SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly period ended March 31, 2002
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number
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SERVICE SYSTEMS INTERNATIONAL, LTD.
Name of Small Business Issuer in Its Charter
NEVADA 88-0263701
State of Incorporation I.R.S. Employer
Identification No.
2nd Floor, 5763 203A STREET,
LANGLEY, B.C., CANADA V3A 1W7
Address of Principal Executive Offices Zip code
604-539-9398
Issuer's Telephone Number
202 - 11 Burbridge Street, Coquitlam, B.C. Canada V3K 7B2
(Former Address of Registrant)
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: 27,254,165 as of June 17, 2002.
INDEX
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PART I Financial Information
Item 1. Consolidated Financial Statements.
- ---------------------------------------------
Consolidated Balance Sheets as of March 31, 2002
and 2001 (unaudited) 3
Consolidated Statements of Operations for the three months ended
March 31, 2002 and 2001 (unaudited) 4
Consolidated Statements of Cash Flows for the three months ended
March 31, 2002 and 2001 (unaudited) 5
Notes to the Financial Statements 6 to 13
Item 2. MANAGEMENT S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITIONS 14 to 22
Part II OTHER INFORMATION 22
ITEM 1. LEGAL PROCEEDINGS 22
ITEM 2 CHANGES IN SECURITIES 22
ITEM 3. DEFAULT UPON SENIOR SECURITIES 23
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 23
ITEM 5. OTHER INFORMATION 23
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 23-24
Signatures 25
Exhibit 11 26
Page 3
Service Systems International, Ltd.
Consolidated Balance Sheets
March 31, December 31,
2002 2001
(Unaudited) (Audited)
ASSETS $ $
Current Assets
Cash 1,063 -
Short-term investments - restricted (Note 3) 244,471 244,599
Accounts receivable (Note 6) 943,608 254,154
Inventory and contract work in progress 197,408 254,154
Prepaid expenses and deposits 156,141 230,151
---------- ----------
Total Current Assets 1,542,691 1,845,648
Property, Plant and Equipment (Note 4) 105,521 118,624
Other Assets
Patents and trademarks (Note 5) 104,345 105,894
---------- ----------
Total Assets 1,752,557 2,070,166
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Cheques issued in excess of funds on deposit - 4,539
Accounts payable (Note 6) 1,118,378 1,130,572
Accrued liabilities 106,510 130,674
Wages and vacation pay payable 69,071 70,566
Customer deposits 6,273 121,396
Loans payable (Note 7) 1,140,689 1,076,419
Amounts owing to related parties (Note 8) 586,299 525,467
---------- ----------
Total Current Liabilities 3,027,220 3,059,633
---------- ----------
Stockholders' Deficit
Common stock, (Note 9) $.001 par value,
50,000,000 shares authorized,
26,904,165 and 26,887,601 issued and
outstanding respectively 26,904 26,888
Additional paid-in capital 8,267,722 8,266,082
Common shares paid for but unissued 2,600 390,600
Common shares allotted for license but unissued - 255,875
Stock based compensation 295,211 255,875
---------- ----------
Deficit (9,864,500) (9,539,521)
---------- ----------
Total Stockholders' Deficit (1,274,663) (989,467)
---------- ----------
Total Liabilities and Stockholders' Equity 1,752,557 2,070,166
========== ==========
Contingency (Note 1 and 11)
Subsequent Events (Note 12)
(See accompanying notes to financial statements)
Page 4
Service Systems International, Ltd.
Consolidated Statements of Operations and Deficit
Three Months Three Months
ended ended
Mar. 31, 2002 Mar. 31, 2001
$ $
(Unaudited) (Unaudited)
Project Revenue 34,893 407,719
Project Costs 31,636 240,715
---------- ----------
Gross Profits before adjustment 3,257 167,004
Additional Project Costs 55,578 -
Manufacturing Costs Not Applied 21,9321 11,012
---------- ----------
(74,253) 155,992
---------- ----------
Expenses
Amortization of goodwill - 121,270
Foreign exchange 5,947 11,779
General and administrative 163,486 206,030
Interest 27,756 16,048
Research and development 16,096 82,452
Selling 37,441 66,607
---------- ----------
Total Expenses 250,726 504,186
---------- ----------
Net Loss for the period 324,979 348,194
========== ==========
Net Loss per share (0.01) (0.02)
========== ==========
Weighted Average Number of Shares Outstanding 26,904,000 22,426,000
========== ==========
(Diluted loss per share has not been presented as the result is anti-dilutive)
(See accompanying notes to financial statements)
Page 5
Service Systems International, Ltd.
Consolidated Statements of Cash Flows
Three Months Three Months
ended ended
Mar. 31, 2002 Mar. 31, 2001
$ $
(Unaudited) (Unaudited)
Cash Flows to Operating Activities
Net loss (324,979) (348,193)
Adjustments to reconcile net loss to cash
Amortization of goodwill - 121,270
Depreciation and amortization 14,547 15,751
Foreign exchange 5,947 11,779
Common stock issued for expenses 1,656 40,000
Accrual of interest 29,386 18,875
Stock based compensation 39,336 -
Change in non-cash working capital items
Decrease increase in accounts receivable 173,136 (350,818)
Decrease in inventory and contract
work in progress 56,746 65,417
Decrease (increase)in prepaid expenses and deposits 74,010) (62,552)
Decrease (increase) in accounts payable,
accrued liabilities, wages and vacation
pay payable and customers' deposits (163,047) 97,499
---------- ----------
Net Cash Used in Operating Activities (93,262) (390,972)
---------- ----------
Cash Flows (to) from Investing Activities
Reduction (acquisition) of short-term investment -
restricted 218 246
Additions to patents and trademarks - (8,794)
Acquisition of capital assets - (25,997)
---------- ----------
Net Cash Used in Investing Activities 218 (34,545)
---------- ----------
Cash Flows from (to) Financing Activities
Common stock issued - 39,065
Increase in loans payable 39,023 363,888
Increase in amounts owing to related parties 60,832 10,790
(Decrease)increase in share subscriptions received (1,209) 55,000
---------- ----------
Net Cash Provided by Financing Activities 98,646 468,743
---------- ----------
Increase in Cash 5,602 43,226
Cash - Beginning of Period (4,539) 30,219
---------- ----------
Cash - End of Period 1,063 73,445
========== ==========
Non-Cash Financing Activities
16,564 shares were issued to settle debts
at $0.10 per share 1,656 -
100,000 shares were issued to settle debts
at $0.40 per share - 40,000
========== ==========
Supplementary Information
Cash paid for interest 324 1,014
Cash paid for income taxes - -
See accompanying notes to financial statements
Page 6
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 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 generated profitable operations since inception
and the Company has a working capital deficit of $1,465,711 as at March 31,
2002. These factors raise substantial doubt about the Company's ability to
continue as a going concern. The ability of the Company to continue operations
is dependent upon its successful efforts to raise additional equity financing in
the long term, continue developing the market for its products, and/or the
attainment of profitable operations.
