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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 Period ended August 31, 2000
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ...................to .......................
Commission file number................................
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 SB is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendments to this Form 10-KSB (X)
The issuer's revenues for its most recent fiscal year were $74,388.
The aggregate market value of the voting and nonvoting 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 17, 2000 was $0.54. The number of shares outstanding of the
issuer's only class of Common $.001 par value was 22,314,023 on November 30,
2000.
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 FROM 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 wholly owned
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. In about February 2001, we will move to new offices at 201-11
Burbridge Street, Coquitlan, B.C. Canada V3K 7B2. 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
wholly-owned subsidairy, UV Systems Technology Inc., unless the context
otherwise requires. ULTRA GUARD-Registered Trademark- 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 remained inactive until September 1995. The initiation of
the current business was accompanied by a change of ownership. Service
Systems 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. (UVS), which was
incorporated in British Columbia, Canada in 1993. Our company issued
1,600,000 shares of its restricted 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, in September 1995,
we entered into a marketing distribution agreement with UVS Systems
Technology Inc., for marketing rights for the Ultra Guard-Registered
Trademark- system in eight
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Western states. In July 1996 we entered into a funding agreement with UVS.
Under the funding agreement, we supplied 50% of UVS' operating funds for a
six-month period. During this period, we structured an agreement with two
principals and certain minority shareholders and exchanged common stock to
acquire 50.69% of UVS.
On February 14, 2000, we entered into a letter agreement with WOF and MDS to
purchase the remaining 49.31% and outstanding preferred stock of UVS. Under
the terms of the letter agreement, WOF and MDS forgave all accrued loan
interest in the amount of C$221,583, loan principal in the aggregate amount
of C$1,576,098 was converted into 2,159,036 shares of Service Systems
restricted common stock, pursuant to Regulation S, valued at C$0.73 per share
(US $0.50 per share). The Class A preferred shares of UVS in the aggregate
amount of C$2,000,000 were converted into 2,054,794 shares of Regulation S
Service Systems restricted common stock valued at C$0.9733 per share
(US$0.6667 per share). In the aggregate, $2,449,383 was converted into
4,213,832 shares of Service Systems common stock at an average fair market
value of $0.58 per share. All Class A Preferred shares and Class B common
shares of UVS were transferred to Service Systems.
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 current United States
environmental standards, at an estimated cost of 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 discharge 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
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alternatives include ozonation and ultraviolet light.
The chlorination process can raise significant environmental concerns. As
reported in a 1986 U.S. Environmental Protection Agency study, MUNICIPAL
WASTEWATER DISINFECTION, even low chlorine residual levels are very difficult to
control in receiving streams. The waste stream is influenced by factors such as
temperature, pH, alkalinity, suspended solids, chemical oxygen demand and
nitrogen containing compounds. All of these factors influence the effectiveness
of chlorine disinfection. The environmental impact includes the toxicity of
residual chlorine to plant and wildlife and the formation of potentially toxic
halogenated organic compounds. Many treatment plants use sulfur dioxide to
remove the chlorine from the treated water. This reduces the chlorine residual,
but probably does not affect halogenated organic compounds and adds its own
negative effect in the receiving water. Chlorine is extremely volatile
therefore, its safe transportation is difficult. Many states' regulations
require that a treatment 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 the use of ozone. Ozone treatment can be expensive; ozone must be
generated on-site in an expensive process. The ozonation process is relatively
complex to operate and maintain, and the equipment costs are high.
According to a 1996 study, ULTRAVIOLET DISINFECTION IN MUNICIPAL WATER
AND WASTEWATER, the number of UV disinfection systems in the United States will
increase from about 1,000 to about 3,000 between 1995 and 2000 and the market
will increase from $20 million annually to $100 million annually in the same
time period. By the year 2010, half of municipal disinfection systems are
expected to use technologies other than chlorine, and use of chlorine will be
almost eliminated by 2025. About 56% of chlorine alternative 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.
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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 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, 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 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 the bacteria
Crypto and Giardia in potable water has proven that at very low doses (below
20mWs/cm2), UV treatment will meet quality standards acceptable for drinking
water. Crypto and Giardia cannot be deactivated using chlorine and the
alternative to UV is the use of filtration. Currently, the US EPA has
approved additional testing and the use of 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 disaster relief.
Disinfection is also needed for bottled and packaged juices and other fluids.
ENHANCEMENT AND EXPANSION OF MARKETING EFFORTS.
Our product is marketed through a representatives' network in North America and
in selected countries of the world. This network needs and continues to be
expanded so that we have at least one representative in each of the United
States. This process will continue both in the United
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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. We have entered into a Letter of Intent
with U.S. Filter, a major producer and marketer of water treatment systems,
to market our UV system in the North, South and Central America and the
Caribbean. Negotiations on a final agreement are in process, and we expect,
but cannot assure, that an agreement will be concluded in the near future.
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 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 PRODUCT
We manufacture and market our UV disinfection system under our registered
trademark, Ultra Guard(R). The Ultra Guard-Registered Trademark- system
incorporates: 1) low-pressure, high intensity, high efficiency UV lamps, 2)
infinitely variable ultraviolet lamp controllers, 3) a patented
high-performance reactor module, 4) patented flow-balanced weirs, and 5) an
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. However, 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
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-Registered Trademark- system also exposes fluid to UV light for a time
sufficient to damage the reproductive ability of the microorganisms. However,
in the Ultra Guard-Registered Trademark- 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
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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-Registered Trademark- patented flow reactor module. Service Systems'
competitors' straight-through systems require repeated and continuous
exposure to multiple banks of UV lights. In our UV system, the fluid
oscillates as it moves through the reactor module. This ensures that all
influent receives 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 that 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 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 the acceptance of our UV systems.
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 that are incorrectly adjusted
can cause surging of the fluid, exposing the UV lamp to air and reducing
system efficiency. The Ultra Guard-Registered Trademark- 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 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-Registered Trademark- system also
requires up to 90% fewer lamps than most other low-pressure, low-intensity
lamps systems. Medium pressure lamp
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systems require 3 - 5 medium pressure lamps to equal 1 of our lamps. We also
minimize replacement downtime for our lamps because our 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 our 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
projects, sold through our distributors and representatives, and
semi-conductor plants to which sales have been made through our Japanese
agent. Ultra Guard-Registered Trademark-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. Other specific sales and sales locations are detailed in
Management Discussion and Analysis.
SALES AND MARKETING
Our Ultra Guard-Registered Trademark- 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 30, 2000, UVS had 1 distributor and 52
representatives, 41 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-Registered
Trademark- UV system and sell these systems in designated territories.
Representatives are paid a commission for sales made within their
territories. All distributorship contracts and sales representative contracts
include a 30 day cancellation clause. Representatives are paid a commission
for sales made within their territories. The usual contract is for a period
of one year.
On October 4th, 2000 our Company signed a letter of intent to complete a
strategic alliance agreement that would give to US Filter the exclusive
rights to market the Ultra Guard-Registered Trademark- UV system within an
exclusive territory, which includes North, South and Central America, and the
Caribbean. Under the terms of the proposed US Filter strategic alliance, all
sales within the exclusive territory will be to US Filter. Sales and
marketing, and the appointment of representative and agents in all countries
outside of the exclusive territory will remain the Company's responsibility.
