UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2009
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
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
Yes No
Indicate by check mark whether the Registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act). Yes No X
The number of shares outstanding of the issuer's class of common
stock, as of August 19, 2009 is 362,291,211 shares, $.0001 par value.
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non accelerated filer, or a smaller
reporting company.
Large accelerated filer Accelerated filer Non-accelerated filer
Smaller reporting company X
CLANCY SYSTEMS INTERNATIONAL, INC.
INDEX
PART I. FINANCIAL INFORMATION Page No.
Item 1: Financial Statements
Consolidated Balance Sheets - September 30, 2008
and June 30, 2009 (unaudited) 3 and 4
Consolidated Statements of Operations and Other
Comprehensive Income - For the Three
Months Ended June 30, 2008 and
June 30, 2009 (unaudited) 5
Consolidated Statements of Operations and Other
Comprehensive Income - For the Nine
Months Ended June 30, 2008 and
June 30, 2009 (unaudited) 6
Consolidated Statement of Stockholders' Equity - For
the Nine Months Ended June 30, 2009
(unaudited) 7
Consolidated Statements of Cash Flows - For the
Nine Months ended June 30, 2008 and
June 30, 2009 (unaudited) 8 and 9
Notes to Unaudited Consolidated Financial Statements 10
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of Operations 17
Item 4T: Controls and Procedures 23
PART II. OTHER INFORMATION 24
Item 1. Legal Proceedings 24
Item 2. Unregistered Sales of Equity Securities
and Use of Proceeds 25
Item 6. Exhibits 26
Signatures 27
CLANCY SYSTEMS INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
September 30, June 30,
2008 2009
(Unaudited)
Current assets: ------------ -----------
Cash and cash equivalents $ 1,183,876 $ 1,186,171
Cash restricted - 174,592
Accounts receivable, net of allowance
for doubtful accounts 650,771 494,192
Receivable from related party 43,461 43,461
Income tax receivable - 31,015
Inventories 183,074 174,353
Prepaid expenses 69,558 58,424
Deferred tax asset 11,200 7,400
---------- ----------
Total current assets 2,141,940 2,169,608
---------- ----------
Furniture and equipment, at cost:
Office furniture and equipment 190,696 194,496
Computers and equipment
under service contracts 2,596,066 2,675,875
Leasehold improvements 13,000 13,000
Vehicles, including vehicles
under capital leases 147,651 147,651
--------- ---------
2,947,413 3,031,022
Less accumulated depreciation (2,368,037) (2,537,423)
---------- ---------
Net furniture and equipment 579,376 493,599
---------- ----------
Other assets:
Investment in marketable securities 858,912 1,019,331
Deposits and other 18,138 16,738
Goodwill 404,547 404,547
Software development costs, net of
accumulated amortization 216,070 219,682
--------- --------
Total other assets 1,497,667 1,660,298
--------- ---------
$ 4,218,983 $ 4,323,505
=========== ===========
See accompanying notes to consolidated financial statements.
-3-
CLANCY SYSTEMS INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS (Continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
September 30, June 30,
2008 2009
(Unaudited)
------------ -----------
Current liabilities:
Accounts payable $ 232,395 $ 323,735
Accrued expenses 329,737 400,977
Income taxes payable 19,652 -
Current portion of obligations under
capital leases 3,393 3,279
Deferred revenue 104,782 54,194
--------- --------
Total current liabilities 689,959 782,185
Deferred income taxes payable 58,400 54,800
Obligations under capital lease,
net of current portion 2,960 -
--------- -------
Total liabilities 751,319 836,985
--------- -------
Commitments and Contingencies
Stockholders' equity:
Preferred stock, $.0001 par value;
100,000,000 shares authorized,
none issued - -
Common stock, $.0001 par value;
800,000,000 shares authorized,
379,882,938 and 362,291,211
shares issued and
outstanding at 9/30/08 and
6/30/09 respectively 37,988 36,229
Additional paid-in capital 1,350,078 1,287,558
Accumulated comprehensive income (loss):
Unrealized loss on marketable
securities (92,298) (24,549)
Retained earnings 2,171,896 2,187,282
--------- ---------
Total stockholders' equity 3,467,664 3,486,520
----------- -----------
$ 4,218,983 $ 4,323,505
=========== ===========
See accompanying notes to consolidated financial statements.