In order to reduce overhead the Company has tentatively reached an agreement
with the Clearwater Group ("Clearwater"). Clearwater will assume the
manufacturing of any new Ultra Guard water treatment systems to be supplied to
their strategic alliance partner, US Filter. Clearwater will also provide
warranty services on any previous Ultra Guard water treatment systems. The
Company will receive a royalty based on a percentage of sales volume. In
anticipation of this the Company has moved from its manufacturing location and
reduced level of staff in production, engineering and support.
2. Significant Accounting Policies
Consolidated financial statements
These financial statements include the accounts of the Company, and its
wholly-owned Canadian subsidiary, UV Systems Technology Inc. ("UVS"). All
significant intercompany transactions and balances have been eliminated.
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.
Patents and trademarks
Patents and trademarks are amortized to operations over their estimated useful
lives of twenty years.
Revenue recognition
Product sales are recognized at the time goods are shipped. System and project
revenue are 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 and 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.
Page 7
Service Systems International, Ltd.
Notes to the Consolidated Financial Statements
2. Significant Accounting Policies (continued)
Foreign currency
i) Translation of foreign currency transactions and balances:
Revenue, expenses and non-monetary balance sheet items in foreign currencies are
translated into US dollars at the rate of exchange prevailing on the transaction
dates. Monetary balance sheet items are translated at the rate prevailing at the
balance sheet date. The resulting exchange gain or loss is included in general
and administration expenses.
ii) Translation of foreign subsidiary balances:
Monetary balance sheet items of UVS are translated into US dollars at the rate
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.
Basic and Diluted Net Income (Loss) Per Share
The Company computes net income (loss) per share in accordance with SFAS No.
128, "Earnings per Share". This statement requires presentation of both basic
and diluted earnings per share (EPS) on the face of the income statement. Basic
EPS is computed by dividing net income (loss) available to common shareholders
(numerator) by the weighted average number of common shares outstanding
(denominator) during the period. Diluted EPS gives effect to all dilutive
potential common shares outstanding during the period including stock options,
using the treasury stock method, and convertible preferred stock, using the
if-converted method. In computing Diluted EPS, the average stock price for the
period is used in determining the number of shares assumed to be purchased from
the exercise of stock options or warrants. Diluted EPS excludes all dilutive
potential common shares if their effect is anti dilutive.
Accounting for Stock-Based Compensation
The Company accounts for stock based compensation in accordance with SFAS No.
123, "Accounting for Stock-Based Compensation." This statement requires that
stock awards granted subsequent to January 1, 1995, be recognized as
compensation expense based on their fair value at the date of grant.
Alternatively, a company may account for granted stock awards under Accounting
Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to
Employees,"and disclose pro forma income amounts which would have resulted from
recognizing such awards at their fair value. The Company has elected to account
for stock-based compensation for employees under APB No. 25 and make the
required pro forma disclosures for compensation expense in accordance with SFAS
No. 123.
Interim Financial Statements
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.
3. Restricted Cash
In connection with a letter of guarantee, required under a long-term project
bonding, the Company purchased a C$391,000 face value Bankers' Acceptance
maturing June 4, 2002, yielding a 2% return, to be held as a bond for the letter
of guarantee of C$390,809. Upon satisfaction of certain minor follow-up
engineering this letter of guarantee will be extinguished and the cash will
become unrestricted.
Page 8
Service Systems International, Ltd.
Notes to the Consolidated Financial Statements
4. Property, Plant, and Equipment
Property, plant, and equipment are stated at cost less accumulated
depreciation.
March 31, December 31,
2002 2001
Accumulated Net Book Net Book
Cost Depreciation Value Value
$ $ $ $
(Unaudited) (Unaudited)
Computer equipment 54,718 45,413 9,305 12,151
Computer software 9,378 6,270 3,108 3,380
Display equipment 33,016 33,016 - -
Office furniture and equipment 32,475 32,475 - 75
Plant jigs, dies, moulds, tools
and equipment 129,080 105,601 23,479 28,533
Leasehold improvements 93,439 23,350 70,089 74,757
------- ------- ------- ------
352,106 246,585 105,521 118,624
======= ======= ======= =======
Depreciation per class of asset:
Three months ended
March 31, March 31,
2002 2001
$ $
(Unaudited) (Unaudited)
Computer equipment 2,845 2,087
Computer software 460 242
Display equipment - 1,651
Office furniture and equipment 75 1,532
Plant jigs, dies, moulds, tools and equipment 5,054 4,447
Leasehold improvements 4,668 5,073
------ ------
13,102 15,030
====== ======
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 System. These costs are amortized over twenty years. Amortization
for the three months ended March 31, 2002 was $1,445 and for the three months
ended March 31, 2001 was $721. Components of the Ultra Guard 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. Secured Liabilities
Pursuant to a funding agreement $747,194 of accounts payable are secured by
$747,194 of accounts receivable.
7. Loans Payable
a) At March 31, 2002, the Company had loans payable to "Elco Bank Clients"
located in Nassau, Bahamas, of $531,416 including principal and interest. During
the first three months of fiscal 2002, interest of $11,972 was accrued, bringing
the loans payable balance to $543,387. These loans are unsecured, interest
bearing at 10% per annum and due on demand.
b) A loan payable of $115,000 plus accrued interest of $16,512 is unsecured,
bears interest at 8% per annum and is due on demand.