Through UVS, we are continuing to recruit distributors and representatives
throughout the world during our attendance at international exhibitions. In
October 2000 we exhibited at the Water Environment Federation in Anaheim,
California, North America's largest water and wastewater show.
We expect that our sales will be to diverse wastewater treatment plants
beginning primarily in the United States and Canada and then, 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.
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As part of our sales effort, we have 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 in Sacramento, California. Four
additional units are in process and will be completed, as demand for testing
requires. PDU's are fully functional Ultra Guard-Registered Trademark-
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.
We access marketing opportunities through: 1) published articles in trade
publications that are directed to wastewater treatment, 2) the marketing
efforts of our distributors and representatives, 3) presentation of technical
papers at industry meetings, and 4) meetings with design engineers and others
involved in treatment plant design. Videotapes and brochures are available
for potential customers and for use by distributors and representatives.
Sales opportunities for our UV wastewater treatment systems are made
available through requests for proposal received from public entities, and
contractor and engineering firms acting for public entities. These
opportunities are for systems designed in response to specific wastewater
plant criteria. We actively respond to requests for proposal in the United
States and throughout the world and normally will provide two to four
quotations per week. As of November 30, 2000, we had sixty-six requests
awaiting response. The large backlog of inquiries is because of the
activities generated from the Letter of Intent signed on October 4, 2000 with
US Filter and as a result of the efforts of the agent network of US Filter.
See Subsequent Events.
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 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, is
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 addresses safety issues of citizens in the surrounding area of
wastewater plants using hazardous chemicals, including chlorine. Each plant
must have had a risk management plan 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
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program. An industry survey has forecasted that over half of chlorine
alternative installations will be UV by 2010. See "INDUSTRY BACKGROUND."
Our UV competitors estimated respective shares of the North American market
for wastewater and process water are: 1) Trojan Technologies, Inc., 60%, 2)
PCI-Wedeco, 12%, 3) IDI Industries, Inc. 8%, 4) Aquionics, Inc, 5%, and 5)
Others, 15%. 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-Registered Trademark- 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 their resultant
high power consumption. IDI, and PCI-Wedeco 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-Registered Trademark- 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 use 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.
In competing in this marketplace, we must address the conservative nature of
the customer and our financial resources. Although we can demonstrate our
systems' superiority, our relative newness in the market and our minimal
financial resources can result in a reluctance on the part of the customer,
which we must overcome, to conclude an acquisition of the Ultra
Guard-Registered Trademark- system . We believe, as more of our systems come
on line and their efficiency and efficacy continue to be demonstrated, that
this reluctance will decrease. - Refer to Risk Factors.
PATENTS AND TRADEMARKS
Key components of the Ultra Guard-Registered Trademark- systems are patented
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 believe that the
expiration of the patents should not materially affect our business. With the
patents we hold on other key components in the Ultra Guard-Registered
Trademark- system, competing systems, even if they use our 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 our "wavy lines
and design" logo in the United States and Canada.
10
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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 us 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 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-Registered
Trademark- 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 funds, or the unavailability of funds, caused by
budgetary constraints or the bureaucratic process.
MANUFACTURING
The Ultra Guard-Registered Trademark- systems are assembled at our Burnaby
facility. Components for the systems are manufactured by a variety of
Canadian, United States and international suppliers. We obtain our UV lamps
and controllers for the systems from a sole supplier for each. To ensure
against any interruption of supply should one of these suppliers be unable or
unwilling to provide the parts as required, we are continuing the process of
identifying and arranging for alternative sources for these components.
RESEARCH AND DEVELOPMENT
Research and development are considered to be key components of our business
strategy. As of November 14, 2000, we had 8 employees collaborating on product
manufacturing and development activities, with a combined 100 years of related
experience. We also use 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
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<PAGE>
research and development efforts. Work on 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, our
research and development expense in fiscal 1998 was $264,282, in fiscal 1999
was $258,132, and in 2000 was $591,811.
EMPLOYEES
As of August 31, 2000, Service Systems had three part-time employees, and UV
Systems Technology, Inc had 14 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 design and in office services.
Of the full-time employees, 2 employees were engaged in management, 1
employee was engaged in sales and marketing, 2 were engaged in office
services, 2 employees were engaged in R & D and design and six were engaged
in production and manufacturing of the Ultra Guard-Registered Trademark-
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
"SELECTED FINANCIAL DATA" AND SERVICE SYSTEMS' CONSOLIDATED FINANCIAL STATEMENTS
AND NOTES THERETO. INFORMATION DISCUSSED HEREIN MAY INCLUDE FORWARD-LOOKING
STATEMENTS REGARDING FUTURE EVENTS OR THE FUTURE FINANCIAL PERFORMANCE OF
SERVICE SYSTEMS, 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 THESE FACTORS ARE: GENERAL BUSINESS AND
ECONOMIC CONDITIONS; CUSTOMER ACCEPTANCE AND DEMAND FOR SERVICE SYSTEMS'
PRODUCTS; SERVICE SYSTEMS' OVERALL ABILITY TO DESIGN, TEST AND INTRODUCE NEW
PRODUCTS ON A TIMELY BASIS; THE NATURE OF THE MARKETS ADDRESSED BY SERVICE
SYSTEMS' PRODUCTS; AND OTHER RESK FACTORS LISTED FROM TIME TO TIME IN DOCUMENTS
FILED BY SERVICE SYSTEMS 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 2000 fiscal year of $2,101,604. We cannot assure that we will become
profitable at any time in the foreseeable future.
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-Registered Trademark- system does provide us
competitive technological and operational advantages, we
12
<PAGE>
cannot assure that this advantage will continue. Moreover, we cannot assure 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 may not
be able to compete effectively in the current or future markets and competitive
pressure may 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. In addition, we
are dependent on sales both to licensees, which are obligated to purchase agreed
upon system components we provide, and on awards of water treatment system
contracts for non-recurring projects. Many of our contracts may be expected to
include provision for hold back, entitling the other party to the contract to
withhold a specified portion of the payment for a given period of time until
after completion of a project. For these and other reasons, we may experience
periods of limited working capital and may be expected to require financing for
working capital during those periods. In addition, we will require financing
over and above our current resources to sustain our operations and expand our
marketing efforts. We may not be able to obtain the additional financing on a
timely basis, or on terms that are acceptable, or at all.
SALES ON BOTH AN ANNUAL AND QUARTERLY BASIS ARE SUBJECT TO FLUCTUATIONS,
WHICH ARE OFTEN BEYOND OUR CONTROL. Our sales of Ultra Guard-Registered
Trademark- 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 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-Registered Trademark- SYSTEMS MAY BE
INSTALLED AS REPLACEMENT SYSTEMS FOR EXISTING DISINFECTION SYSTEMS,
ESPECIALLY CHLORINATED SYSTEMS. The trend is to phase out chlorinated systems
because of their adverse environmental impact. This potential business is
dependent upon the availability of funding for municipalities to replace or
retrofit existing systems, which cannot be predicted with any certainty.
