<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period ended November 30, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from .................... to ........................
Commission file number 0-21753
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 whether the registrant filed all documents and reports required to be
filed by section 12, 13, or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by court. Yes No
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 12,662,988 as of January 11, 1999
Transitional Small Business Disclosure Format (check one): Yes No / x /
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INDEX
-----
PART I Financial Information
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . . .
Consolidated Balance Sheets as of November 30, 1998
and 1997 (unaudited). . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Operations for the three months ended
November 30, 1998 and 1997 (unaudited). . . . . . . . . . . . . . . . . . .
Consolidated Statements of Cash Flows for the three months ended
November 30, 1998 and 1997 (unaudited). . . . . . . . . . . . . . . . . . .
Notes to the Financial Statements. . . . . . . . . . . . . . . . . . . . . . . .
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITIONS
Part II OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 1. LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 2. CHANGES IN SECURITIES. . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 3. DEFAULT UPON SENIOR SECURITIES . . . . . . . . . . . . . . . . . . . .
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. . . . . . . . . .
ITEM 5. OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 6 EXHIBITS AND REPORTS ON FORM 8K. . . . . . . . . . . . . . . . . . . .
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2
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Part 1. Financial Information
Item 1. FINANCIAL STATEMENTS (UNAUDITED)
3
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Service Systems International, Ltd.
Consolidated Balance Sheet
As of November 30, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
November 30, November 30,
1998 1997
<S> <C> <C>
Assets
Current Assets
Cash and short-term investments $6,146 $76,622
Short-term investments - restricted (Note 3) 258,393 0
Accounts receivable 227,429 63,174
Inventory 267,798 358,746
Prepaid expenses 23,715 105,372
Research credit receivable 0 240,137
---------- ----------
783,481 844,051
Capital assets (Note 4) 107,780 169,450
Goodwill - net of amortization 1,455,246 1,940,327
Patents and trademarks (Note 5) 93,436 36,658
---------- ----------
$2,439,943 $2,990,486
---------- ----------
---------- ----------
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable 115,780 96,122
Accrued liabilities 42,503 31,023
Vacation pay payable 7,806 5,812
Customer deposits 0 18,726
Loan payable - other 0 44,047
Amounts owing to related parties (Note 6) 115,357 367,022
Loans payable - minority stockholders
of subsidiary 0 570,300
---------- ----------
281,446 1,133,052
Long-term debt (Note 7) 2,347,998 1,469,660
Convertible Debentures 0 541,141
---------- ----------
2,629,444 3,143,853
---------- ----------
Stockholders' Equity
Common stock, $.001 par value,
50,000,000 shares authorized, 12,662,988
and 5,354,644 issued and outstanding respectively 12,663 5,355
Additional paid-in capital 3,073,619 1,911,501
Deficit (3,275,783) (2,071,972)
Foreign exchange translation adjustment 0 1,749
---------- ----------
(189,501) (153,367)
---------- ----------
$2,439,943 $2,990,486
---------- ----------
---------- ----------
</TABLE>
See accompanying note to financial statements
4
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Service Systems International, Ltd.
Consolidated Statements of Operations and Deficit
For the three months ended November 30, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
Three Months Three Months
ended ended
Nov. 30, 1998 Nov. 30, 1997
<S> <C> <C>
Project Revenue $ 106,811 $ 1,935
Project Costs 82,430 2,155
----------- ----------
Gross Profit (Loss) 24,381 (220)
Manufacturing Costs Not Applied 22,634 24,740
----------- ----------
1,747 (24,960)
----------- ----------
Expenses
Selling 65,387 59,214
General and administrative 77,339 175,140
Research and development 28,003 22,845
Amortization of goodwill 121,270 121,270
Interest, net of interest income 20,682 28,900
Foreign exchange translation (gain) loss 39,650 0
----------- ----------
352,331 407,369
----------- ----------
Net Loss for the period 350,584 432,329
Deficit - Beginning of period 2,925,199 1,639,643
----------- ----------
Deficit - End of period $ 3,275,783 $2,071,972
----------- ----------
----------- ----------
Net Loss per share $ (0.03) $ (0.08)
----------- ----------
----------- ----------
# #
Weighted average shares outstanding 12,662,988 5,354,644
----------- ----------
----------- ----------
</TABLE>
See accompanying notes to financial statements
5
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Service Systems International, Ltd.
