10QSB 1 a10q0305.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 March 31, 2005 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 May 20, 2005 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 Condensed Consolidated Balance Sheet - September 30, 2004 and March 31, 2005 (unaudited) 2 and 3 Condensed Consolidated Statement of Income - For the Three Months ended March 31, 2004 and 2005 (unaudited) 4 Condensed Consolidated Statement of Income - For the Six Months Ended March 31, 2004 and 2005 (unaudited) 5 Condensed Consolidated Statement of Stockholders' Equity - For the Six Months Ended March 31, 200 (unaudited) 6 Condensed Consolidated Statement of Cash Flows - For the Six Months Ended March 31, 2004 and 2005 (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 19 Item 1. Legal Proceedings 19 Item 3. Controls and Procedures 19 Item 6. Exhibits and Reports on Form 8-K 19 -1- CLANCY SYSTEMS INTERNATIONAL, INC. CONDENSED CONSOLIDATED BALANCE SHEETS March 31, 2005 (Unaudited) ASSETS September March 30, 2004 31,2005 (Restated) Current assets: -------- ------- Cash and cash equivalents $ 306,691 $ 453,260 Accounts receivable, net of allowance for doubtful accounts of $10,000 449,628 510,297 Accounts receivable, related party (Note 3) 30,019 - Income tax refund receivable 18,724 30,624 Inventories (Note 2) 101,539 91,828 Prepaid expenses, current portion 74,566 39,040 ---------- -------- Total current assets 981,167 1,125,049 Furniture and equipment, at cost: Office furniture and equipment 322,137 316,318 Computers and Equipment under service contracts 2,058,386 2,581,152 Leasehold improvements 98,936 98,936 Equipment and vehicles under capital leases 467,221 - --------- --------- 2,946,679 2,996,406 Less accumulated depreciation (1,604,762) (1,803,039) --------- --------- Net furniture and equipment 1,341,917 1,193,367 Other assets: Deferred tax asset 16,000 30,800 Investment in marketable securities 353,837 451,164 Deposits and other 60,125 44,608 Goodwill 225,214 225,214 Software development costs, net of accumulated amortization 213,870 218,263 --------- -------- Total other assets 869,046 970,049 --------- -------- $ 3,192,130 $ 3,288,465 =========== =========== See accompanying notes to consolidated financial statements. F-2 CLANCY SYSTEMS INTERNATIONAL, INC. CONDENSED CONSOLIDATED BALANCE SHEETS March 31, 2005 (Unaudited) LIABILITIES AND STOCKHOLDERS' EQUITY September March 30, 2004 31,2005 (Restated) Current liabilities: -------- ------- Accounts payable $ 189,409 $ 170,014 Accrued expenses 316,947 329,869 Accounts payable, related party (Note 3) 38,656 - Bank overdraft 14,645 - Income taxes payable - 63,934 Current portion of long term debt 239,449 14,419 Current portion of obligations under capital leases 41,460 15,253 Deferred revenue 126,078 98,676 --------- -------- Total current liabilities 966,644 692,164 Long term debt - 265,000 Obligations under capital leases, net of current portion 27,430 - Minority interest in subsidiary (Note 4) 72,610 62,912 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 937,387 1,080,329 --------- --------- Total stockholders' equity 2,125,446 2,268,388 --------- --------- $ 3,192,130 $ 3,288,465 =========== =========== See accompanying notes to consolidated financial statements. F-3 CLANCY SYSTEMS INTERNATIONAL, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME For the Three Months Ended March 31, 2004 and March 31, 2005 (Unaudited) March March 31, 2004 31, 2005 Revenues: -------- -------- Sales of goods $ 62,921 $ 29,144 Service contract income 676,936 565,113 Parking ticket and permit operations 98,326 110,404 ----------- ----------- Total revenues 838,183 704,661 Costs and expenses: Cost of sales 17,786 24,261 Cost of services 253,159 176,891 Cost of parking ticket and permit operations 39,569 21,846 General and administrative 408,427 457,435 Research and development 13,868 11,443 ----------- ---------- Total costs and expenses 732,809 691,876 ----------- ---------- Income from operations 105,374 12,785 Other income: Interest income 191 8,073 Interest expense (7,155) (3,603) Other Income 1,168 - Minority interest in (income) loss of subsidiary (17,930) 1,253 ----------- ---------- Total other income (expense) (26,062) 5,723 ----------- ---------- Income (loss) before provision for income taxes 79,312 18,508 Provision for income taxes: Current expense 34,808 (5,557) Deferred expense (benefit) (4,095) 5,075 ----------- --------- Total income tax expense 30,713 (482) ----------- --------- Net income $ 48,599 $ 18,990 =========== ========== Basic and diluted 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. F-4 CLANCY SYSTEMS INTERNATIONAL, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME For the Six Months Ended March 31, 2004 and March 31, 2005 (Unaudited) March March 31, 2004 31, 2005 Revenues: -------- -------- Sales