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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, 1999
[ ] 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
604-541-1069
Issuer's Telephone Number
Securities registered under Section 12(b) of the Act:
NONE
Securities registered under Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $0.001 PER SHARE
Title of class
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes /X/
No / /
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation 405 is not continued 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 ( )
The issuers revenues for its most recent fiscal year were $398,063.
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 26, 1999 was $4,125,608. The number of shares outstanding
of the issuer's only class of Common $.001 par value, was 14,734,316 on
November 15, 1999. Transitional Small Business Disclosure Format (check one):
Yes / / No /x/
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THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH THE
COMPANY'S FINANCIAL STATEMENTS AND NOTES THERETO. INFORMATION DISCUSSED HEREIN
MAY INCLUDE FORWARD-LOOKING STATEMENTS REGARDING FUTURE EVENTS OR THE FINANCIAL
PERFORMANCE OF THE COMPANY, AND IS SUBJECT TO A NUMBER OF RISKS AND OTHER
FACTORS WHICH COULD CAUSE THE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE
CONTAINED IN ANY FORWARD LOOKING STATEMENTS. AMONG SUCH FACTORS ARE: GENERAL
BUSINESS AND ECONOMIC CONDITIONS; CUSTOMER ACCEPTANCE AND DEMAND FOR THE
COMPANY'S PRODUCTS; THE COMPANY'S OVERALL ABILITY TO DESIGN, TEST AND INTRODUCE
NEW PRODUCTS ON A TIMELY BASIS; THE NATURE OF THE MARKETS ADDRESSED BY THE
COMPANY'S PRODUCTS; AND OTHER RISK FACTORS LISTED FORM TIME TO TIME IN DOCUMENTS
FILED BY THE COMPANY WITH THE SEC.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
Vancouver-based Service Systems International, Ltd., through its majority-held
subsidiary UV Systems Technology, Inc. ("UVS"), is the manufacturer and marketer
of state of the art ultraviolet disinfection systems for wastewater and potable
water. 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, BC, 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
its consolidated majority-owned subsidiary, UV Systems Technology Inc., unless
the context otherwise requires. ULTRA GUARDR 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 UV Systems Technology Inc., for marketing rights for the Ultra GuardR
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
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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 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 Discussion and Analysis) converted the
funds loaned to UVS into Class X shares.
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 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 estimated cost more than $180 billion. This,
together with the new treatment plants projected to be built, 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 discharging 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 residuals 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 states' regulations
require that treatment a facility using chlorine, 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.
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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 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.
The installations of UV disinfection systems have 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 requires a large
number of lamps when used in large treatment plants. UV lamps need to be
replaced about once a year. A large number of lamps equal: 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 a high
level of 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, such as that provided by our company, which
deals with these issues will greatly enhance the marketing opportunities for
UV systems. Our UV system is environmentally friendly, efficient in operation
and cost-effective.
SERVICE SYSTEM'S 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
primary treatment method does not address its environmental effects. A
superior, cost-effective system for water disinfection is needed around the
world. Our UV system answers these needs. It is state of the art,
proprietary, environmentally friendly, and efficient, and provides numerous
opportunities for us to expand the scope of our activity beyond municipal
wastewater.
Key elements of our Company's strategy are:
TECHNOLOGICAL SUPERIORITY
We currently hold patents on 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, 2) automatic variability
of lamp intensity to match effluent flow 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. These include
industrial process water disinfection, potable water disinfection, and other
fluid and air disinfection. Once we establish a base in the wastewater
disinfection market, we intend to expand our business into
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disinfection of industrial process water. We also expect to pursue other
business segments, which show growth potential currently and for the future,
such as potable water disinfection, other fluid disinfecting and air
disinfection.
Recent testing of ultraviolet light as a means to deactivate Crypto and Gardia
in potable water has proven that at very low doses (below 20mWs/cm2), three log
reductions is achieved. Currently the US EPA has sanctioned additional testing
and has approved the use of a UV systems in a potable water application. We
expect that the use of UV will receive general acceptance for potable water
application in North America in the near future.
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 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 United States and in other selected
countries of the world until we achieve full customer support. 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 also has expanded 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) we have
available, we believe we have a good potential to expand into the
international market. Given adequate resources, 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 system
incorporates: 1) low-pressure, high intensity, high efficiency UV lamps, 2)
infinitely variable ultraviolet lamp controllers, 3) patented high-performance
reactor module, 4) patented flow-balanced weirs, and 5) automatic quartz sheath
cleaning system. The 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. Our UV technology can be applied to many treatment needs. These
include industrial process water disinfection, potable water disinfection, and
other fluid and air disinfection. Once we establish a base in the wastewater
disinfection market, we intend to expand our business into those areas.
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
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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
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, resulting in 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, permitting 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 in moves through the reactor module.
This ensures that all influent receives exposure at the quartz sheath, the
highest UV intensity point output of 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 temperature permit build up 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 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 system's 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 surging of the fluid, exposing the UV lamp to air and
reducing system efficiency. The Ultra Guard 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 our disinfection system is measured by a flow meter mounted
within the wastewater plant 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 multi-channel 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 UV intensity monitors
reading each UV lamp's intensity, UV output for each lamp can be increased to
compensate for unusual quartz sheath fouling, lamp aging, increased fluid flow
and changes in fluid transmission.
In our UV system, we use low-pressure, high intensity, high efficiency UV lamps.
These lamps emit high intensity light to penetrate murky effluent and reduce
fecal coliform or other
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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
system also requires up to 90% fewer lamps than most other low-pressure,
low-intensity lamps systems. Medium pressure lamp systems take 3 - 5 medium
pressure lamps to equal 1 of our lamps. Replacement downtime for our 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, third or fourth lamp
module may be installed immediately behind the first module. We have designed
the UV system to disinfect wastewater treatment plant flows up to any size.
Systems can be 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 -0.8 million gallons of wastewater disinfected.
CUSTOMERS
Our customers to date have been municipal wastewater treatment facilities and
semi-conductor plants to which sales have been made through our Japanese
agent. Ultra Guard systems have been installed at three 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. Other systems, installed in 1999, include a 3.5
million-gallon per day capacity system at Hamilton, Alabama and a 27,000
cubic meter per day system at Rosemere, Quebec. The purchase order for the
Rosemere project was received in June 1998. The system was delivered in
August 1999 and is currently undergoing acceptance testing. As of August 31,
1999, we had delivered 25 one-lamp systems to our Japanese distributor for
applications in the semiconductor industry.
In September 1998 we sold a production demonstration unit to our North Carolina
representative. This PDU is being used by the representative to test wastewater
at plants in North Carolina. Testing is ongoing at a site in Kings Mountain,
North Carolina, where color discharged from the textile industry reduces the
ability of the ultraviolet light to penetrate the fluid, creating a difficult
effluent to disinfect. Testing to date has produced encouraging results.
In August and September 1999 we received four orders for systems to be
installed in Ontario, Canada. The projects, currently in design and
manufacturing, are valued at approximately C$1.95 million. These projects are
scheduled to be delivered during the fiscal period ending August 31, 2000.
We actively continue to bid on many sites in the United States, Canada and
internationally.
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, in PDU performance, from sales received and from sales
potential. PDU testing was conducted and completed at Peterborough, Ontario in
September 1998. This testing resulted in an order that is part of the C$1.95
million noted above.
Testing for the County and District of Los Angeles, California was successfully
completed in
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June 1999. The tests concluded that our system can perform to the standards
necessary to comply with State of California Title 22 Guidelines. Title 22 is
the standard developed for wastewater reuse needs in the State of California.
The effect of applying these stringent Guidelines to a wastewater treatment
system will approximately triple the number of lamps usually required and
will therefore increase the resultant selling price of the UV system to be
delivered. The test results and report will be submitted by the County and
District of Los Angeles to the California State Health Services to provide
supporting compliance verification in our application for approval of our UV
system under these Guidelines. Acceptance under these guidelines is a
prerequisite to bidding in the State of California for wastewater
disinfection projects in California.
SALES AND MARKETING
Our Ultra Guard UV system is marketed both domestically and internationally
by two marketing employees and through a network of distributors and
representatives with specialized training in wastewater disinfection. As of
November 5, 1999, UVS had 34 distributors and representatives, 23 in North
America and 11 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 Guard UV systems 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 October 1998 we exhibited at the Water Environment Federation
in Orlando; in August 1999 we exhibited at the Electric Power Research
Institute (EPRI) energy efficiency conference in San Diego; and in October
1999 we exhibited at the Water Environment Federation in New Orleans.
We expect that our sales will be to diverse wastewater treatment plants
beginning primarily in the United States and Canada and, thereafter,
expanding world-wide. Other than for initial sales, no one customer is likely
to account for more than 10% of our 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
completed 3 production demonstration units which are available for
demonstration activities. As previously reported, one PDU has been sold to
our North Carolina representative, Emory Wilson and Associates, and is
currently site testing. One of the remaining two units is scheduled for test
demonstration at Sacramento, California. Four additional units are in process
and will be completed, as demand for testing requires. PDU's are fully
functional Ultra Guard systems, complete 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 Plant's 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 at the Treatment
Plant or the site design engineer's staff can be trained to operate 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 representative, 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
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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 November 5, 1999, we had eight 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 de-chlorination 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. Competition in 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.