OUR SYSTEMS CONTAIN STATE-OF-THE-ART COMPONENTS. We cannot assure that we will
continue to
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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 that 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-Registered Trademark- 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. Changes
could cause us to incur significant expense to redesign or upgrade our
system. These standards and guidelines are continuing to develop and have
been and are subject to change, especially with respect to acceptable
microbiological discharge levels.
THE ULTRA GUARD-Registered Trademark- SYSTEM MIGHT BE SUBJECT TO PRODUCT
LIABILITY OR COMMERCIAL WARRANTY CLAIMS. We do 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 may not 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. Issued patents could be infringed or additional patents that are
applied for may not be be issued. The costs of prosecuting an infringement
suit can be very significant. If an infringement occurs, we may not be able
to preserve our exclusive rights to the patented technology or protect the
rights. This could have a material adverse effect on our business. We could
potentially 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.
14
<PAGE>
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 our 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, 2000, the Company had
7,625,147 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 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 OUR COMMON STOCK. We have 22,307,523 shares of common stock
outstanding. Of these shares, approximately 11,657,544 are now eligible for
sale in the public market without restriction pursuant to Rule 144(k) or
Regulation S under the Securities Act.
SINCE OUR INCEPTION, WE HAVE NOT PAID CASH DIVIDENDS ON OUR COMMON STOCK. Our
intention is 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.
WE HAVE NOT HELD AN ANNUAL MEETING OF SHAREHOLDERS SINCE WE BECAME A
REPORTING COMPANY. Because of the cost involved and our limited financial
resources, we have not convened annual meetings of shareholders. Because we
have not done so, shareholders have not had the opportunity to vote on
election of directors or ratification of auditors and to receive proxy
statements. We plan to hold a shareholders' meeting as soon as our financial
resources permit us to do so.
ITEM 2. DESCRIPTION OF PROPERTY
Service System's executive offices were moved in July 1997 from White Rock,
British Columbia, Canada, into the UV Systems premises at 2800 Ingleton
Avenue, Burnaby, British Columbia. The UV Systems leased premises have 2,537
square feet of executive offices and 9,088 square feet of manufacturing
facilities. The lease term was for a period of five years, expiring September
2000. Although an option to renew was included in the lease, our landlord
required the space for his use. In October 2000, we signed a five year lease
for new premises, for both manufacturing and administration, located at
201-11 Burbridge Street, Coquitlan, B.C., Canada V3K 7B2. The new premises
have 2,880 square feet for executive offices and 7,780 square feet for
manufacturing space and the base rent is C$5,526.04 (plus GST) per month.
UVS' manufacturing operations moved to new premises on November 1, 2000. The
office operations of both UV Systems and Service Systems will move their
offices approximately February 1, 2001. Insurance plans covering all of our
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 than 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. Refer to Risk Factors.
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 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>
<S> <C> <C>
FISCAL YEAR 1998
Quarter ended November 30, 1997 1.562 0.625
Quarter ended February 28, 1998 0.687 0.281
Quarter ended May 31, 1998 0.375 0.170
Quarter ended August 31, 1998 0.187 0.10
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
FISCAL YEAR 2000
Quarter ended November 30, 1999 0.75 0.26
Quarter ended February 29, 2000 0.88 0.29
Quarter ended May 31, 2000 1.00 0.31
Quarter ended August 31, 2000 0.93 0.437
</TABLE>
As of August 31, 2000 Service Systems had approximately 126 holders of record of
the Common Stock.
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Service Systems has never had profits and has never paid cash dividends on its
common stock. Our intention is to retain future earnings, if any, to provide
funds for business operations and, accordingly, we do not anticipate paying any
cash dividends on our common stock in the foreseeable future. However, we are
under no restriction as to the payment of dividends.
OTHER SALES
During the quarter ended August 31, 2000, Service Systems made the following
sales in U.S. and 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>
A. Schuler 6/00 13,889 shares $0.36 $ 5,000
13,889 warrants
R. Patrella 8/00 30,000 shares $0.68 $ 20,400
30,000 warrants
M. Dhillon 6/00 200,000 $0.50 $ 100,000
200,000 warrants
M. Dhillon 8/00 70,922 shares $0.812 $ 57,589
Level Jump Trading 8/00 100,000 shares $0.40 $ 40,000
</TABLE>
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) 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 100% owned subsidiary, UV Systems Technology, Inc.
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
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ownership (see "Company Background"). Through UVS, Service Systems
manufactures and markets its Ultra Guard-Registered Trademark- 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, and for
potable water, bottled products and agriculture and aquaculture water
treatment.
In September 1995 Service Systems entered into a marketing distribution
agreement with UV Systems Technology Inc. (UVS), 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 UVS. Under the funding
agreement, Service Systems provided 50% of UVS' operating funds 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
February 14, 2000, Service Systems entered into an agreement with the
remaining two minority stockholders, Growth Works Capital Ltd. (Managers of
Working Opportunity Fund (EVCC) Ltd.) (WOF) and MDS Ventures Pacific
Inc.(MDS), to acquire the remaining 49.31% common stock and preferred stock.
Under this letter agreement, Service Systems issued to WOF 2,809,723 shares
of restricted common shares under Regulation S to acquire all UVST Class A
and B shares held by WOF and debt of UVST totaling C$2,301,098 and to MDS
1,404,109 shares of restricted common shares under Regulation S to acquire
all UVST Class A and B shares held by MDS and debt of UVST totaling
C$1,275,000
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.
Field testing of the mechanical wiper cleaning system was concluded during
October and November, 1997, at a PDU test site 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 its UV
system amounting to C$31,200 and C$45,952, all of which was prepaid. C$31,200 of
the work had been completed by the end of the fiscal period.
A 6-lamp Ultra Guard-Registered Trademark- UV system, valued at $127,000, and
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
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first full scale operating Ultra Guard-Registered Trademark- UV system
installed in North America. This system in Hamilton has provided significant
equipment exposure to other wastewater plants contemplating upgrading their
treatment plant discharges including replacing chlorine as the disinfecting
means with environmentally friendly ultraviolet disinfection.
In September 1999, we secured the formal order for a project in Toronto,
Canada for about C$685,000 (US$466,000). The project is currently in design
and manufacture and has been rescheduled for delivery to meet customer needs
in February 2001. The UV system to be delivered to Toronto is part of a C$50
(US$34) million combined storm overflows (CSO) project (the world largest
submersible CSO pumping station) and will be used for disinfection of CSO
before discharge into Lake Ontario.
After successful PDU testing in September & October, 1998 at the City of
Peterborough wastewater treatment plant, we received an order valued at over
C$1,100,000 (US$748,000) in March 1999. The UV system will disinfect effluent
flow in excess of 36 million gallons per day. The wastewater plant has been
rescheduled to be operational by the end of April 2001.
Purchase orders for two additional UV systems valued at approximately
C$150,000 (US$258,000) were produced during the 2000 fiscal period and will
be delivered into the Province of Ontario in May, 2000. Additional orders for
shipment to Louisiana and Virginia were received, with a aggregate value of
about $258,000. These two systems are to be delivered in February 2001.
