<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the period ended May 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 0-21753
SERVICE SYSTEMS INTERNATIONAL, LTD.
Name of Small Business Issuer in Its Charter
NEVADA 88-0263701
State of Incorporation I.R.S. Employer
Identification No.
2800 INGLETON AVE.,
BURNABY, B.C., CANADA V5C 6G7
Address of Principal Executive Offices Zip code
604-541-1069
Issuer's Telephone Number
Securities registered under Section 12(b) of the Act:
NONE
Securities registered under Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $0.001 PER SHARE
Title of class
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes / X /
No / /
Check whether the registrant filed all documents and reports required to be
filed by section 12, 13, or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by court. Yes No
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 22,420,601 as of July 14, 2000.
1
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<TABLE>
<CAPTION>
INDEX
-------------------------------------------------------------------------------------------------------------------
<S> <C>
PART I Financial Information
Item 1. CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets as of May 31, 2000 (unaudited)
and August 31, 1999 (unaudited) .........................................................................4
Consolidated Statements of Operations for the three months and nine months ended
May 31, 2000 and 1999 (unaudited)........................................................................5
Consolidated Statements of Cash Flows for the nine months ended
May 31, 2000 and 1999 (unaudited)........................................................................6
Notes to the Financial Statements...........................................................................7 to 11
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS
AND RESULTS OF OPERATIONS................................................................11 to 17
Part II OTHER INFORMATION
1. LEGAL PROCEEDINGS..............................................................................18
2. CHANGES IN SECURITIES..........................................................................18
3. DEFAULT UPON SENIOR SECURITIES.................................................................20
4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS...........................................20
5. OTHER INFORMATION..............................................................................20
6. EXHIBITS AND REPORTS ON FORM 8K................................................................20
Signatures.......................................................................................................21
</TABLE>
2
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Part 1. Financial Information
Item 1. Financial Statements (unaudited)
3
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Service Systems International, Ltd.
Consolidated Balance Sheet
As of May 31, 2000 and August 31, 1999
(Unaudited)
<TABLE>
<CAPTION>
May 31, August 31,
2000 1999
Assets
<S> <C> <C>
Current Assets
Cash and short-term investments $ 5,337 $ 7,985
Short-term investments - restricted (Note 3) 259,516 262,902
Accounts receivable 131,164 310,125
Inventory and contract work in progress 345,557 274,592
Prepaid expenses and deposits 38,117 37,166
----------- -----------
Total Current Assets 779,691 892,770
Property, Plant and Equipment (Note 4) 73,421 91,513
Other Assets
Goodwill (net of amortization of $1,697,783) 727,625 1,091,435
Patents and trademarks (Note 5) 376,478 183,388
----------- -----------
Total Assets $1,957,215 $2,259,106
=========== ===========
Liabilities and Stockholders' Equity
Current Liabilities
Bank demand loan $ - $ 209,381
Accounts payable 188,607 243,067
Accrued liabilities 23,183 33,293
Wages & vacation pay payable 18,661 22,057
Customer deposits 6,682 17,147
Loans payable (Note 6) 239,832 428,236
Amounts owing to related parties (Note 7) 55,338 207,699
----------- -----------
Total Current Liabilities 532,303 1,160,880
Long-Term Debt (Note 8)
Amounts owing to related parties (Note 8) 206,230 0
Loan payable - minority shareholders of subsidiary (Note 8) 0 2,491,056
----------- -----------
Total Liabilities 738,533 3,651,936
----------- -----------
Stockholders' Equity (Deficit)
Common stock, $.001 par value,
50,000,000 shares authorized, 22,206,712
and 13,094,988 issued and outstanding respectively 22,207 13,095
Additional paid-in capital 6,691,917 3,132,437
Deficit (5,495,442) (4,538,362)
----------- -----------
Total Stockholders' Equity (Deficit) 1,218,682 (1,392,830)
----------- -----------
Total Liabilities and Stockholders' Equity $1,957,215 $2,259,106
=========== ===========
</TABLE>
See accompanying notes to financial statements
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Service Systems International, Ltd.