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, are chlorine-based
systems. 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
forecasted that over half of chlorine alternative installations will be UV by
2010. See "INDUSTRY BACKGROUND."
Our UV competitors and their estimated their respective shares 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 Guard UV system. We believe our system
to be superior to Trojan's technologically and because of its lower
operational costs. Aquionics Inc. competes primarily in the potable water and
process industrial water sector using medium pressure UV lamps characterized
by high power consumption. IDI, PCI-Wedeco and Capital Controls sell UV
systems of the low pressure, low intensity type for high quality wastewater
disinfection. PCI-Wedeco has recently introduced a low pressure, high
intensity UV lamp system. This system will, however, still require 4-6 lamps
to equal one Ultra Guard-TM- lamp. Compared to competing systems, our UV
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 result
in a lower life cycle operating cost for our systems compared to competitors.
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 of these factors, we believe we can provide a substantially better and
consistent quality effluent discharge in terms of total fecal coliform, e-
coli or other microbiological concentrations at reduced capital and operating
cost.
Our problem with competing in this marketplace is the conservative nature of
the customer. Although we can demonstrate our superiority, our lack of
financial resources results in a reluctance on the part of the customer to
conclude an acquisition of the Ultra Guard system - Refer to Risk Factors.
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PATENTS AND TRADEMARKS
Key components of the Ultra Guard systems are our patents in the United States,
Canada and International Patent Protection Treaty Countries. Patents cover the
UV disinfection system reactor module and the flow balanced weir. Patent
protection on the lamps expired in 1999, but due to the technology and the cost
involved in manufacturing the lamp and the compatible electronics needed to
operate the lamps, we believes 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, 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 that 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. The wastewater
treatment plant must comply with these regulations. 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 our potential liability if not indemnified,
we could become liable to third parties for environmental problems. We could be
required to comply with direct regulations by law or regulations enacted in the
future (including environmental laws). In these cases, our business and
operations could be materially or adversely affected.
We are not aware of any regulations that would adversely affect our ability
to market our system. The effectiveness of the Ultra Guard 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 Guard 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
10
<PAGE>
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 are considered to be key components of our business
strategy. As of November 5, 1999, we had 8 employees collaborating on product
manufacturing and development activities, with a combined 100 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. Research and development effort with
respect to 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 water treatment units for industrial
processes, in addition to sewage effluent disinfection. On a combined pro
forma basis, assuming the acquisition of the majority of UVS outstanding
common stock had occurred, the company research and development expense in
fiscal 1997 was $380,213, in fiscal 1998 was $264,282 and in fiscal 1999 was
$258,132.
EMPLOYEES
As of August 31, 1999, Service Systems had three part-time employee, and UV
Systems Technology, Inc. had 11 full-time employees and 3 part-time
employees. The Service Systems part time employees were engaged in
management. The UV Systems part time employees were engaged in management,
two employees were engaged in office services, 1 employees was engaged in
sales and marketing, one employee was engaged in R & D and design and five
were engaged in production and manufacturing of the Ultra Guard systems which
have been sold. The company receiving the benefit of consulting services,
Service Systems or UV Systems Technology, pays for the service.
RISK FACTORS
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH THE
COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO. INFORMATION
DISCUSSED HEREIN MAY INCLUDE FORWARD-LOOKING STATEMENTS REGARDING FUTURE
EVENTS OR THE FUTURE FINANCIAL PERFORMANCE OF THE COMPANY, AND ARE SUBJECT TO
A NUMBER OF RISKS AND OTHER FACTORS WHICH COULD CAUSE THE ACTUAL RESULTS TO
DIFFER MATERIALLY FROM THOSE CONTAINED IN 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
AVILITY TO DESIGN, TEST AND INTRODUCE NEW PRODUCTS ON A TIMELY BASIS; THE
NATURE OF THE MARKETS ADDRESSED BY THE COMPANY'S PRODUCTS; AND OTHER RESK
FACTORS LISTED FROM TIME TO TIME IN DOCUMENTS FILED BY THE COMPANY WITH THE
SEC.
WE ARE 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. We have generated no profits to date and have a loss as
of the end of our 1999 fiscal year of $1,285,199. We cannot assure that the
company will become profitable at any time in the foreseeable future.
11
<PAGE>
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 the Ultra Guard system does provide us competitive
technological and operational advantages, there is no assurance that this
advantage will enable us to compete effectively or that they will continue.
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 be assured that we will
be able to compete effectively in the current or future markets or that
competitive pressure will not adversely affect our business, financial
condition or results of operations.
WE MAY EXPERIENCE PERIODS OF LIMITED WORKING CAPITAL AND MAY BE EXPECTED TO
REQUIRE FINANCING FOR WORKING CAPITAL DURING THOSE PERIODS. 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 when sales are made. Our sales
of Ultra Guard systems to governmental entities may be expected to occur on
an intermittent rather than consistent basis as requests for proposal ("RFP")
are issued and awards made. 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. Sales on both an annual and quarterly basis are subject to
fluctuations which are often beyond our control.
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.
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.
ENVIRONMENTAL REGULATIONS THAT APPLY TO THE SEWAGE INDUSTRY ARE SPECIFIC TO
THE EFFLUENT BEING DELIVERED TO THE RECEIVING WATERS. THE WASTEWATER
TREATMENT PLANT, AND OUR INSTALLED SYSTEMS, MUST COMPLY WITH THESE
REGULATIONS. Our business and manufacturing are conducted from British
Columbia, Canada. We are not currently subject to any special regulatory
requirements above those that are applicable to manufacturing businesses in
general in, Canada and the United States. Refer to REGULATORY MATTERS
WE ANTICIPATE THAT ULTRA GUARD SYSTEMS MAY BE INSTALLED AS REPLACEMENT
SYSTEMS FOR EXISTING DISINFECTION SYSTEMS, ESPECIALLY CHLORINATED SYSTEMS.
The trend is to phase out clorinated systems because of
12
<PAGE>
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.
OUR SYSTEMS CONTAIN STATE-OF-THE-ART COMPONENTS. We cannot assure 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.
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. We do not have contracts
which would assure availability and price of components to meet our short
term requirements. Lack of timely availability of components could cause
delays in installation of the Ultra Guard system and affect our revenues
during certain periods. As well, this could lead to customer dissatisfaction.
Limited 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.
OUR SUCCESS IS LARGELY DEPENDENT UPON OUR PRESIDENT, KEN FIELDING, AND THE CHIEF
FINANCIAL OFFICER, SECRETARY AND TREASURER, JOHN GAETZ. No employment agreements
are in place with either of these employees, nor do we carry key man insurance
with respect to them. Our continued growth and prosperity, our ability to
maintain our competitive position and our ability 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. We might not be
able to continue to retain or attract qualified personnel.
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,
largely in the past 10 years with respect to acceptable microbiological
discharge levels. Changes could cause us to incur significant expense to
redesign or upgrade our system.
THE ULTRA GUARD SYSTEM MIGHT BE SUBJECT TO PRODUCT LIABILITY OR COMMERCIAL
WARRANTY CLAIMS. Our company does not have product liability insurance.
Considering the use of our systems in large-scale municipal and industrial
water treatment systems, the lack or insufficiency of product liability
insurance could materially adversely affect our financial condition and
ability to do business. We cannot assure that we will be able to obtain
coverage at acceptable premiums that will be adequate to protect us from
liability.
SERVICE SYSTEMS THROUGH UVS, OWNS PATENTS ON ITS FLOW REACTOR CHAMBER AND
DISCHARGE WEIR, AND MANUFACTURES AND MARKETS ITS PRODUCTS UNDER THOSE
PATENTS. We cannot assure that the issued patents will not be infringed or
that additional patents that are applied for will be issued. The costs of
prosecuting an infringement suit can be very significant. If an infringement
13
<PAGE>
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 patent, trademark, or copyrights owned by others, for which licenses 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.
WE HAVE OUTSTANDING WARRANTS AND OPTIONS THAT 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. As of August 31, 1999, the Company had 5,345,812
vested warrants and options outstanding.
OUR COMPANY'S COMMON STOCK IS TRADED ON THE ELECTRONIC 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.
FUTURE SALES BY EXISTING SHAREHOLDERS COULD ADVERSELY AFFECT THE PREVAILING
MARKET PRICE OF THE COMMON STOCK. We have 13,090,935 shares of Common Stock
outstanding. Of these shares, approximately 10,297,870 are now eligible for sale
in the public market without restriction pursuant to Rule 144(k) or Regulation S
under the Securities Act.
SINCE INCEPTION OF OUR COMPANY, 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.
ITEM 2. DESCRIPTION OF PROPERTY
Service System's executive officers 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 plans covering all of its facilities and
contents, as well as general liability insurance in an amount considered
adequate in the industry (although no assurance can be given that the amount
will, in fact, be sufficient should a claim arise).
