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
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 33-4882-D
CLANCY SYSTEMS INTERNATIONAL, INC.
(Exact name of Registrant as specified in its charter)
Colorado 84-1027964
(State or other jurisdiction of (IRS Employer Identification
incorporation or organization) Number)
2250 S. Oneida #308, Denver, Colorado 80224
(Address of principal executive offices and Zip Code)
(303) 753-0197
(Registrant's telephone number)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
Transitional Small Business Disclosure format (check one):
yes x no
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares outstanding of the issuer's classes of common
stock, as of August 12, 2003 is 365,117,938 shares, $.0001 par value.
CLANCY SYSTEMS INTERNATIONAL, INC.
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Consolidated Balance Sheet - September 30, 2002
and June 30, 2003 (unaudited) 2 and 3
Consolidated Statement of Income - For the Three Months
Ended June 30, 2002 and 2003 (unaudited) 4
Consolidated Statement of Income - For the Nine Months
Ended June 30, 2002 and 2003 (unaudited) 5
Consolidated Statement of Stockholders' Equity - For the
Nine Months Ended June 30, 2003 (unaudited) 6
Consolidated Statement of Cash Flows - For the Nine Months
Ended June 30, 2002 and 2003 (unaudited) 7
Notes to Unaudited Consolidated Financial Statements 8
Management's Discussion and Analysis of Financial Condition and
Results of Operations 10
PART II. OTHER INFORMATION 13
Item 3. Controls and Procedures 13
Item 6. Exhibits and Reports on Form 8-K 13
1
CLANCY SYSTEMS INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
September 30, 2002 and June 30, 2003
(unaudited)
ASSETS
September June
---------- ------
Current assets:
Cash, including interest bearing accounts $ 357,315 $ 559,172
Accounts receivable 339,599 643,029
Income tax refund receivable 35,063 ---
Inventories (Note 2) 148,517 122,341
Prepaid expenses 138,141 54,228
--------- ---------
Total current assets 1,018,635 1,378,770
Furniture and equipment, at cost:
Office furniture and equipment 259,595 210,491
Equipment under service contracts 1,893,995 2,592,377
Leasehold improvements 105,259 96,782
Equipment and vehicles under capital leases 356,745 180,487
--------- ----------
2,615,594 3,080,137
Less accumulated depreciation (1,170,030) (1,461,000)
---------- ---------
Net furniture and equipment 1,445,564 1,619,137
Other assets:
Deferred tax asset (Note 3) 38,200 ---
Deposits and other 20,640 74,459
Goodwill 225,214 225,214
Software development costs, net of
accumulated amortization 150,193 172,901
---------- ----------
Total other assets 434,247 472,574
---------- ----------
$ 2,898,446 3,470,481
============ ============
See accompanying notes.
2
CLANCY SYSTEMS INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
September 30, 2002 and June 30, 2003
(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
September June
Current liabilities: --------- ------
Accounts payable $ 141,092 $ 101,550
Accrued expenses 166,159 258,906
Income taxes payable --- 113,526
Current portion of long term debt 111,111 331,588
Current portion of obligations under capital
leases 132,279 45,096
Deferred revenue 110,722 80,328
---------- ---------
Total current liabilities 661,363 930,994
Long-term debt, net of current portions 182,824 211,370
Obligations under capital leases, net of
current portion 53,423 92,900
Minority interest in subsidiary 142,769 134,611
Deferred Income Taxes Payable (note 3) --- 950
Commitments
Stockholders' equity:
Preferred stock, $.0001 par value;
100,000,000 shares authorized, none issued --- ---
Common stock, $.0001 par value;
800,000,000 shares authorized,
365,117,938 shares issued and
outstanding 36,512 36,512
Additional paid-in capital 1,151,547 1,151,547
Retained earnings 670,008 911,597
---------- ---------
Total stockholder's equity 1,858,067 2,099,656
---------- ---------
$ 2,898,446 3,470,481
=========== ==========
See accompanying notes.
