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, 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
incorporation or organization) Identification
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 to such 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 August 13, 2004 is 365,117,938 shares, $.0001 par value.
Transitional Small Business Disclosure Format: Yes No X
CLANCY SYSTEMS INTERNATIONAL, INC.
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Consolidated Balance Sheet - September 30, 2003
and June 30, 2004 (unaudited) 2 and 3
Consolidated Statement of Income - For the Three
Months Ended June 30, 2003 and 2004 (unaudited) 4
Consolidated Statement of Income - For the Nine
Months Ended June 30, 2003 and 2004 (unaudited) 5
Consolidated Statement of Stockholders' Equity - For
the Nine Months Ended June 30, 2004 (unaudited) 6
Consolidated Statement of Cash Flows - For the Nine
Months Ended June 30, 2003 and 2004 (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 17
Item 1. Legal Proceedings 19
Item 3. Controls and Procedures 20
Item 6. Exhibits and Reports on Form 8-K 20
-1-
CLANCY SYSTEMS INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
September 30, 2003 and June 30, 2004
ASSETS
September June
(unaudited)
Current assets: --------- ----
Cash, including interest bearing
accounts $ 669,292 $ 560,025
Marketable Securities-available
for sale --- 400,000
Accounts receivable, net 488,361 565,532
Accounts receivable, related party
(Note 3) 30,019 30,019
Income tax refund receivable 9,450 9,450
Inventories (Note 2) 135,437 105,830
Prepaid expenses 77,389 54,505
---------- ----------
Total current assets 1,409,948 1,725,361
Furniture and equipment, at cost:
Office furniture and equipment 269,523 286,554
Equipment under service contracts 2,109,045 2,288,079
Leasehold improvements 96,604 96,604
Equipment and vehicles under capital
leases 439,286 413,351
---------- ---------
2,914,458 3,084,588
Less accumulated depreciation (1,328,226) (1,693,641)
---------- ---------
Net furniture and equipment 1,586,232 1,390,947
Other assets:
Deposits and other 76,028 60,711
Goodwill 225,214 225,214
Software development costs, net of
accumulated amortization 180,163 207,455
---------- ---------
Total other assets 481,405 493,380
---------- ---------
$ 3,477,585 $ 3,609,688
=========== ===========
See accompanying notes to consolidated financial statements.
-2-
CLANCY SYSTEMS INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
September 30, 2003 and June 30, 2004
LIABILITIES AND STOCKHOLDERS' EQUITY
September June
(unaudited)
Current liabilities: --------- ----
Accounts payable $ 229,229 $ 237,119
Accrued expenses 276,176 305,948
Accounts payable, related party
(Note 3) 11,000 ---
Income taxes payable 21,852 109,173
Current portion of long term debt 250,197 232,840
Current portion of obligations
under capital leases 125,102 7,252
Deferred revenue 134,401 131,516
---------- ---------
Total current liabilities 1,047,957 1,023,848
Long-term debt, net of current
portions 124,866 28,110
Obligations under capital leases,
net of current portion 75,948 63,847
Minority interest in subsidiary 123,084 125,223
Deferred income taxes payable (Note 4) 4,600 1,365
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 1,179,236
--------- ---------
Total stockholder's equity 2,101,130 2,367,295
--------- ---------
$ 3,477,585 $ 3,609,688
=========== ===========
See accompanying notes to consolidated financial statements.
