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 JUNE 30, 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
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(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 June 7, 2004 was 82,663,122 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.........................12-18
Item 3. Controls and Procedures........................................18
PART II - OTHER INFORMATION
Item 1. Legal Proceedings..............................................19
Item 6. Exhibits and Reports on Form 8-K...............................19
Signature Page.................................................20
-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 June 30, 2003
(Unaudited)....................................................4
Consolidated Statements of Operations for the three and six months
ended June 30, 2003 (Unaudited) and 2002 (Unaudited)...........5
Consolidated Statement of Shareholders' Equity (Deficit) for the six
months ended June 30, 2003 (Unaudited).........................6
Consolidated Statements of Cash Flows for the six months
ended June 30, 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 JUNE 30, 2003.
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
ASSETS:
CURRENT ASSETS:
Cash and cash equivalents $ 54
Accounts receivable - net 2,099
Inventory 2,280
Refundable value added tax 88
Employee advances 21
Deferred taxes 6
Other 278
-------
TOTAL CURRENT ASSETS 4,826
PROPERTY AND EQUIPMENT - NET 1,572
OTHER ASSETS 300
-------
TOTAL ASSETS $ 6,698
=======
LIABILITIES AND SHAREHOLDERS' EQUITY:
CURRENT LIABILITIES:
Short-term bank borrowings $ 925
Bank line of credit 77
Accounts payable 2,008
Accrued compensation 590
Accrued expenses 382
Short-term loans 447
Short term loans - related party 112
Deferred taxes 54
Other liabilities 52
-------
TOTAL CURRENT LIABILITIES 4,647
-------
LONG-TERM BANK DEBT 1,382
-------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value, 110,000,000 shares authorized,
53,693,851, issued and outstanding 537
Additional paid-in capital 2,102
Accumulated deficit (1,970)
-------
TOTAL SHAREHOLDERS' EQUITY 669
-------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 6,698
=======
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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------- --------
2 0 0 3 2 0 0 2 2 0 0 3 2 0 0 2
------- ------- ------- -------
REVENUES $ 980 $ 1,578 $ 2,332 $ 4,677
COST OF REVENUE 845 1,407 1,624 3,164
------------ ------------ ------------ -------------
GROSS PROFIT 135 171 708 1,513
OPERATING EXPENSES:
Selling, general and administrative 328 752 655 1,267
------------ ------------ ------------ -------------
[LOSS] INCOME FROM OPERATIONS (193) (581) 53 246
INTEREST EXPENSE 199 117 369 153
FINANCIAL COSTS 27 -- 27 --
OTHER EXPENSE (INCOME) 375 (24) 396 251
------------ ------------ ------------ -------------
INCOME (LOSS) BEFORE PROVISION FOR
INCOME TAXES (794) (674) (739) (158)
PROVISION FOR INCOME TAXES 49 2 56 12
------------ ------------ ------------ -------------
NET (LOSS) $ (843) $ (676) $ (795) $ (170)
============ ============ ============ =============
NET (LOSS) PER SHARE - BASIC $ (.02) $ (.02) $ (.02) $ --
============ ============ ============ =============
NET (LOSS) PER SHARE - DILUTED $ (.02) $ (.02) $ (.02) $ --
============ ============ ============ =============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES - BASIC 49,328,287 42,766,087 47,549,210 42,766,087
============ ============ ============ =============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES - DILUTED 49,328,287 42,766,087 47,549,210 42,766,087
============ ============ ============ =============
See Notes to the Consolidated Financial Statements.