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<PAGE>
ITEM 3. LEGAL PROCEEDINGS
On October 20, 1998 a suit was filed in the Supreme Court of British Columbia by
Thomas O'Flynn against the Company, Kenneth Fielding (the Company's President
and Director), and Charles P Nield (a former Director and Vice President of the
Company). O'Flynn alleges that in April of 1996, he purchased shares of the
Common Stock based on a representation that they would be free trading in 40
days of "the filing of a prospectus". He further alleges that in September of
1996 he purchased additional shares of Common Stock based on the representation
that the shares would be free trading within 40 days of the Common Stock
becoming free trading. O'Flynn alleges that the representation was a warranty
and was incorrect. He further alleges that he suffered a loss because the share
price decreased while he was holding the shares. He seeks damages for breach of
warranty, negligence, misrepresentation and breach of fiduciary duty. The amount
claimed is not specified. The Company filed an answer denying the claims and
continues to actively defend the suit. Examination for discovery of Charles P
Nield was conducted in June 1999; since then there has been no further activity.
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.
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<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Service System's Common Stock is traded in the over-the-counter market and is
listed on the Electronic 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 Electronic Bulletin Board. The
quotations reflect inter-dealer prices, without retail mark-up, markdown or
commission, and may not represent actual transactions.
<TABLE>
FISCAL YEAR 1998
<S> <C> <C>
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
FISCAL YEAR 1999
Quarter ended November 30, 1998 0.115 0.07
Quarter ended February 28, 1999 0.23 0.09
Quarter ended May 31, 1999 1.218 0.20
Quarter ended August 31, 1999 0.687 0.21
</TABLE>
As of August 31, 1999, there were approximately 99 holders of record of the
Common Stock.
Service Systems has never had profits and has never paid cash dividends on its
Common Stock. It is our intention to retain future earnings, if any, to provide
funds for business operations and, accordingly, does not anticipate paying any
cash dividends on its Common Stock in the foreseeable future; however there are
no restrictions to the payment of dividends.
OTHER SALES
During the 1999 fiscal period, Service Systems made the following sales 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; no
underwriters were involved and no commissions were paid in connection with
the sales.
<TABLE>
<CAPTION>
NAME DATE UNITS PRICE PER UNIT TOTAL
- ---- ---- ----- -------------- -----
<S> <C> <C> <C> <C>
P Colak 2/99 100,000 shares $0.10 $10,000
100.000 warrants
M Smith 2/99 11,000 shares $0.10 $1,100
</TABLE>
The warrants are exercisable at $.40 per share until February 2001.
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 are subject to a number of risks and other factors, which could
cause the actual results to differ materially from those, contained in the
forward-looking statements. Among such factors are,1) general business and
economic conditions, 2) customer acceptance and demand for our products, 3)
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<PAGE>
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 1. 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.
MANAGEMENT'S DISCUSSION
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 ultra
violet-based patented water treatment system. This system is sold primarily
for municipal wastewater disinfection; however, the system can also be
adapted for treatment of process and industrial wastewater ( where it is
currently being applied through UVST's Japanese agent) and for potable water,
bottled products and agriculture and aquaculture water treatment.
In September 1995 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 six-month period. On December 1,
1996, Service Systems acquired 50.69% 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 49.31% 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, and 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
$579,535 of additional funding and reduced debt by requiring MDS and Service
Systems to convert their loans receivable into Class X 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 was, with regard to Service Systems, to 1) forgive
$155,322 accrued interest on its existing current loans and 2), convert its
existing 20% per annum loan receivable of $820,771 into Class X Preferred
shares,
The effect of this Agreement was, with regard to MDS, 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 20%
per annum loans receivable, $174,752 into a long-term loan, with a term of
five years, interest at 10% per annum, compounded annually, with interest
accruing for 18 months and payable monthly thereafter.
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<PAGE>
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 million 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
five (5) years, interest at10 % per annum, compounded annually, with interest
accruing for 18 months and payable monthly thereafter.
During the period from December 1, 1996 to September 30, 1997, 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 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, at a PDU test site at Ville de Repentigney near
Montreal, Quebec. The test results concluded that the cleaning system did
perform above anticipated levels, and the system has now been incorporated into
current products sold. The temperature control system for the UVS System was
also tested at the Ville de Repentigney test site during temperatures ranging
down to minus 8 degrees Celsius and up to plus 8 degrees Celsius. The test
showed that with temperature control, infinite 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.
Negotiations continue on finalizing a project delivered to New Zealand in 1995
by UVS and release of hold back funds. Testing of the system is ongoing to
determine if the equipment is in compliance at times of correct effluent flow
conditions. During this fiscal period, the client ordered changes to his UV
system amounting to C$31,200, all of which was prepaid. Fifty percent of the
work had been completed by the end of the fiscal period .
A 6 lamp Ultra Guard UV system, valued at $127,000, capable of disinfecting a
wastewater flow of 3.5 million gallons per day was sold to Hamilton, Alabama
and was installed in March, 1999. Successful final performance testing was
conducted in July 1999. This UV project is the first full scale operating
Ultra Guard UV system installed in North America. We expect that the Ultra
Guard UV system in Hamilton will provide significant equipment exposure to
others contemplating upgrading their Wastewater Treatment Plant discharges by
replacing chlorine as the disinfecting means with environmentally friendly
ultraviolet disinfection.
In June 1998, UVS received a letter of intent for a UV system valued at
C$605,000 for a project in Toronto, Canada. In September 1999, the formal
order was secured for about C$ 685,000. The project is currently in design
and scheduled for delivery in June 2000. The UV system to be delivered to
Toronto is part of a C$50 million combined storm overflows (CSO) project (the
world's largest submersible CSO pumping station) and will be used for
disinfection of CSO.
After successful PDU testing in September & October, 1998 at the City of
Peterborough wastewater treatment plant, and subsequent response to the request
for proposal in August 1999, in September the Company received an order valued
at over C$1,100,000. The UV system will disinfect effluent flow in excess of 36
million gallons per day. The Wastewater Plant is scheduled to be operational by
the end of December 2000.
Purchase orders for two additional UV systems valued at approximately
C$150,00 have been received. The systems will be produced during the 2000
fiscal period and will be delivered into the Province of Ontario.
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<PAGE>
In January 1999 a PDU was installed at the County Sanitation Districts of Los
Angeles Country (the County). The testing program was presented at the Energy
Efficiency Forum held in San Diego on August 30-31, 1999. Testing was
completed in July 1999 and was conducted and paid for by the County. The
purpose of the test was to determine the Ultra Guard UV system's ability
to disinfect wastewater to Title 22 Guidelines, a stringent test protocol
required as a precursor to use of a company's UV product in reuse of
wastewater for agriculture and other purposes. The County reported that the
findings of the five-month testing program confirmed the ability of the Ultra
Guard UV system to achieve Title 22 design objectives at fifty percent
of the dose required by low pressure, low intensity technology previously
tested. A substantial saving in energy usage, 12.7% was achieved by using the
Ultra Guard system. The same safeties are applied to both types of lamps.
SUBSEQUENT EVENT
In October 1999 the Company signed an agreement with a leading Australian UV
equipment manufacturer to market its product in North American. The products
provided through this agreement would permit the Company to sell into market
areas not presently serviced. These products will service small to intermediate
scale projects for municipal and industrial clients in the area of potable
water, food processing and recreational services. In addition, the product is
used by clients requiring treatment solutions beyond disinfection such as
oxidation of chemical and organic by-products occurring in nature as well as
those occurring as a result of production processes.
RESULTS OF OPERATIONS FOR THE TWELVE MONTHS ENDED AUGUST 31, 1999
The following selected financial data for the years ended August 31, 1997
through August 31, 1999 have been derived from the Company's audited
consolidated financial statements and are provided to assist the reader in
understanding the discussion which follows. For full information, the reader
should refer to the audited consolidated financial statements and related
notes thereto for the periods discussed.
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Revenue $398,063 $202,894 $24,118
Loss per common and common
Equivalent share $ (0.13) $ (0.14) $ (0.29)
Total assets $2,259,106 $2,652,179 $2,949,578
Long-term debt $2,491,056 $2,270,525 $1,469,660
Total liabilities $3,651,936 $2,491,096 $2,735,975
Total stockholders' equity $(1,392,830) $ 161,083 $ 213,603
</TABLE>
Year Ended August 31, 1999 compared to Year Ended August 31, 1998.
REVENUES. For the 1999 fiscal year, we reported revenues of $398,063,
an increase of $195,169, or 96%, from $202,894 in fiscal 1998. This increase
resulted from our projects in Rosemere, Quebec, Hamilton, Alabama, Japan, North
Carolina and New Zealand.
DIRECT PROJECT COSTS. For fiscal 1999, we reported direct project costs
of $344,139, an increase of $245,813, or 250%, from $98,326 in fiscal 1998. This
increase resulted from our increased project awards, some of which should
generate revenues in fiscal 2000.
GROSS PROFIT. For fiscal 1999, we reported a gross profit of $53,924, a
decrease of $50,644, or 48%, from $104,568 in fiscal 1998. This decrease
resulted from the increased direct project costs in the 1999 period.
MANUFACTURING COSTS NOT APPLIED. Manufacturing costs not applied are
annual plant overhead costs not being charged against specific contracts. The
balance not charged is identified as manufacturing cost not applied. As our
level of activity increases, we expect that these costs will be fully recovered.
For fiscal 1999, we reported $34,492 of these cost, a decrease of $48,085, or
58%, from $82,577 in fiscal 1998. This decrease occurred as a result of
increased sales and resultant increased manufacturing activities.