3
CLANCY SYSTEMS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
For the three months ended June 30, 2002 and 2003
(unaudited)
June June
2002 2003
---- ----
Revenues:
Sales $ 104,212 $ 51,539
Service contract income 329,852 785,577
Parking ticket collections 30,730 135,077
and other
---------- ---------
Total revenues 464,794 972,193
Costs and expenses:
Cost of sales 38,117 27,912
Cost of services 127,043 188,693
Cost of parking ticket collections 23,999 21,337
General and administrative 186,668 482,066
Research and development 6,511 6,421
-------- ---------
Total costs and expenses 382,338 726,429
-------- --------
Income from operations 82,456 245,764
Other income (expense):
Gain (loss) on disposal of assets --- 1,600
Interest income 1,070 448
Interest expense --- (11,768)
Minority interest in loss of subsidiary --- 5,252
--------- ---------
Total other income (expense) 1,070 (4,468)
--------- ---------
Income before provision for income
taxes and loss in equity-basis partnership 83,526 241,296
Provision for income taxes:
Current expense 25,402 78,260
Deferred expense 4,500 13,050
--------- ------
Total income tax expense 29,902 91,310
---------- ---------
Loss in equity basis partnership (net of tax
benefit
of $7,995 in 2002) (13,046) ---
--------- ---------
Net income $ 40,578 $ 149,986
========== ==========
Basic net income per common share $ * $ *
=========== ==========
Weighted average number of shares outstanding 364,600,000 365,118,000
=========== ===========
*Less than $.01 per share
See accompanying notes.
4
CLANCY SYSTEMS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
For the nine months ended June 30, 2002 and 2003
(unaudited)
June June
2002 2003
Revenues: ---- ----
Sales $ 192,965 $ 123,206
Service contract income 1,017,827 2,046,901
Parking ticket collections 84,553 249,497
and other
--------- ---------
Total revenues 1,295,345 2,419,604
Costs and expenses:
Cost of sales 85,710 70,356
Cost of services 375,254 513,012
Cost of parking ticket collections 75,674 86,201
General and administrative 559,598 1,296,495
Research and development 32,756 23,463
--------- ---------
Total costs and expenses 1,128,992 1,989,527
--------- ---------
Income from operations 166,353 430,077
Other income (expense):
Loss on disposal of assets --- (16,119)
Interest income 2,745 1,329
Interest expense --- (34,403)
Minority interest in loss of subsidiary --- 8,159
--------- ---------
Total other income (expense) 2,745 (41,034)
--------- ---------
Income before provision for income
taxes and loss in equity-basis partnership
169,098 389,043
Provision for income taxes:
Current expense 50,757 108,304
Deferred expense 13,500 39,150
--------- --------
Total income tax expense 64,257 147,454
--------- --------
Loss in equity basis partnership (net
of tax benefit of $10,891 - 2002) (17,770) ---
--------- --------
Net income $ 87,071 $ 241,589
=========== ===========
Basic net income per common share $ * $ *
========== ==========
Weighted average number of shares
outstanding 364,600,000 365,118,000
=========== ===========
*Less than $.01 per share
See accompanying notes.
5
CLANCY SYSTEMS INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the nine months ended June 30, 2003
(Unaudited)
Additional
Common Stock Paid-In Retained
Shares Amount Capital Earnings
------ ------- ---------- --------
Balance, September 30, 2002 365,117,938 $ 36,512 $ 1,151,547 $ 670,008
Net income for the nine
months ended June 30, 2003 --- --- --- 241,589
----------- -------- ----------- ---------
Balance, June 30, 2003 365,117,938 $ 36,512 $ 1,151,547 $ 911,597
=========== ======== =========== =========
See accompanying notes.
