UNITED STATES
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 MARCH 31, 2003
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or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE EXCHANGES ACT
For the transition period from to
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Commission file number 000-14646
CLEAN SYSTEMS TECHNOLOGY GROUP, LTD.
(Exact name of Small Business Issuer as Specified in Its Charter)
NEW YORK 06-1113228
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
4 Ashlagan Street, P.O. Box 8624,
Kiryat Gat, Israel 82021
------------------ -----
(Address of principal executive offices) (Zip Code)
011 972 8 660 2108 (Issuer's telephone number, including area code)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
The number of shares outstanding of the registrant's Common Stock, $0.01
Par Value, on May 30, 2003 was 42,766,540 shares.
Transitional Small Business Disclosure Format (check one):
Yes No X
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TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Page Number
Item 1. Financial Statements...........................................4-11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operation........................11-16
Item 3. Controls and Procedures.......................................16
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.............................................17
Item 6. Exhibits and Reports on Form 8-K..............................17
Signature Page................................................18
-2-
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-QSB contains forward-looking statements as
defined by the Private Securities Litigation Reform Act of 1995. Forward-looking
statements include statements concerning plans, objectives, goals, strategies,
future events or performance and underlying assumptions and other statements,
which are other than statements of historical facts. These statements are
subject to uncertainties and risks including, but not limited to, product and
service demand and acceptance, changes in technology, economic conditions, the
impact of competition and pricing, government regulation, and other risks
defined in this document and in statements filed from time to time with the
Securities and Exchange Commission. These cautionary statements and any other
cautionary statements that may accompany the forward-looking statements
expressly qualify all such forward-looking statements. In addition, Clean
Systems Technology Group, Ltd. disclaims any obligation to update any
forward-looking statements to reflect events or circumstances after the date
hereof.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheet as of March 31, 2003 (Unaudited)........4
Consolidated Statements of Operations for the three months
ended March 31, 2003 (Unaudited) and 2002 (Unaudited).........5
Consolidated Statement of Shareholders' Deficit for the three
months ended March 31, 2003 (Unaudited).......................6
Consolidated Statements of Cash Flows for the three months
ended March 31, 2003 (Unaudited) and 2002 (Unaudited)........7-8
Notes to the Consolidated Financial Statements (Unaudited)........9-11
-3-
CLEAN SYSTEMS TECHNOLOGY GROUP, LTD.
CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 2003.
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
ASSETS:
CURRENT ASSETS:
Cash and cash equivalents $ 15
Accounts receivable - net 2,529
Inventory 2,442
Refundable value added tax 108
Employee advances 18
Deferred taxes 39
Other 148
-------
TOTAL CURRENT ASSETS 5,299
PROPERTY AND EQUIPMENT - NET 1,634
OTHER ASSETS 219
-------
TOTAL ASSETS $ 7,152
=======
LIABILITIES AND SHAREHOLDERS' DEFICIT:
CURRENT LIABILITIES:
Short-term bank borrowings $ 562
Bank line of credit 520
Accounts payable 2,091
Accrued compensation 632
Accrued expenses 348
Short-term loans 372
Short-term loan - related party 103
Other liabilities 68
-------
TOTAL CURRENT LIABILITIES 4,696
-------
CONVERTIBLE NOTES 1,361
-------
LONG-TERM BANK DEBT 1,366
-------
COMMITMENTS AND CONTINGENCIES --
-------
SHAREHOLDERS' DEFICIT:
Common stock, $.01 par value, 110,000,000 shares authorized,
42,766,087, issued and outstanding 428
Additional paid-in capital 428
Accumulated deficit (1,127)
-------
TOTAL SHAREHOLDERS' DEFICIT (271)
-------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT $ 7,152
=======
See Notes to the Consolidated Financial Statements.
