SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the six months ended December 31, 2000
OR
[.] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-9040
DRYCLEAN USA, Inc.
(Exact name of small business issuer as specified in its charter)
DELAWARE 11-2014231
(State of other jurisdiction of (I.R.S. Employer)
incorporation or organization) Identification No.)
290 N.E. 68 Street, Miami, Florida 33138
(Address of principal executive offices)
(305) 754-4551
(Issuer's telephone number)
Not Applicable
(Former name)
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
State the number of shares outstanding of each of the issuer's classes
of common equity as of the latest practicable date: Common Stock, $.025 par
value per share - 7,001,250 shares outstanding as of February 8, 2001.
DRYCLEAN USA, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
- ------------------------------------- ------------------------------------ ----------------------------------
For the six months For the three months
ended December 31, ended December 31,
2000 1999 2000 1999
(Unaudited) (Unaudited)
- ------------------------------------- ------------------------------------ ----------------------------------
Sales $ 8,935,979 $ 8,640,625 $ 4,361,503 $ 4,080,815
Franchise and license fees and
other income 536,555 399,797 195,680 224,839
Total revenues 9,472,534 9,040,422 4,557,183 4,305,654
Cost of goods sold 6,416,091 6,125,230 3,162,964 2,809,284
Selling, general and administrative
expenses 2,370,839 2,138,625 1,205,317 1,128,206
Research and development 59,522 128,821 32,850 66,410
Total operating expenses 8,846,452 8,392,676 4,401,131 4,003,900
Operating income 626,082 647,746 156,052 301,754
Other income (expenses)
Interest income 19,942 15,093 6,190 5,715
Interest expense (75,343) (84,228) (37,043) (41,585)
Total (55,401) (69,135) (30,853) (35,870)
Earnings before taxes 570,681 578,611 125,199 265,884
Provision for income taxes 228,272 231,444 50,080 106,354
Net earnings $ 342,409 $ 347,167 $ 75,119 $ 159,530
===================================== ================= ================== ================= ================
Basic earnings per share $ .05 $ .05 $ .01 $ .02
Diluted earnings per share $ .05 $ .05 $ .01 $ .02
Weighted average number of shares
outstanding:
Basic 7,001,250 6,931,667 7,001,250 6,938,333
Diluted 7,210,908 7,281,210 7,157,213 7,314,559
===================================== ================= ================== ================= ================
See Notes to Condensed Consolidated Financial Statements
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DRYCLEAN USA, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, 2000 June 30, 2000
----------------- -------------
(Unaudited)
ASSETS
- ------
CURRENT ASSETS
Cash and cash equivalents $ 277,163 $ 982,588
Accounts receivable, net 2,433,877 2,065,761
Inventories 4,773,065 4,103,680
Current portion of lease and mortgages receivables 350,163 105,394
Deferred income taxes 46,135 46,135
Prepaid expenses and other 209,138 270,170
Total current assets 8,089,541 7,573,728
Lease and mortgages receivables
due after one year 36,250 45,519
Equipment and improvements- net of accumulated depreciation
and amortization 321,133 340,342
Franchise, trademarks and other
intangible assets, net 658,087 621,941
Deferred tax asset 2,514 2,514
$ 9,107,525 $ 8,584,044
See Notes to Condensed Consolidated Financial Statements
-3-
DRYCLEAN USA, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, 2000 June 30, 2000
----------------- -------------
(Unaudited)
LIABILITIES AND SHAREHOLDERS'
EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 1,063,241 $ 1,301,537
Current portion of bank loan 480,000 480,000
Line of credit 694,503
Customer deposits 609,954 374,396
Income taxes payable - 281,944
Total current liabilities 2,847,698 2,437,877
Long term loan less current portion 920,000 1,160,000
Total liabilities 3,767,698 3,597,877
SHAREHOLDERS' EQUITY
Common stock, $.025 par value; 15,000,000
shares authorized; 7,001,250 and 6,990,000
shares issued and outstanding at December 31,
and June 30, 2000 respectively, including
26,250 shares held in treasury 175,688 175,406
Additional paid-in capital 2,048,571 2,037,602
Retained earnings 3,115,568 2,773,159
-------------- ---------------
Total shareholders' equity 5,339,827 4,986,167
-------------- ---------------
$ 9,107,525 $ 8,584,044
============== ===============
See Notes to Condensed Consolidated Financial Statements
-4-
DRYCLEAN USA, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ended Six months ended
December 31, 2000 December 31, 1999
(Unaudited) (Unaudited)
----------- -----------
Operating Activities:
Net earnings $ 342,409 $ 347,167
Adjustments to reconcile net earnings to net cash