SELLING EXPENSES. For fiscal 1999, we reported selling expenses of
$265,470, an increase of $39,577, or 18%, from $225,893 in fiscal 1998. This
increase was the result of sales commissions and shipping costs paid on the
Hamilton and Rosemere projects.
GENERAL AND ADMINISTRATIVE EXPENSE. For fiscal 1999, we reported
general and administrative expense of $421,482, a decrease of $247,112, or 37%,
from $668,594 in fiscal 1998. This decrease was primarily the result of
decreases in bad debts, legal fees, interest expense, commission on bonds
issued, and miscellaneous office expenses, and the closing of our Scottsdale,
Arizona office.
RESEARCH AND DEVELOPMENT EXPENSE. For fiscal 1999, we reported research
and development expense of $258,132, a decrease of $6,150, or 2%, from $264,282
in fiscal 1998. This nominal decrease indicated that expenditures for research
and development were essentially
19
<PAGE>
comparable in both fiscal periods.
AMORTIZATION OF GOODWILL. For fiscal 1999, we reported amortization of
goodwill of $485,081, the same figure as reported for fiscal 1998. The goodwill
resulted from our acquisition of a majority interest in our subsidiary, UVS. The
goodwill will be completely amortized in 2002.
INTEREST, NET OF INTEREST INCOME. For fiscal 1999, we reported
interest, net of interest income, of $98,200, an increase of $189,012, or 209%,
over $(90,312) in fiscal 1998. This increase resulted from a waiving of interest
expense on shareholder loans in 1998 (see the discussion of the 1998 interim
agreement with WOF, above).
FOREIGN EXCHANGE TRANSLATION LOSS (GAIN). For fiscal 1999, we reported
a foreign exchange translation loss of $104,230, an increase of $349,721, or
142%, over a gain of ($245,491) in fiscal 1998. The loss in the 1999 period
resulted from an increase in the value of the Canadian dollar.
NET LOSS FOR THE PERIOD. For fiscal 1999, we reported a net loss of
$1,613,163, an increase of $327,607, or 25%, over $1,285,556 in fiscal 1998.
This increase in net loss resulted from increased expenses and project costs,
offset by the increase in project revenue.
NET LOSS PER SHARE. For fiscal 1999, we reported a net loss per share
of $(0.13), a decrease of $0.01, or 7%, from $(0.14) in fiscal 1998. The
decrease in the net loss was largely the result of an increase in the number of
shares and share equivalents during fiscal 1999.
Year Ended August 31, 1998 compared to the Year Ended August 31, 1997
REVENUES. For the 1998 fiscal year, we reported revenues of
$202,894, an increase of $178,776, or 741%, from $24,118 in fiscal 1997. This
increase resulted from our sales to Japan, and receipt of a portion of the
revenue from the Hamilton, Alabama sale.
DIRECT PROJECT COSTS. For fiscal 1998, we reported direct project costs
of $98,326, an increase of $57,539, or 141%, from $40,787 in fiscal 1997. This
increase resulted from our increased project awards.
GROSS PROFIT. For fiscal 1998, we reported a gross profit of $104,568,
an increase of $121,237, or 727%, from $(16,669) in fiscal 1997. This increase
resulted from the increase in business activity and projects awarded in the 1998
period.
MANUFACTURING COSTS NOT APPLIED. Manufacturing costs not applied are
annual plant overhead costs not being charged against specific contracts. For
fiscal 1998, we reported $82,577 of these costs, an increase of $48,039, or
139%, from $34,538 in fiscal 1997. This increase occurred as a result of
decreased sales and the resultant decreased manufacturing activities.
SELLING EXPENSES. For fiscal 1998, we reported selling expenses of
$225,893, an increase of $69,976, or 45%, from $155,917 in fiscal 1997. This
increase was the result of increased selling effort attendant upon the hiring of
a new Vice President for Marketing in fiscal 1998.
GENERAL AND ADMINISTRATIVE EXPENSE. For fiscal 1998, we reported
general and administrative expense of $688,594, an increase of $243,614, or 55%,
from $444,980 in fiscal 1997. This increase was primarily a result of an
increase in consulting fees and commissions expense on debentures issued.
RESEARCH AND DEVELOPMENT EXPENSE. For fiscal 1998, we reported research
and development expense of $264,282, a decrease of $48,159, or 15%, from
$312,441 in fiscal 1997. This decrease resulted from our having completed
development of our UV system to a market ready product.
20
<PAGE>
AMORTIZATION OF GOODWILL. For fiscal 1998, we reported amortization
of goodwill of $485,081, an increase of $121,270, or 33%, over $363,811 in
fiscal 1997. The increase resulted because the 1997 period reflects 8 months
of Service Systems ownership of UV Systems, whereas 1998 covers a full 12
month period. The goodwill resulted from our acquisition of a majority
interest in our subsidiary, UVS. The goodwill will be completely amortized in
2002.
INTEREST, NET OF INTEREST INCOME. For fiscal 1998, we reported
interest, net of interest income, of $(90,812), a decrease of $151,098, or 249%,
from $60,786 in fiscal 1997. This decrease resulted from a waiving of interest
expense on shareholder loans in 1998 (see the discussion of the 1998 interim
agreement with WOF, above).
FOREIGN EXCHANGE TRANSLATION LOSS (GAIN). For fiscal 1998, we reported
a foreign exchange translation gain of $(245,491), an increase of $254,774, or
2,745%, over a loss of 9,283 in fiscal 1997. The gain in the 1998 period
resulted from a decrease in the value of the Canadian dollar.
NET LOSS FOR THE PERIOD. For fiscal 1998, we reported a net loss of
$1,285,556, a decrease of $112,869, or 8%, from $1,398,425 in fiscal 1997. This
decrease in net loss is the resultant net decrease of the increase and decrease
of expenses detailed above.
NET LOSS PER SHARE. For fiscal 1999, we reported a net loss per share
of $(0.14), a decrease of $0.15, or 52%, from $(0.29) in fiscal 1998. The
decrease in the net loss was largely the result of an increase in the number of
shares and share equivalents during fiscal 1998.
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 due largely from governments, if and when sales are
made. In addition, we are dependent on sales to a licensee, which is obligated
to purchase agreed upon system components, 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
21
<PAGE>
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 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.
During the twelve months ended August 31, 1999, current assets increased $50,987
as compared to the period ended 1998. The increase, net of decrease, was due
primarily to an increase in accounts receivable of $199,168, inventory of
$36,311 and short-term investments $13,585; offset by a decrease in cash of
$199,067. Long term assets decreased, net of increases, during the fiscal period
ended 1999 by $444,031, as compared to the period ended 1998, due primarily to
the amortization of goodwill of $485,081, and capital assets of $49,884, offset
by an increase in patents and trademarks, of $90,004.
Current liabilities increased during the fiscal period ended 1999 by $940,309 as
compared to the period ended 1998. The increase as detailed on the financial
statements was due to an increase in cash borrowings necessary to finance
operations. In September and October 1999, subsequent to the end of the 1999
fiscal period, debt was reduced by $358,853 as a result of exercising of
warrants into common stock, $289,256, and the sale of common stock, $69,597.
Long-term debt increased during the fiscal period ended 1999 by $220,531 as
compared to the 1998 period. The increase was due primarily to accrued interest,
$104,902 and foreign exchange translation losses, $115,629.
We financed our operations during this fiscal period, in part, from proceeds of
sales of restricted common stock, bank loans, loans from Elco Bank, loans from
related parties and minority shareholders of UVS.
We expect that during fiscal 2000, as and if sales at UVS 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 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 recognise a two-digit
date field as belonging to the 21st century. Mistaking A00@ 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 from its
internal computer systems as well as from computer systems of third parties with
which it deals. Failures of our computers, 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
Director of Manufacturing and Engineering managers to review or products,
business and engineering
22
<PAGE>
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 all internal business and engineering computer systems to ensure
that their systems either will be Y2K ready, or have been modified or
replaced by Y2K ready systems.Except for two computer systems which require
modification, we have completed, to the best of our ability, the readiness of
the internal business and engineering 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. As a precaution, we
are purchasing an upgrade model of the accounting information system to be
assured that the system is fully compliant. We reviewed, simulated and
tested, in a Y2K environment, our engineering, business information systems,
internal telephone equipment, local networks, and security and sprinkler
systems to verify their Y2K readiness.
SUPPLIERS. Our major suppliers are component parts distributors and contract
manufacturers. Often we source our products and manufacturing services from
multiple and/or competing vendors. We have formally canvassed our suppliers
and received written responses to our Y2K questionnaires, which have
determined to the best of our ability to what extent we may be vulnerable due
to their failure to be Y2K ready. We cannot assure 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 minimize
disruption due to non-Y2K readiness, we have contingency plans, including
moving to identified alternate sources, or developing new alternate sources.
PRODUCTS. The task force has assessed the ability of outside sourced, computer
based control systems used within our product to handle the year 2000. Certain
of our computer processor board level products and integrated computer systems
utilise computer chips that include built in operating systems (BIOS) allowing
the computer to initialise and load software. All current built for delivery
computer systems have been assessed for readiness before purchase.
