UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2004
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)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and
2) has been subject tosuch filing requirements for the past 90 days:
Yes X No __
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares outstanding of the issuer's classes of common
stock, as of May 20, 2004 is 365,117,938 shares, $.0001 par value.
Transitional Small Business Disclosure Format: Yes___No__X__
CLANCY SYSTEMS INTERNATIONAL, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - September 30, 2003 and
March 31, 2004 (unaudited) Pages 2 and 3
Consolidated Statements of Income - For the Three Months
Ended March 31, 2003 and 2004 (unaudited) 4
Consolidated Statements of Income - For the Six Months
Ended March 31, 2003 and 2004 (unaudited) 5
Consolidated Statement of Stockholders' Equity - For the
Six Months Ended March 31, 2004 (unaudited) 6
Consolidated Statements of Cash Flows - For the Six Months
Ended March 31, 2003 and 2004 (unaudited) 7
Notes to Unaudited Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
PART II. OTHER INFORMATIION
Item 1. Legal Proceedings 19
Item 2. Controls and Procedures 19
Item 6. Exhibits and Reports on Form 8-K 19
-1-
CLANCY SYSTEMS INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
September 30, 2003 and March 31, 2004
(unaudited)
ASSETS
September March
2003 2004
--------- -----
Current assets:
Cash, including interest bearing accounts $ 669,292 $ 847,253
Accounts receivable, net 488,361 623,994
Accounts receivable, related party (note 3) 30,019 30,019
Income tax refund receivable 9,450 9,450
Inventories (Note 2) 135,437 109,210
Prepaid expenses 77,389 35,424
------------ ----------
Total current assets 1,409,948 1,655,350
Furniture and equipment, at cost:
Office furniture and equipment 269,523 284,523
Equipment under service contracts 2,109,045 2,220,789
Leasehold improvements 96,604 96,604
Equipment and vehicles under capital leases 439,286 439,286
------------ ----------
2,914,458 3,041,202
Less accumulated depreciation (1,328,226) (1,571,913)
------------ ----------
Net furniture and equipment 1,586,232 1,469,289
Other assets:
Deposits and other 76,028 54,542
Goodwill 225,214 225,214
Software development costs, net of
accumulated amortization 180,163 200,553
------------ ----------
Total other assets 481,405 480,309
------------ ----------
$ 3,477,585 $ 3,604,948
============ ===========
See accompanying notes to unaudited consolidated financial statements.
2
CLANCY SYSTEMS INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
September 30, 2003 and March 31, 2004
(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
September March
2003 2004
--------- -----
Current liabilities:
Accounts payable $ 229,229 $ 516,230
Accrued expenses 276,176 293,097
Accounts payable, related party (note 3) 11,000 ---
Income taxes payable 21,852 12,570
Current portion of long term debt 250,197 232,796
Current portion of obligations under
capital leases 125,102 40,935
Deferred revenue 134,401 109,280
--------- ----------
Total current liabilities 1,047,957 1,204,908
Long-term debt, net of current portions 124,866 34,668
Obligations under capital leases, net of
current portion 75,948 57,723
Minority interest in subsidiary 123,084 125,449
Deferred tax liability (note 4) 4,600 1,870
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 913,071 992,271
---------- ----------
Total stockholders' equity 2,101,130 2,180,330
---------- ----------
$ 3,477,585 $ 3,604,948
=========== ============
See accompanying notes to unaudited consolidated financial statements.