Consolidated Statements of Operations and Deficit
For the three months and nine months ended May 31, 2000 and 1999
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
May 31, 2000 May 31, 1999 May 31, 2000 May 31, 1999
----------------------------- -----------------------------
<S> <C> <C> <C> <C>
Project Revenue $ 26,869 $ 104,836 $ 75,993 $ 263,193
Project Costs 26,694 116,128 62,135 246,844
----------- ----------- ----------- -----------
Gross Profit (Loss) 175 (11,292) 13,858 16,349
Manufacturing Costs Not Applied 21,047 10,288 78,777 49,348
----------- ----------- ----------- -----------
(20,872) (21,580) (64,919) (32,999)
----------- ----------- ----------- -----------
Expenses
Selling 52,076 48,768 167,544 168,590
General and administrative 77,808 98,786 338,581 268,549
Research and development 13,771 10,897 73,499 93,554
Amortization of goodwill 121,270 121,270 363,810 363,810
Interest, net of interest income and
interest recovered (Note 8) 4,083 23,995 (113,627) 66,696
Foreign exchange loss 7,060 56,447 62,354 130,769
----------- ----------- ----------- -----------
276,068 360,163 892,161 1,091,968
----------- ----------- ----------- -----------
Net Loss for the period 296,940 381,743 957,080 1,124,967
Deficit - Beginning of period 5,198,502 3,668,423 4,538,362 2,925,199
----------- ----------- ----------- -----------
Deficit - End of period $ 5,495,442 $ 4,050,166 $ 5,495,442 $ 4,050,166
=========== =========== =========== ===========
Net Loss per share $ (0.01) $ (0.03) $ (0.06) $ (0.09)
=========== =========== =========== ===========
Weighted average shares outstanding 21,670,712 12,777,321 17,081,188 12,713,432
=========== =========== =========== ===========
</TABLE>
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Service Systems International, Ltd.
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Nine Months
ended ended
May 31, 2000 May 31, 1999
<S> <C> <C>
Cash Flows to Operating Activities
Net loss ($957,080) ($1,124,967)
Adjustments to reconcile net loss to cash
Amortization of goodwill 363,810 363,810
Depreciation 40,900 32,039
Foreign exchange loss 62,354 130,769
Common stock issued for expenses 71,126 0
Recovery of interest on Long Term Debt (119,670) 0
Change in non-cash working capital items
Decrease (Increase) in accounts receivable 178,961 (93,648)
(Increase) in inventory and contract work in progress (70,965) (71,485)
(Increase) in prepaid expenses and deposits (951) (1,350)
(Decrease) Increase in accounts payable, accrued
liabilities, wages and vacation pay payable
and customers' deposits (78,430) 170,379
---------- ----------
Net Cash Used in Operating Activities (509,945) (594,453)
---------- ----------
Cash Flows (to) from Investing Activities
Decrease (Increase) of short-term investment - restricted 3,386 (16,102)
Additions to patents and trademarks (200,590) (53,584)
(Acquisition) disposal of capital assets (15,308) 17,374
---------- ----------
Net Cash (Used in) Provided by Investing Activities (212,512) (52,312)
---------- ----------
Cash Flows from (to) Financing Activities
(Decrease) in bank demand loan (209,381) 0
Common stock issued 1,048,083 12,600
(Decrease) Increase in loans payable - other (188,404) 255,051
Increase in amounts
owing to related parties 53,868 60,792
(Decrease) Increase in borrowings from
minority shareholders 15,643 117,669
---------- ----------
Net Cash Provided by Financing Activities 719,809 446,112
---------- ----------
(Decrease) in Cash and Cash Equivalents (2,648) (200,653)
Cash and Cash Equivalents - Beginning of Period 7,985 207,052
---------- ----------
Cash and Cash Equivalents - End of Period $5,337 $6,399
========== ==========
--------------------------------------------------------------------------------------------------------------
Non-Cash Financing Activities
4,223,832 common shares were issued to
settle debts at an average of $0.58 per share $2,449,383 0
Cash Paid for
Interest 10,122 7,101
Income Taxes 0 0
</TABLE>
6
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Service Systems International, Ltd.
Notes to the Consolidated Financial Statements
1. Nature of Operations and Continuance of Business
The Company 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, for accounting purposes, from a
development stage company to an operating company. Even though its status
has changed to an operating company, the operating activities have not yet
produced significant revenue and the Company has experienced significant
losses to date. The ability of the Company to continue operations is
dependent upon its successful efforts to raise additional equity financing
in the long term, continue developing the market for its products, and/or
the attainment of profitable operations.
2. Significant Accounting Policies
CONSOLIDATED FINANCIAL STATEMENTS
These financial statements include the accounts of the Company, and its
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.
Cash equivalents are stated at cost, which approximates market.
PROPERTY, PLANT, AND EQUIPMENT
Property, Plant, and Equipment are recorded at cost. Depreciation is
computed on a straight-line method using an estimated useful life of five
years.
GOODWILL
Goodwill represents the excess of purchase consideration over fair market
value of net identifiable assets acquired, and is amortized on a
straight-line basis over five years. Goodwill is evaluated in each
reporting period to determine if there were events or circumstances that
would
7
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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 judgment.