In January 1999, a PDU was installed at the County Sanitation Districts of
Los Angeles Country (the County) for testing. The purpose of the test was to
determine the Ultra Guard-Registered Trademark- 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. Testing was completed in July
1999 and was conducted and paid for by the County. The County reported that
the findings of the five-month testing program confirmed the ability of the
Ultra Guard-Registered Trademark- UV system's to achieve Title 22 design
objectives at fifty percent of the dose required by low pressure, low
intensity technology previously tested. Using the same safeties as had been
applied to the low pressure, low intensity technology, a substantial saving
in energy usage, 12.7%, was achieved by using the Ultra Guard-Registered
Trademark- system. On February 28, 2000 the Company was advised by the
Department of Health Services that Title 22 approval had been granted.
In October 1999 Service Systems signed an agreement with a leading Australian UV
equipment manufacturer to market its product in North America. The products
provided through this agreement will permit Service Systems 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 products are
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. The implementation of these
products into Service Systems' product line has been delayed, pended setup of a
division to lead this business segment and the funding necessary for its
implementation. As a result of the rapidly expanding need for the use of UV in
the disinfection of potable water, this implementation has been placed high on
Service Systems' priority list as a business segment to develop and exploit in
the 2001 fiscal year.
During this reporting period, Service Systems entered into development to
reconfigure its UV
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<PAGE>
system. In the quarter ended February 29, 2000, Service Systems produced the
prototype of a new UV product line, the Ultra-Flow SLR. This product, with a
designed disinfection capacity of up to 1.0 million gallons per day per lamp,
will incorporate Service Systems' patented flow reactor chamber, the proprietary
low pressure, high intensity UV lamp and the patented flow balanced weir. It
encompasses layout flexibility, infinite automatic flow control and monitoring,
and future expansion can be easily accomplished. The client can monitor system
and component performance locally or remotely Additional features include full
password protected, Internet-based, web- monitored, microprocessor control,
which will permit monitoring of the Ultra-Flow SLR UV system from Service
Systems' plant or from any location equipped with an Internet connection.
In May of 2000, Service Systems started discussions with US Filter/ Wallace &
Tiernan Products group, Vineland, NJ for the implementation of a Strategic
Alliance to market Service Systems' ultraviolet products. On October 4, 2000,
a letter of intent was signed that provided for, among other things, an
exclusive alliance to market Service Systems' Ultra Guard-Registered
Trademark- UV system in North, South and Central America, and the Caribbean.
US Filter is a wholly owned subsidiary of Vivendi Company of France. In 1999,
Vivendi Company's total sales were $62.0 billion, including $7.0 billion
sales directly by US Filter. We expect that, if consummated, the Alliance
will provide us entry into wastewater plants that may not have previously
considered us. Although the final documents have not been signed at this
date, we expect they will be signed not later than the end of the first
quarter of fiscal 2001.
RESULTS OF OPERATIONS
The following selected financial data for the years ended August 31, 1998
through August 31, 2000 have been derived from Service Systems' 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
for the periods discussed.
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Revenue $74,388 $398,063 $202,894
Loss per common and common
Equivalent share $(0.12) $(0.13) $(0.14)
Total assets $1,386,198 $2,259,106 $2,652,179
Long-term debt $ 206,230 $2,491,056 $2,270,525
Total liabilities $ 898,479 $3,651,936 $2,491,096
Total stockholders' equity $ 487,719 $(1,392,830) $ 161,083
</TABLE>
Year Ended August 31, 2000 compared to Year Ended August 31, 1999.
REVENUES. For fiscal 2000, we reported revenues of $74,388, a
decrease of $323,675, or 81%, from $398,063 in fiscal 1999. The decrease
resulted from customer driven
20
<PAGE>
delayed completion of projects in process. Revenue from these delayed projects
should be realized in the next fiscal year.
DIRECT PROJECT COSTS. For fiscal 2000, we reported direct project costs
of $61,777, a decrease of $282,362 or 82%, from $344,139 in fiscal 1999. This
decrease resulted from customer driven delays in putting projects into
manufacturing and from non-completion of contract work from sub-contractors.
GROSS PROFIT. For fiscal 2000, we reported a gross profit of $12,611, a
decrease of $41,313, or 77%, from $53,924 in fiscal 1999. This decrease resulted
from customer driven delays in putting projects into manufacturing and delayed
completion of projects.
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 2000, we reported $170,809 of these costs, an increase of $136,317,
or 395%, from $34,492 in fiscal 1999. This increase occurred as a result of lack
of sales and resultant decreased manufacturing activities.
SELLING EXPENSES. For fiscal 2000, we reported selling expenses of
$240,362, a decrease of $25,108, or 9%, from $265,470 in fiscal 1999. This
decrease primarily was a result of reduced sales commissions.
GENERAL AND ADMINISTRATIVE EXPENSE. For fiscal 2000, we reported
general and administrative expense of $650,203, an increase of $228,721, or 54%,
from $421,482 in fiscal 1999. This increase resulted primarily from increase in
expenses relating to investors, administrative management, legal fees, and
advertising and promotion and consulting fees, due to securing new projects.
Part of the increase is also due to bad debt expense and accounting office help
for the audit work.
RESEARCH AND DEVELOPMENT EXPENSE. For fiscal 2000, we reported research
and development expense of $591,811, an increase of $333,679, or 129%, from
$258,132 in fiscal 1999. The increase was due to the write-off of design costs
of $144,981, which had previously been capitalized, and engineering and
prototyping expenses incurred during the fiscal 2000.
AMORTIZATION OF GOODWILL. For fiscal 2000, we reported amortization of
goodwill of $485,081, the same figure as reported for fiscal 1999. 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 2000, we reported interest
recovery, net of interest income and interest waived, of ($89,556), a decrease
of $187,756, or 191%, over $98,200 in fiscal 1999. This decrease resulted from
the interest recovery from interest expense waived by minority shareholders and
by Service Systems, a provision included in the purchase of the minority
shareholders' 49.31% ownership of the Company's subsidiary, UV Systems
Technology Inc.
FOREIGN EXCHANGE TRANSLATION LOSS. For fiscal 2000, we reported a
foreign exchange translation loss of $65,505, a decrease of $38,725, or 37%,
over $104,230 in fiscal 1999. The decrease in loss in the fiscal 2000 resulted
from an increase in the value of the Canadian dollar as
21
<PAGE>
compared to the fiscal 1999.
NET LOSS FOR THE PERIOD. For fiscal 2000, we reported a net loss of
$2,101,604, an increase of $488,441, or 30% over $1,613,163 reported in
fiscal 1999. The increase in net loss was due to decreased revenues, the
write-off of research and development expenses and the increase in expenses
relating to investors, administrative management, legal fees, advertising and
promotion and consulting fees, due to securing new projects.
NET LOSS PER SHARE. For fiscal 2000, we reported a net loss per share
of $0.12, a decrease of $0.01, or 7%, from $0.13 in fiscal 1999. The net loss
per share reduced as a result of the net loss being allocated over an increased
number of outstanding shares and share equivalents in fiscal 2000.
Year Ended August 31, 1999 compared to the 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 costs, 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 comparable in both fiscal periods.
