UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: September 30, 2006
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 Company as specified in its charter)
_____COLORADO_______ ______84-1027964______
State or other jurisdiction of (IRS Employer Identification
incorporation or organization Number)
2250 S. Oneida #308, Denver, Colorado 80224
(Address of principal executive offices and Zip Code)
(303) 753-0197
(Company's telephone number, including area code)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Company (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, and (2) has
been subject to such filing requirements for the past 90 days.
(1) Yes __X__ No _____
(2) Yes __X__ 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
Check if there is no disclosure of delinquent filers in
response to Item 405 of Regulation S-B, and no disclosure will be
contained, to the best of Company's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of
this Form 10-KSB or any amendments to this Form 10-KSB. [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
The Company's revenues for its most recent fiscal year were
$3,535,542.
The aggregate market value of the voting stock held by
non affiliates (based upon the average of the bid and asked price
of these shares on the over-the-counter market) as of December 15,
2006 was approximately $3,148,462.
The number of shares outstanding of the issuer's classes of common
stock, as of December 22, 2006 is 382,617,938 shares, $.0001 par
value.
Documents incorporated by reference: None
Transitional Small Business Disclosure Format:
Yes___ No __X__
CLANCY SYSTEMS INTERNATIONAL, INC.
Form 10-KSB
TABLE OF CONTENTS
PART I
Item 1. Description of Business
Item 2. Description of Property
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
Item 6. Management's Discussion and Analysis or Plan of Operations
Item 7. Financial Statements
Item 8. Changes In and Disagreements with Accountants on Accounting
and Financial Disclosure
Item 8A. Controls and Procedures
PART III
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange Act
Item 10. Executive Compensation
Item 11. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters
Item 12. Certain Relationships and Related Transactions
Item 13. Exhibits
Item 14. Principal Accountant Fees and Services
CLANCY SYSTEMS INTERNATIONAL, INC.
Form 10-KSB
PART I
Item 1. Description of Business
Business Development.
In April 1987 Oxford Financial, Inc. (Oxford) merged with
Clancy Systems International, Inc.(Old Clancy). Oxford,
as the surviving company in the merger, changed its name
to Clancy Systems International, Inc. (the "Company").
Oxford was organized under the laws of the State of Colorado
on March 3, 1986. Old Clancy was organized under the laws
of the State of Colorado on June 28, 1984.
In February 1998, the Company acquired 60% ownership in a
partnership with Urban Transit Solutions (UTS). UTS is a
consolidated subsidiary and is therefore included in the
consolidated financial statements of Clancy as of September
30, 2005 and 2006.
In December 2003, the Company advanced additional funds to UTS
which resulted in additional shares being issued to bring
its ownership to 72%.
In September 2005, both the board of directors and shareholders
of UTS and the board of directors of Clancy Systems International,
Inc. approved an agreement to acquire the remaining shares of
UTS stock from the other shareholders in exchange for Clancy
stock. As a result of this exchange, UTS is a wholly owned
subsidiary of the Company at September 30, 2005 and 2006.
The Company designs, develops and manufactures automated
parking enforcement systems primarily for lease to municipalities,
universities and institutions, including a ticket writing system
and other enforcement systems.
The Company has installed numerous parking enforcement
systems for various clients, towns and universities.
To augment the enforcement element of the system, the Company
manufactures and markets the original Denver Boot and other
enforcement tools. By utilizing an integrated approach, the
Company offers a complete parking citation processing system
including tracking, enforcement, collection and automatic
identification of delinquent violators in an effective and
efficient manner.
The Company also acquired and developed several stand alone
computer programs for special niche operations including
IDBadge.com, WhatsImportantNow.com, VirtualPermit.com, Remit-
online.com, Expo1000.com, Permit-sales.com and Park-by-phone.com.
The Company acquired Expo1000.com and Remit-online.com during
fiscal year 2001. The Company developed IDBadge.com,
WhatsImportantnow.com, VirtualPermit.com, Permit-sales.com and
Park-by-phone.com internally.
-1-
The Company also provides hardware and software for special
projects for Hertz Corporation including a project called Fleet
Control. Fleet Control was developed in 1987 as an internal
security system used by Hertz to track the transfer of cars
between locations.
The Company's principal executive offices are located at 2250
S. Oneida Street, #308, Denver, Colorado 80224 and its
telephone number is (303) 753-0197. The Company's web site is
www.clancysystems.com.
Business of the Issuer.
Principal Products or Services and Markets and
Distribution Methods.
The Company's parking enforcement system is an automated system
which generates parking citations. The system consists of a
hand-held, light-weight, portable data entry terminal, a light-weight
printer to generate the parking citation and a data collection
computer system to store parking citation data at the end of each day.
The data entry terminal includes features such as large keys for
use with gloved hands, easily readable liquid crystal display,
phosphorescent keypad for illuminated night use and a large memory.
The printer contains a "no-wait" buffer which acts to eliminate delay
in entering citation data. The printer has been streamlined and along
with the hand-held terminal weighs less than two pounds and is battery
charged to last for at least eight hours with overnight recharging
capability. The citations are printed on a continuous fan fold flat
forms. The data collection computer is used for uploading and
downloading data and contains the capacity for interfacing directly
to a user's computer. There are currently approximately 2000
ticket-writing units in operation.
The Company's system also includes a complete back office
processing and filing system. The Company provides computers,
printers and software to enable the user to obtain state Department of
Motor Vehicle lookups, maintain citation information storage and
recall, generate delinquent notices and have immediate access to
files of all tickets previously written. In addition, the
Company's system maintains a current, readily accessible list of
vehicles with multiple outstanding citations, stolen vehicles, or
vehicles otherwise wanted by local law enforcement officials. The
system also generates reports of citations by number and officer,
revenues collected, names of scofflaws, officer productivity and
other reports as deemed necessary or valuable to the agency.
The Company offers Internet payment processing of tickets,
permit registrations, and clearing of funds for its clients and
industry affiliates. The program accepts credit cards and checks
at its Remit-online.com web site 24 hours a day. As the items are
accepted, email notification goes immediately to the client for
notification and posting of payment. Settlement of funds is weekly
or monthly per contract arrangement.
-2-
Under the permit fulfillment program, patrons can purchase permits
at on-line web addresses for specific agencies. Payment processing
is done for checks and credit cards and the permits are
mailed directly for the agencies.
The Company's contracts for its parking enforcement systems
generally provide that the Company will provide the ticket writers,
a back office processing system, custom software and training and
support in consideration of a fee per citation issued, a monthly
fee for computer equipment rental and/or a set monthly fee.
Occasionally, the Company will provide its system through an
outright sale rather than through its typical lease arrangement.
The Company generally warrants its equipment, provides updating
and improvements to its system hardware and software and provides
customary indemnification. The Company also contracts its systems
under a privatization program whereby the Company provides a
complete facilities management program for the client. The
operation includes personnel to operate the system, issue tickets,
and take care of enforcement tasks, along with the collection of
ticket revenues, backlog ticket collections and other related
duties. These programs are offered under a revenue guarantee or
revenue split contract.
The Company currently has systems installed in municipalities
and universities representing approximately 9,000,000 tickets
issued per year.
The Denver Boot
The Denver Boot is a metal clamp which is fastened around a
wheel which effectively prevents a vehicle from being moved.
The Denver Boot is removed by unlocking a padlock. The Company
acquired all rights to the product in a transaction with Grace
Berg in June of 1994. The Company paid Mrs. Berg royalties on
all sales for a period extending through June 1999. The Denver
Boot is used by a number of law enforcement agencies on vehicles
with multiple offenses. The Denver Boot can be integrated into the
Company's parking control and enforcement system or may be sold
separately. The Company recently introduced a Super Boot to fit
some of the larger pickup trucks and SUV models.
Fleet Control
The Company sells charger/communication cradles to the Hertz
Corporation for its fleet control project and maintains the
equipment for Hertz under a maintenance service contract
agreement.
-3-
Remit-online.com
Remit-online.com is an Internet based payment processing
system which allows for credit card and check payments to be made
for parking citations and other payment processing activities.
The business was developed independent of Clancy and funded by
Stanley Wolfson, the President of Clancy. The Company acquired
Remit-online.com (with Expo1000.com) from Wolfson in February
2001, in exchange for 17,489,315 shares of Clancy Systems
International, Inc. restricted stock.
Remit-online.com has been expanding and is being offered to
all clients of the Company as well as to other parking industry
businesses. The Company is able to process credit card and check
payments through services provided by 3rd parties. The Company
receives a processing fee for each transaction. As each
transaction is processed, notification is sent to the paid agency
by email so that posting of the account can be made promptly as
parking citations are date critical regarding amount due and
potential late fees. Settlement of collected funds between the
Company and the agency is made based on contractual agreement
either weekly or monthly.
Expo1000.com
Expo1000.com is an Internet based industry guide that is
structured as a virtual trade show with links to the actual
exhibitors Web sites. Expo1000.com was developed and funded
independent of the Company, and acquired from Stanley J. Wolfson
with the Remit-online business on November 18, 1999. The final
agreement and issuance of shares took place February 2001.
The business has been developed for specific industries with
focus on parking. Expo1000.com contains an internal
search engine which searches key words industry specific. Client
company listings are available by company name, product, as well
as search engine within the industry. The listings are
subscription based and billed annually. To make the site viable,
the primary focus in addition to selling the listings is to increase
the visits and exposure to sites. The Expo1000.com site highlights
"what's new" for the industry (press releases, new product
announcements, new service announcements). The site contains a
message board and email services to its subscribers and its
visitors.
Expo1000.com is also a parking advocacy forum and sponsors one
day solution seminars in strategic locations for exhibition and
education purposes. Expo1000.com vendors demonstrate their product
to invitees from strategic municipal, university and commercial
parking agencies.
-4-
Permitsales.com
Permitsales.com is a comprehensive program for online permit
registration. Through this program registration and renewals
for decal permits can be done. The program also is used
to register, create, and print special event permits and
periodic transit permits. The Company provides permit
fulfillment services.
IDBadgemaker.com
This is a PC based badge and security ID program that is used
in conjunction with digital photos to allow users to easily and
inexpensively make two-sided ID badges (with critical information
and bar codes). The program is sold as a stand alone program and
has been marketed directly to our clients as well as through
several on-line software product/download sites such as
Download.com. The product sells for $199 per license. The
download version can be used for demonstration with the word DEMO
stamped across any badge produced. The Company has had a great
deal of interest in the program and sales are commencing on a
regular basis. The program receives "excellent" ratings at
download.com.
VirtualPermit.com
This program is a paperless (and hard copy) permit system
now being used by many of the Company's clients. It includes
monitoring lots and garages, inventory of spaces, and can validate
active or lapsed permits.
Park-by-phone.com
This program is a technology based parking reservation and
payment system that will benefit the customers by allowing them
to pay (by credit card) and park by making one telephone call to
the Park-by-phone data center. Through strategic alliances with
parking operators, cities, and venues, this system will allow
customers to have paid parking in an instant, without the need of
cash or coins.
Competition.
The Company is aware of other companies that currently offer
an automated ticket writing system: Rhino Technologies,
Inc.; Cardinal; Com-Plus; Radix-T-2, and others. The Company
believes that it is able to compete effectively in the field
because of its fee per citation and leased system marketing
approach which eliminates any significant capital expenditures
by the user, its excellent program for customer support and
because of the various enforcement products which it offers
to complement its system.
