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 June 30, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-9040
DRYCLEAN USA, Inc.
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(Name of small business issuer in its charter)
Delaware 11-2014231
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
290 N.E. 68th Street, Miami, Florida 33138
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: 305-754-4551
Securities registered under Section 12(b) of the Exchange Act: Common Stock, $.025 par value
Securities registered under Section 12(g) of the Exchange Act: None
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes [X] No [
]
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
The aggregate market value as at September 15, 2000 of the Common Stock
of the issuer, its only class of voting stock, held by non-affiliates was
approximately $3,336,000, calculated on the basis of the mean between the high
and low sales prices of the Company's Common Stock on the American Stock
Exchange on that date. Such market value excludes shares owned by all executive
officers and directors (and their spouses); this should not be construed as
indicating that all such persons are affiliates.
The number of shares outstanding of the issuer's Common Stock as at
September 15, 2000 was 6,990,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the issuer's Proxy Statement relating to its 2000 Annual
Meeting of Stockholders are incorporated by reference into Items 10, 11 and 12
in Part III of this Report.
Transitional Small Business Disclosure Format Yes [ ] No [X]
FORWARD LOOKING STATEMENTS
Certain statements in this Report under the captions "Item 1.
Business," "Item 2. Properties" and "Item 6. Management's Discussion and
Analysis of Financial Condition or Plan of Operation," are "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995 (the "Reform Act"). When used in this Report, words such as "may,"
"should," "seek," "believe," "expect," anticipate," "estimate," "project,"
"intend," "strategy" and "pro forma" and similar expressions are intended to
identify forward-looking statements regarding events, conditions and financial
trends that may affect the Company's future plans, operations, business
strategies, operating results and financial position. Forward-looking statements
are subject to a number of known and unknown risks and uncertainties that may
cause actual results, trends, performance or achievements of the Company, or
industry trends and results, to differ materially from the future results,
trends, performance or achievements expressed or implied by such forward-looking
statements. Such risks and uncertainties include, among others: general economic
and business conditions, as well as industry conditions and trends, including
supply and demand; changes in business strategies or development plans; the
availability, terms and deployment of debt and equity capital; technology
changes; competition and other factors which may affect prices which the Company
may charge for its products and its profit margins; the availability and cost of
the equipment and raw materials purchased by the Company; relative values of the
United States currency to currencies in the countries in which the Company's
customers, suppliers and competitors are located; availability of qualified
personnel; and changes in, or the failure to comply with, government regulation,
principally environmental regulations. These and certain other factors are
discussed in this Report and from time to time in other Company reports filed
with the Securities and Exchange Commission. The Company does not assume an
obligation to update the factors discussed in this Report or such other reports.
PART I
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ITEM 1. BUSINESS.
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GENERAL
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On November 1, 1998, Steiner-Atlantic Corp. ("Steiner") was merged (the
"Merger") with and into, and therefore became, a wholly-owned subsidiary of
Metro-Tel Corp. ("Metro-Tel" and collectively with Steiner and Steiner's
wholly-owned subsidiaries, the "Company"). As a result of the Merger, the
Company added Steiner's operations as a supplier of dry cleaning, industrial
laundry equipment and steam boilers to Metro-Tel's operations as a manufacturer
and seller of telephone test and customer premise equipment.
For financial accounting (but not corporate law) purposes, the Merger
is treated as a "reverse acquisition" of Metro-Tel by Steiner, utilizing the
"purchase" method of accounting. As a result, all financial statements of the
Company included in this Report covering periods prior to November 1, 1998
reflect only the results of operations, financial position and cash flows of
Steiner on a stand-alone basis. All consolidated financial statements of the
Company for periods commencing
2
November 1, 1998, in addition, include the results of operations, financial
position and cash flows of Metro-Tel from and after November 1, 1998.
Steiner is a supplier of dry cleaning equipment, industrial laundry
equipment and steam boilers to customers in the United States, the Caribbean and
Latin American markets. This aspect of Steiner's services includes: (1)
designing and planning "turn-key" laundry and/or dry cleaning systems to meet
the layout, volume and budget needs of a variety of institutional and retail
customers, (2) supplying replacement equipment and parts to its customers, (3)
providing warranty and preventative maintenance through factory-trained
technicians and service managers, (4) selling its own line of dry cleaning
systems under its Aero-Tech brand name; and (5) selling process steam systems
and boilers.
In March 1999, Steiner formed a new subsidiary, Steiner-Atlantic
Brokerage Corp. ("Steiner Brokerage"), to act as a business broker to assist
others seeking to buy or sell existing dry cleaning stores and coin laundry
businesses. Some of Steiner's existing customers have become Steiner Brokerage
clients, utilizing Steiner's staff and ability to assist them in the sale of
their businesses and associated real property.
In July 1999, Steiner acquired certain assets of DRYCLEAN USA Franchise
Company, including, among other things, the worldwide rights to the name
DRYCLEAN USA along with existing franchise and license agreements. DRYCLEAN USA
is one of the largest franchise and license operations in the dry cleaning
industry, currently consisting of approximately 400 franchised and licensed
locations in the United States, the Caribbean and Latin America. Steiner expects
to aggressively increase the number of existing franchisees and licensees of
DRYCLEAN USA through proven sales and advertising methods with an expanded sales
staff. In fiscal 2000, area franchises were sold for Charlotte, North Carolina
and Puerto Rico. In addition, it has begun to advertise its franchise and
license program on an internet website. The website is also expected to provide
interactive information and solutions to clothing and textile problems in the
home and office.
Metro-Tel is engaged in the manufacture and sale of telephone test and
customer premise equipment utilized by telephone and telephone interconnect
companies in the installation and maintenance of telephone equipment. Through
internal research and development and through acquisition, Metro-Tel has added
various product lines to its telephone test and customer premise product lines.
3
STEINER'S OPERATIONS
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History. Steiner was founded in 1960 by William K. Steiner, initially
operating as a distributor of dry cleaning systems and boilers, and as a
rebuilder of laundry, dry cleaning and boiler equipment. Steiner expanded in
1972, when it began distributing institutional laundry equipment to hotels,
motels and hospitals. In 1980, Steiner began importing dry cleaning systems from
an English manufacturer and, four years later, Steiner replaced this
manufacturer with a relationship with an Italian manufacturer of dry cleaning
systems. In 1990, Steiner established its own branded product line with the
introduction of an updated dry cleaning system under the Aero-Tech label,
substantially all of which is currently manufactured exclusively for Steiner in
Italy. In fiscal 2000, Steiner's Aero-Tech division entered into a license
agreement with Green Earth Solutions to use the Great Earth cleaning system in
Steiner's Green Jet(TM) dry cleaning machines.
Product Lines. Steiner offers a broad line of laundry and dry cleaning
equipment and steam boilers, as well as a comprehensive parts and accessories
inventory. Steiner's laundry equipment features washers and dryers, including
coin-operated machines, boilers, water reuse and heat reclamation systems,
flatwork ironers and automatic folders. Steiner's dry cleaning equipment
includes dry cleaning machines, garment presses, finishing equipment, and
sorting and distributing conveyors.
Steiner's product lines are positioned and priced to appeal to
customers in each of the high-end, mid-range and value priced markets. Steiner's
product lines are offered under a wide range of price points to address the
needs of a diverse customer base. Suggested prices for most of Steiner's
products range from approximately $5,000 to $50,000. Steiner's product line
offers its customers a "one-stop shop" for laundry and dry cleaning systems,
boilers and accessories. By providing "one-stop" shopping, Steiner believes it
is better able to attract and support potential customers who can choose from
Steiner's broad product line.
Steiner seeks to establish customer satisfaction by offering (1) an
on-site training and preventive maintenance program performed by factory trained
technicians and service managers; (2) design and layout assistance; (3)
maintenance of a comprehensive parts and accessories inventory and same day or
overnight availability; and (4) competitive pricing. Steiner provides a
toll-free support line to resolve customer service problems.
In March 1999, Steiner formed Steiner Brokerage as a new subsidiary to
act as a business broker to assist others seeking to buy or sell existing dry
cleaning and laundry businesses. Some of Steiner's existing customers have
become Steiner Brokerage clients, utilizing Steiner's staff and ability to
assist them in the sale of their businesses and associated real property.
In July 1999, Steiner acquired certain assets of DRYCLEAN USA Franchise
Company, including the worldwide rights to the name DRYCLEAN USA along with
existing franchisees and licensees and associated annual revenues. DRYCLEAN USA
is one of the largest franchise and license operations in the dry cleaning
industry, currently consisting of approximately 400 franchised and licensed
locations in the United States, the Caribbean and Latin America.
4
Sales, Marketing and Customer Support. Steiner's laundry and dry
cleaning equipment products are marketed in the United States, the Caribbean and
Latin America. Steiner employs sales executives to market its products,
including its Aero-Tech products, in the United States and in international
markets. Steiner supports its products by representative advertising in trade
publications, participating in trade shows and engaging in regional promotions
and sales incentive programs. A substantial portion of Steiner's equipment sales
orders are obtained by telephone, e-mail and fax inquiries originated by the
customer or by Steiner and significant repeat sales are derived from existing
customers.
Steiner trains its sales and service employees to provide service and
customer support. Steiner uses specialized classroom training, instructional
videos and vendor sponsored seminars to educate employees about product
information. In addition, Steiner's technical staff has prepared comprehensive
training manuals, written in English and Spanish, relating to specific training
procedures. Steiner's technical personnel are continuously updated and retrained
as new technology is developed. Steiner monitors service technicians' continued
educational experience and fulfillment of requirements in order to evaluate
their competence. All of Steiner's service technicians receive service
bulletins, service technicians' tips and continued training seminars.
Customers and Markets. Steiner's customer base consists of
approximately 500 customers in the United States, the Caribbean and Latin
America, including independent and franchise dry cleaning chains and
institutions, hotels, motels, hospitals, cruise lines, nursing homes, government
institutions and distributors. No customer accounted for more than 10% of
Steiner's revenues during the years ended June 30, 2000 or June 30, 1999.
Sources of Supply. Steiner purchases laundry and dry cleaning systems,
boilers and other products from a number of manufacturers, none of which
accounted for more than 20% of Steiner's purchases for the years ended June 30,
2000 or June 30, 1999. Steiner has established long-standing relationships with
many of the leading laundry, dry cleaning and boiler manufacturers. Steiner's
management believes these supplier relationships provide Steiner with a
substantial competitive advantage, including exclusivity in certain products and
areas and favorable prices and terms. Therefore, the loss of a major vendor
relationship could adversely affect Steiner's business. Historically, Steiner
has not experienced difficulty in purchasing desired products from its suppliers
and believes it has good working relationships with its suppliers.
Steiner has a formal contract with only one of its equipment
manufacturers and relies on its long-standing relationship with its other
suppliers. Steiner collaborates in the design, closely monitors the quality of
the manufactured product and believes its Aero-Tech systems exceed the
environmental regulations set by safety and environmental regulatory agencies.
Steiner must place its orders with its Italian manufacturer of its Aero-Tech
product line prior to the time Steiner has received all of its orders. However,
because of Steiner's close working relationship with the Italian manufacturer,
Steiner can usually adjust orders rapidly and efficiently to reflect a change in
customer demands.
