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 December 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 - 6,999,610 shares outstanding as of February 8, 2002.
DRYCLEAN USA, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
- -----------------------------------------------------------------------------------------------------------------
For the six months For the three months
ended December 31, ended December 31,
2001 2000 2001 2000
(Unaudited) (Unaudited)
- -----------------------------------------------------------------------------------------------------------------
Sales $ 7,622,588 $ 8,935,979 $ 3,799,474 $4,361,503
Franchise and license fees,
commissions and
other income 506,522 536,555 287,190 195,680
------------ ------------ ----------- ----------
Total revenues 8,129,110 9,472,534 4,086,664 4,557,183
Cost of goods sold 5,653,454 6,416,091 2,662,132 3,162,964
Selling, general and
administrative expenses 2,188,989 2,370,839 1,091,467 1,205,317
Research and development 34,422 59,522 13,136 32,850
------------ ------------ ----------- ----------
Total operating expenses 7,876,865 8,846,452 3,766,735 4,401,131
Operating income 252,245 626,082 319,929 156,052
Other income (expenses)
Interest income 5,780 19,942 1,666 6,190
Interest expense (33,982) (75,343) (14,386) (37,043)
------------ ------------ ----------- ----------
Total (28,202) (55,401) (12,720) (30,853)
Earnings before taxes 224,043 570,681 307,209 125,199
Provision for income
taxes 89,617 228,272 122,883 50,080
------------ ------------ ----------- ----------
Net earnings $ 134,426 $ 342,409 $ 184,326 $ 75,119
=================================================================================================================
Basic earnings per share $ .02 $ .05 $ .03 $ .01
Diluted earnings per share $ .02 $ .05 $ .03 $ .01
Weighted average number
of shares outstanding
Basic 7,000,777 7,001,250 7,000,303 7,001,250
Diluted 7,000,777 7,210,908 7,000,303 7,157,213
=================================================================================================================
See Notes to Condensed Consolidated Financial Statements
2
DRYCLEAN USA, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, 2001 June 30, 2001
----------------- -------------
(Unaudited)
ASSETS
- ------
CURRENT ASSETS
Cash and cash equivalents $ 291,796 $ 375,912
Accounts and notes receivable, net 1,846,003 2,122,493
Inventories 4,179,286 4,373,519
Current portion of lease receivables 35,336 39,494
Refundable income taxes 257,363
Deferred income taxes 69,337 69,337
Prepaid expenses and other 189,471 190,548
----------- ----------
Total current assets 6,611,229 7,428,666
Lease receivables due after one year 9,413 5,238
Equipment and improvements- net of
accumulated depreciation and
amortization 386,186 329,511
Franchise, trademarks and other
intangible assets, net 535,063 551,718
Deferred tax asset 12,786 12,786
----------- ----------
$7,554,677 $8,327,919
=========== ==========
See Notes to Condensed Consolidated Financial Statements
3
DRYCLEAN USA, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, 2001 June 30, 2001
----------------- -------------
(Unaudited)
LIABILITIES AND
SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued
expenses $ 819,516 $ 1,474,733
Current portion of bank loan 320,000 1,160,000
Line of credit 4,306
Customer deposits 483,826 573,298
Income taxes payable 33,555
----------- -----------
Total current liabilities 1,661,203 3,208,031
Long term bank loan less current portion 640,000
----------- -----------
Total liabilities 2,301,203 3,208,031
SHAREHOLDERS' EQUITY
Common stock, $.025 par value;
15,000,000 shares authorized;
7,027,500 shares issued and
outstanding at December 31, 2001 and
June 30, 2001, respectively, including
27,890 and 26,250 shares held in treasury
at December 31, 2001 and June 30, 2001,
respectively 175,688 175,688
Additional paid-in capital 2,047,730 2,048,570
Retained earnings 3,030,056 2,895,630
----------- -----------
Total shareholders' equity 5,253,474 5,119,888
$ 7,554,677 $8,327,919
=========== ==========
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, 2001 December 31, 2001
(Unaudited) (Unaudited)
----------- -----------
Operating activities:
Net earnings $ 134,426 $ 342,409
Adjustments to reconcile net earnings to net cash
provided (used) by operating activities:
Provision for bad debts 41,513 172,878
Depreciation and amortization 82,783 77,791
Net changes in operating assets and liabilities:
(Increase) decrease in:
Accounts, mortgages and lease receivables 234,960 (776,494)
Inventories 194,233 (669,385)
Prepaid expenses and other assets 1,077 61,032
Refundable income taxes 257,363
Increase (decrease) in:
Accounts payable and accrued expenses (655,218) (238,296)
Customer deposits (89,472) 235,558
Income taxes payable 33,555 (281,944)
----------- -----------
Net cash provided (used) by operating activities 235,220 (1,076,451)
----------- -----------
Investing activities:
Capital expenditures (122,802) (94,727)
----------- -----------
Net cash used by investing activities (122,802) (94,727)
----------- -----------
Financing activities
Payments on term loan (200,000) (240,000)
Borrowings under line of credit 4,306 694,503
Proceeds from exercise of stock options 11,250
Purchase of treasury stock (840)
----------- -----------
Net cash (used) provided by financing activities (196,534) 465,753
----------- -----------
Net decrease in cash and cash equivalents (84,116) (705,425)
Cash and cash equivalents at beginning of period 375,912 982,588
----------- -----------
Cash and cash equivalents at end of period $ 291,796 $277,163
==============================================================================================================
Supplemental information:
Cash paid for interest $ 33,982 $ 75,343
Cash paid for income taxes 586,610
Notes to the 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, 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. The Company's previous
business combinations were accounted for using the purchase method. As of
December 31, 2001, the net carrying amount of other intangible assets was
6
$535,063. Amortization expense during the six months ended December 31, 2001 and
2000 was $38,556 and $47,174, respectively, and during the three months ended
December 31, 2001 and 2000 was $19,523 and $25,753, respectively. There was no
goodwill at December 31, 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. 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.