Page 9
Service Systems International, Ltd.
Notes to the Consolidated Financial Statements
c) Loans payable of $200,000 plus accrued interest of $26,675 are unsecured
and bear interest at 1% per month. The loan was due on May 21, 2001. The
principal portion of the loan can be converted into common shares at $0.50 per
share.
d) A loan payable of $125,000 plus accrued interest of $17,331 is unsecured,
bears interest at 13% per annum starting from December 20, 2001 and will rise by
1% for every month the loan remains outstanding.
e) Loans payable of Cnd $151,454 (US$95,002) plus accrued interest of $1,782
are secured by a general security agreement, bear interest at 8% per annum and
will be due six months from the date of each advance. The loans are repayable
between May 31, 2002 and June 26, 2002.
8. Amounts Owing to Related Parties
These amounts, totalling $586,299, represent unpaid wages, loans and consulting
for two directors. These amounts are due on demand, unsecured and non-interest
bearing.
9. Common Stock
Additional
Common Paid-in
Shares Stock Capital
# $ $
- --------------------------------------------------------------------------------------
Balance, December 31, 2001(audited) 26,887,601 26,888 8,266,082
Issuance of stock for expenses pursuant to
the exercise of employee stock options 16,564 16 1,640
- --------------------------------------------------------------------------------------
Balance, March 31, 2002 (unaudited) 26,904,165 26,904 8,267,722
======================================================================================
(a) Warrants outstanding as at March 31, 2002:
Exercise
Class # Price Expiry Date(s)
"A" 2,880,459 $.30-$1.00 March 10, 2002 - December 20, 2003
"B" 2,705,174 $.07-$.20 January 9, 2003 - December 3, 2003
"C" 8,105,000 $0.24 October 3, 2010
"D" 1,455,049 $0.40 June 2, 2002
"E" 6,130,553 $.20-$.90 December 31, 2001 - December 3, 2003
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.
Page 10
Service Systems International, Ltd.
Notes to the Consolidated Financial Statements
9. Common Stock (continued)
760,439 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.
250,000 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.
100,000 Class A warrants were issued at an exercise price of $0.50 per share
expiring December 15, 2003 for investor relations services. The value of the
warrants on the date of issue was $34,690 which was charged to compensation
expense.
800,000 Class A warrants were issued during fiscal 2001 with an expiry date of
December 8, 2002, 400,000 of these warrants have an exercise price of $0.60 per
share and the balance of 400,000 have an exercise price of $1.00 per share.
These warrants were issued pursuant to an Agreement for private placement
financing and investor relations. The value of the warrants at the date of issue
was $91,320 which was charged to compensation expense. The Agreement calls for a
7% finders fee to be paid pursuant to a private placement of units at $0.50 per
unit. The Agreement also calls for an option to purchase 400,000 shares from an
existing shareholder at an exercise price of approximately $1.10 per share for a
period of one year.
712,500 Class A warrants were issued in fiscal 2001 at an exercise price of
$1.00 per share pursuant to various private placements. 645,000 of these
warrants have an expiry date of February 7, 2003 and the remaining 67,500 have
an expiry date of January 25, 2003. No value was placed on these warrants.
390,000 Class A warrants were issued to a consultant at an exercise price of
$0.30 per share expiring May, 2003 for website development, media services and
other related services. The value of these warrants was $43,875 which is
amortized to investor relations expense over one year. A total of $10,969 was
charged during the first three months of fiscal 2002.
100,000 Class E warrants were issued at $0.70 per share expiring August 31, 2002
for website development and other related services. The value of these warrants
were $20,540 at the date of issue which was charged to compensation expense.
1,487,718 Class B warrants were issued and exercisable at $0.0695 per share
expiring January 9, 2003. These warrants were issued in replacement of 1,487,718
stock options available to the Vice-President.
Page 11
Service Systems International, Ltd.
Notes to the Consolidated Financial Statements
9. Common Stock (continued)
On October 3, 2000, 3,000,000 Class C warrants were issued pursuant to a
Strategic Alliance and other agreements 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 ultraviolet disinfection
technology for water and wastewater applications. The value of the 3,000,000
Class C Warrants issued totalled $656,700. This amount is being amortized to
operations as a marketing expense at a rate of $65,670 per annum. A total of
$16,418 was charged during first three months of fiscal 2002. These warrants
were issued as follows:
(i) 1,000,000 Class C warrants issued, exercisable at the lower of $0.97 per
share or the fair market value of the Company's common stock at April 25, 2001
expiring October 31, 2011 and restricted from exercise for two years from
October 3, 2000.
(ii) 1,000,000 Class C warrants were issued at an exercise price of $1.00
per share, with expiry date of October 31, 2011 and restricted from exercise for
two years from October 3, 2000.
(iii) 1,000,000 Class C warrants were issued at an exercise price of $2.00
per share, with expiry date of October 31, 2011 and restricted from exercise for
two years from October 3, 2000.
In June 2001, the Company entered into a funding agreement with US
Filter/Wallace and Tiernan Products Group. As a term of the funding agreement,
the warrant exercise price on the above 3,000,000 warrants was reduced to $0.24
per share and the restriction from exercise period was changed from October 3,
2003 to October 31, 2001. The expiry date of these warrants was changed to
October 3, 2010. In addition, 5,105,000 Class C warrants were issued with an
exercise price of $0.24 per share and an expiry date of October 3, 2010. These
additional warrants were issued because of certain funding criteria being met.
The value of the 5,105,000 Class C warrants issued totalled $478,000. This
amount is being amortized to operations as a financing expense at a rate of
$47,800 per annum. A total of $11,950 was charged during the first three months
of fiscal 2002.
(b) Employee Stock Option Plan
The common stock underlying the Employee Stock Option Plan, registering
1,588,000 shares for future issuance, was registered with the Securities
Exchange Commission on October 6, 1997 on Form S-8.
On December 5, 2000, three employees were granted stock options to acquire
115,075 shares at $0.35 per share, expiring December 5, 2002. During fiscal
2001, these options were exercised for proceeds of $40,276.