According to its arrangement with the Italian manufacturer, Steiner
purchases dry cleaning systems in Italian lira. Imports into the United States
are also affected by the cost of
5
transportation, the imposition of import duties and increased competition from
greater production demands abroad. The United States and Italy may, from time to
time, impose new quotas, duties, tariffs or other restrictions or adjust
prevailing quotas, duties or tariff levels, which could affect Steiner's margins
on its Aero-Tech systems. United States customs duties presently are
approximately 1% of invoice cost on dry cleaning systems. However, in the case
of a substantial decline in the value of the U.S. dollar against the Italian
lira or the implementation of significant custom duties import controls or trade
barriers with Italy, Steiner believes it has the ability to have its Aero-Tech
line manufactured by other international suppliers.
Competition. The laundry and dry cleaning equipment distribution
business is highly competitive and fragmented with over 100 full-line or
partial-line equipment distributors in the United States. Steiner's management
believes that no distributor supplies more than 6% of the market and that
substantially all such distributors are independently owned and, with the
exception of several regional distributors, operate primarily in local markets.
Competition is based on price, product quality, delivery and support services
provided by the distributor to the customer. In South Florida, Steiner's
principal domestic market, Steiner's primary competition is derived from two
full-line distributors which operate out of the Miami area. In the export
market, Steiner competes with several distributors and anticipates increased
competition as the export market grows. As Steiner expands the sale of its
Aero-Tech line to its distributors on a national level, it competes with over a
dozen manufacturers of dry cleaning equipment whose products are distributed
nationally. Steiner competes by offering an extensive product selection,
value-added services, such as product inspection and quality assurance,
toll-free customer support line, reliability, warehouse location, price and,
with the Aero-Tech line, competitive special features and exclusivity.
As a franchisor/licensor of retail dry cleaning stores, DRYCLEAN USA competes
with several other franchisors and turn-key suppliers of dry cleaning stores
primarily on the basis of trademark recognition and reputation. As a broker in
the purchase and sale of retail dry cleaning stores and coin laundry business,
Steiner Brokerage competes with business brokers generally, as well as with
other professionals with contacts in the retail dry cleaning and coin laundry
business. Competition in this latter area is primarily based on reputation,
advertising and, to a lesser degree, on the level of fees charged.
METRO-TEL'S OPERATIONS.
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History. Metro-Tel was incorporated under the laws of the State of
Delaware on June 30, 1963. Since its inception, Metro-Tel has been engaged in
the manufacture and sale of telephone test and customer premise equipment
utilized by telephone and telephone interconnect companies in the installation
and maintenance of telephone equipment. Through internal research and
development and through acquisition, Metro-Tel has added various product lines
to its telephone test and customer premise product lines.
Product Lines. Metro-Tel is primarily engaged in the manufacture and
sale of telephone test equipment and customer premise equipment.
6
Telephone Test Equipment. Most of Metro-Tel's sales are of telephone
test equipment and transmission test equipment. Metro-Tel's telephone test
equipment includes portable test sets designed for use in locating high
resistance faults resulting from moisture in exchange cables and by cable
splicers on exchange and toll cables for identification of cable wires and other
tone-testing purposes; linemen's rotary and/or touch-tone testing handsets and
portable line test sets for use by telephone installers, repairmen and central
office personnel; hand and pole exploring coils which are used in cable fault
finding; solid state conversion amplifier kits; Volt-Ohmmeter test sets; and
Cable Hound(R), a portable electronic unit that locates and determines the depth
of underground cable and metal pipes primarily for the telephone, utility and
construction industries.
Metro-Tel's transmission test equipment is used in telephone company
central office installations by operating companies, long distance telephone
resellers and large companies who own their own networks. Among these products
are digital and analog rack-mounted test systems, portable transmission test
sets, remote test systems and fiber optic test sets.
Customer Premise Equipment. Metro-Tel also manufactures and markets a
line of telephone station and peripheral products, including telephone call
sequencers (which answer calls on up to 12 incoming unattended lines, provide
the caller with an appropriate message and place the calls in queue until
answered by an attendant) and a line of digital announcers (which provide a
pre-programmed message with the ability to ring through at the end of the
message if so desired by the caller). This product line also includes a series
of specialty telephone products, including call diverters (call forwarding
devices used both by end-users and in telephone company central offices), speed
dialers, specialty telephones and amplified handsets for the hearing impaired.
In addition, Metro-Tel distributes a line of Channel Service Units/Data
Service Units (CSU/DSU) for the data industry. These devices are used to
terminate a digital channel on a customer's premises and enable computer data to
be transmitted and received at high speeds over the telephone line without the
use of a modem.
Other Products and Services. Additionally, Metro-Tel sells spare parts
for its product lines and provides repair services for its products.
Methods of Distribution. Metro-Tel presently sells its products through
its own regional sales managers and sales representatives who assist Metro-Tel's
national telephone equipment distributors. Sales managers are presently based in
Georgia and California. In addition, Metro-Tel maintains an in-house sales staff
at its facilities in Milpitas, California.
Principal Customers. Metro-Tel is not dependent upon any single
customer. However, North Supply Company, a national distributor of telephone
products, accounted for approximately 13% and 11% of Metro-Tel's net sales for
the years ended June 30, 2000 and June 30, 1999, respectively, but less than 10%
of the Company's consolidated revenues for those years. Walker Associates, a
national distributor of telephone products, accounted for 12.7% of Metro-Tel's
net sales for the year ended June 30, 2000 but less than 10% of the Company's
consolidated revenues for that year. Metro-Tel believes that, should it for any
reason lose either
7
of these distributors, Metro-Tel could be adversely impacted although these
sales would normally be absorbed by other Metro-Tel distributors.
Sources of Supply. The basic materials used in the manufacture of
Metro-Tel's telephone test equipment and telephone station and peripheral
telephone equipment consist of electronic components. Metro-Tel utilizes many
suppliers and is not dependent on any supplier. Its raw materials generally are
readily available from numerous suppliers.
Competition. Competition is high with respect to each of Metro-Tel's
product lines. However, as the products contained in such lines are varied and
similar products contain varying features, neither Metro-Tel nor any of its
competitors is a dominant factor in any product line market, except for
linemen's test sets for which Dracon, a division of Harris Corporation, is
dominant.
The principal method of competition for each of Metro-Tel's products is
price and product features, with service and warranty having a relatively less
significant impact. Metro-Tel believes its product lines are competitively
priced. Many of Metro-Tel's competitors have greater financial resources and
have more extensive research and development and marketing staffs than
Metro-Tel.
Research and Development. Metro-Tel is regularly engaged in the design
of new products and improvement of existing products for all of its
telecommunication equipment products lines. The amounts specifically allocated
to research and development activities for the years ended June 30, 2000 and
1999 was $231,219 and $171,354, respectively. All research and development is
internally generated, except for products designed for Metro-Tel by unaffiliated
third parties compensated by either a lump-sum payment or on a royalty basis.
PATENTS AND TRADEMARKS
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The Company is the owner of United States service mark registrations
for the names Aero-Tech, Logitrol, Petro-Star, Aqua Star and Enviro-Star, which
are used in connection with its laundry and dry cleaning business lines, and of
DRYCLEAN USA, which is licensed by it to retail dry cleaning establishments. The
Company intends to use and protect these or related service marks, as necessary.
The Company believes its trademarks and service marks have significant value and
are an important factor in the marketing of its products.
The Company has obtained a number of trademarks which are used to
identify its telephone test and customer premise product lines. None of these
trademarks is considered to be material to the Company's telecommunication's
product lines. The Company also pays royalties to third parties under
arrangements permitting the Company to manufacture various items in its product
lines.
COMPLIANCE WITH ENVIRONMENTAL AND OTHER GOVERNMENT LAWS AND REGULATIONS
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Over the past several decades in the United States, federal, state and
local governments have enacted environmental protection laws in response to
public concerns about the
8
environment. A number of industries, including the dry cleaning and laundry
equipment industry, are subject to these evolving laws and implementing
regulations. As a supplier to the industry, the Company serves customers who are
primarily responsible for compliance with environmental regulations. Among the
federal laws that the Company believes are applicable to the industry, are the
Comprehensive Environmental Response, Compensation and Liability Act of 1980
("CERCLA"), which provides for the investigation and remediation of hazardous
waste sites; The Resource Conservation and Recovery Act of 1976, as amended
("RCRA"), which regulates generation and transportation of hazardous waste as
well as its treatment, storage and disposal; and the Occupation Safety and
Health Administration Act ("OSHA"), which regulates exposure to toxic substances
and other health and safety hazards in the workplace. Most states and a number
of localities have laws that regulate the environment which are at least as
stringent as the federal laws. In Florida, for example, in which a significant
amount of the Company's dry cleaning and laundry equipment sales are made,
environmental matters are regulated by the Florida Department of Environmental
Protection which generally follows the Environmental Protection Agency's ("EPA")
policy in the EPA's implementation of CERCLA and RCRA and closely adheres to
OSHA's standards.
Certain of the Company's customer premise equipment products that
connect to public telephone networks need Federal Communications Commission (or,
in the case of foreign sales, the equivalent agency in the foreign country in
which they will be sold) approval prior to their sale.
The Company does not believe that compliance with Federal, state and
local environmental and other laws and regulations which have been adopted have
had, or will have, a material effect on its capital expenditures, earnings or
competitive position.
EMPLOYEES
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The Company currently employs 58 employees on a full-time basis, of
whom three are in executive management, 17 are engaged in sales and marketing,
16 are administrative and clerical, two are engineers and technicians, 15 are
engaged in production and five are in warehouse support. Of the Company's
employees, 36 are employed exclusively with respect to the Company's laundry and
dry cleaning equipment operations, 20 are employed exclusively with respect to
the Company's telecommunications equipment operations and 2 currently divide
their time between the two operations. None of the Company's employees are
subject to a collective bargaining agreement, nor has the Company experienced
any work stoppages. The Company believes that its relations with employees are
satisfactory.
FOREIGN AND GOVERNMENT SALES
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Steiner's export sales of the Company's laundry and dry cleaning
business were approximately $3,387,149 and $3,276,000 during the years ended
June 30, 2000 and June 30, 1999, respectively. Such export sales were made
principally to Latin America and the Caribbean. See "--Steiner's
Operations-Customers and Markets".
9
Metro-Tel's export sales of telephone test and customer premise
equipment were approximately $265,000 and $167,000 for the year ended June 30,
2000 and the eight months ended June 30, 1999, respectively. Such export sales
were made principally to Europe, Canada and South America. Some of Metro-Tel's
export sales are made through distributors and agents.
All of the Company's export sales require the customer to make payment
in United States dollars. Accordingly, foreign sales may be affected by the
strength of the United States dollar relative to the currencies of the countries
in which their customers and competitors are located.
Revenues from sales to the United States government (none of the
contracts relating thereto being subject to renegotiation of profits or
termination at the election of the government) are immaterial.
ITEM 2. PROPERTIES.
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The Company's executive offices and the main distribution center for
its laundry and dry cleaning equipment products are housed in three leased
adjacent facilities totaling approximately 47,000 square feet in Miami, Florida,
and the manufacturing and distribution facility for its telephone test and
customer premise equipment operations is located in approximately 21,500 square
feet of leased space in Milpitas, California. The Company believes its
facilities are adequate for its present and anticipated future needs. The
following table sets forth certain information concerning the leases at these
facilities:
Approximate
Facility Sq. Ft. Expiration
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Miami, Florida (1) 27,000 October 2004
Miami, Florida 8,000 Month to Month
Miami, Florida 12,000 Month to Month
Milpitas California 21,500 March 2002
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(1) Leased from William K. Steiner, a director of the Company. The lease
includes an option to renew the lease for a ten-year term at a rent to
be agreed upon by the parties.
ITEM 3. LEGAL PROCEEDINGS.
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Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
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Not applicable.