3
CLANCY SYSTEMS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three months ended March 31, 2003 and 2004
(unaudited)
March March
2003 2004
----- -----
Revenues:
Sales $ 30,892 $ 62,921
Service contract income 639,873 676,936
Parking ticket collections 76,134 98,326
---------- ----------
Total revenues 746,899 838,183
Costs and expenses:
Cost of sales 22,001 17,786
Cost of services 202,223 253,159
Cost of parking ticket collections 29,176 39,569
General and administrative 475,501 408,427
Research and development 8,117 13,868
---------- ----------
Total costs and expenses 737,018 732,809
---------- ----------
Income from operations 9,881 105,374
Other income (expense):
Other income (loss) 43 (1,168)
Interest income 333 191
Interest expense (11,128) (7,155)
Minority interest in (income)
loss of subsidiary 6,756 (17,930)
----------- ----------
Total other income (expense) (3,996) (26,062)
----------- ----------
Income before provision for
income taxes 5,885 79,312
Provision (benefit)for income taxes:
Current expense (benefit) (10,969) 34,808
Deferred expense (benefit) 13,050 (4,095)
----------- ----------
Total income tax expense 2,081 30,713
----------- ----------
Net income $ 3,804 $ 48,599
=========== ==========
Basic net income per common share $ * $ *
=========== ==========
Weighted average number of shares
outstanding 365,118,000 365,118,000
=========== ===========
*Less than $.01 per share
See accompanying notes to unaudited consolidated financial statements.
4
CLANCY SYSTEMS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the six months ended March 31, 2003 and 2004
(unaudited)
March March
2003 2004
----- -----
Revenues:
Sales $ 71,667 $ 104,850
Service contract income 1,261,324 1,336,671
Parking ticket collections 114,420 162,645
---------- ----------
Total revenues 1,447,411 1,604,166
Costs and expenses:
Cost of sales 42,444 21,513
Cost of services 324,319 484,791
Cost of parking ticket collections 64,864 71,488
General and administrative 814,429 853,867
Research and development 17,042 27,890
---------- ----------
Total costs and expenses 1,263,098 1,459.549
---------- ----------
Income from operations 184,313 144,617
Other income (expense):
Other income (expense) (17,719) 704
Interest income 881 385
Interest expense (22,635) (15,565)
Minority interest in loss (income)
of subsidiary 2,907 (2,365)
---------- ----------
Total other income (expense) (36,566) (16,841)
---------- ----------
Income before provision for income taxes 147,747 127,776
Provision for income taxes:
Current expense 30,044 51,308
Deferred expense (benefit) 26,100 (2,730)
---------- ---------
Total income tax expense 56,144 48,576
---------- ---------
Net income $ 91,603 $ 79,200
=========== ===========
Basic net income per common share $ * $ *
========== ==========
Weighted average number of shares
outstanding 365,118,000 365,118,000
=========== ===========
*Less than $.01 per share
See accompanying notes to unaudited consolidated financial statements.
5
CLANCY SYSTEMS INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the six months ended March 31, 2004
(Unaudited)
Additional
Common Stock Paid-In Retained
Shares Amount Capital Earnings
---------------------- ---------- --------
Balance, September 30,
2003 365,117,938 $ 36,512 $ 1,151,547 $ 913,071
Net income for the
six months ended
March 31, 2004 --- --- --- 79,200
------------ --------- ------------- ----------
Balance, March 31,
2004 365,117,938 $ 36,512 $ 1,151,547 $ 992,271
============= ========= ============= ==========
See accompanying notes to unaudited consolidated financial statements.
6
CLANCY SYSTEMS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended March 31, 2003 and 2004
(unaudited)
March 31, March 31,
2003 2004
-------- --------
Cash flows from operating activities:
Net income $ 91,603 $ 79,200
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 247,537 280,645
Deferred income tax expense (benefit) 26,100 (2,730)
Minority interest (2,907) 2,365
Changes in assets and liabilities:
Accounts receivable (143,143) (135,633)
Inventories 21,447 26,227
Income taxes refundable 35,063 ---
Prepaid expenses 45,700 41,965
Accounts payable 45,670 287,001
Accounts payable, related party --- (11,000)
Accrued expenses 99,077 16,921
Income taxes payable 34,162 (9,282)
Deferred revenue 5,735 (25,121)
--------- ----------
Total adjustments 414,441 471,358
--------- ----------
Net cash provided by operating activities 506,044 550,558
--------- ----------
Cash flows from investing activities:
Acquisition of furniture and equipment (451,996) (126,744)
Increase in software licenses and software
development costs (43,585) (56,061)
Decrease (increase) in deposits and other
assets (41,122) 20,199
--------- ----------
Net cash used in investing activities (536,703) (162,606)
--------- ---------
Cash flows from financing activities:
Borrowings on notes payable and capital
leases 282,619 ---
Payments on notes payable and capital leases (85,789) (209,991)
--------- ---------
Net cash provided by (used in) financing
activities 196,830 (209,991)
--------- ---------
Increase in cash and cash equivalents 166,171 177,961
Cash and cash equivalents at beginning of
period 357,315 669,292
--------- ---------
Cash and cash equivalents at end of period $ 523,486 $ 847,253
========== ==========
See accompanying notes to unaudited consolidated financial statements.