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Three Months Three Months
ended ended
Nov. 30, 1998 Nov. 30, 1997
------------- -------------
<S> <C> <C>
Cash Flows to Operating Activities
Net loss $(350,584) $(432,329)
Adjustments to reconcile net loss to cash
Amortization of goodwill 121,270 121,270
Depreciation 10,684 11,718
Foreign exchange translation adjustment 39,650 1,749
Discount on convertible debenture 0 12,500
Change in non-cash working capital items
(Increase) in accounts receivable (116,472) (143)
(Increase) in inventory (29,517) (1,738)
Decrease (Increase) in prepaid expenses 12,460 (92,822)
Decrease in research credit receivable 0 4,654
Increase (Decrease) in accounts payable, accrued
liabilities, vacation pay payable
and customers' deposits 40,960 (91,213)
----------- ----------
Net Cash Used in Operating Activities (271,549) (466,354)
----------- ----------
Cash Flows (to) from Investing Activities
Acquisition of short-term investment - restricted (9,076) 0
Additions to patents and trademarks (952) 0
Disposal (Acquisition) of Capital assets 22,933 (7,864)
----------- ----------
Net Cash (Used in) Provided by Investing Activities 12,905 (7,864)
----------- ----------
Cash Flows from (to) Financing Activities
Funds applied against cheques issued in
excess of deposit 0 (8,752)
Common stock issued 0 63,610
Increase in loans payable - other 0 22,841
Increase (decrease) in amounts owing to
related parties 19,915 6,469
Increase in borrowings from minority shareholders 37,823 13,660
Proceeds from convertible debenture 0 452,373
----------- ----------
Net Cash Provided by Financing Activities 57,738 500,201
----------- ----------
Increase (Decrease) in Cash and Cash Equivalents (200,906) 75,983
Cash and Cash Equivalents - Beginning of Period 207,052 639
----------- ----------
Cash and Cash Equivalents - End of Period $6,146 $76,622
----------- ----------
----------- ----------
</TABLE>
See accompanying notes to financial statements
6
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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. See Note 4
regarding acquisition of UV Systems Technology Inc. a Canadian Company
("UVS") on December 1, 1996. Through UVS, the Company manufactures and
markets its Ultra Guard-TM- ultraviolet based patented water treatment
system. These products and systems are sold primarily for municipal waste
disinfection, treatment of process and industrial waste water, and for
potable water, bottled products and agriculture and aquaculture water
treatment.
During fiscal 1998 the Company emerged from a development stage company to
an operating company. Even though its status has changed to an operating
company, the operating activities have not yet produced significant revenue
and the Company has experienced significant losses to date. The ability of
the Company to continue operations is dependent upon its successful efforts
to raise additional equity financing in the long term, continue developing
the market for its products, and/or the attainment of profitable
operations.
2. Significant Accounting Policies
CONSOLIDATED FINANCIAL STATEMENTS
These financial statements include the accounts of the Company, and its
50.7% owned Canadian subsidiary, UVS.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand, in banks and all highly
liquid investments with a maturity of three months or less when purchased.
Cash equivalents are stated at cost which approximates market.
FIXED ASSETS
Fixed assets are recorded at cost. Depreciation is computed utilizing the
straight-line method using an estimated useful life of five years for all
asset categories.
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 judgment.
PATENTS AND TRADEMARKS
Patents and trademarks will be amortized to operations over their estimated
useful lives not exceeding 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.
EARNINGS PER SHARE
The earnings per share is computed by dividing the net income (loss) for
the period by the weighted average number of common shares outstanding for
the period. Common stock equivalents are excluded from the computation if
their effect would be anti-dilutive.