of goods $ 104,850 $ 80,509 Service contract income 1,336,671 1,227,218 Parking ticket and permit operations 162,645 253,563 ----------- ----------- Total revenues 1,604,166 1,561,290 Costs and expenses: Cost of sales 21,513 44,591 Cost of services 484,791 352,650 Cost of parking ticket and permit operations 71,488 50,024 General and administrative 853,867 873,357 Research and development 27,890 28,419 ----------- ---------- Total costs and expenses 1,459,549 1,349,041 ----------- ---------- Income from operations 144,617 212,249 Other income: Interest income 385 8,094 Interest expense (15,565) (11,483) Other Income 704 - Minority interest in (income) loss of subsidiary (2,365) 9,655 ----------- ---------- Total other income (expense) (16,841) 6,266 ----------- ---------- Income (loss) before provision for income taxes 127,776 218,515 Provision for income taxes: Current expense 51,306 60,773 Deferred expense (benefit) (2,730) 14,800 ----------- --------- Total income tax expense 48,576 75,573 ----------- --------- Net income $ 79,200 $ 142,942 =========== ========== Basic and diluted 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. F-5 CLANCY SYSTEMS INTERNATIONAL, INC. CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY For the Six Months Ended March 31, 2005 (Unaudited)
Additional Common Stock Paid-In Retained Shares Amount Capital Earnings ------ ------ --------- -------- Balance, September 30, 2004 (Restated) 365,117,938 $ 36,512 $ 1,151,547 $ 937,387 Net income for the six months ended March 31, 2005 --- --- --- 142,942 ----------- --------- ---------- ---------- Balance, March 31, 2005 365,117,938 $ 36,512 $ 1,151,547 $ 1,080,329 =========== ========= ============= ===========
See accompanying notes to consolidated financial statements. F-6 CLANCY SYSTEMS INTERNATIONAL, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS For the Six Months Ended March 31, 2004 and 2005 (unaudited) March March 31, 2004 31, 2005 ------- ------- Cash flows from operating activities: Net income $ 79,200 $ 142,942 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 280,645 245,717 Deferred income tax expense (2,730) (14,800) Minority interest 2,365 ( 9,698) Changes in assets and liabilities: Accounts receivable (135,633) (60,669) Accounts receivable related party - 30,019 Inventories 26,227 9,711 Income taxes refundable - (11,900) Prepaid expenses 41,965 35,526 Accounts payable 287,001 (19,395) Accrued expenses 16,921 12,922 Accounts payable, related party (11,000) (38,656) Income taxes payable (9,282) 63,934 Deferred revenue (25,121) (27,402) ---------- --------- Total adjustments 471,358 215,309 ---------- --------- Net cash provided by operating activities 550,558 358,251 ---------- --------- Cash flows from investing activities Acquisition of furniture and equipment (126,744) (55,956) (Increase) in software licenses and software development costs (56,061) (43,171) (Increase) in investments in marketable securities - (97,327) Decrease in deposits and other assets 20,199 13,084 ---------- --------- Net cash (used) in investing activities (162,606) (183,370) ---------- --------- Cash flows from financing activities: Proceeds from borrowings of long term debt - 265,000 Payments on long term debt and capital leases (209,991) (278,667) (Decrease) in bank overdraft - (14,645) ---------- ----------- Net cash (used) in financing activities (209,991) (28,312) ----------- ----------- Increase (decrease) in cash and cash equivalents 177,961 146,569 Cash and cash equivalents at beginning of period 669,292 306,691 ---------- ----------- Cash and cash equivalents at end of period $ 847,253 $ 453,260 ========== ========== See accompanying notes to consolidated financial statements. F-7 CLANCY SYSTEMS INTERNATIONAL, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS March 30, 2005 1. Basis of Presentation The accompanying unaudited condensed 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, 2004, as restated (see below). 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 are denominated in U.S. dollars. Therefore, there are no amounts recorded for foreign currency translation or for transactions denominated in a foreign currency. The Company has consolidated the financial results of UTS with those of the Company for the three and six months ended March 31, 2004 and 2005. All significant inter company transactions and balances have been eliminated in consolidation. Restatement During February 2005, and error was discovered in the amount of revenue recognized by UTS for the year ended September 30, 2004. The result of the restatement, which has not been finalized or filed as of today's date, is expected to reduce revenue by $130,000, increase minority interest in the net loss by $36,448 and increase the deferred tax benefit by $5,000 resulting in a decrease of $78,536 consolidated