On December 6, 2000, a consultant was granted stock options to acquire 100,000
shares at $0.40 per share, expiring December 6, 2002. These options were
exercised during fiscal 2001 for proceeds of $40,000.
On December 27, 2000, an employee was granted stock options to acquire 5,000
shares at $0.25 per share. These options were exercised in fiscal 2001 for
proceeds of $1,250.
On June 11, 2001, two consultants were granted stock options to acquire 310,751
shares at $0.22 per share. These options were exercised in fiscal 2001 for
proceeds of $68,365.
On June 21, 2001, two consultants were granted stock options to acquire 488,890
shares at $0.135 per share. These options were exercised in fiscal 2001 for
proceeds of $66,000.
On July 5, 2001, two consultants were granted stock options to acquire 35,000
shares at $0.181 per share. These options were exercised in fiscal 2001 for
proceeds of $6,335.
On October 10, 2001, ten employees were granted stock options to acquire 124,067
shares at $0.10 per share. These options were exercised in fiscal 2001 for
proceeds of $12,407.
On October 10, 2001, 2 employees were granted stock options to acquire
16,564 shares at $0.10 per share. These options were exercised in fiscal 2002
for proceeds of $1,640.
Page 12
Service Systems International, Ltd.
Notes to the Consolidated Financial Statements
9. Common Stock (continued)
These options were granted for services provided, or to be 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.
If compensation expense had been determined pursuant to SFAS 123, the Company's
net loss and net loss per share would have been as follows:
Three months Three months
ended March ended December
31, 2002 31, 2001
$ $
(Unaudited) (Unaudited)
Net loss
As reported (324,979) (1,831,701)
Pro forma (324,979) (1,951,925)
Basic net loss per share
As reported (.01) (.08)
Pro forma (.01) (.08)
(c) 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.
(d) Legal Services Plan
Pursuant to an S-8 Registration Statement filed and accepted on November 19,
2001 the Company issued 3,925,000 common shares at $0.19 per share pursuant to
three separate contracts. Of these, a total of 2,500,000 shares have been
cancelled as the related contract was never consummated.
Page 13
Service Systems International, Ltd.
Notes to the Consolidated Financial Statements
10. Segmented Information
The business of the Company is carried on in one industry segment (See Note 1).
The Company operates in two geographic segments. The United States operations
only consist of costs associated with debt and equity financing and being a
public company.
Three months ended Three months ended
March 31, 2002 March 31, 2001
----------------- -----------------
United United
Canada States Total Canada States Total
$ $ $ $ $ $
Revenue 62,588 - 62,588 407,719 - 407,719
Expense 247,497 140,070 387,567 465,017 290,895 755,912
- ------------------------------------------------------------------------------------------------------------------
Loss (184,909) (140,070) (324,979) (57,298) (290,895) (348,193)
- ------------------------------------------------------------------------------------------------------------------
As of March 31, 2002 As of March 31, 2001
------------------- ---------------------
United United
Canada States Total Canada States Total
$ $ $ $ $ $
Identifiable assets 1,479,583 168,629 1,648,212 1,154,605 52,606 1,207,211
Goodwill and patents 104,345 - 104,345 50,527 323,391 381,991
- ---------------------------------------------------------------------------------------------------------------
Total assets 1,583,928 168,639 1,752,557 1,213,205 375,997 1,589,202
===============================================================================================================
11. Legal Proceedings
On October 20, 1998 a suit was filed in the Supreme Court of British Columbia by
Thomas O'Flynn against the Company, Kenneth Fielding (the Company's President
and Director), and Charles P. Nield (a former Director and Vice President of the
Company), O'Flynn alleges that in April of 1996, he purchased shares of the
Common Stock based on a representation that they would be free trading in 40
days of "the filing of a prospectus." He further alleges that in September of
1996 he purchased additional shares of Common Stock based on the representation
that the shares would be free trading within 40 days of the Common Stock
becoming free trading. O'Flynn alleges that the representation was a warranty
and was incorrect. He further alleges that he suffered a loss because the share
price decreased while he was holding the shares. He seeks damages for breach of
warranty, negligence, misrepresentation and breach of fiduciary duty. The amount
claimed is not specified. The Company filed an answer denying the claims and
continues to actively defend the suit. There has been no loss provision set-up
pursuant to this action against the Company.
12. Subsequent Events
Subsequent to March 31, 2002 the Company received $35,000 and issued 350,000
common shares at $0.10 per common share pursuant to private placements.
Page 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS AND FINANCIAL
CONDITION.
The following discussion and analysis should be read in conjunction with our
Financial Statements and the Notes attached. Information discussed in this
report may include forward-looking statements regarding events or our financial
performance and are subject to a number of risks and other factors, which could
cause the actual results to differ materially from those, contained in the
forward-looking statements. Among those factors are, 1) general business and
economic conditions, 2) customer acceptance and demand for our products, 3) our
overall ability to design, test and introduce new products on a timely basis, 4)
the nature of the markets addressed by our products, and, 5) other risk factors
listed from time to time in documents filed by our company with the SEC.
BASIS OF PRESENTATION
The financial statements include accounts of Service Systems International Ltd.
and its 100% owned subsidiary, UV Systems Technology Inc. ("UVS")
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 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 initiated a marketing distribution agreement
with UVS, a manufacturer of equipment using proprietary ultraviolet light
technology for the microbiological disinfection of industrial and municipal
wastewater. In July 1996 Service Systems entered into a funding agreement with
UVS, whereby under the funding agreement, Service Systems provided 50% of UVS'
operating cash needs for a six-month period. On December 1, 1996, Service
Systems acquired 50.69% of the common stock of UVS from two principals and the
minority stockholders. On February 14, 2000, Service Systems entered into an
agreement with the remaining two minority stockholders, Growth Works Capital
Ltd. (Managers of Working Opportunity Fund (EVCC) Ltd.) (WOF) and MDS Ventures
Pacific Inc.(MDS), to acquire the remaining 49.31% common stock and preferred
stock. Under this letter agreement, Service Systems issued to WOF 2,809,723
shares of restricted common shares under Regulation S to acquire all UVST Class
A and B shares held by WOF and debt of UVST totaling C$2,301,098 and to MDS
1,404,109 shares of restricted common shares under Regulation S to acquire all
UVST Class A and B shares held by MDS and debt of UVST totaling C$1,275,000.
