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 SEPTEMBER 30, 2003
------------------
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 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 September 30, 2003 (Unaudited)..........................4
Consolidated Statements of Operations for the three and nine months
ended September 30, 2003 (Unaudited) and 2002 (Unaudited)............................5
Consolidated Statement of Shareholders' Equity (Deficit) for the nine
months ended September 30, 2003 (Unaudited)..........................................6
Consolidated Statements of Cash Flows for the nine months
ended September 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 SEPTEMBER 30, 2003.
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
ASSETS:
CURRENT ASSETS:
Cash and cash equivalents $ 6
Accounts receivable - net 1,481
Inventory 2,223
Refundable value added tax 82
Employee advances 20
Deferred taxes 2
Other 216
-------
TOTAL CURRENT ASSETS 4,030
PROPERTY AND EQUIPMENT - NET 1,486
OTHER ASSETS 328
-------
TOTAL ASSETS $ 5,844
=======
LIABILITIES AND SHAREHOLDERS' DEFICIT:
CURRENT LIABILITIES:
Short-term bank borrowings $ 929
Bank line of credit 177
Accounts payable 2,136
Accrued compensation 525
Accrued expenses 483
Short term loans 68
Short term loans - related party 108
Deferred taxes 62
Other liabilities 39
-------
TOTAL CURRENT LIABILITIES 4,527
-------
LONG-TERM BANK DEBT 1,160
-------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value, 110,000,000 shares authorized,
55,028,851, issued and outstanding 551
Additional paid-in capital 2,235
Accumulated Deficit (2,629)
-------
TOTAL SHAREHOLDERS' EQUITY 157
-------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 5,844
=======
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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
2 0 0 3 2 0 0 2 2 0 0 3 2 0 0 2
------- ------- ------- -------
REVENUES $ 477 $ 1,512 $ 2,809 $ 6,189
COST OF REVENUE 645 1,196 2,269 4,360
------------ ------------ ------------ ------------
GROSS PROFIT (LOSS) (168) 316 540 1,829
OPERATING EXPENSES:
Selling, general and administrative 466 475 1,121 1,742
------------ ------------ ------------ ------------
INCOME(LOSS) FROM OPERATIONS (634) (159) (581) 87
INTEREST EXPENSE (105) (164) (474) (317)
FINANCIAL COSTS -- -- (27) --
OTHER INCOME (EXPENSE) 86 (57) (310) (308)
------------ ------------ ------------ ------------
(LOSS) BEFORE PROVISION FOR
INCOME TAXES (653) (380) (1,392) (538)
PROVISION(BENEFIT) FOR INCOME
TAXES 6 (17) 62 (5)
------------ ------------ ------------ ------------
NET(LOSS) $ (659) $ (363) $ (1,454) $ (533)
============ ============ ============ ============
NET (LOSS) PER SHARE - BASIC $ (.01) $ (.01) $ (.03) $ (.01)
============ ============ ============ ============
NET (LOSS) PER SHARE - DILUTED $ (.01) $ (.01) $ (.03) $ (.01)
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES - BASIC 54,376,184 42,766,087 48,823,519 42,766,087
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES - DILUTED 54,376,184 42,766,087 48,823,519 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 4,635,588 47 529 576
NET (LOSS) -- -- -- (1,454) (1,454)
-------------- ------------- ------------- ------------- --------------
BALANCE SEPTEMBER 30, 2003 55,028,851 $ 551 $ 2,235 $ (2,629) $ 157
============== ============= ============= ============= =============
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)
NINE MONTHS ENDED
SEPTEMBER 30,
2 0 0 3 2 0 0 2
------- -------
OPERATING ACTIVITIES:
Net (loss) $(1,454) $ (533)
Adjustments to reconcile net (loss) to net cash
(used for) operating activities:
Amortization and depreciation 235 281
Loss from the sale of property and equipment 10 50
Change in accrued severance pay - net -- 20
Issuance of stock for services 147 --
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable - net 246 (1,055)
Accounts receivable - related party -- 129
Inventory 184 23
Costs incurred in excess of billings on contracts in progress -- (231)
Refundable value added tax 42 (13)
Employee advances 1 7
Deferred taxes 97 1
Other current assets (114) (309)
Increase (decrease) in:
Accounts payable 408 293
Accrued compensation (210) 244
Accrued expenses 84 (86)
Other liabilities (9) 98
------- -------
NET CASH - OPERATING ACTIVITIES (333) (1,081)
------- -------
INVESTING ACTIVITIES:
Acquisition of property and equipment -- (573)
Proceeds from sale of property and equipment 44 --
Investment in unconsolidated subsidiary (50) 108
Other assets (35) (6)
------- -------
NET CASH - INVESTING ACTIVITIES (41) (471)
------- -------
FINANCING ACTIVITIES:
Proceeds from short-term loans 18 --
Proceeds from convertible notes -- 1,009
Changes in bank line of credit - net 12 777
Changes in short-term loans - net (165) (175)
Common stock issuance 429 --
Deferred loan costs -- (117)
Repayment of long term bank credit (23) --
Proceeds from long term bank credit 86 --
------- -------
NET CASH - FINANCING ACTIVITIES 357 1,494
------- -------
NET [DECREASE] IN CASH AND CASH EQUIVALENTS - FORWARD $ (17) $ (58)
See Notes to the Consolidated Financial Statements.