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PART II
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ITEM 5. MARKET FOR THE COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
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The Company's Common Stock has been traded on the American Stock
Exchange (the "Amex") under the symbol "DCU" since November 10, 1999 and on the
Chicago Stock Exchange under the symbol "MTF" from January 11, 1999 until
November 9, 1999 and thereafter under the symbol "DCU." From January 11, 1999
until November 9, 1999, the Company's Common Stock was also quoted on the Nasdaq
Electronic Bulletin Board and prior thereto on The Nasdaq Stock Market Small Cap
Market, each under the symbol "MTRO." The following table sets forth the high
and low sales prices on the Amex since November 10, 1999, as reported by Amex,
and high and low bid prices prior thereto for the Company's Common Stock, as
reported by Nasdaq, for each quarterly period reflected. The Nasdaq quotations
are without retail markups, markdowns or commissions and may not represent
actual transactions.
HIGH LOW
---- ---
Fiscal 1999
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First Quarter 1 3/8 7/8
Second Quarter 3 9/16 5/8
Third Quarter 3 3/16 2 1/2
Fourth Quarter 2 3/4 1 11/16
Fiscal 2000
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First Quarter 3 3/8 1 3/4
Second Quarter 2 7/8 1
Third Quarter 5 7/8 1 1/4
Fourth Quarter 3 7/8 1 5/16
As of September 15, 2000 there were approximately 910 holders of record
of the Company's Common Stock.
Except for S Corporation distributions prior to the Merger, no
dividends have been paid on the Company's Common Stock during either of the last
two fiscal years. Steiner is a party to a Loan and Security Agreement with a
commercial bank, loans under which are guaranteed by Metro-Tel and secured by
substantially all of the assets of the Company. Among other things, this
agreement provides that the Company may not declare or pay dividends if such
payment would likely cause it to fail to maintain a specified consolidated debt
service ratio or a specified ratio of consolidated liabilities to tangible net
worth. The Company does not intend to pay cash dividends in the foreseeable
future.
11
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
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GENERAL
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On November 1, 1998, Steiner-Atlantic Corp. ("Steiner") was merged (the
"Merger") with and into, and therefore became, a wholly owned subsidiary of
Metro-Tel Corp. ("Metro-Tel" and collectively with Steiner and Steiner's wholly
owned subsidiaries, the "Company"). As a result of the Merger, the Company added
Steiner's operations as a supplier of dry cleaning, industrial laundry equipment
and steam boilers to Metro-Tel's telecommunications operations as a manufacturer
and seller of telephone test and customer premise equipment.
On November 5, 1999, the Company filed an amendment to its Certificate of
Incorporation, pursuant to which, effective November 7, 1999, the Company's name
was changed from Metro-Tel Corp. to DRYCLEAN USA, Inc.
In March 1999 Steiner formed a new subsidiary to act as a business broker to
assist others seeking to buy or sell existing drycleaning stores and coin
laundry businesses. In July 1999, Steiner acquired certain assets, including the
worldwide rights to the name "DRYCLEAN USA" along with existing franchise and
licensing agreements from an unaffiliated third party.
For financial accounting (but not corporate law) purposes, the Merger is treated
as a "reverse acquisition" of Metro-Tel by Steiner utilizing the "purchase"
method of accounting. As a result, all financial statements of the Company
included in this Report covering periods prior to November 1, 1998 reflect only
the results of operations, financial position and cash flows of Steiner on a
stand-alone basis. All consolidated financial statements of the Company for
periods commencing November 1, 1998, in addition, include the results of
operations, financial position and cash flows of Metro-Tel from and after
November 1, 1998. The consolidated results for the year ended June 30, 1999
include eight months of telecommunications operations.
LIQUIDITY AND CAPITAL RESOURCES
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As of June 30, 2000, the Company had cash and cash equivalents of $982,588. Net
cash provided by operating activities was $1,200,432 for 2000 and $152,191 for
1999. Cash provided by operating activities in 2000 was principally the result
of net income of $965,449, a decrease in inventories of $139,668, a decrease in
income taxes payable of $201,270, and an increase in customer deposits of
$96,388, which were partially offset by an increase of $287,783 in accounts and
lease receivables and an increase in other assets of $126,285. Non-cash
adjustments to net income, principally resulting from depreciation and
amortization amounted to $177,023. Cash provided by operating activities in 1999
was principally the result of net income of $761,476, a decrease in inventories
of $289,954, a decrease in other assets of $63,136 and an increase in income
taxes payable of $80,674. These increases in cash flow were offset by a $285,451
increase in accounts and lease receivables, a decrease in accounts payable and
accrued expenses of $792,618 and an decrease in customer deposits of $111,363.
Non-cash adjustments to net income, principally resulting from depreciation and
amortization and deferred income taxes amounted to $146,383 in 1999.
12
Net cash used in investing activities in 2000 amounted to $767,612, and was
principally due to capital expenditures for equipment of $137,612 and the
acquisition of a franchise license for $550,000, and other licenses amounting to
$80,000. Net cash provided by investing activities in 1999 amounted to $154,631,
and was principally the result of the Company's capital expenditures for
equipment of $143,687, offset by cash acquired from the Metro-Tel acquisition of
$298,318.
Net cash used in financing activities amounted to $415,000 in 2000, and
principally resulted from payments on the term loan of $480,000, offset by the
proceeds from the exercise of stock options of $65,000. Net cash used in
financing activities in 1999 amounted to $170,444, and principally resulted from
repayments of the line of credit of $1,000,000, payments on the term loan of
$696,613, advances to affiliates of $198,000, cash distributions to shareholders
of $727,394, offset by borrowings under the term loan of $2,400,000 and proceeds
from the exercise of stock options of $51,563.
The Company believes that its present cash, cash it expects to generate from
operations and borrowings available under its $2,250,000 line of credit will be
sufficient to meet its operational needs. The Company has no present borrowings
outstanding under this line of credit (which, as extended, matures on October
30, 2000, subject to renewal at the discretion of the lender). As to the
$1,600,000 principal amount outstanding under its term loan, the Company is
required to make monthly payments of $40,000 until January 2002, when the
remaining $960,000 will become due. The Company believes it will be able to
refinance such debt at that time.
RESULTS OF OPERATIONS
- ---------------------
Total revenues for the fiscal year ended June 30, 2000 increased by $1,049,701
(5.7%) over fiscal 1999. Sales of the laundry and dry cleaning equipment
business segment decreased by $938,706 (5.7%), principally due to a decrease in
the number of units sold. In July 1999, the license and franchise operations
business segment commenced operations. Revenues from the sale of such licenses
and franchises of retail dry cleaning establishments under the name DRYCLEAN,
USA aggregated $536,340 for the year ended June 30, 2000. Sales of the Company's
telephone test equipment business segment increased $1,452,067 (70.9%),
principally due to the inclusion of a full year of operations versus eight
months in fiscal 1999.
Costs of goods sold, expressed as a percentage of net sales, improved to 71.6%
in fiscal 2000 from 73.3% in fiscal 1999. The improvement for the year is
attributable to the inclusion of a full year in fiscal 2000, in lieu of only
eight months in fiscal 1999, of telecommunication operations, which historically
carry a higher margin.
Selling, general and administrative expenses increased by $558,704 (14.5%) in
fiscal 2000 over fiscal 1999, of which $337,000 was due to the inclusion of
Metro-Tel's expenses in this category for the full year versus eight months in
fiscal 1999. Additionally, amortization expense of the newly acquired franchise,
trademark and other intangible assets amounted to $74,000. The balance of the
increase was substantially all attributable to the license and franchise
business segment which commenced operations in July 1999.
13
Research and development expenses, which relate solely to telecommunications
operations increased by $59,865 (34.9%) in fiscal 2000 mainly due to the fact
that only eight months of telecommunications operations were included in fiscal
1999.
Interest income decreased by $26,086 (42.0%) in fiscal 2000 over 1999 as a
result of fewer customer leases of laundry and dry cleaning equipment (which
qualify as sales-type leases) being outstanding.
In fiscal 2000, interest expense decreased by $7,267 (4.2%) from fiscal 1999 due
to a reduction in outstanding debt, which was partially offset by higher
interest rates.
The provision for income taxes increased by $173,510 (44.4%) in fiscal 2000 over
fiscal 1999 due primarily to the increase in pre-tax profit and a higher
effective tax rate than in fiscal 1999 when, for the first four months of that
fiscal year, Steiner was taxed as a Subchapter S Corporation under the Internal
Revenue Code of 1986, as amended, and accordingly its shareholders, rather than
it, were subject to income taxation on Steiner's earnings.
INFLATION
- ---------
Inflation has not had a significant effect on the Company's operations during
any of the reported periods.
NEW ACCOUNTING PRONOUNCEMENTS
- -----------------------------
In March 2000, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 44 (Interpretation 44), Accounting for Certain Transactions
Involving Stock Compensation. Interpretation 44 provides criteria for the
recognition of compensation expense in certain stock-based compensation
arrangements that are accounted for under Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees. Interpretation 44 is effective
July 1, 2000, with certain provisions that are effective retroactively to
December 15, 1998 and January 12, 2000. Interpretation 44 is not expected to
have an impact on the Company's future consolidated financial statements.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 requires companies to recognize
all derivatives contracts as either assets or liabilities in the balance sheet
and to measure them at fair value. If certain conditions are met, a derivative
may be specifically designated as a hedge, the objective of which is to match
the timing of gain or loss recognition on the hedging derivative with the
recognition of (i) the changes in the fair value of the hedged assets or
liability that are attributable to the hedged risk or (ii) the earnings effect
of the hedged forecasted transaction. For a derivative not designated as a
hedging instrument, the gain or loss is recognized in the period of change. SFAS
No. 133 is effective for all fiscal quarters of fiscal years beginning after
June 15, 2000. Historically, the Company has not entered into derivative
contracts either to hedge existing risks or for speculative purposes.
Accordingly, the Company does not expect adoption of the new standard to
materially affect its financial statements.
14
ITEM 7. FINANCIAL STATEMENTS.
---------------------
Metro-Tel Corp. And Subsidiaries
Index to Consolidated Financial statements
Page No.
--------
Report of Independent Certified Public Accountants 17
Consolidated Balance Sheets at June 30, 2000 and 1999 18
Consolidated Statements of Income for the years ended June 30, 2000
and June 30, 1999 19
Consolidated Statements of Shareholders' Equity for the years ended
June 30, 2000 and June 30, 1999 20
Consolidated Statements of Cash Flows for the years ended June 30, 2000
and June 30, 1999 21
Summary of Business and Significant Accounting Policies 22
Notes to Consolidated Financial Statements 26
15
Report of Independent Certified Public Accountants
Board of Directors and Shareholders
DRYCLEAN USA, Inc.
Miami, Florida
We have audited the accompanying consolidated balance sheets of DRYCLEAN USA,
Inc. and Subsidiaries as of June 30, 2000 and 1999, and the related consolidated
statements of income, shareholders' 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 conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit 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 consolidated 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
DRYCLEAN USA, Inc. and Subsidiaries as of June 30, 2000 and 1999, and the
consolidated results of their operations and their cash flows for the years then
ended in conformity with generally accepted accounting principles.
