<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended November 30, 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
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: 22,314,023 as of January 11, 2001.
Transitional Small Business Disclosure Format (Check One) Yes / / No /X/
1
<PAGE>
INDEX
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
PART I Financial Information
Item 1. CONSOLIDATED FINANCIAL STATEMENTS......................................3
Consolidated Balance Sheets as of November 30, 2000 (unaudited)
and August 31, 2000 (audited) .........................................4
Consolidated Statements of Operations for the three months ended
November 30, 2000 and 1999 (unaudited).................................5
Consolidated Statements of Cash Flows for the three months ended
November 30, 2000 and 1999 (unaudited).................................6
Notes to the Consolidated Financial Statements............................7 to 14
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITIONS........................................15 to 23
Part II OTHER INFORMATION............................................21
1. LEGAL PROCEEDINGS............................................21
2. CHANGES IN SECURITIES........................................21
3. DEFAULT UPON SENIOR SECURITIES...............................21
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..........21
5. OTHER INFORMATION............................................21
6. EXHIBITS AND REPORTS ON FORM 8K........................22 to 23
Signatures.....................................................................24
</TABLE>
2
<PAGE>
Part 1. Financial Information
Item 1. Financial Statements (unaudited)
3
<PAGE>
Service Systems International, Ltd.
Consolidated Balance Sheet
As of November 30, 2000 and August 31, 2000
(Unaudited)
<TABLE>
<CAPTION>
November 30, August 31,
2000 2000
(Unaudited) (Audited)
ASSETS $ $
<S> <C> <C>
Current Assets
Cash and short-term investments 18,211 9,291
Short-term investments - restricted (Note 3) 253,033 262,279
Accounts receivable 56,175 85,097
Inventory and contract work in progress 304,847 264,663
Prepaid expenses and deposits 47,584 43,965
----------- -----------
Total Current Assets 679,850 668,295
Property, Plant and Equipment (Note 4) 74,527 60,495
Other Assets
Goodwill (net of amortization of $1,940,324) 485,084 606,354
Patents and trademarks (Note 5) 49,553 51,054
----------- -----------
Total Assets 1,289,014 1,386,198
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable 139,399 164,080
Accrued liabilities 45,324 23,286
Wages & vacation pay payable 24,243 19,046
Customer deposits 73,862 88,422
Loans payable (Note 6) 260,091 252,614
Amounts owing to related parties (Note 7 (i)) 151,179 144,801
----------- -----------
Total Current Liabilities 694,098 692,249
Long-Term Debt
Amounts owing to related parties (Note 7 (ii)) 206,230 206,230
----------- -----------
Total Liabilities 900,328 898,479
----------- -----------
Stockholders' Equity
Common stock, (Note 8) $.001 par value,
50,000,000 shares authorized,
22,307,523 issued and outstanding 22,308 22,308
Additional paid-in capital 7,105,377 7,105,377
Common shares paid for but unissued
(representing 840,000 shares) 390,600 -
Deficit (7,129,599) (6,639,966)
----------- -----------
Total Stockholders' Equity 388,686 487,719
----------- -----------
Total Liabilities and Stockholders' Equity 1,289,014 1,386,198
=========== ===========
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
Service Systems International, Ltd.
Consolidated Statements of Operations and Deficit
For the three months ended November 30, 2000 and 1999
(Unaudited)
<TABLE>
<CAPTION>
Three Months Three Months
ended ended
Nov. 30, 2000 Nov. 30, 1999
(Unaudited) (Audited)
------------- -------------
$ $
<S> <C> <C>
Project Revenue - -
Project Costs - -
----------- -----------
Gross Profit - -
Manufacturing Costs Not Applied 28,875 35,340
----------- -----------
(28,875) (35,340)
----------- -----------
Expenses
Selling 80,350 79,425
General and administrative 138,333 127,339
Research and development 120,422 36,075
Amortization of goodwill 121,270 121,270
Interest, net of interest income 4,833 26,309
Foreign exchange gain (4,450) 32,695
----------- -----------
Total Expenses 460,758 423,113
----------- -----------
Net Loss for the period 489,633 458,453
Deficit - Beginning of period 6,639,966 4,538,362
----------- -----------
Deficit - End of period 7,129,599 4,996,815
=========== ===========
$ $
Net Loss per share (0.02) (0.03)
=========== ===========
# #
Weighted average shares outstanding 22,307,523 14,672,669
=========== ===========
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
Service Systems International, Ltd.