FOREIGN CURRENCY
i) Translation of foreign currency transactions and balances:
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Revenue, expenses and non-monetary balance sheet items in foreign
currencies are translated into US dollars at the rate of exchange
prevailing on the transaction dates. Monetary balance sheet items are
translated at the rate prevailing at the balance sheet date. The
resulting exchange gain or loss is included in general and
administration expenses.
ii) Translation of foreign subsidiary balances:
Monetary balance sheet items of UVS are translated into US dollars at
the rates of exchange on the balance sheet date. Non-monetary balance
sheet items are translated into US. dollars at the rate of exchange
prevailing on the transaction dates. The foreign subsidiary's
operating results are translated into US dollars using the average
exchange rate for the year with any translation gain or loss charged
to operations as a separate component of other items.
3. Restricted Cash
Pursuant to a letter of credit, required under a long-term project to be
completed in fiscal 1999, the Company purchased a C$396,000 face value
Bankers' Acceptance to be held as a bond for the letter of credit.
4. Capital Assets
Capital assets are stated at cost less accumulated depreciation.
<TABLE>
<CAPTION>
1998 1997
Accumulated Net Book Net Book
Cost Depreciation Value Value
$ $ $ $
<S> <C> <C> <C> <C>
Computer equipment 35,403 15,720 19,683 25,670
Computer software 5,033 2,054 2,979 2,503
Display equipment 31,836 17,510 14,326 20,732
Office furniture and equipment 29,157 15,014 14,143 19,610
Plant jigs, dies, moulds, tools
and equipment 88,333 41,481 46,852 85,757
Leasehold improvements 26,724 16,927 9,797 15,178
------- ------- ------- -------
216,486 108,706 107,780 169,450
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
Depreciation per class of asset:
<TABLE>
<CAPTION>
Three Months Three Months
ended ended
Nov. 30, 1998 Nov. 30, 1997
$ $
<S> <C> <C>
Computer equipment 1,762 1,404
Computer software 255 169
Display equipment 1,592 1,552
Office furniture and equipment 1,459 1,355
Plant jigs, dies, moulds, tools and equipment 4,278 5,936
Leasehold improvements 1,338 1,302
------ ------
10,684 11,718
------ ------
------ ------
</TABLE>
5. Patents and Trademarks
Patents and trademarks represent legal costs associated with designing,
registering and protecting certain patents and trademarks associated with
the Ultra Guard-TM- System. These costs will be amortized not exceeding
twenty years starting September 1, 1998. Components of the Ultra Guard-TM-
System were patented in the United States on April 12, 1996. Applications
have been made for patent protection under the International Patent
Protection Treaty covering up to 13 European countries.
6. Amounts Owing to Related Parties
<TABLE>
<CAPTION>
1998 1997
$ $
<S> <C> <C>
(a) Amounts owing to a shareholder, due on demand,
unsecured and non-interest bearing - 123,760
(b) Amounts owing to two directors, due on demand,
unsecured and non-interest bearing 115,357 243,262
------- -------
115,357 367,022
------- -------
------- -------
</TABLE>
7. Long-term Debt
8
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Prior to fiscal 1998, UVS issued 2,000 Class "A" preferred shares at
C$1,000 per share for proceeds of C$2,000,000 (US$1,304,546). The holders
of these shares also own 49.3% of UVS ("minority shareholders"). Class "A"
Preferred Shares are retractable once sales reach C$10,000,000 and net
income reaches C$1,000,000, and are to be redeemed by June 30, 2000.
During fiscal 1997, minority shareholders advanced C$631,000 to UVS.
Interest accrued to June 29, 1998, at 20% per annum, totaled C$280,000.
Pursuant to an interim refinancing agreement ("the Agreement"), dated June
29, 1998, all accrued interest was waived. The principal repayment of
C$631,000 has been deferred to June 29, 2003, and interest at 20% accrues
until December 29, 2000, after which it is paid monthly. The Company
waived interest of C$217,000 accrued on its loan to UVS of C$1,287,000.
