10QSB 1 a10q0307.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, 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 May 21, 2007 is 382,005,438 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 March 31, 2007 (unaudited) 3 and 4 Consolidated Statements of Income - For the Three Months Ended March 31, 2006 and 2007 (unaudited) 5 Consolidated Statements of Income - For the Six Months Ended March 31, 2006 and 2007 (unaudited) 6 Consolidated Statement of Stockholders' Equity - For the Six Months Ended March 31, 2007 (unaudited) 7 Consolidated Statements of Cash Flows - For the Six Months Ended March 31, 2006 and 2007 (unaudited) 8 Notes to Unaudited Consolidated Financial Statements 9 Management's Discussion and Analysis of Financial Condition and Results of Operations 11 PART II. OTHER INFORMATION 20 Item 1. Legal Proceedings 20 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 21 Item 6. Exhibits 22 -1- CLANCY SYSTEMS INTERNATIONAL, INC. CONSOLIDATED BALANCE SHEETS ASSETS September 30, March 31, 2006 2007 (Unaudited) Current assets: ------------ ----------- Cash and cash equivalents $ 387,663 $ 635,818 Accounts receivable, net of allowance for doubtful accounts 642,056 676,279 Income tax receivable 23,264 - Inventories 104,224 109,209 Prepaid expenses 89,124 43,731 ---------- ---------- Total current assets 1,246,331 1,465,037 ---------- ---------- Furniture and equipment, at cost: Office furniture and equipment 226,011 214,171 Computers and equipment under service contracts 2,638,800 2,709,747 Leasehold improvements 81,424 81,424 Vehicles, including vehicles under capital leases 149,886 149,886 --------- --------- 3,096,121 3,155,228 Less accumulated depreciation (2,250,994) (2,376,361) ---------- --------- Net furniture and equipment 845,127 778,867 ---------- ---------- Other assets: Deferred tax asset 65,100 98,700 Investment in marketable securities 588,212 638,749 Deposits and other 21,740 24,451 Goodwill 404,547 404,547 Software development costs, net of accumulated amortization 221,878 225,542 --------- -------- Total other assets 1,301,477 1,391,989 --------- --------- $ 3,392,935 $ 3,635,893 =========== =========== See accompanying notes to consolidated financial statements. -2- CLANCY SYSTEMS INTERNATIONAL, INC. CONSOLIDATED BALANCE SHEETS (Continued) LIABILITIES AND STOCKHOLDERS' EQUITY September 30, March 31, 2006 2007 (Unaudited) ------------ ----------- Current liabilities: Accounts payable $ 27,826 $ 54,915 Accrued expenses 376,075 338,655 Income Taxes Payable 62,417 Current portion of obligations under capital leases 3,279 3,397 Deferred revenue 128,853 96,316 --------- -------- Total current liabilities 536,033 555,700 Obligations under capital leases, net of current portion 9,941 8,113 --------- ------- Total liabilities 545,974 563,813 --------- ------- 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, 382,617,938 shares issued and outstanding at 9/30/06 and 382,107,938 shares issued and outstanding at 3/31/07 38,262 38,211 Additional paid-in capital 1,359,797 1,357,985 Retained earnings 1,448,902 1,675,884 --------- --------- Total stockholders' equity 2,846,961 3,072,080 ----------- ----------- $ 3,392,935 $ 3,635,893 =========== =========== See accompanying notes to consolidated financial statements. -3- CLANCY SYSTEMS INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF INCOME For the Three Months Ended March 31, 2006 and 2007 (Unaudited) March March 31, 2006 31, 2007 Revenues: -------- -------- Sales $ 18,755 $ 23,984 Service contract income 778,941 744,498 Parking ticket collections 144,205 111,919 ---------- ---------- Total revenues 941,901 880,401 ---------- ---------- Costs and expenses: Cost of sales 16,424 17,845 Cost of services 164,364 263,753 Cost of parking ticket collections 22,032 35,343 General and administrative 516,610 562,277 Research and development 11,686 1,515 --------- --------- Total costs and expenses 731,116 880,733 --------- --------- Income (loss) from operations 210,785 (332) -------- --------- Other income (expense): Interest income 6,433 23,490 Interest expense (1,534) ( 9,465) Other Income 455 1,708 --------- --------- Total other income (expense) 5,354 15,733 --------- --------- Income before provision for income taxes 216,139 15,401 --------- ---------- Provision for income taxes: Current expense (benefit) 96,726 46,553 Deferred expense (benefit) 26,100 (50,300) ---------- --------- Total income tax expense (benefit) 122,826 ( 3,747) ---------- --------- Net income $ 93,313 $ 19,148 =========== ========== Basic and diluted net income per common share $ * $ * ========== =========== Weighted average number of shares outstanding 382,617,938 382,142,271 ============ =========== *Less than $.01 per share See accompanying notes to consolidated financial statements. -4- CLANCY SYSTEMS INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF INCOME For the Six Months Ended March 31, 2006 and 2007 (Unaudited) March March 31, 2006 31, 2007 Revenues: -------- -------- Sales $ 55,218 $ 62,946 Service contract income 1,457,947 1,457,295 Parking ticket collections 290,980 416,699 ---------- ---------- Total revenues 