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, 2002
-------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE EXCHANGES ACT
For the transition period from to
----------------- -------------------
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 August 13, 2002 was 42,766,087 shares.
Transitional Small Business Disclosure Format (check one):
Yes X No
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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...........................12-16
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 June 30, 2002 (Unaudited)........4
Consolidated Statements of Operations for the three and six months
ended June 30, 2002 (Unaudited) and 2001 (Unaudited).........5
Consolidated Statement of Shareholders' Equity for the six
months ended June 30, 2002 (Unaudited).......................6
Consolidated Statements of Cash Flows for the six months
ended June 30, 2002 (Unaudited) and 2001 (Unaudited)......7-8
Notes to Consolidated Financial Statements (Unaudited).........9-11
-3-
CLEAN SYSTEMS TECHNOLOGY GROUP, LTD.
CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 2002.
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
ASSETS:
CURRENT ASSETS:
Cash and cash equivalents $ 167
Accounts receivable - net 2,405
Inventory 2,255
Costs incurred in excess of billings on contracts in progress 575
Refundable value added tax 58
Employee advances 22
Other current assets 225
Deferred taxes 31
------
TOTAL CURRENT ASSETS 5,738
PROPERTY AND EQUIPMENT - NET 1,973
OTHER ASSETS 236
------
TOTAL ASSETS $7,947
======
LIABILITIES AND SHAREHOLDERS' EQUITY:
CURRENT LIABILITIES:
Bank line of credit $2,067
Accounts payable 2,163
Accrued compensation 507
Short-term loans 159
Accrued expenses 229
Other liabilities 104
------
TOTAL CURRENT LIABILITIES 5,229
------
CONVERTIBLE NOTES 1,226
------
COMMITMENTS AND CONTINGENCIES --
------
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value, 110,000,000 shares authorized,
42,766,087, issued and outstanding 428
Additional paid-in capital 428
Retained earnings 636
------
TOTAL SHAREHOLDERS' EQUITY 1,492
------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $7,947
======
See Notes to 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 2 2 0 0 1 2 0 0 2 2 0 0 1
------- ------- ------- -------
REVENUES $ 1,578 $ 4,695 $ 4,677 $ 7,965
COST OF REVENUE 1,407 2,868 3,164 5,291
------------ ------------ ------------ ------------
GROSS PROFIT 171 1,827 1,513 2,674
OPERATING EXPENSES:
Selling, general and administrative 752 518 1,267 938
------------ ------------ ------------ ------------
[LOSS] INCOME FROM OPERATIONS (581) 1,309 246 1,736
INTEREST EXPENSE (117) (32) (153) (75)
OTHER (EXPENSE) INCOME 24 (5) (251) 85
------------ ------------ ------------ ------------
[LOSS] INCOME BEFORE PROVISION FOR
INCOME TAXES (674) 1,272 (158) 1,746
PROVISION FOR INCOME TAXES 2 154 12 154
------------ ------------ ------------ ------------
NET [LOSS] INCOME $ (676) $ 1,118 $ (170) $ 1,592
============ ============ ============ ============
NET [LOSS] INCOME PER SHARE - BASIC $ (.01) $ .03 $ -- $ .04
============ ============ ============ ============
NET [LOSS] INCOME PER SHARE - DILUTED $ (.01) $ .03 $ -- $ .04
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES - BASIC 42,766,087 42,766,087 42,766,087 42,766,087
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES - DILUTED 42,766,087 43,809,087 42,766,087 43,809,087
============ ============ ============ ============
See Notes to Consolidated Financial Statements.
-5-
CLEAN SYSTEMS TECHNOLOGY GROUP, LTD.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
(IN THOUSANDS, EXCEPT NUMBER OF SHARE DATA)
COMMON STOCKADDITIONAL TOTAL
NUMBER PAID-IN RETAINED SHAREHOLDERS'
OF SHARES AMOUNT CAPITAL EARNINGS EQUITY
BALANCE DECEMBER 31, 2001 42,766,087 $ 428 $ 428 $ 806 $ 1,662
Net [Loss] -- -- -- (170) (170)
---------- ---------- ---------- ---------- ----------
BALANCE JUNE 30, 2002 42,766,087 $ 428 $ 428 $ 636 $ 1,492
========== ========== ========== ========== ==========
See Notes to Consolidated Financial Statements.