Miami, Florida BDO Seidman, LLP
August 11, 2000
16
DRYCLEAN USA, Inc. and Subsidiaries
Consolidated Balance Sheets
June 30, 2000 1999
- -----------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 982,588 $ 964,768
Accounts receivable, net of allowance for doubtful accounts
of $36,000 and $25,000 at 2000 and 1999, respectively 2,065,761 1,741,698
Lease receivables (Note 2) 105,394 116,927
Inventories (Note 3) 4,103,680 4,243,348
Deferred income tax asset (Note 5) 46,135 43,141
Other current assets (Note 7) 270,170 143,885
- -----------------------------------------------------------------------------------------------------------
Total current assets 7,573,728 7,253,767
LEASE RECEIVABLES - due after one year (Note 2) 45,519 90,882
EQUIPMENT AND IMPROVEMENTS, at cost - net of accumulated
depreciation and amortization (Note 4) 340,342 333,705
FRANCHISE, TRADEMARKS AND OTHER INTANGIBLE ASSETS - net of
accumulated amortization of $74,327 (Notes 1 and 9) 621,941 -
DEFERRED INCOME TAX ASSET (Note 5) 2,514 22,884
- -----------------------------------------------------------------------------------------------------------
$ 8,584,044 $ 7,701,238
- -----------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 1,301,537 $ 1,266,838
Income taxes payable 281,944 80,674
Customer deposits 374,396 278,008
Current portion of term loan (Note 6) 480,000 440,000
- -----------------------------------------------------------------------------------------------------------
Total current liabilities 2,437,877 2,065,520
TERM LOAN, less current portion (Note 6) 1,160,000 1,680,000
- -----------------------------------------------------------------------------------------------------------
Total liabilities 3,597,877 3,745,520
- -----------------------------------------------------------------------------------------------------------
COMMITMENTS (Notes 7, 9 and 10)
- -----------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY (Notes 1, 11 and 12) Common stock, $0.025 par value:
Authorized shares - 15,000,000; 7,016,250 and 6,951,250
shares issued and outstanding at 2000 and 1999,
respectively, including shares held in treasury 175,406 173,781
Additional paid-in capital 2,037,602 1,974,227
Retained earnings 2,773,159 1,807,710
Treasury shares, 26,250 shares in 2000 and 1999, at cost - -
- -----------------------------------------------------------------------------------------------------------
Total shareholders' equity 4,986,167 3,955,718
- -----------------------------------------------------------------------------------------------------------
$ 8,584,044 $ 7,701,238
- -----------------------------------------------------------------------------------------------------------
17
DRYCLEAN USA, Inc. and Subsidiaries
Consolidated Statements of Income
Year ended June 30, 2000 1999
- ---------------------------------------------------------------------------------------------------------
REVENUES:
Net sales $ 18,447,560 $ 17,985,847
Management fee, franchise and license fees, commissions
and other income (Note 7) 1,076,939 488,951
- ---------------------------------------------------------------------------------------------------------
Total 19,524,499 18,474,798
- ---------------------------------------------------------------------------------------------------------
COST OF SALES 13,213,440 13,178,610
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (Notes 7 and 9) 4,422,131 3,863,427
RESEARCH AND DEVELOPMENT EXPENSES 231,219 171,354
- ---------------------------------------------------------------------------------------------------------
Total 17,866,790 17,213,391
- ---------------------------------------------------------------------------------------------------------
OPERATING INCOME 1,657,709 1,261,407
- ---------------------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE):
Interest income 35,994 62,080
Interest expense (164,254 ) (171,521 )
- ---------------------------------------------------------------------------------------------------------
Total Other Expense (128,260 ) (109,441 )
- ---------------------------------------------------------------------------------------------------------
EARNINGS BEFORE INCOME TAXES 1,529,449 1,151,966
PROVISION FOR INCOME TAXES (Note 5) 564,000 390,490
- ---------------------------------------------------------------------------------------------------------
NET EARNINGS $ 965,449 $ 761,476
- ---------------------------------------------------------------------------------------------------------
Basic earnings per share $0.14 $0.12
Diluted earnings per share $0.13 $0.12
- ---------------------------------------------------------------------------------------------------------
Weighted average number of shares of common stock outstanding:
Basic 6,952,083 6,165,318
Diluted 7,305,931 6,491,450
- ---------------------------------------------------------------------------------------------------------
PRO FORMA AMOUNTS (UNAUDITED) (NOTE 5):
Earnings before income taxes $ 1,151,966
Provision for income taxes (Notes 1 and 5) 493,490
- ---------------------------------------------------------------------------------------------------------
PRO FORMA NET EARNINGS $ 658,476
- ---------------------------------------------------------------------------------------------------------
Pro forma basic earnings per share $0.11
Pro forma diluted earnings per share $0.10
- ---------------------------------------------------------------------------------------------------------
18
DRYCLEAN USA, Inc. and Subsidiaries
Consolidated Statements of Shareholders' Equity
(Note 1)
Common Stock Additional Treasury Stock Undistributed
-------------------- Paid-in -------------------- Retained Shareholders
Shares Amount Capital Shares Amount Earnings Earnings Total
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1998 4,720,954 $ 118,024 $ 51,726 - $ - $ 1,448,950 $ 324,678 $ 1,943,378
Year ended June 30, 1999:
Distributions - - - - - - (727,394 ) (727,394 )
Reclassification of cumulative
undistributed earnings applicable
to the Company's S corporation
status - - - - - (402,716 ) 402,716 -
Stock exchanged in acquisition
of business 2,180,296 54,507 1,872,188 26,250 - - - 1,926,695
Stock options exercised 50,000 1,250 50,313 - - - - 51,563
Net income - - - - 761,476 - 761,476
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1999 6,951,250 173,781 1,974,227 26,250 - 1,807,710 - 3,955,718
Year ended June 30, 2000:
Stock options exercised 65,000 1,625 63,375 - - - - 65,000
Net income - - - - - 965,449 - 965,449
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 2000 7,016,250 $ 175,406 $ 2,037,602 26,250 $ - $ 2,773,159 $ - $ 4,986,167
- -----------------------------------------------------------------------------------------------------------------------------------
19
DRYCLEAN USA, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Year ended June 30, 2000 1999
- --------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income $965,449 $761,476
Adjustments to reconcile net income to net cash
provided by operating activities, net of effect of acquisition:
Bad debt expense 20,614 33,793
Depreciation and amortization 139,033 50,615
Deferred income taxes 17,376 61,975
(Increase) decrease in:
Accounts and lease receivables (287,783 ) (285,451 )
Inventories 139,668 289,954
Other assets (126,285 ) 63,136
Increase (decrease) in:
Accounts payable and accrued expenses 34,702 (792,618 )
Income taxes payable 201,270 80,674
Customer deposits 96,388 (111,363 )
- --------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 1,200,432 152,191
- --------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Capital expenditures (137,612 ) (143,687 )
Acquisition of franchise and license agreements (630,000 ) -
Cash of acquired company - 298,318
- --------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by investing activities (767,612 ) 154,631
- --------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Repayments under line of credit - (1,000,000 )
Payments on term loans (480,000 ) (696,613 )
Borrowings under term loan - 2,400,000
Advances to affiliate - (198,000 )
Cash distributions to shareholders - (727,394 )
Proceeds from exercise of stock options 65,000 51,563
- --------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (415,000 ) (170,444 )
- --------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 17,820 136,378
Cash and cash equivalents at beginning of year 964,768 828,390
- --------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $982,588 $964,768
- --------------------------------------------------------------------------------------------------------------
Supplemental Information:
Cash paid for:
Interest $164,254 $171,521
Income taxes $345,625 $239,311
- --------------------------------------------------------------------------------------------------------------
Non-cash Transaction:
Acquisition of business, net of cash of acquired company (Note 1) $ - $ 1,628,377
- --------------------------------------------------------------------------------------------------------------
20
DRYCLEAN USA, Inc. and Subsidiaries
Summary of Business and Significant Accounting Policies
NATURE OF BUSINESS DRYCLEAN USA, Inc. and
Subsidiaries (collectively, the "Company")
are engaged in the sale of commercial and
industrial laundry and dry cleaning
equipment, boilers and replacement parts, the
sale of individual and area franchises under
the DRYCLEAN USA name, acting as a business
broker in connection with the purchase and
sale of retail dry cleaning stores and coin
laundries and the manufacture and sale of
telephone test equipment and customer premise
equipment, as well as related accessories.
The Company primarily sells to customers
located in the United States, the Caribbean
and Latin America.
PRINCIPALS OF The accompanying consolidated financial
CONSOLIDATION statements include the accounts of DRYCLEAN
USA, Inc. and its wholly-owned subsidiaries.
Intercompany transactions and balances have
been eliminated in consolidation.
REVENUE Sales of products are generally recorded as
RECOGNITION they are shipped. Commissions and
management fees are recorded when earned.
Individual franchise arrangements include a
license and provide for payment of initial
fees, as well as continuing service fees.
Initial franchise fees are generally recorded
upon the opening of the franchised store.
Continuing services fees are recorded when
earned.
INVENTORIES Inventories are valued at the lower of cost
or market determined on the first-in
first-out method.
EQUIPMENT, Property and equipment are stated at cost.
IMPROVEMENTS AND Depreciation and amortization are calculated
DEPRECIATION on accelerated and straight-line methods
over lives of five to seven years for
furniture and equipment and the life of the
lease for leasehold improvements for both
financial reporting and income tax purposes,
except that leasehold improvements which are
amortized over 31 years for income tax
purposes.
FRANCHISE LICENSE, The franchise license, trademark and other
TRADEMARK AND OTHER intangible assets are stated at cost less
INTANGIBLE ASSETS accumulated amortization. These assets are
amortized on a straight-line basis over the
estimated future periods to be benefited
(2-15 years). The Company reviews the
recoverability of the franchise license,
trademark and other intangible assets based
primarily upon an analysis of undiscounted
21
DRYCLEAN USA, Inc. and Subsidiaries
Summary of Business and Significant Accounting Policies
cash flows from the acquired assets. In the
event the expected future net cash flows
should become less than the carrying amount
of the assets, an impairment loss will be
recorded in the period such determination is
made based on the fair value of the related
assets.
ASSET IMPAIRMENTS The Company periodically reviews the
carrying value of certain of its assets in
relation to historical results, current
business conditions and trends to identify
potential situations in which the carrying
value of assets may not be recoverable. If
such reviews indicate that the carrying
value of such assets may not be recoverable,
the Company would estimate the undiscounted
sum of the expected future cash flows of
such assets or analyze the fair value of the
asset, to determine if permanent impairment
exists. If a permanent impairment exists,
the Company would determine the fair value
by using quoted market prices, if available,
for such assets, or if quoted market prices
are not available, the Company would
discount the expected future cash flows of
such assets. There were no asset impairments
during 2000 and 1999.
INCOME TAXES For the purpose of the provision for income
taxes, the Company has adopted the
provisions of Statement of Financial
Accounting Standards (SFAS) No. 109,
Accounting for Income Taxes, for all periods
presented. Under the asset and liability
method of SFAS No. 109, deferred taxes are
recognized for differences between
consolidated financial statement and income
tax bases of assets and liabilities.
STATEMENT OF For purposes of this statement, cash
CASH FLOWS equivalents include all highly liquid
investments with original maturities of
three months or less.
ESTIMATES The preparation of consolidated financial
statements in conformity with generally
accepted accounting principles 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
consolidated financial statements and the
reported amounts of revenues and expenses
during the reporting period. Actual results
could differ from those estimates.
22
DRYCLEAN USA, Inc. and Subsidiaries
Summary of Business and Significant Accounting Policies
STOCK BASED The Company recognizes compensation expense
COMPENSATION for its stock option incentive plans using
the intrinsic value method of accounting.