1,804,145 1,936,940 ---------- ---------- Costs and expenses: Cost of sales 52,601 27,221 Cost of services 328,562 416,531 Cost of parking ticket collections 47,668 59,499 General and administrative 995,830 1,117,046 Research and development 26,336 1,515 --------- --------- Total costs and expenses 1,450,997 1,621,812 --------- --------- Income from operations 353,148 315,128 -------- --------- Other income (expense): Interest income 13,466 25,204 Interest expense (8,086) (1,324) Other Income 2,293 1,708 --------- --------- Total other income (expense) 7,673 25,588 --------- --------- Income before provision for income taxes 360,821 340,716 --------- ---------- Provision for income taxes: Current expense (benefit) 118,235 140,412 Deferred expense (benefit) 40,700 (33,600) ---------- --------- Total income tax expense (benefit) 158,935 106,812 ---------- --------- Net income $ 201,886 $ 233,904 =========== ========== Basic and diluted net income per common share $ * $ * ========== =========== Weighted average number of shares outstanding 382,617,938 382,381,619 ============ =========== *Less than $.01 per share See accompanying notes to consolidated financial statements. -5- CLANCY SYSTEMS INTERNATIONAL, INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY For the Six Months Ended March 31, 2007 (unaudited)
Additional Common Stock Paid-In Retained Shares Amount Capital Earnings ------ ------ --------- -------- Balance, September 30, 2006 382,617,938 $ 38,262 $ 1,359,797 $ 1,448,902 Common stock repurchase (510,000) (51) (1,812) (6,922) Net income for the six months ended March 31, 2007 - - - 233,904 ---------- --------- ---------- ---------- Balance, March 31, 2007 382,107,938 $ 38,211 $ 1,357,985 $ 1,675,884 =========== ========= ============= =========== See accompanying notes to consolidated financial statements. -6-
CLANCY SYSTEMS INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS For the six months ended March 31, 2006 and 2007 (Unaudited) March March 31, 2006 31, 2007 ------- ------- Cash flows from operating activities: Net income $ 201,886 $ 233,904 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 214,749 188,796 Deferred income tax expense 40,700 (33,600) Changes in assets and liabilities: Accounts receivable 7,663 (34,223) Inventories 1,694 (4,985) Income taxes refundable (15,170) 23,264 Prepaid expenses 43,271 45,393 Accounts payable (8,917) 27,089 Accounts payable, related party (1,530) - Accrued expenses (62,020) (37,420) Income taxes payable (69,549) 62,417 Deferred revenue (7,484) (32,537) ---------- --------- Total adjustments 143,407 204,194 ---------- --------- Net cash provided by operating activities 345,293 438,098 ---------- --------- Cash flows from investing activities: Acquisition of furniture and equipment (66,471) (76,207) Increase in software licenses and software development costs (41,262) (47,704) Increase in investments in marketable securities (84,242) (50,537) Decrease in deposits and other assets 6,232 (5,000) ---------- --------- Net cash used in investing activities (185,743) (179,448) ---------- --------- Cash flows from financing activities: Proceeds from related party loan 175,000 - Repurchase of Common Stock 0 (8,785) Payments on long-term debt and capital leases (286,910) (1,710) ---------- ---------- Net cash used in financing activities (111,910) (10,495) ----------- ---------- See accompanying notes to consolidated financial statements. -7- CLANCY SYSTEMS INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) For the six months ended March 31, 2006 and 2007 (Unaudited) March March 31, 2006 31, 2007 ------- ------- Increase in cash and cash equivalents 47,640 248,155 Cash and cash equivalents at beginning of period 533,485 387,663 ---------- --------- Cash and cash equivalents at end of period $ 581,125 $ 635,818 ========== ========== See accompanying notes to consolidated financial statements. -8- CLANCY SYSTEMS INTERNATIONAL, INC. CONSOLIDATED NOTES TO FINANCIAL STATEMENTS March 31, 2007 (Unaudited) 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. All such adjustments are of a normal and recurring nature only. 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, 2006. 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 six months ended March 31, 2006 and 2007. 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. 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 basic and -9- CLANCY SYSTEMS INTERNATIONAL, INC. CONSOLIDATED NOTES TO FINANCIAL STATEMENTS March 31, 2007 (Unaudited) 1. Basis of Presentation (continued) 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. 2. Inventories Inventories consist of the following at: September 30, March 31, 2006 2007 ---- ---- Finished goods $ 15,574 $ 32,210 Work in Process 2,962 25,666 Purchased parts and supplies 85,688 51,333 -------- --------- $ 104,224 $ 109,209 ========= ========= 3. Income taxes The provision for income taxes for the six months ended March 31, 2006 and 2007 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 before taxes mainly consist of tax-exempt income and changes in estimates of previously reported income tax expense. The components of the Company's deferred tax assets and liabilities are as follows: September 30, March 31, 2006 2007 ---- ---- Non-current deferred tax assets $ 132,700 $ 159,800 Non-current deferred tax liabilities (67,600) (61,100) ----------- ---------- Net non-current deferred taxes $ 65,100 $ 98,700 =========== ========== -10- CLANCY SYSTEMS INTERNATIONAL, INC. CONSOLIDATED NOTES TO FINANCIAL STATEMENTS March 31, 2007 (Unaudited) 4. 