net income. F-8 2. Inventories Inventories consist of the following at: September March 30, 2004 31,2005 --------- ------- Finished Goods $ 25,157 $ 14,631 Work in Process 15,863 34,310 Purchased parts and supplies 60,519 42,887 ---------- ---------- $ 101,539 $ 91,828 ========== ========== 3. Related party transactions Related party account balances consist of the following at: September March 30, 2004 31,2005 ----------- -------- Accounts receivable, related party $ 30,019 $ - =========== ========= Accounts payable, related party $ 38,656 $ - =========== ========= Accounts receivable, related party is due from Pan American Parking Solutions, Inc. which is a company owned by the former president of UTS. This amount was written off in the quarter ended March 31, 2005. Accounts payable, related party is due to Pan American Products, a company owned by the current president of UTS. This amount was paid in the quarter ended March 31, 2005. F-9 4. Income taxes The provision for income taxes for the three and six months ended March 31, 2004 and 2005 is based on the expected rate for the tax year. The components of the Company's deferred net tax assets and liabilities are as follows: September March 30, 2004 31, 2005 ----------- -------- Non-current deferred tax assets $ 177,400 $ 185,300 Non-current deferred tax liabilities (161,400) (154,500) ----------- ---------- Net non-current deferred tax assets $ 16,000 $ 30,800 =========== ========== 5. Restructuring of UTS debt On February 28, 2005, the Company obtained a loan for its Puerto Rican subsidiary, UTS, to consolidate the current debt and leases obtained under its former president. A zero coupon loan was provided by Salem Capital Group, Inc. in the amount of $300,000 at an interest rate of 6.5% per annum. The note is secured by the assets of UTS. The net proceeds to the Company were $265,000. The note matures February 28, 2007. F-10 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. At March 31, 2005, the Company had consolidated net working capital of $432,885 derived primarily from cash flow from contract sales and contract service and consolidation of UTS liabilities into a long- term note for $265,000. 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, 2005. COMPARISON OF RESULTS FOR THE THREE MONTHS ENDED March 31, 2005 AND 2004 REVENUES. From the quarter ended March 31, 2004 to the quarter ended March 31, 2005 revenues decreased by $133,522 or 15.9% from $838,183 to $704,661. Management believes this has to do with timing of its clients' ticket purchases and not a decrease in overall business. Clancy's Remit-online.com service has processed 33,548 transactions totaling $1,376,782.17 for the quarter ended March 31, 2005. Revenues are generated based on a per transaction fee less bank processing costs. The gross amount of cash, less amounts due to the client, flowing through Remit-online.com is presented as revenue based on SEC Staff Accounting Bullentin No. 104 and Emerging Issues Task Force No. 99-19. In other words, the Company only presents its net proceeds from each transaction as revenue in the statements of operations. -11- The Company's other ticket issuance revenues are derived from the ticket issuance productivity of its clients which can vary based on client staffing, seasonal conditions, budget considerations and other factors unique to each client. Sales of goods will vary for many of the same reasons. Parking ticket and permit operations revenues have been steadily increasing overall for the Company. These operations are facilities management contracts the Company operates. COST OF SERVICES AND SALES. From the three month quarter ended March 31, 2004 to the three month quarter ended March 31, 2005, cost of services decreased by $76,268 or 30.1% from $253,159 to $176,891 for the Company. Cost of services were down in relation to the ticket sales being down slightly. Cost of services as a percentage of service contract income was 37.3% for the 2004 quarter and 31.3% for the 2005 quarter. Cost of sales of goods include manufacturing, labor and shipping. These costs reflect some seasonal planning for manufacturing particularly necessary for the Denver Boot. The cost of operations of permit and ticket programs where the Company is actually the facilities manager also reflects some seasonal cost variations. RESEARCH AND DEVELOPMENT. The Company's parking enforcement systems research and development costs decreased from $13,868 to $11,443 or 17.5%, from the quarter ended March 31, 2004 to 2005. Product development and improvement is still paramount to the Company, and costs are being incurred for development of several new items. GENERAL AND ADMINISTRATIVE. General and administrative expenses increased by $49,008 or 11.9% from $408,427 to $457,435 for the three month quarter ended March 31, 2004 and 