PATENTS AND TRADEMARKS
Patents and trademarks will be 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.
EARNINGS PER SHARE
The earnings per share is computed by dividing the net income (loss) for
the period by the weighted average number of common shares outstanding for
the period. Common stock equivalents are excluded from the computation if
their effect would be anti-dilutive.
FOREIGN CURRENCY
i) Translation of foreign currency transactions and balances:
Revenue, expenses and non-monetary balance sheet items in foreign
currencies are translated into 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
administrative 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 are
included separately in operations.
8
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Adjustments
These interin financial statements include all adjustments which in
the opinion of management are necessary in order to make the financial
statements not misleading.
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>
May 31, Aug. 31,
2000 1999
Accumulated Net Book Net Book
Cost Depreciation Value Value
$ $ $ $
<S> <C> <C> <C> <C>
Computer equipment 45,209 27,571 17,638 19,729
Computer software 7,850 4,086 3,764 2,818
Display equipment 33,016 27,094 5,922 10,613
Office furniture and equipment 32,480 23,869 8,611 10,950
Plant jigs, dies, moulds, tools and equipment 104,320 68,836 35,484 41,613
Leasehold improvements 26,724 24,722 2,002 5,790
------- ------- ------- -------
249,599 176,178 73,421 91,513
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
Depreciation per class of asset: Nine months ended
May 31, May 31,
2000 1999
$ $
<S> <C> <C>
Computer equipment 5,964 5,283
Computer software 1,214 761
Display equipment 4,691 4,775
Office furniture and equipment 4,351 4,375
Plant jigs, dies, moulds, tools and equipment 13,393 12,836
Leasehold improvements 3,788 4,009
------ ------
33,400 32,039
====== ======
</TABLE>
9
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5. Patents and Trademarks
Patents and trademarks represent legal costs associated with designing,
registering and protecting certain patents and trademarks associated with
the Ultra Guard-Registered Trademark- System. These costs are amortized
over twenty years. Components 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
As of August 31, 1999, the Company repaid $289,956 of the $341,940 loans
payable owing to three unafilliated companies (not acting as a group for
Section 13 or Section 16 purposes and introduced to Service Systems by
Elco Bank located in Nassau, Bahamas) with $289,256 in proceeds from the
exercise of Class "E" warrants for 1,446,281 shares @ $0.20 per share
and with the issuance of 1,446,281 Class "E" warrants exercisable at
$0.40 each expiring September 13, 2002, leaving a balance owing of
$52,683. During the first quarter of fiscal 2000, loan proceeds from
these same investors were received in the amount of $258,753; during the
second quarter additional loan proceeds in the amount of $250,080, were
received, which, together with accrued interest amounting to $12,095,
brought the loans payable balance to $573,611. During the third quarter,
additional loan proceeds of $232,000 were received and interest
amounting to $8,057 was accrued, bringing the balance to $813,669. The
Company repaid $573,837 of these loans during the third quarter with
issuance of the following:
<TABLE>
<CAPTION>
No. of Shares Price Per Share Class E Warrants Class B Warrants
<S> <C> <C> <C> <C>
1,217,456 $0.30 1,217,456 @ $0.40 1,217,456 @ $0.20
93,334 $0.30 93,334 @ $0.35
214,000 $0.40 214,000 @ $0.40
475,000 $0.20 475,000 @ $0.25
</TABLE>
At the end of the third quarter, the balance owing was $239,832. The loans
payable to these companies are unsecured, interest bearing at 10% per
annum and due on demand.
7. Amounts Owing to Related Parties
<TABLE>
<CAPTION>
Current Liabilities 2000 1999
$ $
<S> <C> <C>
(a) Amounts owing to two directors, due on demand,
unsecured and non-interest bearing $55,338 $156,234
</TABLE>
8. Restructuring of Long-term Debt and elimination of minority interest
Amounts owing to Related Parties
During the quarter ended February 29, 2000, two directors agreed to defer
payment of their loans amounting to $206,230 until June 30, 2001.
10
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Before fiscal 1998, UV Systems Technology Inc. (UVS) issued 2,000 Class "A"
preferred shares at C$1,000 per share for proceeds of C$2,000,000
(US$1,356,392). Until February 14, 2000, the holders of these shares also
owned 49.3% of the common shares of UVS ("minority shareholders").
During fiscal 1998, minority shareholders advanced C$631,000 to UVS.
Interest accrued to June 29, 1998, at 20% per annum, totaled C$280,000.
