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 quarterly period ended September 30, 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 November 9, 2001.
PART I
Financial Information
DRYCLEAN USA, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
- --------------------------------------------------------------------------------
For the three months ended
September 30,
2001 2000
(Unaudited) (Unaudited)
- ----------------------------------------------------------------------------------
Net sales $ 3,823,114 $ 4,574,476
Management, franchise and license fees,
commissions and other income 219,329 340,875
- ----------------------------------------------------------------------------------
Total revenues 4,042,443 4,915,351
Cost of sales 2,991,322 3,253,127
Selling, general and
administrative expenses 1,097,519 1,165,522
Research and development expenses 21,286 26,672
- ----------------------------------------------------------------------------------
Total Operating Expenses 4,110,127 4,445,321
Operating (loss) income (67,684) 470,030
Interest income 4,114 13,752
Interest expense (19,596) (38,300)
- ----------------------------------------------------------------------------------
Earnings (loss) before income taxes (83,166) 445,482
Provision (benefit) for income taxes (33,266) 178,200
- ----------------------------------------------------------------------------------
Net (loss) earnings $ (49,900) $ 267,282
==================================================================================
Basic (loss) earnings per share $ (.01) $ .04
Diluted (loss) earnings per share $ (.01) $ .04
==================================================================================
Weighted average number of shares
of common stock outstanding:
Basic 7,001,250 7,001,250
Diluted 7,001,250 7,252,856
==================================================================================
See Notes to Condensed Consolidated Financial Statements
-2-
DRYCLEAN USA, Inc
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
- --------------------------------------------------------------------------------
September 30, June 30,
2001 2001
(Unaudited)
- --------------------------------------------------------------------------------
Current Assets
Cash and cash equivalents $ 176,947 $ 375,912
Accounts receivable, net 2,368,610 2,122,493
Inventories 4,570,234 4,373,519
Refundable income taxes 257,363 257,363
Lease receivables 33,695 39,494
Deferred income tax asset 69,337 69,337
Other current assets, net 227,227 190,548
- --------------------------------------------------------------------------------
Total current assets 7,703,413 7,428,666
Lease receivables, due after one year 3,219 5,238
Equipment and improvements - net of
accumulated depreciation and amortization 376,589 329,511
Franchise, trademarks and other
intangible assets, net 541,011 551,718
Deferred income tax asset 12,786 12,786
- --------------------------------------------------------------------------------
$8,637,018 $8,327,919
================================================================================
See Notes to Condensed Consolidated Financial Statements
-3-
DRYCLEAN USA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND
STOCKHOLDERS' EQUITY
- ---------------------------------------------------------------------------------
September 30, June 30,
2001 2001
(Unaudited)
- ---------------------------------------------------------------------------------
Current Liabilities
Accounts payable and
accrued expenses $1,011,265 $1,474,733
Line of credit 963,146 --
Customer deposits and other 552,619 573,298
Notes payable 1,040,000 1,160,000
- -----------------------------------------------------------------------------------
Total current liabilities 3,567,030 3,208,031
- -----------------------------------------------------------------------------------
Total liabilities 3,567,030 3,208,031
Stockholders' Equity
Common stock, $.025 par value,
15,000,000 shares authorized;
7,027,500 shares issued and
outstanding at September 30,
and June 30, 2001, including
26,250 shares held in treasury 175,688 175,688
Additional paid-in capital 2,048,570 2,048,570
Retained earnings 2,845,730 2,895,630
- -----------------------------------------------------------------------------------
Total shareholders' equity 5,069,988 5,119,888
- -----------------------------------------------------------------------------------
$8,637,018 $8,327,919
===================================================================================
See Notes to Condensed Consolidated Financial Statements
-4-
DRYCLEAN USA, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
- ------------------------------------------------------------------------------------------------
For the three months ended
SEPTEMBER 30,
2001 2000
(Unaudited) (Unaudited)
- ------------------------------------------------------------------------------------------------
Operating activities:
Net (loss) earnings $ (49,900) $ 267,282
Adjustments to reconcile net earnings:
to net cash used by operating activities
Depreciation and amortization 39,804 38,701
Bad debt expense -- 81,619
(Increase) decrease in operating assets:
Accounts, notes and lease receivables (238,299) (493,568)
Inventories (196,715) (362,510)
Other current assets (36,679) 8,723
Increase (decrease) in operating liabilities:
Accounts payable and accrued expenses (463,468) (123,324)
Income taxes payable -- (155,249)
Customer deposits and other (20,679) 194,109
- ------------------------------------------------------------------------------------------------
Net cash used in operating activities (965,936) (544,217)
- ------------------------------------------------------------------------------------------------
Investing activities:
Capital expenditures, net (68,172) (78,954)
Increase in patents (8,003) --
- ------------------------------------------------------------------------------------------------
Net cash used in investing activities (76,175) (78,954)
- ------------------------------------------------------------------------------------------------
Financing activities:
Borrowings under line of credit 963,146 228,613
Payments on term loan (120,000) (120,000)
Proceeds from the exercise of stock options -- 11,250
- ------------------------------------------------------------------------------------------------
Net cash provided by financing activities 843,146 119,863
- ------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (198,965) (503,308)
Cash and cash equivalents at beginning of perio 375,912 982,588
- ------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 176,947 $ 479,280
================================================================================================
Supplemental disclosures of cash flow
information
Cash paid during the period for
Interest $ 19,596 $ 38,300
Income taxes 12,170 333,449
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 in the Company's Annual Report on Form 10-KSB
for the year ended June 30, 2001. The June 30, 2001 balance sheet information
contained herein was derived from the audited consolidated financial statements
included in the Company's Annual Report on Form 10-KSB as of that date.