-4-
CLANCY SYSTEMS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME
INCOME
(Unaudited)
For Three Months Ended June 30, 2008 and 2009
June June
30, 2008 30, 2009
-------- --------
Revenues $ 998,514 $ 923,212
Costs of Sales 248,312 231,796
------------ -----------
Gross Profit 750,202 691,416
Costs and expenses ------------ -----------
General and administrative 409,085 590,546
Research and development 10,369 9,354
--------- ---------
Total costs and expenses 419,454 599,900
--------- ---------
Income from operations 330,748 91,516
-------- ---------
Other income (expense):
Loss on disposal of assets (22,068) -
Interest income 17,149 13,363
Interest expense (366) 2,023
Other income 28,213 16,259
--------- ---------
Total other income (expense) 22,928 31,645
--------- ---------
Income before provision for
income taxes 353,676 123,161
--------- ----------
Provision for income taxes:
Current expense 85,428 33,071
Deferred expense 8,200 (5,000)
---------- ---------
Total income tax expense 93,628 28,071
---------- ---------
Net income 260,048 95,090
Other comprehensive income (loss)
Unrealized gain (loss) on
marketable securities (51) 4,487
----------- --------
Comprehensive income $ 259,997 $ 99,577
=========== ========
Basic and diluted:
Net income per common
share $ * $ *
========== ==========
Weighted average number of
shares outstanding 380,773,130 377,739,133
============ ===========
*Less than $.01 per share
See accompanying notes to consolidated financial statements.
-5-
CLANCY SYSTEMS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE
INCOME
(Unaudited)
For Nine Months Ended June 30, 2008 and 2009
June June
30, 2008 30, 2009
-------- --------
Revenues $ 2,973,371 $ 3,003,562
Costs of Sales 685,597 750,117
------------ -----------
Gross Profit 2,287,774 2,253,445
Costs and expenses ------------ -----------
General and administrative 1,607,100 2,006,350
Research and development 17,489 25,211
--------- ---------
Total costs and expenses 1,624,589 2,031,561
--------- ---------
Income from operations 663,185 221,884
Other income (expense):
Loss on disposal of assets (22,068) -
Interest income 52,869 41,326
Interest expense (787) (1,782)
Loss on sale of marketable securities - (458)
Other income 279,487 38,670
--------- ---------
Total other income (expense) 309,501 77,756
--------- ---------
Income before provision for
income taxes 972,686 299,640
--------- ----------
Provision for income taxes:
Current expense 230,894 215,301
Deferred expense 25,900 200
---------- ---------
Total income tax expense 256,794 215,501
---------- ---------
Net income 715,892 84,139
---------- ---------
Other comprehensive income (loss)
Unrealized gain (loss) on
marketable securities (26,847) 67,749
----------- --------
Comprehensive income $ 689,045 $ 151,888
=========== ========
Basic and diluted:
Net income per common
share $ * $ *
========== ===========
Weighted average number of
shares outstanding 380,969,347 374,972,046
============ ===========
*Less than $.01 per share
See accompanying notes to consolidated financial statements.
-6-
CLANCY SYSTEMS INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the Nine Months Ended June 30, 2009
(Unaudited)
Accumulated
Other
Additional Compre-
Common Stock paid-in hensive Retained
Shares Amount Capital Income Earnings
(Loss)
------ ------ --------- -------- ------
Balance,
September 30, 2008 379,882,938 $ 37,988 $ 1,350,078 $(92,298)$ 2,171,896
Common stock
repurchase (17,591,727) (1,759) (62,520) - (68,753)
Unrealized gain on
marketable securities - - - 67,749 -
Net income for the
nine months ended
June 30, 2009 - - - - 84,139
---------- --------- ---------- ------- ------
Balance, June
30, 2009 362,291,211 $ 36,229 $ 1,287,558 $ (24,549) $2,187,282
(unaudited)
=========== ========= ============= ======== ========
See accompanying notes to consolidated financial statements.