During the period from December 1, 1996 to September 30, 1997, Service Systems
continued with UVS' system development and testing programs. These programs
included the development of both a mechanical and electronic automatic quartz
sheath cleaning system, to remove the fouling build-up due to suspended solids
and chemical prevalent in wastewater.
Field testing of the mechanical wiper cleaning system was concluded during
October and November 1997, at a production demonstration unit ("PDU") test site
near Montreal, Quebec. The test results concluded that the cleaning system did
perform above anticipated levels, and the system has now been incorporated into
current products sold. The temperature control system for the UVS System was
also tested at the Ville de Repentigney test site during temperatures ranging
down to minus 8 degrees Celsius and up to plus 8 degrees Celsius. The test
Page 15
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 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 fiscal year ended August 31, 2000, 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 was completed in fiscal 2000. The work to be
completed includes replacement lamp controllers, which are in construction for
the Single Lamp Reactors but will require addition features for remote location
mounting to replace the controllers at this location. This work was expected to
be completed in August 2001, but will be delayed due to delayed delivery of
materials from suppliers, until the first quarter of fiscal 2002. In February we
were informed that the New Zealand customer embarked on a consolidation of a
number of wastewater plants. Until the size of the combined wastewater plant is
known and the systems layout is know, we have stopped work of the order and have
applied the payment of $45,952 against an accounts receivable for this customer.
A 6-lamp Ultra Guard UV system valued at $127,000, capable of disinfecting a
wastewater flow of 3.5 million gallons per day, was sold to Hamilton, Alabama
and was installed in March, 1999. Successful final performance testing was
conducted in July 1999. This UV project is the first full scale operating Ultra
Guard UV system installed in North America. This system in Hamilton has provided
significant equipment exposure to other wastewater plants contemplating
upgrading their treatment plant discharges, including replacing chlorine as the
disinfecting means with environmentally friendly ultraviolet disinfection.
In September 1999 the formal order for a project in Toronto, Canada was secured
for about C$ 685,000 (approximately $466,000). The project is now delivered and
operating on demand. As this system is used only when high rainfall and storm
runoff occurs, demand for it's operating is infrequent. Since installation, we
are informed of two storm events which required the UV system to be activated.
This UV system delivered to Toronto is part of a C$50 million combined storm
overflows (CSO) project (the world largest submersible CSO pumping station) and
is used for disinfection of CSO before discharge into Lake Ontario.
After successful PDU testing in September & October 1998 at the City of
Peterborough wastewater treatment plant, we received an order valued at over
C$1,100,000 (approximately $748,000.) in March 1999. The UV system will
disinfect effluent flow in excess of 36 million gallons per day. The UV system
delivery was completed in January 2002 and installed during February and March
for operation starting May 15, 2002. Problems were encountered with the field
wiring which affected the operating software. As well, problems were encountered
with the installation of some of the structural components. At this time, four
of the five channels (48 of the 60 lamps) have been operated. The balance of the
system is being completed.
Purchase orders for two additional UV systems valued at approximately C$150,000
(approximately $96,000) were produced during the 2000-2001 period and delivered
into the Province of Ontario. One project was delivered in May 2000. Additional
orders for shipment to Louisiana and Virginia were received, with an aggregate
value of about $258,000. These two systems are to be delivered in the fourth
Page 16
quarter of fiscal 2001.
In July 2001 an order was received from USFilter/W&T, the first order received
as a result of the Strategic Alliance signed in January 2001(detailed below). An
order for delivery of a system to Chile, valued at about $32,500 is rescheduled
to be delivered in November 2001.
In January 1999 a PDU was installed at the County Sanitation Districts of Los
Angeles County (the County). The purpose of the test was to determine the Ultra
Guard UV system's ability to disinfect wastewater to Title 22 Guidelines; a
stringent test protocol required as a precursor to use of a company's UV product
in reuse of wastewater for agriculture and other purposes. 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 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 low pressure, low intensity
technology, a substantial saving in energy usage, 12.7%, was achieved by using
the Ultra Guard system. On February 28, 2000 the Department of Health Services
advised Service Systems 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. In November 2001,
the Managing Director advised us that Australian UV had been sold to Wedeco AG
Water Technologies, a leading manufacturer of ultraviolet equipment.
During the fiscal year ended August 31, 2000, Service Systems began development
to reconfigure its UV system. In the quarter ended March 31, 2001, Service
Systems produced the prototype of a new UV product line, the Ultra-Flow Single
amp Reactor (SLR. The SLR, with a designed disinfection capacity of up to 1.0
million gallons per day per lamp, incorporates Service Systems' patented flow
reactor chamber, the proprietary low pressure, high intensity UV lamp, and the
patented flow balanced weir. It encompasses layout flexibility, infinite
automatic flow control and monitoring, and future expansion can be easily
accomplished. The client can monitor system and component performance locally or
remotely. Additional features include full password-protected, Internet-based,
web-monitored, microprocessor control, which will permit monitoring of the
Ultra-Flow SLR UV system from Service Systems' plant or from any location
equipped with an Internet connection. As part of this SLR development, Service
Systems proceeded on the development of a High Voltage Power Controller with
increased power and lamp striking voltage. The work on this component of the SLR
was slower than anticipated, the result of which is the rescheduling of jobs in
progress. Production units have now been manufactured at Service System' factory
and have been tested and accepted for installation into the SLR products. These
Power Controller have been installed into all SLR ultraviolet system currently
delivered and into those systems currently on order for delivery by the end of
fiscal 2001.