AMORTIZATION OF GOODWILL. For fiscal 1999, we reported amortization of
goodwill of
22
<PAGE>
$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, and 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.
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 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-Registered Trademark- 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 that 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 that are
acceptable or if at all.
During the year ended August 31, 2000, current assets decreased $224,475 as
compared to the period ended 1999. The decrease, net of increase, was due
primarily to a decrease in accounts receivable of $225,028, and inventory of
$9,929; offset by an increase in cash of $1,306, short term investments of
$2,377 and prepaid expenses and deposits of $6,799. Long term assets decreased,
net of increases, during the fiscal period ended 2000 by $648,433, as compared
to the period ended 1999, due to the amortization of goodwill of $485,081,
capital assets $31,018, and a net decrease in patents and trademarks of $132,334
as a result of the write-off of design costs.
23
<PAGE>
Current liabilities decreased during fiscal 2000 by $468,631 as compared to the
period ended 1999. The decrease as detailed on the financial statements was due
to a decrease in bank loans of $209,381, accounts payable of $67,665, accrued
liabilities of $10,007, wages payable of $3,011, loans payable of $175,622 and
amounts owing to related parties of $ 62,898, offset by an increase in customer
deposits of $59,953. Loans payable and amounts owing to related parties were
reduced primarily through conversion of both into capital stock. Long-term debt
decreased during fiscal 2000 by $2,284,826 as compared to the 1999 period. The
decrease was accomplished by converting of loans payable to minority
shareholders into Service Systems capital stock of $2,491,056, offset by an
increase in loans payable to related parties of $206,230.
We financed our operations during the 2000 fiscal year, in part, from proceeds
of sales of restricted common stock, bank loans, loans from Elco Bank, and loans
from related parties and minority shareholders of UVS.
We expect that, during fiscal 2001, 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.
24
<PAGE>
ITEM 7. CONSOLIDATED FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Cash Flows
Notes to the Consolidated Financial Statements
25
<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, 2000 and 1999, 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, 2000 and 1999, 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 30, 2000
26
<PAGE>
Service Systems International, Ltd.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
August 31,
-------------------------------
2000 1999
$ $
<S> <C> <C>
ASSETS
Current Assets:
Cash and short-term investments 9,291 7,985
Short-term investments - restricted (Note 3) 265,279 262,902
Accounts receivable 85,097 310,125
Inventory 264,663 274,592
Prepaid expenses and deposits 43,965 37,166
-------------------------------
Total Current Assets 668,295 892,770
Property, Plant, and Equipment (Note 4) 60,495 91,513
Other Assets:
Goodwill (net of amortization of $1,819,054) 606,354 1,091,435
Patents and trademarks (Note 5) 51,054 183,388
-------------------------------
Total Assets 1,386,198 2,259,106
===============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Bank demand loan - 209,381
Accounts payable 164,080 243,067
Accrued liabilities 23,286 33,293
Wages and vacation pay payable 19,046 22,057
Customer deposits 88,422 17,147
Loans payable (Note 6) 252,614 428,236
Amounts owing to related parties (Note 7(i)) 144,801 207,699
-----------------------------
Total Current Liabilities 692,249 1,160,880
Long Term Debt:
Amounts owing to related parties (Note 7(ii)) 206,230 -
Loans payable - minority stockholders of subsidiary (Note 8) - 2,491,056
-------------------------------
Total Liabilities 898,479 3,651,936
-------------------------------
Stockholders' Equity (Deficit)
Common stock (Note 9), $.001 par value
50,000,000 shares authorized, 22,307,523 and
13,094,988 issued and outstanding respectively 22,308 13,095
Additional paid-in capital 7,105,377 3,132,437
Deficit (6,639,966) (4,538,362)
-------------------------------
Total Stockholders' Equity (Deficit) 487,719 (1,392,830)
-------------------------------
Total Liabilities and Stockholders' Equity 1,386,198 2,259,106
===============================
</TABLE>
(See accompanying notes to financial statements)
27
<PAGE>
Service Systems International, Ltd.
Consolidated Statements of Operations and Deficit
<TABLE>
<CAPTION>
Year ended August 31,
-------------------------------
2000 1999
$ $
<S> <C> <C>
Project Revenue 74,388 398,063
Project Cost 61,777 344,139
---------------------------
Gross Profit 12,611 53,924
Manufacturing Costs Not Applied 170,809 34,492
---------------------------
(158,198) 19,432
--------------------------
Expenses
Selling 240,362 265,470
---------------------------
General and administrative 650,203 421,482
---------------------------
Research and development:
Materials 44,987 32,375
Wages and benefits 182,724 96,113
Subcontracting 238,010 18,497
Depreciation 3,018 2,813
Equipment rental 2,579 -
Indirect costs 91,613 101,644
Shipping 7,597 1,327
Travel 21,283 5,363
---------------------------
591,811 258,132
---------------------------
Amortization of goodwill 485,081 485,081
---------------------------
Interest, net of interest income and interest recovered (Note 8) (89,556) 98,200
---------------------------
Foreign exchange translation loss 65,505 104,230
---------------------------
Total Expenses 1,943,406 1,632,595
---------------------------
Net Loss for the year 2,101,604 1,613,163
Deficit - Beginning of year 4,538,362 2,925,199
---------------------------
Deficit - End of year 6,639,966 4,538,362
===========================
$ $
Net Loss per share (0.12) (0.13)
=====================================
# #
Weighted average shares outstanding 18,230,000 12,757,000
============================
</TABLE>
(See accompanying notes to financial statements)
28
<PAGE>
Service Systems International, Ltd.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended August 31,
----------------------------
2000 1999
$ $
<S> <C> <C>
Cash Flows to Operating Activities
Net Loss (2,101,604) (1,613,163)
Adjustments to reconcile net loss to cash
Research and development expenses 131,590 -
Amortization of goodwill 485,081 485,081
Depreciation 49,365 50,344
Foreign exchange translation loss 65,505 104,230
Common stock issued for expenses 269,715 11,100
(Recovery of) accrual of interest on long-term debt (119,670) 122,675
Change in non-cash working capital items
Decrease (increase) in accounts receivable 218,589 (199,168)
Decrease (increase) in inventory and contract work in progress 9,929 (36,311)
(Increase) in prepaid expenses and deposits (6,799) (991)
(Decrease) increase in accounts payable, accrued
liabilities, wages and vacation pay payable
and customers' deposits (26,035) 190,435
----------------------------
Net Cash Used in Operating Activities (1,024,334) (885,768)
----------------------------
Cash Flows (to) from Investing Activities
Reduction (Acquisition) of short-term investment - restricted 1,373 (13,585)
Additions to patents and trademarks - (95,764)
Capital assets acquired (17,603) (25,433)
Proceeds on disposal of capital assets - 29,833
----------------------------
Net Cash Used in Investing Activities (16,230) (104,949)
----------------------------
Cash Flows from (to) Financing Activities
(Decrease) increase in bank demand loan (209,381) 209,381
Common stock issued 1,263,055 48,150
(Decrease) increase in loans payable (152,172) 427,015
Increase in amounts owing to related parties 140,368 107,104
----------------------------
Net Cash Provided by Financing Activities 1,041,870 791,650
----------------------------
Increase (Decrease) in Cash 1,306 (199,067)
Cash - Beginning of year 7,985 207,052
----------------------------
Cash - End of year 9,291 7,985
============================
Non-cash Financing Activities
4,213,832 shares (1999 - 111,000 shares) were issued to
settle debts at $0.58 (1999 - $0.10) per share 2,449,383 11,100
---------------------------------------------------------------------------------------------------------
Cash paid for interest 13,484 -
Cash paid for income tax - -
</TABLE>
(See accompanying notes to financial statements)
29
<PAGE>
Service Systems International, Ltd.