-5-
Initially, the Company provides potential parking control
clients with consulting services to analyze the client's ticketing
and enforcement needs. The Company then develops a proposal based
upon those needs, which indicates how the Company's system and
related products would aid the client in achieving the two primary
goals of ticket writing and enforcement: creation of an equitable
enforcement policy and an increase in revenues. The Company
believes that a system which is perceived by the public to provide
a greater certainty of enforcement will result in a greater
willingness upon the part of the public to promptly and
consistently pay fines, thus increasing the flow of revenues to
the client. Depending upon the size of the client, the Company's
services may range from the simple sale of hardware (i.e., the
Denver Boot) to providing a ticketing and enforcement system and
related equipment through a lease or sale arrangement, training
users and handling data processing of tickets and the collection
of fines. The Internet based services added to client programs as
well as the Remit-online.com payment processing program makes the
Company's system more comprehensive and advantageous than
competitor systems.
Although a few of the Company's systems provide for the
purchase of systems or fees based on set monthly amounts, the
Company has been marketing its system and other products to
municipalities, universities, colleges, institutions and parking
companies primarily under a professional services contract geared
to a transactional or per citation basis. The Company supplies
all hardware, software, training, supplies and maintenance for the
system, thus eliminating all significant capital expenditures by
the user.
The Company markets its ticket writing and enforcement system
directly to municipalities, universities, colleges, institutions
and parking companies through commissioned sales representatives
and members of management. The Company currently has marketing
alliances with two organizations throughout the United States.
The Company's management attends trade shows and makes direct sales
calls.
Raw Materials and Principal Suppliers.
The Company purchases its hand-held computers from outside
vendors and the Company builds the printer units that incorporate
the hand-held terminal. The printer units for the various systems
are the same. The Company's latest generation printers feature
injection molded cases and an automatic top-of-form feature for
the paper feed. Other new technology for the electronics enable
interfacing with auxiliary hardware such as radio communications
devices, magnetic credit card readers and other peripheral devices.
The Company purchases its hand-held terminals from several different
vendors who sell computers that are all comparable in quality.
One type of handheld the Company uses for its parking enforcement
systems is a Palm PDA.
-6-
Component parts for the Company's products are purchased from
various sources. The Company has established relationships with
various vendors for such parts. The Company is not reliant on
sole source vendors for any item.
The Company's paper products are purchased from outside
vendors. Should any of these vendors be unable to supply these
specialized products, the Company believes that there are many
other available sources of supply.
The Company has manufactured a printer to interface to Palm
Computing devices. In December 2001, the Company began
production of a special keyboard/cradle for the Palm PDA
terminals. The cradle is called a Palmtype.
Other products sold by the Company which complement the
parking citation issuance programs, include: ID BADGEMAKER
(which is sold for $199 per license) and PalmTicketer which
is a program to issue special event tickets. The Company has
enhanced features on its ticket processing system; digital photo
system; virtual permit system which is a fully operational permit
issuance, payment and tracking system which reduces paperwork,
decal distribution and employee time to administer a parking permit
program; a daily permit one use parking permit program for short
duration parking validation; an employee badge ID system which
can be used by parking systems, rental car systems, and other
industries; a management alert system which is an automated data
analysis program which emails information and alerts directly to
management to reveal such information as permit violations, ticket
issuance productivity numbers, revenue numbers and other
and timely information. Other software products include the
on-line permit renewal system.
Significant Customers.
Presently, the Company has 152 customers. The Company
continually updates the hardware and software products provided
to these and all of its customers in an effort to ensure quality
service and customer satisfaction.
Privatization Contracts. In a contract for privatization,
the Company provides a full facilities management operation for
the city of Logan, UT, Los Angeles Metropolitan Transportation
Authority (LAMTA) and Norwalk Transit Santa Fe Springs (NTSFS).
For the City of Logan, the Company provides personnel,
vehicles, an office, ticket issuance and ticket payment processing.
The Company pays the City a 50/50 split after all expenses are
paid. For LAMTA and NTSFS, the Company provides lot services
including signage and striping, ticket issuance, permit fulfillment,
special event parking, and other related services. Fees are based on
the different service levels.
-7-
Urban Transit Solutions, Puerto Rico.
In February 1998, the Company acquired 60% ownership in a partnership
with Urban Transit Solutions (UTS). The Company committed to
$500,000 in funding to UTS between January 20, 1998 and April 30,
1999. At September 30, 2001, the Company had paid $500,000 to UTS.
UTS currently has contracts in Mayaguez, Humacao, Carolina, San German,
Manati, Arecibo Caguas, and beginning in October 2006 with Isabela,
Aquas Buenas, and Ponce, Puerto Rico. In Mayaguez, UTS has installed
600 parking meters and is responsible for collection of parking meter
revenues. In Caguas, UTS leases parking facilities from the City
and collects the parking revenues from the lot. UTS has installed
meters and provides ticket issuance parking enforcement. In Humacao,
UTS installed meters and collects revenues from the meters as well
as provides ticket issuance parking enforcement. UTS is completing
installation of parking meters in San German and will also provide
ticket issuance and enforcement. UTS anticipates additional contracts
in Puerto Rican cities for meter installation, collections and ticket
issuance enforcement. The marketing approach is to bring Puerto
Rican cities into the 21st century by organizing parking
operations and providing current technology to modernize city
operations. Currently UTS accounts for approximately 42% of
total revenues.
Patents and Licenses.
The Company obtained a patent (No. 5,006,002) for its printer
used in its parking enforcement, rental car return and inventory
control systems in April 1991. This patent expires April 2008.
The Company also obtained a patent for a printer latch on
June 27, 2000. The patent expires in June 2019.
The Company applied for a patent for its palmtype and
Palm specific software in July 2002. The Company was
awarded patent No. 6,970,109 on November 29, 2005.
The Company has also filed for and was granted
Trademarks for PARK-BY-PHONE. On July 26, 2005, the Company
received trademark No. 2,979,359 for PARK-BY-PHONE.COM and
trademark No. 2,979,358 for PARK-BY-PHONE.
Need for Governmental Approval.
Many of the Company's contracts are awarded after a
Request for Proposal has been tendered by the agency.
Other companies with similar technologies also bid on
the Request for Proposal tenders.
-8-
Research and Development.
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 has redesigned
the printer so that it weighs less than two pounds. New
battery technology has also allowed the Company to reduce
the weight in the printers.
The Company currently produces a printer to interface to
its handheld devices that is light weight (at 1 1/2
pounds) and can produce a completed ticket in 20
seconds.
The Company has developed a keyboard and cradle for Palm
devices.
Management keeps informed of new developments in components
so that the printer is up-to-date, fast and suits user
requirements. The Company communicates with vendors on a regular
and ongoing basis so that management is aware of upgraded
components, new components and new processes to upgrade its
hardware. By adapting its equipment to user needs and keeping
current of the latest technology, the Company anticipates that its
enforcement ticket writing and rental car systems will not become
obsolete. The Company is currently developing new applications
with the new printer and Palm computing devices which will move
outside the parking and rental car industries. The Company's
software is developed in-house by four full-time programmers and
by Stanley J. Wolfson, the Company's President and a director,
and is maintained and updated on a regular basis.
The office computer software allows the daily ticket and
rental and inventory information to be transferred from the
portable units to a central computer. 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 most software at the client's location via a modem and
the Internet.
The Company spent $70,317 and $43,915 on research and
development activities for the fiscal years ended September 30,
2005 and 2006, respectively. None of the cost of such activities
was borne directly by the customers.
-9-
Compliance with Environmental Laws.
Compliance with federal, state and local provisions regulating
the discharge of materials into the environment or otherwise
relating to the protection of the environment will have no material
effect on the capital expenditures, earnings and competitive position
of the Company. The Company has entered into an arrangement with
RBRC (Rechargeable Battery Recycling Corporation) for the recycling of
all batteries.
The Company donates its used computer equipment to various
churches. The program has been very successful as the computers
are capable of early computer training programs even though they
are no longer acceptable to operate the Company's systems.
Employees.
The Company currently has ten employees in Company operations
and four employees in privatization projects, all of whom are employed
on a full time basis. Urban Transit Solutions has 2 employees in
upper management, 4 employees in field management and 22 employees
in operations.
Item 2. Description of Properties.
The Company is leasing approximately 1,700 square feet of
office space located at 2250 South Oneida Street, #308, Denver,
Colorado for its corporate offices for $2,464 per month pursuant
to a lease agreement with an unaffiliated party which expires
May 31, 2008.
The Company also leases approximately 3,000 square feet of
manufacturing space located at 5789 S. Curtice, Littleton,
Colorado, from an unaffiliated party. Rental payments are $630 per
month pursuant to a lease agreement that expires August 1, 2007.
The Company leases an office in Logan, Utah which is
approximately 500 square feet from an unaffiliated party. Rental
payments are $500 per month plus utilities pursuant to a lease
agreement which expires June 30, 2007.
The Company believes that these facilities are suitable and
adequate for its needs.
The Company has always entered into 1 and 2 year lease agreements
and is confident that it can renew its leases under the same
terms and conditions.
-10-
Item 3. 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. That petition is pending.
During the year ended September 30, 2005, UTS initiated legal
action against one of its previous legal counsels alleging
malpractice in the services provided. Management believes,
based on the advise of the Company's current legal counsel that
the suit could result in a settlement award by the court in favor
of the Company. However, the ultimate outcome of the litigation
cannot be determined and no amount has been recognized for
possible collection of any amounts asserted in the litigation.
UTS is in dispute with the Puerto Rico Municipality Revenue
Center (CRIM), the governmental entity in charge of the
assessment collection of property taxes in Puerto Rico, for
personal property taxes owned from 1998. The Company has
filed a written protest as to these assessments and will
vigorously contest the asserted deficiencies through the
administrative appeals process and, if necessary, litigation.
The Company believes an adequate provision, amounting to
$313,069, has been made in the financial statements for
any possible liability.
-11-
Item 4. Submission of Matters to a Vote of Security Holders.
None.
PART II
Item 5(a). Market for Company's Common Stock and Related Security
Holder Matters.
The principal market on which the Company's Common Stock is
traded is the over-the-counter market and the Company's Common
Stock is quoted in the OTC Bulletin Board.
The range of high and low bid quotations for the Company's
Common Stock for the last two fiscal years are provided below.
The quotations are obtained daily from Yahoo.com stock quotations
via the Internet. These over-the-counter market quotations reflect
inter-dealer prices without retail markup, markdown or commissions
and may not necessarily represent actual transactions.
High bid Low bid
10/1/04 - 12/31/04 $ .02 $ .019
01/01/05 - 03/31/05 .0179 .0179
04/01/05 - 06/30/05 .019 .017
07/01/05 - 09/30/05 .017 .0125
10/01/05 - 12/30/05 .010 .010
01/01/06 - 03/31/06 .014 .010
04/01/06 - 06/30/06 .014 .012
07/01/06 - 09/30/06 .013 .011
On December 12, 2006 the reported bid and asked prices for
the Company's Common Stock were $.016 and $.014, respectively.
The approximate number of record holders of the Company's
Common Stock on December 12, 2006 was 568. The Company has paid
no dividends with respect to its Common Stock.
There are no contractual restrictions on the Company's
present or future ability to pay dividends.
-12-
Item 6. Management's Discussion and Analysis or Plan of
Operation
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 continue 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 Condition
and Results of Operations
At September 30, 2006, the Company had working capital of
$710,298 as compared to $518,464 at September 30, 2005.
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.
Clancy's current consolidated ratio increased from 1.69 to 1 to
2.33 to 1 from September 30, 2005 to September 30, 2006.