COSTS. The cost of our Y2K assessment, including both incremental spending and
re-deployed resources, has not been 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 our customers' decisions to purchase our
Ultra Guard UV system. However, we can not predict the impact on us of our
customers' lack of Y2K compliance and any disruption 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 effect
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 of Y2K remedial work
and have not set aside and contingency fund to deal with any contingencies
which may arise. The cost for Y2K compliance is 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 may differ
materially from those plans. Specific factors that might cause material
differences include, but are not limited to, the availability and the cost of
personnel trained in this area and the ability to identify and correct all
relevant computer codes.
23
<PAGE>
ITEM 7. CONSOLIDATED FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report........................................................................................25
Consolidated Balance Sheets.........................................................................................26
Consolidated Statements of Operations...............................................................................27
Consolidated Statements of Cash Flows...............................................................................28
Notes to the Consolidated Financial Statements......................................................................29
</TABLE>
24
<PAGE>
[LETTERHEAD]
Independent Auditors' Report
To the Board of Directors and Stockholders of
Service Systems International, Ltd.
We have audited the accompanying consolidated balance sheets of Service Systems
International, Ltd. as of August 31, 1999 and 1998, 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, 1999 and 1998, 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"
Chartered Accountants
Vancouver, Canada
November 10, 1999
25
<PAGE>
Service Systems International, Ltd.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
August 31,
-------------------------
<S> <C> <C>
1999 1998
$ $
Assets
Current Assets
Cash and short-term investments 7,985 207,052
Short-term investments - restricted (Note 3) 262,902 249,317
Accounts receivable 310,125 110,957
Inventory and contract work in progress 274,592 238,281
Prepaid expenses and deposits 37,166 36,175
- -------------------------------------------------------------------------------------------------------------------
Total Current Assets 892,769 841,782
Property, Plant and Equipment (Note 4) 91,513 141,397
Other Assets
Goodwill (net of amortization of $1,333,973) 1,091,435 1,576,516
Patents and trademarks (Note 5) 183,388 92,484
- -------------------------------------------------------------------------------------------------------------------
Total Assets 2,259,106 2,652,179
===================================================================================================================
Liabilities and Stockholders' Equity (Deficit)
Current Liabilities
Bank demand loan (Note 6(a)) 209,381 -
Accounts payable 243,067 102,823
Accrued liabilities 33,293 14,677
Vacation pay payable 22,057 7,629
Customer deposits 17,147 -
Loans payable (Notes 6 and 13) 428,236 -
Amounts owing to related parties (Note 7) 207,699 95,442
- -------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 1,160,880 220,571
Long-Term Debt (Note 8) 2,491,056 2,270,525
- -------------------------------------------------------------------------------------------------------------------
Total Liabilities 3,651,936 2,491,096
- -------------------------------------------------------------------------------------------------------------------
Contingencies (Notes 1 and 11)
Stockholders' Equity (Deficit)
Common stock (Note 9), $.001 par value,
50,000,000 shares authorized, 13,094,988
and 12,662,988 issued and outstanding respectively 13,095 12,663
Additional paid-in capital 3,132,437 3,073,619
Deficit (4,538,362) (2,925,199)
- -------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity (Deficit) (1,392,830) 161,083
- -------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity 2,259,106 2,652,179
===================================================================================================================
</TABLE>
(See accompanying notes to financial statements)
26
<PAGE>
Service Systems International, Ltd.
Consolidated Statements of Operations and Deficit
<TABLE>
<CAPTION>
Year ended August 31,
-------------------------
1999 1998
$ $
<S> <C> <C>
Project Revenue 398,063 202,894
Project Costs 344,139 98,326
- -------------------------------------------------------------------------------------------------------------------
Gross Profit 53,924 104,568
Manufacturing Overhead Not Applied 34,492 82,577
- -------------------------------------------------------------------------------------------------------------------
19,432 21,991
- -------------------------------------------------------------------------------------------------------------------
Expenses
Selling 265,470 225,893
General and administrative 421,482 668,594
Research and development 258,132 264,282
Amortization of goodwill 485,081 485,081
Interest, net of interest income and interest waived 98,200 (90,812)
Foreign exchange (gain) loss 104,230 (245,491)
- -------------------------------------------------------------------------------------------------------------------
1,632,595 1,307,547
- -------------------------------------------------------------------------------------------------------------------
Net Loss for the year 1,613,163 1,285,556
Deficit - Beginning of year 2,925,199 1,639,643
- -------------------------------------------------------------------------------------------------------------------
Deficit - End of year 4,538,362 2,925,199
- -------------------------------------------------------------------------------------------------------------------
$ $
Net Loss per share (0.13) (0.14)
- -------------------------------------------------------------------------------------------------------------------
# #
Weighted average shares outstanding 12,757,000 9,160,000
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
(See accompanying notes to financial statements)
27
<PAGE>
Service Systems International, Ltd.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended August 31,
-------------------------
1999 1998
$ $
<S> <C> <C>
Cash Flows to Operating Activities
Net loss (1,613,163) (1,285,556)
Adjustments to reconcile net loss to cash
Amortization of goodwill 485,081 485,081
Depreciation 50,344 49,602
Foreign exchange translation (gain) loss 104,230 (245,491)
Convertible debenture interest converted into shares -- 25,980
Common stock issued for expenses 11,100 42,558
Accrued interest on long-term debt 122,675 --
Change in non-cash working capital items
(Increase) in accounts receivable (199,168) (47,926)
(Increase) decrease in inventory and contract work in progress (36,311) 118,727
(Increase) in prepaid expenses and deposits (991) (23,625)
Decrease (increase) in research credit receivable -- 244,791
Increase (decrease) in accounts payable, accrued liabilities,
vacation pay payable and customer deposits 190,435 (117,767)
- -------------------------------------------------------------------------------------------------------------------
Net Cash Used in Operating Activities (885,768) (753,626)
- -------------------------------------------------------------------------------------------------------------------
Cash Flows (to) from Investing Activities
Acquisition of short-term investment - restricted (13,585) (249,317)
Additions to patents and trademarks (95,764) (55,826)
Capital assets acquired (25,433) (17,695)
Proceeds on disposal of capital assets 29,833 --
- -------------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (104,949) (322,838)
- -------------------------------------------------------------------------------------------------------------------
Cash Flows from (to) Financing Activities
Cheques issued in excess of funds on deposit -- (8,752)
Proceeds from bank demand loan 209,381 --
Common stock issued 48,150 46,000
Increase in loans payable 427,015 75,030
Increase in amounts owing to related parties 107,104 51,785
Proceeds from long-term debt -- 588,885
Proceeds from convertible debenture converted to common stock -- 529,929
- -------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities 791,650 1,282,877
- -------------------------------------------------------------------------------------------------------------------
Increase (Decrease) in Cash (199,067) 206,413
Cash - Beginning of Year 207,052 639
- -------------------------------------------------------------------------------------------------------------------
Cash - End of Year 7,985 207,052
- -------------------------------------------------------------------------------------------------------------------
Non Cash Financing Activities
111,000 (1998 - 3,149,300) common shares were issued to settle
debts at prices ranging from $0.10 to $0.30 11,100 580,839
- -------------------------------------------------------------------------------------------------------------------
Cash paid for interest -- --
Cash paid for income tax -- --
</TABLE>
(See accompanying notes to financial statements)
28
<PAGE>
Service Systems International, Ltd.
Notes to the Consolidated Financial Statements
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. On December 1,
1996 the Company acquired 50.7% of UV Systems Technology Inc. ("UVST"), a
Canadian operating company. Through UVST, the Company manufactures and
markets its Ultra Guard-R- 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 the Company's status has changed to an
operating company, the operating activities have not yet produced positive
cash flows or significant revenue and the Company has experienced
significant operating losses to date with total losses accumulated to
August 31, 1999 of $4,538,362. These factors raise substantial doubt about
the Company's ability to continue as a going concern. The ability of the
Company to continue operations is dependent upon its successful efforts to
raise additional equity and/or debt financing in the long term, continue
developing the market for its products, and the attainment of profitable
operations.
2. Significant Accounting Policies
Consolidated financial statements
These financial statements include the accounts of the Company, and its
50.7% owned Canadian subsidiary, UVST.
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.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Depreciation is
computed on a straight-line method using an estimated useful life of five
years.
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.
Patents and trademarks
Patents and trademarks are amortized to operations over their estimated
useful lives of twenty years.
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.
Comparative Figures
Certain of the prior year's figures have been reclassified to conform with
the current year's presentation.
29
<PAGE>
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 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 administrative 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.
The resulting translation gain or loss is 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, 1999 the Company has accumulated net operating losses in Canada and
the United States available to offset future taxable income as scheduled
below:
<TABLE>
<CAPTION>
Canadian United States
Losses Losses
Year $ Expiration Date $ Expiration Date
<S> <C> <C> <C> <C>
1995 82,000 2002 -
1996 463,000 2003 240,000 2011
1997 558,000 2004 202,000 2012
1998 191,000 2005 650,000 2013
1999 872,000 2006 152,000 2014
------------- -------------
2,166,000 1,244,000
============= =============
</TABLE>
Pursuant to SFAS 109 the Company is required to compute tax asset benefits
for net operating losses carried forward. If total losses were recognized
the Company would receive a tax benefit of $1,500,000. The 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 losses in future years,
therefore, a valuation allowance of $1,500,000 has been recognized.