7
Note (3) continued
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,
2001 2000 2001 2000
(Unaudited) (Unaudited)
- ------------------------------------------------------------------------------------------------------------------------
Revenues:
Commercial and industrial laundry
and dry cleaning equipment $ 6,830,921 $ 7,711,508 $3,383,177 $ 3,908,420
Manufacturing and sales of
telephone test equipment 1,119,422 1,455,369 609,139 547,825
- ------------------------------------------------------------------------------------------------------------------------
License and franchise operations 178,767 305,657 94,348 100,938
- ------------------------------------------------------------------------------------------------------------------------
Total revenues $ 8,129,110 $ 9,472,534 $4,086,664 $ 4,557,183
========================================================================================================================
Operating income (loss)
Commercial and industrial laundry
and dry cleaning equipment $ 208,676 $ 534,698 $ 252,544 $ 274,391
Manufacturing and sales of
telephone test equipment (55,919) (132,313) 25,290 (165,156)
License and franchise operations 99,488 223,697 42,095 46,817
- ------------------------------------------------------------------------------------------------------------------------
Total operating income $ 252,245 $ 626,082 $ 319,929 $ 156,052
========================================================================================================================
December 31, 2001 June 30, 2001
(Unaudited)
Identifiable assets:
Commercial and industrial
laundry and dry cleaning equipment $ 4,661,119 $ 5,076,391
Manufacturing and sales of
telephone test equipment 2,116,440 2,452,098
License and franchise operations 777,118 799,430
- ------------------------------------------------------------------------------------------------------------------------
Total assets $ 7,554,677 $ 8,327,919
========================================================================================================================
Note (4) - Credit Agreement: In December 2001, the Company entered into a bank
loan agreement to replace its existing bank credit facility. The new facility
consists of a term loan of $960,000 and a revolving credit facility of
$2,225,000, including a $1,000,000 letter of credit subfacility and $250,000
foreign exchange subfacility. Revolving credit borrowings are limited by a
borrowing base of 60% of eligible accounts receivable and 60% of certain, and
50% of other, eligible inventories. Borrowings under the term loan facility and
revolving credit facility bear interest at 2.65% and 2.50% per annum,
respectively, above the Adjusted LIBOR Market Index Rate (1.87% at December 31,
2001), are guaranteed by all of the Company's subsidiaries and are
collateralized by substantially all of the Company's and its subsidiaries'
assets. In connection with entering into the new credit facility, the Company
paid, among other things, a commitment fee of
8
$5,000 and various transaction costs. The term loan is repayable in equal
monthly installments of $26,667 through December 31, 2004. The line of credit
matures October 30, 2002. At December 31, 2001, there was $4,306 outstanding
under the line of credit. At December 31, 2000, there were no outstanding
borrowings under the Company's predecessor line of credit. The loan agreement
requires maintenance of certain financial ratios and contains other restrictive
covenants. The loan agreement also contains limitations on the extent to which
the Company and its subsidiaries may incur additional indebtedness, guarantee
indebtedness of others, grant liens, sell assets and make investments.
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Liquidity and Capital Resources
- -------------------------------
For the six months ended December 31, 2001, cash decreased by $84,116 compared
to a decrease of $705,425 for the six month period ended December 31, 2000.