REVENUES. From fiscal 2005 to fiscal 2006 revenues increased by
approximately $512,521 or 17.0% from $3,023,021 to $3,535,542. This
increase in revenues is due to the addition of new customers and
products during the year ended September 30, 2006. Clancy's
Remit-online services has processed 179,353 transactions
totaling $7,156,982 for the year ended September 30, 2006.
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. From fiscal 2005 to fiscal 2006, cost of
services increased by $63,185 or 8.8% from $714,669 to $777,854.
Cost of services as a percentage of service contract income was
29.0% for fiscal 2005 and 25.5% for fiscal 2006. The decrease
in cost of services was a small factor in the increased earnings.
RESEARCH AND DEVELOPMENT. The Company's parking enforcement systems
research and development costs decreased from $70,317 to $43,915, or
37.5%, from fiscal 2005 to 2006. Product development and improvement
to current products is paramount to the Company and the Company has
some new products in development. The decrease is due to research
and development projects of new technology done in the prior year
which are now incorporated into the current products.
GENERAL AND ADMINISTRATIVE. General and administrative
expenses increased by $229,035 or 12.6% from $1,823,719 to $2,052,754
from fiscal 2005 to 2006. The increase in general and
administrative costs for the Company is primarily due to the
substantial addition of two new offices opened by UTS in
October 2005.
NET INCOME. The Company reported net income of $175,952 for fiscal
2005 as compared to $335,563 for fiscal 2006. The primary reason
for the increase in net income of $159,611 for fiscal 2006
is the increase in net revenue which is discussed above.
During the fiscal years ended September 30, 2005 and 2006,
the Company had in place a total of approximately 146 and
152 ticket issuance systems respectively.
During the next twelve months, the Company will continue to expand
its Internet parking services and operations. An expansion of
Park-by-Phone programs is planned under several strategic
alliance agreements and the Company plans to expand its
transit permit systems.
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.
The Company manufactures a printer to interface to Palm
Ipaq, and other handheld devices. It incorporates a state
of the art printer mechanism, light weight battery technology,
and prints flat ticket forms. The company also manufactures
a keyboard cradle for Palm devices. The Palm keyboard features
a full 45 key alpha/numeric keypad with assignable function keys.
14
Management keeps informed of new developments in components
so that the printer and keypads are up-to-date, fast and
suit user requirements. The Company communicates with
vendors on a regular and ongoing basis so that management
is aware of upgraded components, new technologies and
processes that can be used to upgrade its hardware.
The Company has a relationship with an engineer, who, although
he works as an independent contractor, dedicates as much
time as the Company requires to develop and enhance its
products. The engineer also does R&D 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 is qualified as a Microsoft Certified Partner.
The 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 its systems.
The office computer software allows daily ticket, rental
and inventory information to be transferred from the
portable data entry units to a central computer database.
The information is compiled and then processed further
according to user requirements.
Through sophisticated communications software developed
internally, the Company is able to update, modify, repair,
enhance and change programs at the client's location
via modem and the Internet.
The Company has developed numerous Internet based parking
programs which include payment processing, permit
registrations, and pre-paid parking and parking reservations,
special event parking and permitting, and its Expo1000
Parking Industry Guide.
URBAN TRANSIT SOLUTIONS
The Company provided a total financial investment of $500,000 to
Urban Transit Solutions between March 1998 and April 1999. UTS
has been generating revenue since August 1998. Collections from
parking lot fees from Caguas commenced in January 1999. The
Company's loan to its primary bank and private lender have been
paid back by the Company's cash flows.
-15-
In September 2005, the Company acquired all outstanding shares
of UTS stock in exchange for shares of the Company's common stock.
It's ownership changed from 72% to 100%.
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. For the city of Ponce, UTS will
install 800 meters. For the city of Agua Buena, UTS will install
500 meters. For the city of Isabela, UTS will install 500 meters.
These installations will be completed by June 2007.
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. The Company now utilizes four
different accounting firms for preparation of financial
statements, reviews and auditing functions.
Director and Officer insurance premiums have tripled for
the Company(this is consistent with the industry as a result
of the public company accounting 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
is 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.
-16-
In addition, the Company supplies all hardware, software,
training, supplies and maintenance for the system, thus
eliminating all significant capital expenditures by the user.
The Company has experienced a large number of inquiries about
its system related to the total program and special features and
anticipates growth in this area in the next fiscal year.
Uncertainties that can impact revenues from the Company's
service contract agreements would be related to dramatic
weather changes and municipal disaster occurrences (i.e.
September 11, 2001). As parking ticket issuance
operations are primarily "out-of-doors" tasks, severe
weather such as a major blizzard, hurricane, or rains could
impact ticket production for a limited period in certain
locales. While such reductions are temporary, they can impact
revenues as the Company bills most clients on a fee-per-ticket
basis. The meter collections for UTS could be temporarily
reduced during a hurricane or tropical storm. Further, as
the Company is contracting primarily with City government
agencies, a deployment of personnel to other duties during
a disaster could temporarily reduce ticket issuance activities.
Internal and external sources of liquidity
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
debt. It has notes payable and capital lease
obligations arising from borrowings for working capital
and purchases and installation of meter equipment. With
installation of new contracts, the Company anticipates
that UTS will continue to be profitable for the year
ending September 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.
-17-
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 $700,000 per month in transactions. The Company has
observed a continuing increase in activity monthly. The
Company realizes revenue on each transaction as each
remitter pays the Company a processing fee to use the
service. The net amount received by the company
per transaction varies based on the remitter's payment
amount.
In addition, outstanding ticket fines of approximately
$5,994,736 for UTS and $900,000 for Clancy's Logan, UT
operation have not been recognized as revenue at September
30, 2006 based on SEC accounting guidance.
CONTRACTUAL OBLIGATIONS
The following obligations are those of the consolidated
Company.
Payment Due by Period
Contractual Less than
Obligations Total 1 year 1-3 years 4-5 years Over
5 years
Long Term
debt $ --- $ --- $ --- $ --- $ ---
Capital
Lease
Obligations 14,920 4,068 10,852 --- ---
Operating
Leases
UTS 72,000 60,000 12,000 --- ---
Clancy 49,335 29,601 19,734 --- ---
Purchase
Obligations --- --- --- --- ---
Other Long-
term
obligations --- --- --- --- ---
--------- --------- ---------- ---------- ---------
Total
Contractual
Cash
Obligations $ 136,255 $ 93,669 $ 42,586 $ --- $ ---
========= ========== ========= ========== ==========
-18-
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 this Annual Report requires the Company to
make estimates and assumptions that affect the reported amount
of assets and liabilities of the Company, revenues and expenses
of the Company during the reporting period and contingent assets
and liabilities as of the date of the Company's financial statements.
There can be no assurance that the actual results will not differ
from those estimates.
REVENUE RECOGNITION: Revenue derived from professional service
contracts on equipment and support services is included in
income ratably over the contract term; related costs consist
mainly of depreciation, supplies and sales commissions.
The Company defers revenue for equipment and services under
service contracts that are billed to customers on a quarterly,
semi-annual, annual, or other basis and are included in
income ratably over the expected term of the contract.
Revenue from the issuance of parking citations for the
Company's privatization projects is recognized on a cash basis
when received as collectibility is not reasonably assured.
Revenue derived from professional service contracts on
parking meter and lots fees collections is recognized net of
municipalities' fees as services are provided. Related costs
consist mainly of depreciation and lot rents.
Revenue derived from professional service contracts for permit
fulfillment and remit-online services is recognized based on
add-on fees earned for each transaction.
COMPUTER SOFTWARE. Costs incurred prior to establishment of
the technological feasibility of computer software are research
and development costs, which are expensed as incurred. Software
development costs incurred subsequent to establishment of
technological feasibility are capitalized and subsequently
amortized based on the lesser 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.
-19-
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 Standards
No. 142 (SFAS 142), "Goodwill and Intangible Assets", which
clarifies the accounting for goodwill and intangible assets.
Under SFAS 142, goodwill and intangible assets with indefinite
lives will no longer be amortized, but will be tested for impairment
at least annually and also in the event of an impairment indicator.
There is no impairment of goodwill considered necessary as of September
30, 2005 or 2006.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 2005, the FASB issued FASB Interpretation ("FIN") No. 47,
"Accounting for Conditional Asset Retirement Obligations" ("FIN No. 47").
FIN No. 47 clarifies that the term conditional asset retirement obligation
as used in FASB Statement No. 143, "Accounting for Asset Retirement
Obligations," refers to a legal obligation to perform an asset retirement
activity in which the timing and (or) method of settlement are conditional
on a future event that may or may not be within the control of the entity.
The obligation to perform the asset retirement activity is unconditional
even though uncertainty exists about the timing and (or) method of
settlement. Uncertainty about the timing and /or method of settlement
of a conditional asset retirement obligation should be factored into the
measurement of the liability when sufficient information exists.
This interpretation also clarifies when an entity would have sufficient
information to reasonably estimate the fair value of an asset retirement
obligation. FIN No. 47 is effective no later than the end of fiscal
periods ending after December 15, 2005. Retrospective application of
interim financial information is permitted but is not required. Management
does not expect adoption of FIN No. 47 to have a material impact on our
financial statements.
SFAS 157, "Fair Value Measurements", defines fair value, establishes a
framework for measuring fair value in generally accepted accounting
principles (GAAP), and expands disclosures about fair value measurements.
This Statement applies under other accounting pronouncements that require
or permit fair value measurements, the Board having previously concluded
in those accounting pronouncement that fair value is the relevant measurement
attribute. Accordingly, this Statement does not require any new fair
value measurements. However, for some entities, the application of this
Statement will change current practice. Management has not evaluated the
impact of this statement. The Effective date for SFAS 157 is effective for
years beginning after November 15, 2007.
In June 2005, the EITF reached a consensus on Issue No. 05-6("EITF No.
05-6"), "Determining the Amortization Period for Leasehold Improvements
Purchased after Lease Inception or Acquired in a Business Combination."
EITF No. 05-6 clarifies that the amortization period for leasehold
improvements acquired in a business combination or placed in service
-20-
significantly after and not contemplated at or near the beginning of
the lease term should be amortized over the shorter of the useful life
of the assets or a term that includes the required lease periods and
renewals that are reasonably assured of exercise at the time of the
acquisition. EITF No. 05-6 is to be applied prospectively to leasehold
improvements purchased or acquired in reporting period beginning after
June 29, 2005. The adoption of EITF No. 05-6 did not have a material
impact on our consolidated financial statements.
FIN No. 48, "Accounting for Uncertainty in Income Taxes-an interpretation
of FASB Statement No. 109 (Issued 6/06)." This Interpretation clarifies
the accounting for uncertainty in income taxes recognized in an enterprise's
financial statements in accordance with FASB Statement No. 109, Accounting
for Income Taxes. This Interpretation prescribes a recognition threshold
and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to taken in a tax return.
The enterprise determines whether it is more likely than not that a tax
position will be sustained upon examination, including resolution of any
related appeals or litigation processes, based on the technical merits of
the position. A tax position that meets the more-likely-than-not recognition
threshold is measured to determine the amount of benefit to recognize in
the financial statements. This Interpretation also provides guidance on
derecognition, classification, interest and penalties, accounting in
interim periods, disclosure, and transition. This interpretation is
effective for fiscal years beginning after December 15, 2006. Management
does not expect adoption of FIN No. 48 to have a material impact on our
financial statements.
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.
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,
affirm or dispute information disclosed on these boards.
Management can only provide 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.
-21-
HUMAN RESOURCES
Our greatest resources are our dedicated employees who
devote their talents and energies to bettering our systems
and improving our products. Their efforts have driven the
Company's success and they continue to be the most valuable
resource of the Company.