-4-
CLEAN SYSTEMS TECHNOLOGY GROUP, LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
THREE MONTHS ENDED
MARCH 31,
2 0 0 3 2 0 0 2
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REVENUES $ 1,352 $ 3,099
COST OF REVENUE 779 1,757
------------ ------------
GROSS PROFIT 573 1,342
OPERATING EXPENSES:
Selling, general and administrative 327 515
------------ ------------
INCOME FROM OPERATIONS 246 827
INTEREST EXPENSE 170 36
OTHER (EXPENSE) (21) (275)
------------ ------------
INCOME BEFORE PROVISION FOR INCOME TAXES 55 516
PROVISION FOR INCOME TAXES 7 10
------------ ------------
NET INCOME $ 48 $ 506
============ ============
NET INCOME PER SHARE - BASIC $ -- $ .01
============ ============
NET INCOME PER SHARE - DILUTED $ -- $ .01
============ ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES - BASIC 42,766,087 42,766,087
============ ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES - DILUTED 44,321,516 43,809,087
============ ============
See Notes to the Consolidated Financial Statements.
-5-
CLEAN SYSTEMS TECHNOLOGY GROUP, LTD.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' DEFICIT
(UNAUDITED)
(IN THOUSANDS, EXCEPT NUMBER OF SHARE DATA)
COMMON STOCK ADDITIONAL TOTAL
NUMBER PAID-IN ACCUMULATED SHAREHOLDERS'
OF SHARES AMOUNT CAPITAL DEFICIT DEFICIT
BALANCE DECEMBER 31, 2002 42,766,087 $ 428 $ 428 $ (1,175) $ (319)
Net Income -- -- -- 48 48
---------- ---------- ---------- ---------- ----------
BALANCE MARCH 31, 2003 42,766,087 $ 428 $ 428 $ (1,127) $ (271)
========== ========== ========== ========== ==========
See Notes to the Consolidated Financial Statements.
-6-
CLEAN SYSTEMS TECHNOLOGY GROUP, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
THREE MONTHS ENDED
MARCH 31,
2 0 0 3 2 0 0 2
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OPERATING ACTIVITIES:
Net income $ 48 $ 506
Adjustments to reconcile net income to net cash
(used for) operating activities:
Amortization and depreciation 85 65
Gain from the sale of property and equipment 10 --
Change in accrued severance pay - net (9) 6
Other 27 7
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable - net (802) (306)
Accounts receivable - related party -- 103
Inventory (35) 33
Costs incurred in excess of billings on contracts in progress -- (992)
Refundable value added tax 16 (10)
Employee advances 3 7
Deferred taxes (2) (2)
Other current assets (46) (55)
Increase (decrease) in:
Accounts payable 363 (106)
Accrued compensation (95) (29)
Accrued expenses 31 (76)
Other liabilities 20 36
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NET CASH - OPERATING ACTIVITIES (386) (813)
------- -------
INVESTING ACTIVITIES:
Acquisition of property and equipment -- (331)
Proceeds from sale of property and equipment 44 --
Investment in unconsolidated subsidiary -- (94)
Other assets (3) (2)
------- -------
NET CASH - INVESTING ACTIVITIES 41 (427)
------- -------
FINANCING ACTIVITIES:
Proceeds from short-term loans 382 --
Proceeds from convertible notes -- 673
Changes in bank line of credit - net 3 623
Repayment of short-term loans - net -- (68)
Repayment of short-term bank borrowings (48) --
Deferred loan costs -- (72)
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NET CASH - FINANCING ACTIVITIES 337 1,156
------- -------
NET [DECREASE] IN CASH AND CASH EQUIVALENTS - FORWARD $ (8) $ (84)
See Notes to the Combined Financial Statements.
-7-
CLEAN SYSTEMS TECHNOLOGY GROUP, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
THREE MONTHS ENDED
MARCH 31,
2 0 0 3 2 0 0 2
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NET [DECREASE] IN CASH AND CASH EQUIVALENTS - FORWARD $ (8) $ (84)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIODS 23 107
----- -----
CASH AND CASH EQUIVALENTS - END OF PERIODS $ 15 $ 23
===== =====
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for:
Interest $ 106 $ 33
Income taxes $-- $--
See Notes to the Consolidated Financial Statements.