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 six month period ended March 31, 2007, the Company reacquired 510,000 shares of its common stock for $8,785. 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. Subsequent to March 31, 2007, the Company repurchased 102,500 shares of its common stock for a total of $2,048. -11- 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. Management's Discussion and Analysis of Financial Condition and Results of Operations At March 31, 2007, the Company had consolidated working capital of $909,337 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, 2007. 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 MARCH 31, 2006 AND 2007 REVENUES. From the three month quarter ended March 31, 2006 to the three month quarter ended March 31, 2007 revenues decreased by $61,500 or 6.5% from $941,901 to $880,401. The decrease in revenues is due to a slow down in ticket issuance during bad weather during the winter months for the quarter ended March 31, 2007. Clancy's Remit-online.com service has processed 59,256 transactions totaling $2,418,771.10 for the quarter ended March 31, 2007. 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. -13- COST OF SERVICES. For the three month quarter ended March 31, 2006 to the three month quarter ended March 31, 2007, cost of services increased by $99,389 or 60.5% from $164,364 to $263,753 for the Company. Cost of services as a percentage of service contract income was 21.1% for the 2006 quarter and 35.4% for the 2007 quarter. RESEARCH AND DEVELOPMENT. The Company's parking enforcement systems research and development costs decreased from $11,686 to $1,515, or 87.0%, from the three month quarter ended March 31, 2006 to 2007. GENERAL AND ADMINISTRATIVE. General and administrative expenses increased by $45,667 or 8.8 % from $516,610 to $562,277 for the three month quarter ended March 31, 2006 and 2007, respectively. Product development and improvement is still paramount to the Company, and costs are being incurred for development of several new items. NET INCOME. For the three month quarter ended March 31, 2007, the Company reported net income of $19,148 compared to $93,313 for the three month quarter ended March 31, 2006. The primary reason for the decrease in net income is related to the addition of new contracts in Puerto Rico which require additional offices, personnel and setting up the infrastructure of the projects. These installations have been financed through cash flows and costs have been expensed. These costs are startup expenses, before revenue is recognized, which typically occurs after several months of operation. Some of these expenses are non-recurring contract support costs. COMPARISON OF RESULTS FOR THE SIX MONTHS ENDED MARCH 31, 2006 AND 2007 REVENUES. From the six months ended March 31, 2006 to the six months ended March 31, 2007 revenues increased by $132,795 or 7.4% from $1,804,145 to $1,936,940. The increase in revenues is due to the addition of new customers and products during the six months ended March 31, 2007. Clancy's Remit-online.com service has processed 113,455 transactions totaling $4,657,203.59 for the six months ended March 31, 2007. 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 six months ended March 31, 2006 compared to the six month ended March 31, 2007, cost of services increased by $87,969 or 26.8% from $328,562 to $416,531 for the Company. Cost of services as a percentage of service contract income was 22.54% for the 2006 quarter and 28.58% for the 2007 quarter. RESEARCH AND DEVELOPMENT. The Company's parking enforcement systems research and development costs decreased from $26,336 to $1,515, or 94.2%, from the six months ended March 31, 2006 to 2007. The company did not do any significant product engineering during this period. However, the company will begin a new printer board design in the next quarter. -14- GENERAL AND ADMINISTRATIVE. General and administrative expenses increased by $121,216 or 12.2% from $995,830 to $1,117,046 for the six months ended March 31, 2006 and 2007, respectively. The increase relates primarily to increased rent, salaries, office supplies, health insurance, repairs and maintenance, and UTS opening offices in additional cities. NET INCOME. For the six months ended March 31, 2007, the Company reported net income of $233,904 compared to $201,886 for the six months ended March 31, 2006. The primary reason for the modest increase in net income is related to the addition of new contracts in Puerto Rico which require additional offices, personnel and setting up the infrastructure of the projects. These installations have been financed through cash flows and costs have been expensed. These costs are startup expenses, before revenue