NOTE (2) - NEW ACCOUNTING PRONOUNCEMENTS:
In June 2001, the Financial Accounting Standard Board issued FASB Statements No.
141, Business Combinations (SFAS 141), and No. 142, Goodwill and Other
Intangible Assets (SFAS 142). SFAS 141 requires the use of the purchase method
of accounting for business combinations initiated after June 30, 2001. SFAS 141
also requires that the Company recognize acquired intangible assets apart from
goodwill if the acquired intangible assets meet certain criteria. SFAS 141
applies to all business combinations initiated after June 30, 2001 and for
purchase business combinations completed on or after July 1, 2001. It also
requires, upon adoption of SFAS 142, that the Company reclassify the carrying
amounts of intangible assets and goodwill based on the criteria in SFAS 141.
SFAS No. 142 requires, among other things, that companies no longer amortize
goodwill, but instead test goodwill for impairment at least annually. In
addition, SFAS 142 requires that the Company identify reporting units for the
purposes of assessing potential future impairments of goodwill, reassess the
useful lives of other existing recognized intangible assets, and cease
amortization of intangible assets with an indefinite useful life. An intangible
asset with an indefinite useful life should be tested for impairment in
accordance with the guidance in SFAS 142. SFAS 142 is required to be applied in
fiscal years beginning after December 15, 2001 to all goodwill and other
intangible assets recognized at that date, regardless of when those assets were
initially recognized. SFAS 142 requires the Company to complete a transitional
goodwill impairment test six months from the date of adoption. The Company is
also required to reassess the useful lives of other intangible assets within the
first interim quarter after adoption of SFAS 142.
-6-
The Company's previous business combinations were accounted for using the
purchase method. As of September 30, 2001, the net carrying amount of other
intangible assets is $541,011. Amortization expense during the three months
ended September 30, 2001 and 2000 was $19,033 and $21,421, respectively. There
was no goodwill at September 30, 2001. Currently, the Company is assessing but
has not yet determined how the adoption of SFAS 141 and SFAS 142 will impact its
financial position and results of operations.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. This Statement addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. This Statement
supersedes FASB Statement No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of, and the accounting and
reporting provisions of APB Opinion No. 30, Reporting the Effects of Disposal of
a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions, for the disposal of a segment of a business (as
previously defined in that Opinion). This Statement also amends ARB No. 51,
Consolidated Financial Statements, to eliminate the exception to consolidation
for a subsidiary for which control is likely to be temporary. The provisions of
this Statement are effective for financial statements issued for fiscal years
beginning after December 15, 2001, and interim periods within those fiscal
years, with early application encouraged. The provisions of this Statement
generally are to be applied prospectively. Currently, the Company is assessing
but has not yet determined how the adoption of SFAS No. 144 will impact its
financial position and results of operations.
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:
-7-
For the three months ended
September 30,
2001 2000
(Unaudited) (Unaudited)
- -------------------------------------------------------------------------------------
Revenues:
Commercial and industrial laundry and
dry cleaning equipment $ 3,447,741 $ 3,803,088
Manufacturing and sales of telephone
test equipment 510,283 907,544
License and franchise operations 84,419 204,719
- -------------------------------------------------------------------------------------
Total revenues $ 4,042,443 $ 4,915,351
=====================================================================================
Operating (loss) income
Commercial and industrial laundry and
dry cleaning equipment $ (43,868) $ 260,307
Manufacturing and sales of telephone
test equipment (81,209) 32,843
License and franchise operations 57,393 176,880
- -------------------------------------------------------------------------------------
Total operating (loss) income $ (67,684) $ 470,030
=====================================================================================
SEPTEMBER 30, June 30
2001 2001
(Unaudited) (Unaudited)
----------- -----------
Identifiable assets:
Commercial and industrial laundry and
dry cleaning equipment $ 5,479,376 $ 5,076,391
Manufacturing and sales of telephone
test equipment 2,427,960 2,452,098
License and franchise operations 729,682 799,430
- -------------------------------------------------------------------------------------
Total assets $ 8,637,018 $ 8,327,919
=====================================================================================
-8-
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
LIQUIDITY AND CAPITAL RESOURCES
The three month period ended September 30, 2001, cash decreased by $198,965
compared to a decrease of $503,308 for the three months ended September 30,
2000.
