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 nine months ended March 31, 2001
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 May 8, 2001.
DRYCLEAN USA, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
- ----------------------------------------- --------------------------------- ---------------------------------
For the nine months For the three months
ended March 31, ended March 31,
2001 2000 2001 2000
(Unaudited) (Unaudited)
- ----------------------------------------- --------------------------------- ---------------------------------
Sales $13,549,820 $13,726,000 $ 4,613,841 $5,085,375
Franchise and license fees and other
income 656,130 584,386 119,574 184,589
Total revenues 14,205,950 14,310,386 4,733,415 5,269,964
---------- ---------- --------- ---------
Cost of goods sold 9,867,432 9,696,738 3,451,341 3,571,508
Selling, general and administrative
expenses 3,450,752 3,268,310 1,079,910 1,129,686
Research and development 93,076 198,537 33,554 69,716
---------- ---------- --------- ---------
Total 13,411,260 13,163,585 4,564,805 4,770,910
Operating income 794,690 1,146,801 168,610 499,054
Other income (expenses)
Interest income 25,082 21,092 5,140 5,999
Interest expense (111,140) (124,461) (35,798) (40,233)
---------- ---------- --------- ---------
Total (86,058) (103,369) (30,658) (34,234)
Earnings before taxes 708,632 1,043,432 137,952 464,820
Provision for income taxes 283,453 417,373 55,181 185,928
---------- ---------- --------- ---------
Net earnings $ 425,179 $ 626,059 $ 82,771 $ 278,892
========================================= ================ ================ ================ ================
Basic earnings per share $ .06 $ .09 $ .01 $ .04
Diluted earnings per share $ .06 $ .09 $ .01 $ .04
Weighted average number of shares
outstanding
Basic 7,001,250 6,940,556 7,001,250 6,958,333
Diluted 7,170,335 7,338,037 7,049,881 7,431,297
========================================= ================ ================ ================ ================
See Notes to Condensed Consolidated Financial Statements.
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DRYCLEAN USA, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 2001 June 30, 2000
-------------- -------------
(Unaudited)
ASSETS
- ------
CURRENT ASSETS
Cash and cash equivalents $ 322,687 $ 982,588
Accounts receivable, net 1,949,117 2,065,761
Inventories 4,334,352 4,103,680
Current portion of lease, notes and mortgages
receivables 384,687 105,394
Deferred income taxes 46,135 46,135
Prepaid expenses and other 177,391 270,170
------------- -------------
Total current assets 7,214,369 7,573,728
Lease, notes and mortgages receivables due after
one year 20,171 45,519
Equipment and improvements - net of
accumulated depreciation and
amortization 355,799 340,342
Franchise, trademarks and other intangible 635,233 621,941
assets, net
Deferred tax asset 2,514 2,514
-------------- --------------
$8,228,086 $8,584,044
============== ==============
See Notes to Condensed Consolidated Financial Statements.
-3-
DRYCLEAN USA, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 2001 June 30, 2000
-------------- -------------
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 1,069,667 $ 1,301,537
Current portion of bank loan 480,000 480,000
Customer deposits 455,822 374,396
Income taxes payable - 281,944
------------------ -------------
Total current liabilities 2,005,489 2,437,877
Long term loan less current portion 800,000 1,160,000
-------------- ------------
Total liabilities 2,805,489 3,597,877
SHAREHOLDERS' EQUITY
Common stock, $.025 par value; 15,000,000 shares authorized; 7,027,500 and
7,016,250 shares issued and outstanding at March 31, 2001 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 3,198,338 2,773,159
----------- -----------
Total shareholders' equity 5,422,597 4,986,167
------------ -------------
$ 8,228,086 $ 8,584,044
=========== ===========
See Notes to Condensed Consolidated Financial Statements.