2005, respectively. This increase in General and Administrative expenses reflects some additional accounting costs, which pertain primarily to the UTS operations. NET INCOME. For the quarter ended March 31, 2005, the Company reported net income of $18,990 compared to net income of $ 48,599 for the quarter ended March 31, 2004. The primary reason for the decrease in net income is the decrease in revenues for the quarter ended March 31, 2005. The March 31, 2005 net income also reflects a one-time write down of an note receivable from the former president of UTS which the Company deemed uncollectable. COMPARISON RESULTS FOR THE SIX MONTHS ENDED MARCH 31, 2005 AND MARCH 31, 2004 REVENUES. From the six months ended March 31, 2004 to the six months ended March 31, 2005 revenues decreased by $42,876 or 2.7% from $1,604,166 to $1,561,290. Service contract revenues are generated based on a per transaction fee. -12- The gross amount of cash, less amounts due to the client, flowing through Remit-online.com is presented as revenue based on SEC Staff Accounting Bullentin No. 104 and Emerging Issues Task Force No. 99-19. In other words, the Company only presents its net proceeds from each transaction as revenue in the statements of operations. The Company's other ticket issuance revenue are derived from the ticket issuance productivity of its clients which can vary based on client staffing, seasonal conditions, budget considerations and other factors unique to each client. Sales of goods will vary for many of the same reasons. Parking ticket and permit operations revenues have been steadily increasing overall for the Company. These operations are facilities management contracts the Company operates. COST OF SERVICES AND SALES. From the six months ended March 31, 2004 to the six months ended March 31, 2005, cost of services decreased by $132,141 or 27.3% from $484,791 to $352,650 for the Company. Cost of services as a percentage of service contract income was 36.2% for the 2004 six months and 28.7% for the 2005 six months. Cost of sales of goods include manufacturing, labor and shipping. These costs reflect some seasonal planning for manufacturing particularly necessary for the Denver Boot. The cost of operations of permit and ticket programs where the Company is actually the facilities manager also reflects some seasonal cost variations. RESEARCH AND DEVELOPMENT. The Company's parking enforcement systems research and development costs increased from $27,890 to $28,419 or 1.9% from the six months ended March 31, 2004 to 2005. Product development and improvement is still paramount to the Company, and costs are being incurred for development of several new items. GENERAL AND ADMINISTRATIVE. General and administrative expenses increased by $19,490 or 2.3% from $853,867 to $873,357 for the six months ended March 31, 2004 and 2005, respectively. This increase in General and Administrative expenses reflects some additional accounting costs, which pertain primarily to the UTS operations. NET INCOME. For the six months ended March 31, 2005, the Company reported net income of $142,942 compared to net income of $79,200 for the six months ended March 31, 2004. Net income figures in 2005 were reduced to reflect the one-time write-down of a note receivable from the former president of UTS which the Company deemed uncollectable. The Company's business is a transaction based business. As the Company gears itself to more business activities related to transactional activity, it will not necessarily increase overhead as the infrastructure to process these transactions has been developed. -13- 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 is currently manufacturing its printer in a new and smaller case. All current customers will receive the upgrade model within the next 9 months. In order to keep its products and systems from becoming obsolete, the Company regularly modifies and updates its hardware and software. In order to streamline its ticket writing and car rental equipment, the Company redesigned the printer so that it weighs less than two pounds. New battery technology has also allowed the Company to reduce the size and weight of the printers. During 2001/2002, the Company began manufacturing a new printer board to interface to Palm handheld devices. It incorporates a state of the art print mechanism, light weight battery technology, and flat forms. The company has also developed a keyboard cradle for the Palm devices. The Palm keyboard 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. -14- 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, a major client, commenced in January of 1999. UTS loans borrowed from its primary bank and private lender are being paid back by the UTS cash flows. UTS obtained a loan through the Company's primary bank, however the Company's parent had no obligation on the