Pursuant to an interim refinancing agreement ("the Agreement"), dated June
29, 1998, all accrued interest was waived. The principal repayment of
C$631,000 was deferred to June 29, 2003, with interest at 10% accruing. The
Company waived interest of C$217,000 accrued on its loan to UVS of
C$1,287,000.
Under the Agreement one of the minority shareholders advanced C$909,000 to
UVS. This advance was secured by a subordinated debenture on all of UVS's
assets, bearing interest at 10%, payable monthly.
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 C$1,576,098 was converted into
2,159,036 shares of Regulation S common stock of the Company 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 common
stock of the Company 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.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH
SERVICE SYSTEMS' FINANCIAL STATEMENTS AND NOTES THERETO. INFORMATION
DISCUSSED MAY INCLUDE FORWARD-LOOKING STATEMENTS REGARDING EVENTS OR THE
FINANCIAL PERFORMANCE OF SERVICE SYSTEMS, AND IS SUBJECT TO A NUMBER OF
RISKS AND OTHER FACTORS WHICH COULD CAUSE THE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THOSE CONTAINED IN THE FORWARD-LOOKING STATEMENTS. AMONG SUCH
FACTORS ARE: GENERAL BUSINESS AND ECONOMIC CONDITIONS; CUSTOMER ACCEPTANCE
AND DEMAND FOR OUR PRODUCTS; SERVICE SYSTEMS' OVERALL ABILITY TO DESIGN, TEST
AND INTRODUCE NEW PRODUCTS ON A TIMELY BASIS; THE NATURE OF THE MARKETS
ADDRESSED BY OUT PRODUCTS; SERVICE SYSTEMS' NEED FOR CONTINUING CAPITAL
INFUSION IN ORDER TO FINANCE OPERATIONS; AND OTHER RISK FACTORS LISTED FROM
TIME TO TIME IN DOCUMENTS FILED BY US WITH THE SEC.
Our company was incorporated in the State of Nevada in August 1990. Through
our Canadian subsidiary, UV Systems Technology Inc., Service Systems
manufactures and markets its Ultra Guard-Registered Trademark-ultra
violet-based patented water treatment systems. These products are sold
primarily for municipal wastewater disinfection; however, the systems can
also be adapted for treatment of process and industrial wastewater (where
they are currently being applied through UVS's Japanese agent) and for
potable
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water, bottled products and agriculture and aquaculture water treatment.
On December 1, 1996, Service Systems acquired 50.69% of the common stock of
UVS from two principals and the minority stockholders. In February 2000, we
signed a letter agreenent with the remaining two minority stockholders,
Working Opportunity Fund (EVCC) Ltd. (WOF) and MDS Ventures Pacific
Inc.(MDS), to purchase the remaining 49.31% of UVS and to eliminate debt owed
to them. Under the terms of this letter agreement, WOF and MDS forgave all
accrued loan interest in the amount of C$221,583, loan principal in aggregate
amounting to C$1,576,098 was converted into 2,159,036 shares of Service
Systems Regulation S common stock at C$0.73 (US$0.50) per share, and Class A
preferred shares of UVS held by WOF and MOS in the amount of C$2,000,000 were
converted into 2,054,794 shares of Service Systems Regulation S common stock
at C$0.9733 (US$0.6667) per share. All UVS shares of Class A Preferred shares
and Class B Common shares were transferred to Service Systems.
Service Systems' Ultra Guard-Registered Trademark- UV systems include a
tested mechanical wiper cleaning system and a tested temperature control
system. The temperature control system permits the infinite variable lamp UV
output intensity to be stable and controllable. 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.
Research and development of an electronic ultrasonic cleaning system are in
process.
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 the 1999 fiscal year, the client ordered changes to his UV
system amounting to C$31,200, all of which was prepaid by the client. Fifty
percent of the work had been completed by August 31, 1999. The balance of the
work was shipped in April 2000. Due to design changes that will increase the
flow at this site, additional upgrades will be conducted in the future. In June
2000, an additional prepaid order was received for upgrades to the existing UV
system amounting to C$43,952.00
A 6-lamp Ultra Guard-Registered Trademark- UV system capable of disinfecting a
wastewater flow of 3.5 million gallons per day was sold to Hamilton, Alabama and
was installed in March, 1999. Successful final performance testing was conducted
in July 1999. This UV project is the first full scale operating Ultra
Guard-Registered Trademark- UV system installed in North America. We expect that
the Ultra Guard-Registered Trademark- UV system in Hamilton will provide
significant equipment exposure to others contemplating upgrading their
Wastewater Treatment Plant discharges by replacing chlorine as the disinfecting
means with environmentally friendly ultraviolet disinfection.
