-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, L97a+F5084sq2pzx/SeGvbAhRgl0yjM9Dfuo6F7GhsjSA+eCSu6ZTx6kU6TDp2FJ ghRqNtRXu7H5idjf40QGPw== 0000789318-04-000009.txt : 20040816 0000789318-04-000009.hdr.sgml : 20040816 20040816132347 ACCESSION NUMBER: 0000789318-04-000009 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20040630 FILED AS OF DATE: 20040816 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CLANCY SYSTEMS INTERNATIONAL INC /CO/ CENTRAL INDEX KEY: 0000789318 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 841027964 STATE OF INCORPORATION: CO FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 033-04882-D FILM NUMBER: 04977459 BUSINESS ADDRESS: STREET 1: 2250 S ONEIDA STREET 2: STE 308 CITY: DENVER STATE: CO ZIP: 80224 BUSINESS PHONE: 3037530197 MAIL ADDRESS: STREET 1: 2250 S ONEIDA STREET 2: STE 3308 CITY: DENVER STATE: CO ZIP: 80224 FORMER COMPANY: FORMER CONFORMED NAME: OXFORD FINANCIAL INC DATE OF NAME CHANGE: 19600201 10QSB 1 a10q0604.txt 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 $ - $ - ========= ========== ========= ========== ========== 17 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. -18- 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. 19 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 -20- 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 -21- EX-31 2 cert311.txt Exhibit 31.1 Section 302 Certification Quarterly Report on Form 10-QSB I, Stanley J. Wolfson, certify that: I have reviewed this quarterly report on Form 10-QSB of Clancy Systems International, Inc.; 1. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 2. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report; 3. The small business issuer's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and 4. The small business issuer's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting. Date: August 16, 2004 /s/Stanley J. Wolfson Chief Executive Officer EX-31 3 cert312.txt Exhibit 31.2 Section 302 Certification Quarterly Report on Form 10-QSB I, Lizabeth M. Wolfson, certify that: I have reviewed this quarterly report on Form 10-QSB of Clancy Systems International, Inc.; 1. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 2. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report; 3. The small business issuer's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) for the small business issuer and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and 4. The small business issuer's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting. Date: August 16, 2004 /s/Lizabeth M. Wolfson Chief Financial Officer EX-32 4 cert321.txt Exhibit 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Clancy Systems International, Inc. (the "Company") on Form 10-QSB for the period ended June 30, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Stanley J. Wolfson, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Stanley J. Wolfson _______________________ Chief Executive Officer August 16, 2004 EX-32 5 cert322.txt Exhibit 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Clancy Systems International, Inc. (the "Company") on Form 10-QSB for the period ended June 30, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Lizabeth M. Wolfson, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Lizabeth M. Wolfson _______________________ Chief Financial Officer August 16, 2004 -----END PRIVACY-ENHANCED MESSAGE-----