Under the terms of the intrinsic value
method, compensation cost is the excess, if
any, of the quoted market price of the stock
at the grant date, or other measurement
date, over the amount an employee must pay
to acquire the stock. During 2000 and 1999,
all stock options were granted with exercise
prices at least equal to the market price of
the stock at the grant date.
EARNINGS PER SHARE The Company has adopted the provisions of
SFAS No. 128, Earnings Per Share, for all
periods presented. SFAS No. 128 requires a
dual presentation of basic and diluted
earnings per share. See Note 11.
Basic earnings per share are computed on the
basis of the weighted average number of
common shares outstanding during each year.
Diluted earnings per share are computed on
the basis of the weighted average number of
common shares and dilutive securities
outstanding during each year. Securities
having an antidilutive effect on earnings per
share are excluded from the calculation of
diluted earnings per share.
The weighted average number of common shares
outstanding for all periods presented
retroactively reflects the effects of the
recapitalization of the Company described in
Note 1.
ADVERTISING The Company expenses the costs of
COSTS advertising as of the first date the
advertisements take place. The Company
expensed approximately $200,000 and $185,000
of advertising costs for the years ended June
30, 2000 and 1999, respectively.
FAIR VALUE OF The Company's financial instruments consist
FINANCIAL INSTRUMENTS principally of cash, accounts receivable,
leases receivables, accounts payable and
accrued expenses and debt. The carrying
amounts of such financial instruments as
reflected in the accompanying consolidated
balance sheets approximate their estimated
fair value. Their estimated fair value is
not necessarily indicative of the amounts
the Company could realize in a current
market exchange or of future earnings or
cash flows.
23
DRYCLEAN USA, Inc. and Subsidiaries
Summary of Business and Significant Accounting Policies
SEGMENTS The Company applies the provisions of
Statement of Financial Accounting Standards
No. 131 ("SFAS 131"), Segments of an
Enterprise and Related Information, in
determining its segments and reporting. SFAS
131 supercedes SFAS No. 14, Financial
Reporting for Segments of a Business
Enterprise. Information regarding the
Company's segments is reported in Note 13.
NEW ACCOUNTING In June 1998, the Financial Accounting
PRONOUNCEMENTS Standard Board issued SFAS No. 133,
Accounting for Derivative Instruments and
Hedging Activities. SFAS No. 133 requires
companies to recognize all derivatives
contracts as either assets or liabilities in
the balance sheet and to measure them at
fair value. If certain conditions are met, a
derivative may be specifically designated as
a hedge, the objective of which is to match
the timing of gain or loss recognition on
the hedging derivative with the recognition
of (i) the changes in the fair value of the
hedged assets or liability that are
attributable to the hedged risk or (ii) the
earnings effect of the hedged forecasted
transaction. For a derivative not designated
as a hedging instrument, the gain or loss is
recognized in income in the period of
change. SFAS No. 133 is effective for all
fiscal quarters of fiscal years beginning
after June 15, 2000. Historically, the
Company has not entered into derivatives
contracts either to hedge existing risks or
for speculative purposes. Accordingly, the
Company does not expect adoption of the new
standard to materially affect its financial
statements.
In March 2000, the Financial Accounting
Standards Board (FASB) issued FASB
Interpretation No. 44 (Interpretation 44),
Accounting for Certain Transactions Involving
Stock Compensation. Interpretation 44
provides criteria for the recognition of
compensation expense in certain stock-based
compensation arrangements that are accounted
for under Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to
Employees. Interpretation 44 is effective
July 1, 2000, with certain provisions
effective retroactively to December 15, 1998
and January 12, 2000. There was no effect of
the retroactive provisions of Interpretation
44 on the Company's consolidated financial
statements. Interpretation 44 is not expected
to have a material effect on the Company's
consolidated financial statements.
24
DRYCLEAN USA, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. ACQUISITIONS AND On July 9, 1999, the Company acquired
REORGANIZATION DRYCLEAN USA Franchise Company and the
worldwide rights to the name DRYCLEAN USA
along with existing franchise and license
agreements for $550,000 cash. In connection
with this acquisition, the Company acquired
$50,000 of current assets, $10,000 of
fixtures and equipment, $610,000 of
franchise license, trademark and other
intangibles, and assumed $80,000 of current
liabilities. The pro forma effect of the
transaction was insignificant to the
consolidated statement of income for 2000.
On November 1, 1998, Metro-Tel Corp.
("Metro-Tel") completed a merger in which a
wholly-owned subsidiary was merged with and
into Steiner-Atlantic Corp. ("Steiner"). In
connection therewith, Metro-Tel issued
4,720,954 shares of its common stock to the
shareholders of Steiner and Steiner became a
wholly-owned subsidiary of the Company. In
addition, Metro-Tel granted options for the
purchase of up to 500,000 shares of its
common stock to employees of Steiner.
Subsequently, on November 7, 1999, the
Company changed its name to DRYCLEAN USA,
Inc.
For financial accounting purposes, this
transaction was accounted for as a reverse
acquisition of Metro-Tel by Steiner. In this
connection, historical amounts, shares and
per share amounts for Steiner have been
retroactively adjusted to reflect the
foregoing transactions.
The purchase of Metro-Tel was valued at
approximately $1,926,000, an amount equal to
the fair market value of the Metro-Tel's
outstanding common shares. This acquisition
was accounted for under the purchase method,
whereby the purchase price was allocated to
the underlying assets and liabilities of
Metro-Tel based upon their estimated fair
values. The transaction was recorded as
follows:
Fair value of net assets acquired:
Current assets $ 2,520,898
Other assets 150,278
--------------------------------------------------------------------------------
Total 2,671,176
Less liabilities assumed (744,481)
--------------------------------------------------------------------------------
Net $ 1,926,695
--------------------------------------------------------------------------------
25
DRYCLEAN USA, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
The consolidated statements of income include
the results of operations of the acquired
business (Metro-Tel) from November 1, 1998.
The following unaudited pro forma summary
presents the consolidated results of
operations of the Company as if the
acquisition had occurred on July 1, 1998, and
the Company's S Corporation status had been
terminated as of that date:
Year ended June 30, 1999
--------------------------------------------------------------------------------
Pro forma revenues $ 19,751,668
--------------------------------------------------------------------------------
Pro forma net earnings $ 917,275
--------------------------------------------------------------------------------
Pro forma basic earnings per share $ 0.15
--------------------------------------------------------------------------------
Pro forma diluted earnings per share $ 0.14
--------------------------------------------------------------------------------
2. LEASE RECEIVABLES Lease receivables result from customer
leases of equipment under arrangements which
qualify as sales-type leases. At June 30,
2000, annual future lease payments, net of
deferred interest ($17,714 at June 30,
2000), due under these leases are as
follows:
Years ending June 30,
--------------------------------------------------------------------------------
2001 $ 105,394
2002 39,567
2003 4,262
2004 1,690
--------------------------------------------------------------------------------
$ 150,913
--------------------------------------------------------------------------------
26
DRYCLEAN USA, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
3. INVENTORIES The components of inventories are summarized as follows:
June 30, 2000 1999
--------------------------------------------------------------------------------
Raw materials $ 709,606 $ 713,867
Work-in-process 311,384 180,947
Finished goods 3,082,690 3,348,534
--------------------------------------------------------------------------------
$ 4,103,680 $ 4,243,348
--------------------------------------------------------------------------------
4. EQUIPMENT AND Major classes of equipment and improvements consist of the following:
IMPROVEMENTS
June 30, 2000 1999
----------------------------------------------------------------------------------
Furniture and equipment $ 696,728 $ 661,407
Leasehold improvements 298,764 262,714
----------------------------------------------------------------------------------
Total 995,492 924,121
Less accumulated depreciation and
amortization 655,150 590,416
----------------------------------------------------------------------------------
$ 340,342 $ 333,705
----------------------------------------------------------------------------------
Depreciation and amortization amounted to
$64,734 and $50,617 for the years ended June
30, 2000 and 1999, respectively.
5. INCOME TAXES Through October 31, 1998, Steiner, the
source of its income which, as explained in
Note 1, represented the Company's entire
reportable income for financial reporting
purposes for periods prior to November 1,
1998, with the consent of its shareholders,
elected to be taxed as an S Corporation
under the provisions of Subchapter S of the
Internal Revenue Code of 1986, as amended
(the "Code"). Shareholders of an S
Corporation are taxed on their proportionate
share of the company's taxable income.
Accordingly, no provision for federal or
state income tax is required for periods
prior to October 31, 1998. Had the Company
been treated as a C Corporation, the Company
would have incurred approximately $103,000
of additional income taxes during the year
ended June 30, 1999.
27
DRYCLEAN USA, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
The following are the components of income
tax expense:
Year ended June 30, 2000 1999
-----------------------------------------------------------------------------------
Current
Federal $ 466,729 $ 280,499
State 79,895 48,016
-----------------------------------------------------------------------------------
546,624 328,515
-----------------------------------------------------------------------------------
Deferred
Federal 15,803 50,087
State 1,573 11,888
-----------------------------------------------------------------------------------
17,376 61,975
-----------------------------------------------------------------------------------
Total $ 564,000 $ 390,490
-----------------------------------------------------------------------------------
The reconciliation of income tax expense
computed at the Federal statutory tax rate of
34% to the provision for income taxes is as
follows:
Pro Forma
Year ended June 30, 2000 1999
------------------------------------------------------------------------
Tax at the statutory rate $ 520,013 $ 391,668
Tax effect of S Corporation status - (103,000 )
State income taxes,
net of federal benefit 53,769 50,222
Income taxes attributable to
termination of S Corporation
status - 21,427
Other (9,782 ) 30,173
------------------------------------------------------------------------
Total $ 564,000 $ 390,490
------------------------------------------------------------------------
Deferred income taxes reflect the net tax
effect of temporary differences between the
bases of assets and liabilities for financial
reporting purposes and the bases used for
income tax purposes. Significant components
of the Company's current and noncurrent
deferred tax assets and liabilities are as
follows:
28
DRYCLEAN USA, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Year ended June 30, 2000 1999
---------------------------------------------------------------------------------
Current deferred tax asset (liability):
Allowance for doubtful accounts $ 13,680 $ 9,408
Inventory capitalization 18,414 25,174
Compensation 21,845 14,129
Other (7,804 ) (5,570 )
---------------------------------------------------------------------------------
46,135 43,141
---------------------------------------------------------------------------------
Noncurrent deferred tax asset (liability):
Depreciation (9,452 ) 16,271
Amortization 11,966 -
Other - 6,613
---------------------------------------------------------------------------------
2,514 22,884
---------------------------------------------------------------------------------
Total net deferred tax asset $ 48,649 $ 66,025
---------------------------------------------------------------------------------
6. CREDIT AGREEMENT The Company is a party to a loan agreement
facility consisting of a line of credit of
$2,250,000 and a term loan of $2,400,000.
Borrowings under the agreement are
guaranteed by the Company, bear interest at
the Adjusted LIBOR Market Index Rate (9.40%
at June 30, 2000) and are collateralized by
substantially all of the Company's assets.
The line of credit is due on demand. The
term loan is due January 2002. At June 30,
2000 and 1999, there were no outstanding
borrowings under the line of credit and,
therefore, the Company could borrow
$2,250,000. At June 30, 2000 and 1999, the
Company owed $1,640,000 and $2,120,000,
respectively, under the term loan. The term
loan requires monthly payments of $40,000
plus interest, with a $960,000 balloon
payment in January 2002. The agreement
requires maintenance of certain financial
ratios and contains other restrictive
covenants. The Company was in compliance
with these ratios and covenants at June 30,
2000.