(used) provided by operating activities:
Bad debt expense 172,878 3,641
Depreciation and amortization 77,791 62,578
Net changes in operating assets and liabilities:
(Increase) decrease in:
Accounts, mortgages and lease receivables (776,494) 432,108
Inventories (669,385) (408,048)
Prepaid expenses and other assets 61,032 5,970
Increase(decrease)in:
Accounts payable and accrued expenses (238,296) (279,416)
Customer deposits 235,558 76,960
Income taxes payable (281,944) (45,881)
Net cash (used) provided by operating activities (1,076,451) 195,079
Investing activities:
Capital expenditures (94,727) (91,341)
Acquisition of franchise and license agreements (550,000)
Net cash used by investing activities (94,727) (641,341)
Financing activities
Payments on term loan (240,000) (240,000)
Borrowings under line of credit 694,503 64,000
Proceeds from exercise of stock options 11,250 20,000
Net cash provided (used) by financing activities 465,753 (156,000)
Net decrease in cash and cash equivalents (705,425) (602,262)
Cash and cash equivalents at beginning of period 982,588 964,768
Cash and cash equivalents at end of period $ 277,163 $ 362,506
================================================================= ====================== ======================
Supplemental information:
Cash paid for interest $ 75,343 $ 84,228
Cash paid for income taxes 586,610 277,325
See Notes to Condensed Consolidated Financial Statements
-5-
DRYCLEAN USA Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note (1) - General: The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally accepted accounting
principles for interim financial statements and the instructions to Form 10-QSB
related to interim period financial statements. Accordingly, these condensed
consolidated financial statements do not include certain information and
footnotes required by generally accepted accounting principles for complete
financial statements. However, the accompanying unaudited condensed consolidated
financial statements contain all adjustments (consisting only of normal
recurring accruals) which, in the opinion of management, are necessary in order
to make the financial statements not misleading. The results of operations for
interim periods are not necessarily indicative of the results to be expected for
the full year. For further information, refer to the Company's financial
statements and footnotes thereto included in the Company's Annual Report on Form
10-KSB for the year ended June 30, 2000. The June 30, 2000 balance sheet
information is derived from audited consolidated financial statements in the
Company's Annual Report on Form 10-KSB as of that date.
Note (2) - New Accounting Pronouncements: In June 1998, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS 133 establishes accounting and reporting standards for
derivative instruments, including derivative instruments embedded in other
contracts, and for hedging activities. SFAS 133 was amended by SFAS 138 in June
1999 and is effective, as amended, for all fiscal quarters of fiscal years
beginning after June 15, 2000. The adoption of SFAS 133 did not have a material
impact on the Company's earnings or financial position.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin 101, "Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101
provides guidance on the recognition, presentation and disclosure of revenues in
financial statements and requires adoption no later than the fourth fiscal
quarter of fiscal years beginning after December 15, 1999. The Company
implemented SAB 101 effective July 1, 2000, and its adoption did not have a
material impact on the Company's earnings or financial position.
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities." SFAS 140
provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities. SFAS 140 replaces SFAS No.
125 and is effective for transfers and servicing of financial assets and
extinguishments occurring after March 31, 2001. SFAS 140 is effective for
recognition and reclassification of collateral and for disclosures relating to
securitization transactions and collateral for fiscal years ending after
December 15, 2000. The adoption of SFAS 140 did not materially impact the
Company's earnings or financial position.
-6-
In March 2000, the FASB issued FASB 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-Based Compensation. Interpretation 44 was effective
July 1, 2000, with certain provisions that were effective retroactively to
December 15, 1998 and January 12, 2000. The adoption of Interpretation 44 did
not have an impact on the Company's consolidated financial statements.
Note (3) - 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. 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.