7
CLANCY SYSTEMS INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004
1. Basis of Presentation
The accompanying unaudited consolidated financial statements have
been prepared in accordance with accounting principles generally
accepted in the United States of America for interim financial
information and with the instructions to Form 10-QSB and Item 310 of
Regulation S-B. Accordingly, they do not include all of the information
and footnotes required by accounting principles generally accepted in
the United States of America for complete financial statements. The
accompanying unaudited consolidated financial statements reflect all
adjustments that, in the opinion of management, are considered necessary
for a fair presentation of the financial position, results of operations,
and cash flows for the periods presented. The results of operations for
such periods are not necessarily indicative of the results expected for
the full fiscal year or for any future period. The accompanying
unaudited consolidated financial statements should be read in conjunction
with the audited consolidated financial statements of Clancy Systems
International, Inc. and Subsidiary included in the Form 10-KSB for the
fiscal year ended September 30, 2003.
The Company's subsidiary, Urban Transit Solutions, Inc. ("UTS") was
incorporated under the Laws of the Commonwealth of Puerto Rico. The
financial statements of UTS have been prepared on the basis of
accounting principles generally accepted in the United States of
America and denominated in U.S dollars. Therefore, there are no
amounts recorded for foreign currency translation or for transactions
denominated in a foreign currency. The Company has consolidated the
financial results of UTS with those of the Company for the three and
six months ended March 31, 2003 and 2004. All significant inter company
transactions and balances have been eliminated in consolidation.
2. Inventories
Inventories consist of the following at:
September 30, March 31,
2003 2004
------------ -----------
Finished goods $ 21,521 $ 11,228
Work in process 4,563 36,098
Purchased parts and
supplies 109,353 61,884
----------- ----------
$ 135,437 $ 109,210
=========== ==========
8
CLANCY SYSTEMS INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004
3. Related party transactions
Related party account balances consist of the following at:
September 30, March 31,
2003 2004
---- ----
Accounts receivable, related party $ 30,019 $ 30,019
========= ========
Accounts payable, related party $ 11,000 $ -0-
========= =========
Accounts receivable, related party is due from Pan American
Parking Solutions, Inc. which is a company formerly owned by
the former president of UTS.
Accounts payable, related party is due to Pan American Products,
a company owned by the current president of UTS, which was paid
during the quarter ended March 31, 2004.
4. Income taxes
The provision for income taxes for the three months and six months
ended March 31, 2004 and 2003 are based on the expected tax rate for
the year.
Total deferred tax assets and liabilities are as follows:
September 30, March 31,
2003 2004
--------- ----------
Non current deferred tax assets $ 68,400 $ 68,400
Non current deferred tax liabilities (73,000) (70,270)
--------- ---------
Net non-current deferred taxes $ (4,600) $ (1,870)
=========== ===========
9
Item 2.
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Management's Statement Regarding 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 with any future event, there can be no assurance that the events
described in 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 made 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.
Management's Discussion and Analysis of Financial Condition
and Results of Operations
At March 31, 2004, the Company had consolidated working capital of
$450,442 derived primarily from contract sales and contract service,
as compared to $361,991 at September 30, 2003. At March 31, 2004,
the components of working capital were $1,117,376 for Clancy and
working capital deficit of $(666,934) for UTS compared to $1,007,082
for Clancy and $(645,091) for UTS at September 30, 2003.
The Company anticipates using its working capital to fund ongoing
operations, including general and administrative expenses, equipment
purchases, equipment manufacturing, travel, marketing and research and
development. The Company anticipates having sufficient working capital
to fund operations for the fiscal year ending September 30, 2004.