6
CLANCY SYSTEMS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended June 30, 2002 and 2003
(unaudited)
June 30, June 30,
2002 2003
------- -------
Cash flows from operating activities:
Net income $ 87,071 $ 241,589
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 108,190 369,128
Deferred income tax expense 13,500 39,150
Minority interest --- (8,160)
Common stock issued for services 18,000 ---
Changes in assets and liabilities:
Investment in equity-basis partnership 28,661 ---
Accounts receivable (83,008) (303,430)
Inventories (12,463) 26,176
Income taxes refundable 9,083 35,063
Prepaid expenses (84,121) 83,913
Accounts payable (16,008) (39,542)
Accrued expenses --- 92,747
Income taxes payable --- 113,526
Deferred revenue 69,634 (30,394)
--------- --------
Total adjustments 51,468 378,177
--------- --------
Net cash provided by operating activities 138,539 619,766
--------- --------
Cash flows from investing activities:
Acquisition of furniture and equipment (109,810) (494,891)
Increase in software licenses and software
development costs (45,704) (68,585)
Decrease (increase) in deposits and other assets 94 (55,750)
--------- --------
Net cash used in investing activities (155,420) (619,226)
--------- --------
Cash flows from financing activities:
Borrowings on notes payable and capital leases --- 288,500
Payments on notes payable and capital leases --- (87,183)
--------- --------
Net cash provided by financing activities --- 201,317
--------- --------
Increase (decrease) in cash and cash
equivalents (16,881) 201,857
Cash and cash equivalents at beginning of
period 385,491 357,315
--------- --------
Cash and cash equivalents at end of period $ 368,610 $ 559,172
========== ============
See accompanying notes.
7
CLANCY SYSTEMS INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003
1. Basis of presentation
The accompanying financial statements have been prepared by the Company,
without audit. In the opinion of management, the accompanying unaudited
financial statements contain all adjustments (consisting of only normal
recurring accruals) necessary for a fair presentation of the financial
position as of September 30, 2002 and June 30, 2003, and the results
of operations and cash flows for the periods ended June 30, 2002 and
2003.
As a result of the July 2002 settlement agreement with the principals
of UTS (Urban Transit Solutions) we have changed the reporting method
for the Company's 60% ownership in UTS from the equity method of
accounting to presenting the information on a consolidated basis.
The difference in presentation between the equity method of accounting
and on a consolidated basis is significant. For the fiscal year ended
September 30, 2002, Clancy presented its investment in UTS as a single
Line item "investment in partnership" on the balance sheet and as a
single line item on the statement of operations. For the fiscal year
ending September 30 2003, the consolidated financial statements
combine each line item on the balance sheet and statement of operations
of Clancy with those of UTS.
2. Inventories
Inventories consist of the following at:
September 30, June 30,
2002 2003
------------ ------------
Finished goods $ 22,272 $ 16,123
Work in process 4,795 59,010
Purchased parts and supplies 121,450 47,208
-------- ---------
$148,517 $122,341
======== ========
8
CLANCY SYSTEMS INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
JUNE 30, 2003
3. Income taxes
The provision for income taxes for the nine months ended June
30, 2002 and 2003 is based on the expected tax rate for the year.
As of September 30, 2002 and June 30, 2003 total deferred tax
assets and liabilities are as follows:
September 30, June 30,
2002 2003
---- ----
Deferred tax assets $ 87,700 $ 120,700
Deferred tax liabilities (49,500) (121,650)
--------- ----------
$ 38,200 $ (950)
========= ===========
4. Investment in UTS
Pro Forma consolidated financial information for the three and
nine months ended June 30, 2002 are as follows:
For three For nine months
Pro Forma consolidated months ended ended June 30,
statement of operations June 30, 2002 2002
------------------------- ----------- --------------
Total Revenues $ 732,700 $ 2,109,877
Total costs and expenses (692,122) (2,022,806)
------------- --------------
Net income $ 40,578 $ 87,071
============= ==============
9
Item 2.