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Three Months Three Months
ended ended
Nov. 30, 2000 Nov. 30, 1999
<S> <C> <C>
Cash Flows to Operating Activities
Net loss ($489,633) ($458,452)
Adjustments to reconcile net loss to cash
Amortization of goodwill 121,270 121,270
Depreciation 10,933 11,445
Foreign exchange loss (4,450) 32,695
Common stock issued for expenses - 6,972
Accrual of interest on long term debt 5,660 28,555
Change in non-cash working capital items
Decrease (Increase) in accounts receivable 31,190 216,406
(Increase) in inventory and contract work in progress (40,184) (35,346)
(Increase) in prepaid expenses and deposits (5,376) 9,111
(Decrease) Increase in accounts payable, accrued
liabilities, wages and vacation pay payable
and customers' deposits (2,973) (2,361)
----------- -----------
Net Cash Used in Operating Activities (374,563) (69,705)
----------- -----------
Cash Flows (to) from Investing Activities
Decrease (Increase) of short-term investment - restricted 1,155 (2,258)
Additions to patents and trademarks (1,321) (41,232)
(Acquisition) disposal of capital assets (24,276) (4,350)
----------- -----------
Net Cash (Used in) Provided by Investing Activities (24,442) (47,840)
----------- -----------
Cash Flows from (to) Financing Activities
(Decrease) in bank demand loan - (186,741)
Common stock issued - 350,880
(Decrease) Increase in loans payable 2,462 (78,265)
Increase in amounts owing to related parties 14,863 52,332
Increase in shares subscriptions received 390,600 -
----------- -----------
Net Cash Provided by Financing Activities 407,925 138,206
----------- -----------
(Decrease) in Cash and Cash Equivalents 8,920 20,661
Cash and Cash Equivalents - Beginning of Period 9,291 7,985
----------- -----------
Cash and Cash Equivalents - End of Period $18,211 $28,646
=========== ===========
Non-Cash Financing Activities - -
Cash Paid for
Interest - 2,146
Income Taxes - -
</TABLE>
See accompanying notes to financial statements.
6
<PAGE>
Service Systems International, Ltd.
Notes to the Consolidated Financial Statements
(Unaudited)
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.
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.
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 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.
7
<PAGE>
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 & ASSUMPTIONS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities in
the financial statements and accompanying notes. Actual results could
differ from these estimates.
ADJUSTMENTS
These interim unaudited financial statements have been prepared on the same
basis as the annual financial statements and in the opinion of management,
reflect all adjustments, which include only normal recurring adjustments,
necessary to present fairly the Company's financial position, results of
operations and cash flows for the periods shown. The results of operations
for such periods are not necessarily indicative of the results expected for
a full year or for any future period.
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
administration expenses.
8
<PAGE>
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.
3. Restricted Cash
In connection with a letter of credit, required under a long-term project
bonding, 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>
Nov. 30, Aug. 31,
2000 2000
Accumulated Net Book Net Book
Cost Depreciation Value Value
$ $ $ $
<S> <C> <C> <C> <C>
Computer equipment 47,299 32,572 14,727 15,263
Computer software 8,184 4,668 3,516 3,925
Display equipment 33,016 30,024 2,992 4,010
Office furniture and equipment 32,476 27,455 5,021 6,662
Plant jigs, dies, moulds, tools and equipment 108,521 80,198 28,322 30,190
Leasehold improvements 46,674 26,724 19,950 445
-------- -------- -------- ---------
276,170 201,643 74,527 60,495
======= ======= ====== ======
</TABLE>
<TABLE>
<CAPTION>
Depreciation per class of asset: Three months ended
Nov. 30, Nov. 30,
2000 1999
$ $
<S> <C> <C>
Computer equipment 2,279 2,067
Computer software 409 251
Display equipment 1,017 1,592
Office furniture and equipment 1,641 1,520
Plant jigs, dies, moulds, tools and equipment 4,453 4,679
Leasehold improvements 445 1,336
------ ------
10,244 11,445
====== ======
</TABLE>
9
<PAGE>
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 the current fiscal year.
6. Demand Loans
a) At August 31, 2000, the Company had loans payable to "Elco Bank
Clients" located in Nassau, Bahamas, of $121,644. During the first
quarter 2001, loan proceeds of $16,000 were received and interest of
$3,366 was accrued, bringing the loans payable balance to $141,010.
The loans payable to Elco Bank clients are unsecured, interest bearing
at 10% per annum and due on demand.
b) Loans payable to a shareholder of $119,081 are unsecured and interest
bearing at 8% per annum and are due on demand.