10
COMPARISON OF RESULTS FOR THE THREE MONTHS ENDED MARCH 31,
2004 AND 2003
REVENUES. From the quarter ended March 31, 2003 to the quarter ended
March 31, 2004 revenues increased by $91,284 or 12.2% from $746,899
to $838,183 For Clancy only, revenues increased $33,344 or 6.8%, from
$487,469 to $520,813. For UTS, revenues increased $57,940 or 22.3% from
$259,430 to $317,370 for UTS. The increase in revenues is due to the
addition of new customers and products during the quarter ended
March 31, 2004. Clancy's remit-online.com service has processed
23,030 transactions totalling $892,196 for the quarter ended March 31,
2004. The gross amount of revenues flowing through Remit-online.com
cannot be captured as revenue based on the SEC rules. The Company
only captures its net profit from each transaction as revenue.
COST OF SERVICES. From the quarter ended March 31, 2003 to the quarter
ended March 31, 2004, cost of services increased by $50,936 or 25.2% from
$202,223 to $253,159 for the Company. Cost of services as a percentage
of service contract income was 31.6% for the 2003 quarter and 37.4% for
the 2004 quarter.
For Clancy only, the cost of services was $198,878 for the quarter ended
March 31, 2004 compared to $182,943 for the comparable period of 2003.
The increase of $15,935 or 8.7% is primarily due to an increase in
depreciation expense and increases in cost of tickets/envelopes.
The Company has gone from a 5 year straight line depreciation schedule
to a 3 year straight line depreciation schedule. Paper costs have
escalated and been reflected in billings from the Company's ticket
and envelope suppliers. Cost of services as a percentage of service
contract income was 48.1% for the 2003 quarter and 55.3% for the 2004
quarter.
For UTS, cost of services increased by $35,001 or 181.5% from $19,280
in the quarter ended March 31, 2003 to $54,281 for the quarter ended
March 31, 2004. The increase is due to moving service and ticket
fees and increased depreciation. UTS has also gone from a 5 year straight
line depreciation schedule to a 3 year straight line depreciation schedule.
Cost of services as a percentage of service contract income was 7.4% for
the 2003 quarter and 17.1% for the 2004 quarter. The company is now
issuing tickets at two of its cities. While this will increase revenues,
this has also increased basic cost of services.
11
RESEARCH AND DEVELOPMENT. The Company's parking enforcement systems
research and development costs increased from $8,117 to $13,868, or
70.9%, from the quarter ended March 31, 2003 to 2004. Product development
and improvement is still paramount to the Company, and costs have been
incurred for development of several new items during the quarter ended
March 31, 2004.
GENERAL AND ADMINISTRATIVE. General and administrative expenses
decreased by $67,074 or 14.1% from $475,501 to $408,427 for the quarter
ended March 31, 2004 and 2003. For Clancy, general and administrative
expenses decreased $31,029 or 13.5% from $229,549 to $198,520 and UTS
decreased by $36,045 or 14.7% from $245,952 to $209,907. Clancy's
general and administrative expenses decreased due to decreased
legal fees.
NET INCOME. For the quarter ended March 31, 2004, the Company reported
net income of $48,599 ($33,230 for Clancy directly and $15,369
for UTS) compared to $3,804 ($20,691 for Clancy directly and a loss of
$16,887 for UTS) for the quarter ended March 31, 2003.
The primary reason for the increase in net income of $44,795 is the
increase in revenues from remit online and the increased services
which are discussed above.
COMPARISON OF RESULTS FOR THE SIX MONTHS ENDED MARCH 31,
2004 AND 2003
REVENUES. From the six months ended March 31, 2003 to the six months
ended March 31, 2004 revenues increased by $156,755 or 10.8% from
$1,447,411 to $1,604,166 For Clancy only, revenues increased $60,281
or 6.4%, from $943,821 to $1,004,102. For UTS, revenues increased
$96,474 or 19.2% from $503,590 to $600,064. The increase in revenues
is due to the addition of new customers and products during the six
months ended March 31, 2004. During this quarter, the company
doubled its permit fulfillment program for BART.
12
COST OF SERVICES. From the six months ended March 31, 2003 to the
six months ended March 31, 2004, cost of services increased by $160,472
or 49.5% from $324,319 to $484,791 for the Company. Cost of services as
a percentage of service contract income was 25.7% for the 2003 six months
and 36.3% for the 2004 six months.