-6-
CLEAN SYSTEMS TECHNOLOGY GROUP, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
SIX MONTHS ENDED
JUNE 30,
2 0 0 2 2 0 0 1
------- -------
OPERATING ACTIVITIES:
Net [loss] income $ (170) $ 1,592
Adjustments to reconcile net [loss] income to net cash
(used for) provided by operating activities:
Amortization and depreciation 158 83
Loss from the sale of property and equipment -- 1
Change in accrued severance pay - net 23 9
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable - net (914) (8)
Accounts receivable - related party 129 --
Inventory 42 41
Costs incurred in excess of billings on contracts in progress (238) (741)
Refundable value added tax 14 157
Employee advances 8 (33)
Other current assets (202) (111)
Deferred taxes 3 (69)
Increase (decrease) in:
Accounts payable 522 (330)
Accrued compensation 48 28
Accrued expenses (149) 53
Other liabilities 87 37
------- -------
NET CASH - OPERATING ACTIVITIES (639) 709
------- -------
INVESTING ACTIVITIES:
Acquisition of property and equipment (443) (351)
Proceeds from sale of property and equipment -- 16
Other assets (4) 3
Investment in unconsolidated subsidiary (94) --
------- -------
NET CASH - INVESTING ACTIVITIES (541) (332)
------- -------
FINANCING ACTIVITIES:
Proceeds from convertible notes 948 --
Repayment of shareholder loans -- (60)
Changes in short-term bank credit - net 566 (570)
Repayment of short-term loans - net (157) (94)
Deferred loan costs (117) --
------- -------
NET CASH - FINANCING ACTIVITIES 1,240 (724)
------- -------
NET INCREASE [DECREASE] IN CASH AND CASH EQUIVALENTS - FORWARD $ 60 $ (347)
See Notes to 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 2 2 0 0 1
------- -------
NET INCREASE [DECREASE] IN CASH AND CASH EQUIVALENTS - FORWARD $ 60 $ (347)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIODS 107 1,238
------- -------
CASH AND CASH EQUIVALENTS - END OF PERIODS $ 167 $ 891
======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid for:
Interest $ 91 $ 75
Income taxes $ 12 $ 83
See Notes to 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.
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,
2002 are not necessarily indicative of the results that may be expected for the
year ended December 31, 2002. For further information, refer to 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, 2001.
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, 2002. The consolidated financial statements for the three
and six months ended June 30, 2001, reflect the results of operations and
financial position of CSTI Hi-Tec, Ltd. and its subsidiaries. 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 1 to the
Company's consolidated financial statements included in the Company's Form
10-KSB for the year ended December 31, 2001.
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 and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
-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 July 2001, the Financial
Accounting Standards Board ("FASB") issued SFAS No. 141, "Business Combinations"
("SFAS No. 141"). SFAS No. 141 changes the accounting for business combinations
initiated after June 30, 2001, requiring that all business combinations be
accounted for using the purchase method and that intangible assets be recognized
as assets apart from goodwill if they arise from contractual or other legal
rights, or if they are separable or capable of being separated from the acquired
entity and sold, transferred, licensed, rented or exchanged. SFAS No. 141 is
effective for all business combinations initiated after June 30, 2001. The
adoption of SFAS No. 141 did not have a material impact on the Company's
financial statements.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangibles"
(SFAS No. 142") SFAS No. 142 specifies the financial accounting and reporting
for acquired goodwill and other intangible assets. Goodwill and intangible
assets with indefinite useful lives will not be amortized but rather will be
tested at least annually for impairment. SFAS No. 142 is effective for fiscal
years beginning after December 15, 2001. SFAS No. 142 requires that the useful
lives of intangible assets acquired on or before June 30, 2001 be reassessed and
the remaining amortization periods adjusted accordingly. Previously recognized
intangible assets deemed to have indefinite lives shall be tested for
impairment. Goodwill recognized on or before June 30, 2001, shall be assigned to
one or more reporting units and shall be tested for impairment as of the
beginning of the fiscal year in which SFAS No. 142 is initially applied in its
entirety. As of March 31, 2002, the Company had no recorded goodwill or
indefinite lived intangibles. Therefore, the Company believes that the adoption
of SFAS No. 142 will not have a significant impact on its results of operations
or financial position.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations" ("SFAS No. 143"), which is effective October 1, 2003. SFAS No. 143
requires, among other things, the accounting and reporting of legal obligations
associated with the retirement of long-lived assets that result from the
acquisition, construction, development, or normal operation of a long-lived
asset. The Company is currently assessing, but has not yet determined, the
effect of SFAS No. 143 on its financial position or results of operations.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," ("SFAS No. 144"). SFAS No. 144 is effective for
fiscal years beginning after December 15, 2001. SFAS No. 144 addresses
accounting and reporting of all long-lived assets, except goodwill, that are
either held and used or disposed of through sale or other means. The Company is
currently assessing the impact of SFAS No. 144, but believes that its adoption
will not have a material impact on its operating results or financial position.
