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 December 31, 2007
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 February 14, 2008 is 381,102,938 shares, $.0001 par value.
Transitional Small Business Disclosure Format: Yes No X
Indicate by check mark whether the Registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act).
Yes No X
CLANCY SYSTEMS INTERNATIONAL, INC.
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Consolidated Balance Sheets - September 30, 2006
and December 31, 2006 (unaudited) 2 and 3
Consolidated Statements of Income - For the Three
Months Ended December 31, 2005 and 2006 (unaudited) 4
Consolidated Statement of Stockholders' Equity - For
the Three Months Ended December 31, 2006 (unaudited) 5
Consolidated Statements of Cash Flows - For the Three
Months Ended December 31, 2005 and 2006 (unaudited) 6 and 7
Notes to Unaudited Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Controls and Procedures 16
PART II. OTHER INFORMATION 16
Item 1. Legal Proceedings 16
Item 6. Exhibits 16
-1-
CLANCY SYSTEMS INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
September 30, December 31,
2007 2007
(Unaudited)
Current assets: ------------ -----------
Cash and cash equivalents $ 619,642 $ 1,042,954
Accounts receivable, net of allowance
for doubtful accounts 709,419 717,376
Income tax receivable - 26,677
Inventories 135,010 130,129
Prepaid expenses 64,075 47,402
---------- ----------
Total current assets 1,528,146 1,964,538
---------- ----------
Furniture and equipment, at cost:
Office furniture and equipment 218,337 218,337
Computers and equipment
under service contracts 2,771,942 2,854,894
Leasehold improvements 81,424 81,424
Vehicles, including vehicles
under capital leases 149,886 149,885
--------- ---------
3,221,589 3,304,540
Less accumulated depreciation (2,505,867) (2,572,526)
---------- ---------
Net furniture and equipment 715,722 732,014
---------- ----------
Other assets:
Investment in marketable securities 733,244 733,244
Deposits and other 24,312 18,922
Goodwill 404,547 404,547
Software development costs, net of
accumulated amortization 222,212 219,315
--------- --------
Total other assets 1,384,315 1,376,028
--------- ---------
$ 3,3628,183 $ 4,072,580
=========== ===========
See accompanying notes to consolidated financial statements.
-2-
CLANCY SYSTEMS INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS (Continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
September 30, December 31,
2007 2007
(Unaudited)
------------ -----------
Current liabilities:
Accounts payable $ 150,319 $ 208,111
Accrued expenses 361,019 335,693
Income taxes payable 74,323 93,307
Current portion of obligations under
capital leases 3,393 3,393
Deferred revenue 95,453 65,577
--------- --------
Total current liabilities 684,507 706,081
Obligations under capital leases,
net of current portion 6,648 5,797
--------- -------
Total liabilities 709,955 750,678
--------- -------
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,
381,102,938 shares issued and
outstanding 38,110 38,110
Additional paid-in capital 1,354,414 1,354,414
Retained earnings 1,525,704 1,929,378
--------- ---------
Total stockholders' equity 2,918,228 3,321,902
----------- -----------
$ 3,628,183 $ 4,072,580
=========== ===========
See accompanying notes to consolidated financial statements.
-3-
CLANCY SYSTEMS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
For the Three Months Ended December 31, 2006 and 2007
(Unaudited)
December December
31, 2006 31, 2007
Revenues: -------- --------
Sales $ 38,962 $ 15,758
Service contract income 712,797 779,866
Parking ticket collections 304,780 360,683
---------- ----------
Total revenues 1,056,539 1,156,307
---------- ----------
Costs and expenses:
Cost of sales 9,376 27,445
Cost of services 152,778 202,128
Cost of parking ticket
collections 24,156 25,094
General and administrative 554,769 613,633
Research and development - 2,593
--------- ---------
Total costs and expenses 741,079 870,893
--------- ---------
Income from operations 315,460 285,414
-------- ---------
Other income (expense):
Interest income 10,803 18,653
Interest expense (948) (893)
Other Income - 200,707
--------- ---------
Total other income (expense) 9,855 218,467
--------- ---------
Income before provision for
income taxes 325,315 503,881
--------- ----------
Provision for income taxes:
Current expense (benefit) 93,859 80,207
Deferred expense (benefit) 16,700 20,000
---------- ---------
Total income tax expense (benefit) 110,559 100,207
---------- ---------
Net income $ 214,756 $ 403,674
=========== ==========
Basic and diluted
net income per common
share $ * $ *
========== ===========
Weighted average number of
shares outstanding 382,617,938 381,102,938
============ ===========
*Less than $.01 per share
See accompanying notes to consolidated financial statements.