RISK FACTORS
An investment in our common stock involves a high degree of risk.
Prospective investors should consider carefully the following
factors and other information in this report before deciding to
invest in shares of our common stock. If any of the following
risks actually occur, our business, financial condition, results
of operations and prospects for growth would likely suffer. As a
result, the trading price of our common stock could decline and
you could lose all or part of your investment.
Risks Related to Our Business
Our success depends on our ability to continue to develop and
commercialize our products and services. Our success depends on
our ability to continue to develop our products and services.
Our ability to develop any of the products or services is dependent
on a number of factors, including availability of working capital to
complete development efforts and to commercialize our products and
services, thereby maintaining and/or increasing revenues once
development efforts prove successful. There can be no assurance
that we will not encounter setbacks with the products and services,
or that working capital and our revenues will be sufficient.
A loss of several of our customers at once could adversely affect
our business.
We derive a large portion of our revenues from the parking
enforcement products and services we provide to our customers.
Although a loss of a few customers would have a minimal impact on
our business, a loss of several customers at once could materially
affect our revenue and projected growth.
As a result, our revenues from parking enforcement products
and services may decline significantly in any given period.
Our competitors may have greater resources or research and
development capabilities than we have, and we may not have
the resources necessary to successfully compete with them.
Our business strategy has been to create a niche in the parking
enforcement operations. We believe that we are able to compete
effectively in the field because of our fee per citation and
leased system marketing approach which eliminates any significant
capital expenditures by the user, our excellent program for customer
support and because of the various enforcement products which we
offer to complement our system.
-22-
The parking enforcement business is highly competitive, and
we may face increasing competition. We expect that some
of our competitors will have greater financial and human
resources, more experience in research and development,
and more established sales, marketing and distribution capabilities
than we have. In addition, new product introductions or other
technological advancements by our competitors could have an
adverse affect on some or all of our products and services.
RISKS RELATED TO OUR SECURITIES
We do not expect to pay dividends in the foreseeable future.
We do not expect to pay cash dividends on our common stock at
any time in the foreseeable future. The future payment of
dividends directly depends upon our future earnings, capital
requirements, financial requirements and other factors that
our board of directors will consider. Since we do not anticipate
paying cash dividends on our common stock, return on your investment,
if any, will depend solely on an increase, if any, in the market
value of our common stock.
Our common stock is classified as a "penny stock" under SEC
rules and the market price of our common stock is highly unstable.
A limited trading market exists for our common stock on the OTC
Bulletin Board. Since inception of trading in January 2003, our
common stock has not traded at $5 or more per share. Because our
stock is not traded on a stock exchange or on the Nasdaq National
Market or the Nasdaq Small Cap Market,if the market price of the
common stock is less than $5 per share, the common stock is
classified as a "penny stock." SEC Rule 15g-9 under the Exchange
Act imposes additional sales practice requirements on broker-dealers
that recommend the purchase or sale of penny stocks to persons
other than those who qualify as an "established customer"
or an "accredited investor." This includes the requirement that a
broker-dealer must make a determination that investments in penny
stocks are suitable for the customer and must make special
disclosures to the customers concerning the risk of penny stocks.
Many broker-dealers decline to participate in penny stock transactions
because of the extra requirements imposed on penny stock transactions.
Application of the penny stock rules to our common stock reduces the
market liquidity of our shares, which in turn affects the ability of
holders of our common stock to resell the shares they purchase, and
they may not be able to resell at prices at or above the prices they
paid. Furthermore, at present there is relatively limited trading in
our stock which could cause our price to fall if shares are sold
into the market.
-23-
We Could Lose Our Ability to Trade on the OTC Bulletin Board
During the year ended September 2006, our common stock was removed
from Over-the-Counter Bulletin Board because our Form 10-KSB for
fiscal year ended September 30, 2005 and our Form 10-QSB for quarter
ended December 31, 2005 were filed late. In August 2006, the
company was relisted on the Over-the-Counter Bulletin Board
Exchange. However, if we fail to remain current in our filings
with the SEC, we could once again lose our ability to trade on
the Over the Counter Bulletin Board.
Because our officers and directors exercise combined voting power
of more than 41% of our common stock, they may be able to
significantly influence the outcome of all matters submitted
to our shareholders for approval, regardless of the preferences
of the minority shareholders.
Stanley and Lizabeth Wolfson currently own 34.42% and James
Nyman owns 7% of our outstanding common stock. Accordingly,
they may have the ability to control matters affecting us,
including the composition of our board of directors, any
determinations with respect to mergers, or other business
combinations, our acquisition or disposition of assets and
our financings. In addition, Mr. and Mrs. Wolfson and Mr.
Nyman may be able to prevent or cause a change in control of
our company and may be able to amend our articles of
incorporation and bylaws if the remaining shareholders
do not vote against such a proposal, depending on the
number of votes cast on any proposal. Their interests may
conflict with the interests of our other shareholders.
-24-
Item 7. Financial Statements.
The following financial statements are filed as a part of
this Form 10-KSB and are included immediately following the
signature page.
Reports of Independent Registered Public Accounting
Firms F-1
Consolidated Balance Sheets - September 30, 2005 and
September 30, 2006 F-3
Consolidated Statements of Income -
Years ended September 30, 2005 and 2006 F-5
Consolidated Statements of Stockholders' Equity -
Years ended September 30, 2005 and 2006 F-6
Consolidated Statements of Cash Flows -
Years ended September 30, 2005 and 2006 F-7
Notes to Consolidated Financial Statements F-9
Item 8. Changes in and Disagreements With Accountants
on Accounting and Financial Disclosure.
NONE
-25-
Item 8A. Controls and Procedures
An evaluation was performed under the supervision and with
the participation of the Company's management, including the Chief
Executive Officer and Chief Financial Officer of the effectiveness
of the design and operation of the Company's disclosure controls
and procedures within 90 days before the filing date of this
annual report. Based on that evaluation, the Company's
management, including the CEO and CFO, concluded that the Company's
disclosure controls and procedures were effective.
There have been no changes in the Company's internal
controls or in other factors that could significantly affect
internal controls subject to their evaluation.
PART III
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange
Act.
Identification of Directors and Executive Officers.
Dates
Position of
Name held with Company Age service
Stanley J. Wolfson President, Chief Executive 63 1987
Officer and Director
Lizabeth M. Wolfson Secretary-Treasurer and 61 1987
Chief Financial and Chief
Accounting Officer and Director
James R. Nyman Director 60 2003
The business experience of the Company's officers and
directors is as follows:
Stanley J. Wolfson, President, Chief Executive Officer and a
director of the Company since February 1987. Mr. Wolfson attended
the University of Colorado at Boulder and the University of
Colorado at Denver. Mr. Wolfson had been president and a director
of Clancy from inception until its merger into the Company in
April 1987. Since 1967 Mr. Wolfson has been president and
director of Portion Controlled Foods, Inc. d/b/a Stan Wolfson and
Associates, Inc., a data processing systems consulting firm
located in Denver, Colorado which employs two persons on a
part-time basis. His firm's clients include The Hertz Corporation
that utilizes Stan Wolfson and Associates, Inc.'s hand-held data
entry equipment as part of its on-site national inventory control
system. The Hertz Corporation has been a major customer of the
Company. See Part I, Item 1. Mr. Wolfson has served as remote
data acquisition consultant for AT&T as well as a consultant for a
number of small local companies. Mr. Wolfson is the husband of
Lizabeth Wolfson, an officer and director of the Company.
-26-
Lizabeth M. Wolfson, Secretary-Treasurer and Chief Financial
and Chief Accounting Officer of the Company since February 1987.
Mrs. Wolfson attended the University of Colorado at Boulder and
the University of Colorado at Denver. Mrs. Wolfson had been
secretary and treasurer of Clancy from 1986 and a director since
June 1999. Since 1978, Mrs. Wolfson has served as secretary of
Stan Wolfson and Associates, Inc. She is the wife of Stanley J.
Wolfson, President, Chief Executive Officer and a director of the
Company.
James R. Nyman, Director since October 2003. Mr. Nyman is a graduate
of University of Minnesota with a degree in Aerospace Engineering and
received his Master's Degree in Business Administration at California
State University, Long Beach. Mr. Nyman has 23 years of experience in
local government services. He served as the director of Information
Services for the City of Inglewood, CA, from January, 1976 until
May 2002 and from May 2002 to present he is serving as
President of California Municipal Technologies, Inc. Mr. Nyman served
two terms as Mayor of Palos Verdes Estates, Palos Verdes, CA.
Audit Committee
The Board of Directors is performing the functions of the audit
committee. The Company does not have an audit committee financial
expert because its limited resources have not permitted it to search
for and locate an appropriate financial expert.
Nominating Committee
The entire Board of Directors fulfills the duties of our Nominating
Committee ("Nominating Committee"), which include overseeing the
process by which individuals may be nominated to our board of directors.
While the Company hopes to establish a separate nominating committee
consisting of independent directors if the number of directors is
expanded, the current size of the Company's Board of Directors
does not facilitate the establishment of a separate committee. Our
Nominating Committee's charter was adopted by the board of directors
effective as of September 30, 2005.
The functions performed by the Nominating Committee include
identifying potential directors and making recommendations as to the
size, functions and composition of the Board and its committees. In
making nominations, our Nominating Committee is required to submit
candidates who have the highest personal and professional integrity,
who have demonstrated exceptional ability and judgment and who shall
be most effective, in conjunction with the other nominees to the
board, in collectively serving the long-term interests of the
shareholders.
-27-
The Nominating Committee considers nominees proposed by our
shareholders. To recommend a prospective nominee for the Nominating
Committee's consideration, you may submit the candidate's name
by delivering notice in writing to Clancy Systems International,
Inc., 2250 S. Oneida St., Suite 308, Denver, CO 80224, attention Liz
Wolfson, Nominating Committee chairperson.
The facsimile number is 303.759.4681. Email address is
clancy@clancysystems.com.
A shareholder nomination submitted to the nomination committee must
include at least the following information (and can include
such other information the person submitting the recommendation
desires to include), and must be submitted to the Company in writing:
(i). The name, address, telephone number, fax number and e-mail
address of the person submitting the recommendation;
(ii). The number of shares and description of the Company voting
securities held by the person submitting the nomination and
whether such person is holding the shares through a brokerage
account (and if so, the name of the broker-dealer) or directly;
(iii). The name, address, telephone number, fax number and e-mail
address of the person being recommended to the nominating
committee to stand for election at the next annual
meeting (the "proposed nominee") together with information
regarding such person's education (including degrees
obtained and dates), business experience during the past
ten years, professional affiliations during the past ten
years, and other relevant information.
(iv). Information regarding any family relationships of the
proposed nominee as required by Item 401(d) of SEC Regulation
S-K.
(v). Information whether the proposed nominee or the person
submitting the recommendation has (within the ten years prior
to the recommendation) been involved in legal proceedings
of the type described in Item 401(f) of SEC Regulation
S-K (and if so, provide the information regarding those legal
proceedings required by Item 401(f) of Regulation S-K).
(vi). Information regarding the share ownership of the
proposed nominee required by Item 403 of Regulation S-K.
(vii). Information regarding certain relationships and
related party transactions of the proposed nominee as required
by Item 404 of Regulation S-K.