loan. The loan was secured by UTS assets. This loan has been refinanced as described below. The recent settlement of ownership issue between the Company and UTS set forth the opportunity for Clancy management to take a more significant role in the operations of UTS. In June, 2003, a new management team was installed at UTS. Kenneth Stewart is the President of UTS. Damaris Carasquillo is the operations manager. The UTS Board of Directors includes Kenneth Stewart, Stanley Wolfson, and Lizabeth Wolfson. The new management team has taken an assertive 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 2004-2005 fiscal year. UTS has funded its operations primarily by loans and operation 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 it to expand its operations and reduce its outside debt obligations. In February, 2005, Urban Transit Solutions borrowed $300,000 in a zero coupon 2 year loan for Salem Capital Group, Inc., an unrelated entity, to consolidate its debt. The note proceeds from the loan were $265,000. The loan matures at February 28, 2007 and bears interest at the rate of 6.5%. Substantially all other outstanding loans and debts have been paid, with this being the only outstanding long-term debt. In addition, management has reclassified leased and other equipment to service equipment in the six months ended March 31, 2005. 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; and (ii) additional legal costs due to compliance with new corporate governance mandates. -15- The Company now utilizes three 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 cashflow to accomplish the upgrades without incurring debt, it is anticipated that the ongoing upgrades and tooling for newer product shall continue to require a large capital commitment. With the weakened economy as of recent years, municipalities are in search of additional revenues and the installation and implementation of means to efficiently and effectively collect parking ticket revenues as a viable source of such additional revenues for many locales. As on street parking spaces are finite, and populations increase, a structured management system of turnover, enforcement and accountability of parking revenues will be imperative for all cities. In addition, the Company supplies all hardware, software, training, supplies and maintenance for the system, thus eliminating all significant capital expenditures by the user. The Company has experienced a large number of inquiries about its system related to the total program and special features and anticipates growth in this area in the next fiscal year. Uncertainties that can impact revenues from the Company's service contract agreements would be related to dramatic weather changes and municipal disaster occurrences (i.e. September 11, 2001). As parking ticket issuance operations are primarily "out-of-doors" tasks, severe weather such as a major blizzard, hurricane, or rains could impact ticket production for a limited period in certain locales. While such reductions are temporary, they can impact revenues as the Company bills most clients on a fee-per-ticket basis. The meter collections for UTS could be temporarily reduced during a hurricane or tropical storm. Further, as the Company is contracting primarily with City government agencies, a deployment of personnel to other duties during a disaster could temporarily reduce ticket issuance activities. Internal and external sources of liquidity Overall, the Company generated net cash flows of $146,569 in the six months ended March 31, 2005 compared to $177,961 in the comparable 2004 period. Cash at March 31, 2004 and 2005 was $847,253 and $453,260 respectively. The primary reason for the difference at the period end was the investment in bonds that occurred later in 2004. Net cash from operations decreased from $550,558 to $358,252 for the six months ended March 31, 2004 and 2005, respectively. -16- This was primarily due to the significant increase in accounts payable in 2004. Net cash used in investing activities increased from $162,606 to $183,371 in the six months ended March 31, 2004 and 2005, respectively. While the amounts are somewhat similar, in fiscal 2004 the Company primarily invested cash in equipment but in fiscal 2005 invested cash into marketable securities (bonds). Net cash flows used by financing activities were $209,991 and $28,312 in the six months ended March 31, 2004 and 2005, respectively. In fiscal 2004 the Company solely repaid debt and lease obligations while in fiscal 2005, the Company restructured its debt by borrowing $265,000 and repaid various debt obligations. 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, 2005. The Company has experienced significant interest by clients 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. 