-3-
CLANCY SYSTEMS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
For the three months ended June 30, 2003 and 2004
(unaudited)
June June
2003 2004
Revenues: ---- ----
Sales $ 51,539 $ 86,892
Service contract income 785,577 930,534
Parking ticket collections and
other 135,077 89,660
----------- -----------
Total revenues 972,193 1,107,086
Costs and expenses:
Cost of sales 27,912 2,696
Cost of services 188,693 211,088
Cost of parking ticket
collections 21,337 23,643
General and administrative 482,066 547,855
Research and development 6,421 11,236
----------- ----------
Total costs and expenses 726,429 796,518
----------- ----------
Income from operations 245,764 310,568
Other income:
Other income 1,600 2,987
Interest income 448 163
Interest expense (11,768) (14,331)
Minority interest in (income)
loss of subsidiary 5,252 226
----------- ----------
Total other income (expense) (4,468) (10,955)
----------- ----------
Income before provision for
income taxes 241,296 299,613
Provision for income taxes:
Current expense 78,260 113,153
Deferred expense 13,050 (505)
----------- ---------
Total income tax expense 91,310 112,648
----------- ---------
Net income $ 149,986 $ 186,965
=========== ==========
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 consolidated financial statements.
-4-
CLANCY SYSTEMS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
For the nine months ended June 30, 2003 and 2004
(unaudited)
June June
2003 2004
Revenues: ---- ----
Sales $ 123,206 $ 191,742
Service contract income 2,046,901 2,267,205
Parking ticket collections
and other 249,497 252,305
----------- -----------
Total revenues 2,419,604 2,711,252
Costs and expenses:
Cost of sales 70,356 24,209
Cost of services 513,012 695,879
Cost of parking ticket
collections 86,201 95,131
General and administrative 1,296,495 1,401,722
Research and development 23,463 39,126
----------- -----------
Total costs and expenses 1,989,527 2,256,067
----------- -----------
Income from operations 430,077 455,185
Other income (expense):
Other income (expense) (16,119) 3,691
Interest income 1,329 548
Interest expense (34,403) (29,896)
Minority interest in (income)
loss of subsidiary 8,159 (2,139)
----------- ----------
Total other income (expense) (41,034) (27,796)
----------- ----------
Income before provision for
income taxes 389,043 427,389
Provision for income taxes:
Current expense 108,304 164,459
Deferred expense 39,150 (3,235)
---------- ---------
Total income tax expense 147,454 161,224
---------- ----------
Net income $ 241,589 $ 266,165
========== =========
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 consolidated financial statements.
-5-
CLANCY SYSTEMS INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the nine months ended June 30, 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
nine months ended
June 30, 2004 --- --- --- 266,165
----------- --------- ---------- ----------
Balance, June 30,
2004 365,117,938 $ 36,512 $ 1,151,547 $ 1,179,236
=========== ========= ============= ===========
See accompanying notes to consolidated financial statements.
-6-
CLANCY SYSTEMS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended June 30, 2003 and 2004
(unaudited)
June 30, June 30,
2003 2004
------- -------
Cash flows from operating activities:
Net income $ 241,589 $ 266,165
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 369,128 422,673
Deferred income tax expense 39,150 (3,235)
Minority interest (8,160) 2,139
Changes in assets and liabilities:
Accounts receivable (303,430) (77,171)
Inventories 26,176 29,607
Income taxes refundable 35,063 ---
Prepaid expenses 83,913 35,674
Accounts payable (39,542) 7,890
Accounts payable, related party --- (11,000)
Accrued expenses 92,747 29,772
Income taxes payable 113,526 87,321
Deferred revenue (30,394) (2,885)
---------- ---------
Total adjustments 378,177 520,785
---------- ---------
Net cash provided by operating
activities 619,766 786,950
---------- ---------
Cash flows from investing activities
Acquisition of furniture and equipment (494,891) (170,130)
Purchase of marketable securities --- (400,000)
Increase in software licenses and
software development costs (68,585) (82,023)
Increase in deposits and
other assets (55,750) ---
---------- ---------
Net cash used in investing
activities (619,226) (652,153)
---------- ---------
Cash flows from financing activities:
Borrowings on notes payable and capital
leases 288,500 ---
Payments on notes payable and capital
leases (87,183) (244,064)
---------- -----------
Net cash provided by financing
activities 201,317 (244,064)
----------- -----------
Increase (decrease) in cash and
cash equivalents 201,857 (109,267)
Cash and cash equivalents at beginning
of period 357,315 669,292
---------- -----------
Cash and cash equivalents at end
of period $ 559,172 $ 560,025
========== ==========
See accompanying notes to consolidated financial statements.