For the first three months of fiscal 2002, operating activities used cash of
$965,936, principally to support increases in accounts and lease receivables
($238,299), inventories ($196,715) and other current assets ($36,679) and a
decrease in customer deposits ($20,679), as well as to reduce accounts payable
and accrued expenses ($463,468). Additional cash was used to fund an operating
loss ($49,900), which included non-cash expenses of $39,804 for depreciation and
amortization.
For the three months ended September 30, 2000, operating activities used cash of
$544,217, principally to support an increase in accounts and lease receivables
($493,568) and inventories ($362,510) and to reduce accounts payable and accrued
expenses ($123,324) and income taxes payable ($155,109). These uses were
partially offset by $267,282 provided by the Company's net income, supplemented
by non-cash expenses of $38,701 for depreciation and amortization and $81,619 in
bad debt expense. Additional cash was provided by an increase in customer's
deposits ($194,109) and prepaid expenses ($8,723).
Net cash used in investing activities for the first quarter of fiscal 2002 was
$76,175, principally to purchase equipment ($68,172) and to fund patent work
($8,003). During the first quarter of fiscal 2001, investing activities used
cash of $78,954 mostly to acquire capital assets.
Financing activities provided cash of $843,146 for the three month period ended
September 30, 2001, principally due to the borrowing of $963,146 under the
Company's line of credit, which was partially offset by the monthly installment
payments made on the Company's term loan ($120,000). For the first quarter of
fiscal 2001 financing activities provided cash of $119,863 principally due to
borrowing $228,613 under the Company's line of credit and $11,250 of proceeds
from the exercise of stock options, which was offset by payments made on the
Company's term loan ($120,000). The Company's Board of Directors has authorized
the Company to repurchase up to 250,000 shares of Common Stock from time to time
in open market and privately negotiated transactions, subject to general market
and other conditions. Following the close of the first quarter of fiscal 2002,
the Company purchased 300 shares, its first purchase under this authorization.
The Company believes that its present cash, cash it expects to generate from
operations and cash borrowings available under its $2,250,000 line of credit
will be sufficient to meet its operational needs. The Company's credit line,
which matures on October 30, 2001, has been extended to December 30, 2001. The
Company is required to make monthly payments of $40,000 until January 2002 under
its term loan, when the remaining $960,000
-9-
will become due. The Company is currently negotiating with its lender and
believes it will be able to refinance such debt and obtain a new line of credit
at that time.
RESULTS OF OPERATIONS
Total revenues for the three month period ended September 30, 2001 decreased by
$872,908 (17.8%) from the same period of fiscal 2001. Revenues of the laundry
and dry cleaning equipment segment decreased by $355,347 (9.3%) due to a
reduction in sales in most categories of equipment, the economy and the recent
terrorist attacks, which have reduced occupancies in existing hotels and cruise
lines, which are significant customers of this segment. This reduction offset an
increase in brokerage commissions of $19,425 (30.0%). Revenues of the Company's
license and franchise segment decreased by $120,300 (58.8%) as a result of the
opening of a fewer number of licensed and franchised units. Sales of the
Company's telecommunications segment decreased by $397,261 (43.8%), principally
due to the downturn in the economy which has depressed the telecommunications
market.
Cost of goods sold, expressed as a percentage of net sales, increased to 78.2%
in the first quarter of fiscal 2002 from 71.1% for the first quarter of fiscal
2001. The increase was mostly due to the reduced sales in both the
telecommunications and the laundry and dry cleaning segments which affected the
segment's ability to absorb fixed expenses. In addition, the laundry and dry
cleaning segment had a lower margin mix of sales.
Selling, general and administrative expenses during the first quarter of fiscal
2002 decreased by $68,003 (5.8%) from the same period of a year ago. The
decrease was mostly attributable to a 35.3% decrease in expenses in the
telecommunications segment due to a substantial reduction in advertising and
selling expenses. This offset a 2.3% increase in this category of expenses for
the laundry and dry cleaning segment due to increases in payroll, consulting
services and advertising, which offset a reduction in bad debt expense. Selling,
general and administration expenses for the license and franchising segment
remained relatively flat for the period.