Basic and Diluted Net Income (Loss) per Share
The Company computes net income (loss) per share in accordance with SFAS
No. 128, "Earnings per Share". This statement requires presentation of
both basic and diluted earnings per share (EPS) on the face of the income
statement. Basic EPS is computed by dividing net income (loss) available
to common shareholders (numerator) by the weighted average number of
common shares outstanding (denominator) during the period. Diluted EPS
gives effect to all dilutive potential common shares outstanding during
the period including stock options, using the treasury stock method, and
convertible preferred stock, using the if-converted method. In computing
Diluted EPS, the average stock price for the period is used in determining
the number of shares assumed to be purchased from the exercise of stock
options or warrants. Diluted EPS excludes all dilutive potential common
shares if their effect is anti dilutive.
Accounting for Stock-Based Compensation
The Company accounts for stock based compensation in accordance with SFAS
No. 123, "Accounting for Stock-Based Compensation." This statement
requires that stock awards granted subsequent to January 1, 1995, be
recognized as compensation expense based on their fair value at the date
of grant. Alternatively, a company may account for granted stock awards
under Accounting Principles Board Opinion (APB) No. 25, "Accounting for
Stock Issued to Employees," and disclose pro forma income amounts which
would have resulted from recognizing such awards at their fair value. The
Company has elected to account for stock-based compensation expense under
APB No. 25 and make the required pro forma disclosures for compensation
expense in accordance with SFAS No. 123 (see Note 9(b)).
30
<PAGE>
2. Significant Accounting Policies (continued)
New Accounting Pronouncements
Effective September 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income." This
statement requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in
a financial statement that is displayed with the same prominence as other
financial statements. Comprehensive income is the same as net income for
all periods presented.
Effective September 1, 1998, the Company adopted Statement of Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information." This statement requires the Company to report income
(loss), revenue, expense and assets by business segment including
information regarding the revenues derived from specific products and
services and about the countries in which the Company is operating. The
Statement also requires that the Company report descriptive information
about the way that operating segments were determined, the products and
services provided by the operating segments, differences between the
measurements used in reporting segment information and those used in the
Company's general-purpose financial statements and changes in the
measurement of segment amounts from period to period. As noted above this
statement establishes standards for reporting and display and has no
material effect on the Company's financial condition or results of
operations. See Note 10 for segmented information disclosures.
Effective September 1, 1998 the Company adopted Statement of Financial
Accounting Standards No. 132, "Employers' Disclosures about Pensions and
other Post Retirement Benefits." This statement standardizes the
disclosure requirements for pension and other post retirement benefits.
The Company typically does not offer the types of benefit programs that
fall under the guidelines of this statement.
In June 1998 and June 1999, the FASB issued Statement of Financial
Accounting Standards No.'s 133 and 137, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting
and reporting standards for derivative instruments and requires
recognition of all derivatives as assets or liabilities in the statement
of financial position and measurement of those instruments at fair value.
The statement is effective for fiscal quarters and fiscal years beginning
after June 15, 2000. The Company does not have any derivative instruments
and has not entered into any hedging activities.
3. Restricted Cash
Pursuant to a letter of credit, required under a long-term project to be
completed in fiscal 2000, the Company purchased a Cnd$393,000 face value
Bankers' Acceptance to be held as a bond for the letter of credit of
Cnd$390,809.
4. Property, Plant and Equipment
Property, plant and equipment are stated at cost less accumulated
depreciation.
<TABLE>
<CAPTION>
1999 1998
Accumulated Net Book Net Book
Cost Depreciation Value Value
$ $ $ $
<S> <C> <C> <C> <C>
Computer equipment 41,335 21,606 19,729 21,189
Computer software 5,690 2,872 2,818 3,234
Display equipment 33,016 22,403 10,613 15,918
Office furniture and equipment 30,468 19,518 10,950 15,602
Plant jigs, dies, moulds, tools and equipment 97,057 55,444 41,613 74,319
Leasehold improvements 26,724 20,934 5,790 11,135
- -------------------------------------------------------------------------------------------------------------------
234,290 142,777 91,513 141,397
===================================================================================================================
</TABLE>
31
<PAGE>
4. Property, Plant and Equipment (continued)
Depreciation per class of asset:
<TABLE>
<CAPTION>
1999 1998
$ $
<S> <C> <C>
Computer equipment 7,648 6,387
Computer software 1,073 851
Display equipment 6,485 6,367
Office furniture and equipment 5,963 5,690
Plant jigs, dies, moulds, tools and equipment 18,970 24,962
Leasehold improvements 5,345 5,345
- -------------------------------------------------------------------------------------------------------------------
45,484 49,602
===================================================================================================================
</TABLE>
5. Patents and Trademarks
Patents and trademarks represent legal and other costs associated with
ongoing design improvements and registering and protecting certain patents
and trademarks associated with the Ultra Guard-R- System. These costs are
amortized over twenty years. Components of the Ultra Guard-R- System were
patented in the United States on April 12, 1996. Applications have been
approved for patent protection under the International Patent Protection
Treaty covering 13 European countries.
6. Demand Loans
(a) The bank demand loan is from the Toronto Dominion Bank of Canada
in the amount of Cnd$312,500 which bears interest at Toronto
Dominion Bank Prime plus 2%.
(b) A loan payable of $341,940 is from "the Elco Bank Group" located
in Nassau, Bahamas and is unsecured, non-interest bearing and
due on demand. $289,256 of this loan was repaid subsequent to
August 31, 1999 from proceeds from the exercise of Class "E"
Warrants. See Note 13(a).
(c) Loans payable of $61,625 are unsecured, non-interest bearing and
were repaid subsequent to August 31, 1999 by the issuance of
162,000 shares at prices between $0.20 and $0.40 and the
issuance of 324,000 Class "A" warrants exercisable at prices
between $0.60 and $0.70 expiring between March 10, 2002 and
August 10, 2002.
(d) A minority shareholder of UVST loaned it $23,450 (Cnd$35,000)
bearing interest at 10% per annum, unsecured and due on demand.
7. Amounts Owing to Related Parties
<TABLE>
<CAPTION>
1999 1998
$ $
<S> <C> <C>
(a) Amounts owing to a company owned by a director is due on demand,
unsecured and bears interest at 12% per annum compounded monthly. The
creditor has the option to demand repayment in shares and warrants at
the bid price on settlement
day for the shares and 10% above the bid price for the warrants; 51,559 -
(b) Amounts owing to two directors, due on demand,
unsecured and non-interest bearing. 156,140 95,442
- -------------------------------------------------------------------------------------------------------------------
207,699 95,442
===================================================================================================================
</TABLE>
32
<PAGE>
8. Long-Term Debt
<TABLE>
<CAPTION>
1999 1998
$ $
<S> <C> <C>
(a) 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$1,340,040). 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. The Company's subsidiary, UVST, has proposed a debt
and share restructuring. Class "X" 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" 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. 1,340,040 1,275,104
(b) During fiscal 1997, minority shareholders of UVST 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. As at August 31, 1999 principal and interest
totalled Cnd$706,283. 473,224 409,367
(c) 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. All interest to
August 31, 1999 has been capitalized and the total owing is
Cnd$1,011,599. 677,792 586,054
- ------------------------------------------------------------------------------------------------------------------
2,491,056 2,270,525
==================================================================================================================
</TABLE>
9. 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
</TABLE>
33
<PAGE>
9. Common Stock
<TABLE>
<CAPTION>
Additional
Common Paid-in
Shares Stock Capital
# $ $
<S> <C> <C> <C>
Balance forward 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
Issuance of stock at $0.10 per share to settle debt 111,000 111 10,989
Issuance of stock for cash pursuant to stock options
exercised at $0.15 per share 321,000 321 47,829
- -------------------------------------------------------------------------------------------------------------------
Balance August 31, 1999 13,094,988 13,095 3,132,437
===================================================================================================================
</TABLE>
(a) Warrants outstanding as at August 31, 1999:
<TABLE>
<CAPTION>
Exercise
Price
Class # $ Expiry Date
<S> <C> <C> <C>
"A" 360,000(i) .40 to .90 June 30, 2000 (redeemable at $0.001 per share)
----------
"D" 1,455,049(ii) 0.40 May 2, 2001
----------
"E" 1,446,281(iii) 0.20 April 28, 2000 (exercised subsequently)
"E" 1,523,926 0.40 April 28, 2000
"E" 60,556 0.40 May 4, 2000
"E" 100,000(iv) 0.40 January 20, 2001
"E" 200,000 0.40 December 31, 2000
"E" 200,000 0.50 December 31, 2000
----------
3,530,763
----------
5,345,812
==========
</TABLE>
(i) Prices reduced from $1.25 and expiration period extended
to June 30, 2000 pursuant to an agreement dated July 14,
1999.
(ii) Prices reduced from $1.50 and Cnd$2.00 and expiration date
extended to May 2, 2001 pursuant to an agreement dated
June 21, 1999.
(iii) Prices reduced from $0.40 to $0.20 on May 19, 1999.
(iv) These warrants were issued in connection with a shares for
debt agreement where 100,000 shares were issued at $0.10
per share to settle $15,000 of debt.
(v) Class "B" and "C" warrants expired on March 24, 1999.