-7-
CLEAN SYSTEMS TECHNOLOGY GROUP, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NINE MONTHS ENDED
SEPTEMBER 30,
2 0 0 3 2 0 0 2
------- -------
NET [DECREASE] IN CASH AND CASH EQUIVALENTS - FORWARDED $ (17) $ (58)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIODS 23 107
----- -----
CASH AND CASH EQUIVALENTS - END OF PERIODS $ 6 $ 49
===== =====
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for:
Interest $ 230 $ 184
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 nine months ended September
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 nine
months ended September 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. 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, 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 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 nine months ended September 30, 2003 and 2002,
the shares issued in the Transaction are treated as outstanding for all periods
presented.
[5] CONVERTIBLE NOTES
During the nine months ended September 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 reflects 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
In the second quarter of 2003, an aggregate of $402,000 was invested in the
Company related to the issuance of 3,300,588 shares of common stock.
On August 14, 2003, 1,335,000 common shares were issued to a public relations
firm for services rendered (135,000 shares) and to a Company Director as
compensation (1,200,000 shares). A charge of $146,850 is included in selling,
general and administrative expenses reflecting the market value of the stock on
the date of issuance.
[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 nine months ended September 30, 2003, certain assets and liabilities
were denominated in new Israeli Shekel ("NIS") while the payments to suppliers
were linked to the U.S. dollar. This caused a substantial translation adjustment
due to the 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 OTHERS FRANCE TOTAL
------ ----- ------- ------ -----
For the period ended September 30, 2003 $2,502 $ 80 $ -- $ 227 $2,809
For the period ended September 30, 2002 $5,880 $ 284 $ 25 $ -- $6,189
-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 NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
2 0 0 3 2 0 0 2 2 0 0 3 2 0 0 2
------- ------- ------- -------
% % % %
Revenues 100 100 100 100
---- ---- ---- ----
Cost of Revenues 135 79 81 70
Gross Profit (35) 21 19 30
Selling General and (98) (31) 40 28
Administrative
Income(loss) from Operations (133) (10) (21) 2
Interest Expense (22) (11) (18) (5)
Other (Expense) 18 (4) (11) (5)
Income (loss) Before 50 Taxes (137) (25) (50) (8)
Income Taxes (1) 1 (2) (1)
---- ---- ---- ----
Net Income (52) (9) (138) (24)
==== ==== ==== ====
THREE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED WITH THREE MONTHS ENDED
SEPTEMBER 30, 2002 (AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED)
REVENUES
Revenues in 2003 of $477 decreased $1,035 (or 68%) from $1,512 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 September 30, 2003 and 2002, revenues to customers in Israel
amounted to $427 and $1,474, respectively. Revenues to non-domestic customers
amounted to $50 and $38, 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
SEPTEMBER 30,
2 0 0 3 2 0 0 2
------- -------
Cost of materials and inventory $ 152 $ 436
Salaries, subcontractors and related expenses 237 568
Cost of service abroad 17 13
Rent and taxes 43 35
Vehicles and transportation 98 51
Equipment maintenance and insurance 31 48
Depreciation and amortization 56 45
Miscellaneous 11 -
------------ -------------
Cost of Revenues $ 645 $ 1,196
============ =============
Cost of revenues has decreased by $551 (or 46%) to$ 645 in 2003 from $1,196 in
2002. The decrease is in line with the overall decline in Company revenues. The
purchase cost of materials increased in 2003 as a percentage of the revenue as
compared to 2002, from 29% to 32% . Materials, inventory costs and labor as a
percentage of revenues was higher in 2003 as compared to 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 $484 (or 153%) to $(168) in 2003 from $316 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
SEPTEMBER 30,
2 0 0 3 2 0 0 2
------- -------
Salaries and related expenses $ 104 $ 169
Professional fees 202 111
Telephone and office maintenance 72 27
Travel vehicles and transportation 10 85
Depreciation 41 28
Sales and marketing 37 55
----------- ------------
$ 466 $ 475
=========== ============
Selling, General and Administrative Expenses ("SG&A") have decreased $9 (or 2%)
to $466 in 2003 from $ 475 in 2002. The decrease is primarily attributable to
the termination of three senior employees at the end of 2002. Management's
initiative to increase domestic sales efforts resulted in increased professional
fees.