-4-
CLANCY SYSTEMS INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the Three Months Ended December 31, 2007
(unaudited)
Additional
Common Stock Paid-In Retained
Shares Amount Capital Earnings
------ ------ --------- --------
Balance,
September 30, 2007 381,102,938 $ 38,110 $ 1,354,414 $ 1,525,704
Net income for the
three months ended
December 31, 2007 - - - 403,674
---------- --------- ---------- ----------
Balance, December
31, 2007 381,102,938 $ 38,110 $ 1,354,414 $ 1,929,378
=========== ========= ============= ===========
See accompanying notes to consolidated financial statements.
-5-
CLANCY SYSTEMS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended December 31, 2006 and 2007
(Unaudited)
December December
31, 2006 31, 2007
------- -------
Cash flows from operating activities:
Net income $ 214,756 $ 403,674
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 95,967 89,602
Deferred income tax expense 16,700 20,000
Changes in assets and liabilities:
Accounts receivable 63,536 (7,957)
Inventories (8,579) 4,881
Income taxes refundable 22,077 (26,677)
Prepaid expenses 26,966 16,673
Accounts payable 390,847 57,792
Accounts payable, related party - -
Accrued expenses (33,559) (25,326)
Income taxes payable 40,122 18,984
Deferred revenue (16,963) (29,876)
---------- ---------
Total adjustments 597,114 118,096
---------- ---------
Net cash provided by operating
activities 811,870 521,770
---------- ---------
Cash flows from investing activities:
Acquisition of furniture and equipment (65,760) (82,951)
Increase in software licenses and
software development costs (25,111) (19,401)
Increase in investments in
marketable securities - -
Decrease in deposits and other
assets (501) 4,745
---------- ---------
Net cash(used in) investing
activities (91,372) (97,607)
---------- ---------
Cash flows from financing activities:
Proceeds from notes payable related
party - -
Payments on notes - -
Payments on long-term debt and capital
leases (887) (851)
---------- ----------
Net cash (used in) financing
activities (887) (851)
----------- ----------
See accompanying notes to consolidated financial statements.
-6
CLANCY SYSTEMS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
For the three months ended December 31, 2006 and 2007
(Unaudited)
December December
31, 2006 31, 2007
------- -------
Increase in cash and
cash equivalents 719,611 423,312
Cash and cash equivalents at beginning
of period 387,663 619,642
---------- ---------
Cash and cash equivalents at end
of period $ 1,107,274 $ 1,042,954
========== ==========
See accompanying notes to consolidated financial statements.
-7-
CLANCY SYSTEMS INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007
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, 2007.
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 months ended December 31, 2006
and 2007. All significant inter company transactions and balances have been
eliminated in consolidation.
Use of Estimates:
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions. These estimates affect
the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Net Income Per Common Share:
The Company computes net income per common share in accordance with
Statement of Financial Accounting Standards No. 128, Earnings Per Share
("SFAS 128"). SFAS 128 provides for the calculation of diluted earnings
per share. Basic earnings per share includes no dilution and is
computed by dividing income available to common stockholders by the
weighted average number of common shares outstanding for the period.
Dilutive earnings per share reflects the potential dilution of securities
that could share in the earnings of the company.
-8-
CLANCY SYSTEMS INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007
2. Inventories
Inventories consist of the following at:
September 30, December 31
2007 2007
------------ -----------
Finished goods $ 44,316 $ 36,826
Work in process 2,861 34,989
Purchased parts and supplies 87,833 58,315
---------- ---------
$ 135,010 $ 130,129
========== =========
3. Income taxes
The provision for income taxes for three months ended December 31, 2006
and 2007 is based on the expected rate for the tax year.
The components of the Company's deferred tax assets and liabilities are
as follows:
September 30, December 31,
2007 2007
------------ -----------
Non-current deferred tax assets $ 233,700 $ 187,000
Valuation allowance (192,600) (146,000)
Non-current deferred tax liabilities (59,900) (79,800)
------------ -----------
$ (18,800) $ (38,800)
============ ===========
-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 maintain its
competitive position in the parking enforcement business by continuing
to offer competitive products and services, (iii) the ability of the
Company to reduce costs and thereby maintain adequate profit margins.
In the following discussion, reference to Clancy is to the parent
company on a stand-alone basis and reference to Clancy consolidated
is for Clancy and UTS combined.
Management's Discussion and Analysis of Financial Conditions
and Results of Operations
At December 31, 2007, the Company had consolidated working capital of
$1,258,457 derived primarily from contract sales and contract service. 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, 2008. The company
settles funds for permit collections after the end of each month.
Occasionally this overlaps into a next quarter. The timing of the
payout is captured as a an accounts payable amount if it falls into a
subsequent quarter by a few days.