Financial information for the Company's business segments is as follows:
For the six months For the three months
ended December 31, ended December 31,
2000 1999 2000 1999
(Unaudited) (Unaudited)
- ------------------------------------------- -------------------------------- --------------------------------
Revenues:
Commercial and industrial laundry and
dry cleaning equipment $ 7,711,508 $ 7,361,501 $ 3,908,420 $ 3,421,765
License and franchise operations 305,657 113,949 100,938 73,710
Manufacturing and sales of telephone
test equipment 1,455,369 1,564,972 547,825 810,179
- ------------------------------------------- ---------------- --------------- ---------------- ---------------
Total revenues $ 9,472,534 $ 9,040,422 $ 4,557,183 $ 4,305,654
=========================================== ================ =============== ================ ===============
Operating income (loss)
Commercial and industrial laundry and
dry cleaning equipment $ 534,698 $ 694,977 $ 274,391 $ 334,752
License and franchise operations 223,697 59,343 46,817 42,717
Manufacturing and sales of telephone
test equipment (132,313) (106,574) (165,156) (75,715)
- ------------------------------------------- ---------------- --------------- ---------------- ---------------
Total operating income (loss) $ 626,082 647,746 $ 156,052 $ 301,754
=========================================== ================ =============== ================ ===============
December 31, 2000 June 30, 2000
(Unaudited)
Identifiable assets:
Commercial and industrial laundry and dry
cleaning equipment $ 5,952,930 $ 5,043,287
License and franchise operations 848,414 981,505
Manufacturing and sales of telephone test
equipment 2,306,181 2,559,252
- ---------------------------------------------------- ---------------------------- ---------------------------
Total assets $ 9,107,525 $ 8,584,044
==================================================== ============================ ===========================
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MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
For the six months ended December 31, 2000, cash decreased by $705,425, compared
to a decrease of $602,262 for the six month period ended December 31, 1999.
For the first six months of fiscal 2001, operating activities used cash of
$1,076,451, principally to support an increase in accounts, mortgages and lease
receivables ($776,494) and inventories ($669,385) and to reduce accounts payable
and accrued expenses ($238,296) and income taxes payable ($281,944). These uses
were partially offset by the Company's net income of $342,409, non-cash expenses
of $77,791 for depreciation and amortization and $172,878 in the allowance for
bad debts. Additional cash was provided by an increase in customer deposits
($235,558) and a decrease in prepaid expenses ($61,032).
Of the cash generated by operating activities for the first six months of fiscal
2000 ($195,079), $347,167 was provided by net income and $62,578 and $3,641 was
adjusted for non-cash expenses for depreciation and amortization and bad debts,
respectively. Additional cash was provided by a decrease in accounts, mortgages
and lease receivables ($432,108), pre-paid expenses ($5,970) and customer
deposits ($76,960). Cash was also used to support an increase in inventories
($408,048) and to decrease accounts payable and accrued expenses ($279,416) and
income taxes payable ($45,881).
For the first six months of fiscal 2001, investing activities used cash of
$94,727 to purchase capital assets. During the six month period ended December
31, 1999, investing activities used cash of $641,341 to fund the acquisition of
certain assets of DRYCLEAN USA Company, including the worldwide rights to the
name DRYCLEAN USA and existing franchise and license agreements, for $550,000
and $91,341 to purchase other capital assets.
Financing activities for the first six months of fiscal 2001 provided cash of
$465,753 principally due to the borrowing of $694,503 under the Company's line
of credit and $11,250 from the exercise of stock options. This was offset by the
monthly installment payments on the Company's term loan (an aggregate payment of
$240,000). During the same period of fiscal 2000, financing activities used cash
of $156,000, mostly to make payments on the Company's term loan ($240,000),
which was offset, in part, by borrowing $64,000 under the Company's line of
credit and $20,000 received from the exercise of stock options.
The Company believes that its present cash, cash it expects to generate from
operations and the remaining cash available ($1,555,497) for borrowing under its
$2,250,000 line of credit will be sufficient to meet its operational needs.
-8-
RESULTS OF OPERATIONS
- ---------------------
Total revenues for the six and three month periods ended December 31, 2000
increased by $432,112 (4.8%) and $251,529 (5.8%), respectively, over the same
periods of fiscal 2000. For the six month period revenues of the laundry and dry
cleaning equipment segment increased by $350,007 (4.8%) primarily due to
increased sales of dry cleaning machines partially offset by reduced sales of
boiler equipment. For the three month period sales of laundry and dry cleaning
equipment increased by $486,655 (14.2%) mostly due to increased sales volume of
dry cleaning machines, which offset a decrease in sales of boiler equipment and
parts. The Company's license and franchise segment, which was acquired in July
1999, increased its revenues by $191,708 (168.2%) and $27,228 (36.9%) for the
six and three month periods, respectively, mostly due to increased initial fees
and increased royalty payments. Sales of the Company's telecommunications
segment decreased by $109,603 (7.0%) and $262,354 (32.4%) for the six and three
month periods, respectively. The decrease in sales is believed to be
attributable to an industry slowdown coupled with historical year end budget
constraints of telephone companies (which did not seem to apply in fiscal 2000).
Costs of goods sold, expressed as a percentage of net sales, increased to 71.8%
and 72.5% for the six and three month period, respectively, of fiscal 2001 from
70.8% and 68.8% for the comparable periods of fiscal 2000. The increase for both
periods was mostly due to the reduced sales volume of the telecommunications
segment which affected the segment's ability to absorb its fixed expenses.