-5-
CLEAN SYSTEMS TECHNOLOGY GROUP, LTD.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
(IN THOUSANDS, EXCEPT NUMBER OF SHARE DATA)
COMMON STOCK ADDITIONAL TOTAL
NUMBER PAID-IN ACCUMULATED SHAREHOLDERS'
OF SHARES AMOUNT CAPITAL DEFICIT EQUITY (DEFICIT)
BALANCE DECEMBER 31, 2002 42,766,087 $ 428 $ 428 $ (1,175) $ (319)
ISSUANCE RELATED TO CONVERSION
OF CONVERTIBLE NOTES 7,627,176 76 1,278 1,354
ISSUANCE OF NEW SHARES 3,300,588 33 396 429
NET (LOSS) (795) (795)
----------- ----------- ----------- ----------- -----------
BALANCE JUNE 30, 2003 53,693,851 $ 537 $ 2,102 $ (1,970) $ 669
=========== =========== =========== =========== ===========
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)
SIX MONTHS ENDED
----------------
JUNE 30,
--------
2 0 0 3 2 0 0 2
------- -------
OPERATING ACTIVITIES:
Net (loss) $ (795) $ (170)
Adjustments to reconcile net income to net cash
(used for) operating activities:
Amortization and depreciation 149 158
Gain from the sale of property and equipment 10 --
Change in accrued severance pay - net -- 23
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable - net (372) (914)
Accounts receivable - related party -- 129
Inventory 127 42
Costs incurred in excess of billings on contracts in progress -- (238)
Refundable value added tax 36 14
Employee advances -- 8
Deferred taxes 85 3
Other current assets (23) (202)
Increase (decrease) in:
Accounts payable 280 522
Accrued compensation (146) 48
Accrued expenses 40 (149)
Other liabilities 4 87
------- -------
NET CASH - OPERATING ACTIVITIES (605) (639)
------- -------
INVESTING ACTIVITIES:
Acquisition of property and equipment -- (443)
Proceeds from sale of property and equipment 44 --
Investment in unconsolidated subsidiary -- (94)
Other assets (57) (4)
------- -------
NET CASH - INVESTING ACTIVITIES (13) (541)
------- -------
FINANCING ACTIVITIES:
Proceeds from short-term loans - net 217 --
Proceeds from convertible notes -- 948
Changes in bank line of credit - net (88) 566
Repayment of short-term loans - net -- (157)
Proceeds of short-term bank borrowings 14 --
Deferred loan costs -- (117)
Common stock issuance 429 --
Proceeds from long term bank credit 86 --
Prepayment of long term bank credit (9) --
------- -------
NET CASH - FINANCING ACTIVITIES 649 1,240
------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS - FORWARD $ 31 $ 60
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)
SIX MONTHS ENDED
----------------
JUNE 30,
--------
2 0 0 3 2 0 0 2
------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS - FORWARD $ 31 $ 60
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIODS 23 107
---- ----
CASH AND CASH EQUIVALENTS - END OF PERIODS $ 54 $167
==== ====
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for:
Interest $152 $ 91
Income taxes $-- $ 12
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 six months ended June 30,
2003 are not necessarily indicative of the results that may be expected for the
year ending 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 operations 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 and six
months ended June 30, 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. 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 costs
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 January 2003, the Financial
Accounting Standards Board FASB issued FASB Interpretation No- 46 ("FIN 46"),
"Consolidation of Variable Interest Entities - an interpretation of ARB No. 51.
"FIN 46 requires existing unconsolidated variable interest entities to be
consolidated by their primary beneficiaries if the entities do not effectively
disperse risks among parties involved. FIN 46 applies immediately to variable
interest entities created after January 31, 200 and the variable interest
entities in which an enterprise obtains an interest after that date. It applies
in the first fiscal year or interim period beginning after June 15, 2003 to
variable interest entities in which an enterprise holds a variable interest that
it acquired before February 1, 2003. We believe that we have no unconsolidated
variable interest entities that would be considered under the requirements of
FIN 46.
In April 2003, the FASB issued Statement of Financial Accounting 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 September 30, 2003 and
for hedging relationships designated after September 30, 2003.
In May 2003, the FASB issued Statement of Financial Accounting Standards No.