Under the Agreement, one of the minority shareholders advanced C$909,000 to
UVS. This advance is secured by a subordinated debenture on all of UVS'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.
The Company's subsidiary, UVS, completed its debt and share restructuring
subject to completion of documentation and regulatory approval. Class "X"
Preferred Shares will be a new class of shares added to the authorized
capital stock of UVS. 500 Class "A" Preferred Shares, representing 50% of
the Class "A" preferred shares held by one of UVS's minority shareholders,
will be replaced with 500,000 Class "X" Preferred Shares retractable at
C$1.00 per share. The Company's loan to UVS of C$1,287,000 will be
transferred into 1,287,379 Class "X" Preferred Shares retractable at C$1.00
per share. These Class "X" Preferred Shares will be retractable by the
holders only if there is a sale of UVS or an initial public offering of its
securities which values UVS, excluding Class X Preferred Shares, at C$20
million. If not retracted by June 29, 2002, the Class X Preferred Shares
will be redeemable by UVS for C$1 in total.
8. Comparative Figures
Certain of the prior year's figures have been reclassified to conform with
the current year's presentation.
9
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SERVICE SYSTEMS INTERNATIONAL, LTD.
ITEM 2. 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) 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.
MANAGEMENT'S DISCUSSION
OVERVIEW
Our company is an ultraviolet disinfection equipment manufacturing company
which 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 UV
Systems Technology Inc. (UVS), Service Systems manufactures and markets its
Ultra Guard-TM- ultra violet-based patented water treatment system. These
products are sold primarily for municipal wastewater disinfection; however,
the system can also be adapted for treatment of process and industrial
wastewater ( where it is currently being applied 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. WOF agreed to loan UVS additional funds (see
details following) and agreed to allow conversion of the funds advanced under
the Purchase Agreement into preferred shares.
In June 1998, UVS entered into an agreement with WOF (Agreement) to provide
C$900,000.00 of additional funding and to reduce 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.
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 chemicals 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 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 cleaning 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 ambient air temperatures readings 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.
As a result of the PDU testing an order was received in May of 1998 in the
amount of about C$390,000. The project is currently being manufactured and is
scheduled for delivery and installation in March 1999, with final testing to
occur in May 1999.
A 6 lamp Ultra Guard-TM- UV system capable of disinfecting a wastewater flow
of 3.5 MGD sold to Hamilton, Alabama is scheduled for delivery on January 15,
1999, with installation and testing to follow by the end of January. This
project is the first full scale operating Ultra Guard-TM- UV system to be
installed in North America. Its destination is a market area in which UV
systems are being actively introduced. We expect that the Ultra Guard-TM- UV
system in Hamilton will provide
10
<PAGE>
equipment exposure to others contemplating upgrading their wastewater
discharges to ultraviolet disinfection.
In June 1998, UVS received a letter of intent for a UV system valued at
C$605,000 for a project in Eastern Canada. The issuing of a purchase order
for and subsequent delivery of this system is subject to a number of
conditions, including a provision that the purchaser must receive an order
from the General Contractor for this phase of the project. The Contractor is
currently completing his negotiations with his client and has requested a
revised quotation to address minor changes in the design condition. The
project is scheduled for purchase by the end of February 1999.
In September and October 1998, our Production Demonstration Unit performed
testing at a municipal wastewater plant in Eastern Canada. Testing was
successful and an engineering report has been issued by the client's
engineer, CH2M Gore & Storrie Ltd., recommending the Ultra Guard-TM- UV
system as acceptable for the project and further stating "it appears that
satisfactory results can be achieved with this type of equipment with a very
low number of lamps and low energy consumption for given flow". The project
is valued at about C$900,000. Based on information we received from the
wastewater plant, the RFP is scheduled to be issued in February 1999. We will
submit a response to the RFP and hope, based on the engineering report, to be
awarded the project, although we cannot be certain that it will be awarded to
us.