-8-
CLEAN SYSTEMS TECHNOLOGY GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE AND
PER SHARE DATA OR AS OTHERWISE NOTED)
[1] BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Clean Systems
Technology Group, Ltd. (the "Company") have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-QSB and Item 310(b) of Regulation S-B.
Accordingly, they do not include all information and footnotes required by
generally accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments [consisting of normal recurring
accruals] considered necessary in order to make the interim financial statements
not misleading have been included. Results for the three months ended March 31,
2003 are not necessarily indicative of the results that may be expected for the
year ended December 31, 2003. These interim consolidated financial statements
should be read in conjunction with the consolidated financial statements and
footnotes thereto of the Company and management's discussion and analysis of
financial condition and results of options included in the Company's annual
report on Form 10-KSB for the year ended December 31, 2002.
On October 17, 2001, Entertainment International Ltd. ("ENTI"), through its
wholly-owned subsidiary ENTI Acquisition I Corp., closed a transaction (the
"Transaction") providing for the acquisition of CSTI Hi-Tec, Ltd. an Israeli
corporation. All of the issued and outstanding shares of CSTI Hi-Tec, Ltd. were
exchanged for shares of ENTI's unregistered restricted common stock.
Simultaneously with the closing, the Board of Directors authorized a one for
twenty reverse stock split of all ENTI's issued and outstanding common stock.
All references in the accompanying consolidated financial statements to the
number of shares have been restated to reflect the reverse stock split.
For accounting purposes, the Transaction has been treated as a recapitalization
of CSTI Hi-Tec, Ltd., with CSTI Hi-Tec, Ltd. as the acquirer. The shares issued
in the Transaction are treated as being issued for cash and are shown as
outstanding for all periods presented in the same manner as for a stock split.
The consolidated financial statements reflect the results of operations of CSTI
Hi-Tec, Ltd. and its subsidiaries and ENTI as of and for the three months ended
March 31, 2003 and 2002. Pro forma information on the Transaction is not
presented as, at the date of the Transaction, ENTI was considered a public shell
and accordingly, the Transaction was not considered a business combination. On
December 27, 2001, ENTI amended its certificate of incorporation to change its
name from Entertainment International, Ltd. to Clean Systems Technology Group,
Ltd. (the "Company" or "CSTI").
[2] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting policies followed by the Company are set forth in Note 2 to the
Company's consolidated financial statements included in the Company's Form
10-KSB for the year ended December 31, 2002.
USE OF ESTIMATES - The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, the disclosure of contingent assets and
liabilities and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Significant estimates include the Company's estimate of allowance for doubtful
accounts and its revenue recognition policy using the percentage of completion
method of accounting for contracts.
-9-
CLEAN SYSTEMS TECHNOLOGY GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE AND
PER SHARE DATA OR AS OTHERWISE NOTED)
[2] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [CONTINUED]
REVENUE RECOGNITION - The Company follows the percentage-of-completion method of
accounting for contracts that extend for periods in excess of one year.
Accordingly, income is recognized in the ratio that costs incurred bears to
estimated total costs. Where contracts in progress are subject to negotiation
and it is probable that the additional costs will be recovered, none of the
costs are recognized in the income statement until pricing has been approved.
Similarly, the revenue is not recognized until realization is assured beyond a
reasonable doubt. Adjustments to cost estimates are made periodically, and
losses expected to be incurred on contracts in progress are charged to
operations in the period such losses are determined. The aggregate of cost
incurred on contracts in progress in excess of related billings is shown as a
current asset, and the aggregate of billings on contracts in progress in excess
of related costs incurred as shown as a current liability.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS - In April 2003, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial Account
Standards No. 149, "Amendment of Statement 133 on Derivative Instruments and
Hedging Activities" ("SFAS 149"), which clarifies financial accounting and
reporting for derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities under FASB Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No.