7. Amounts Owing to Related Parties
(i) These amounts, totaling $151,179, 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.
10
<PAGE>
8. 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 stock options
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
canceled 725,000 - -
(725,000) - -
Share Issue Costs (2,340)
---------- ------ ---------
Balance, August 31, 2000 (audited)
and November 30, 2000 (unaudited) 22,307,523 22,308 7,105,377
---------- ------ ---------
</TABLE>
11
<PAGE>
(a) Warrants outstanding as at November 30, 2000 (unaudited):
<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.
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.
12
<PAGE>
(b) Warrants to be issued
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 provides 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 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 common stock, exercisable at
$1.00 per share;
. 1,000,000 warrants for the purchase of 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.
(c) Employee Stock Option Plan
The common stock underlying the Employee Stock Option Plan, registering
1,588,000 shares for future issuance, was registered with the
Securities Exchange Commission on October 6, 1997 on Form S-8.
On August 21, 1997 employees were granted stock options to acquire
1,217,000 shares at $1.00 per share expiring August 21, 2000. These
options are currently unexercised. On April 15, 1998 two directors and
an employee were granted stock options to acquire 341,000 shares at
$0.15 per share expiring April 15, 2001. During fiscal 1999, 321,000
options were exercised for proceeds of $48,150. The remaining 20,000
were exercised subsequently.
The options are granted for services provided to the Company. Statement
of Financial Accounting Standards No. 123 ("SFAS 123") requires that an
enterprise recognize, or at its option, disclose the impact of the fair
value of stock options and other forms of stock based compensation in
the determination of income. The Company has elected under SFAS 123 to
continue to measure compensation cost on the intrinsic value basis set
out in APB Opinion No. 25. As options are granted at exercise prices
based on the market price of the Company's shares at the date of grant,
no compensation cost is recognized. However, under SFAS 123, the impact
on net income and income per share of the fair value of stock options
must be measured and disclosed on a fair value based method on a pro
forma basis.
The fair value of the employee's purchase rights under SFAS 123, was
estimated using the Black-Scholes model with the following assumptions
used for grants on August 21, 1997: risk free interest rate was 5.57%,
expected volatility of 120%, an expected option life of three years and
no expected dividends; and for grants on April 15, 1998: risk free
interest rate was 5.56%, expected volatility of 120%, an expected
option life of three years and no expected dividends.
13
<PAGE>
If compensation expense had been determined pursuant to SFAS 123, the
Company's net loss and net loss per share for the period ended November
30, 2000 and 1999 would have been as follows:
<TABLE>
<CAPTION>
November 30, November 30,
2000 1999
(Unaudited) (Unaudited)
$ $
------------ -------------
<S> <C> <C>
Net loss
As reported (489,633) (458,453)
Pro forma (489,633) (458,453)
Basic net loss per share
As reported (.02) (.03)
Pro forma (.02) (.03)
</TABLE>
(d) Long-Term Equity Incentive Plan
The Company has allotted 5,000,000 shares pursuant to a Long-Term
Equity Incentive Plan approved and registered December 17, 1999. The
Plan permits the grant of Non-qualified Stock Options, Incentive
Stock Options, Restricted Stock and Performance Shares. During the
prior year 330,922 performance shares were granted at a fair market
value of $193,589.
9. 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>
November 30, 2000 November 30, 1999
----------------------------------- -----------------------------------------
(Unaudited) (Unaudited)
United United
Canada States Total Canada States Total
$ $ $ $ $ $
-------- --------- -------- ------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenue - - - - - -
Expense 297,740 191,893 489,633 263,549 194,904 458,453
Income (loss) (297,740) (191,893) (489,633) (263,549) (194,904) (458,453)
-------- -------- --------- --------- --------- ---------
Identifiable assets 743,241 11,136 754,377 776,447 33,489 809,936
Goodwill and patents 49,553 485,084 534,637 224,620 970,165 1,194,785
-------- -------- -------- -------- -------- ---------
Total assets 792,794 496,220 1,289,014 1,001,067 1,003,654 2,004,721
======== ======== ========= ========= ========= =========
</TABLE>
10. Legal Proceedings
On October 20, 1998 a suit was filed in the Supreme Court of British
Columbia by Thomas O'Flynn against the Company, Kenneth Fielding (the
Company's President and Director), and Charles P. Nield (a former Director
and Vice President of the Company), O'Flynn alleges that in April of 1996,
he purchased shares of the Common Stock based on a representation that
they would be free trading in 40 days of "the filing of a prospectus." He
further alleges that in September of 1996 he purchased additional shares
of Common Stock based on the representation that the shares would be free
trading within 40 days of the Common Stock becoming free trading. O'Flynn
alleges that the representation was a warranty and was incorrect. He
further alleges that he suffered a loss because the share price decreased
while he was holding the shares. He seeks damages for breach of warranty,
negligence, misrepresentation and breach of fiduciary duty. The amount
claimed is not specified. The Company filed an answer denying the claims
and continues to actively defend the suit. There has been no loss
provision set-up pursuant to this action against the Company.