Notes to the Consolidated Financial Statements
1. Nature of Operations and Continuance of Business
The Company manufactures and markets its Ultra Guard-Registered
Trademark- ultra violet based patented water treatment system through its
wholly-owned Canadian subsidiary, UV Systems Technology Inc. ("UVS").
These products and systems are sold primarily for municipal waste
disinfection, treatment of process and industrial wastewater, and for
potable water, bottled products and agriculture and aquaculture water
treatment.
See Note 8 regarding restructuring of long-term debt and elimination of
minority interest.
During fiscal 1998 the Company emerged from, for accounting purposes, 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
Canadian subsidiary, UVS, of which the Company owned 50.7% until
February 14, 2000, when it acquired 100% of UVS' capital stock (See
Note 8).
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand, in banks and all highly
liquid investments with maturity of three months or less when purchased.
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.
30
<PAGE>
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 that
would indicate inability to recover the carrying amount. Such evaluation is
based on various analyses including discounted cash flows and profitability
projections that necessarily involve management judgement.
PATENTS AND TRADEMARKS
Patents and trademarks are being 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 that 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.
FOREIGN CURRENCY
i) Translation of foreign currency transactions and balances:
Revenue, expenses and non-monetary balance sheet items in foreign
currencies are translated into US dollars at the rate of exchange
prevailing on the transaction dates. Monetary balance sheet items are
translated at the rate prevailing at the balance sheet date. The
resulting exchange gain or loss is included in general and
administration expenses.
ii) Translation of foreign subsidiary balances:
Monetary balance sheet items of UVS are translated into US dollars at
the rates of exchange on the balance sheet date. Non-monetary balance
sheet items are translated into US dollars at the rate of exchange
prevailing on the transaction dates. The foreign subsidiary's operating
results are translated into US dollars using the average exchange rate
for the year with any translation gain or loss and is included
separately in operations.
31
<PAGE>
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, 2000 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 US
Losses Losses
Year $ Expiration Date $ Expiration Date
<S> <C> <C> <C> <C>
1995 87,000 2002 -
1996 491,000 2003 240,000 2011
1997 993,000 2004 202,000 2012
1998 453,000 2005 650,000 2013
1999 845,000 2006 152,000 2014
2000 1,060,000 2007 444,000 2015
--------------------------------------------------------------------------------
3,929,000 1,688,000
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
</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 $2,471,000. 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 $2,471,000 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
32
<PAGE>
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)).
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
33
<PAGE>
any derivative instruments and has not entered into any hedging
activities.
3. Restricted Cash
In connection with a letter of credit, required under a long-term project
to be completed in fiscal 2000, the company purchased a C$391,000 face
value Bankers' Acceptance to be held as a bond for the letter of credit of
C$390,809.
4. Property, Plant, and Equipment
Property, Plant, and Equipment are stated at cost less accumulated
depreciation.
<TABLE>
<CAPTION>
2000 1999
Accumulated Net Book Net Book
Cost Depreciation Value Value
$ $ $ $
<S> <C> <C> <C> <C>
Computer equipment 45,558 30,295 15,263 19,729
Computer software 8,184 4,259 3,925 2,818
Display equipment 33,016 29,006 4,010 10,613
Office furniture and equipment 32,476 25,814 6,662 10,950
Plant jigs, dies, moulds, tools and equipment 105,935 75,745 30,190 41,613
Leasehold improvements 26,724 26,279 445 5,790
------- ------ ------ -------
251,893 191,398 60,495 91,513
======= ======= ====== ======
Depreciation per class of asset:
<CAPTION>
2000 1999
$ $
<S> <C> <C>
Computer equipment 8,689 7,648
Computer software 1,387 1,073
Display equipment 6,603 6,485
Office furniture and equipment 6,296 5,963
Plant jigs, dies, moulds, tools and equipment 20,301 18,970
Leasehold improvements 5,345 5,345
----- -----
48,621 45,484
====== ======
</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-Registered
Trademark- System. These costs are amortized over twenty years.
Components
34
<PAGE>
of the Ultra Guard-Registered Trademark- 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. Translations and other requirements
to formalize these patents will continue through Year 2000.
6. Demand Loans
a) Of $341,940 loans payable to "Elco Bank Clients" located in Nassau,
Bahamas, as of August 31, 1999, the Company repaid $289,256 with the
exercise of Class "E" warrants for the issuance of 1,446,281 shares
@ $0.20 per share and the issuance of 1,446,281 Class "E" warrants
exercisable at $0.40 each expiring September 13, 2002, leaving a
balance owing of $52,684. During the year, total proceeds in the
amount of $816,222 were received, plus accrued interest amounting to
$26,575. The company repaid $773,837 of this loan with issuance of
the following:
<TABLE>
<CAPTION>
No. of Shares Price Per Share Class E Warrants Class B Warrants
<S> <C> <C> <C>
1,217,456 $0.30 1,617,456 @ $0.40 1,217,456@ $0.20
93,334 $0.30 93,334 @ $0.35
714,000 $0.40 214,000 @ $0.40
475,000 $0.20 475,000 @ $0.25
</TABLE>
This left a balance owing of $121,644. The loans payable to Elco Bank
Clients is unsecured, interest bearing at 10% per annum and due on
demand.
b) Loans payable in the amount of $14,183 are unsecured, non-interest
bearing and were repaid subsequent to August 31, 2000.
c) Loans payable to a shareholder of $116,787 are unsecured and
interest bearing at 8% per annum and are due on demand.
7. Amounts Owing to Related Parties
(i) These amounts, totaling $144,801, are owing to two directors, due on
demand, unsecured and non-interest bearing.
(ii)During the quarter ended February 29, 2000, two directors agreed to
defer payment of their loans amounting to $ 206,230 until September
30, 2001.
8. Restructuring of Long-term Debt and Elimination of Minority Interest
Pursuant to a letter agreement signed February 14, 2000, the minority
shareholders forgave accrued interest in the amount of C$221,583; loan
principal in aggregate amounting to
35
<PAGE>
C$1,576,098 was converted into 2,159,038 shares of Regulation S,
restricted common stock at C$0.73 (US$0.50) per share. Class A
preferred shares of UVS in the amount of C$2,000,000 were converted
into 2,054,794 shares of Regulation S, restricted common stock at
C$0.9733 (US$0.6667) per share. In aggregate $2,449,383, was converted
into 4,213,832 shares of the company, at an average fair market value
of $0.58 per share. All Class A Preferred shares and Class B Common
shares of the subsidiary, UVS, were transferred to the Company.