7. RELATED PARTY During the years ended June 30, 2000 and
TRANSACTIONS 1999, the Company charged management fees of
$118,391 and $265,000, respectively, to an
entity controlled by one of the principal
shareholders of the Company. At June 30,
2000 and 1999, $86,391 and $23,000,
respectively, was due from that company and
is included in other current assets in the
accompanying balance sheets. Advances to or
from that affiliate are non-interest bearing
and are due on demand.
29
DRYCLEAN USA, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
The Company leases warehouse and office
space from a principal shareholder of the
Company under an operating lease which
expires in October 2004. Annual rental
commitments under this lease approximate
$83,200.
8. CONCENTRATIONS OF The Company places its excess cash in
CREDIT RISK overnight deposits with a large national
bank. Concentration of credit risk with
respect to trade and lease receivables is
limited due to a large customer base. Trade
and lease receivables are generally
collateralized with equipment sold.
The Company is exposed to foreign currency
risk in Italy. To mitigate such risk, the
Company enters into foreign exchange forward
contracts to hedge transactions related to
firm commitments to purchase equipment
denominated in Italian Lira. Gains and losses
are deferred and accounted for as part of the
underlying transactions. At June 30, 2000,
the Company has foreign exchange contracts to
purchase approximately 675 million Italian
Lira, for delivery in July and August 2000.
9. COMMITMENTS Rent
----
The Company leases additional office and
warehouse space under operating leases,
including two leases on a monthly basis. The
leases expire in March 2002 and October 2004
(the latter has an option to renew for a
period of ten years at a rent to be agreed
upon). Minimum future rental commitment for
leases in effect at June 30, 2000, including
leases to related parties, approximates the
following:
Years ending June 30,
----------------------------------------------
2001 $ 261,000
2002 219,000
2003 83,000
2004 83,000
2005 28,000
---------------------------------------------
Rent expense, including rentals paid to a
related party (see Note 7), aggregated
$309,794 and $232,013 for the years ended
June 2000 and 1999, respectively.
30
DRYCLEAN USA, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
License Agreements
The Company is a party to a license agreement
under which it is obligated to pay 10% of
annual sales of certain products. The
agreement may be canceled by the Company
annually upon sixty days notice. In February
2000, the Company acquired, for $80,000, all
the manufacturing rights under another
license agreement under which it was
obligated to pay the greater of 10% of sales
of certain products or $75,000 per year. The
Company recorded the license as an intangible
asset for $80,000 as of June 30, 2000, and is
amortizing the license on a straight-line
basis over 5 years. During the years ended
June 30, 2000 and 1999, royalty expense
aggregated $40,677 and $54,640, respectively.
10. DEFERRED The Company has a participatory deferred
COMPENSATION compensation plan wherein it matches
PLAN employee contributions up to, at the
Company's option, for all employees
determined annually, 1% or 2% of an eligible
employee's yearly compensation. Employees
are eligible to participate in the plan
after three months of service. The Company
contributed $23,926 and $18,657 in fiscal
2000 and 1999, respectively. The plan is tax
exempt under Section 401(k) of the Internal
Revenue Code.
The Company also maintains a profit-sharing
plan which covers substantially all
employees. Annual contributions are
determined at the discretion of the Board of
Directors. There were no contributions for
fiscal years 2000 and 1999.
11. EARNINGS PER SHARE The following reconciles the components of
the earnings per share computation:
Year ended June 30, 2000
---------------------------------------------------------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
---------------------------------------------------------------------------------
Net earnings $965,449 6,952,083 $0.14
Effect of dilutive securities:
Stock options - 353,848 (.01 )
---------------------------------------------------------------------------------
Net earnings plus assumed dilution $965,449 7,305,931 $0.13
---------------------------------------------------------------------------------
31
DRYCLEAN USA, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Year ended June 30, 1999
-----------------------------------------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
-----------------------------------------------------------------------------
Net earnings $761,476 6,165,318 $0.12
Effect of dilutive securities:
Stock options - 326,132 -
-----------------------------------------------------------------------------
Net earnings plus assumed dilution $761,476 6,491,450 $0.12
-----------------------------------------------------------------------------
There were no stock options outstanding at
June 30, 2000 that were excluded in the
computation of earnings per share for 2000
because the exercise prices of the options
were less than the average market price of
the common shares for that year.
12. STOCK OPTIONS At June 30, 2000 and 1999, the Company had
in effect two stock option plans that
authorize the grant of options to purchase
850,000 shares (until September, 2001) and
100,000 shares (until August, 2004),
respectively, of the Company's common stock
to employees and non-employee directors of
the Company, respectively. In addition, the
Company's board of directors authorized
another plan, subject to shareholder
approval, that would authorize the grant of
options to purchase 500,000 shares to
employees, directors and consultants. The
Company applies APB Opinion 25, Accounting
for Stock Issued to Employees, and related
interpretations in accounting for stock
options. Under APB Opinion 25, because the
exercise price of the Company's stock
options equals or exceeds the market price
of the underlying stock on the date of
grant, no compensation cost has been
recognized.
Pursuant to the pre-existing and new employee
plans, the Company may grant incentive stock
options and nonqualified stock options. All
options under the non-employee director plan
are nonqualified stock options. Options may
have a maximum term of 10 years, are not
transferable and must be granted at an
exercise price of at least 100% of the market
value of the common stock on the date of
grant. Incentive stock options granted to an
individual owning more than 10% of the total
combined voting power of all classes of stock
issued by the Company must have an exercise
price of at least equal to 110% of the fair
market value of the shares issuable on the
date of the grant and may not have a
32
DRYCLEAN USA, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
term of more than five years. Incentive
stock options granted under the plans are
subject to the limitation that the aggregate
fair market value (determined as of the date
of grant) of those options which may first
become exercisable in any calendar year
cannot exceed $100,000. Generally, options
terminate three months following termination
of service (except generally one year in the
case of termination of service by reason of
death or disability).
Generally, options granted to date have been
exercisable as to one-fourth of the shares
covered thereby on the first anniversary of
grant and one-fourth on the next three
anniversaries of grant. However, options
granted under the non-employee directors plan
become immediately exercisable upon certain
events which are deemed to be a "change in
control" of the Company. Options granted
under the pre-existing employee plan
terminate upon a merger in which the Company
is not the surviving corporation, a capital
reorganization in which more than 50% of the
Company's common stock is exchanged, or the
liquidation or dissolution of the Company,
unless other provision is made by the board
of directors.
In fiscal 2000, the Company granted 10,000
options to an employee, exercisable at a
price of $2.00 per share.
In fiscal 1999, the Company granted a total
of 565,000 options to employees, exercisable
at prices of $1.00 or $2.00 per share. In
addition, the Company granted a total of
30,000 options to directors, exercisable at
prices of $0.91 or $2.00 per share.
SFAS No. 123, "Accounting for Stock-Based
Compensation," requires the Company to
provide pro forma information regarding net
income and net income per share as if
compensation cost for the Company's stock
options had been determined in accordance
with the fair value based method prescribed
in SFAS No. 123. The Company estimates the
fair value of each stock option at the grant
date by using the Black-Scholes
option-pricing model with the following
weighted-average assumptions used for grants
in fiscal year 2000: no dividend yield
percent; expected volatility of 46.1%;
risk-free interest rates of approximately
6.36%, and expected lives of 5 years. Based
on these assumptions, under the accounting
provisions of SFAS No. 123, the Company's net
income and net income per common share would
have been as follows:.
33
DRYCLEAN USA, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Year ended June 30, 2000
--------------------------------------------------------------------------------
Net income As reported $ 965,449
Pro forma $ 957,649
-------------------------------------------------------------------------------
Net income per common share:
Basic As reported $ 0.14
Pro forma $ 0.14
-------------------------------------------------------------------------------
Diluted As reported $ 0.13
Pro forma $ 0.13
-------------------------------------------------------------------------------
Year ended June 30, 1999
-------------------------------------------------------------------------------
Net income As reported $ 761,476
Pro forma $ 761,081
-------------------------------------------------------------------------------
Net income per common share - basic and As reported $ 0.12
diluted Pro forma $ 0.12
-------------------------------------------------------------------------------
A summary of options under the Company's
stock option plans and non-plan options as of
June 30, 2000, and changes during the year
then ended is presented below:
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
-------------------------------------------------------------------------------
Outstanding at beginning of year 720,000 $1.10
Granted 10,000 2.00
Exercised (65,000 ) 1.00
Expired (55,000 ) 1.42
-------------------------------------------------------------------------------
Outstanding at end of year 610,000 1.09
-------------------------------------------------------------------------------
Options exercisable at year-end 172,500 $1.01
-------------------------------------------------------------------------------
Weighted-average fair value per share of
options granted during the year $2.00
-------------------------------------------------------------------------------
34
DRYCLEAN USA, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
A summary of the status of the Company's
stock option plan and non-plan options as of
June 30, 1999, and changes during the year
then ended is presented below:
Weighted
Average
Exercise
Shares Price
-------------------------------------------------------------------------------
Outstanding at beginning of year 225,000 $0.98
Granted 595,000 1.12
Exercised (50,000 ) 1.03
Expired (50,000 ) 0.97
-------------------------------------------------------------------------------
Outstanding at end of year 720,000 1.10
-------------------------------------------------------------------------------
Options exercisable at year-end 125,000 0.97
-------------------------------------------------------------------------------
Weighted-average fair value per share of
options granted during the year $1.12
-------------------------------------------------------------------------------
The following table summarizes information
about stock option plan and non-plan options
outstanding at June 30, 2000:
Weighted
Number Average Weighted Number Weighted
Range of Outstanding Remaining Average Exercisable Average
Exercise at Contractual Exercise at Exercise
Prices 6/30/00 Life Price 6/30/00 Price
------------------------------------------------------------------------------------
$ 0.81-2.00 610,000 3.30 $1.09 172,500 $1.01
------------------------------------------------------------------------------------
13. SEGMENT INFORMATION The Company's reportable segments are
strategic businesses that offer different
products and services. They are managed
separately because each business requires
different technology and marketing
strategies. Steiner-Atlantic Corp. and
Steiner-Atlantic Brokerage Company, Inc.
comprise the commercial and industrial
laundry and dry cleaning equipment segment.
Steiner-Atlantic Corp. is a supplier of dry
cleaning equipment, industrial laundry
equipment and steam boilers to customers in
the United States, the Caribbean and Latin
American markets. Steiner-Atlantic Brokerage
Company, Inc. acts as a business broker to
assist others seeking to buy or sell
existing dry cleaning and laundry
businesses. Metro-Tel Corp. comprises the
manufacture and sale of telephone test
equipment segment. This segment is engaged
in the manufacture and sale of telephone
test and customer premise equipment utilized
35
DRYCLEAN USA, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
by telephone and telephone interconnect
companies in the installation and
maintenance of telephone equipment. DRYCLEAN
USA License Corp. comprises the license and
franchise operations segment. In July 1999,
Steiner-Atlantic Corp. acquired certain
assets of DRYCLEAN USA Franchise Company,
including, among other things, the worldwide
rights to the name DRYCLEAN USA along with
existing franchise and license agreements.
DRYCLEAN USA is one of the largest franchise
and license operations in the dry cleaning
industry, currently consisting of
approximately 400 franchised and licensed
locations in the United States, the
Caribbean and Latin America. The Company
primarily evaluates the operating
performance of its segments based on the
categories noted in the table below. The
Company has no sales between segments.
For the years ended June 30, 2000 and 1999,
export sales, principally to the Caribbean
and Latin America, aggregated approximately
$3,652,000 and $3,443,000, respectively.