12
<PAGE>
In September 1999, a formal order for a UV system for a project in Toronto,
Canada was secured for about C$685,000. The project was scheduled for delivery
in June 2000 but has been delayed by the client until October 2000. This project
is currently in the design and approval phase. Manufacturing has as well been
delayed from the scheduled February 2000 start and now will commence in July
2000. The UV system will be delivered to the City of Toronto to be used for
disinfection of combined storm overflows (CSO) and is part of a C$50 million
project (the world's largest submersible CSO pumping station).
In September 1999, we received an order valued at over C$1,100,000 for the
City of Peterborough wastewater treatment plant. Design approval is currently
ongoing. The client has delayed the wastewater plant construction project and
has now scheduled it for completion in April 2001. Manufacturing of the UV
equipment will not commence until July 2000. Delivery of our equipment is
scheduled for January 2001 and startup of the system is scheduled for the end
of April 2001. The UV system will disinfect effluent flow in excess of 36
million gallons per day.
Purchase orders for two additional UV systems valued at approximately
C$150,000 were received in the 1999 fiscal year. The systems are being
produced during the 2000 fiscal period and will be delivered into the
Province of Ontario. One project at Deep River, Ontario, manufactured for
Thorburn Penny Ltd, an Azurix Company, was delivered in March 2000 and
startup will occur in July 2000. The second project, to be manufactured for
the Mohawk Council of Akwesasne in Cornwall, Ontario, was delayed by the
owner and will now be produced for delivery in December 2000.
In January 1999, a Production Demonstration Unit was installed at the County
Sanitation District of Los Angeles County (the County). The testing program
was presented at the Energy Efficiency Forum held in San Diego on August
30-31, 1999. Testing was completed in July 1999 and was conducted and paid
for by the County. The purpose of the test was to determine the Ultra
Guard-Registered Trademark- UV system's ability to disinfect wastewater to
Title 22 Guidelines, a stringent test protocol required as a precursor to the
use of a company's UV product in reuse of wastewater for agriculture and
other purposes. The County reported that the findings of the five-month
testing program confirmed the ability of the Ultra Guard-Registered
Trademark- UV system to achieve Title 22 design objectives at fifty percent
of the dose required by low pressure, low intensity technology previously
tested. A substantial saving in energy usage, 12.7%, was achieved by using
the Ultra Guard-Registered Trademark- system. The same safeties are applied
to both types of lamps. On February 28, 2000, we were advised by the
Department of Health Services that Title 22 approval had been granted.
In October 1999, we signed an agreement with a leading Australian UV
equipment manufacturer to market its products in North America. The products
provided through this agreement would permit us to sell into market areas not
currently 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 that require 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.
13
<PAGE>
During the quarter ended February 29, 2000, we produced the prototype of a new
UV product line. This product, with a designed disinfection capacity of up to
1.0 million gallons per day per lamp, will incorporate our patented flow reactor
chamber, the proprietary low pressure, high intensity UV lamp and the patented
flow balanced weir. Additional features include full password protected,
Internet based, web monitored, microprocessor control which will permit
monitoring of any UVS, UV system from our plant or from any location with an
internet connection.
In December 1999, the Company was invited to conduct PDU testing of the
effluent at the Sacramento WWTP in Sacramento, California. Personnel from the
Wastewater Plant conducted the testing. Results of this first phase testing
were encouraging, but not conclusive. Because of these results, a formal
testing program was begun in June 2000. Results of the first phase of
that testing was within within design requirements. Another series of tests is
planned for further verification. The treatment plant currently disinfects
using chlorine based chemicals and wishes to switch to UV disinfection. As a
result of the large size of solids contained within the effluent, previous UV
systems that have been tested at this plant have been unable to effect
treatment without first including filtration equipment in the effluent
stream. Should the UVST UV system be successful in achieving the disinfection
requirements, which test results to date indicate may be expected to occur,
the plant would not need to purchase filtration equipment, saving the City in
excess of US $20.0 million.
RESULTS OF OPERATIONS
Three Months Ended May 31, 2000 compared to the Three Months ended May 31, 1999.
REVENUES. During the three months ended May 31, 2000, revenues
decreased by $77,967 or 74%, to $26,869 compared to $104,836 during the
comparable period for the prior year. This decrease resulted from
rescheduling of the projects to meet the client's timing requirement. Revenue
from the existing projects awarded will be realized in subsequent periods.
DIRECT PROJECT COSTS. During the three months ended May 31, 2000,
direct project costs decreased by $89,434 or 77% to $26,694, compared to
$116,128 for the comparable period of the prior year. This decrease resulted
from rescheduling of the projects to meet the client's timing requirement.