Additional PDU testing was performed at the City of Toronto, Humber plant to
determine the efficacy of UV to disinfect wastewater containing levels of
iron (Fe) at ranges on .3 to 4.0 mg/l. This testing was successful, proving
the ability of the Ultra Guard-TM- UV system to disinfect with these high
levels of iron present in the wastewater. The results of these tests will be
presented at the CAWQ conference on water pollution being held in February
1999. In December 1998, a PDU was shipped to the County Sanitation Districts
of Los Angeles County (the County). The testing program, which is conducted
and paid for by the County, will test the Ultra Guard-TM- UV system's ability
to disinfect wastewater to Title 22 Guidelines a stringent test protocol
required as a precursor use of a company's UV product in reuse of wastewater
for agriculture purposes. Additional tests are scheduled for Colorado on
completion of the County testing.
In November 1998, a PDU valued at about $68,000 including training services
was sold and delivered to our agent in North Carolina. The purchase was made
by the agent so that he would have immediate access and opportunity to
demonstrate the low power usage and low operating costs of the Ultra
Guard-TM- UV system. The agent reports he has 5 sites which have requested
PDU testing.
RESULTS OF OPERATIONS
THREE MONTHS ENDED NOVEMBER 30, 1998
During the quarter ended November 30, 1998 our project revenues increased by
$104,876 to $106,811 from $1,935 for the comparable quarter for the previous
year, primarily because of estimated manufacturing completion of projects and
the sale of a PDU. Our Project costs for the quarter increased by $80,275 to
$82,430, from $2,155 in the prior years quarter as a result of the increase
in revenue generating work. Our Gross Profit, which results when Project
Costs and Manufacturing Costs Not Applied are subtracted from Project
Revenue, increased $26,707 to $1,747 from ($24,740), again as a result of
increased business activity.
During the quarter ended November 30, 1998, Expenses decreased by $55,038 to
$352,331 from $407,369 in the comparable quarter of the prior fiscal year,
primarily as a result of a significant decrease in general and administrative
expenses. Selling expense increased by $6,173 to $65,387 from $59,214 in the
prior year's quarter, largely because of the expenses incurred for PDU
testing and because the quarter reflects the salary during the entire quarter
of the Vice President-Sales and Marketing we hired in October 1997, midway
through the prior year's quarter. General and administrative expense
decreased by $97,801 to $77,339 from $175,140 in the prior year's quarter.
This decrease resulted primarily resulted from of a reduction in spending on
public relations consulting during the quarter ended November 30, 1998 and
the cost incurred because of the discounts and commission expense on the
convertible debentures that were issued in the comparable quarter of the
prior year. Research and Development expenses increased by $5,158 to $28,003
from $22,845 in the prior year's quarter because of system automation design
labor. Amortization of goodwill in connection with the acquisition of UVS
(see Notes 2- Goodwill under Note to Financial Statements) was the same in
both quarters. Interest, net of interest income decreased by $8,218 to
$20,682 from $28,900, primarily because of a lower rate of interest on funds
due to related parties (see Note 7 Financial Statements). Foreign exchange
expenses increased during the quarter by $39,650 from 0 as a result of the
increase in the value of the Canadian dollar as compared to the fiscal year
end value. Foreign debts (our Long Term Debt) are required to be revalued and
restated at any reporting period, to reflect any increase or decrease in
foreign exchange rates. This revaluation, for the increase in the value of
the Canadian dollar, resulted in an incremental increase of the Long term
debt, stated in US dollars. This increase is booked as an increase in the
foreign exchange expense.
Net Loss for the quarter ended November 30, 1998 decreased by $81,745 to
$350,584 from $432,329 for the comparable quarter of the previous fiscal
year, because of an increase in Project Revenue due to increased business
activity and lower operating cost as discussed in the previous paragraph.
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 both to a
licensee which is obligated to purchase agreed upon system components we
provide and on awards of water treatment system contracts for non-recurring
projects. Many of our contracts may be expected to include provision for hold
back, entitling the other party to the contract to withhold a specified
portion of the payment for a given period of time until after completion of a
project. For these and other reasons, we may experience
11
<PAGE>
periods of limited working capital and may be expected to require financing
for working capital during those periods.
