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 -2- 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 ==================================================== ============================ ===========================
-7- 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 -11-