-7-
CLANCY SYSTEMS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Nine Months Ended
June June
30, 2008 30, 2009
------- -------
Cash flows from operating activities:
Net income $ 715,892 $ 84,139
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 252,839 234,822
Loss on disposal of assets 22,068 -
Deferred income tax expense 25,900 200
Loss on sale of marketable securities - 458
Changes in assets and liabilities:
Accounts receivable 160,809 156,579
Inventories (44,589) 8,721
Income taxes refundable (3,641) (31,015)
Prepaid expenses 8,376 11,134
Accounts payable (66,036) 91,340
Accrued expenses (204,139) 71,240
Income taxes payable (26,565) (19,652)
Deferred revenue (17,136) (50,588)
---------- ---------
Total adjustments 107,886 473,239
---------- ---------
Net cash provided by operating
activities 823,778 557,378
---------- ---------
Cash flows from investing activities:
Increase in restricted cash - (174,592)
Acquisition of furniture and equipment (112,544) (83,761)
Increase in software licenses and
software development costs (60,580) (67,559)
Increase in investments in
marketable securities (200,835) (108,128)
Proceeds from sale of marketable
securities 25,299 15,000
Decrease (increase)in deposits and
other assets 2,046 63
---------- ---------
Net cash (used in) investing
activities (346,614) (418,977)
---------- ---------
Cash flows from financing activities:
Repurchase of common stock (5,828) (133,032)
Payments on long-term debt and capital
leases (2,517) (3,074)
---------- ----------
Net cash (used in) financing
activities (8,345) (136,106)
----------- ----------
See accompanying notes to consolidated financial statements.
-8-
CLANCY SYSTEMS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)
For the Nine Months Ended
June June
30, 2008 30, 2009
------- -------
Increase in cash and
cash equivalents 468,819 2,295
Cash and cash equivalents at beginning
of period 619,642 1,183,876
---------- ---------
Cash and cash equivalents at end
of period $ 1,088,461 $ 1,186,171
========== ==========
See accompanying notes to consolidated financial statements.
-9-
CLANCY SYSTEMS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
(Unaudited)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements have
been prepared in accordance with generally accepted accounting principles
(GAAP) for interim financial information and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes
required by GAAP for complete financial statements. In the opinion of
management, all adjustments (consisting only of normal recurring adjustments)
are included.
The results of operations for the periods presented are not necessarily
indicative of the results to be expected for the full fiscal year. For
further information, refer to the financial statements of Clancy Systems
International, Inc. included in the Company's form 10K for the fiscal
year ended September 30, 2008, as filed with the Commission on January 14,
2009.
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 nine
months ended June 30, 2008 and 2009. All significant intercompany
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.
Reclassifications:
Certain reclassifications have been made to the prior year
statements to conform to the current year presentation.
-10-
CLANCY SYSTEMS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
(Unaudited)
1. Basis of Presentation (continued)
Net income (loss) per common share:
The Company computes net income (loss) 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 basic and diluted earnings (loss) per share. Basic earnings (loss)
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 (loss)
per share reflects the potential dilution of securities that could
share in the earnings of the Company. The Company has no potentially
dilutive securities.
Fair Value of Financial Instruments
The carrying value of cash, accounts receivable, accounts payable and
obligations under capital leases at September 30, 2008 and June 30,
2009 approximates fair value due to the short term nature of these
instruments.
2. Recently Issued Accounting Standards
Recently Adopted accounting standards:
SFAS No. 141(R): Effective January 1, 2009, the Company adopted SFAS
No. 141(R), "Business Combinations" (SFAS 141 (R)), which significantly
changes the accounting for and reporting of business combinations.
The acquirer must recognize the assets acquired, liabilities assumed
and any non-controlling interest in the acquired entity at the
acquisition date fair values and requires the expensing of most
transaction and restructuring costs. This new standard is applicable
only to transactions occurring after the effective date of January 1,
2009, and it had no impact on the Company's consolidated financial
statements.