34
<PAGE>
9. Common Stock (continued)
(b) Employee Stock Option Plan
The common stock underlying the Employee Stock Option Plan
registering 1,588,000 shares for future issuance was registered with
the Securities Exchange Commission on October 6, 1997 on Form S-8.
On August 21, 1997 employees were granted stock options to acquire
1,217,000 shares at $1.00 per share expiring August 21, 2000. These
options are currently unexercised.
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. During fiscal 1999, 321,000 options were exercised for
proceeds of $48,150. The remaining 20,000 were exercised
subsequently.
The options are granted for services provided to the Company.
Statement of Financial Accounting Standards No. 123 ("SFAS 123")
requires that an enterprise recognize, or at its option, disclose the
impact of the fair value of stock options and other forms of stock
based compensation in the determination of income. The Company has
elected under SFAS 123 to continue to measure compensation cost on
the intrinsic value basis set out in APB Opinion No. 25. As options
are granted at exercise prices based on the market price of the
Company's shares at the date of grant, no compensation cost is
recognized. However, under SFAS 123, the impact on net income and
income per share of the fair value of stock options must be measured
and disclosed on a fair value based method on a pro forma basis.
The fair value of the employee's purchase rights under SFAS 123, was
estimated using the Black-Scholes model with the following
assumptions used for grants on August 21, 1997: risk free interest
rate was 5.57%, expected volatility of 120%, an expected option life
of three years and no expected dividends; and for grants on April 15,
1998: risk free interest rate was 5.56%, expected volatility of 120%,
an expected option life of three years and no expected dividends.
If compensation expense had been determined pursuant to SFAS 123, the
Company's net loss and net loss per share for the years ended May 31,
1999 and 1998 would have been as follows:
<TABLE>
<CAPTION>
1999 1998
$ $
<S> <C> <C>
Net loss
As reported (1,613,163) (1,285,556)
Pro forma (1,933,413) (1,595,306)
Basic net loss per share
As reported (.13) (.14)
Pro forma (.15) (.17)
</TABLE>
10. Segmented Information
The business of the Company is carried on in one industry segment (See
Note 1).
The Company operates in two geographic segments. The United States
operations only consists of costs associated with debt and equity
financing and being a public company.
<TABLE>
<CAPTION>
1999 1998
------------------------------------ ----------------------------------
<S> <C> <C> <C> <C> <C> <C>
United United
Canada States Total Canada States Total
$ $ $ $ $ $
Revenue 398,063 - 398,063 202,894 - 202,894
Expense (1,186,330) (824,897) (2,011,227) (781,274) (707,176) (1,488,450)
- --------------------------------------------------------------------------------------------------------------------
Income (loss) (788,267) (824,897) (1,613,164) (578,380) (707,176) (1,285,556)
====================================================================================================================
Identifiable assets 956,940 27,343 984,283 931,575 51,604 983,179
Goodwill and patents 183,388 1,091,435 1,274,823 92,484 1,576,516 1,669,000
- --------------------------------------------------------------------------------------------------------------------
Total assets 1,140,328 1,118,778 2,259,106 1,024,059 1,628,120 2,652,179
====================================================================================================================
</TABLE>
Revenue from projects exported from Canada to other countries amounted to
$148,645 (1998: $202,894), the majority of which was exported to the
United States.
35
<PAGE>
11. Legal Proceedings
On October 20, 1998 a suit was filed in the Supreme Court of British
Columbia by Thomas O'Flynn against the Company, Kenneth Fielding (the
Company's President and Director), and Charles P. Nield (a former Director
and Vice President of the Company), O'Flynn alleges that in April of 1996,
he purchased shares of the Common Stock based on a representation that
they would be free trading in 40 days of "the filing of a prospectus." He
further alleges that in September of 1996 he purchased additional shares
of Common Stock based on the representation that the shares would be free
trading within 40 days of the Common Stock becoming free trading. O'Flynn
alleges that the representation was a warranty and was incorrect. He
further alleges that he suffered a loss because the share price decreased
while he was holding the shares. He seeks damages for breach of warranty,
negligence, misrepresentation and breach of fiduciary duty. The amount
claimed is not specified. The Company filed an answer denying the claims
and continues to actively defend the suit. There has been no loss
provision set-up pursuant to this action against the Company.
12. 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.
13. Subsequent Events
(a) A total of $289,256 was received pursuant to 1,446,281 Class "E"
warrants exercised at $0.20 per share. Per an agreement between
the Company and the warrant holder an additional 1,446,281 Class
"E" warrants were issued exercisable at $0.40 each expiring
September 13, 2002.
(b) A total of $3,000 was received and 20,000 shares were issued at
$0.15 per share pursuant to stock options exercised.
(c) See Note 6(c) for shares and warrants issued to convert loans
payable of $61,625.
36
<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 49 Director, President, and
President of UV Systems
Technology, Inc.
John R. Gaetz 59 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 form the BC Institute of Technology.
John R. Gaetz has served as a Director, Secretary-Treasurer and Chief Financial
Officer since June 15, 1997, and as a Director, Vice president, and Secretary of
UVS since August 1995, positions he held in UVS' predecessor, UV Waterguard
Systems Ltd. since 1990.
BOARD MATTERS
The Board of Directors has no standing committees. The Board of Directors is
responsible for nominating a proposed slate of Directors for each year to
stand for election at the annual shareholders meeting, when a meeting is
held. 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 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, 1999 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."
37
<PAGE>
Based solely upon a review of Forms 3, 4 and 5 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, Messrs. Fielding and Gaetz failed to file Forms 5 (for
the 1998 fiscal year) and Mr. Fielding failed to file a Form 4 in a timely
manner. All Directors and Officers timely filed all other reports required by
Section 16(a) of the Act.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth an overview of compensation for the fiscal years
ended August 31, 1997, 1998 and 1999 to the Chief Executive Officer and each of
the Company's other Executive Officers whose total compensation exceeded
$100,000
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
- -----------------------------------------------------------------------------------------------
LONG TERM COMPENSATION
------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
------------------------ -------------------------- --------
OTHER
ANNUAL RESTRICTED SECURITIES
NAME AND COMPEN- STOCK UNDERLYING LTIP ALL
PRINCIPAL SATION AWARD(S) OPTIONS PAYOUTS OTHER
POSITION SALARY BONUS ($) ($) (#) ($) COMPENSATION
(A) (C) (D) (E) (F) (G) (H) (I)
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------
Kenneth E.
Fielding,
President,
CEO and
President
of UVS
- -----------------------------------------------------------------------------------------------
1997 84,000 - - - 200,000 - -
1998 49,442* - - - 150,500 - -
1999 53,218** - - - - - -
- -----------------------------------------------------------------------------------------------
* Accrued
** $45,000 Accrued
</TABLE>
No options were granted to the named executive officer during the 1999 fiscal
year.
The following table sets out the aggregated option exercises for the named
executive officer during the 1999 fiscal year, and the fiscal year-end value
of unexercised, in-the-money options. Unexercisable options are designated
with a (u) and exercisable options are designated with and (e).
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION VALUES
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
VALUE OF
NUMBER OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
SHARES OPTIONS AT OPTIONS AT
ACQUIRED 1999 FISCAL 1999 FISCAL
ON VALUE YEAR END(#) YEAR END ($)
NAME EXERCISE (#) REALIZED EXERCISABLE/ EXERCISABLE/
(A) (B) (C) UNEXERCISABLE UNEXERCISABLE
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Kenneth E. Fielding 150,500 -- 200,000(1) --
</TABLE>
(1) Does not include 1,243,445 E warrants issued for cash which was not
compensatory.
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.
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, 1999 of (i) each person known to own
beneficially more than 5% of our Common Stock, (ii) each Director of the
Company, (iii) each of the Company's
38
<PAGE>
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) 14.65%
John R. Gaetz 2,305,354(4) 11.71%
Douglas F. Sommerville 1,235,499(5) 6.28%
All officers and
directors as a group 5,189,980(3)(4) 24.88%
</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, 7,000 shares owned by Mr. Fielding's minor daughter,
200,000 shares which Mr Fielding has the right to acquire at price of
$1.00 under immediately exercisable options, and 1,243.445 shares
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 $0.40 under immediately exercisable warrants, 20,000 shares
which Mr. Gaetz has the right to acquire at a price of $0.60 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, 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 $1.50 under immediately exercisable warrants and 45,028
shares owned by Mr. Sommerville's wife.
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 UV system. We issued 1,600,000
shares of Our restricted common stock to these individual stockholders,
including one of our officers 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
39
<PAGE>
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, 1999: John
R Gaetz, $76,924 and Ken Fielding $79,215. The loans are payable on demand and
bear interest at the CIBC rate.
In July 1996, John Gaetz purchased for cash 20,000 shares of Common stock and
20,000 warrants for Common Stock in a private offering at a cost of $0.75 per
share. In April 1998, John Gaetz purchased for cash 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 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.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits (exhibit reference numbers refer to Item 601 of
Regulation SB
<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
40
<PAGE>
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
between UVS, MDS and WOF ***
(10)(xi) Letter of Agreement between the
Company and Elco Bank and Trust Company Filed Herewith
Limited Electronically
(10)(xii) Loan Agreement between the Company and Filed Herewith
TD Bank Electronically
(11) Statement Regarding Computation Filed Herewith
of Per Share Earnings Electronically
(21) Subsidiaries of the Corporation:
UV Systems Technology, Inc.,
incorporated in British Columbia,
Canada ***
(23) Consent of Elliott Tulk Price Anderson Filed Herewith
Electronically
(27) Financial Data Schedule Filed Herewith
Electronically
</TABLE>
- --------
* Incorporated by reference to the Corporation's Form S-8 filed with the
Commission on October 6, 1997.