Selling, general and administrative expenses increased by $232,214 (10.9%) and
$77,111 (6.8%) for the six and three month periods, respectively, in fiscal 2001
from the comparable periods of fiscal 2000. The increase in both periods was
mostly attributed to increases in the allowance for bad debts at the commercial
and industrial laundry and dry cleaning segment and increased advertising
expenses in the telecommunication segment. The increase in the reserve for bad
debts was primarily attributable to a $75,000 reserve against accounts
receivable from an entity controlled by one of the Company's principal
shareholders.
Research and development expenses, which relate solely to the telecommunications
operations, decreased by $69,299 (53.8%) and $33,560 (50.5%) for the six and
three month periods, respectively, from the same periods of a year ago. These
reductions are mainly due to a reduction in salary expense while the segment is
continuing its search for a new Director of Engineering.
Interest income increased by $4,849 (32.1%) and $475 (8.3%) for the six and
three month periods, respectively, of fiscal 2001, over the comparable periods
of fiscal 2000 as a result of increased mortgages and interest earned on daily
bank balances.
-9-
Interest expense decreased by $8,885 (10.5%) and $4,542 (10.9%) for the six and
three month periods, respectively, of fiscal 2001 over the same periods of
fiscal 2000 attributable to a reduction in outstanding debt, which was partially
offset by higher interest rates and increased borrowing against the Company's
line of credit.
The effective tax rate used in each of the periods was 40%
Inflation has not had a significant effect on the Company's operations during
the reported periods.
NEW ACCOUNTING PRONOUNCEMENTS
- -----------------------------
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 establishes accounting and
reporting standards for derivative instruments, including derivative instruments
embedded in other contracts, and for hedging activities. SFAS 133 was amended by
SFAS 138 in June 1999 and is effective, as amended, for all fiscal quarters of
fiscal years beginning after June 15, 2000. The adoption of SFAS 133 did not
have a material impact on the Company's earnings or financial position.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin 101, "Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101
provides guidance on the recognition, presentation and disclosure of revenues in
financial statements and requires adoption no later than the fourth fiscal
quarter of fiscal years beginning after December 15, 1999. The Company
implemented SAB 101 effective July 1, 2000, and its adoption did not have a
material impact on the Company's earnings or financial position.
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities." SFAS 140
provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities. SFAS 140 replaces SFAS No.
125 and is effective for transfers and servicing of financial assets and
extinguishments occurring after March 31, 2001. SFAS 140 is effective for
recognition and reclassification of collateral and for disclosures relating to
securitization transactions and collateral for fiscal years ending after
December 15, 2000. The adoption of SFAS 140 did not materially impact the
Company's earnings or financial position.
In March 2000, the FASB issued FASB 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-Based Compensation. Interpretation 44 was effective
July 1, 2000, with certain provisions that were effective retroactively to
December 15, 1998 and January 12, 2000. The adoption of Interpretation 44 did
not have an impact on the Company's consolidated financial statements.
-10-
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
------------------
The Company's wholly-owned subsidiary, Steiner-Atlantic Corp.
("Steiner-Atlantic") was named as one of 17 defendants in an Amended Original
Petition filed in the District Court of Harris County, Texas on or about August
17, 2000 by 8880 Bellaire LP, the owner of a shopping center at 8880 Bellaire,
Houston, Texas (the "Property"). The plaintiff alleges, among other things, that
Steiner-Atlantic and another defendant were sellers of dry cleaning equipment
manufactured by other defendants that was used at the Property by other
defendants who, over a period of approximately 20 years, were the tenants (or,
in one case, a lease guarantor) operating a series of retail dry cleaning
establishments at the Property. The plaintiff alleges that the groundwater
and/or soil beneath the Property was contaminated as a result of leaks,
discharges and/or spills of contaminants caused by the defendants' manufacture,
sale and/or use of the dry cleaning equipment. The plaintiff seeks an
unspecified amount of damages for the alleged diminution in value of the
Property, the cost of clean up and remediation and restrictions on the
plaintiff's right to capture the groundwater beneath the Property and its future
use, exemplary damages, interest, attorneys fees, costs and such other relief to
which plaintiff may be entitled. The Company believes that, if it is found
liable for any damages, such amounts would be covered by insurance or under
indemnification from the equipment manufacturer. The Company also does not
expect to incur significant defense costs.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: February 13, 2001 DRYCLEAN USA, Inc.
By: /s/ Vernerando J. Indelicato
----------------------------------
Venerando J. Indelicato
Treasurer and Chief Financial
Officer
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