149 is effective for contracts entered into or modified after June 30, 2003 and
for hedging relationships designated after June 30, 2003. The Company expects
that the adoption of SFAS 149 will not have a significant impact on its
financial statements.
In May 2003 SFAS No. 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity was issued. The Statement
improves the accounting for certain financial instruments that under
previous guidance, issuers could account for as equity. The new Statement
requires that those instruments be classified as liabilities in statements
of financial position.
SFAS No. 150 affects the issuer's accounting for three types of
freestanding financial instruments. One type is mandatorily redeemable
shares, which the issuing company is obligated to buy back in exchange for
cash or other assets. A second type, which includes put options and forward
purchase contracts, involves instruments that do or may require the issuer
to buy back some of its shares in exchange for cash or other assets. The
third type of instruments that are liabilities under this Statement is
obligations that can be settled with shares, the monetary value of which is
fixed, tied solely or predominantly to a variable such as a market index, or
varies inversely with the value of the issuers' shares.
Most of the guidance in Statement SFAS No. 150 is effective for all
financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. It is not possible to quantify the impact on
its financial statements until the newly issued statement has been studied.
[3] INVENTORY
Inventory, which consists of raw materials, is valued at the lower of cost or
market. Cost is determined by the weighted average method.
[4] NET INCOME PER SHARE
Earnings per share are calculated in accordance with the provisions of Statement
of Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"). SFAS 128
requires the reporting of both basic earnings per share, which is the
weighted-average number of common shares outstanding, and diluted earnings per
share, which includes the weighted-average number of common shares outstanding
and all dilutive potential common shares outstanding, utilizing the treasury
stock method. For the three months ended March 31, 2003 and 2002, the shares
issued in the Transaction are treated as outstanding for all periods presented.
For the three months ended March 31, 2003 and 2002, dilutive potential common
shares outstanding reflect shares issuable under convertible notes [See Note 5].
Share and per share amounts reflect the effect of the one for twenty reverse
stock split in October 2001.
[5] CONVERTIBLE NOTES
Principal amounts of the notes may be converted by the holder after eighteen
months into shares of Company common stock, at a conversion price of $0.875 per
share, at any time from issuance until eighteen months have passed since
issuance. The notes automatically convert into shares of Company common stock at
a price equal to $0.875, subject to adjustment. The adjustment entitles the
noteholders to receive consideration at least equal to the original principal
amount of the note plus accrued interest at eight percent per annum from the
date of issuance. The consideration may be paid in cash or common stock at the
sole discretion of the Company. At March 31, 2003, the outstanding balance plus
accrued interest aggregated $1,361.
-10-
CLEAN SYSTEMS TECHNOLOGY GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE AND
PER SHARE DATA OR AS OTHERWISE NOTED)
[6] OTHER (EXPENSE)
Aggregate amounts in other (expense) are primarily the result of foreign
currency translation adjustments. Substantially all of the Company's sales are
made in U.S. dollars. In addition, a substantial portion of the Company's costs
are incurred in U.S. dollars. Since the U.S. dollar is the primary currency in
the economic environment in which the Company operates, the U.S. dollar is its
functional currency.
During the three months ended March 31, 2003, certain assets and liabilities
were denominated in NIS while the payments to suppliers were linked to the U.S.
dollar.
[7] GEOGRAPHIC REPORTING
Revenues by geographic classifications are as follows:
[IN U.S. $ THOUSANDS]
-------------------
ISRAEL ITALY INDIA FRANCE TOTAL
For the period ended March 31, 2003 $1,110 $ 15 $ -- $ 227 $1,352
For the period ended March 31, 2002 $3,007 $ 74 $ 18 $ -- $3,099
. . . . . . . . . .