[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 [LOSS] PER SHARE
Earnings per share are calculated in accordance with the provisions of Statement
of Financial 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, 2002 and 2001, the
shares issued in the Transaction are treated as outstanding for all periods
presented. For the three and six months ended June 30, 2002 and 2001, dilutive
potential common shares outstanding reflect shares issuable under convertible
notes [See Note 5]. The computation of diluted earnings per share does not
assume conversion, exercise or contingent issuance of securities that would have
an anti-dilutive effect on earnings per share. Share and per share amounts
reflect the effect of the one for twenty reverse stock split in October 2001.
[5] CONVERTIBLE NOTES
During the six months ended June 30, 2002, the Company issued $948 in principal
convertible notes. Principal amounts of the notes may be converted by the
holders into shares of Company common stock, at a conversion price of $0.875 per
share, at any time from issuance until May 15, 2003. At May 15, 2003, 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 from the date of issuance. The
consideration may be paid in cash or common stock at the sole discretion of the
Company.
At June 30, 2002, interest of $38 has been accrued on the outstanding principal
convertible notes.
[6] OTHER (EXPENSE) INCOME
Aggregate amounts in other (expense) income 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, 2002 certain assets and liabilities were
denominated in NIS while the payments to suppliers were linked to the U.S.
dollar which caused a substantial translation adjustment due to the relative
strength of the U.S. dollar to the New Israeli shekel in 2002.
[7] GEOGRAPHIC REPORTING
Revenues by geographic classifications are as follows:
[IN U.S. $ THOUSANDS]
-------------------
ISRAEL ITALY INDIA OTHER TOTAL
------ ----- ----- ----- -----
For the period ended June 30, 2002 $ 4,406 $ 253 $ 18 $ -- $ 4,677
For the period ended June 30, 2001 $ 144 $ 5,869 $ 1,659 $ 293 $ 7,965
[8] INVESTMENT IN UNCONSOLIDATED SUBSIDIARY - AT COST
In January 2002 the Company paid $94 for a nineteen percent (19%) interest in
Altan Systems Ltd., an entity whose processes and technology may enhance CSTI's
product line. The investment will be carried at cost.
. . . . . . . . . .
-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 CSTI 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." CSTI 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. CSTI 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 and the
disclosure of contingent assets and liabilities at the date of the financial
statements 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 1 to the consolidated financial
statements included in this 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 and income recognized on uncompleted contracts in excess of related
billings is shown as a current asset, and the aggregate of billings on
uncomplete contracts in excess of related costs incurred and income recognized
is 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 and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS - In July 2001, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial Accounting
Standards ("SFAS') No. 141, "Business Combinations" ("SFAS No. 141"). SFAS No.
141 changes the accounting for business combinations initiated after June 30,
2001, requiring that all business combinations be accounted for using the
purchase method and that intangible assets be recognized as assets apart from
goodwill if they arise from contractual or other legal rights, or if they are
separable or capable of being separated from the acquired entity and sold,
transferred, licensed, rented or exchanged. SFAS No. 141 is effective for all
business combinations initiated after June 30, 2001. The adoption of SFAS No.
141 did not have a material impact on the Company's financial statements.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangibles"
(SFAS No. 142") SFAS No. 142 specifies the financial accounting and reporting
for acquired goodwill and other intangible assets. Goodwill and intangible
assets with indefinite useful lives will not be amortized but rather will be
tested at least annually for impairment. SFAS No. 142 is effective for fiscal
years beginning after December 15, 2001. SFAS No. 142 requires that the useful
lives of intangible assets acquired on or before June 30, 2001 be reassessed and
the remaining amortization periods adjusted accordingly. Previously recognized
intangible assets deemed to have indefinite lives shall be tested for
impairment. Goodwill recognized on or before June 30, 2001, shall be assigned to
one or more reporting units and shall be tested for impairment as of the
beginning of the fiscal year in which SFAS No. 142 is initially applied in its
entirety. As of December 31, 2001, the Company had no recorded goodwill or
indefinite lived intangibles. Therefore, the Company believes that the adoption
of SFAS No. 142 will not have a significant impact on its results of operations
or financial position.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations" ("SFAS No. 143"), which is effective October 1, 2003. SFAS No. 143
requires, among other things, the accounting and reporting of legal obligations
associated with the retirement of long-lived assets that result from the
acquisition, construction, development, or normal operation of a long-lived
asset. The Company is currently assessing, but has not yet determined, the
effect of SFAS No. 143 on its financial position or results of operations.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," ("SFAS No. 144"). SFAS No. 144 is effective for
fiscal years beginning after December 15, 2001. SFAS No. 144 addresses
accounting and reporting of all long-lived assets, except goodwill, that are
either held and used or disposed of through sale or other means. The Company is
currently assessing the impact of SFAS No. 144, but believes that its adoption
will not have a material impact on its operating results or financial position.