INTEREST EXPENSE
Interest expense decreased by $59 to $105 in 2003 from $164 in 2002. The
decrease is primarily attributable to a reduction in interest rates.
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OTHER INCOME (EXPENSE)
The decrease in other expense of $143 to income of $ 86 in 2003 as compared to
an expense of $57 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 September 30, 2003 and 2002, certain assets and
liabilities were denominated in NIS while the payments to suppliers was linked
to the U.S. dollar.
NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED WITH NINE MONTHS ENDED SEPTEMBER
30, 2002(AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED).
REVENUES
Revenues in 2003 of $2,809 decreased $3,380 (or 55%) from $6,189 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 nine months ended
September 30, 2003 and 2002, revenues to customers in Israel amounted to $2,502
and $5,880, respectively. Revenues to Italian, Indian, and other non-domestic
costumers amounted to $307 and $309 for the nine months ended September 30, 2002
and 2001, respectively.
COST OF REVENUES
The following table sets forth a comparison of the costs of revenues for the
periods indicated:
NINE MONTHS ENDED
SEPTEMBER 30,
2 0 0 3 2 0 0 2
------- -------
Cost of materials and inventory $ 774 $ 1,007
Salaries, subcontractors, and related expenses 821 1,956
Cost of service abroad 85 69
Rent and taxes 101 77
Vehicles and transportation 204 238
Equipment maintenance and insurance 116 118
Depreciation 145 134
Miscellaneous 23 27
Changes in work in process --- 734
----------- -----------
Cost of revenues $ 2,269 $ 4,360
=========== ===========
Cost of revenues has decreased by $2,091 (or 48%) to $2,269 in 2003 from $4,360
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 57% in 2003
as compared to 48% in 2002 reflecting large decrease in revenues. 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.
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GROSS PROFIT
Gross profit has decreased by $1,289 to $540 in 2003 from $1,829 in 2002. The
decrease in gross profit percentage to 19% in 2003 from 30% in 2002 is due to
the lower margins attained on revenues in Israel due to the pricing environment.
During the nine months ended September 30, 2003, a substantial portion of
revenues was earned in Israel as well as revenues earned in the comparative nine
month period for 2002. The projects worked on in the first nine months of 2003
were more labor intensive than the materials intensive projects of the first
nine months of 2002.
SELLING, GENERAL AND ADMINISTRATIVE
The following table sets forth details regarding selling, general and
administrative expenses for the periods indicated:
NINE MONTHS ENDED
SEPTEMBER 30,
2 0 0 3 2 0 0 2
------- -------
Salaries and related expenses $ 281 $ 754
Professional fees 363 420
Telephone and office maintenance 226 150
Travel vehicles and transportation 29 168
Depreciation 98 71
Sales and marketing 124 179
-------------- ---------------
1,121 1,742
============== ===============
Selling, general and administrative expenses ("SG&A") have decreased $621 (or
36%) to $1,121 in 2003 from $1,742 in 2002. The decrease is primarily
attributable to the termination of three executive management positions end of
2002.
Management has also instituted cost cutting program in response to slow down in
activities.
INTEREST EXPENSES
Interest expense increased by $157 to $474 in 2003 from $317 in 2002. The
increase is primarily attributable to a higher level of outstanding debt in 2003
as compared to 2002. Part of the increase was offset by the conversion of
convertible notes to common stock in 2003.
OTHER INCOME (EXPENSE)
No material change in this category over the comparative periods.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2003, the Company had cash and cash equivalents of $6 as
compared to $49 at September 30, 2002.
Net cash used in operating activities was $333 for the nine months ended
September 30, 2003 as compared to $1,081 for the nine months ended September 30,
2002. The use of net cash for operating activities in 2003 is primarily
attributable to net losses offset by decreases in net accounts receivables and
increases in accounts payable.
Net cash used in investing activities was $41 and $471 for the nine months ended
September 30, 2003 and 2002, respectively. During 2002, the Company invested in
property and equipment as a consequence of an arrangement with Israeli tax
authorities regarding a benefit program on new investment.
-17-
Net cash provided by financing activities was $357 and $1,494 for the nine
months ended September 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 September 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 September. 30, 2003, the bank had extended approximately $383 in
guarantees to five customers.
Assuming there is improvement in the results of the business, the Company
believes that additional equity funding 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 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/ JOYA LIEBOWITZ
----------------------------
Yona Liebowitz
Chief Financial Officer
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