-4-
DRYCLEAN USA, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended Nine months ended
March 31, March 31,
2001 2000
(Unaudited) (Unaudited)
----------- -----------
Operating activities:
Net earnings $ 425,179 $ 626,059
Adjustments to reconcile net earnings to net cash (used) provided by
operating activities:
Bad debt expense 180,241 3,641
Depreciation and amortization 118,455 98,229
Net changes in operating assets and liabilities:
(Increase) decrease in:
Accounts, mortgages and lease receivables (317,539) (152,554)
Inventories (230,672) (27,759)
Prepaid expenses and other assets 92,779 (30,833)
Increase (decrease) in:
Accounts payable and accrued expenses (231,870) 40,585
Customer deposits 81,426 (1,670)
Income taxes payable (281,944) 140,048
------------- ------------
Net cash (used) provided by operating activities (163,945) 695,746
------------- ------------
Investing activities:
Capital expenditures (147,206) (733,292)
------------- -------------
Net cash used by investing activities (147,206) (733,292)
------------- -------------
Financing activities
Payments on term loan (360,000) (360,000)
Proceeds from exercise of stock options 11,250 50,000
--------------- --------------
Net cash used by financing activities (348,750) (310,000)
------------- --------------
Net decrease in cash and cash equivalents (659,901) (347,546)
Cash and cash equivalents at beginning of period 982,588 964,768
-------------- --------------
Cash and cash equivalents at end of period $ 322,687 $ 617,222
================================================================== ==================== =====================
Supplemental information:
Cash paid for interest $ 111,140 $ 124,461
Cash paid for income taxes 635,950 277,325
See Notes to Condensed Consolidated Financial Statements.
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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 was 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.
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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.
-7-
Note (3) continued
Financial information for the Company's business segments is as follows:
For the nine months For the three months
ended March 31, ended March 31,
2001 2000 2001 2000
(Unaudited) (Unaudited)
- ----------------------------------------- --------------------------------- ---------------------------------
Revenues
Commercial and industrial laundry
and drycleaning equipment $ 11,642,493 $ 11,558,495 $ 3,930,987 $ 4,196,994
Manufacturing and sales of telephone
test equipment 2,186,645 2,521,771 731,276 956,799
License and franchise operations 376,812 230,120 71,152 116,171
- ----------------------------------------- ---------------- ---------------- ---------------- ----------------
Total revenues $ 14,205,950 $ 14,310,386 $ 4,733,415 $ 5,269,964
========================================= ================ ================ ================ ================
Operating income (loss)
Commercial and industrial laundry
and drycleaning equipment $ 708,184 $ 1,052,403 $ 173,487 $ 359,426
Manufacturing and sales of telephone
test equipment (169,509) (27,491) (37,195) 79,082
License and franchise operations 256,015 121,889 32,318 62,546
- ----------------------------------------- ---------------- ---------------- ---------------- ----------------
Total operating income $ 794,690 $ 1,146,801 $ 168,610 $ 501,054
========================================= ================ ================ ================ ================
March 31, 2001
(Unaudited) June 30, 2000
Identifiable assets:
Commercial and industrial laundry
and drycleaning equipment $ 5,017,149 $ 5,043,287
Manufacturing and sales of telephone
test equipment 2,402,721 2,559,252
License and franchise operations 808,216 981,505
- ----------------------------------------- --------------------------------- ---------------------------------
Total assets $ 8,228,086 $ 8,584,044
========================================= ================================= =================================
-8-
Management's Discussion and Analysis
Or Plan of Operation
Liquidity and Capital Resources
- -------------------------------
For the nine months ended March 31, 2001, cash decreased by $659,901 compared to
a decrease of $347,546 for the nine month period ended March 31, 2000.
For the first nine months of fiscal 2001, operating activities used cash of
$163,945, principally to support an increase in accounts, mortgages and lease
receivables ($317,539) and inventories ($230,672) and to reduce accounts payable
and accrued expenses ($231,870) and income taxes payable ($281,944). These uses
were partially offset by the Company's net income of $425,179, non-cash expenses
of $118,455 for depreciation and amortization and $180,241 for bad debt expense.
Additional cash was provided by an increase in customer deposits ($81,426) and a
decrease in pre-paid expenses ($92,779).
Of the $695,746 of cash generated by operating activities for the first nine
months of fiscal 2000, $626,059 was provided by net income and $98,229 and
$3,641 was derived from non-cash expenses for depreciation and amortization and
bad debts, respectively. Additional cash was used by an increase in accounts,
mortgages and lease receivables ($152,554), inventories ($27,759), pre-paid
expenses ($30,833) and a decrease in customer deposits ($1,670). Cash was also
provided by an increase in accounts payable and accrued expenses ($40,585) and
income taxes payable ($140,048).