On January 25, 2001, Service Systems and its wholly owned subsidiary, UV Systems
Technology, Inc., a British Columbia company ("UV Systems"), entered into a
Strategic Alliance Agreement and related agreements with US Filter/Wallace &
Tiernan, Inc., a Delaware corporation ("U.S. Filter "). In general, the
Strategic Alliance Agreement provides that U.S. Filter will market, offer and
sell Service Systems' UltraGuard ultraviolet disinfection systems (the
"Systems"), including aftermarket components and spare parts, on an exclusive
basis for ten years throughout a territory consisting of North America, Central
America (including the Caribbean Zone) and South America (the "Territory").
Certain of the basic terms of the Strategic Alliance Agreement and the related
agreements are summarized below. The summaries are subject to and qualified by
the agreements themselves. Reference should be made to the agreements themselves
to insure adequate understanding.
Page 17
Strategic Alliance Agreement.
The parties to the Strategic Alliance Agreement are Service Systems and UV
Systems, and U.S. Filter/Wallace & Tiernan, Inc. The term of the Strategic
Alliance Agreement is ten years, subject to earlier termination, including a
termination for convenience by either party after three years. If not
terminated, the Agreement is subject to automatic one-year renewals. During the
term, U.S. Filter will act as the exclusive agent within the Territory for the
marketing, sales and distribution of the Systems, including aftermarket
components and spare parts, for all municipal (excluding aquatics) and
industrial water and wastewater treatment applications. Service Systems will
refrain from any direct or indirect attempt to market, sell or distribute
Systems or components within the Territory. U.S. Filter will use its existing
sales network and distribution system to market, offer and distribute the
Systems, and also will provide start up assistance, ongoing service, and
components, parts and spares installation support. U.S. Filter will cause
certain companies related to it to refrain from any direct or indirect attempt
to market, sell or distribute competitive products within the Territory. Service
Systems will sell ultraviolet disinfection systems and components to U.S.
Filter, and will provide related support services. The purchase price to be paid
by U.S. Filter for each System or component manufactured or supplied by Service
Systems will be based upon Service Systems' list price and applicable tax, less
a negotiated deduction, and will be subject to further adjustment depending upon
the price at which U.S. Filter sells the System or component to the end user.
U.S. Filter will make progress payments as the design and manufacture of the
System progresses through to delivery and final acceptance of the System by the
end user. If Service Systems is unable or unwilling to meet specified
manufacture and supply requirements, then U.S. Filter may manufacture and supply
Systems and components. U.S. Filter will pay a royalty payment for each System
or component, whether manufactured or supplied by Service System or U.S. Filter.
The Strategic Alliance Agreement also gives U.S. Filter a right of first refusal
with respect to any distribution or marketing agreements, which Service Systems
or UV Systems may wish to make outside the Territory.
License Agreement.
Service Systems, UV Systems and U.S. Filter also entered into a License
Agreement by which Service System and UV Systems granted to U.S. Filter certain
exclusive rights in and to patents, trademarks, trade secrets, copyrights,
software and know-how related to the sale, distribution, promotion, marketing or
manufacture of Systems for installation within the Territory. U.S. Filter will
pay a royalty equal to 5% of the net sales price with respect to any System
manufactured or supplied by Service Systems/UV Systems and a royalty between 5%
and 10% with respect to any System manufactured or supplied by U.S. Filter. In
connection with the License Agreement, the parties have entered a Trust
Agreement with Fort Knox Escrow Services, Inc., a Georgia corporation, which
provides that software and manufacturing instructions be placed into escrow.
In June 2001 we entered into an agreement with US Filter's Wallace and Tiernan
Products Group to provide funding ("Funding Agreement") to support the
production of the various projects noted above. As part of this Funding
Agreement, USFilter purchased and paid for a new generation Production
Demonstration Unit ("PDU"). This PDU, valued at $85,000, includes the new Single
Lamp Reactor design and is self contained, and trailer mounted for easy delivery
and setup for testing of the wastewater from selected wastewater plants
interested in applying UV disinfection. The PDU will be delivered in September
2001. Complete details of the Funding Agreement were filed with the Securities
and Exchange Commission on Form 8-K on June 18, 2001.
Page 18
Stock Purchase Warrants.
Concurrently with the execution of the original Strategic Alliance Agreement,
Service Systems granted three Stock Purchase Warrants to U.S. Filter for an
aggregate of 3,000,000 shares of Service Systems common stock.
* 1,000,000 shares at an exercise price equal to the lower of $0.97 per
share or the "Fair Market Value" of the common stock as of April 25, 2001;
* 1,000,000 shares at an exercise price of $1.00 per share; and
1,000,000 shares at an exercise price of $2.00 per share.
As a term of the Funding Agreement, the exercise prices on the 3,000,000
warrants was reduced to $0.24 per share. In addition, up to 5,000,000 Class C
warrants (the "Additional Warrants") may be issued if the full funding amount of
$785,000 ("Target Level") is used by Service Systems. Should the funding
provided be less or more than the Target Level, the number of Additional
Warrants will be increased or decreased proportionately. Up to the date of this
report a total of 105,000 Additional warrants had been issued. The exercise
price for the Additional Warrants is also $0.24 per share. All warrants issued
to US Filter may be exercised any time after October 31, 2001. The Warrants may
be exercised until October 10, 2010.
If the Strategic Alliance Agreement is terminated for convenience, the warrants
will expire on the second anniversary of the effective date of the termination
for convenience. In addition, on January 25 of each year during the term of the
Strategic Alliance Agreement, Service Systems will grant to U.S. Filter
additional warrants to purchase Service Systems common stock, based upon the
orders for Systems booked or significantly influenced by U.S. Filter during the
preceding 12 months. Provided at least US$1,000,000 of orders for Systems have
been booked or influenced, each warrant will permit U.S. Filter to purchase
50,000 shares and also 500 shares for each US$10,000 of orders for Systems
booked or significantly influenced by U.S. Filter in excess of US$1,000,000
during the preceding 12 months.
Registration Rights Agreement.
Service Systems and U.S. Filter also entered into a Registration Rights
Agreement. The Registration Rights Agreement entitles U.S. Filter to demand
registrations (two long form registrations and, if available, short form
registrations at specified intervals) and piggyback registrations for the shares
of Service Systems common stock issued upon exercise of the warrants.
Security Agreement.