-11-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
When used in this Form 10-QSB and in future filings by Clean Systems with the
Securities and Exchange commission, the words or phrases "will likely result"
and "the company expects," "will continue," "is anticipated," "estimated,"
"project," or "outlook" or similar expressions are intended to identify
"forward-looking statements." Clean Systems wishes to caution readers not to
place undue reliance on any such forward-looking statements, each of which speak
only as of the date made. Such statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from
historical earnings and those presently anticipated or projected. Clean Systems
has no obligation to publicly release the result of any revisions which may be
made to any forward-looking statements to reflect anticipated or unanticipated
events or circumstances occurring after the date of such statements.
OVERVIEW
CSTI designs, engineers, manufactures, installs and services ultra high purity
systems for transportation of clean gases and liquids from the source, where the
gases and liquids are stored, to the point of use for the following processing
industries:
o Micro-electronics (semi conductors);
o Optical fibers;
o Pharmaceuticals and Bio-technology; and
o Metal Blades.
CSTI product lines provide a total solution for the four major gas and chemical
systems from source to the point of use referenced above. Since the gases and
the chemicals are pure and extremely dangerous, the systems that CSTI
manufactures must have the highest levels of safety and quality.
CSTI products are divided into three main categories:
o Systems for ultra high purity gases from source to point of use;
o Pre-manufactured products sub-systems; and
o System upgrades.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
This discussion and analysis of the Company's financial condition and results of
operations are based on its consolidated financial statements that have been
prepared under accounting principles generally accepted in the United States of
America. 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, the
disclosure of contingent assets and liabilities and the reported amounts of
revenue and expenses during the reporting period. Actual results could differ
from those estimates. All significant accounting policies are disclosed in note
2 to the consolidated financial statements included in Form 10-KSB. The
consolidated financial statements and the related notes thereto should be read
in conjunction with the following discussion of the Company's critical
accounting policies. Critical accounting policies and estimates are:
o Revenue Recognition
o Use of Estimates
-12-
REVENUE RECOGNITION - The Company follows the percentage-of-completion method of
accounting for contracts that extend for periods in excess of one year.
Accordingly, income is recognized in the ratio that costs incurred bears to
estimated total costs. Where contracts in progress are subject to negotiation
and it is probable that the additional costs will be recovered, none of the
costs are recognized in the income statement until pricing has been approved.
Similarly, the revenue is not recognized until realization is assured beyond a
reasonable doubt. Adjustments to cost estimates are made periodically, and
losses expected to be incurred on contracts in progress are charged to
operations in the period such losses are determined. The aggregate of cost
incurred on contracts in progress in excess of related billings is shown as a
current asset, and the aggregate of billings on contracts in progress in excess
of related costs incurred as shown as a current liability.
USE OF ESTIMATES - The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, the disclosure of contingent assets and
liabilities and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS - In April 2003, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial Account
Standards No. 149, "Amendment of Statement 133 on Derivative Instruments and
Hedging Activities" ("SFAS 149"), which clarifies financial accounting and
reporting for derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities under FASB Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No.
149 is effective for contracts entered into or modified after June 30, 2003 and
for hedging relationships designated after June 30, 2003. The Company expects
that the adoption of SFAS 149 will not have a significant impact on its
financial statements.
RESULTS OF OPERATIONS
The following table sets forth, as a percentage of total revenue, certain
consolidated statements of operations data for the periods indicated. These
operating results are not necessarily indicative of the results for any future
period.
THREE MONTHS ENDED MARCH 31,
----------------------------
2 0 0 3 2 0 0 2
------- -------
Revenues 100 % 100 %
-------- ----- -----
Cost of Revenues 58 % 57 %
Gross Profit 42 % 43 %
Selling General and Administrative 24 % 16 %
Income from Operations 18 % 27 %
Interest Expense 12 % 1 %
Other (Expense) (2)% (9)%
Income Before Taxes on Income 4 % 17 %
Income Taxes -- % -- %
Net Income 4 % 17 %
-13-
THREE MONTHS ENDED MARCH 31, 2003 COMPARED WITH THREE MONTHS ENDED
MARCH 31, 2002
(AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED)
REVENUES
Revenues in 2003 of $1,352 decreased $1,747 (or 57%) from $3,099 in 2002.