(viii). The signed consent of the proposed nominee in which he
or she
a. consents to being nominated as a director of the Company
if selected by the nominating committee,
b. states his or her willingness to serve as a director
if elected for compensation not greater than that described
in the most recent proxy statement;
c. states whether the proposed nominee is "independent" as
defined by Nasdaq Marketplace Rule 4200(a)(15); and
d. attests to the accuracy of the information submitted
pursuant to paragraphs (i), (ii), (iii), (iv), (v), (vi),
and (vii), above.
-28-
Although the information may be submitted by fax, e-mail, mail, or
courier, the nominating committee must receive the proposed
nominee's signed consent, in original form, within ten days
of making the nomination.
When the information required above has been received, the
nominating committee will evaluate the proposed nominee based
on the criteria described below, with the principal criteria being
the needs of the Company and the qualifications of such proposed
nominee to fulfill those needs.
The process for evaluating a director nominee is the same whether
a nominee is recommended by a shareholder or by an existing
officer or director. The Nominating Committee will:
1. Establish criteria for selection of potential directors,
taking into consideration the following attributes which are
desirable for a member of our Board of Directors:
leadership; independence; interpersonal skills; financial acumen;
business experiences; industry knowledge; and diversity of
viewpoints. The Nominating Committee will periodically assess
the criteria to ensure it is consistent with best practices
and the goals of the Company.
2. Identify individuals who satisfy the criteria for
selection to the Board and, after consultation with the Chairman
of the Board, make recommendations to the Board on new
candidates for Board membership.
3. Receive and evaluate nominations for Board membership
which are recommended by existing directors, corporate
officers, or shareholders in accordance with policies
set by the Nominating Committee and applicable laws.
The Nominating Committee has held no formal meetings and taken
no action by unanimous written consent through December 15, 2006.
The Company has not engaged the services of or paid a fee to any
third party or parties to identify or evaluate or assist in
identifying or evaluating potential nominees. Neither the Company
nor the Company's Nominating Committee has received a recommended
nominee from any shareholder that beneficially owns more than
5% of the Company's common stock or group of shareholders that
beneficially own more than 5% of the Company's common stock.
Family Relationships
Lizabeth M. Wolfson, Secretary-Treasurer and Chief Financial and Chief
Accounting Officer of the Company, is the wife of Stanley J. Wolfson,
President, Chief Executive Officer and a director of the Company.
Section 16(a) Beneficial Ownership Reporting Compliance
-29-
Officers, directors and beneficial owners of more than 10% of the
Company's common stock are not required to file reports under Section
16(a)and therefore no disclosure of delinquent reports is included
in this annual report.
Code of Ethics
In December, 2003, the Company adopted a Code of Ethics and has
posted the Code of Ethics on its website.
Item 10. Executive Compensation.
General. For the fiscal year ended September 30, 2006
the Company paid a ten percent sales commission totaling $2,611
to Stanley J. Wolfson, the President, Chief Executive Officer
and a director of the Company, based upon gross sales
(excluding supplies) to the Hertz Corporation. In addition,
Mr. Wolfson received a salary of $86,500 for the most recent
fiscal year ended.
Summary Compensation Table.
Name and Other annual
principal position Year Salary compensation
Stanley J. Wolfson 2006 $86,500 $2,611
President and Chief 2005 81,600 2,813
Executive Officer 2004 77,700 2,773
Compensation of Directors
Each member of the Board of Directors is paid an annual fee of
$5,000, distributed at $1,250 per quarter.
Item 11. Security Ownership of Certain Beneficial Owners and
Management.
Security Ownership of Beneficial Owners and Management.
The following table sets forth information as of December 15,
2006 with respect to the ownership of the Company's Common Stock
for all directors, individually, all officers and directors as a
group, and all beneficial owners of more than five percent of
the Common Stock.
-30-
Name and address Number of
of beneficial owner shares Percentage
Stanley J. Wolfson and
Lizabeth M. Wolfson 130,887,779 (1) 34.42%
2250 S. Oneida Ste. 308
Denver, Colorado 80224
James R. Nyman 26,835,000 (2) 7.0%
2529 Via Olivera
Palos Verdes, CA 90274
All officers and directors 157,727,779 (1&2) 41.42%
as a group (3 persons)
(1)Includes 4,075,642 shares of Common Stock owned of record by
Lizabeth M. Wolfson and 126,812,137 owned by Stanley J. Wolfson.
(2) Includes 26,510,000 shares owned by CMTI (an entity controlled
by Mr. Nyman) and 325,000 shares owned by James R. and Alice Nyman.
Item 12. Certain Relationships and Related Transactions.
Stanley Wolfson, President and Chief Executive Officer,
receives a 10% commission on all sales to Hertz Corporation based
on an agreement made between the Company and Mr. Wolfson in 1986.
During the years ended September 30, 2005 and 2006, the commissions
totaled $2,813 and $2,611 respectively.
In March 28, 2006, the Company entered into an unsecured
note payable agreement with Liz Wolfson, an officer and director
of the Company, in the amount of $175,000, with interest at a
rate of 7.75% per annum on the unpaid balance, payable in
periodic payments of $25,000 plus interest. As of September
30,2006, the note was paid in full and the Company paid interest
related to the note of $4,223.
Item 13. Exhibits and Reports.
(a) Exhibits.
The following is a complete list of exhibits filed as a part
of this Report on Form 10-KSB and are those incorporated herein by
reference.
-31-
Exhibit Number Title of Exhibit
3.1 Articles of Incorporation filed with the
Colorado Secretary of State on March 3, 1986 (2)
3.1(a) Articles of Amendment to Articles of Incorporation
(2)
3.3 Bylaws (2)
10.1 Partnership agreement between the Company and
Urban Transit Solutions (4)
10.6 Indemnification Agreements between the Company
Robert M. Brodbeck, Stanley J. Wolfson and
Lizabeth M. Wolfson dated February 26, 1987 (1)
10.12 Indemnity Agreements between Company and
Stanley J. Wolfson, and Lizabeth M. Wolfson (3)
10.13 Agreement of merger dated September 26, 2005
14.1 Code of Ethics (5)
21.1 List of Subsidiaries, included herewith
31.1 Certification Pursuant to 18 USC Section 302
for Stanley Wolfson, included herewith
31.2 Certification Pursuant to 18 USC Section 302
for Lizabeth Wolfson, included herewith
32.1 Certification Pursuant to 18 USC Section 1350
as adopted pursuant to Section 906 of Sarbanes-
Oxley Act of 2002 for Stanley Wolfson, included
herewith
32.2 Certification Pursuant to 18 USC Section 1350
as adopted pursuant to Section 906 of Sarbanes-
Oxley Act of 2002 for Lizabeth Wolfson, included
herewith
________
(1) Incorporated by reference from exhibit 2.1 filed with the
Company's current report on Form 8-K dated February 26,
1987.
(2) Incorporated by reference from the like numbered exhibits
filed with the Company's Registration Statement on Form
S-18, SEC File No. 33-4882-D.
-32-
(3) Incorporated by reference from the like numbered exhibits
filed with the Company's Annual Report on Form 10-KSB for
the year ended September 30, 1987.
(b) Reports on Form 8-K. During the last quarter of the
period covered by this report the Company filed no
reports on form 8-K.
(4) Incorporated by reference from like numbered exhibits
filed with the Company's Annual Report on Form 10-KSB for
the year ended September 30, 1998.
(5) Incorporated by reference from like numbered exhibits
filed with the Company's Annual Report on Form 10-KSB
for the year ended September 30, 2003
Item 14. Principal Accountant Fees and Services.
..
AUDIT RELATED FEES. The aggregate fees billed in each of the
last two fiscal years ended September 30, 2006 and 2005 by
Stark Winter Schenkein & Co, LLP. for assurance and related services
that were reasonably related to the performance of the audit or
review of the financial statements were $32,100 and $5,000.00,
respectively.
The Board of Directors approved the selection of Stark Winter
Schenkein & CO, LLP to conduct its audit work on October 1,
2006.
-33-
SIGNATURES
In accordance with the requirements of Section 13 or 15(d)
of the Securities Exchange Act of 1934, the Company has duly
caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
CLANCY SYSTEMS INTERNATIONAL, INC.
By /s/ Stanley J. Wolfson
Stanley J. Wolfson, President
and Chief Executive Officer
Date: December 22, 2006
In accordance with the requirements of the Securities
Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the Company and in the capacities
and on the dates indicated.
Date: December 22, 2006 /s/ Stanley J. Wolfson
Stanley J. Wolfson, President,
Chief Executive Officer and a
Director
Date: December 22, 2006 /s/ Lizabeth M. Wolfson
Lizabeth M. Wolfson, Secretary-
Treasurer and Chief Financial
and Chief Accounting Officer
Date: December 22, 2006 /s/James R.Nyman
Director
-34-
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED
PURSUANT TO SECTION 15(d) OF THE EXCHANGE ACT BY NON-REPORTING
ISSUERS.
None.
Index of Exhibits
Exhibit Number Title of Exhibit
3.1 Articles of Incorporation filed with the
Colorado Secretary of State on March 3, 1986 (2)
3.1(a) Articles of Amendment to Articles of Incorporation
(2)
3.3 Bylaws (2)
10.1 Partnership agreement between the Company and
Urban Transit Solutions (4)
10.6 Indemnification Agreements between the Company
and Robert M. Brodbeck, Stanley J. Wolfson and
Lizabeth M. Wolfson dated February 26, 1987 (1)
10.12 Indemnity Agreements between Company and
Stanley J. Wolfson, and Lizabeth M. Wolfson (3)
10.13 Agreement of merger dated September 26, 2005
14.1 Code of Ethics (5)
21.1 List of Subsidiaries, included herewith
31.1 Certification Pursuant to 18 USC Section 906
for Stanley Wolfson, included herewith
31.2 Certification Pursuant to 18 USC Section 906
for Lizabeth Wolfson, included herewith
32.1 Certification Pursuant to 18 USC Section 1350
as adopted pursuant to Section 906 of Sarbanes-
Oxley Act of 2002 for Stanley Wolfson, included
herewith
32.2 Certification Pursuant to 18 USC Section 1350
as adopted pursuant to Section 906 of Sarbanes-
Oxley Act of 2002 for Lizabeth Wolfson, included
herewith
________
(1) Incorporated by reference from exhibit 2.1 filed with the
Company's current report on Form 8-K dated February 26,
1987.
-35-
(2) Incorporated by reference from the like numbered exhibits
filed with the Company's Registration Statement on Form
S-18, SEC File No. 33-4882-D.
(3) Incorporated by reference from the like numbered exhibits
filed with the Company's Annual Report on Form 10-KSB for
the year ended September 30, 1987.
(b) Reports on Form 8-K. During the last quarter of the
period covered by this report the Company filed no
reports on form 8-K.
(4) Incorporated by reference from like numbered exhibits
filed with the Company's Annual Report on Form 10-KSB for
the year ended September 30, 1998.
(5) Incorporated by reference from like numbered exhibits
filed with the Company's Annual Report on Form 10-KSM
for the year ended September 30, 2003
-36-
Report of Independent Registered Public Accounting Firm
To the Board of Directors
Clancy Systems International, Inc.
We have audited the accompanying consolidated balance sheets of Clancy
Systems International, Inc. as of September 30, 2006 and 2005, and
the related consolidated statements of income, stockholders' equity and
cash flows for the years then ended. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility
is to express an opinion on these consolidated financial statements based
on our audits. We did not audit the financial statements of Urban Transit
Solutions, Inc., a 100% owned subsidiary, which statements reflect 31% and
27% of total consolidated assets as of September 30, 2006 and 2005,
respectively, and 42% and 29% of consolidated revenues for the years
ended September 30, 2006 and 2005, respectively. Those financial
statements were audited by other auditors whose report has been furnished
to us, and our opinion, insofar as it relates to the amounts included
for Urban Transit Solutions, Inc. as of September 30, 2006 and 2005, and
for the years then ended is based solely on the report of the
other auditor.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, and based on that of the other auditor, the consolidated
financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Clancy Systems International,
Inc. as of September 30, 2006 and 2005, and the consolidated results
of its operations and cash flows for the years then ended, in conformity
with accounting principles generally accepted in the United States of
America.