For Clancy only, the cost of services was $378,778 for the six months
ended March 31, 2004 compared to $298,272 for the comparable period of
2003. The increase of $80,506 or 27.0% is primarily due to an increase
in depreciation expense and increases in cost of tickets/envelopes.
The Company has gone from a 5 year straight line depreciation schedule
to a 3 year straight line depreciation schedule. Paper costs have
escalated and been reflected in billings from the Company's ticket and
envelope suppliers. The Company is also providing its Palmtype keypads
and digital cameras to clients. As these items individually are less
than $250 each (the Palmtypes cost the Company $60 to build and digital
cameras average between $25 and $100) they are expensed and not
captilized. Cost of services as a percentage of service contract
income was 39.4% for the 2003 six months and 51.4% for the 2004 six
months. The company anticipates this cost of service to increase
as it continues to convert the balance of our clients to the newer
hardware system.
For UTS, cost of services increased by $79,966 or 307% from $26,047 in
the six months ended March 31, 2003 to $106,013 for the six months ended
March 31, 2004. The increase is due to moving service and ticket fees
and increased depreciation. UTS has also gone from a 5 year straight
line depreciation schedule to a 3 year straight line depreciation schedule.
Cost of services as a percentage of service contract income was 5.1% for
the 2003 six months and 17.7% for the 2004 six months. The company is
now issuing tickets at two of its cities. While this will increase
revenues, this has also increased basic cost of services.
RESEARCH AND DEVELOPMENT. The Company's parking enforcement systems
research and development costs increased from $17,042 to $27,890, or
63.7%, from the six months ended March 31, 2003 to 2004. Product
development and improvement is still paramount to the Company,
and costs have been incurred for development of several new items
during the six months ended March 31, 2004.
GENERAL AND ADMINISTRATIVE. General and administrative expenses
increased by $39,438 or 4.8% from $814,429 to $853,867 for the
six months ended March 31, 2004 and 2003. For Clancy, general and
administrative expenses increased $10,653 or 2.9% from $369,971 to
$380,624 and UTS increased $28,785 or 6.5% from $444,458 to $473,243.
The increase in general and administrative costs for the Company is
primarily due to the increase in directors and officers insurance,
accounting, and other professional services, increased salaries and
related expenses of expanding operations and increases due more
stringent and comprehensive securities laws and corporate governance
requirements under Sarbanes-Oxley Act of 2002.
13
NET INCOME. For the six months ended March 31, 2004, the Company
reported net income of $79,200 ($102,743 for Clancy directly and a
loss of $23,543 for UTS) compared to $91,603 ($98,872 for Clancy
directly and a loss of $7,269 for UTS) for the six months ended
March 31, 2003.
The primary reason for the decrease in net income of $12,403 is
the increase in cost of services for both Clancy and UTS which
are discussed above. UTS also had legal expenses related to
transactions and activities incurred by the prior management.
During the next twelve months, the Company will continue to
expand its Internet parking services and operations. A concentrated
effort will be "Park-by-phone" which will include an
aggressive advertising campaign. The Company will also be
manufacturing its printer in a new and smaller case.
In order to keep its products and systems from becoming obsolete,
the Company regularly modifies and updates its hardware and software.
In order to streamline its ticket writing and car rental equipment,
the Company redesigned the printer so that it weighs less than
two pounds. New battery technology has also allowed the Company
to reduce the size and weight of the printers.
During 2001/2002, the Company began manufacturing a new printer board
to interface to Palm handheld devices. It incorporates a state of
the art print mechanism, light weight battery technology, and flat forms.
The company has also developed a keyboard cradle for the Palm devices.
The Palm type has a 45 key full alpha/numeric keypad with function keys
and assignable function keys.
Management keeps informed of new developments in components so that
the printer and keypads are up-to-date, fast and suit user requirements.
The Company communicates with vendors on a regular and ongoing basis so
that management is aware of upgraded components, new technologies and
processes that can be used to upgrade its hardware. The Company has
a relationship with an engineer, who, although he works as an independent
contractor, he dedicates as much time as the company requires to develop
and enhance its products. The engineer also performs R&D for the company
and makes prototype boards for testing and evaluation.