Revenue from the existing projects awarded will be realized in subsequent
periods.
GROSS PROFIT. We reported an increase in gross profit for the three
months ended May 31, 2000 by $11,467 or 102%, compared to a gross profit of
$175 from a loss of $11,292 for the same period of the prior year.
MANUFACTURING COSTS NOT APPLIED. Manufacturing costs not applied are
annual plant overhead costs not being charged against specific contracts. We
reported an increase for the three months of fiscal 2000 of $10,759 or 105%,
to $21,047 from $10,288 for the same period of the prior year. This increase
resulted from the decrease in project manufacturing in progress and resultant
decrease in manufacturing overhead utilization.
SELLING EXPENSES. We reported an increase for the three months of
fiscal 2000 of $3,308 or 7%, to $52,076 from $48,768 for the comparable period
of the prior year. The increase for the three months was due to an increase
in sales engineering expenses.
14
<PAGE>
GENERAL AND ADMINISTRATIVE EXPENSE. We reported a decrease of $20,978
or 21% for the three months of fiscal 2000 to $77,808 from $98,786 for the same
period of the prior year. The decrease during the quarter was mainly due to
decrease in expenses relating to administrative management.
RESEARCH AND DEVELOPMENT. We reported an increase for the three months
of fiscal 2000 of $2,874 or 26%, to $13,771 from $10,897 for the comparable
period of the prior year. The increase for the three months was due to a recent
addition of a staff member.
AMORTIZATION OF GOODWILL. We reported $121,270 for the three months of
fiscal 2000 and the same figure for the comparable period of the prior year.
INTEREST, NET OF INTEREST INCOME. For the three months of fiscal 2000,
we reported a decrease of $19,912 or 83%, to $4,083 from $23,995 for the
comparable period of the prior year, largely due to the decrease in loan
amounts payable and forgiveness of interest.
FOREIGN EXCHANGE TRANSLATION LOSS. For the three months of fiscal 2000,
we reported a decrease of $49,387 or 87%, to $7,060 from $56,447 for the
comparable period of prior year. This decrease resulted from the decrease in the
value of the Canadian dollar as compared to the third quarter of the prior year.
NET LOSS FOR THE PERIOD. We reported a decrease in net loss for the
period of $84,803 or 22% for the three months of fiscal 2000, to $296,940
from $381,743 reported for the comparable period of the prior year. The
decrease in net loss was due primarily to the effect of the decrease in loan
amounts payable and interest forgiven as described above.
NET LOSS PER SHARE. For the three months of fiscal 2000, we reported
a net loss per share of $0.01, a decrease of $0.02, or 67% over the net loss
per share of $0.03 reported for the same period in the prior year. The net
loss per share reduced as a result of the decrease in net loss reported above
and the effect of the loss being allocated over an increased number of
outstanding shares and share equivalents.
Nine Months Ended May 31, 2000 compared to the Nine months ended May 31, 1999.
REVENUES. During the nine months of fiscal 2000, we reported revenues
of $75,993, a decrease of $187,200 or 71%, from the $263,193 reported in the
nine months of fiscal 1999. This decrease resulted from delayed completion of
projects in process, which did not provide for payment during that period.
Revenue from the additional projects awarded during the period is expected to be
realized during subsequent quarters.
DIRECT PROJECT COSTS. For the nine months of fiscal 2000, we
reported $62,135 of direct project costs, a decrease of $184,709 or 75%, from
the $246,844 reported in the nine months of fiscal 1999. This decrease
resulted from delays in putting projects into manufacturing and from
non-completion of contract work from sub-contractors.
GROSS PROFIT. For the nine months of fiscal 2000, we reported
$13,858 of gross profit, a decrease
15
<PAGE>
of $2,491, or 15%, from the $16,349 reported in the nine months of fiscal
1999. This decrease resulted from 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. For
the nine months of fiscal 2000, we reported manufacturing costs not applied of
$78,777, an increase of $29,429, or 60%, from $49,348 reported in the comparable
period of the prior year. This increase resulted from the decrease in project
manufacturing in progress and resultant decrease in manufacturing overhead
utilization.
SELLING EXPENSES. For the nine months of fiscal 2000, we reported
selling expenses of $167,544, a decrease of $1,046, or 1%, from the $168,590
reported in the comparable period of the prior year. This decrease primarily
resulted from a decrease in brochure and presentation materials.
GENERAL AND ADMINISTRATIVE EXPENSE. For the nine months of fiscal
2000, we reported general and administrative expense of $338,581, an increase of
$70,032, or 26% from the $268,549 reported in the comparable period of the prior
year. This increase resulted primarily from increases in expenses relating to
investor relations, administrative management, legal fees, advertising and
promotion, and consulting fees due to securing of new projects. Part of the
increase is also due to accounting office help for the audit work.