Our sales of Ultra Guard -TM- systems to governmental entities may be
expected to occur on an intermittent rather than consistent basis as requests
for proposal ("RFP") are issued and awards made. Sales on both an annual and
quarterly basis are subject to fluctuations which are often beyond our
control.
In addition, we will require financing over and above our current resources
to sustain our operations and expand our marketing efforts. We cannot assure
that the additional financing can be obtained on a timely basis, on terms
which are acceptable or if at all.
During the twelve months ended August 31, 1998, our liquidity was improved as
a result of actions taken by management. Accrued interest payable on loans
from related parties and minority shareholders and our Company to UVS in the
amount of $353,570 were waived by the debt holders. The remaining principal
balances of those loans were transferred from Current Liabilities to Long
term debt and the interest rate on those loans was reduced to 10%, reducing
our interest costs in the quarter ended November 30, 1998 and in the future.
We expect that during fiscal 1999, if sales of UVS systems increase as we
anticipate, 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 recognize a two-digit
date field as belonging to the 21st century. Mistaking "00" for 1900 or any
other incorrect year could result in a system failure or miscalculations
causing disruptions to operations, including manufacturing, a temporary
inability to process transactions, or send invoices, or engage in other
normal business activities. This is a significant issue for most, if not all
companies, with far reaching implications, some of which cannot be
anticipated or predicted with any degree of certainty. The Y2K issue may
create unforeseen risks to our from our internal computer systems as well as
from computer systems of third parties with which it deals. Failures of our
and/or third parties' computer systems could have a material adverse impact
on our ability to conduct its business.
YEAR 2000 TASK FORCE. We have set up an internal task force comprised of our
Director of Manufacturing and Engineering managers to review our products,
business and engineering applications and suppliers and develop contingency
plans for Y2K readiness. This task is to be completed by the end of calendar
1999. The goal of the task force is to minimize the effect that Y2K issues
will have on the Company and its customers. The Director of Manufacturing
will update the CEO of the Company on its Y2K readiness.
INTERNAL BUSINESS AND ENGINEERING SYSTEMS. The task force has completed a
review of internal computer systems and will continue to review all internal
business and engineering computer systems to ensure that these systems either
will be Y2K ready, or will be modified or replaced by Y2K ready systems. We
have already been assured that our accounting information system installed in
1995 is Y2K ready as long as we adhere to the supplier's Y2K readiness
guidelines. We plan to simulate and have tested, in a Y2K environment, our
engineering and business information systems, internal telephone equipment,
local networks, security and sprinkler systems to verify our Y2K readiness by
the middle of fiscal 1999.
SUPPLIERS. Our major suppliers are component parts distributors and contract
manufacturers. Often the Company sources its products and manufacturing
services from multiple, competing vendors. We are conducting a review of
these key suppliers to ensure the Y2K readiness of as many vendors as
possible and will initiate communication with all of our key suppliers to
determine to what extent we may be vulnerable due to their failure to be Y2K
ready. This communication, including site visits by our personnel, will be
ongoing throughout fiscal 1999. There can be no assurance that the systems of
other companies on which we rely will be Y2K ready on a timely basis and will
not have an adverse effect on our operations. In instances where we are
unable to determine that our vendors have taken appropriate steps to minimize
disruption due to non-Y2K readiness, we will consider contingency plans,
including moving to identified alternate sources, or developing new alternate
sources.
PRODUCTS. The task force will also assess outside sourced computer based
control systems used within our product to determine if they have the
capability of dealing with the year 2000.
COSTS. We expect the cost of our Y2K assessment, including both incremental
spending and redeployed resources, will not be material. The current
assessment does not include potential costs related to any customer or other
claims or the cost of internal software and hardware replaced in the normal
course of business. This assessment is subject to change. Because there is no
uniform definition of "Y2K readiness" and because 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. Because 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 effect a customer's decision to purchase our Ultra
Guard-TM- UV
12
<PAGE>
system. However, we cannot predict the impact of our customers' lack of Y2K
compliance and any disruptions caused to treatment systems we have installed
because of their non-compliance. Costs and damages related to or arising from
non-compliance could materially adversely affect our revenues or our
business, even though we believe our systems themselves to be compliant.