150, "Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity" ("SFAS 150"), which established standards for how an
issuer classifies and measures certain financial instruments. SFAS 150 requires
that an issuer classify certain financial instruments as liabilities (or assets
in some circumstance) that were previously classified as equity. Financial
instruments which embody an unconditional obligation requiring the issuer to
redeem or repurchase it by the transfer of assets or by issuing a variable
number of its equity shares must be classified as a liability. SFAS 150 is
effective for 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.
We expect that the adoption of the new statements will not have a significant
impact on our financial statements.
[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.
-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)
[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 and six months ended June 30, 2003 and 2002, the
shares issued in the Transaction are treated as outstanding for all periods
presented.
[5] CONVERTIBLE NOTES
During the six months ended June 30, 2003, the Company did not issue any
convertible notes.
During the second quarter of 2003, 7,627,176 common shares were issued to
convert certain convertible notes issued during October 2001 to February 2002 by
several investors in the Company. According to the terms and conditions of the
notes, each note holder has received a number of shares which reflect his
investment plus interest of 8% annually for a period of 18 months.
According to section 4 of the notes the conversion rate was fixed at $ 0.1775 as
of May 15, 2003.
[6] ISSUANCE OF SHARES
During the second quarter of 2003, an aggregate of $402,000 was invested in the
Company in exchange for 3,300,588 shares of common stock.
[7] 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 six months ended June 30, 2003, certain assets and liabilities were
denominated in the new Israeli shekel while the payments to suppliers were
linked to the U.S. dollar. This caused a substantial translation adjustment due
to relative strength of the U.S. Dollar to the NIS in 2003.
[8] GEOGRAPHIC REPORTING
Revenues by geographic classifications are as follows:
[IN U.S. $ THOUSANDS]
ISRAEL ITALY INDIA FRANCE TOTAL
For the period ended June 30, 2003 $ 2,075 $ 30 $ -- $ 227 $ 2,332
For the period ended June 30, 2002 $ 4,406 $ 253 $ 18 $ - $ 4,677
-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 is based on its consolidated financial statements that have been
prepared under accounting principles generally accepted in the United States of
America. 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. 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 January 2003, the Financial
Accounting Standards Board FASB issued FASB Interpretation No- 46 ("FIN 46"),
"Consolidation of Variable Interest Entities - an interpretation of ARB No. 51.
"FIN 46 requires existing unconsolidated variable interest entities to be
consolidated by their primary beneficiaries if the entities do not effectively
disperse risks among parties involved. FIN 46 applies immediately to variable
interest entities created after January 31, 200 and the variable interest
entities in which an enterprise obtains an interest after that date. It applies
in the first fiscal year or interim period beginning after June 15, 2003 to
variable interest entities in which an enterprise holds a variable interest that
it acquired before February 1, 2003. We believe that we have no unconsolidated
variable interest entities that would be considered under the requirements of
FIN 46.
In April 2003, the FASB issued Statement of Financial Accounting 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 September 30, 2003 and
for hedging relationships designated after September 30, 2003.
In May 2003, the FASB issued Statement of Financial Accounting Standards No.
150, "Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity" ("SFAS 150"), which established standards for how an
issuer classifies and measures certain financial instruments. SFAS 150 requires
that an issuer classify certain financial instruments as liabilities (or assets
in some circumstance) that were previously classified as equity. Financial
instruments which embody an unconditional obligation requiring the issuer to
redeem or repurchase it by the transfer of assets or by issuing a variable
number of its equity shares must be classified as a liability. SFAS 150 is
effective for 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.
We expect that the adoption of the new statements will not have a significant
impact on our financial statements.