Management's strategic decision is to continue to be a premier industry leader
in Israel as well as to continue to gain market share in the European and
Central Asian markets. During the three months ended March 31, 2003 and 2002,
revenues to customers in Israel amounted to $1,110 and $3,007, respectively.
Revenues to non-domestic customers amounted to $242 and $92 for the three months
ended March31, 2003 and 2002, respectively. In general, the Company is not
dependent upon any single customer or group of customers. The nature of the
Company's business is such that it works on several large contracts at any one
time. Therefore, several customers may comprise a significant portion of CSTI's
revenues during any fiscal period. Once the Company installs a system for its
customer, the customer is generally dependent on the Company for future upgrades
of that system.
COST OF REVENUES
The following table sets forth a comparison of the costs of revenues for the
periods indicated:
THREE MONTHS ENDED
MARCH 31,
2 0 0 3 2 0 0 2
------- -------
Cost of materials and inventory $243 $862
Salaries, Subcontractors and related expenses 279 696
Cost of service abroad 55 39
Rent and taxes 49 22
Vehicles and transportation 53 74
Equipment maintenance and insurance 42 9
Depreciation and Amortization 52 44
Miscellaneous 6 11
---- ----
Cost of Revenues $ 779 $ 1,757
===== =======
Cost of revenues has decreased by $0.98 million (or 55.7%) to $0.78 million in
2003 from $1.76 million in 2002. The decrease is in line with the overall
decline in Company revenues. The purchase cost of materials did not
significantly increase in 2003 over 2002. Materials, inventory costs and labor
as a percentage of revenues was 39% in 2003 as compared to 50% in 2002. The
average number of employees during 2003 was 65 as compared to 145 for 2002.
Other costs such as rent and taxes, transportation, equipment maintenance and
insurance and depreciation have changed in relative proportion to the decrease
in revenues.
GROSS PROFIT
Gross profit has decreased by $769 (or 57%) to $573 in 2003 from $1,342 in 2002.
Gross profit margins remained consistent at 42% in 2003 versus 43% in 2002.
-14-
SELLING, GENERAL AND ADMINISTRATIVE
The following table sets forth details regarding selling, general and
administrative expenses for the periods indicated:
THREE MONTHS ENDED
MARCH 31,
2 0 0 3 2 0 0 2
------- -------
Salaries and related expenses $ 78 $243
Professional fees 105 94
Telephone and office maintenance 53 51
Travel vehicles and transportation 10 46
Depreciation 33 21
Sales and marketing 48 60
---- ----
$327 $515
==== ====
Selling, General and Administrative Expenses ("SG&A") have decreased $0.19
million (or 36.5%) to $0.33 million in 2003 from $0.51 million in 2002. The
decrease is primarily attributable to the termination of three senior employees
at end of 2002.
INTEREST EXPENSE
Interest expense increased by $134 to $170 in 2003 from $36 in 2002. The
increase is primarily attributable to a higher level of outstanding debt in 2003
as compared to 2002.
OTHER INCOME (EXPENSE)
The decrease in other expense of $(254) to $(21) in 2003 as compared to an
expense of $(275) in 2002 is primarily the result of foreign currency
translation adjustments. Substantially all of the Company's sales are made in
U.S. dollars. In addition, a substantial portion of the Company's costs are
incurred in U.S. dollars. Since the U.S. dollar is the primary currency in the
economic environment in which the Company operates, the U.S. dollar is its
functional currency.
During the three months ended March 31, 2003 and 2002, certain assets and
liabilities were denominated in NIS while the payments to suppliers was linked
to the U.S. dollar.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2003, the Company had cash and cash equivalents of $15 as compared
to $23 at March 31, 2002.