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Critical Accounting Policies:
The Company has identified the accounting policies described
below as critical to its business operations and the understanding
of the Company's results of operations. The impact and any
associated risks related to these policies on the Company's
business operations is discussed throughout this section where
such policies affect the Company's reported and expected financial
results. The preparation of this Quarterly Report requires the
Company to make estimates and assumptions that affect the reported
amount of assets and liabilities of the Company, revenues and
expenses of the Company during the reporting period and contingent
assets and liabilities as of the date of the Company's financial
statements. There can be no assurance that the actual results
will not differ from those estimates.
Revenue Recognition:
Revenue derived from professional service contracts on equipment
and support services is included in income ratably over the
contract term; related costs consist mainly of depreciation,
supplies and sales commissions.
The Company defers revenue for equipment and services under service
contracts that are billed to customers on a quarterly, semi-annual,
annual or other basis and are included in income ratably over the
expected term of the contract.
Revenue from the issuance of parking tickets for the Company's
privatization projects is recognized on a cash basis when received
as collectability is not reasonably assured.
Revenue derived from professional service contracts on parking meter
and lots fees collections is recognized net of municipalities' fees
as services are provided. Related costs consist mainly of
depreciation and lot rents.
Revenue derived from professional service contracts for permit
fulfillment and remit-online services is recognized based on
add-on fees earned for each transaction.
Computer software:
Costs incurred prior to the establishment of the technological
feasibility of computer software are research and development
costs, which are charged to expense as incurred. Software
development costs incurred subsequent to establishment of
technological feasibility are capitalized and subsequently
amortized based on the greater of the straight line
method over the remaining estimated economic life of
the product (generally five years) or the estimate of
current and future revenues for the related software product.
10
Goodwill
On January 1, 2002, the Company adopted Statement of Financial
Accounting Standards No. 142 (SFAS 142), Goodwill and Intangible
Assets, which clarifies the accounting for goodwill and intangible
assets. Under SFAS 142, goodwill and intangible assets with
indefinite lives will no longer be amortized, but will be tested
for impairment annually and also in the event of an impairment
indicator.
Material Changes in Financial Condition
At June 30, 2003 the Company had working capital of $447,776
derived primarily from contract sales and contract service, as
compared to working capital of $357,272 at September 30, 2002.
The Company anticipates that working capital will be sufficient
to meet its working capital requirements for the current year.
Funds will continue to be used for general and administrative
purposes, equipment purchases, equipment manufacturing, travel,
marketing and research and development.
Material Changes in Results of Operations
During the quarter ended June 30, 2003, the Company generated
revenues from contract sales from its professional services contracts,
sales, remit-online payment processing, privatization contract, and
meter operations in Puerto Rico. New contracts signed during the
quarter includedincluded Central Parking Virginia Beach, Central
Parking Ft. Myers, Strategic Protectiion Agency, Western Towing,
Summit Security, Santa Cruz CA, University of Louisiana at Lafayette,
Morrison CO, Ft. Lewis College, Parking Control Systems Denver, Fairway
Parking, Los Angeles Metropolitan Transit Authority, and BYU Idaho.
Consolidated revenues during the quarter were higher than the prior
year's quarter by $507,399 or 109%. Consolidated expenses increased by
$344,091 or 90.0% over the prior year's quarter. The Company reported
a profit of $149,986 ($163,116 for Clancy directly and a net loss of
$13,130 for UTS)for the quarter as compared to a net profit of
$40,578 for the prior year's quarter. The consolidated revenues are
reported as $972,193 ($661,665 for Clancy directly, up 42.36% from the
prior year's quarter, and $310,529 for UTS). The consolidated expenses
are reported as $726,429 ($412,939 for Clancy directly, up 8.0% from
the prior year's quarter and $313,490 for UTS). Long term debt, capital
lease, and interest expenses are attributed to the obligations of UTS.
Clancy directly has no outstanding debt.
