 950,878
<PP&E> 148,066
<DEPRECIATION> 35,873
<TOTAL-ASSETS> 2,843,794
<CURRENT-LIABILITIES> 1,158,398
<BONDS> 0
0
0
<COMMON> 12,663
<OTHER-SE> 3,218,686
<TOTAL-LIABILITY-AND-EQUITY> 2,843,794
<SALES> 2,787
<TOTAL-REVENUES> 2,787
<CGS> 2,463
<TOTAL-COSTS> 68,080
<OTHER-EXPENSES> 891,694
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 78,627
<INCOME-PRETAX> (1,399,424)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,399,424)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,399,424)
<EPS-PRIMARY> (0.18)
<EPS-DILUTED> (0.18)
</TABLE>