14
<PAGE>
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 these 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 we
have filed with the SEC.
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 ownership. 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. 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 all 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
15
<PAGE>
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 performed 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 the last quarter of the 2000 fiscal year, 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 year. The balance of the work will be completed during the third
quarter of the current fiscal year, pending completion of electrical power
components.
A 6-lamp Ultra Guard-Registered Trademark- UV system, valued at $127,000, and
capable of disinfecting a wastewater flow of 3.5 million gallons per day, was
sold to Hamilton, Alabama and was installed in March, 1999. Successful final
performance testing was conducted in July 1999. This UV project is the first
full scale operating Ultra Guard-Registered Trademark- UV system installed in
North America. This system in Hamilton has provided significant equipment
exposure to other wastewater plants contemplating upgrading their treatment
plant discharges including replacing chlorine as the disinfecting means with
environmentally friendly ultraviolet disinfection.
In September 1999, we secured the formal order for a project in Toronto,
Canada for about C$ 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.
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After successful PDU testing in September and 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$101,000) were produced during FY2000 and were delivered into
the Province of Ontario on May 2, 2000. Additional orders for shipment to
Louisiana and Virginia were received in the last quarter of FY2000, with an
aggregate value of about US$258,000. These two systems are to be produced for
delivery in March 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 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 Service Systems 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, pending 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 the first fiscal quarter ended November 30, 1999, Service Systems
entered into development to reconfigure its UV 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
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chamber, the proprietary low pressure, high intensity UV lamp and the patented
flow balanced weir. It encompasses layout flexibility, and 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. This reconfigured product is now being
used in all systems we maunfacture.
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 second
quarter of fiscal 2001.
RESULTS OF OPERATIONS
Three months ended November 30, 2000 compared to three months ended November 30,
1999.
REVENUES. During the first quarter of fiscal 2001, we reported no
revenues compared to no revenues being reported in the first quarter of fiscal
2000. Sales revenue from all booked projects will be recorded during the
remaining quarters of the fiscal period. This lack of revenue resulted from
delays in putting projects into manufacturing.
DIRECT PROJECT COSTS. No project costs were recorded during the
first quarter of fiscal 2001 and during the first quarter of fiscal 2000
because of customer driven delays in putting projects into production.
GROSS PROFIT. As there was no revenue or direct project costs during
the first quarters of fiscal 2001 and 2000, no gross profit was recorded for
both first quarter fiscal periods.
MANUFACTURING COSTS NOT APPLIED. Manufacturing costs not applied are
annual plant
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overhead costs, that are not being charged against 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 the
first quarter of fiscal 2001, we reported $28,875 of these costs, a decrease of
$6,465, or 18%, from $35,340 in the comparable period of the prior year. This
decrease occurred as a result of lack of sales and resultant decreased
manufacturing activities. The reported amounts represent manufacturing costs
such as facilities, plant personnel, power, etc which continue irrespective of
manufacturing activity.
SELLING EXPENSES. For the first quarter of fiscal 2001, we reported
selling expenses of $80,350, an increase of $925, or 1%, from $79,425 reported
in the comparable period of the prior year. This increase primarily was a result
of increased presentation material expenses due to increased activity in the
Marketing Department.
GENERAL AND ADMINISTRATIVE EXPENSE. For the first quarter of fiscal
2001, we reported general and administrative expense of $138,334, a increase of
$10,995, or 9%, from $127,339 reported in the comparable period of prior year.
This increase resulted primarily from a one time cost due to plant facilities
moving costs, offset partly by a decrease relating to administrative management
fees.
RESEARCH AND DEVELOPMENT EXPENSE. For the first quarter of fiscal
2001, we reported research and development expense of $120,422, an increase
of $84,347, or 234%, from $36,075 in the comparable period of the prior year.