FSP FAS No. 141 (R)-1: In April 2009, the Financial Accounting Standards
Board (FASB) issued FASB Staff Position (FSP) Financial Accounting
Standard (FAS) No. 141(R)-1, "Accounting for Assets Acquired and
Liabilities Assumed in a Business Combination That Arises from
Contingencies" (FSP FAS No. 141(R)-1).
-11-
CLANCY SYSTEMS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
(Unaudited)
2. Recently Issued Accounting Standards (continued)
This FSP amends and clarifies SFAS No. 141(R), to require that
an acquirer recognize at fair value, at the acquisition date, an
asset acquired or a liability assumed in a business combination
that arises from a contingency if the acquisition-date fair value
of that asset or liability can be determined during the measurement
period. If the acquisition-date fair value of such an asset acquired
or liability assumed cannot be determined, the acquirer should apply
the provisions of SFAS No.5, Accounting for Contingencies, to
determine whether the contingency should be recognized at the
acquisition date or after it. FSP FAS No. 141(R)-1 is effective for
assets or liabilities arising from contingencies in business
combinations occurring in the first annual reporting period beginning
after December 15, 2008. The Company adopted FSP FAS No. 141(R)-1
prospectively on January 1, 2009, and there was no impact on its
consolidated financial statements.
SFAS No. 157: In December 2006, SFAS No. 157, "Fair Value Measurement"
(SFAS No. 157), was issued. SFAS No. 157 clarifies the definition of
fair value, describes methods used to appropriately measure fair value,
and expands fair value disclosure requirements, but does not changes
existing guidance as to whether or not an instrument is carried at fair
value. SFAS No. 157 is effective for fiscal years beginning after
November 15, 2007. The Company adopted the provisions for financial
assets and liabilities effective January 1, 2008. The Company
adopted the provisions for nonfinancial assets and liabilities
effective January 1, 2009. The adoption of SFAS No. 157 had no
impact on its consolidated financial statements.
SFAS No. 165: Effective April 1, 2009, the Company adopted
SFAS No. 165, "Subsequent Events" (SFAS No. 165). SFAS No. 165
establishes general standards of accounting for and disclosure of
events that occur after the balance sheet date but before financial
statements are issued or are available to be issued. It requires the
disclosure of the date through which an entity has evaluated
subsequent events and the basis for that date and alerts all users
of financial statements that an entity has not evaluated subsequent
events after that date in the set of financial statements being presented.
The adoption of SFAS No. 165 had no impact on the Company's
consolidated financial statements.
FSP FAS No. 107-1 and APB 28-1: On April 9, 2009, the FASB issued FSP
FAS No. 107-1 and Accounting Principles Board (APB) 28-1, "Interim
Disclosures about Fair Value of Financial Instruments," (FSP FAS No.
107-1 and APB 28-1) which relates to fair value disclosures for any
financial instruments that are not currently reflected on the balance
sheet at fair value. Prior to issuing this FSP, fair values for these
assets and liabilities were only disclosed once a year.
-12-
CLANCY SYSTEMS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
(Unaudited)
2. Recently Issued Accounting Standards (continued)
The FSP now requires these disclosures on a quarterly basis, providing
qualitative and quantitative information about fair value estimates for
all those financial instruments not measured on the balance sheet at
fair value. FSP FAS No. 107-1 and APB 28-1 were adopted by the Company
effective April 1, 2009 and had no impact on its consolidated financial
statements.