COMPARISON OF RESULTS FOR THE THREE MONTHS ENDED December 31, 2006
AND 2007
REVENUES. During the quarter ended December 31, 2006 as compared to
the quarter ended December 31, 2007 revenues increased by $99,768
or 9.4% from 1,056,539 to $1,156,307. The increase in revenues is
due to the addition of new customers and increased remit-online
activity for the quarter ended December 31, 2007. Clancy's
Remit-online.com service has processed 71,936 transactions totaling
$2,859,456 for the quarter ended December 31,2007. Revenues are
generated based on per transaction fees less bank processing costs.
-10-
The gross amount of cash flowing through Remit-online.com cannot
be presented as revenue based on SEC accounting guidance. The
Company only presents its net profit from each transaction as
revenue in the statements of operations.
COST OF SERVICES. During the three month quarter ended December 31,
2006, as compared to the three month quarter ended December 31, 2007,
cost of services increased by $49,350 or 32.3% from $152,778 to
$202,128 for the Company. Cost of services as a percentage of service
contract income was 21.4% for the 2006 quarter and 25.9% for the 2007
quarter.
RESEARCH AND DEVELOPMENT. The Company's parking enforcement systems
research and development costs increased from $0 to $2,593, or 2500%
from the quarter ended December 31, 2006 to 2007.
GENERAL AND ADMINISTRATIVE. General and administrative expenses
increased by $58,864 or 10.6% from $554,769 to $613,633 the for quarter
ended December 31, 2006 and 2007, respectively.
NET INCOME. During the quarter ended December 31, 2007, the Company
reported net income of $403,674 compared to $214,756 for the quarter
ended December 31, 2006. The primary reason for the increase in net
income is the Company received a $200,000 contract termination fee from
the City of Arecibo, Puerto Rico.
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 1999. Collections from parking
lot fees from Cauguas commenced in January 1999.
In September 2005, the Company acquired all outstanding shares of UTS
stock in exchange for shares of the Company's common stock.
Damaris Carasquillo is the operations manager. The UTS Board of Directors
includes Kenneth Stewart, Stanley Wolfson, and Lizabeth Wolfson. UTS
has funded its operations primarily by loans and cash flows. During
fiscal 2005-2006 UTS consolidated all of its loans into one note
payable to the Company. The note is a five year note payable in
monthly installments.
UTS continues to add new clients. In December, 2007, UTS entered
into a contract for a full service program for the city of San Juan
Puerto Rico, which will include the installation of single space
meters, multi-space meters, signs, ticket issuance an collection
and enforcement. The program will be operational by June 2008.
-11-
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 additional
accounting and auditing procedures for compliance with new corporate
governance mandates. The Company now utilizes three different
accounting firms for preparation of financial statements, reviews
and auditing functions.
Director and Officer insurance premiums are 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 products shall continue to require a large capital
commitment. 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.
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.
-12-
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, 2008.
UTS has funded its operations primarily by cash flows, bank debt, and
advances from the Company. 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, 2008.
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 is 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 experiences 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 $925,000 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, outstanding ticket fines of approximately
$2,720,255 for UTS and $770,442 for Clancy, have not been recognized
as revenue at December, 31, 2007 based on SEC accounting guidance.
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.
-13-
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 lot 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
The excess of the purchase price over net assets acquired by
the Company from unrelated third parties is recorded as goodwill. Goodwill
resulted from the acquisition of UTS. On January 1, 2002, the Company
adopted Statement of Financial Accounting Standard 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 at least annually and also in the event of an
impairment indicator.
-14-
STOCK PURCHASE
The Company has implemented a reacquisition of equity securities to
commence in December 2006. Under Rule 10b-18, the Company intends
to regularly repurchase shares of its common stock. Based on
profitability at the end of each month, the Company will determine
the dollar amount to allocate to the buyback program. No shares
were purchased during the quarter ended December 31, 2007.
Item 3. Controls and Procedures
We have established disclosure controls and procedures to ensure
that material information relating to the Company, including its
consolidated subsidiary, is made know to the officers who certify the
Company's financial reports and to other members of senior management
and the Board of Directors.
Based on their evaluation, the Company's principal executive and
principal financial officers have concluded that the Company's
disclosure controls and procedures (as defined in Rules 13a-15(e)
and 15d-15(e) under the Securities Act of 1934) were effective as
of September 30, 2007 to ensure that the information required to be
disclosed by the Company in the reports that it files or submits
under the Securities Exchange Act of 1934 is recorded, processed
and reported within the time periods specified in the SEC rules
and forms.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
No changes have occurred in the quarter ended December 31, 2007.
Item 6. Exhibits
(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.
-15-
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: February 14, 2008 CLANCY SYSTEMS INTERNATIONAL, INC.
(Registrant)
By: /s/ Stanley J. Wolfson
Stanley J. Wolfson, President
and Chief Executive Officer
-17-