Service Systems and UV Systems have granted to U.S. Filter a security interest
in certain rights in and to their patents, trademarks, trade secrets,
copyrights, soft ware and know how, and contracts related to the use or
exploitation of these rights in connection with the sale, distribution,
promotion, marketing or manufacture of Systems for installation within the
Territory. The security interest secures an obligation to make a $100,000
payment under the Strategic Alliance Agreement upon a termination by
convenience, or a termination, rejection, disclaiming or repudiation of the
License Agreement in connection with insolvency proceedings.
Service Systems believes the Strategic Alliance with US Filter will benefit
Service Systems through a reduction of operating and working capital, as US
Filter will be responsible for sales and marketing expenses and after sales
costs associated with start up, installation support and ongoing service, among
other things. Due to the operational cost reduction, margin expectations remain
consistent with those contemplated before the signing of the Agreement.
Page 19
With the signing of our Strategic Alliance Agreements and related agreements
with US Filter's Wallace and Tiernan Products Group on January 25, 2001, the
responsibility for marketing the Ultra Guard systems within the Exclusive
Territory was transferred to US Filter. The exclusive territory consists of
North, South and Central America and the Caribbean. At this time, a joint
determination is being made as to which of our agents will be retained by US
Filter, those not taken over will be terminated. US Filter's representative
companies will then have the responsibility for all our sales within the
Exclusive Territory.
In September 2001 we licensed the Korean company, VITROSYS, the exclusive rights
to manufacture and sell our SLR Ultraviolet disinfection systems within the
Republic of Korea and a non-exclusive right to manufacture and sell in other
territories not currently represented by Service Systems agents. VITROSYS will
pay a royalty on each UV system sold within the. The royalty fee is variable,
dependant on the selling price of the UV system. Under the License Agreement,
Service Systems will provide full manufacturing drawings, software technology
and expertise, and a specified number of hours of training at Service Systems'
facilities. As a requirement of the License Agreement, VITROSYS will be required
to purchase from Service Systems, a key component for each SLR system. This key
component is defined as the royalty verification component. Its purchase will
trigger a sale and resultant royalty payment liability. The Korean market for UV
is expected to increase as a result of legislation that will require all
municipal and Industrial wastewater to be disinfected.
During this quarter we made a major move to reduce our overheads. Having
completed the delivery of the UV systems that were produced during 2000 to
January 2002, we searched out a partner to work with on production of future UV
systems orders. We were fortunate to find The Clearwater Group for this purpose.
Clearwater is engaged in the water industry, targeting the treatment of potable
water for smaller towns to which they provide complete packaged treatment
plants. Clearwater will assume the manufacturing of new UV project supplying
these to our Strategic Alliance partner, USFilter. Clearwater will also provide
warranty services on the previously delivered UV products. Service Systems will
be paid a royalty on sales, the percentage being related to sales volume. This
association with Clearwater as our manufacturing partner permitted the company
to move from its' factory and reduce staff level in production, engineering and
support. A number of key production staff moved to the Clearwater facility to
assist in setting up for this manufacturing responsibility. The remaining staff
at Service Systems works in a liaison and support role between USFilter and
Clearwater.
We anticipate recent US and world events will accelerate the use of ultraviolet
products for use in drinking water applications, and as well, in air treatment,
both for surface and ventilation. As a result of this, our company has started
research and development of products to be used in these applications. UV units
for the drinking water market will target application such as point of entry
(POE) and point of use (POU). POE UV systems will treat water at the entry point
into single-family homes or apartment complex. POU systems will treat water at
selected points within the home using a system installed under the sink. Both
POE and POU will use of various combinations of filters and an ultraviolet
sterilizer. Additional types of systems that are being looked at for
exploitation are; 1) Air systems for ventilation will use ultraviolet lamps and
filtration, installed within ventilation ducts, and; 2) Surface disinfections
systems which will use ultraviolet systems mounted above and/or under conveyors
to disinfect articles such as food and drink packaging container while moving on
the conveyor. Other applications could include external disinfection of mail or
packages mounted on a conveyor. Ultraviolet will not penetrate the envelope or
the wrappings to disinfect the contents of the package but is applicable to
external surface disinfection.
Page 20
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED March 31, 2002.
Three months ended March 31, 2002 compared to the three months ended March 31,
2001.
Revenues. During the first quarter of fiscal 2002, we reported revenues
of $34,893 compared to revenues of $407,719 being reported in the first quarter
of fiscal 2001, a decrease of $372,826 or 91%. The decrease was as a result of
the reduced activity in the sales and manufacturing of projects as they have
been completed and shipped in the prior fiscal year.
Direct Project Costs. Project costs recorded during the first quarter of
fiscal 2002 amounted to $31,636 compared to $240,715 during the first quarter of
fiscal 2001, a decrease of $209,079 or 87%. The decrease of costs incurred
resulted from reduced production activity due to decrease in sales.
Gross Profit before adjustment. Gross profits dropped to $3,257 during
the first quarter of fiscal 2002, compared to $167,004 recorded during the first
quarter of fiscal 2001. The decrease was due to the decrease in sales.
Additional Project Costs. During the first quarter of fiscal 2002,
additional costs incurred relating to systems shipped in 2001 amounted to
$55,578 as compared to nil or 100% increase over the comparable period of the
prior fiscal period.
Manufacturing Costs Not Applied. Manufacturing costs not applied are
annual plant overhead costs that are not being charged against contracts. The
balance not charged is identified as manufacturing cost not applied. For the
first quarter of fiscal 2002, we reported $21,932 of these costs, a decrease of
$10,920 or (99%), from $11,012 in the comparable period of the prior year. This
decrease occurred due to lack of sales in the first quarter, which resulted in
the overhead costs not applied directly against project costs. 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 2002, we reported
selling expenses of $37,441, a decrease of $29,166, or 44%, from $66,607
reported in the comparable period of the prior year. The decrease was due mainly
to the lack of activity in Marketing that resulted in reduced expenses of
$45,584. This $45,584 decrease was reduced by the recording in the first quarter
of 2002 of the stock based compensation of $16,418 resulting from the Strategic
Alliance signed with USFilter/WT.