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 $450,000 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 $400,000 and for UTS, outstanding ticket fines of approximately $253,703, have not been recognized as revenue at March 31, 2005 based on SEC Staff Accounting Bulletin No. 104. 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. -17- The preparation of financial statements requires the Company to make estimates and assumptions that affect the reported amount of assets and liabilities of the Company, revenues and expenses of the Company during the reporting period and contingent assets and liabilities as of the date of the Company's financial statements. There can be no assurance that the actual results will not differ from those estimates. REVENUE RECOGNITION: Revenue derived from professional service contracts on equipment and support services is included in income ratably over the contract term; related costs consist mainly of depreciation, supplies and sales commissions. The Company defers revenue for equipment and services under service contracts that are billed to customers on a quarterly, semi-annual, annual, or other basis and are included in income ratably over the expected term of the contract. Revenue from the issuance of parking citations for the Company's privatization projects is recognized on a cash basis when received as collectibility is not reasonably assured. Revenue derived from professional service contracts on parking meter and lots fees collections is recognized net of municipalities' fees as services are provided. Related costs consist mainly of depreciation and lot rents. Revenue derived from professional service contracts for permit fulfillment and remit-online services is recognized based on add-on fees earned for each transaction. COMPUTER SOFTWARE. Costs incurred prior to establishment of the technological feasibility of computer software are research and development costs, which are charged to expense as incurred. Software development costs incurred subsequent to establishment of technological feasibility are capitalized and subsequently amortized based on the greater of the straight line method over the remaining estimated economic life of the product (generally 5 years) or the estimate of current and future revenues for the related product. GOODWILL. On January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142(SFAS 142), Goodwill and Intangible Assets, which clarifies the accounting for goodwill and intangible assets.Under SFAS 142, goodwill and intangible assets with indefinite lives will no longer be amortized, but will be tested for impairment annually and also in the event of an impairment indicator. Chat Room Disclaimer This forum of exposure to publicly traded companies presents a venue for the public to inquire about companies from other individuals as well as post opinions. The Company has no way to regulate postings nor monitor information posed on these boards. Management can only provide accurate information to shareholders and potential shareholders when contacted directly and such information can only be provided when it is based on fact and has been filed as required by law with the Securities and Exchange Commission and other regulatory agencies. -18- 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. PART II - OTHER INFORMATION Item 1. Legal Proceedings In August 2000, the Company hired the law firm of Bingham Dana Ltd to commence actions on behalf of the Company against several John Does that bashed the company by posting false information about the Company and its officers and directors on the Raging Bull Internet chat room site and other chat rooms. On September 19, 2000, the Company filed an action in Suffolk Superior Court against John Short, Syracuse NY, who posted as Darth4, MrDarth4 and possible other aliases. Relief sought includes monetary damages for harm done to the Company and its officers, retraction of false and damaging statements and for the subject to cease and desist posting or discussing the Company, its officers and any activities related thereto. After a final appeal by Mr. Short, the Massachusetts State Supreme Court upheld the earlier judgement awarded in favor of the Company. The court awarded an additional $23,000 in damages to the Company. The Company's attorney in Syracuse New York has filed a motion to restore the case to the court's motion calendar for a decision on an earlier motion to schedule a sheriff's sale. The Honorable Thomas J. Murphy, Justice, for the State of New York, Supreme Court, County of Onondaga signed and order on April 14, 2005 to order the sale of the property. 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. -19- Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: May 20, 2005 CLANCY SYSTEMS INTERNATIONAL, INC. (Registrant) By: /s/ Stanley J. Wolfson Stanley J. Wolfson, President and Chief Executive Officer -20-