Issued but not yet effective accounting standards:
SFAS No. 168: In June 2009, the FASB issued SFAS No. 168, "The FASB
Accounting Standards Codification(tm) and the Hierarchy of Generally
Accepted Accounting Principles" (SFAS No. 168). SFAS No. 168 establishes
the FASB Accounting Standards Codification (the "Codification") as the
source of authoritative U.S. GAAP for nongovernmental entities, in
combination with rules and interpretive releases of the SEC under authority
of U.S. federal securities laws for SEC registrants. The Codification
organizes and simplifies all authoritative U.S. GAAP literature, and
establishes that all authoritative U.S. GAAP in the Codification carries
an equal level of authority. SFAS 168 will be effective for financial
statements issued for interim and annual periods ending after September
15, 2009 (September 30, 2009 for the Company).The Company does not
anticipate that the adoption of SFAS No. 168 will have any impact on
its consolidated financial statements.
3. Inventories
Inventories consist of the following at:
September 30, June 30,
2008 2009
---- ----
Finished goods $ 42,925 $ 67,671
Work in process 2,606 40,006
Purchased parts and supplies 137,543 66,676
-------- ---------
$ 183,074 $ 174,353
========= =========
4. Income Taxes
The provision for income taxes for the nine months ended June 30, 2008
and 2009 is based on the expected rate for the tax year.
Differences in amounts of income taxes reported in the financial statements
to taxes that would be obtained by applying regular tax rates to income
taxes mainly consist of tax-exempt income and changes to estimates of
previously reported income tax expense.
-13-
CLANCY SYSTEMS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
(Unaudited)
4. Income taxes (continued)
The components of the Company's deferred tax assets and liabilities are
as follows:
September 30, June 30,
2008 2009
------------ --------
Current deferred tax asset:
Section 263A capitalization $ 3,200 $ 3,200
Allowance for doubtful accounts 8,000 4,200
--------- ----------
Current deferred tax assets $ 11,200 $ 7,400
========= ==========
Non current deferred tax assets
Loss on equity investment $ 221,500 $ 297,300
Section 263A capitalization 30,600 30,600
---------- ----------
252,100 327,900
Valuation allowance (221,500) (297,300)
---------- ----------
30,600 30,600
Non current deferred tax liabilities:
Depreciation and amortization (89,000) (85,400)
---------- ----------
Net non current deferred tax liabilities $ (58,400) $ (54,800)
========== ==========
5. Stockholders' Equity
In December 2006, under Rule 10b-18, the Company implemented a
policy 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.
During the nine month period ended June 30, 2009 the Company
reacquired 17,591,727 shares of its common stock for $133,032.
The reacquisition has been accounted for by reducing common stock
for the par value of the shares reacquired and the excess paid
per share over the par value has been allocated to additional
paid in capital, based on the number of shares acquired, and the
balance charged to retained earnings. 16,148,300 shares were
purchased under a private block transaction at a price less
than market price and the balance of 1,443,427 shares were purchased
under the plan.
6. Contingencies
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.
-14-
CLANCY SYSTEMS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
(Unaudited)
6. Contingencies (continued)
The Company filed a motion to dismiss which was granted in December
2002, but subsequently overturned on appeal in October 2003.
Clancy filed a motion with the District Court, City and County of
Denver, Colorado, Case #02-CV-2391, for Summary Judgment to dismiss
the case in June 2004. That motion was granted and the case was
dismissed on August 13, 2004.
In November 2004, Mr. Salazar filed a notice of appeal
in the Colorado Court of Appeals with respect to the suit dismissed
by the District Court in August, 2004. In September 2006, the Court
of Appeals granted Mr. Salazar's appeal. Clancy has filed a petition
for certiorari seeking to have the matter heard by the Colorado
Supreme Court. The Writ was granted and the Supreme Court heard the
case on September 11, 2007.
On March 17, 2008, the Colorado Supreme Court issued a decision
affirming the District Court dismissal of Mr. Salazar's suit. It
also denied Mr. Salazar's request to amend his Complaint in the
District Court to add a new claim. The case was thereafter
remanded to the District Court. Mr. Salazar then filed a motion
in District Court to amend his Complaint to add a new claim. The
District Court denied Mr. Salazar's motion to amend based upon
the finality of the Supreme Court ruling and the Supreme Court's
denial of Mr. Salazar's request to amend his pleading in the
District Court. Mr. Salazar has filed notice of appeal in Colorado
Court of Appeals with respect to the District Court's denial of his
motion to amend. In July 2009 Mr. Salazar's appeal was denied.