-7-
CLANCY SYSTEMS INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 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 nine months ended June
30, 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, June 30,
2003 2004
------------ ------------
Finished goods $ 21,521 $ 15,107
Work in process 4,563 35,250
Purchased parts and supplies 109,353 55,473
-------- ---------
$135,437 $105,830
======== ========
-8-
CLANCY SYSTEMS INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
3. Related Party Transactions
Related party account balances consist of the following
at:
September June
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 was 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
and nine months ended June 30, 2003 and 2004 is
based on the expected tax rate for the year.
As of September 30, 2003 and June 30, 2004 total deferred tax
assets and liabilities are as follows:
September 30, June 30,
2003 2004
---- ----
Deferred tax assets $ 68,400 $ 120,700
Deferred tax liabilities (73,000) (121,650)
--------- ----------
$ ( 4,600) $ (1,365)
========= ===========
-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 June 30, 2004, the Company had consolidated working capital of
$701,513 derived primarily from contract sales and contract service,
as compared to $361,991 at September 30, 2003. At June 30, 2004 the
components of working capital were $1,300,648 for Clancy and
working capital deficit of ($599,135) 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 JUNE 30,
2004 AND 2003
REVENUES. From the quarter ended June 30, 2003 to the quarter ended
June 30, 2004 revenues increased by $134,893 or 13.9% from $972,193
to $1,107,086. For Clancy only, revenues increased $105,761 or 16.0%, from
$661,665 to $767,426. For UTS, revenues increased $29,132 or 9.4% from
$310,528 to $339,660 for UTS. The increase in revenues is due to the
addition of new customers and products during the quarter ended June 30,
2004. Clancy's remit-online.com service has processed 27,551
transactions totaling $1,202,822 for the quarter ended June 30, 2004.
Revenues are generated based on a per transaction fee less bank
processing costs. The gross amount of revenues flowing through
Remit-online.com cannot be presented as revenue based on the SEC
accounting guidance. The Company only presents its net profit
from each transaction as revenuein the statements of income.
COST OF SERVICES. From the quarter ended June 30, 2003 to the quarter
ended June 30, 2004, cost of services increased by $22,395 or 11.9%
from $188,693 to $211,088 for the Company. Cost of services as a
percentage of service contract income was 24.0% for the 2003 quarter
and 22.7% for the 2004 quarter.
For Clancy only, the cost of services was $194,752 for the quarter
ended June 30, 2004 compared to $162,465 for the comparable period of
2003. The increase of $32,287 or 19.9% 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 to a
3 year straight line depreciation. 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 34.2% for the 2003 quarter and 33.0% for the 2004 quarter.
For UTS, cost of services decreased by $9,891 or 37.7% from $26,227
in the quarter ended June 30, 2003 to $16,336 for the quarter ended
June 30, 2004. The decrease is due to a concerted effort to reduce
unnecessary expenses including leased vehicles and personnel.
Two remote offices were consolidated to reduce duplicate expenses.
Cost of services as a percentage of service contract income was
8.5% for the 2003 quarter and 4.8% for the 2004 quarter.
The company is now issuing tickets at three of its locations.
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 $6,421 to $11,236, or
75.0%, from the quarter ended June 30, 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 June 30, 2004.
GENERAL AND ADMINISTRATIVE. General and administrative expenses
increased by $65,789 or 13.7% from $482,066 to $547,855 for the
quarter ended June 30, 2004 and 2003.
11
For Clancy, general and administrative expenses increased $40,508
or 20.8% from $194,803 to $235,311 and UTS increased by $25,281
or 8.8% from $287,263 to $312,544. Clancy's general and
administrative expenses increased due to increased legal fees.
NET INCOME. For the quarter ended June 30, 2004, the Company
reported net income of $186,965 ($187,530 for Clancy directly and
a loss of $565 for UTS) compared to $149,986 ($163,116 for Clancy
directly and a loss of $13,130 for UTS) for the quarter ended June
30, 2003.