-13-
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 JUNE 30, 2002 COMPARED WITH THREE MONTHS ENDED JUNE 30, 2001
(AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED)
REVENUES
Revenues in 2002 of $1,578 decreased $3.12 million (or 66.4%) from $4,695 in
2001. The decrease is due to fewer new projects in 2002 as compared to 2001.
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, especially Italy and India. During the three months ended
June 30, 2002 and 2001, revenues to customers in Israel amounted to $1,399 and
$124, respectively. Revenues to Italian, Indian, and other non-domestic
customers amounted to $179 and $4,571 for the three months ended June 30, 2002
and 2001, 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
JUNE 30,
2 0 0 2 2 0 0 1
------- -------
Cost of materials and inventory $ 443 $ 2,136
Salaries and related expenses 634 475
Subcontractors 58 112
Cost of service abroad 17 342
Rent and taxes 20 26
Vehicles and transportation 113 96
Equipment maintenance and insurance 61 23
Depreciation 45 29
Miscellaneous 16 5
Changes in work in process -- (376)
------------ ------------
Cost of Revenues $ 1,407 $ 2,868
============ ============
-14-
Cost of revenues has decreased by $1.46 million (or 51%) to $1.41 million in
2002 from $2.87 million in 2001. The decrease is due to the decline in revenues.
Materials and inventory costs decreased by $1.70 million to $0.44 million in
2002 from $2.14 million in 2001. The lower material costs also were partially
offset by the higher use of project labor costs versus 2001. The purchase cost
of materials did not significantly increase in 2002 over 2001. Materials and
inventory costs as a percentage of revenues was 28% in 2002 as compared to 45%
in 2001. The average number of employees during 2002 was 145 as compared to 83
for 2001. Other costs such as rent and taxes, transportation, equipment
maintenance and insurance and depreciation decreased in relative proportion to
the decrease in revenues.
GROSS PROFIT
Gross profit has decreased by $1.66 million to $0.17 million in 2002 from $1.83
million in 2001 due to the lower volume of revenues. Gross margins approximated
11% in 2002 versus 39% in 2001. The lower margins relate to the comparative
non-absorption of the fixed production costs from the lower base revenue. During
the three months ended June 30, 2002, a substantial portion of revenues were
earned in Israel while revenues earned in the comparative three month period
were earned substantially outside of Israel. Further, the projects worked on in
the second quarter of 2002 were more labor intensive than the materials
intensive projects of the second quarter of 2001.
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 2 2 0 0 1
------- -------
Salaries and related expenses $ 307 $ 149
Professional fees 175 225
Telephone and office maintenance 72 47
Travel vehicles and transportation 38 23
Depreciation 22 10
Sales and marketing 138 64
------------- ------------
$ 752 $ 518
============= ============
Selling, general and administrative expenses ("SG&A") have increased $0.23
million to $0.75 million in 2002 from $0.52 million in 2001. The increase is
primarily attributable to the addition of three executive management positions
in 2002. Management's initiative to increase sales efforts resulted in increased
related expenses.
INTEREST EXPENSE
Interest expense increased by $85 to $117 in 2002 from $32 in 2001. The increase
is attributable to higher levels of outstanding debt in 2002 as compared to
2001.
-15-
OTHER INCOME (EXPENSE)
The increase in other income of $29 to $24 in 2002 as compared to $(5) in
other expenses in 2001 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, 2002, certain assets and liabilities were
denominated in NIS while the payments to suppliers were linked to the U.S.
dollar which caused a substantial translation adjustment due to the relative
strength of the U.S. dollar to the New Israeli shekel in 2002 .