The Company's software is developed in-house by five full- time
programmers and by the Company's President, Stanley Wolfson, and
is maintained and updated on a regular basis.
14
Clancy has qualified to be a Microsoft Certified Partner. This
relationship allows the Company to receive pre-releases of software
products which gives us the leading edge on upgrading programs and
embedding new services into our systems.
The office computer software allows daily ticket, rental and inventory
information to be transferred from the portable data entry units to a
central computer database. The information is compiled and then processed
further according to user requirements.
Through sophisticated communications software developed internally,
the Company is able to update, modify, repair, enhance and change
programs at the client's location via modem and the Internet.
The Company has developed numerous Internet based parking programs
which include payment processing, permit registrations, and pre-paid
parking and parking reservations, special event parking and permitting,
and its Expo1000 Parking Industry Guide.
URBAN TRANSIT SOLUTIONS
The Company provided a total financial investment of $500,000 to
Urban Transit Solutions between March 1998 and April 1999. UTS
has been generating revenue since August 1998. Collections from parking
lot fees from Cauguas commenced in January of 1999. The Company's loan
to its primary bank and private lender have been paid back by the
Company's cash flows. The settlement of ownership between the Company
and UTS set forth the opportunity for Clancy management to take a more
significant role in the operations of UTS. In June, 2003, a new management
team was installed at UTS. Kenneth Stewart is the President of UTS.
Damaris Carasquillo is the operations manager. The UTS Board of
Directors includes Kenneth Stewart, Stanley Wolfson, and Lizabeth Wolfson.
The new management team has taken an aggressive approach to bringing
the accounts payable current, reducing unnecessary expenses and reducing
debt obligations. The Company expects to see an improvement to UTS
profitability during the 2003-2004 fiscal year. UTS has funded its
operations primarily by loans and cash flows. It has notes payable
and capital lease obligations arising from borrowings for working
Capital and purchases of equipment. The Company will advance funding
to Urban Transit Solutions in order to allow them to expand their
operations and reduce their outside debt obligations.
TRENDS AND CONDITIONS
The Company anticipates no major impact as a result of trends of
the past few years. A further discussion appears below. If current
trends continue, the Company's liquidity will continue to improve on
a short-term and a long-term basis.
The Company anticipates that its expenses shall increase as a direct
result of the Sarbanes-Oxley Act of 2002 as it pertains to:
(i) additional accounting and auditing procedures; (ii) additional
legal costs due to compliance with new corporate governance mandates.
The Company now utilizes four 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
irregularities of several years ago). The Company is able to qualify for
Directors and Officers insurance when many companies are no longer able
to qualify.
15
The Company's newest equipment has proven to be a capital intense program.
The Company has designed its printer board to work and fit in both its
current model case as well as its new case, which will prove to be a cost
savings. While the Company has adequate cash flow to accomplish the
upgrades without incurring debt, it is anticipated that the ongoing
upgrades and tooling for newer product shall continue to require a
large capital commitment.
With the weakened economy as of recent years, municipalities are in
search of additional revenues and the installation and implementation
of means to efficiently and effectively collect parking ticket revenues
as a viable source of such additional revenues for many locales. As
on street parking spaces are finite, and populations increase, a structured
management system of turnover, enforcement and accountability of parking
revenues will be imperative for all cities.
In addition, the Company supplies all hardware, software, training,
supplies and maintenance for the system, thus eliminating all significant
capital expenditures by the user.
The Company has experienced a large number of inquiries about its system
related to the total program and special features and anticipates growth
in this area in the next fiscal year.
Uncertainties that can impact revenues from the Company's service
contract agreements would be related to dramatic weather changes and
municipal disaster occurrences (i.e. September 11, 2001). As parking
ticket issuance operations are primarily "out-of-doors" tasks, severe
weather such as a major blizzard, hurricane, or rains could impact ticket
production for a limited period in certain locales. While such reductions
are temporary, they can impact revenues as the Company bills most clients
on a fee-per-ticket basis. The meter collections for UTS could be
temporarily reduced during a hurricane or tropical storm. Further,
as the Company is contracting primarily with City government agencies,
a deployment of personnel to other duties during a disaster could
temporarily reduce ticket issuance activities.