For the first half of fiscal 2002, operating activities provided cash of
$235,220. Of this amount, $134,426 was provided by net earnings and $82,783 and
$41,513 was provided by non cash expenses for depreciation and amortization and
a provision for bad debts, respectively. Additional cash was provided by a
decrease in accounts, mortgages and lease receivables ($234,960), inventories
($194,233), prepaid expenses ($1,077) and the return of income taxes ($257,363)
along with an increase in income tax payable ($33,555). The cash generated was
partially used to decrease accounts payable and accrued expenses ($655,218) and
decrease customer's deposits ($89,472).
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 a provision for bad debts of
$172,878. Additional cash was provided by an increase in customer's deposits
($235,558) and a decrease in prepaid expenses ($61,032).
Net cash used in investing activities during the first half of fiscal 2002 was
$122,802, principally to purchase equipment ($107,344) and to fund patent work
($15,458). During the six month period ended December 31, 2000, investing
activities used cash of $94,727 to purchase equipment.
Financing activities for the first six months of fiscal 2002 used cash of
$196,534, principally to pay monthly installments on the Company's term loan
($200,000) and to purchase treasury stock ($840) under the Company's stock
repurchase plan authorized by the Board of Directors in fiscal 2001, partially
offset by cash of $4,306 provided by borrowings under the Company's line of
credit. During the same period of fiscal 2001, financing activities 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 partially offset by monthly installment payments on the Company's term loan
($240,000).
In December 2001, the Company entered into a bank loan agreement to replace its
existing bank credit facility. The new facility consists of a term loan of
$960,000 and a revolving credit facility of $2,225,000, including a $1,000,000
letter of credit subfacility and $250,000 foreign exchange subfacility.
Revolving credit borrowings are limited by a borrowing base of 60% of eligible
accounts receivable and 60% of certain, and 50% of
10
other, eligible inventories. Borrowings under the term loan facility and
revolving credit facility bear interest at 2.65% and 2.50% per annum,
respectively, above the Adjusted LIBOR Market Index Rate (1.87% at December 31,
2001), are guaranteed by all of the Company's subsidiaries and are
collateralized by substantially all of the Company's and its subsidiaries'
assets. The term loan is repayable in equal monthly installments of $26,667
through December 31, 2004. The line of credit matures October 30, 2002. The loan
agreement also contains limitations on the extent to which the Company and its
subsidiaries may incur additional indebtedness, guarantee indebtedness of
others, grant liens, sell assets and make investments.
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.
Results of Operations
- ---------------------
Total revenues for the six and three month periods ended December 31, 2001
decreased by $1,343,424 (14.2%) and $470,519 (10.3%), respectively, from the
same periods of fiscal 2001. For the six month period, revenues of the
commercial laundry and dry cleaning segment decreased by $880,587 (11.4%) from
the same six month fiscal 2001 period due to a reduction in sales of most
categories of equipment due to the effects of the downturn in the economy on
hotels and cruise lines, which are significant customers of this segment. For
the three month period, revenues of this segment decreased by $525,243 (13.4%)
from the comparable prior year three month period. Although sales of laundry and
dry cleaning machines also declined during this period, they were partially
offset by revenues from a subsidiary of the Company established in fiscal 2001
to develop new turn-key dry cleaning establishments for resale to third parties.
The Company's license and franchise segment experienced a decrease in revenue of
$126,890 (41.5%) and $6,590 (6.5%) for the six month and three month periods,
respectively, as a result of the opening of a fewer number of licensed and
franchised units. Sales of the Company's telecommunications segment decreased by
$335,947 (23.1%) for the six month period but increased by $61,314 (11.2%) for
the three month period ended December 31, 2001. The decrease for the six month
period was principally due to the general downturn in the telecommunications
market. The gain in the three month period is attributable to sales to certain
telephone operating companies who, unlike in fiscal 2001, had not yet fully
utilized their full year budgets. Sales of telecommunications test equipment for
the third quarter have so far been below expectations and may not improve until
the general telecommunications markets improve.
Cost of goods sold, expressed as a percentage of net sales, increased to 74.2%
for the six month period of fiscal 2002 from 71.8% for the comparable period of
a year ago. The increase was mostly due to the reduction in sales in the
telecommunications segment 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. For the current year three month period, cost of goods sold
decreased to 70.1% from 72.5% of net sales from the
11
same period of a year ago. This improvement was attributable principally to an
increase in sales, coupled with a reduction in direct labor costs, in the
telecommunication segment. In addition, laundry and dry cleaning sales for the
period included sales of the segment's new environmentally safe GreenJet(TM)
dry-wet cleaning machine which carries a higher gross profit margin.
Selling, general and administrative expenses decreased by $181,850 (7.7%) and
$113,850 (9.4%) for the six and three month periods, respectively, in fiscal
2002 from the comparable periods of fiscal 2001. The decrease for both periods
was due primarily to a substantial reduction in selling and administrative
expenses in the telecommunications segment as that segment was restructured to
offset reductions in sales. This category of expenses remained relatively flat
in the laundry and dry cleaning segment.