The primary reason for the increase in net income of $36,979
is the increase in revenues from remit online and the increased
services which are discussed above.
COMPARISON OF RESULTS FOR THE NINE MONTHS ENDED JUNE 30,
2004
AND 2003 REVENUES. From the nine months ended June 30,
2003 to the nine months ended June 30, 2004 revenues increased by
$291,648 or 12.1% from $2,419,604 to $2,711,252. For Clancy only,
revenues increased $166,042 or 10.3%, from $1,605,486 to $1,771,528.
For UTS, revenues increased $125,606 or 15.4% from $814,118 to $939,724.
The increase in revenues is due to the addition of new customers
and products during the nine months ended June 30, 2004.
COST OF SERVICES. From the nine months ended June 30, 2003 to the
nine months ended June 30, 2004, cost of services increased by
$182,867 or 35.6% from $513,012 to $695,879 for the Company.
Cost of services as a percentage of service contract income was
25.1% for the 2003 nine months and 30.7% for the 2004 nine months.
For Clancy only, the cost of services was $573,530 for the nine
months ended June 30, 2004 compared to $460,737 for the comparable
period of 2003. The increase of $112,793 or 24.5% is primarily
due to an increase in depreciation expense, new clients, and supply
costs. The Company has gone from a 5 year straight line depreciation
to a 3 year straight line depreciation. Costs
from the Company's paper suppliers has increased. Also, 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 capitalized. Cost of services as
a percentage of service contract income was 37.4% for the 2003 nine
months and 43.2% for the 2004 nine months. The company anticipates
this cost of service to increase as it continues to convert the
balance of Clancy's clients to the newer hardware system.
For UTS, cost of services increased by $70,075 or 134% from $52,274
in the nine months ended June 30, 2003 to $122,349 for the nine
months ended June 30, 2004. The increase is due to adding ticket
issuance services to several of its current contracts. This
requires start up fees, manpower, service expense for equipment and
supplies provided by Clancy and other related installation expenses.
UTS has also gone from 5 year straight line depreciation
to a 3 year straight line depreciation.
12
Cost of services as a percentage of service contract income was
6.4% for the 2003 nine months and 13.02% for the 2004 nine months.
The company is now issuing tickets at three of its contract locations.
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 $23,463 to $39,126, or
66.8%, from the nine months ended June 30, 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 nine months ended June 30, 2004.
GENERAL AND ADMINISTRATIVE. General and administrative expenses
increased by $105,227 or 8.12% from $1,296,495 to $1,401,722 for
the nine months ended June 30, 2004 and 2003. For Clancy, general
and administrative expenses increased $51,161 or 9.1% from $564,774
to $615,935 and UTS increased $54,066 or 7.39% from $731,721 to
$785,787. The increase in general and administrative costs for the
Company is primarily due to the increase in directors and officers
insurance, legal fees, accounting, and other professional services,
increased salaries and related expenses of expanding operations and
increases due to more stringent and comprehensive securities laws and
corporate governance requirements under Sarbanes-Oxley Act of 2002.
NET INCOME. For the nine months ended June 30, 2004, the Company
reported net income of $266,165 ($260,818 for Clancy directly and
$5,347 for UTS) compared to $241,589 ($261,988 for Clancy directly
and a loss of $20,399 for UTS) for the nine months ended June 30,
2003.
The primary reason for the increase in net income of $24,576 is
the increase in service contract revenues, which is partially
offset by 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 made for "Park-by-phone". The Company will also be
manufacturing its printer in a new and smaller case. While the
Company has experienced some delays in tooling, we anticipate
the new molds to be completed by September 30, 2004.
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.
13
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, dedicates as much time as
the company requires to develop and enhance its products.
The engineer also performs research and development 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.
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.