Research and development expenses decreased by $5,386 (20.2%) in the first
quarter of fiscal 2002 from the first quarter of fiscal 2001. The reduction was
mostly attributable to the reduction in engineering staff at the
telecommunications segment, which offset an increase in start-up research and
development expenses in the laundry and dry cleaning segment
Interest income decreased by $9,638 (70.1%) from the same prior year period as a
result of fewer outstanding customer leases of laundry and dry cleaning
equipment and a reduction in interest earned on daily bank balances due to lower
average cash balances on hand and lower prevailing interest rates.
Interest expense decreased by $18,704 (48.8%) in the first quarter of fiscal
2002 from the same period in fiscal 2001, primarily due to a reduction in the
amount of term loan debt
-10-
outstanding and reduced interest rates, partially offset by periodic borrowings
against the Company's line of 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 period.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standard Board issued FASB Statements No.
141, Business Combinations (SFAS 141), and No. 142, Goodwill and Other
Intangible Assets (SFAS 142). SFAS 141 requires the use of the purchase method
of accounting for business combinations initiated after June 30, 2001. SFAS 141
also requires that the Company recognize acquired intangible assets apart from
goodwill if the acquired intangible assets meet certain criteria. SFAS 141
applies to all business combinations initiated after June 30, 2001 and for
purchase business combinations completed on or after July 1, 2001. It also
requires, upon adoption of SFAS 142, that the Company reclassify the carrying
amounts of intangible assets and goodwill based on the criteria in SFAS 141.
SFAS No. 142 requires, among other things, that companies no longer amortize
goodwill, but instead test goodwill for impairment at least annually. In
addition, SFAS 142 requires that the Company identify reporting units for the
purposes of assessing potential future impairments of goodwill, reassess the
useful lives of other existing recognized intangible assets, and cease
amortization of intangible assets with an indefinite useful life. An intangible
asset with an indefinite useful life should be tested for impairment in
accordance with the guidance in SFAS 142. SFAS 142 is required to be applied in
fiscal years beginning after December 15, 2001 to all goodwill and other
intangible assets recognized at that date, regardless of when those assets were
initially recognized. SFAS 142 requires the Company to complete a transitional
goodwill impairment test six months from the date of adoption. The Company is
also required to reassess the useful lives of other intangible assets within the
first interim quarter after adoption of SFAS 142.
The Company's previous business combinations were accounted for using the
purchase method. As of September 30, 2001, the net carrying amount of other
intangible assets is $541,011. Amortization expense during the three months
ended September 30, 2001 and 2000 was $19,033 and $21,421, respectively. There
was no goodwill at September 30, 2001. Currently, the Company is assessing but
has not yet determined how the adoption of SFAS 141 and SFAS 142 will impact its
financial position and results of operations.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. This Statement addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. This Statement
supersedes
-11-
FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of, and the accounting and reporting
provisions of APB Opinion No. 30, Reporting the Effects of Disposal of a Segment
of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions, for the disposal of a segment of a business (as previously defined
in that Opinion). This Statement also amends ARB No. 51, Consolidated Financial
Statements, to eliminate the exception to consolidation for a subsidiary for
which control is likely to be temporary. The provisions of this Statement are
effective for financial statements issued for fiscal years beginning after
December 15, 2001, and interim periods within those fiscal years, with early
application encouraged. The provisions of this Statement generally are to be
applied prospectively. Currently, the Company is assessing but has not yet
determined how the adoption of SFAS No. 144 will impact its financial position
and results of operations.
FORWARD LOOKING STATEMENT
Certain statements in this Report under the captions. 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; the effects on hotels and cruise lines, significant customers
for the Company's laundry equipment, of the recent terrorist attacks; 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; changes in, or the
failure to comply with, government regulation, principally environmental
regulations; and the Company's ability to successfully introduce, market and
sell at acceptable profit margins its new Green Jet(TM) dry cleaning machines.
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.
-12-
PART II
Other Information
Item 4. Submission of Matters to a Vote of Securityholders.
At the Company's 2001 Annual Meeting of Stockholders held on November 9,
2001, the Company's stockholders reelected the Company's then existing Board of
Directors by the following votes:
Votes
----------------------------------
For Withheld
--- --------
Michael S. Steiner 6,507,370 28,297
William K. Steiner 6,504,613 31,054
Venerando J. Indelicato 6,502,382 33,285
David Blyer 6,503,964 31,703
Lloyd Frank 6,509,305 26,362
Alan Grunspan 6,509,234 26,433
Stuart Wagner 6,503,964 31,703
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
4.1 Letter agreement dated October 22, 2001 between the Company and
First Union National Bank of Florida
(b) Reports on Form 8-K
No Reports on Form 8-K were filed during the quarter covered by this report.
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: November 9, 2001 DRYCLEAN USA, Inc.
By: /s/ Venerando J. Indelicato
---------------------------
Venerando J. Indelicato,
Treasurer and Chief Financial
Officer
-13-
EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
4.1 Letter agreement dated October 22, 2001 between the Company and
First Union National Bank of Florida
-14-