/s/ Stark Winter Schenkein & Co., LLP
Denver, Colorado
December 4, 2006
F-1
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
Urban Transit Solutions, Inc.
We have audited the accompanying balance sheets of Urban Transit
Solutions, Inc. as of September 30, 2006 and 2005, and the related
statements of operations, changes in stockholders' equity and
cash flows for the years then ended. These financial statements
are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the Standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements
are free of material misstatement. The Company has determined
that it is not required to have, nor were we engaged to perform
an audit of its internal control over financial reporting.
Accordingly, we express no such opinion. An audit includes
examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Urban
Transit Solutions, Inc. as of September 30, 2006 and 2005, and the
results of its operations and its cash flows for the years then
ended in conformity with accounting principles generally accepted
in the United States of America.
Kevane Grant Thornton LLP
San Juan, Puerto Rico
November 6, 2006
F-2
CLANCY SYSTEMS INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2005 AND 2006
ASSETS
2005 2006
Current assets: ---- ----
Cash and cash equivalents $ 533,485 $ 387,663
Accounts receivable, net of
allowance for doubtful accounts
of $11,438 and $11,000 508,810 642,056
Income tax refund receivable - 23,264
Inventories 137,562 104,224
Prepaid expenses 84,717 89,124
--------- ---------
Total current assets 1,264,574 1,246,331
--------- ---------
Furniture and equipment, at cost:
Office furniture and equipment 267,021 226,011
Equipment under service contracts 2,501,874 2,638,800
Leasehold improvements 98,936 81,424
Vehicles, including vehicles
under capital leases 150,171 149,886
-------- --------
3,018,002 3,096,121
Less accumulated depreciation (1,979,528) (2,250,994)
----------- -----------
Net furniture and equipment 1,038,474 845,127
---------- ---------
Other assets:
Deferred tax asset 80,600 65,100
Marketable securities
($400,000 pledged) 503,970 588,212
Deposits and other 33,969 21,740
Goodwill 404,547 404,547
Software development costs, net
of accumulated amortization
of $255,413 and $338,676 218,068 221,878
--------- ---------
Total other assets 1,241,154 1,301,477
--------- ---------
$ 3,544,202 $ 3,392,935
========== ==========
See accompanying notes to consolidated financial statements.
F-3
CLANCY SYSTEMS INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2005 AND 2006
LIABILITIES AND STOCKHOLDERS' EQUITY
(continued)
2005 2006
Current liabilities: ---- ----
Accounts payable $ 55,842 $ 27,826
Accrued expenses 441,140 376,075
Accounts payable, related party 1,530 -
Income taxes payable 117,827 -
Current portion of long term debt 6,419 -
Current portion of obligations
under capital leases 10,950 3,279
Deferred revenue 112,402 128,853
---------- ---------
Total current liabilities 746,110 536,033
--------- ---------
Long-term debt, net of current
portions 274,763 -
Obligations under capital leases,
net of current portion 11,931 9,941
--------- ---------
Total liabilities 1,032,804 545,974
--------- ---------
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 authorized,
382,617,938 shares issued
and outstanding 38,262 38,262
Additional paid-in capital 1,359,797 1,359,797
Retained earnings 1,113,339 1,448,902
--------- ---------
Total stockholders' equity 2,511,398 2,846,961
--------- ---------
$ 3,544,202 $ 3,392,935
=========== ===========
See accompanying notes to consolidated financial statements.
F-4
CLANCY SYSTEMS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED SEPTEMBER 30, 2005 AND 2006
2005 2006
Revenues: ---- ----
Sales $ 140,340 $ 128,661
Service contract income 2,466,473 3,052,259
Parking ticket collections and other 416,208 354,622
---------- ---------
Total revenues 3,023,021 3,535,542
---------- ---------
Costs and expenses:
Cost of sales 71,814 106,714
Cost of services 714,669 777,854
Cost of parking ticket collections 95,104 91,792
General and administrative 1,823,719 2,052,754
Research and development 70,317 43,915
--------- ---------
Total costs and expenses 2,775,623 3,073,029
--------- ---------
Income from operations 247,398 462,513
--------- ---------
Other income (expense):
Interest income 27,547 27,177
Interest expense (21,831) (18,440)
Other income 19,236 10,486
Minority interest in loss of subsidiary 41,943 -
--------- --------
Total other income (expense) 66,895 19,223
--------- --------
Income before provision for income
taxes 314,293 481,736
Provision for income taxes:
Current expense (202,941) (130,673)
Deferred benefit (expense) 64,600 (15,500)
--------- --------
(138,341) (146,173)
--------- --------
Net income $ 175,952 $ 335,563
========= =========
Basic and diluted net income per
common share $ * $ *
========= =========
Weighted average number of shares
outstanding - basic and diluted 365,310,000 382,618,000
=========== ===========
*Less than $.01 per share
See accompanying notes to consolidated financial statements.
F-5
CLANCY SYSTEMS INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 2005 AND 2006
Additional
Common Stock Paid-In Retained
Shares Amount Capital Earnings
------------------- ---------- --------
Balance, September 30,
2004 365,117,938 $ 36,512 $ 1,151,547 $ 937,387
Common shares issued
to acquire minority
interests of UTS 17,500,000 1,750 208,250 ---
Net income for year
ended September 30,
2005 --- --- --- 175,952
---------- -------- ---------- -----------
Balance, September 30,
2005 382,617,938 38,262 1,359,797 1,113,339
Net income for year
ended September 30,
2006 --- --- --- 335,563
--------- ------- -------- --------
Balance, September
30, 2006 382,617,938 $ 38,262 $ 1,359,797 $1,448,902
============ ========= ========== ==========
See accompanying notes to consolidated financial statements.
F-6
CLANCY SYSTEMS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 2005 AND 2006
2005 2006
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 175,952 $ 335,563
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 521,477 418,305
Bad debt expense, related party 30,019 -
Deferred income tax expense (64,600) 15,500
Minority interest (41,943) -
Loss on disposal of equipment - 283
Changes in assets and liabilities:
Accounts receivable (59,182) (133,246)
Inventories (30,023) 33,338
Income tax refund receivable 18,724 (23,264)
Prepaid expenses (10,151) (4,407)
Accounts payable (133,567) (28,016)
Accounts payable, related party (37,126) (1,530)
Accrued expenses 124,193 (65,065)
Income taxes payable 117,827 (117,827)
Deferred revenue (13,676) 16,451
------- --------
Total Adjustments 415,972 110,522
------- -------
Net cash provided by operating
activities 591,924 446,085
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of furniture and equipment (90,420) (137,400)
Increase in software licenses and
software development costs (88,397) (87,073)
Increase in investments in marketable
securities (150,133) (84,242)
Decrease in deposits and other assets (66) 7,651
------- --------
Net cash (used in) investing
activities (329,016) (301,064)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable, related
party --- 175,000
Payments on notes payable, related
party --- (175,000)
Proceeds from borrowings of long term
debt 265,000 ---
Payments on long term debt and capital
leases (286,469) (290,843)
Decrease in bank overdraft (14,645) ---
-------- --------
See accompanying notes to consolidated financial statements.
F-7
CLANCY SYSTEMS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 2005 AND 2006
(continued)
2005 2006
---- ----
Net cash (used in) financing
activities (36,114) (290,843)
-------- --------
Increase (decrease) in cash and
cash equivalents 226,794 (145,822)
Cash and cash equivalents at
beginning of year 306,691 533,485
-------- --------
Cash and cash equivalents at end
of year $ 533,485 $ 387,663
========= =========
Supplemental disclosure of cash
flow information:
Cash paid for interest $ 13,664 4,223
========== =========
Cash paid for income taxes $ 103,838 $ 169,997
========== =========
During the year ended September 30, 2005, UTS entered into a
capital lease for the purchase of a vehicle in the amount
of $17,193.
See accompanying notes to consolidated financial statements.
F-8
CLANCY SYSTEMS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005 AND 2006
1. Organization and Summary of Significant Accounting Policies
Organization:
Clancy Systems International, Inc. (the "Company") was organized
in Colorado on June 28, 1984. The Company is in the business of
developing and marketing parking ticket writing systems, rental
car return systems, internet payment remittance systems, and internet
industry guides. The Company's revenues are derived primarily
from cities, universities and car rental companies throughout the
United States and Canada. The Company manufactures some of its
equipment for field operations including printers, chargers,
Palmtype keypad, and other items used in its applications.
The Company's subsidiary, Urban Transit Solutions, Inc.
("UTS") was incorporated on March 6, 1997 under the Laws of the
Commonwealth of Puerto Rico and is engaged in providing a wide
variety of services in the areas of consulting design and the
management of digital parking meter systems in Puerto Rico and
Latin America. 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 US dollars. The
functional currency of Puerto Rico is the US dollar, and, therefore,
there are no amounts recorded for foreign currency translation or for
transactions denominated in a foreign currency.
Principles of consolidation:
The consolidated financial statements include the accounts of the
Company and its subsidiary, UTS. 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 that
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.
F-9
CLANCY SYSTEMS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005 AND 2006
(continued)
1. Organization and Summary of Significant Accounting Policies
(continued)
Accounts receivable:
The allowance for doubtful accounts at September 30, 2005 and
2006 was $11,438 and $11,000, respectively. Bad debt expense
amounted to $41,019 in 2005, and $43,639 in 2006. The Company
evaluates trade receivables that are past due to determine the
appropriate allowance for doubtful accounts. The receivables
are charged off in the period in which they are deemed
uncollectible. The Company contracts primarily with government
agencies and takes into account budget year issues in evaluating
its past due receivables. Recoveries of trade receivables previously
charged off are recorded when received.
Inventories:
Inventories are carried at the lower of cost (first-in, first-out)
or market. Inventory costs include materials, labor and
manufacturing overhead. Inventories consist primarily of computer
and printer parts and supplies and are subject to technical
obsolescence.
Computer software:
Costs incurred to establish the technological feasibility of
computer software are classified as 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 lesser of the
straight line method over the remaining estimated economic life of
the product (generally five years) or the estimate of current and future
revenues for the related software product. Amortization expense for the
years ended September 30, 2005 and 2006 amounted to $84,199 and $83,263,
respectively, and is included in cost of services. The cost of direct labor
is periodically capitalized as computer software costs.
Furniture and equipment:
Furniture and equipment are stated at cost. Depreciation is provided
by the Company on the straight line method over the assets' estimated
useful lives of three to five years. Leasehold improvements are
being amortized over the shorter of the useful life of the improvement
or the remaining term of the lease. Vehicles under capital leases
are amortized over the related lease term. Property and equipment
consists partly of computers and printers which are subject to
technical obsolescence. During the years ended September 30, 2005
and 2006, depreciation amounted to $411,056 and $330,464
respectively.
F-10
CLANCY SYSTEMS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005 AND 2006
(continued)
1. Organization and Summary of Significant Accounting Policies
(continued)
Sales and retirements of depreciable property are recorded
by removing the related cost and accumulated depreciation from
the accounts. Gains and losses on sales and retirements of
property are reflected in results of operations.