Internal and external sources of liquidity
The Company anticipates using its working capital to fund ongoing
operations, including general and administrative expenses, equipment
manufacturing, travel, marketing and research and development. The
Company anticipates having sufficient working capital to fund operations
for the fiscal year ending September 30, 2004.
UTS has funded its operations primarily by cash flows and bank debt.
It has notes payable and capital lease obligations arising from borrowings
for working capital and purchases and installation of meter equipment. With
UTS under new management, the Company anticipates that UTS will be
profitable for the year ending September 30, 2004.
The Company has experienced significant interest in the Denver Boot
for vehicles as well as for security on other mobile devices including
construction trailers and communications generators. There has also
been a demand for the Denver Boot for enforcement on private property.
Exposure on the Internet has been favorable for sales of this product.
16
The Company has experienced an interest in its IDBadgemaker software.
The program is utilized by news services, janitorial companies, social
service agencies, private clubs and others for security and identification
purposes. The program receives "excellent" ratings at download.com.
Remit-on-line.com has grown as a ticket payment site.
It is offered to Clancy ticket system clients and other companies
in parking industry businesses. Remit processes and average of $297,000
per month in transactions. The Company has observed a continuing
increase in activity monthly.
In addition, for Clancy, outstanding ticket fines of approximately
$200,000 and for UTS, oustanding ticket fines of approximately
$253,703, have not been recognized as revenue at March 31, 2004.
CONTRACTUAL OBLIGATIONS
The following obligations are the debt responsibility of UTS.
Clancy does not have any obligations other than operating leases
for its office space.
Payment Due by Period
Contractual Less than
Obligations Total 1 year 1-3 years 4-5 years Over
Long Term
Debt $ 323,384 $ 253,946 $ 69,438 $ - $ -
Capital
Lease
Obligations 192,641 118,754 63,440 10,447 -
Operating
Expenses
UTS 9,600 3,600 6,000 - -
Clancy 21,798 21,798
Purchase
Obligations - - - - -
Other Long-
term
obligations - - - - -
--------- --------- ---------- ---------- ---------
Total
Contractual
Cash
Obligations $ 547,423 $ 398,098 $ 138,878 $ 10,447 $ -
========= ========== ========= ========== ==========
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 financial statements 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.
17
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 citations for the Company's
privatization projects is recognized on a cash basis when received
as collectibility 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 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
5 years) or the estimate of current and future revenues for the
related product.
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.
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.
18
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
See status of Legal Proceedings disclosed in form 10-KSB
for period ended September 30, 2003 as it relates to Clancy
Systems International, Inc. vs John Short.
On March 21, 2002, a complaint was filed in Denver District
Court (Colorado) by Francis Salazar against the Company.
Mr. Salazar is seeking compensation for alleged loss of profit
on the sale of six million shares of the Company's common stock
which carried a restrictive legend under Rule 144 of the
Securities Act of 1933, as amended. The complaint alleges
that the restrictive legend prevented him from selling the
shares during an up tick in the Company's stock price.
The Company views this as a non meritorious lawsuit by Mr.
Salazar and filed a Motion to Dismiss on April 29, 2002.
The Motion to Dismiss was granted in December 2002, but
subsequently overturned on appeal in October 2003. Clancy
filed an answer and partial Motion to Dismiss on November 3, 2003.
The motion sought to dismiss Salazar's second claim for relief.
Mr. Salazar filed an amended second claim for relief on December 4,
2003, and Clancy filed another partial Motion to Dismiss that claim
on December 7, 2003. The second partial Motion to Dismiss was
granted on February 20, 2004.
The Company continues to believe the remaining claims are non
meritorious and will continue to defend the remaining claims
vigorously.
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
19
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: May 20, 2004 CLANCY SYSTEMS INTERNATIONAL,
INC.
(Registrant)
By: /s/ Stanley J. Wolfson
Stanley J. Wolfson, President
and Chief Executive Officer
20