9. Common Stock
<TABLE>
<CAPTION>
Additional
Common Paid-in
Shares Stock Capital
# $ $
<S> <C> <C> <C>
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
Issuance of stock for cash in private sales at
prices ranging from $0.20 to $0.68 2,855,340 2,856 910,336
Issuance of stock for the 49.3% of UV Systems
Technology from its minority shareholders
at a fair market value of $0.58 per share 4,213,832 4,214 2,445,169
Issuance of stock for expenses pursuant to
exercise of employee stock options 20,000 20 2,980
Issuance of stock for cash pursuant to exercise
of warrants
exercised at $0.20, per share 1,446,281 1,446 287,810
exercised at $0.40, per share 60,000 60 23,940
exercised at $0.50, per share 78,000 78 38,922
Issuance of stock for expenses at prices ranging
from $0.20 to $0.48 208,160 208 72,865
Issuance of stock under the Long-Term Equity
Incentive Plan at a fair market value of
prices ranging from $0.60 to $0.81 330,922 331 193,258
Issuance of stock under the Long-Term Equity
Incentive Plan for nil consideration subsequently
returned for cancellation 725,000 - -
(725,000) - -
Share Issue Costs (2,340)
-------------------------------------------------------------------------------------------------------------------
Balance August 31, 2000 22,307,523 22,308 7,105,377
===================================================================================================================
</TABLE>
(a) Warrants outstanding as at August 31, 2000:
36
<PAGE>
<TABLE>
<CAPTION>
Exercise
Class # Price Expiry Date(s)
<S> <C> <C> <C>
"A" 1,321,879 $.20-$.90 June 30, 2001 - December 20, 2003
"B" 1,217,456 $0.20 December 3, 2003
"D" 1,455,049 $0.40 June 2, 2002
"E" 6,030,553 $.20-$.90 December 31, 2001 - December 3, 2003
</TABLE>
450,420 Class A warrants exercisable at between $.40 to $.90 per share
were extended to June 30, 2001.
17,520 Class A warrants were issued at an exercise price of $.35
expiring April 8, 2002 in connection with a shares for debt agreement
where 17,520 shares were issued at $.35 to settle $6,132 of debt.
952,699 Class A warrants were issued at various exercise prices of $.40
to $.90 per share with various expiry dates of June 30, 2001 to
December 20, 2003 pursuant to various private placements and stock
options exercised.
1,217,456 Class B warrants and 2,399,790 Class E warrants were issued
in connection with a shares for debt agreement. Refer to Note 6(a) for
details.
1,684,482 Class E warrants issued in prior years were reduced to an
exercise price of $.20 per share and the expiration period was extended
to June 30, 2002.
100,000 Class A and 100,000 Class E warrants with an exercise price of
$.60 and $.90 respectively were issued with an expiry period of May 29,
2002 in connection with 200,000 performance shares issued.
150,000 Class E warrants at an exercise price of $.40 were extended
from December 31, 2000 to December 31, 2001.
37
<PAGE>
1,446,281 Class E warrants were issued at an exercise price of $.40
pursuant to stock options exercised. These warrants expire September
13, 2002.
450,000 Class E warrants were issued at an exercise price of $.40 -
$.90 per share pursuant to various private placements. These warrants
expire from December 31, 2000 - February 20, 2003.
(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
stock options were not exercised and expired on August 21, 2000.
On April 15, 1998 two directors and an employee were granted stock
options to acquire 341,000 shares at $0.15 per share expiring April 15,
2001. 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.
38
<PAGE>
If compensation expense had been determined pursuant to SFAS 123, the
Company's net loss and net loss per share for the years ended August
31, 2000 and 1999 would have been as follows:
<TABLE>
<CAPTION>
2000 1999
$ $
<S> <C> <C>
Net loss
As reported (2,101,604) (1,613,163)
Pro forma (2,396,604) (1,933,413)
Basic net loss per share
As reported (.12) (.13)
Pro forma (.13) (.15)
</TABLE>
(c) Long-Term Equity Incentive Plan
The Company has allotted 5,000,000 shares pursuant to a Long-Term
Equity Incentive Plan approved and filed with the Securities and
Exchange Commission December 17, 1999. The Plan permits the grant
of Non-qualified Stock Options, Incentive Stock Options,
Restricted Stock and Performance Shares. During the year 330,922
performance shares were granted at a fair market value of
$193,589, and 725,000 were granted for nil consideration which
have been returned for cancellation.
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>
2000 1999
------------------------------------- --------------------------------------
United United
Canada States Total Canada States Total
$ $ $ $ $ $
<S> <C> <C> <C> <C> <C> <C>
Revenue 74,388 - 74,388 398,063 - 398,063
Expense 1,181,315 994,677 2,175,992 (1,186,330) (824,897) (2,011,227)
-------------------------------------------------------------------------------------------------------------------
Income (loss) 1,106,927 994,677 2,101,604 (788,267) (824,897) (1,613,164)
===================================================================================================================
Identifiable assets 711,689 17,101 728,790 956,940 27,343 984,283
Goodwill and patents 51,054 606,354 657,408 183,388 1,091,435 1,274,823
-------------------------------------------------------------------------------------------------------------------
Total assets 762,743 623,455 1,386,198 1,140,328 1,118,778 2,259,106
===================================================================================================================
</TABLE>
Revenue from projects exported from Canada to other countries amounted to
$10,323 (1999: $148,645), the majority of which was exported to New
Zealand (1999 - United States).
11. Legal Proceedings
On October 20, 1998 a suit was filed in the Supreme Court of British
Columbia by Thomas
39
<PAGE>
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. Subsequent Event
On October 4, 2000, the Company entered into a non-binding Letter of
Intent with US Filter's Wallace and Tiernan Products Group, a wholly
owned subsidiary of U.S. Filter ("US Filter") to market and sell under
license Service Systems' UltraGuard-Registered Trademark- ultraviolet
disinfection technology for water and wastewater applications. The
exclusive territory for the sales of UltraGuard-Registered Trademark-
systems will be North, Central and South America and the Caribbean.
The Letter of Intent with US Filter will provide for a:
- Reduction of capital requirements through the provision of progress
payments covering ultraviolet systems ordered.
- Five percent (5%) license fee on all systems and components ordered.
US Filter will receive:
- 1,000,000 warrants for the purchase of Service Systems common stock,
exercisable at fair market value on the date of the signing of the
Letter of Intent, as determined by the average closing price for the
common stock for the 10 days immediately preceding the date of the
letter of intent which has been determined as $0.97 per share.
- 1,000,000 warrants for the purchase of Service Systems common stock,
exercisable at $1.00 per share;
- 1,000,000 warrants for the purchase of Service Systems common stock,
exercisable at $2.00 per share;
- Opportunities to earn further warrants upon receiving certain product
sales levels.
None of the warrants received will be exercisable before two years from
the date of grant.
40
<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 50 Director, President, and President of UV
Systems Technology, Inc.
John R. Gaetz 60 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 one 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, 2000 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."