Other assets:
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 in 1998. On January 1,
2002, the Company adopted Statement of Financial Accounting
Standards No. 142 (SFAS 142), "Goodwill and Other Intangible Assets",
which clarifies the accounting for goodwill and intangible assets.
Under SFAS 142, goodwill and intangible assets with indefinite
lives are no longer be amortized, but are tested for impairment
at least annually and also in the event of an impairment indicator.
There is no impairment of goodwill considered necessary as of September
30, 2005 or 2006.
Revenue recognition:
Revenue derived from professional service contracts
on equipment and support services is included in income as
earned 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. Revenue from the issuance of parking tickets is
recognized on a cash basis when received since collectibility
cannot be reliably predicted at this time. Revenue derived
from professional service contracts on parking meter and lot
fees collections is recognized on a cash basis when received.
Related costs consist mainly of municipalities' fees, depreciation
and lot rents.
The Company recognizes revenue in accordance with the Securities and
Exchange Commission Staff Accounting Bulletin 104 (SAB 104).
SAB 104 provides that the conditions for realization of revenue are
as follows:
(1) persuasive evidence of an arrangement exists; (2) delivery has
occurred or services have been rendered; (3) the seller's price to
the buyer is fixed or determinable, and (4) collectibility is
reasonably assured.
F-11
CLANCY SYSTEMS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005 AND 2006
(continued)
1. Organization and Summary of Significant Accounting Policies
(continued)
In addition, the Company presents revenue gross or net of direct
expenses in accordance with Emerging Issues Task Force Issue 99-16
(EITF 99-19), "Reporting Revenue Gross as a Principal Versus Net
as an Agent". Under EITF 99-19, revenue is presented gross,
determined on a contract by contract basis, where the Company acts
as principal, takes title to the products sold, has the risks and
rewards of ownership, such as the risk of loss for collection, delivery
or product returns. Revenue is presented net of direct costs, determined
on contract by contract basis, where the Company primarily acts as agent
by providing services for a commission or fee.
Before the Company recognizes revenue, a contract is entered into
with the client (which details the fees to be charged), all software
and equipment per the contract is delivered, and as most of the
Company's clients are municipalities or universities, in general,
collectibility is reasonably assured.
Contracts for the Company's ticket writing system are entered into
under one of four different pricing options. The Company (1) sells
the equipment, ticket stock and licenses the software separately,
(2) charges a monthly fee for the use of equipment and software,
(3) charges a fee per ticket at the time the ticket stock is
provided to the client, or (4) provides a full privatization program.
In a sale transaction, revenue is recognized on the sale of the equipment,
license and ticket stock (less an amount for customer support). When
the Company charges a monthly fee, that fee is recognized in income
in the period the services are provided. When the Company charges a
fee per ticket, the Company recognizes revenue for the portion
considered a sale of the ticket stock on delivery of the tickets
and the remainder is recognized over the period of estimated usage
of the tickets based on past history with the client.
In a privatization program, client revenue guarantees may be entered
into for a period of time, generally one year at a time. A ratable
portion of the client revenue guarantee is recognized each month as an
expense. In revenue split arrangements, the portion of the cash
collected and owed each month is recognized as a liability and an
expense.
The Company does not offer a right of return on sales of equipment
or ticket stock. Equipment sold, other than the Company's proprietary
products, is covered under the manufacturer's warranty.
F-12
CLANCY SYSTEMS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005 AND 2006
(continued)
1. Organization and Summary of Significant Accounting Policies
(continued)
Warranty expense for the Company's products has been immaterial
in the past. Revenue recognition commences after the
equipment has been delivered and the software has been installed
and is operational.
Shipping and handling costs:
The Company pays all shipping costs for its contract services.
Customers are provided prepaid shipping labels for shipping
stem equipment to the Company for repair and shipping back to the
client is also paid for by the Company.
Advertising costs:
The Company expenses the costs of advertising as incurred.
Advertising expense was $8,713 and $11,736 for the years
ended September 30, 2005 and 2006, respectively.
Deferred Income taxes:
The Company accounts for deferred income taxes under Statement
of Financial Accounting Standards No. 109 (SFAS 109), "Accounting
for Income Taxes". Under SFAS 109, deferred income taxes are
accounted for under an asset and liability approach that requires
recognition of deferred tax assets and liabilities for the expected
future tax consequences of transactions based on temporary
differences. Temporary differences are differences between the
tax basis of assets and liabilities and their reported amounts in
the financial statements that will result
in taxable or deductible amounts in future years. The Company's
temporary differences consist primarily of tax operating loss carry
forwards, depreciation differences and capitalized section
263A costs.
Cash equivalents:
For purposes of the statement of cash flows, the Company
considers all highly liquid debt instruments purchased with
a maturity of three months or less to be cash equivalents.
F-13
CLANCY SYSTEMS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005 AND 2006
(continued)
1. Organization and Summary of Significant Accounting Policies
(continued)
Marketable Securities
The Company accounts for marketable securities in accordance with
SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." In accordance with SFAS No. 115, the investment
in securities has been classified as available-for-sale because the
securities are being held for an indefinite period of time. Under
available-for sale classification, securities are recorded as an asset
at current fair value on the balance sheet with any amount representing
unrealized gains and losses recorded as comprehensive income in
stockholders' equity. The current fair value is derived from
published market quotations. At the time of sale, a gain or loss
is recognized using the cost basis of securities sold as determined
by specific identification.
Investments in marketable securities at September 30, 2005 and
2006, consist of Colorado local government and municipal bonds that
are triple A rated and insured that are subject to market risk related
to changes in interest rates and are available for sale.
Unrealized gains and losses have not been reflected in the
financial statements as cost of $588,212 is not significantly
different from fair value. At September 30, 2005 and 2006,
investments in marketable securities have been pledged (up
to the amount of $400,000) as a performance bond on a sales
contract agreement.
Fair value of financial instruments:
All financial instruments are held for purposes other than
trading. The following methods and assumptions were used to
estimate the fair value of each financial instrument for which
it is practicable to estimate value.
For cash and cash equivalents, accounts receivable, accounts
payable, accrued expenses and current portions of long-term debt
and obligations under capital leases, the carrying amount is
assumed to approximate fair value due to the short-term maturities
of these instruments. For long-term debt obligations under capital
leases, the carrying value approximates fair value due to the
interest rates approximating prevailing market rates.
F-14
CLANCY SYSTEMS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005 AND 2006
(continued)
1. Organization and Summary of Significant Accounting Policies
(continued)
Concentrations of credit risk:
Financial instruments which potentially subject the Company
to concentrations of credit risk consist principally of cash,
trade receivables and marketable securities. The Company
places its cash with high quality financial institutions.
At September 30, 2005 and 2006 and at various times during
the years, the balance at one of the financial institutions
exceeded FDIC insured limits. At September 30, 2006
the balance exceeding the per account FDIC limit was
$424,000, and $395,924 at September 30, 2005.
The Company provides credit, in the normal course of business,
to customers throughout the United States, Puerto Rico and Canada.
All transactions are denominated in U.S. Dollars. The Company
performs ongoing credit evaluations of its customers.
Credit terms are typically 30 days from billing date.
Significant portions of the Company's revenues are derived
from contracts with universities, car rental companies and
municipalities.
Earnings per share:
The Company follows SFAS No. 128 "Earnings per Share",in presenting
earnings per share. SFAS No. 128 established the methodology of
calculating basic earnings per share and diluted earnings per share.
The calculations differ by adding any instruments convertible to
common stock (such as stock options, warrants, and convertible
preferred stock) to weighted average shares outstanding when
computing diluted earnings per share. At September 30, 2005 and 2006,
the Company had no potentially dilutive securities.
Impairment of Long-lived Assets
The Company evaluates the carrying value of assets, other than
investments in marketable securities, for potential impairment on
an ongoing basis under the tenets of SFAS No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets". Under SFAS No.
144, the Company periodically evaluates the carrying value of
F-15
CLANCY SYSTEMS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005 AND 2006
(continued)
1. Organization and Summary of Significant Accounting Policies
(continued)
long-lived assets and long-lived assets to be disposed of
and certain identifiable intangibles related to those assets for
potential impairment. The Company considers projected future
operating results, cash flows, trends and other circumstances in
making such estimates and evaluations and, if necessary, reduces
the carrying value of impaired assets to fair value. At September
30, 2005 and 2006, the Company determined that no such impairments
existed.
Segment Information
The Company follows SFAS 131, "Disclosures about Segments of an
Enterprise and Related Information." Certain information is
disclosed, per SFAS 131, based on the way management organizes
financial information for making operating decisions and assessing
performance. The Company currently operates in a single segment and
will evaluate additional segment disclosure requirements as it
expands its operations.
Comprehensive Income
The Company reports comprehensive income in accordance with
SFAS 131, "Reporting Comprehensive Income" which requires the
reporting of all changes in equity during a period, except those
resulting from investment by owners and distribution to owners,
in a financial statement for the period in which they are
recognized. This encompasses unrealized gains and losses from
available-for-sale securities held. At September 30, 2005 and
2006, the Company had no comprehensive income or loss.
Recent accounting pronouncements:
In March 2005, the FASB issued FASB Interpretation ("FIN") No. 47,
"Accounting for Conditional Asset Retirement Obligations" ("FIN No. 47").
FIN No. 47 clarifies that the term conditional asset retirement obligation
as used in FASB Statement No. 143, "Accounting for Asset Retirement
Obligations," refers to a legal obligation to perform an asset retirement
activity in which the timing and (or) method of settlement are
conditional on a future event that may or may not be within the control
of the entity. The obligation to perform the asset retirement activity
is unconditional even though uncertainty exists about the timing and (or)
method of settlement.
F-16
CLANCY SYSTEMS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005 AND 2006
(continued)
1. Organization and Summary of Significant Accounting Policies
(continued)
Uncertainty about the timing and /or method of settlement of a conditional
asset retirement obligation should be factored into the measurement
of the liability when sufficient information exists. This interpretation
also clarifies when an entity would have sufficient information to reasonably
estimate the fair value of an asset retirement obligation. FIN No. 47
is effective no later than the end of fiscal periods ending after December
15, 2005. Retrospective application of interim financial information is
permitted but is not required. Management does not expect adoption of FIN No.
47 to have a material impact on our financial statements.
SFAS 157, "Fair Value Measurements", defines fair value, establishes a
framework for measuring fair value in generally accepted accounting principles
(GAAP), and expands disclosures about fair value measurements. This Statement
applies under other accounting pronouncements that require or permit fair value
measurements, the Board having previously concluded in those accounting
pronouncement that fair value is the relevant measurement attribute.
Accordingly, this Statement does not require any new fair value measurements.
However, for some entities, the application of this Statement will change
current practice. Management has not evaluated the impact of this statement.
In June 2005, the EITF reached a consensus on Issue No. 05-6("EITF No. 05-6"),
"Determining the Amortization Period for Leasehold Improvements Purchased after
Lease Inception or Acquired in a Business Combination." EITF No. 05-6 clarifies
that the amortization period for leasehold improvements acquired in a business
combination or placed in service significantly after and not contemplated at
or near the beginning of the lease term should be amortized over the shorter
of the useful life of the assets or a term that includes the required lease
periods and renewals that are reasonably assured of exercise at the
time of the acquisition. EITF No. 05-6 is to be applied prospectively to
leasehold improvements purchased or acquired in reporting period beginning
after June 29, 2005. The adoption of EITF No. 05-6 did not have a material
impact on our consolidated financial statements.