The Company is in dispute with the Puerto Rico Municipality Center
(CRIM), the governmental entity in charge of the assessment collection
of property taxes in Puerto Rico, for personal property taxed owed
from 1998. The Company filed a written protest as to these assessments
and vigorously contested the asserted deficiencies through the
administrative appeals process. During the year ended September 30,
2008, the process finalized.
-15-
CLANCY SYSTEMS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
(Unaudited)
6. Contingencies (continued)
The accrual for $310,068 that was recorded on the books was
reduced to $102,740 which is the total amount assessed by the
CRIM for unpaid personal property tax since 1999. The effect
of this reduction amounted to $219,814.
However, during the quarter ended December 31, 2008, the CRIM assessed
new debt for $441,987, including penalties, interest and surcharges,
for parking meters considered as real property from 2002. The
company has protested this assessment and accrued the liability
during the quarter ended December 31,2008.
During the quarter ended March 31, 2009, the Company made payment of
$68,623 for the remaining personal property assessment and an
additional payment of $26,211 for the real property assessment.
In May 2009, CRIM froze the UTS bank accounts. The
Company is currently negotiating with CRIM regarding the final debt
assessment which management believes will be reduced. The final
outcome of this is expected by August 31, 2009. Accordingly, cash
in the amount of $174,592, pertaining to the frozen UTS bank accounts,
is presented as current restricted cash in the accompanying consolidated
financial statements.
-16-
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) and the ability of the Company to
reduce costs and thereby maintain adequate profit margins.
At June 30, 2009, the Company had consolidated working capital of
$1,387,423 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,
2009. The Company settles funds for permit collections after the
end of each month. Occasionally this overlaps into the next quarter.
The timing of the payout is captured as an accounts payable amount
if it falls into a subsequent quarter by a few days.
COMPARISON OF RESULTS FOR THE THREE MONTHS ENDED June 30,
2008 AND 2009
REVENUES. For the three month quarter ended June 30, 2008
to the three month quarter ended June 30, 2009 revenues decreased
by $75,302 or 7.5% from $998,514 to $923,212. The decrease in
revenue reflects a decrease in ticket issuance by clients. Clancy's
Remit-online.com service has processed 69,656 transactions totaling
$2,430,913 for the quarter ended June 30, 2009. The Company was
processing permits for BART through May 2009. As of June 2009 the
Company is no longer processing monthly permits for BART. However, the
profit from BART transactions was negligible and will have little
impact on future revenues flowing through remit-online.
Revenues are generated based on a per transaction fee
less bank processing costs. The gross amount of cash 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 revenue in the statements of operations.
-17-
COST OF SERVICES. For the three month quarter ended June 30, 2008
to the three month quarter ended June 30, 2009, cost of services
decreased by $16,516 or 6.7% from $248,312 to $231,796 for the
Company. Cost of services as a percentage of service contract income
was 24.8% for the 2008 quarter and 25.1% for the 2009 quarter. The
decrease is primarily related to the decrease in revenues.
RESEARCH AND DEVELOPMENT. The Company's parking enforcement systems
research and development costs decreased from $10,369 to $9,354, or
9.8% from the three month quarter ended June 30, 2008 and 2009.
The company's research and development fluctuates as product
development completes or upgrades may or may not be in process.
GENERAL AND ADMINISTRATIVE. General and administrative expenses
increased by $181,461 or 44.4% from $409,085 to $590,546 for the
three month quarter ended June 30, 2008 and 2009, respectively.
The increase in general and administrative expenses is a result of
an additional property tax assessment by the Puerto Rico Municipality
Revenue Center (CRIM), the governmental entity in charge of
assessment and collection of property taxes.
NET INCOME. For the three month quarter ended June 30, 2009,
the Company reported net income of $95,090 compared to net income of
$260,048 for the three month quarter ended June 30, 2008. The
primary reason for the decrease in net income is related to the
property tax assessment discussed above.