-13-
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 SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
--------------- ----------------
2003 2002 2003 2002
---- ---- ---- ----
% % % %
Revenues 100 100 100 100
---- ---- ---- ----
Cost of Revenues 86 89 70 68
Gross Profit 14 11 30 32
Selling General and Administrative 34 48 28 27
(Loss) Income from Operations (20) (37) 2 5
Interest Expense 20 8 16 3
Financial Costs 3 -- 1 --
Other (Income)Expense 38 (2) 17 5
Income (loss) Before Taxes on
Income (81) (43) (32) (3)
Income Taxes 5 -- 2 1
---- ---- ---- ----
Net (Loss) (86) (43) (34) (4)
==== ==== ==== ====
THREE MONTHS ENDED JUNE 30, 2003 COMPARED WITH THREE MONTHS ENDED JUNE 30, 2002
(AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED)
REVENUES
Revenues in 2003 of $980 decreased $598 (or 38%) from $1,578 in 2002. This
decrease was due to the general slow down in the Israeli economy and the
slowdown in particular in the industrial sector. 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 June 30, 2003 and 2002, revenues to customers in Israel amounted to
$965 and $ 1,399, respectively. Revenues to non-domestic customers amounted to
$15 and $179for the three months ended June 30, 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.
-14-
COST OF REVENUES
The following table sets forth a comparison of the costs of revenues for the
periods indicated:
THREE MONTHS ENDED
JUNE 30,
2 0 0 3 2 0 0 2
------- -------
Cost of materials and inventory $ 379 $ 443
Salaries, subcontractors and related expenses 305 692
Cost of service abroad 13 17
Rent and taxes 9 20
Vehicles and transportation 53 113
Equipment maintenance and insurance 43 61
Depreciation and Amortization 37 45
Miscellaneous 6 16
------ ------
Cost of Revenues $ 845 $1,407
====== ======
Cost of revenues has decreased by $562 (or 40%) to $845 in 2003 from $1,407 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 70% in 2003
as compared to 72% in 2002. The average number of employees during 2003 was 60
as compared to 140 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 $36 (or 21%) to $135 in 2003 from $171 in 2002.
Gross profit margins remained consistent at 14% in 2003 versus 11% in 2002.
SELLING, GENERAL AND ADMINISTRATIVE
The following table sets forth details regarding selling, general and
administrative expenses for the periods indicated:
THREE MONTHS ENDED
JUNE 30,
2 0 0 3 2 0 0 2
------- -------
Salaries and related expenses $ 99 $ 307
Professional fees 56 250
Telephone and office maintenance 101 72
Travel vehicles and transportation 9 38
Depreciation 24 22
Sales and marketing 39 63
--------- ---------
$ 328 $ 752
========= =========
Selling, General and Administrative Expenses ("SG&A") have decreased $424 (or
56%) to $328 in 2003 from $752 in 2002. The decrease is primarily attributable
to the termination of three senior positions at the end of 2002. Management also
instituted a cost cutting plan due to the decrease in revenue generating
activities.
INTEREST EXPENSE
Interest expense increased by $122 to $199 in 2003 from $77 in 2002. The
increase is primarily attributable to a higher level of outstanding debt in 2003
as compared to 2002.
-15-
OTHER INCOME (EXPENSE)
The increase in other expense of $399 to $375 in 2003 as compared to an income
of $24 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 June 30, 2003 and 2002, certain assets and
liabilities were denominated in NIS while the payments to suppliers was linked
to the U.S. dollar.
SIX MONTHS ENDED JUNE 30, 2003 COMPARED WITH THE SIX MONTHS ENDED JUNE 30,
2002(AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED).
REVENUES
Revenues in 2003 of $2,332 decreased $2,345 (or 50%) from $4,677 in 2002. This
decrease was due to the general slow down in the Israeli economy and the
slowdown in particular in the industrial sector. During the six months ended
June 30, 2003 and 2002, revenues to customers in Israel amounted to $2,075 and
$201, respectively. Revenues to Italian and other non-domestic costumers
amounted to $257 and $9,922 for the six months ended June 30, 2003 and 2002,
respectively.