For the first nine months of fiscal 2001, investing activities used cash of
$147,206 to purchase capital assets. During the nine month period ended March
31, 2000, investing activities used cash of $733,292 to fund the acquisition of
DRYCLEAN USA License Corp. for $550,000 and $91,341 for transaction costs,
$80,000 to acquire the rights to certain products already marketed by the
telecommunications segment under a royalty agreement and $11,951 to purchase
other capital assets.
Financing activities, for the first nine months of fiscal 2001, used cash of
$348,750 principally to make payments on the Company's term loan ($360,000)
which was partially offset by $11,250 obtained from the exercise of stock
options. During the same period of fiscal 2000, financing activities used cash
of $310,000, with payments on the Company's term loan ($360,000) being offset,
in part, by $50,000 obtained from the exercise of stock options.
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, 2001, subject to renewal at the discretion of the lender). As to the
$1,280,000 principal amount outstanding under its term loan at March 31, 2001,
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.
-9-
Results of Operations
- ---------------------
Total revenues for the nine and three month periods ended March 31, 2001
decreased by $104,436 (.7%) and $536,549 (10.2%), respectively, from the same
periods of fiscal 2000. For the nine month period in fiscal 200l, revenues of
the laundry and dry cleaning equipment segment increased by $83,998 (.7%)
primarily due to increased sales of dry cleaning machines, partially offset by
reduced sales of boiler equipment. For the three month period, revenues of this
segment decreased by $266,007 (6.3%) mostly due to a decrease in dry cleaning
equipment sales. Sales of the Company's telecommunications segment decreased by
$335,126 (13.3%) and $225,523 (23.6%) for the nine and three month periods in
fiscal 2001, respectively. The decrease in sales for each period is believed
attributable to an industry slowdown. Although the telecommunication segment
implemented some selective price increases on January 1, 2001, its effect on
results of operations for the three and nine month reported periods were not
material. The Company's license and franchise segment, which was acquired in
July 1999, increased its revenues by $146,692 (63.7%) for the nine month period
, mostly due to increased initial fees and increased royalty payments. However,
revenues for the three month period decreased by $45,019 (38.8%) , primarily as
a result of the opening of a fewer number of licensed and franchised units in
the period compared to the similar period in the prior year.
Costs of goods sold, expressed as a percentage of net sales, increased to 72.8%
and 74.8% for the nine and three month periods, respectively, of fiscal 2001
from 70.6% and 70.2% 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 $182,442 (5.6%) for
the first nine months of fiscal 2001 over the same period of fiscal 2000
primarily as a result of an increase in the allowance for bad debts in the
commercial and industrial laundry and dry cleaning segment and increased selling
expenses in the telecommunications 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. Selling, general and administrative expenses decreased by $49,776
(4.4%) for the three months ended March 31, 2001 principally due to reduced
expenses for commissions, exhibits and conventions in the dry cleaning and
laundry equipment segment, which offset an increase in selling expense for the
telecommunications segment.
Research and development expenses, which relate solely to the telecommunications
segment, decreased by $105,461 (53.1%) and $36,162 (51.9%) for the nine and
three month periods, respectively, from the same periods in the prior year.
These reductions were mainly due to a reduction in salary expense while the
Company is continuing its search for a new Director of Engineering.
-10-
Interest income increased by $3,990 (18.9%) for the nine month period, but
decreased by $859 (14.3%) for the three month period of fiscal 2001 compared to
the same periods of fiscal 2000. The increase for the nine month period was due
primarily to an increase in mortgage loans made by the Company during the first
six months of fiscal 2001. The decrease for the third quarter of fiscal 2001 was
due to a reduction in interest earned on daily bank balances.
Interest expense decreased by $13,321 (10.7%) and $4,435 (11.0%) for the nine
and three month periods, respectively, of fiscal 2001 from the same periods of
fiscal 2000 due to a reduction in outstanding debt and reduced interest rates,
partially offset by periodic borrowings against the Company's line credit.
The effective tax rate used in each of the periods was 40%.
Effects of Inflation
- --------------------
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.
-11-
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.
Forward Looking Statements
- --------------------------
Certain statements in this Report under the caption "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 II - OTHER INFORMATION
Not Applicable.
-12-
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: May 11, 2001 DRYCLEAN USA, Inc.
By:/s/ Venerando J. Indelicato
-----------------------------
Venerando J. Indelicato
Treasurer and Chief Financial
Officer
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