RESEARCH AND DEVELOPMENT. For the nine months of fiscal 2000, we
reported general and administrative expense of $73,499, a decrease of $20,055,
or 21%, from the $93,554 reported in the comparable period of the prior year.
This decrease was due to the reduction of engineering and prototyping expenses.
AMORTIZATION OF GOODWILL. For the nine months of fiscal 2000, we
reported amortization of goodwill of $363,810, the same figure for the
comparable period of the prior year.
INTEREST, NET OF INTEREST INCOME. For the nine months of fiscal
2000, we reported interest recovery, of $113,627, an increase of $180,323, or
270%, over interest expense of $66,696 reported in the comparable period of
the prior year. The increase in interest recovery is a result of interest
waived by minority shareholders and 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 the nine months of fiscal
2000, we reported foreign exchange translation loss of $62,354, a decrease of
$68,415, or 52%, from the $130,769 reported in the comparable period of the
prior year. This decrease resulted from the decrease in the value of the
Canadian dollar as compared to the nine months of the prior year.
NET LOSS FOR THE PERIOD. For the nine months of fiscal 2000, we
reported a net loss for the period of $957,080, a decrease of $167,887, or
15% over $1,124,967 reported in the comparable period of the prior year. The
decrease in net loss was due primarily to the effect of interest forgiven and
the decrease in loans payable as
16
<PAGE>
described above.
NET LOSS PER SHARE. For the nine months of fiscal 2000, we reported
a net loss per share for the period of $0.06, a decrease of $0.03, or 50%
over the net loss per share of $0.09, reported for the comparable period of
the prior year. The net loss per share reduced as a result of the decrease in
net loss reported above and the effect of the loss being allocated over an
increased number of outstanding shares and share equivalents.
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 a 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, which are often beyond
our control.
In addition, we will require financing over and above our current resources to
sustain our operations and expand our marketing efforts. We cannot assure that
the additional financing can be obtained on a timely basis, on terms that are
acceptable or if at all.
We financed our operations during the nine months of fiscal 2000, in part,
from sales of Regulation S and restricted common stock amounting to
$1,048,083, as well as from loans from related parties in the amount of
$53,868. Our financial resources, including an opening cash balance as at
August 31, 1999 of $7,985, totalled $1,109,936 for the period. Cash was used
to pay out a bank loan in the amount of $209,381 and to reduce loans payable
by $172,760. After adjustments to reconcile net loss to cash, total cash used
amounted to $509,945. During the period, we spent $215,898 on patents,
trademarks, and capital assets and received proceeds of $3,386 from
short-term investment. After the above outflows, we were left with $5,337.
We expect that during fiscal 2000, even if sales at UVS increase as expected,
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.
Subsequent to May 31, 2000, loans amounting to $14,900 and subscriptions to
purchase restricted common stock amounting to $95,400 were received. 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.
17
<PAGE>
Part II OTHER INFORMATION
Item 1. Legal Proceedings
On October 20, 1998 a suit was filed in the Supreme Court of British Columbia by
Thomas O'Flynn against the Company, Kenneth Fielding (the Company's President
and Director), and Charles P Nield (a former Director and Vice President of the
Company). O'Flynn alleges that in April of 1996, he purchased shares of the
Common Stock based on a representation that they would be free trading in 40
days of "the filing of a prospectus". He further alleges that in September of
1996 he purchased additional shares of Common Stock based on the representation
that the shares would be free trading within 40 days of the Common Stock
becoming free trading. O'Flynn alleges that the representation was a warranty
and was incorrect. He further alleges that he suffered a loss because the share
price decreased while he was holding the shares. He seeks damages for breach of
warranty, negligence, misrepresentation and breach of fiduciary duty. The amount
claimed is not specified. The Company filed an answer denying the claims and
continues to actively defend the suit. Examination for discovery of Charles P.
Nield was conducted in June 1999; since then there has been no further activity.
Item 2. Changes in Securities
During the fiscal quarter ended May 31, 2000, Service Systems issued the
following securities.