COMPARISON OF RESULTS FOR THE NINE MONTHS ENDED JUNE 30,
2008 AND 2009
REVENUES. For the nine months ended June 30, 2008
to the nine months ended June 30, 2009 revenues increased
by $30,191 or 1.0% from $2,973,371 to $3,003,562. The increase in
revenue reflects a increase in ticket issuance by clients.
Remit-online.com service has processed 225,640 transactions totaling
$8,326,526 for the nine months ended June 30, 2009. Revenues are
generated based on a per transaction fee less bank processing costs.
The gross amount of cash 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 revenue
in the statements of operations.
COST OF SERVICES. For the nine months ended June 30, 2008
to the nine months ended June 30, 2009, cost of services
increased by $64,520 or 9.4% from $685,597 to $750,117 for the
Company. Cost of services as a percentage of service contract income
was 23.1% for the 2008 period and 25.0% for the 2009 period. The
increase reflects costs related to contract expansion at Urban Transit
Solutions.
-18-
RESEARCH AND DEVELOPMENT. The Company's parking enforcement systems
research and development costs increased from $17,489 to $25,211, or
44.2%, from the nine months ended June 30, 2008 to 2009, respectively.
The primary reason for the increase in costs was the engineering and
development of a sensor system for parking garage activity. The
company is also working on a new board for it's blue tooth printer.
GENERAL AND ADMINISTRATIVE. General and administrative expenses
increased by $399,250 or 24.8% from $1,607,100 to $2,006,350 for the
nine months ended June 30, 2008 and 2009, respectively.
The increase in general and administrative expenses is a result of
an additional property tax assessment by the Puerto Rico Municipality
Revenue Agency (CRIM), the governmental entity in charge of
assessment and collection of property taxes, for approximately $153,000
that was completed in December 2008. Additionally with the new contract
in Puerto Rico, salaries and other expenses have increased.
NET INCOME (Loss). For the nine months ended June 30, 2009,
the Company reported net income of $84,139 compared to net income of
$715,892 for the nine months ended June 30, 2008. The primary reason
for the decrease in net income is related to the property tax assessment
discussed above. Additionally in December 2007, the Company
recieved a $200,000 contract termination fee from the city of Arecibo,
Puerto Rico which is not a recurring item.
STATUS OF PRODUCTS AND SERVICES
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. The Company is currently updating
its Bluetooth printer technology.
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 four 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 the
Company a 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. The Company is
offering its programs in a "cloud computing" environment.
-19-
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.
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'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.
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 introduced a new cellular-based real time ticket
issuance system. This is a giant leap in both issuing the citations
and managing information. The Company anticipates this will be
a program that will ensure continued growth. The programs are
maintained and utilized in a cloud computing environment.
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.
-20-
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 next twelve months
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.
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.
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. The Company continues to experience an 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 $2,900,000, for
UTS and $1,361,451 for Clancy, have not been recognized
as revenue at June 30, 2009 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.
-21-
USE OF ESTIMATES
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 collectability 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.
-22-
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.
Item 4T. Controls and Procedures
Our management, with the participation of our chief executive officer
and our chief financial officer, has evaluated the effectiveness of our
disclosure controls and procedures as required by Exchange Act Rule
13a-15(b) as of June 30, 2009 (the end of the period covered by
this report). Based on that evaluation, our chief executive officer
and our chief financial officer have concluded that because of the
material weakness identified in our internal control over financial
reporting described in Item 8A(T) of our annual report for the year
ended September 30, 2008 on Form 10-KSB, that, our disclosure controls
and procedures were not effective as of June 30, 2009. Due to the
small size of the Company and our lack of personnel resources, we are
unlikely to immediately take any action to remediate the material
weaknesses identified.
Disclosure controls and procedures are controls and other procedures
that are designed to ensure that information required to be disclosed
in our reports filed or submitted under the Securities Exchange Act is
recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission's rules and forms.
Disclosure controls and procedures include, without limitation, controls
and procedures designed to ensure that information required to be
disclosed in our reports filed under the Exchange Act is accumulated
and communicated to our management, including our principal executive
officer and our principal financial officer, as appropriate, to allow
timely decisions regarding required disclosure.