General and Administrative Expense. For the first quarter of fiscal 2002,
we reported general and administrative expense of $163,486, a decrease of
$42,544, or 21% from $206,030 reported in the comparable period of the prior
year. This decrease resulted primarily in the decreased legal fees, decreased
finders fees paid to fund raisers and a recovery of bad debts from an account
that was written off in the prior years.
Research and Development Expense. For the first quarter of fiscal 2002,
we reported research and development expense of $16,096, a decrease of $66,356,
or 80%, from $82,452 in the comparable period of the prior fiscal period. The
decrease in R & D activities was due to the reduction of costs related to the
development of the of the Single Lamp Reactor UV system. Cost include items such
as design, engineering and prototyping expenses for mechanical and structural
components as well as printed circuit boards and computer based software for the
web based operating system of the single lamp reactor product. These costs and
all other R & D activities were fully expensed during the fiscal 2001 and 2002.
Page 21
Amortization of Goodwill. For the first quarter of fiscal 2002, there was
no amortization of goodwill as it had been fully amortized in the fourth quarter
of 2001 compared to the $121,270 for the comparable period of the prior fiscal
period. The goodwill resulted from our acquisition of a majority interest in our
subsidiary, UVS.
Interest, Net of Interest Income. For the first quarter of fiscal 2002,
we reported interest, net of interest income, of $27,756, an increase of
$11,708, or 73%, from $16,048 reported in the comparable prior fiscal period.
The increase was due to interest costs on additional loans required to fund
manufacturing to complete shipments during the quarter 2002.
Foreign Exchange Translation Loss. For the first quarter of fiscal 2002,
we reported a foreign exchange translation loss of $5,947, a decrease of $5,832,
or 50%, over $11,779 in the comparable prior fiscal period.
Net Loss for the Period. For the first quarter of fiscal 2002, we reported
a net loss for the period of $324,979, a decrease of $23,215, or 7% over
$348,194 in the comparable period of fiscal 2001. The decrease in net loss was
due primarily to goodwill having been fully amortized in the prior fiscal year,
recovery of bad debts, decrease in the loss in foreign exchange accounts and
reduced activity which resulted in decreased general and administrative
expenses, decreased engineering and prototyping expenses, decreased selling
expenses, in spite of the fact that there was a reduction of gross profit from
lack of sales during the first quarter of 2002, compared to the amortization of
goodwill during the comparable period of the prior fiscal period.
Net Loss per Share. For the first quarter of fiscal 2002, we reported a
net loss per share for the period of $0.01, a decrease of $0.01, or 100%, from
$0.02 in the comparable period of prior year. The net loss per share decreased
mainly as a result of the net loss being allocated over an increased number of
shares outstanding and share equivalents in fiscal 2002 and partly due to the
decrease in net loss.
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 royalty receivables 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 systems to governmental entities outside of the
Strategic Alliance distribution area 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.
Page 22
We financed our operations during this fiscal period from short-term loans,
loans from related parties and minority shareholders of Service Systems, and
from the proceeds of a Funding Agreement entered into on June 1, 2001 with
USFilter/Wallace & Tiernan Inc. During this fiscal period USFilter/Wallace &
Tiernan Inc. has provided about $47,088 in project funding. The funds advanced
by USFilter/Wallace & Tiernan Inc. will be repaid from customer payments
received on completion of the installation.
We expect that during fiscal 2002, sales should increase, as a result of the
signed Strategic Alliance with US Filter, the relationship established with The
Clearwater Group and our Korean Licensee. We expect these activities will
generate royalty revenues in the later part of 2002. Also, 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 already covered and in potable water industry activities. Except
as previously indicated and although arrangements have not been completed to
raise funds we continue to actively seek funding sources. Failure to receive
these funds may be expected to have a material adverse effect on our company.
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
Service Systems issued the following shares of common stock to two Canadian
employees under the Employee Stock Option Plan - S-8 filed on October 6, 1997.
Date Shares Residence/ Consideration Exemption
Exemption Citizenship Valued at
- ------------------------------------------------------------------------------------------
25 Jan 2002 16,564 Canadian Exercised Options
for services valued at $1,656.40 S-8*
*Registered on Form S-8 on October 6, 1997
Page 23
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 Method of Filing
(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)
Page 24
(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)
(10)(xvi) Amended Long Term Equity Incentive
Plan (10)
(10)(xvii) Strategic Alliance Agreement Between
Service Systems, UV Technology, Inc.
And US Filter dated January 25, 2001 (9)
(10)(xviii) Letter Agreement between Service Systems,
UV Technology, Inc. and US Filter dated
June 1, 2001 (11)
(11) Statement Regarding Computation Filed Herewith
of Per Share Earnings Electronically
(21) Subsidiaries of the Corporation:
UV Systems Technology, Inc.,
incorporated in British Columbia,
Canada (4)
(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
(9) Incorporated by reference to the Corporation's Form 8-K filed February
27, 2001
(10) Incorporated by reference to the Corporation's Form 10QSB for the fiscal
quarter ended March 31, 2001
(11) Incorporated by reference to the Corporation's Form 8-K filed June 18,
2001
(b) Reports on Form 8-K
None filed
Page 25
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant caused this registration statement to be signed on its behalf by
the undersigned, thereunto duly authorized.
SERVICE SYSTEMS INTERNATIONAL, LTD.
/s/ Kenneth R. Fielding
--------------------------------
Kenneth R. Fielding, President
Date: June 17 ,2002 /s/ Ken Fielding
---------------------
Ken Fielding, President
Date: June 17, 2002 /s/ John R. Gaetz
----------------------
John R Gaetz, Principal Financial Officer
Page 26
EXHIBIT 11
Service Systems International, Ltd.
Computation of Per-Share Income
Treasury Stock Method
As Modified for 20% Test
Period Ended March 31, 2002
---------------------------
Weighted average number of shares outstanding 26,904,165
==========
Total common and common equivalent shares 26,904,165
==========
Net income (loss) for the period $ (324,979)
===========
Loss per common and common equivalent shares $ (0.01)
===========
Earnings per share:
The earnings per share are 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.