is recognized, which typically occurs after several months of operation. Some of these expenses are non-recurring contract support costs. CONTROLS AND PROCEDURES The Company's principal executive officer and principal financial officer have evaluated the effectiveness of the Company's disclosure controls and procedures (as such term is defined in Rules 13a-15(e) a nd 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on such evaluation, the Company's principal executive officer and principal financial officer have concluded that, as of the end of such period, the Company's disclosure control and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act. The Company's management has also concluded that the Company's disclosure controls and procedures are effective to ensure that information required to be disclosed in the Company's reports filed under the Exchange Act is accumulated and communicated to management, including the principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure. There was no change in the Company's internal control over financial reporting that occurred during the fiscal quarter to which this report relates that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. 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 the quarter ended December 31, 2005, the Company began production of a printer using wireless Bluetooth technology. -15- 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. Through sophisticated communications software developed internally, the Company is able to update, modify, repair, enhance and change programs at the client's location via modem and the Internet. The Company has developed numerous Internet based parking programs which include payment processing, permit registrations, and pre-paid parking and parking reservations, special event parking and permitting, and its Expo1000 Parking Industry Guide. URBAN TRANSIT SOLUTIONS The Company provided a total financial investment of $500,000 to Urban Transit Solutions between March 1998 and April 1999. UTS has been generating revenue since August 1999. Collections from parking lot fees from Cauguas commenced in January of 1999. In September 2005, the Company acquired all outstanding shares of UTS stock in exchange for shares of the Company's common stock. Damaris Carasquilo 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. For the city of Ponce, UTS will install 800 meters. For the city of Aqua Buena, UTS will install 500 meters. For the city of Isabela, UTS will install 500 meters. These installations will be completed by June 2007. -16- 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. 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 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 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. -17- 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, 2007. UTS has funded its operations primarily by cash flows and bank debt. It has notes payable and capital lease obligations arising from borrowings for working capital and purchases and installation of meter equipment. With UTS under new management, the Company anticipates that UTS will be profitable for the year ending September 30, 2007. 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 $2,720,255, for UTS and $1,005,961 for Clancy, have not been recognized as revenue at March 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. 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. -18- 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. 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. -19- PART II - OTHER INFORMATION Item 1. Legal Proceedings On March 21, 2002, a complaint was filed in Denver District Court by Francis Salazar against the Company. Mr. Salazar was seeking compensation for alleged loss of profit on the sale of 6,000,000 shares of the Company's common stock that carried a restrictive legend under Rule 144 of the Securities Act of 1933, as amended. The complaint alleges that the restrictive legend prevented Salazar from selling the shares during an uptick in the Company's share price. The Company filed a motion to dismiss which was granted in December 2002, but subsequently overturned on appeal in October 2003. 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 company expects the Court to hear the case during 2007. A definite date has not been scheduled. -20- 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 -------- ---------- ---------- ------------------ ------------------- Month #1 January 1 500,000 .0185 500,000 - through January 31, 2007 Month #2 February 1 10,000 .02 10,000 - through February 28, 2007 ------- ---- --------- ---------- Total 510,000 .0187 510,000 - * ======== ===== ========= ==========
* The company announced in its 10-KSB filing for the year ended September 30, 2006, that it implemented a reaquisition 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. -21- 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. -22- 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 18, 2007 Clancy Systems International, Inc. (Registrant) By:/s/ Stanley J. Wolfson Stanley J. Wolfson, President and Chief Executive Officer -23-