During the nine months ended June 30, 2003, consolidated revenues were
higher than the prior year's period by 86.79%. The Company reported
net income $241,589 ($261,988 for Clancy directly and a net loss of
$20,399 for UTS)for the nine months as compared to a net profit of
$87,071 for the prior year's period. The consolidated revenues are
reported as $2,419,604 ($1,605,486 for Clancy directly, up 23.94%
from the prior year's period, and $814,118 for UTS). The consolidated
expenses are reported as $1,989,527 ($1,205,532 for Clancy directly,
up 6.78% from the prior year's period and $783,995 for UTS).
11
General and administrative expenses increased 158% for the quarter and
132% for the nine months ended June 30, 2003 due to the following
activities for Clancy: legal expenses during the quarter, increased
travel expenses, increased customer supply expenses (ticket forms and
envelopes), a monthly retainer fee to a consultant who works for Clancy
as a liaison directly with UTS. Expense increases directly related to
UTS include payment of a monthly retainer to the Clancy-UTS liaison,
infrastructure expenses related to meter installations and general
operational expenses.
The Company anticipates that its expenses shall increase as a direct
result of the Sarbanes-Oxley legislation as it pertains to additional
accounting and auditing procedures. The company now utilizes two
different accounting firms for preparation of financial statements,
reviews and auditing functions. Director and Officer insurance premiums
have tripled for the Company (this is consistent with the industry as a
result of the public company accounting scandals of several years ago).
Client upgrades to the Company's newest equipment has proven to be a
capital intense program. While the Company has adequate cash flow to
accomplish the upgrades without incuring debt, it is anticipated that
the ongoing upgrades and tooling for newer product shall continue to
require a large capital commitment.
Forward Looking Information
Statements of the Company's or management's intentions, beliefs,
anticipations, expectations and similar expressions concerning future
events contained in this document constitute "forward looking
statements" as defined in the Private Securities Litigation Reform
Act of 1995. As with any future event, there can be no assurance that
the events described in the forward looking statements made in this
report will occur or that the results of future events will not vary
materially from those described in the forward looking statements in
this document.
Important factors that could cause the Company's actual performance
and operating results to differ materially from the forward looking
statements include, but are not limited to, (i) the ability of the
Company to obtain new customers, (ii) the ability of the Company to
obtain sufficient financing for business opportunities, (iii) the
ability of the Company to reduce costs and thereby maintain adequate
profit margins.
Chat Room Disclaimer
This forum of exposure to publicly traded companies presents a venue for
the public to inquire about companies from other individuals as well as
post opinions. The Company has no way to regulate postings nor monitor
information posed on these boards. Management can only provide accurate
information to shareholders and potential shareholders when contacted
directly and such information can only be provided when it is based on
fact and has been filed as required by law with the Securities and
Exchange Commission and other regulatory agencies.
12
PART II - OTHER INFORMATION
Item 3. Controls and Procedures
An evaluation was performed under the supervision and with the
participation of the Company's management, including the
Chief Executive Officer and Chief Financial Officer of the
effectiveness of the design and operation of the Company's
disclosure controls and procedures within 180 days before the
filing date of this quarterly report.
Based on that evaluation, the Company's management, including the
CEO and CFO, concluded that the Company's disclosure controls and
procedures were effective. There have been no significant changes
in the Company's internal controls or in other factors that could
significantly affect internal controls subject to their evaluation.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 31.1 Section 302 Certification by Chief Executive Officer
Exhibit 31.2 Section 302 Certification by Chief Financial Officer
Exhibit 32.1 Section 906 Certification by Chief Executive Officer
Exhibit 32.2 Section 906 Certification by Chief Financial Officer
Filed herewith.
(b) Reports on form 8-K
None
13
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
Date: August 14, 2003 CLANCY SYSTEMS INTERNATIONAL, INC.
(Registrant)
By: /s/ Stanley J. Wolfson
Stanley J. Wolfson, President
and Chief Executive Officer
14