F-17
CLANCY SYSTEMS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005 AND 2006
(continued)
1. Organization and Summary of Significant Accounting Policies
(continued)
FIN No. 48, "Accounting for Uncertainty in Income Taxes-an interpretation
of FASB Statement No. 109 (Issued 6/06)." This Interpretation clarifies
the accounting for uncertainty in income taxes recognized in an enterprise's
financial statements in accordance with FASB Statement No. 109, Accounting for
Income Taxes. This Interpretation prescribes a recognition threshold
and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to taken in a tax return.
The enterprise determines whether it is more likely than not that a tax
position will be sustained upon examination, including resolution of any
related appeals or litigation processes, based on the technical merits of
the position. A tax position that meets the more-likely-than-not recognition
threshold is measured to determine the amount of benefit to recognize in
the financial statements. This Interpretation also provides guidance on
derecognition, classification, interest and penalties, accounting in interim
periods, disclosure, and transition. Management does not expect adoption
of FIN No. 48 to have a material impact on our financial statements.
2. Inventories
Inventories consist of the following at September 30:
2005 2006
---- ----
Finished goods $ 18,835 $ 15,574
Work in process 17,553 2,962
Purchased parts and supplies 101,174 85,688
--------- ---------
$ 137,562 $ 104,224
========= =========
F-18
CLANCY SYSTEMS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005 AND 2006
(continued)
3. Related Party Transactions
The Company pays a 10% sales commission to an officer
and director of the Company for gross sales (excluding
supplies) to The Hertz Corporation. For the years ended
September 30, 2005 and 2006, commissions of $2,813 and
$2,611 have been paid under this agreement, respectively.
During the years ended September 30, 2005 and 2006, the
Company paid fees for professional services provided by
Pan American Products, a company owned by the current
President of UTS, in the amounts of $44,074 and $48,000
respectively.
In March 28, 2006, the Company entered into an unsecured
note payable agreement with Liz Wolfson, an officer and director
of the Company, in the amount of $175,000, with interest at a
rate of 7.75% per annum on the unpaid balance, payable in
periodic payments of $25,000 plus interest. As of September
30,2006, the note was paid in full and the Company paid interest
related to the note of $4,223.
4. Investment in UTS
On January 31, 1998, the Company entered into a partnership
agreement (the Partnership) with Urban Transit Solutions, Inc.
of Puerto Rico (UTS). The Partnership was formed to
contract with cities and towns in Puerto Rico for the
privatization of their parking ticket management and collection
services. As provided in the Partnership agreement, the Company
contributed $500,000 in exchange for a 60% ownership in the
Partnership and related share of net income or losses. During 2001,
UTS issued additional stock diluting the ownership interest of the
Company in UTS below 50%. However, pursuant to the partnership
agreement, substantially all management authority rested in UTS,
and consequently, the Company accounted for their investment
in the Partnership using the equity method through September
30, 2001.
During 2001, the Company filed suit against UTS and the officers
of UTS claiming that UTS unlawfully issued dilutive shares of
stock in UTS. During 2002, the Company entered
into a settlement agreement with UTS reaffirming the Company's
60% ownership interest. On December 31, 2004, the Company
acquired 30,000 new shares of common stock in UTS for payment
of $60,000 of legal services paid by the Company on behalf of
UTS, which increased the Company's ownership to 72%.
F-19
CLANCY SYSTEMS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005 AND 2006
(continued)
4. Investment in UTS (continued
On September 26, 2005, UTS entered into a merger agreement
with Klancy Newco, Inc. (Newco), a Puerto Rico corporation and
100% subsidiary of the Company. As part of the merger transaction,
Newco merged with and into UTS (the surviving corporation) and
as a consequence of the merger transaction became a wholly
owned subsidiary of Clancy. Accordingly, the financial results
of UTS have been consolidated for the years ended
September 30, 2005 and 2006. All significant inter-company
transactions and balances have been eliminated in consolidation.
To effectuate the merger, Clancy issued 17,500,000 shares of its
common stock to the minority interest shareholders of UTS. Of the
total shares issued, 2,500,000 shares are being held in escrow
pending resolution of certain disputed items. These 2,500,000
shares have been recorded at par value. If and when the disputed
items are resolved, the shares will be released from escrow or, in
absence of a resolution, canceled. If they are released from
escrow, the fair value of the shares on the date of release will
be recorded as goodwill. The remaining 15,000,000 shares were
issued to one shareholder. The fair value of these shares on
the date of acquisition was $210,000 and the excess paid over
the $30,667 balance in minority interest liability account has
been reflected as goodwill in the accompanying financial
statements. Accordingly, the amount of goodwill recognized as
a result of the merger was a net increase of $179,333.
5. Long-term Debt
Long term debt consisted of the following at September 30:
2005 2006
---- ----
$300,000 discounted note payable
loan for working capital collateralized
by a security interest in all corporate
assets, recorded at the present value of
the future cash flows, utilizing an
imputed interest of 6.21%. Paid in full
during the year ended September 30, 2006 $ 274,763 -
Note payable - unsecured, interest at
9%, payable in monthly installments
of $2,000, paid in full during
the year ended September 30, 2006 $ 6,419 -
---------- --------
$ 281,182 -
(6,419)
---------- --------
$ 274,763 $ -
========== ========
F-20
CLANCY SYSTEMS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005 AND 2006
(continued)
6. Lease Commitments
The Company is party to certain non-cancelable capital lease
arrangements for vehicles with a lease finance company. Terms
of such leases call for UTS to make monthly lease payments
for leases that expire on various dates through the year 2010.
The Company is leasing approximately 1,700 square feet of
office space for its corporate offices for $2,467 per month
pursuant to a lease agreement with an unaffiliated party which
expires on May 31, 2008. The Company also leases approximately
3,000 square feet of manufacturing space from an unaffiliated
party. Rental payments are $630 per month pursuant to a lease
agreement that expires August 1, 2007. The Company leases an
office from an unaffiliated party. Rental payments are $500
per month pursuant to a lease that expires June 30, 2007. Total
rent expense under all operating leases for the years ended
September 30, 2005 and 2006, amounted to $123,970 and $133,434
respectively.
In addition, the Company leases office spaces in Mayaguez,
Humacao, Manati, Arecibo, San German, Caguas, and Toa Baja,
Puerto Rico that expire over the next three years. These
leases generally contain renewal options ranging from 3 to 5
years.
F-20
CLANCY SYSTEMS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005 AND 2006
(continued)
6. Lease Commitments (continued)
The following is a schedule by years of the future minimum
lease payments under operating and capital leases together
with the present value of the net minimum lease payments for
capital leases as of September 30, 2006:
Capital Real Estate
Leases Leases Total
-------- ----------- -----
Year ended September
30, 2007 $ 4,068 $ 89,601 $ 93,669
2008 4,068 31,734 35,802
2009 4,068 - 4,068
2010 2,716 - 2,716
------ ------ ------
Total minimum lease
payments $ 14,920 $ 121,335 $ 136,255
========= =========
Amount representing
interest 1,700
-------
Present value of future
minimum lease payments 13,220
Current portion of
lease obligations 3,279
-------
Obligations under capital
leases due after one year $ 9,941
========
F-21
CLANCY SYSTEMS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005 AND 2006
(continued)
6. Lease Commitments (continued)
The Company's property under capital leases,
which is included in property and equipment,
is summarized as follows:
2005 2006
---- ----
Vehicles $ 50,992 $ 17,194
Accumulated depreciation (34,945) (4,585)
---------- --------
Net capitalized leased
property $ 16,047 $ 12,609
========== ==========
7. Income Taxes
The components of the Company's deferred tax assets and
liabilities at September 30 are as follows:
2005 2006
---- ----
Non-current deferred tax
assets $ 142,200 $ 132,700
Non-current deferred tax
liabilities (61,600) (67,600)
--------- ---------
Net non-current deferred
taxes $ 80,600 $ 65,100
=========== ===========
Deferred tax assets:
Loss on equity investment $ 115,100 $ 96,100
Section 263A capitalization 23,600 33,100
Allowance for doubtful
accounts 3,500 3,500
---------- --------
142,200 132,700
Deferred tax liabilities:
Depreciation and amortization (61,600) (67,600)
---------- --------
(61,600) (67,600)
Net non-current deferred ---------- --------
taxes $ 80,600 $ 65,100
========= ========
F-22
CLANCY SYSTEMS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004 AND 2005
(continued)
7. Income Taxes (continued)
The following is a reconciliation of the statutory
federal income tax rate applied to pre-tax accounting net
income compared to the income taxes in the consolidated
statements of income:
For the years ended September 30,
2005 2006
---- ----
Income tax expense at
the statutory rate $ 106,860 $ 163,790
State and local income
taxes, net of federal
income tax 29,305 25,526
Tax exempt income - (8,790)
Nondeductible expenses 652 376
Other 1,524 (34,729)
--------- ---------
$ 138,341 $ 146,173
========= ==========
8. Basic and diluted net income per common share
Basic and diluted net income per common share is based on the
weighted average number of shares outstanding of 365,310,000
and 382,618,000 during the years ended September 30, 2005 and
2006, respectively.
9. Professional Service Contracts
The Company provides equipment and support services under 12
month professional service contracts. At September 30, 2005
and 2006, all of the contracts contained cancellation provisions
requiring notice of 30 days or less.
The cost of the equipment provided in the contracts and related
accumulated depreciation are as follows at September 30:
2005 2006
---- ----
Equipment under service
contracts $ 1,183,621 $ 1,279,297
Less accumulated
depreciation (993,692) (1,132,117)
----------- ----------
$ 189,929 $ 147,180
=========== ==========
F-23
CLANCY SYSTEMS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004 AND 2005
(continued)
10. Parking Citation Collection Services:
Clancy formed an agreement with Logan City, Utah for the
period June 1998 through May 1999 for the purpose of
providing parking citation issuance, ticket processing, meter
collections and maintenance, and ticket collection services.
In conjunction with the contract, Clancy and the town each
receive half of all the revenues after payment of all associated
costs related to the collections. The terms of the agreement can
be extended for additional one year periods or discontinued with 30
days written notice.
The Company has professional service contracts with the Municipal
Governments of Mayaguez, Humacao, Manati, Arecibo, San
German and Caguas, Puerto Rico, to provide the equipment and
management of its digital parking meter system. Under the terms
of the contracts, the Company will pay to the municipalities
between 25% and 50% of the income before income taxes.
11. Sales by Geographic Region
The Company's revenues for the years ended September 30, by
geographic region, are as follows:
2005 2006
---- ----
United States $ 2,111,292 $ 1,988,289
Puerto Rico 868,205 1,479,810
Canada 43,524 67,443
---------- -----------
Total $ 3,023,021 $ 3,535,542
========== ==========
12. 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.
F-24
CLANCY SYSTEMS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004 AND 2005
(continued)
12. Legal Proceedings (continued)
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. That petition is pending.
During the year ended September 30, 2005, UTS initiated legal
action against one of its previous legal counsels alleging
malpractice in the services provided. Management believes,
based on the advise of the Company's current legal counsel that
the suit could result in a settlement award by the court in favor
of the Company. However, the ultimate outcome of the litigation
cannot be determined and no amount has been recognized for
possible collection of any amounts asserted in the litigation.
UTS is in dispute with the Puerto Rico Municipality Revenue
Center (CRIM), the governmental entity in charge of the
assessment collection of property taxes in Puerto Rico, for
personal property taxes owned from 1998. The Company has
filed a written protest as to these assessments and will
vigorously contest the asserted deficiencies through the
administrative appeals process and, if necessary, litigation.
The Company believes an adequate provision, amounting to
$313,069, has been made in the financial statements for
any possible liability.
F-25