COST ESTIMATES. We have not been required to incur costs for Y2K remedial
work and have not set aside any contingency fund to deal with any
contingencies which may arise. The costs for Y2K compliance are based on our
best estimates, which were derived from numerous assumptions about future
events, including third party modification plans and other factors. However,
we cannot guarantee that those estimates will be accurate and actual results
could differ materially from those plans. Specific factors that might cause
material differences include, but are not limited to, the availability and
cost of personnel trained in this area and ability to identify and correct
all relevant computer codes.
13
<PAGE>
PART II OTHER INFORMATION
Item 1. 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 a Director), and Charles P.
Neild (a former Director and Vice President of the Company).
O'Flynn alleges that in April of 1996, he purchased shares of
Common Stock based upon a representation that they would be free
trading within 40 days of "the filing of a prospectus". He
further alleges that in September of 1996 he purchased additional
shares of Common Stock based upon 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 has filed an answer denying the
claims.
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submissions of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits (exhibit reference numbers refer to Item 601 of
Regulation SB
Exhibit Number Description
(3)(i) Articles of Incorporation (1)
(3)(ii) Bylaws (2)
(4) Statement re: computation of per share earnings
-- filed electronically herewith
(27) Financial Data Schedule -- filed electronically
herewith
(B) Reports on Form 8K
During the reporting period we did not file any Form 8-K.
- ----------------
1. Incorporated by reference to the Registrant's Form 10-SB effective 1/17/97
2. Incorporated by reference to the Registrant's Form S-8 effective 10/6/97
14
<PAGE>
Signatures
In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, hereunto duly
authorized.
Dated: January 14, 1999
Service Systems International Ltd.
By: /s/ Ken Fielding
------------------------------
Ken Fielding, President
By: /s/ J. R. Gaetz
------------------------------
J. R. Gaetz, Vice President
15
<PAGE>
Exhibit (4)
Service Systems International, Ltd.
Computation of Per-Share Income
Treasury Stock Method
As Modified for 20% Test
<TABLE>
<CAPTION>
Period Ended Nov. 30, 1998
Three months
--------------------------
<S> <C>
Weighted average number of shares outstanding 12,662,988
-----------
Total common and common equivalent shares 12,662,988
-----------
-----------
Net income (loss) for the period $ (350,584)
-----------
-----------
Total common and common equivalent shares 12,662,988
-----------
-----------
Loss per common and common equivalent shares $ (0.03)
-----------
-----------
</TABLE>
Earnings per share:
The earnings per share is computed by dividing the net income (loss) for the
period by the weighted average number of common shares outstanding for the
period. Common stock equivalents are excluded from the computation if their
effect would be anti-dilutive.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> AUG-31-1999
<PERIOD-START> SEP-01-1998
<PERIOD-END> NOV-30-1998
<CASH> 6,146
<SECURITIES> 258,393
<RECEIVABLES> 227,429
<ALLOWANCES> 0
<INVENTORY> 267,798
<CURRENT-ASSETS> 783,481
<PP&E> 107,780
<DEPRECIATION> 10,684
<TOTAL-ASSETS> 2,439,943
<CURRENT-LIABILITIES> 281,446
<BONDS> 0
0
0
<COMMON> 12,663
<OTHER-SE> 3,073,619
<TOTAL-LIABILITY-AND-EQUITY> 2,439,943
<SALES> 106,811
<TOTAL-REVENUES> 106,811
<CGS> 82,430
<TOTAL-COSTS> 105,064
<OTHER-EXPENSES> 352,331
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 25,011
<INCOME-PRETAX> (350,584)
<INCOME-TAX> 0
<INCOME-CONTINUING> (350,584)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (350,584)
<EPS-PRIMARY> (0.03)
<EPS-DILUTED> (0.03)
</TABLE>