41
<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, all Directors and Officers filed all reports required by Section
16(a) of the Act.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth an overview of compensation for the fiscal years
ended August 31, 1998, 1999 and 2000 to the Chief Executive Officer and each of
the Company's other Executive Officers whose total compensation exceeded
$100,000
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Name and Other Restricted Securities All Other
Principal Annual Stock Underlying LTIP Compen
Position Compen Award(s) Options/SARs Payouts sation
sation(2)
Year Salary(1) ($) Bonus ($) ($) ($) ($) ($)
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Ken Feilding
President,
CEO and
President
of UVS Inc.
1998 49,442 0 0 0 150,500 0
1999 53,218 0 45,000 0 0 0
2000 57,143* 0 54,000 0 0 0
</TABLE>
(1) Paid by Service Systems' subsidiary, UVS.
(2) Accrued for payment as consulting fees to Service Systems.
* Accrued $30,769
No options were granted to any Named Executive Officers or Directors during
fiscal 2000.
The following table sets forth information with respect to stock options
exercised made during the fiscal year ended August 31, 2000 to each of our Named
Executive Officers:
42
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF VALUE OF
UNEXERCISED UNEXERCISED
OPTION AT IN-THE-MONEY
SHARES 2000 FISCAL OPTIONS AT
ACQUIRED YEAR END (#) 2000 FISCAL
ON VALUE EXERCISED/ YEAR END($)
NAME EXERCISE (#) REALIZED UNEXERCIZED EXERCISED/
UNEXERCIZED
----------------------------------------------------------------------------------------------
(A) (B) (C) (D) (E)
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Kenneth E. Fielding 150,500 -- 200,000 (1) --
----------------------------------------------------------------------------------------------
</TABLE>
(1) Expired August 21, 2000.
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.
43
<PAGE>
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, 2000 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 Names Executive Officers, and (iv) all
Officers and Directors as a group. Except as otherwise noted, Service Systems
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 2,659,904 (3) 11.9%
John R. Gaetz 2,106,344 (4) 9.4%
MDS Ventures Pacific, Inc 1,404,109 (5)(7) 6.3%
Working Opportunity Fund (EVVC) Ltd 2,809,723 (6)(7) 12.6%
All Officers and Directors
as a group 4,766,248 (3 & 4) 21.3%
------------------------------------------------
</TABLE>
(1) The address for all shareholders is in care of the company at 2800
Ingleton Avenue, Burnaby, British Columbia, Canada V5C 6G7. The
Company's address will change in December 15th, 2000 ( approx.), to 201
- 11 Burbidge Street, Coquitlam BC, Canada, V3K 7B2.
(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 of these shares owned by Mr. Fielding's minor daughter,
and 1,243,445 shares which Mr. Fielding has the right to acquire at a
price of $0.20 under immediately exercisable E Warrants.
44
<PAGE>
(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 $0.40 (reduced
in fiscal 2000 from $0.60) under immediately exercisable warrants,
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) Shares acquired under an agreement dated February 14th, 2000, issued in
exchange for debt and the acquisition of MDS Venture Pacific, Inc.'s
24.65 % ownership of UVS.
(6) Shares acquired under an agreement dated February 14th, 2000, issued in
exchange for debt and the acquisition of Working Opportunity Fund
(EVVC) Ltd.'s 24.65% ownership of UVS.
(7) Under the letter agreement dated February 14th, 2000, the shares
issued to MDS Venture Pacific, Inc and Working Opportunity Fund (EVVC)
Ltd, in aggregate totaling 4,213,832, conferred to John R Gaetz and
Kenneth E. Fielding jointly, the voting rights to the shares issued for
a period of one year.
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-Registered Trademark- 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 Officer) 11,257 shares; John Gaetz (a Director and Executive
Officer), 600,000 shares and 600,00
45
<PAGE>
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.
Since the acquisition of the Company by the investor group in 1995, the
following Directors, Executive Officers, and greater than 5% shareholders, have
made loans to us for additional working capital up to August 31, 2000: John R
Gaetz, $164,588 and Ken Fielding $176,294. Of these loans, $206,230 have been
deferred to September 30, 2001.
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 and
exercise price, respectively, of $0.20 per share; the market price on that date
was $0.18.
In April 1998, options for 150,100 shares of Common Stock were granted to each
of Kenneth Fielding and John Gaetz at an option price of $0.15. The market price
on the date of grant was $0.18.
In August 1997, options (which expired on August 21, 2000) for 200,000 shares of
Common Stock were granted to each of Kenneth Fielding and John Gaetz at an
option price of $1.00.
46
<PAGE>
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(1)
(3)(ii) Bylaws, as amended(2)
(10)(iii) Agreement between Douglas
Sommerville and Company dated
12/6/96(3)
(10)(iv) Agreement between John Gaetz
and the Company dated 12/6/96(3)
(10)(v) Sample Agreement among minority
Shareholders of UV Systems
Technology, Inc. and the Company
each dated 2/28/97(3)
(10)(vi) Marketing Distribution Agreement
Between UV Systems Technology, Inc.
and the Company(2)
(10)(vii) Sales Representation Agreement
between UV Systems Technology,
Inc. and "The Representative"(2)
(10)(viii) Exclusive Distributorship Agreement
Between UV Waterguard Systems, Inc.
and Chiyoda Kohan Co., Ltd., and
NIMAC Corporation.(2)
(10)(ix) 1997 Stock Option Plan(4)
(10)(x) Interim Funding Agreement
between UVS, MDS and WOF(5)
(10)(xi) Letter Agreement between Service
Systems and Elco Bank and Trust
Company Limited(6)
(10)(xii) Loan Agreement between the Company
and TD Bank(6)
(10)(xiii) Service Systems 1999 Long-Term
Equity Incentive Plan(7)
(10)(xiv) Letter Agreement between Service
Systems, UVS, WOF and MDS dated
February 13, 2000(7)
47
<PAGE>
(10)(xv) Lease dated October, 2000 between Filed Herewith
Service Systems, UV Technology Inc. Electronically
and Slough Estates Canada Limited
(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 Fulk Pryce Filed Herewith
Anderson Electronically
(27) Financial Data Schedule Filed Herewith
Electronically
</TABLE>
--------
(1) Incorporated by reference to the Corporation's Form 10SB effective on
January 22, 1997.
(2) Incorporated by reference to the Corporation's Form S-8 filed with the
Commission on October 6, 1997.
(3) Incorporated by reference to the Corporation's Form 10QSB for the fiscal
quarter ended February 28, 1997.
(4) Incorporation by reference to the Corporation's Form 10KSB for the fiscal
Year ended August 31, 1997.
(5) Incorporation by reference to the Corporation's Form 10KSB for the fiscal
Year ended August 31, 1998.
(6) Incorporated by reference to the Corporation's Form 10KSB for the
fiscal year ended August 31, 1999.
(7) Incorporated by reference to the Corporation's Form 10QSB for the fiscal
quarter ended February 29, 2000.
48
<PAGE>
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the fourth quarter of
fiscal 2000.
49
<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.
/s/ Kenneth R. Fielding
------------------------------
Kenneth R. Fielding, President
Date: December 14, 2000 /s/ Ken Fielding
-------------------------------------------------------
Ken Fielding, Director
Date: December 14, 2000 /s/ John R. Gaetz
-------------------------------------------------------
John R. Gaetz, Director
50