No single customer accounted for more than
10% of the Company's revenues.
Financial information for the Company's
business segments is as follows:
Year ended June 30, 2000 1999
------------------------------------------------------------------------------------
Revenues:
Commercial and industrial laundry and dry
cleaning equipment $15,487,499 $16,426,205
Manufacture and sale of telephone test
equipment 3,500,660 2,048,593
License and franchise operations 536,340 -
------------------------------------------------------------------------------------
Total revenues $19,524,499 $18,474,798
------------------------------------------------------------------------------------
Operating income (loss):
Commercial and industrial laundry
and dry cleaning equipment $1,272,313 $1,556,895
Manufacture and sale of telephone test
equipment 21,414 (295,488 )
License and franchise operations 363,982 -
------------------------------------------------------------------------------------
Total operating income $1,657,709 $1,261,407
------------------------------------------------------------------------------------
Identifiable assets:
Commercial and industrial laundry
and dry cleaning equipment $5,043,287 $6,015,693
Manufacture and sale of telephone test
equipment 2,559,252 1,685,545
License and franchise operations 981,505 -
-----------------------------------------------------------------------------------
Total assets $8,584,044 $7,701,238
-----------------------------------------------------------------------------------
36
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
------------------------------------
On January 4, 1999, the Company selected BDO Seidman, LLP ("BDO
Seidman") to replace Grant Thornton LLP ("Grant Thornton") as the Company's
independent public accountants. BDO Seidman has acted as independent accountants
for Steiner, which became a wholly-owned subsidiary of the Company pursuant to
the Merger. The Company believes that the change to BDO Seidman as the Company's
independent accountants will facilitate the audit of the Company's consolidated
financial statements. The decision to change auditors was approved by the Audit
Committee of the Board of Directors.
Grant Thornton's report on the financial statements of the Company for
each of the past two fiscal years did not contain any adverse opinion or
disclaimer of opinion and was not qualified or modified as to uncertainty, audit
scope or accounting principles.
During the Company's two most recent fiscal years, and the subsequent
interim period through January 4, 1999, there were no disagreements with Grant
Thornton on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure, which disagreements, if
not resolved to the satisfaction of Grant Thornton, would have caused Grant
Thornton to make reference to the subject matter of the disagreements in
connection with their audit report with respect to financial statements of the
Company either individually or consolidated with Steiner.
During the Company's two most recent fiscal years, and the subsequent
interim period through January 4, 1999, Grant Thornton did not advise the
Company of any of the items listed in Item 304(a)(1)(iv)(B) of Regulation S-B.
37
PART III
--------
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
--------------------------------------------------
The following information is presented with respect to the background
of each of the directors and executive officers of the Company:
Michael S. Steiner, 44, has been President and Chief Executive Officer
of the Company since the effectiveness of the Merger on November 1, 1998 and of
Steiner since 1988. Mr. Steiner has been a director of the Company since the
effectiveness of the Merger on November 1, 1998.
William K. Steiner, 70, has been Chairman of the Board of Steiner since
he founded Steiner in 1960. Mr. Steiner has been a director of the Company since
the effectiveness of the Merger on November 1, 1998.
Venerando J. Indelicato, 67, was President of the Company from December
1967 until the effectiveness of the Merger on November 1, 1998 and has been
Treasurer and Chief Financial Officer of the Company since December 1969.
Lloyd Frank, 75, has been a member of the law firm of Parker Chapin LLP
since 1977. Mr. Frank has been a director of the Company since 1977. The Company
retained Parker Chapin during the Company's last fiscal year and is retaining
that firm during the Company's current fiscal year. Mr. Frank is also a director
of Park Electrochemical Corp. and Volt Information Sciences, Inc.
David Blyer, 40, has served as a director of the Company since the
effectiveness of the Merger on November 1, 1998. Mr. Blyer has been Chief
Executive Officer and President of Vento Software, since he co-founded that
company in 1994. Vento Software develops software for specialized business
application. Before founding Vento Software, Mr. Blyer served as Senior Account
Manager of the South Florida and Caribbean regions for Tandem Computers.
Alan M. Grunspan, 40, has served as a director of the Company since May
1999. Mr. Grunspan has been a member of the law firm of Kaufman Dickstein &
Grunspan P.A. since 1991. The Company has retained Kaufman Miller Dickstein &
Grunspan P.A. during the Company's last fiscal year and is retaining that firm
during the Company's current fiscal year.
Stuart Wagner, 68, has served as a director of the Company since the
effectiveness of the Merger on November 1, 1998 and has been retained as a
consultant for Diversitech Corp. since 1997. From 1975 to 1997, Mr. Wagner
served as President of Wagner Products Corp., a manufacturer and distributor of
products in the HVAC industry, a company which he founded.
Mr. Michael S. Steiner is the son of Mr. William K. Steiner. There are
no other family relationships among any of the directors and executive officers
of the Company. All directors serve until the next annual meeting of
stockholders and until the election and qualification of their respective
successors. All officers serve at the pleasure of the Board of Directors.
The following information is presented with respect to the background
of each person who is not an executive officer but who is expected to continue
to make a significant contribution to the Company:
Osvaldo Rubio, 37, serves as Vice President and Director of Sales for
the Export Department of Steiner since joining Steiner in May 1993.
Ronald London, 67, serves as Vice President and primarily overseas
sales of the retail Dry Cleaning Equipment Department of Steiner since joining
Steiner in September 1992.
Jon D. Robinette, 42, has, since July 1999, served as Vice President
and General Manager of the Company's telecommunications operations, responsible
for managing and coordinating operations in the Company's Milpitas, California
facility. Prior thereto, Mr. Robinette served as Operations Manager for the
Company's telecommunications operations from October 1984.
38
ITEM 10. EXECUTIVE COMPENSATION.
- -------- -----------------------
The information called for by this Item will be contained in
the Company's definitive Proxy Statement with respect to the Company's 2000
Annual Meeting of Stockholders to be filed pursuant to Regulation l4A under the
Securities Exchange Act of 1934, and is incorporated herein by reference to such
information.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
- -------- --------------------------------------------------------------
The information called for by this Item will be contained in
the Company's definitive Proxy Statement with respect to the Company's 2000
Annual Meeting of Stockholders to be filed pursuant to Regulation l4A under the
Securities Exchange Act of 1934, and is incorporated herein by reference to such
information.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
- -------- ------------------------------------------------
The information called for by this Item will be contained in
the Company's definitive Proxy Statement with respect to the Company's 2000
Annual Meeting of Stockholders to be filed pursuant to Regulation l4A under the
Securities Exchange Act of 1934, and is incorporated herein by reference to such
information.
39
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
---------------------------------
(a) Exhibits
2(a) Agreement of Merger dated as of July 1, 1998 among the
Company, Metro-Tel Acquisition Corp., Steiner-Atlantic Corp.,
William K. Steiner and Michael S. Steiner. (Exhibit A of the
definitive Proxy Statement of the Company filed with the
Commission on October 5, 1998, File No. 0-9040.)
3(a)(1) Certificate of Incorporation of the Company, as filed with the
Secretary of State of the State of Delaware on June 30, 1963.
(Exhibit 4.1(a) to the Company's Current Report on Form 8-K
dated (date of earliest event reported) October 29, 1998.)
3(a)(2) Certificate of Amendment to the Certificate of Incorporation
of the Company, as filed with the Secretary of State of the
State of Delaware on March 27, 1968. (Exhibit 4.1(b) to the
Company's Current Report on Form 8-K dated (date of earliest
event reported) October 29, 1998.)
3(a)(3) Certificate of Amendment to the Certificate of Incorporation
of the Company, as filed with the Secretary of State of the
State of Delaware on November 4, 1983. (Exhibit 4.1(c) to the
Company's Current Report on Form 8-K dated (date of earliest
event reported) October 29, 1998.)
3(a)(4) Certificate of Amendment to the Certificate of Incorporation
of the Company, as filed with the Secretary of State of the
State of Delaware on November 5, 1986. (Exhibit 4.1(d) to the
Company's Current Report on Form 8-K dated (date of earliest
event reported) October 29, 1998.)
3(a)(5) Certificate of Change of Location of Registered Office and of
Agent, as filed with the Secretary of State of the State of
Delaware on December 31, 1986. (Exhibit 4.1(e) to the
Company's Current Report on Form 8-K dated (date of earliest
event reported) October 29, 1998.)
3(a)(6) Certificate of Ownership and Merger of Design Development
Incorporated into the Company, as filed with the Secretary of
State of the State of Delaware on June 30, 1998. (Exhibit
4.1(f) to the Company's Current Report on Form 8-K dated (date
of earliest event reported) October 29, 1998.)
3(a)(7) Certificate of Amendment to the Company's Certificate of
Incorporation as filed with the Secretary of State of the
State of Delaware on October 30, 1998. (Exhibit 4.1(g) to the
Company's Current Report on Form 8-K dated (date of earliest
event reported) October 29, 1998.)
3(a)(8) Certificate of Amendment to the Company's Certificate of
Incorporation, as filed with the Secretary of State of the
State of Delaware on November 5,
40
1999. (Exhibit 4.1 to the Company's Quarterly Report on Form
10-QSB for the quarter ended September 30, 1999, File No.
0-9040.)
3(b) By-Laws of the Company, as amended. (Exhibit 4.2 to the
Company's Quarterly Report on Form 10-QSB for the quarter
ended September 30, 1999, File No. 0-9040.)
4(a)(1) Loan and Security Agreement dated November 2, 1998 between
Steiner-Atlantic Corp. and First Union National Bank. (Exhibit
4.2(a) to the Company's Current Report on Form 8-K dated (date
of earliest event reported) October 29, 1998.)
4(a)(2) Guaranty and Security Agreement dated November 2, 1998 by the
Company in favor of First Union National Bank. (Exhibit 4.2(b)
to the Company's Current Report on Form 8-K dated (date of
earliest event reported) October 29, 1998.)
10(a)(1)(i) Lease dated April 1, 1991 between the Company and CB
Institutional Fund VII with respect to the Company's
facilities at 240 South Milpitas Boulevard, Milpitas,
California. (Exhibit 10(a)(2) to the Company's Annual Report
on Form 10-K for the year ended June 30, 1991, File No.
0-9040.)
10(a)(1)(ii) Second Amendment to Lease dated November 1, 1998 between the
Company and The Realty Associates Fund III, L.P.
(successor-in-interest to CB Institutional Fund VII) with
respect to the Company's facilities at 240 South Milpitas
Boulevard, Milpitas, California. (Exhibit 10(a)(1)(ii) to the
Company's Transition Report on Form 10-KSB for the transition
period from January 1, 1998 to June 30, 1998, File No.
0-9040.)
10(a)(2) Lease dated October 6, 1995 between Steiner and William, K.
Steiner with respect to Steiner's facilities located 290 N.E.
68th Street, 297 N.E. 67 St. and 277 N.E. 67 St. Miami,
Florida. (Exhibit 10(a)(2) to the Company's Transition Report
on Form 10-KSB for the transition period from January 1, 1998
to June 30, 1998, File No. 0-9040.)
10(b)(1)(i)+ Employment Agreement dated July 1, 1981 between the Company
and Venerando J. Indelicato. (Exhibit 10(b)(1)(i) to the
Company's Annual Report on Form 10-KSB for the year ended June
30, 1995, File No. 0-9040.)
10(b)(1)(ii)+ Amendment No. 1 dated July 1, 1983 to the Employment Agreement
dated July 1, 1981 between the Company and Venerando J.