There were no changes in our internal control over financial reporting
during the quarter ended June 30, 2009, that have materially affected,
or are reasonably likely to materially affect, our internal control over
financial reporting.
-23-
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is in dispute with the Puerto Rico Municipality Center
(CRIM), the governmental entity in charge of the assessment and collection
of property taxes in Puerto Rico, for personal property taxes owed
from 1998. The company filed a written protest as to these assessments
and vigorously contested the asserted deficiencies through the
administrative appeals process. During the year ended September 30,
2008, the process finalized. The accrual for $310,068 that was
recorded on the books was reduced to $102,740, which is the total
amount assessed by the CRIM for unpaid personal property tax since
1999. The effect of this reduction amounted to $219,814. However
the CRIM assessed a new debt for $441,987, including penalties,
interest for parking meters considered as real property from 2002.
The Company has protested this assessment and accrued the liability
during the quarter ended December 31, 2008.
During the quarter ended March 31, 2009, the Company made a payment of
$68,623 for the remaining personal property assessment and an additional
payment of $26,211 for the real property assessment.
In May 2009, CRIM froze the UTS bank accounts. The
Company is currently negotiating with CRIM regarding the final debt
assessment which management believes will be reduced. The final outcome
of this is expected by August 31, 2009.
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.
Clancy filed a motion with the District Court, City and County of
Denver, Colorado, Case #02-CV-2391, for Summary Judgment to dismiss
the case in June 2004. That motion was granted and the case was
dismissed on August 13, 2004.
However, in November 2004, Mr. Salazar filed a notice of appeal
in the Colorado Court of Appeals with respect to the suit dismissed
by the District Court in August, 2004. In September 2006, the Court
of Appeals granted Mr. Salazar's appeal. Clancy has filed a petition
for certiorari seeking to have the matter heard by the Colorado
Supreme Court. The Writ was granted and the Supreme Court heard the
case on September 11, 2007.
On March 17, 2008, the Colorado Supreme Court issued a decision
affirming the District Court dismissal of Mr. Salazar's suit. It
also denied Mr. Salazar's request to amend his Complaint in the
District Court to add a new claim. The case was thereafter
remanded to the District Court. Mr. Salazar then filed a motion
in District Court to amend his Complaint to add a new claim.
-24-
The District Court denied Mr. Salazar's motion to amend based upon
the finality of the Supreme Court ruling and the Supreme Court's
denial of Mr. Salazar's request to amend his pleading in the
District Court. Mr. Salazar has filed notice of appeal in Colorado
Court of Appeals with respect to the District Court's denial of his
motion to amend. In July 2009 Mr. Salazar's appeal was denied.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(c) Small Business issuer purchases of equity securities
Period (a) Total (b) Average (c) Total (d) Maximum Number
Number Price Paid Number of of shares that
of Shares Per Share Shares Purchased May Yet Be Purchased
Purchased as Part of Under the Plans or
Publicly Announced Programs
Plans or Program
- -------- ---------- ---------- ------------------ ------------------
- -
April 1
through
April 30,
2009 - - - -
May 1,
through
May 31,
2009 - - - -
June 1,
through
June 30,
2009 16,450,800 $.0070 16,450,800 -
------- ---- --------- ----------
Total 16,450,800 $.0070 16,450,800 -
======== ======= ========= ==========
* The Company announced in its 10-KSB filing for the year ended
September 30, 2006, that it 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.
-25-
Item 3. Defaults upon senior securities
None
Item 4. Submission of matters to a vote of security holders
None
Item 5. Other information
Non
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.
-26-
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 19, 2009 Clancy Systems International, Inc.
(Registrant)
By:/s/ Stanley J. Wolfson
Stanley J. Wolfson,
President and Chief
Executive Officer
By:/s/ Lizabeth Wolfson
Lizabeth Wolfson,
Secretary-Treasurer and
Chief Financial and
Chief Accounting Officer
-27-