UTS loans to its primary bank and private lender are
being paid back by the UTS cash flows. UTS secured a long through
the Company's primary bank, however the Company has no olbigation
on the load. The loan is secured by UTS assets. 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.
14
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.
The Company's newest equipment has proven to be a capital intensive
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.
15
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.
On August 13, 2004, a lawsuit brought by Francis Salazar against
the Company for placing a restriction on shares he received in
March of 2000 from Robert Brodbeck, based on Rule 144 requirements,
was dismissed. The Company's legal defense for this matter was
considerable and has had a substantial impact on it's bottom
line. Francis Salazar has brought numerous frivolous lawsuits
against the Company and the Company has had to vigorously defend
itself against him. In all cases, the lawsuits have been
dismissed in favor of the Company as having no merit.
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 an average
of $350,000 per month in transactions. The Company has observed
a continuing increase in activity monthly. The Company generates
revenue from Remit-online.com based on a per transaction fee.
In addition, for Clancy, outstanding ticket fines of approximately
$200,000 and for UTS, outstanding ticket fines of approximately
$253,703, have not been recognized as revenue at June 30, 2004,
based on SEC accounting guidance.
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 $ 260,950 $ 232,840 $ 28,110 $ - $ -
Capital
Lease
Obligations 71,099 7,252 63,847 -
Operating
Expenses
UTS 8,100 3,600 4,500 - -
Clancy 7,266 7,266
Purchase
Obligations - - - - -
Other Long-
term
obligations - - - - -
--------- --------- ---------- ---------- ---------
Total
Contractual
Cash
Obligations $ 347,415 $ 250,958 $ 96,457 $ - $ -
========= ========== ========= ========== ==========
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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 thereporting 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 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.
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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.
BERLIN-BREMEN EXCHANGE
The Company has been made aware that it has been listed on the
Berlin-Bremen Exchange. Management neither sought or approved
this listing. Management believes it is in the best interest
of its shareholders to be delisted from the Berlin-Bremen
exchange and will make best efforts with reasonable costs to
to be removed from listing.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
In the case of Clancy Systems International, Inc vs John Short,
Short's attorney filed an appeal for an Emergency Motion
for Relief From Judgment on December 20, 2002. The motion
was granted, and another appeal was filed. The Commonwealth
of Massachusetts Appeals Court heard the case in May 2004,
and ruled on June 2, 2004 that the earlier "denial for relief
from judgment was affirmed." Short then filed an appeal with
the Supreme Judicial Court of Massachusetts to review the case
on June 18, 2004. On July 23, 2004, the Supreme Judicial Court
of Massachusetts denied the Application for Further Appellate
Review.
On March 21, 2002, a complaint was filed in Denver District
Court by Francis Salazar against the Company. Mr. Salazar was
seeking compensation for alleged loss of profit on the sale of
6,000,000 shares of the Company's common stock that carried a
restrictive legend under Rule 144 of the Securities Act of
1933, as amended. The complaint alleges that the restrictive
legend prevented Salazar from selling the shares during an
uptick in the Company's share price. The Company filed a
motion to dismiss which was granted in December 2002, but
subsequently overturned on appeal in October 2003.
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Clancy filed a motion with the District Court, City and County
of Denver, Colorado, Case #02-CV-2391, for Summary Judgement
to dismiss the case in June 2004. The case was dismissed on
August 13, 2004. Management is pleased with the results
which evidenced the Company's position that this case was
frivolous. The Company has been severely damaged by Mr.
Salazar as it had to incur substantial legal fees on this
matter which are not recoverable and have had a negative
impact on the company's profits and shareholder value.
Mr. Salazar has brought numerous frivolous lawsuits against
the Company over the years and the defense of these suits
has been costly to the Company. In all cases the suits
have been dismissed in favor of the Company and as having
no merit.
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 90 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
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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 13, 2004 CLANCY SYSTEMS INTERNATIONAL, INC.
(Registrant)
By: /s/ Stanley J. Wolfson
Stanley J. Wolfson, President
and Chief Executive Officer
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