Indelicato. (Exhibit 10(b)(1)(ii) to the Company's Annual
Report on Form 10-KSB for the year ended June 30, 1995, File
No. 0-9040.)
10(b)(1)(iii)+ Amendment No. 2 dated October 30, 1998 to the Employment
Agreement dated July 1, 1981 between the Company and Venerando
J. Indelicato. (Exhibit 10(b)(1)(iii) to the Company's
Transition Report on Form 10-KSB for the transition period
from January 1, 1998 to June 30, 1998, File No. 0-9040.)
41
10(b)(2)+ Letter agreement dated August 29, 1996 between the Company and
Richard A. Wildman, a former executive officer of the Company.
(Exhibit 10(b)(2) to the Company's Annual Report on Form
10-KSB for the year ended June 30, 1997, File No. 0-9040.)
10(c)(1)+ The Company's 1991 Stock Option Plan, as amended. (Exhibit
99.3 to the Company's Current Report on Form 8-K dated (date
of earliest event reported) October 29, 1998, File No.0-9040.)
10(c)(2)(a)+ The Company's 1984 Non-Employee Director Stock Option Plan, as
amended. (Exhibit 10(d)(2) to the Company's Annual Report on
Form 10-K for the year ended June 30, 1987, File No. 0-9040.)
10(c)(2)(b)+ The Company's 1994 Non-Employee Director Stock Option Plan.
(Exhibit A to the Company's Proxy Statement dated October 14,
1994 used in connection with the Company's 1994 Annual Meeting
of Stockholders, File No. 0-9040.)
10(c)(2)(c)+ The Company's 2000 Stock Option Plan. (Exhibit 99.1 to the
Company's Registration Statement on Form S-8, File No.
333-37582).
10(c)(3)+ Form of Stock Option Agreement dated June 25, 1991 entered
into between the Company and each of Sheppard Beidler (option
has since expired), Lloyd Frank and Michael Michaelson (option
has since been exercised), together with a schedule
identifying the details in which the actual agreements differ
from the exhibit filed herewith. (Exhibit 10(c)(4) to the
Company's Annual Report on Form 10-K for the year ended June
30, 1991, File No. 0-9040.)
10(c)(4)+ Form of Stock Option Agreement dated May 4, 1993 entered into
between the Company and each of Sheppard Beidler (option has
since expired), Lloyd Frank and Michael Michaelson (option has
since been exercised), together with a schedule identifying
the details in which the actual agreements differ from the
exhibit filed herewith. (Exhibit 10(c)(4) to the Company's
Annual Report on Form 10-KSB for the year ended June 30, 1993,
File No. 0-9040.)
*27 Financial Data Schedule.
- --------------------
* Filed with this Report. All other exhibits are incorporated herein by
reference to the filing indicated in the parenthetical reference
following the exhibit description.
+ Management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K
No Reports on Form 8-K were filed during the last quarter of
the period covered by this Report.
42
SIGNATURES
Pursuant to 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.
DRYCLEAN USA, Inc.
Dated: September 27, 2000
By: /s/ Michael S. Steiner
--------------------------
Michael S. Steiner
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Capacity Date
- --------- -------- ----
/s/ Michael S. Steiner President, September 27, 2000
- ------------------------------------------- Chief Executive Officer
Michael S. Steiner (Principal Executive Officer) and
Director
/s/ William K. Steiner Director September 27, 2000
- -------------------------------------------
William K. Steiner
/s/ Venerando J. Indelicato Chief Financial Officer September 27, 2000
- ------------------------------------------- (Principal Financial and Accounting
Venerando J. Indelicato Officer) and Director
/s/ Lloyd Frank Director September 27, 2000
- -------------------------------------------
Lloyd Frank
/s/ Alan M. Grunspan Director September 27, 2000
- -------------------------------------------
Alan M. Grunspan
/s/ Stuart Wagner Director September 27, 2000
- -------------------------------------------
Stuart Wagner
/s/ David Blyer Director September 27, 2000
- -------------------------------------------
David Blyer
43
2(a) Agreement of Merger dated as of July 1, 1998 among the
Company, Metro-Tel Acquisition Corp., Steiner-Atlantic Corp.,
William K. Steiner and Michael S. Steiner. (Exhibit A of the
definitive Proxy Statement of the Company filed with the
Commission on October 5, 1998, File No. 0-9040.)
3(a)(1) Certificate of Incorporation of the Company, as filed with the
Secretary of State of the State of Delaware on June 30, 1963.
(Exhibit 4.1(a) to the Company's Current Report on Form 8-K
dated (date of earliest event reported) October 29, 1998.)
3(a)(2) Certificate of Amendment to the Certificate of Incorporation
of the Company, as filed with the Secretary of State of the
State of Delaware on March 27, 1968. (Exhibit 4.1(b) to the
Company's Current Report on Form 8-K dated (date of earliest
event reported) October 29, 1998.)
3(a)(3) Certificate of Amendment to the Certificate of Incorporation
of the Company, as filed with the Secretary of State of the
State of Delaware on November 4, 1983. (Exhibit 4.1(c) to the
Company's Current Report on Form 8-K dated (date of earliest
event reported) October 29, 1998.)
3(a)(4) Certificate of Amendment to the Certificate of Incorporation
of the Company, as filed with the Secretary of State of the
State of Delaware on November 5, 1986. (Exhibit 4.1(d) to the
Company's Current Report on Form 8-K dated (date of earliest
event reported) October 29, 1998.)
3(a)(5) Certificate of Change of Location of Registered Office and of
Agent, as filed with the Secretary of State of the State of
Delaware on December 31, 1986. (Exhibit 4.1(e) to the
Company's Current Report on Form 8-K dated (date of earliest
event reported) October 29, 1998.)
3(a)(6) Certificate of Ownership and Merger of Design Development
Incorporated into the Company, as filed with the Secretary of
State of the State of Delaware on June 30, 1998. (Exhibit
4.1(f) to the Company's Current Report on Form 8-K dated (date
of earliest event reported) October 29, 1998.)
3(a)(7) Certificate of Amendment to the Company's Certificate of
Incorporation as filed with the Secretary of State of the
State of Delaware on October 30, 1998. (Exhibit 4.1(g) to the
Company's Current Report on Form 8-K dated (date of earliest
event reported) October 29, 1998.)
3(a)(8) Certificate of Amendment to the Company's Certificate of
Incorporation, as filed with the Secretary of State of the
State of Delaware on November 5, 1999. (Exhibit 4.1 to the
Company's Quarterly Report on Form 10-QSB for the quarter
ended September 30, 1999, File No. 0-9040.)
44
3(b) By-Laws of the Company, as amended. (Exhibit 4.2 to the
Company's Quarterly Report on Form 10-QSB for the quarter
ended September 30, 1999, File No. 0-9040.)
4(a)(1) Loan and Security Agreement dated November 2, 1998 between
Steiner-Atlantic Corp. and First Union National Bank. (Exhibit
4.2(a) to the Company's Current Report on Form 8-K dated (date
of earliest event reported) October 29, 1998.)
4(a)(2) Guaranty and Security Agreement dated November 2, 1998 by the
Company in favor of First Union National Bank. (Exhibit 4.2(b)
to the Company's Current Report on Form 8-K dated (date of
earliest event reported) October 29, 1998.)
10(a)(1)(i) Lease dated April 1, 1991 between the Company and CB
Institutional Fund VII with respect to the Company's
facilities at 240 South Milpitas Boulevard, Milpitas,
California. (Exhibit 10(a)(2) to the Company's Annual Report
on Form 10-K for the year ended June 30, 1991, File No.
0-9040.)
10(a)(1)(ii) Second Amendment to Lease dated November 1, 1998 between the
Company and The Realty Associates Fund III, L.P.
(successor-in-interest to CB Institutional Fund VII) with
respect to the Company's facilities at 240 South Milpitas
Boulevard, Milpitas, California. (Exhibit 10(a)(1)(ii) to the
Company's Transition Report on Form 10-KSB for the transition
period from January 1, 1998 to June 30, 1998, File No.
0-9040.)
10(a)(2) Lease dated October 6, 1995 between Steiner and William, K.
Steiner with respect to Steiner's facilities located 290 N.E.
68th Street, 297 N.E. 67 St. and 277 N.E. 67 St. Miami,
Florida. (Exhibit 10(a)(2) to the Company's Transition Report
on Form 10-KSB for the transition period from January 1, 1998
to June 30, 1998, File No. 0-9040.)
10(b)(1)(i)+ Employment Agreement dated July 1, 1981 between the Company
and Venerando J. Indelicato. (Exhibit 10(b)(1)(i) to the
Company's Annual Report on Form 10-KSB for the year ended June
30, 1995, File No. 0-9040.)
10(b)(1)(ii)+ Amendment No. 1 dated July 1, 1983 to the Employment Agreement
dated July 1, 1981 between the Company and Venerando J.
Indelicato. (Exhibit 10(b)(1)(ii) to the Company's Annual
Report on Form 10-KSB for the year ended June 30, 1995, File
No. 0-9040.)
10(b)(1)(iii)+ Amendment No. 2 dated October 30, 1998 to the Employment
Agreement dated July 1, 1981 between the Company and Venerando
J. Indelicato. (Exhibit 10(b)(1)(iii) to the Company's
Transition Report on Form 10-KSB for the transition period
from January 1, 1998 to June 30, 1998, File No. 0-9040.)
10(b)(2)+ Letter agreement dated August 29, 1996 between the Company and
Richard A. Wildman, a former executive officer of the Company.
(Exhibit 10(b)(2) to the
45
Company's Annual Report on Form 10-KSB for the year ended June
30, 1997, File No. 0-9040.)
10(c)(1)+ The Company's 1991 Stock Option Plan, as amended. (Exhibit
99.3 to the Company's Current Report on Form 8-K dated (date
of earliest event reported) October 29, 1998, File No.0-9040.)
10(c)(2)(a)+ The Company's 1984 Non-Employee Director Stock Option Plan, as
amended. (Exhibit 10(d)(2) to the Company's Annual Report on
Form 10-K for the year ended June 30, 1987, File No. 0-9040.)
10(c)(2)(b)+ The Company's 1994 Non-Employee Director Stock Option Plan.
(Exhibit A to the Company's Proxy Statement dated October 14,
1994 used in connection with the Company's 1994 Annual Meeting
of Stockholders, File No. 0-9040.)
10(c)(2)(c)+ The Company's 2000 Stock Option Plan. (Exhibit 99.1 to the
Company's Registration Statement on Form S-8, File No.
333-37582).
10(c)(3)+ Form of Stock Option Agreement dated June 25, 1991 entered
into between the Company and each of Sheppard Beidler (option
has since expired), Lloyd Frank and Michael Michaelson (option
has since been exercised), together with a schedule
identifying the details in which the actual agreements differ
from the exhibit filed herewith. (Exhibit 10(c)(4) to the
Company's Annual Report on Form 10-K for the year ended June
30, 1991, File No. 0-9040.)
10(c)(4)+ Form of Stock Option Agreement dated May 4, 1993 entered into
between the Company and each of Sheppard Beidler (option has
since expired), Lloyd Frank and Michael Michaelson (option has
since been exercised), together with a schedule identifying
the details in which the actual agreements differ from the
exhibit filed herewith. (Exhibit 10(c)(4) to the Company's
Annual Report on Form 10-KSB for the year ended June 30, 1993,
File No. 0-9040.)
*27 Financial Data Schedule.
- --------------------
* Filed with this Report. All other exhibits are incorporated herein by
reference to the filing indicated in the parenthetical reference
following the exhibit description.
+ Management contract or compensatory plan or arrangement.
46