** Incorporated by reference to the Corporation's Form 10K for the fiscal
Year ended August 31, 1997.
*** Incorporated by reference to the Corporation's Form 10K for the fiscal
Year ended August 31, 1998.
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the fourth quarter of
fiscal 1998.
41
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant caused this registration statement to be signed on its behalf by
the undersigned, thereunto duly authorized.
SERVICE SYSTEMS INTERNATIONAL, LTD.
By: /s/ Kenneth R. Fielding
--------------------------------
Kenneth R. Fielding, President
Date: November 29, 1998 By:/s/ Kenneth R Fielding
- ----------------------------------------------------
Ken Fielding, Director
Date: November 29, 1998 By:/s/ John R Gaetz
- ----------------------------------------------------
John R Gaetz, Director
42
<PAGE>
[ELCO BANK AND TRUST LETTERHEAD]
May 19, 1999
Service Systems International Ltd.
2800 Ingleton Ave.,
Burnaby B.C. V5C 6G7
Attention: Mr. Ken Fielding, President
Mr. J.R. Gaetz, Vice President
Reference: Collingham Investments, SA
Carmel International, S.A.
Korrington Corporation (collectively "the Debtor")
LETTER OF AGREEMENT
-------------------
Gentlemen:
We refer to discussion on the following matters which were subject of our
various meetings held during your visit to Nassau during the week of May 3,
1999. For purposes of clarification we provide the following background.
As pointed out to you, the above referenced Debtor companies are clients of
Elco Bank and Trust Company. Based on the commitment of undertaking of Mr.
Fielding and Mr. Gaetz and our reliance on this commitment and undertaking,
our clients have advanced funds to Service Systems International Ltd. (the
"Company"). In addition, our clients have provided and will on your
instructions continue to provide to other parties, in lieu of cash, common
stock of the Company to secure loans from these parties to the Company or to
repay debt (Share Advances).
We wish first to generally recap the terms and conditions on which cash
advances have been made to the Company over the past four years. These terms
were, 1), 10% interest, 2), 10% discount, 3), convertible into common stock
at 20% less then market on the day of the cash advance, at our option, and
4), repayment on demand. Stock advances were made on the undertaking that
cash value (based on market offer) at time of issuance would be repaid to our
clients. We have your confirmation of these terms and conditions as provided
during your visit.
In the past these loans have been repaid by conversion into stock and
warrants and in those conversions, all terms and conditions have been
summarized into the purchase price which satisfied all those condition
without being specific as to the value of each condition.
<PAGE>
With regard to the current debt owing to Debtor now demanded, we have again
agreed to convert our debt into shares by exercising our outstanding Class E
Warrants. To satisfy all conditions of the debt at the face value of the loans,
you offered to reduce the exercise price of the Class E Warrants from $0.40
to $0.20 so that for each Class E Warrant tendered and cash (debt reduction)
of $0.20, one share of Common Stock of Service Systems International Ltd.
would be issued. In addition, for each Common share purchased, an additional
3 year Warrant, exercisable at $0.40 would be issued.
At the time of our meeting and writing of this Letter of Agreement, the debt
amount was not available. Mr. J.R. Gaetz and Mr. K. Fielding agreed to
provide funds for a period of up to one year to cover any shortfall between
the total purchase cost of the common shares due upon exercise of Warrants
and the amount of debt payable.
The number of Class E Warrants held, which are to be converted is as follows:
Collingham Investments SA 455,000
Carmel International SA 899,281
Kerrington Corporation Certificate #103 92,000
We request your confirmation of the above, by signing below where indicated.
Signed on behalf of;
Collingham Investment SA
Carmel International SA /s/ Isaac Collie
Kerrington Corporation -------------------------
Signed on behalf of;
Services Systems International Ltd.
-------------------------
Kenneth Fielding
Signed on behalf of; /s/ John R. Gaetz
John R. Gaetz -------------------------
John R. Gaetz
/s/ John R. Gaetz
-------------------------
Signed on behalf of;
Kenneth Fielding -------------------------
<PAGE>
THE TORONTO-DOMINION BANK
NORTH BURNABY COMM. BKG. CTRE. 96560-004
1933 WILLINGDON AVE., NR. LOUGHEED HWY.
BURNABY, B.C. V5C 5J3
$351,729.00
----------- ---------------------------------------- -------
BRANCH DATE
* "JOINTLY AND On Demand for value received the undersigned jointly and
SEVERALLY" severally* promise(s) to pay to THE TORONTO-DOMINION BANK (the
MAY BE DELETED "Bank") or order at the above Branch, in lawful money of
IF THE UNDER- Canada, the lesser of-
SIGNED IS ONE
CORPORATION (i) the principal sum of THREE HUNDRED FIFTY-ONE THOUSAND
OR ONE SEVEN HUNDRED TWENTY-NINE ($351,729.00) DOLLARS (together
INDIVIDUAL with interest as determinable below) and
BORROWER.
(ii) the unpaid principal balance of all advances (together
with interest as determinable below) made by the Bank to
the undersigned as recorded by the Bank in its records.
The Bank shall record in its records the amount of all
advances made under, payments made in respect of, and all
other amounts becoming due to the Bank under this Note
(collectively, the "Entries"). The Bank's records constitute,
in the absence of manifest error, conclusive evidence of the
indebtedness of the undersigned to the Bank pursuant to this
Note. The Entries shall be indicated on the statement of
account or accounts (the "Statement of Account"). Unless
within thirty (30) days of the date of the Statement of
Account (the "Statement Date") the undersigned claims and
establishes that an error has been made in the Entries, the
undersigned shall be precluded after the Statement Date from
objecting to the Entries listed on the Statement of Account,
and after the Statement Date the Entries shall be admissible in
any proceeding as full and conclusive evidence of the principal
and accrued interest and shall be binding on the undersigned to
the same extent and effect as though all the Entries had been
made pursuant to written instructions from the undersigned.
In addition to receiving the Statement of Account, the
undersigned may for information purposes only, no more often
than once quarterly, if requested, receive from the Bank a
loan history statement of all advances made under and
payments made in respect of this Note during that quarter.
The principal amount (including any overdue interest)
outstanding hereunder shall bear interest calculated and
payable monthly from and including the date hereof until
paid, before and after default or judgement, at the Bank's
prime rate plus 2% per annum.
Prime rate means the rate of interest per annum established
and reported by the Bank to the Bank of Canada from time to
time as the reference rate of interest for the determination
of interest rates that the Bank charges to customers of
varying degrees of credit worthiness in Canada for Canadian
dollar loans made by it in Canada.
The undersigned hereby acknowledge(s) that the undersigned
will be bound by any and all changes of the prime rate
irrespective of whether or not the Bank has directly
notified the undersigned of any such changes.
For: UV Systems Technology Inc.
/s/ KEN FIELDING
----------------
KEN FIELDING
<PAGE>
EXHIBIT 11
Service Systems International, Ltd.
Computation of Per-Share Income
Treasury Stock Method
As Modified for 20% Test
<TABLE>
<CAPTION>
PERIOD ENDED AUGUST 31, 1999
------ ----- ------ --- ----
<S> <C>
Weighted average number of shares outstanding 12,757,000
=============
Total common and common equivalent shares 13,094,988
=============
Net income (loss) for the period $ (1,613,163)
=============
Total common and common equivalent shares 13,094,988
=============
Loss per common and common equivalent shares $ (0.13)
=============
</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 23
The Board of Directors
Service Systems International, Ltd.
We consent to incorporation by reference in the registration statement (No.
1-333-37203) on Form S-8 of our report dated November 10, 1999, relating to
the consolidated financial statements of Service Systems International, Ltd.
as of August 31, 1999 and 1998, which report appears in the August 31, 1999
annual report on Form 10-KSB of Service Systems International, Ltd.
/s/ ELLIOTT, TULK, PRYCE, ANDERSON
Vancouver, BC, Canada
November 29, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1999
<PERIOD-START> SEP-01-1998
<PERIOD-END> AUG-31-1999
<CASH> 7,985
<SECURITIES> 262,902
<RECEIVABLES> 324,061
<ALLOWANCES> 13,936
<INVENTORY> 274,592
<CURRENT-ASSETS> 892,769
<PP&E> 234,288
<DEPRECIATION> 142,777
<TOTAL-ASSETS> 2,259,106
<CURRENT-LIABILITIES> 1,160,880
<BONDS> 0
0
0
<COMMON> 13,095
<OTHER-SE> 3,132,437
<TOTAL-LIABILITY-AND-EQUITY> 2,259,106
<SALES> 398,063
<TOTAL-REVENUES> 398,063
<CGS> 344,139
<TOTAL-COSTS> 378,631
<OTHER-EXPENSES> 1,534,395
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 98,200
<INCOME-PRETAX> (1,613,163)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,613,163)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,613,163)
<EPS-BASIC> (13)
<EPS-DILUTED> (13)
</TABLE>