Service Systems issued the following shares of common stock and warrants to four
Canadian technical consultants and one US technical consultant for services:
<TABLE>
<CAPTION>
----------- ---------- ----------------------- --------------------- ------------------- ------------
Date Shares Warrants Residence/ Consideration Exemption
Class A* Citizenship valued at
----------- ---------- ----------------------- --------------------- ------------------- ------------
<S> <C> <C> <C> <C> <C>
3/30/00 50,000 50,000, exercisable Canada Services valued Regulation S
at $.90/sh. at $24,000
----------- ---------- ----------------------- --------------------- ------------------- ------------
3/30/00 20,000 U.S. Services valued Section 4(2)
at $6,000
----------- ---------- ----------------------- --------------------- ------------------- ------------
</TABLE>
Service Systems also issued common stock and/or warrants to five Canadian
investors as follows:
<TABLE>
<CAPTION>
----------- ---------- ----------------------- --------------- --------------------------- ----------------
Date Shares Warrants Residence/ Consideration Exemption
Citizenship
----------- ---------- ----------------------- --------------- --------------------------- ----------------
<S> <C> <C> <C> <C> <C>
3/30/00 50,000 200,000 Class E *, Canada $20,000 from exercise of Regulation S
exercisable at 50,000 Class E warrants
$0.60/sh. Extension
of current Class E
warrant exercise
period
----------- ---------- ----------------------- --------------- --------------------------- ----------------
18
<PAGE>
3/30/00 78,000 78,000 Class A*, Canada $39,000 Regulation S
exercisable at
$0.60/sh
----------- ---------- ----------------------- --------------- --------------------------- ----------------
5/2/00 44,000 22,000 Class A*, Canada $19,792.10 Regulation S
exercisable at
$0.60/sh
----------- ---------- ----------------------- --------------- --------------------------- ----------------
</TABLE>
Service Systems issued to three unaffiliated companies in Nassau, Bahamas,
(introduced to Service Systems by Elco Bank and not acting as a group for
Section 13 or Section 16 purposes), the following to repay loans from those
companies:
<TABLE>
<CAPTION>
----------- ---------- ----------------------- --------------- --------------------------- ----------------
Date Shares Warrants Residence/ Consideration Exemption
Citizenship
----------- ---------- ----------------------- --------------- --------------------------- ----------------
<S> <C> <C> <C> <C> <C>
3/30/00 1,999,790 1,217,456 Bahamas Repayment of loans of Regulation S
Class B**, $573,837
exercisable at
$0.20/sh
1,999,790 Class E **
exercisable at $0.25
- 0.40/sh
----------- ---------- ----------------------- --------------- --------------------------- ----------------
----------- ---------- ----------------------- --------------- --------------------------- ----------------
----------- ---------- ----------------------- --------------- --------------------------- ----------------
</TABLE>
*These warrants are immediately exercisable for a period of 3 years.
**These warrants are exercisable for 1 year from the date of issuance for a
period of 2 years.
In accordance with the Letter Agreement between Service Systems, WOF and MDS
dated February 14, 2000, Service Systems issued, on March 30, 2000, to WOF
2,819,723 and to MDS 1,404,109 shares of common stock in repayment of debt of
$2,449,383, pursuant to Regulation S.
Three employees (including two executive officers) and a technical consultant
were issued performance shares under Service Systems' 1999 Long Term
Employee Incentive Plan as follows:
<TABLE>
<CAPTION>
---------- ----------- --------------- --------------------- -----------------
Date Shares Residence/ Consideration Exemption
Citizenship
---------- ----------- --------------- --------------------- -----------------
<S> <C> <C> <C> <C>
5/2/00 760,000 Canada Attainment of Regulation S
performance goals
---------- ----------- --------------- --------------------- -----------------
</TABLE>
19
<PAGE>
All of the investors in Service Systems' securities were informed of the risks
involved in an investment in Service Systems and had access to all information
about Service Systems that they needed in order to make an informed investment
in Service Systems. All securities bear restrictive legends appropriate for the
particular exemption under which they were issued. Each investor executed an
appropriate representation letter.
Item 3. Defaults upon Senior Securities
None
Item 4. Submissions of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits (exhibit reference numbers refer to Item 601 of
Regulation SB)
Exhibit Number Description
(3)(i) Articles of Incorporation(1)
(3)(ii) Bylaws(2)
(4) Statement re: computation of per share earnings
Filed electronically herewith
(27) Financial Data Schedule Filed electronically
herewith
--------
(1) Incorporated by reference to the Registrant=s Form 10-SB effective 1/17/97
(2) Incorporated by reference to the Registrant=s Form S-8 effective 10/6/97
20
<PAGE>
Signatures
In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, hereunto duly
authorized.
SERVICE SYSTEMS INTERNATIONAL, LTD.
Date: July 14, 2000 /s/ Kenneth R. Fielding
---------------------------------------
Kenneth R. Fielding, President
Date: July 14, 2000 /s/ John R. Gaetz
---------------------------------------
John R. Gaetz, Chief Financial Officer
21