COST OF REVENUES
The following table sets forth a comparison of the costs of revenues for the
periods indicated:
SIX MONTHS ENDED
JUNE 30,
2 0 0 3 2 0 0 2
------- -------
Cost of materials and inventory $ 622 $ 571
Salaries subcontractors and related expenses 584 1,388
Cost of service abroad 68 56
Rent and taxes 58 42
Vehicles and transportation 106 187
Equipment maintenance and insurance 85 70
Depreciation 89 89
Miscellaneous 12 27
Changes in work in process -- 734
------ ------
Cost of revenues $1,624 $3,164
====== ======
Cost of revenues has decreased by $1,540 (or 49%) to $1,624 in 2003 from $3,164
in 2002. The decrease is in line with the overall decline in Company revenues.
The purchase cost of materials increased 8% in 2003 over 2002. Materials,
inventory costs and labor as a percentage of revenues was 52% in 2003 as
compared to 42% in 2002 reflecting increased materials costs. The average number
of employees during 2003 was 60 as compared to 140 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 $805 to $708 in 2003 from $1,513 in 2002. Gross
profit percentage decreased to 30% in 2003 from 32% in 2002 due to the lower
margins attained on revenues in Israel due to the pricing environment. During
the six months ended June 30, 2003,a substantial portion of revenues was earned
in Israel as well as revenues earned in the comparative six month period for
2002. Further, the projects worked on in the first six months of 2003 were more
labor intensive than the materials intensive projects of the first six months of
2002.
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SELLING, GENERAL AND ADMINISTRATIVE
The following table sets forth details regarding selling, general and
administrative expenses for the periods indicated:
SIX MONTHS ENDED
JUNE 30,
2 0 0 3 2 0 0 2
------- -------
Salaries and related expenses $ 177 $ 550
Professional fees 161 269
Telephone and office maintenance 154 123
Travel vehicles and transportation 19 83
Depreciation 57 43
Sales and marketing 87 199
--------- -----------
$ 655 $ 1,267
========= ===========
Selling, general and administrative expenses ("SG&A") have decreased by $ 612
(or 48%) to $655 in 2003 from $1,267 in 2002. The decrease is primarily
attributable to the cut in three executive management positions in end of 2002
and cost cutting as a result the decrease in revenue generating activities.
INTEREST EXPENSE
Interest expense increased by $216 to $369 in 2003 from $153 in 2002. The
increase is primarily attributable to the higher level of outstanding debt in
2003 as compared to 2002.
OTHER INCOME (EXPENSE)
The increase in other expense of $145 to $396 in 2003 as compared to $251 in
2002 is primarily the result of a foreign currency translation adjustment.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2003, the Company had cash and cash equivalents of $54 as compared
to $167 at June 30, 2002.
Net cash used in operating activities was $605 for the six months ended June 30,
2003 as compared to $639 for the six months ended June 30, 2002. The use of net
cash for operating activities for 2003 is due primarily to net losses and an
increase in net accounts receivables offset by increases in accounts payable.
Net cash used in investing activities was $13 and $541 for the six months ended
June 31, 2003 and 2002, respectively. During 2002 the Company invested in
property and equipment as a consequence of an arrangement with the Israeli tax
authorities regarding a benefit program on new investment.
Net cash provided by financing activities was $649 and $1,240 for the six months
ended June 30, 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 JUNE 30, 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 June 30, 2003, the bank had extended approximately $383 in guarantees to
five customers.
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Assuming there is no significant adverse change affecting the business, the
Company believes that additional equity funding and cash flow from operations
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 as of the end of the period covered by 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.
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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 6, 2004 By: /s/JACOB LUSTGARTEN
----------------------------------
Jacob Lustgarten
Chief Executive Officer and
Chairman of the Board
Dated: June 6, 2004 By: /S/ YONA LIEBOWITZ
----------------------------------
Yona Liebowitz
Chief Financial Officer
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