Net cash used in operating activities was $386 for the three months ended March
31, 2003 as compared to $813 for the three months ended March 31, 2002. The use
of net cash for operating activities is primarily attributable to increases in
net accounts receivables and costs incurred in excess of billings. These cash
outflows were partially offset by the increase in net income.
Net cash used in investing activities was $41 and $(427) for the three months
ended March 31, 2003 and 2002, respectively. In 2002, the Company purchased real
estate property ($200) and an equity investment in an unconsolidated subsidiary
($100) versus 2003 in which there were no such cash outlays.
-15-
Net cash provided by financing activities was $337 and $1,156 for the three
months ended March 31, 2003 and 2002, respectively. The decrease was primarily
due to a lower level of new borrowings to support the Company's working capital
position in 2003 versus 2002.
The following summarizes certain financing outstanding as of March 31, 2003:
[a] Bank Guarantees - Certain customers require the Company to obtain bank
guarantees of a portion of the contract undertaken. The Company has an agreement
with the bank under which such guarantees are available. In the event the
Company is unable to perform all aspects of the contracts, the bank will make
contractual payments to customers and then seek reimbursement from the Company.
As of March 31, 2003, the bank had extended approximately $333 in guarantees to
five customers.
Subsequent to March 31, 2003, the Company issued an aggregate of $200
convertible notes with terms substantially the same as described in Note 5 of
the unaudited consolidated interim financial statements.
Assuming there is no significant change in the business, the Company believes
that additional funding such as described above and cash flow from operations
and will be sufficient to fund its needs for at least the next twelve months.
ITEM 3. CONTROLS AND PROCEDURES.
Our Chief Executive Officer and Chief Financial Officer have concluded, based on
their evaluation within 90 days of the filing date of this report, that our
disclosure controls and procedures are effective for gathering, analyzing and
disclosing the information we are required to disclose in our reports filed
under the Securities Exchange Act of 1934. There have been no significant
changes in our internal controls or in other factors that could significantly
affect these controls subsequent to the date of the previously mentioned
evaluation.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Other than as previously disclosed in the Company's Form 10-KSB, the Company is
not party to any other material legal proceedings.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
99.1 - Certification of Chief Executive Officer pursuant to the Sarbanes-Oxley
Act of 2002 99.2 - Certification of Chief Financial Officer pursuant to the
Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K.
There were no reports filed on Form 8-K during the quarter
ended March 31, 2003.
-17-
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on behalf by the undersigned, thereunto duly
authorized.
CLEAN SYSTEMS TECHNOLOGY GROUP, LTD.
Dated: June 2, 2003 By: /S/ JACOB LUSTGARTEN
-----------------------------------------
Jacob Lustgarten
Chief Executive Officer and
Chairman of the Board
Dated: June 2, 2003 By: /S/ YONA LIEBOWITZ
-----------------------------------------
Yona Liebowitz
Chief Financial Officer
-18-
CERTIFICATIONS
CERTIFICATION BY JACOB LUSTGARTEN PURSUANT TO SECURITIES EXCHANGE ACT
RULE 13A-14
I, Jacob Lustgarten, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Clean Systems
Technology Group, Ltd.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: June 2,, 2003
/S/ JACOB LUSTGARTEN
--------------------
CHIEF EXECUTIVE OFFICER AND CHAIRMAN
-19-
CERTIFICATION BY YONA LEIBOWITZ PURSUANT TO
SECURITIES EXCHANGE ACT RULE 13A-14
I, Yona Liebowitz, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Clean Systems
Technology Group, Ltd.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: June 2, 2003
/S/ YONA LIEBOWITZ
------------------
CHIEF FINANCIAL OFFICER
-20-
CERTIFICATION BY MEIR ELAZAR PURSUANT TO
SECURITIES EXCHANGE ACT RULE 13A-14
I, Meir Elazar, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Clean Systems
Technology Group, Ltd.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: June 2, 2003
/S/ MEIR ELAZAR
---------------
SECRETARY AND DIRECTOR
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