SIX MONTHS ENDED JUNE 30, 2002 COMPARED WITH SIX MONTHS ENDED JUNE 30, 2001
(AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED)
REVENUES
Revenues in 2002 of $4,677 decreased $3.29 million (or 41.2%) from $7,965 in
2001. The decrease is due to fewer new projects in Second Quarter 2002 as
compared to 2001. During the six months ended June 30, 2002 and 2001, revenues
to customers in Israel amounted to $4,406 and $144, respectively. Revenues to
Italian, Indian, and other non-domestic customers amounted to $271 and $7,821
for the six months ended June 30, 2002 and 2001, 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 2 2 0 0 1
------- -------
Cost of materials and inventory $ 571 $ 3,338
Salaries and related expenses 1,288 862
Subcontractors 100 177
Cost of service abroad 56 552
Rent and taxes 42 50
Vehicles and transportation 187 171
Equipment maintenance and insurance 70 50
Depreciation 89 54
Miscellaneous 27 37
Changes in work in process 734 --
---------- -----------
Cost of Revenues $ 3,164 $ 5,291
========== ===========
GROSS PROFIT
Gross profit has decreased by $1.16 million to $1.51 million in 2002 from $2.67
million in 2001. The decrease in gross profit percentage to 32% in 2002 from 34%
in 2001 is due to the lower margins attained on revenues in Israel due to the
pricing environment. During the six months ended June 30, 2002, a substantial
portion of revenues were earned in Israel while revenues earned in the
comparative six month period were earned substantially outside of Israel.
Further, the projects worked on in the first six months of 2002 were more labor
intensive than the materials intensive projects of the first six months of 2001.
-16-
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 2 2 0 0 1
------- -------
Salaries and related expenses $ 550 $ 304
Professional fees 269 276
Telephone and office maintenance 123 92
Travel vehicles and transportation 83 54
Depreciation 43 19
Sales and marketing 199 193
------------- ----------
$ 1,267 $ 938
============= ==========
Selling, general and administrative expenses ("SG&A") have increased $0.33
million (or 35%) to $1.27 million in 2002 from $0.94 million in 2001. The
increase is primarily attributable to the addition of three executive management
positions as previously discussed.
INTEREST EXPENSE
Interest expense increased by $78 to $153 in 2002 from $75 in 2001. The increase
is attributable to higher level of outstanding debt in 2002 as compared to 2001.
OTHER INCOME (EXPENSE)
The increase in other expense of $336 to $251 in 2002 as compared to an income
of $85 in 2001 is primarily the result of foreign currency translation
adjustments.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2002, the Company had cash and cash equivalents of $167 as compared
to $891 at June 30, 2001.
Net cash used in operating activities was $639 for the six months ended June 30,
2002 as compared to net cash provided by operating activities of $709 for the
six months ended June 30, 2001. The increase in net cash used in operating
activities is primarily attributable to increases in net accounts receivables
offset by accounts payables. These net cash outflows were offset by the net
change in operating results.
Net cash used in investing activities was $541 and $332 for the six months ended
June 30, 2002 and 2001, respectively. The increase is primarily due to the
direct purchase of real estate property ($200) and an equity investment in an
unconsolidated subsidiary ($100).
Net cash provided by financing activities was $1,240 versus net cash used $(724)
for the six months ended June 30, 2002 and 2001, respectively. The increase was
primarily due to the increased use of the bank-line of credit facility and the
proceeds received from the issuance of convertible notes.
-17-
The following summarizes certain financing outstanding as of June 30, 2002:
[a] Convertible Notes - During the six months ended June 30, 2002, the Company
issued $948 in convertible notes. Principal amounts of the notes may be
converted by the holder into shares of Company common stock, at a conversion
price of $0.875 per shares, at any time from issuance until May 15, 2003. At May
15, 2003, 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 from the date of
issuance. The consideration may be paid in cash or common stock at the sole
discretion of the Company.
[b] 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, 2002, the bank had extended approximately $297 in guarantees to
four customers.
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 remainder of year
2002.
-18-
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.
None.
(b) Reports on Form 8-K.
None.
-19-
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.
The undersigned chief executive officer and chief financial officer of Clean
Systems Technology Group, Ltd., certify that this quarterly report on Form
10-QSB for the period ended June 30, 2002, which accompanies this certification
fully complies with the requirements of Section 13(a) or 15(d), as applicable,
of the Securities Exchange Act of 1934 and the information contained in the
periodic report fairly presents, in all material respects, the financial
condition and results of operations of the Registrant at the dates and for the
periods indicated. The foregoing certification is made pursuant to ss. 906 of
the Sarbanes-Oxley Act of 2002 (18 U.S.C. ss. 1350) and no purchaser or seller
of securities of any other person shall be entitled to rely upon the foregoing
certification for any purpose. The undersigned expressly disclaims any
obligation to update the foregoing certification except as required by law.
CLEAN SYSTEMS TECHNOLOGY GROUP, LTD.
Dated: August 19, 2002 By: /s/ JACOB LUSTGARTEN
------------------------------------
Jacob Lustgarten
Chief Executive Officer and
Chairman of the Board
Dated: August 19, 2002 By: /S/ YONA LIEBOWITZ
------------------------------------
Yona Leibowitz
Chief Financial Officer
-20-