The increase in design costs and engineering and prototyping expenses was due
to the write-off of all R & D activity costs incurred during this first
quarter of fiscal 2001.
AMORTIZATION OF GOODWILL. For the first quarter of fiscal 2001, we
reported amortization of goodwill of $121,270, the same figure for the
comparable period of the prior year. The goodwill resulted from our acquisition
of a majority interest in our subsidiary, UVS. The goodwill will be completely
amortized in fiscal 2002.
INTEREST, NET OF INTEREST INCOME. For the first quarter of fiscal 2001,
we reported interest, net of interest income, of $4,833, a decrease of $21,476,
or 82%, over $26,309 in the comparable period of the prior year. This decrease
was mainly due to the decrease in interest expense relating to the long-term
debt of the prior fiscal year.
FOREIGN EXCHANGE TRANSLATION LOSS. For the first quarter of fiscal
2001, we reported a foreign exchange translation gain of $4,450, a decrease
of $37,145, or 114%, from $32,695 in the comparable period of the prior year.
The decrease in loss in the fiscal 2001 period resulted from a decrease in
the value of the Canadian dollar as compared to previous fiscal periods.
NET LOSS FOR THE PERIOD. For the first quarter of fiscal 2001, we
reported a net loss for the period of $489,633, an increase of $31,180, or 7%
over $458,453 in the comparable period of
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prior year. The increase in net loss was due primarily to the increased
write-off of engineering and prototyping expenses incurred during the first
quarter of the fiscal 2001.
NET LOSS PER SHARE. For the first quarter of fiscal 2001, we reported a
net loss per share for the period of $0.02, a decrease of $0.01, or 33%, from
$0.03 in the comparable period of prior year. The net loss per share reduced as
a result of the net loss being allocated over an increased number of shares
outstanding and share equivalents in fiscal 2001.
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.
We financed our operations during this fiscal period, in part, through loans
from related parties and from the proceeds of sales to accredited investors
of equity securities in Units at $0.70 per Unit. Each unit consisted of one
share of common stock and one Class A Warrant. Each Class A Warrant entitles
the holder to acquire an additional share of common stock at a per share
price of $1.00 exercisable upon issuance until August 31, 2003. As of the end
of the quarter, we had raised $420,000 ($390,600 after expenses) through Unit
sales.
We expect that during fiscal 2001, project sales should increase, as a result of
the pendng Strategic Alliance with US Filter. We expect to fund these projects,
primarily through the progress payments expected to be provided in the US Filter
agreements. As well, 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 expansion of our market in territories not covered within the Strategic
Alliance, in potable water industry activities, and 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.
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<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
We have not yet issued securities in connection with our sale
of Units of common stock and warrants during the first quarter of FY 2001.
However, the sales were as follows:
Subscriptions for 840,000 units, consisting of one share of common stock and
one Class A warrant, at $0.70 per Unit, were accepted from 4 Canadian entities
which are accredited investors. Three subscriptions were accepted on October
5, 2000 and one on October 17, 2000. Each warrant entitles the shareholder to
acquire an additional share of common stock. The warrants are immediately
exercisable at $1.00 per share and will expire in August of 2003.
All Units were sold in reliance on the exemption provided by Section 4(2) of
the Securities Act.
All of the investors were informed of the risks involved in an investment in
our company and had all information about us that they needed to make an
informed investment in our company. All securities issued will bear
restrictive legends.
Item 3. Defaults upon Senior Securities
None
Item 4. Submissions of Matters to a Vote of Security Holders
None
Item 5. Other Information
On January 10, 2001 our Board of Directors voted to change our
fiscal year from September 1 -- August 31 to January 1 -- December 31. We
expect to file the transition report on Form 10-KSB not later than March 31,
2001.
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ITEM 6. 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)
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
(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)
(10)(xv) Lease dated October, 2000 between Service Systems,
UV Technology Inc. and Slough Estates Canada Limited(8)
(11) Statement Regarding Computation of Per Share Earnings Filed Herewith
Electronically
</TABLE>
(1) Incorporates 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 10Q 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.
(8) Incorporated by reference to the Corporation's Form 10KSB for the fiscal
year ended August 31, 2000.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
SERVICE SYSTEMS INTERNATIONAL, LTD.
Date: January 19, 2001 /s/ Ken Fielding
-------------------------------------------------------
Ken Fielding, President
Date: January 19, 2001 /s/ John R Gaetz
-------------------------------------------------------
John R Gaetz, Chief Executive Officer
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