Research and development expenses decreased by $25,100 (42.2%) and $19,714
(60.0%) for the six and three month periods, respectively, in fiscal 2002 from
the comparable periods of fiscal 2001. The reduction for both periods was
principally attributable to a reduction in engineering staff at the
telecommunication segment, which offset start-up research and development
expenses in the laundry and dry cleaning segment associated with the segment's
new environmentally safe GreenJet(TM) dry-wet cleaning machine. The expenses for
research and development in fiscal 2001 were solely related to the
telecommunications segment.
Interest income decreased by $14,162 (71.0%) and $4,524 (73.1%) for the six and
three month periods, respectively, of fiscal 2002 from the comparable periods of
fiscal 2001, 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 interest rates.
Interest expense decreased by $41,361 (54.9%) and $22,657 (61.2%) for the six
and three month periods, respectively, in fiscal 2002 from the same periods of
fiscal 2001, mostly due to a reduction in outstanding debt and reduced interest
rates, partially offset by periodic borrowings under 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 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
12
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
December 31, 2001, the net carrying amount of other intangible assets was
$535,063. Amortization expense during the six months ended December 31, 2001 and
2000 was $38,556 and $47,174, respectively, and during the three months ended
December 31, 2001 and 2000 was $19,523 and $25,753, respectively. There was no
goodwill at December 31, 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. 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.
13
Forward Looking Statements
- --------------------------
Certain statements in this Report are "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995.
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; 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.
14
PART II
OTHER INFORMATION
Item 2. Changes in Securities.
- ------- ----------------------
The following is a brief discussion of the Company's new Loan and Security
Agreement, dated as of December 19, 2001 (the "Loan Agreement"), with First
Union National Bank (the "Bank"), the Term Note and the Revolving Credit Note,
each dated as of December 31, 2001, issued thereunder by the Company in favor of
the Bank and the Guaranty and Security Agreement, dated as of December 19, 2001,
by Steiner-Atlantic Corp., Steiner-Atlantic Brokerage Company, Inc., DRYCLEAN
USA Development Corp. and DRYCLEAN USA License Corp., wholly-owned subsidiaries
of the Company, in favor of the Bank, which are annexed hereto as Exhibits
4.1(a) and 4.1(b), 4.1(c) and 4.1(d), respectively. The discussion below is
qualified in its entirety by reference to those exhibits.
On December 19, 2001, the Company entered into the Loan Agreement to refinance
the remaining principal balance of $960,000 on the then existing term loan of
its wholly-owned subsidiary, Steiner-Atlantic Corp. ("Steiner"), from the Bank
which was due in January 2002, and to provide a new line of credit to replace
Steiner's line of credit with the Bank which matured on December 31, 2001. The
former term loan and line of credit (as well as any other indebtedness of the
Company or any of its affiliates) had been guaranteed by the Company and
collateralized by substantially all of Steiner's and the Company's assets,
excluding real estate.
The Company's new term loan provided under the Loan Agreement of $960,000 is
payable in 36 equal monthly installments of $26,667 beginning on January 31,
2002. The outstanding principal balance of term loans bears interest at the one
month LIBOR Market Index Rate plus 2.65% per annum.
The new line of revolving credit provided under the Loan Agreement enables the
Company to request borrowings from the Bank of up to $2,250,000 outstanding at
any one time, on a demand loan basis, until October 30, 2002. The revolving
credit facility includes a $250,000 foreign exchange subfacility for the purpose
of enabling the Company to hedge currency exposure in connection with its import
activities through spot foreign exchange and forward exchange contracts and a
$1,000,000 letter of credit subfacility. Revolving credit loans outstanding at
any one time are limited by a borrowing base equal to the sum of (i) 60% of
eligible accounts receivable (as defined), plus (ii) 50% of eligible inventory
(as defined) consisting of spare parts, plus (iii) 60% of eligible inventory (as
defined) consisting of equipment, less any outstanding letters of credit and the
value of any outstanding forward and spot transactions. Outstanding borrowings
under the revolving credit facility bear interest at the one month LIBOR Market
Index Rate plus 2.50% per annum.
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In connection with entering into the Loan Agreement, the Company paid, among
other things, a commitment fee of $5,000 and various transaction costs.
The obligations of the Company and its affiliates to the Bank, whether arising
under the Loan Agreement or otherwise, are guaranteed by the Company's
subsidiaries and are collateralized by substantially all present and future
assets of the Company and its subsidiaries, excluding real estate.
The Loan Agreement requires, among other things, the Company to maintain, on a
consolidated basis: (a) a ratio of (i) the sum of (1) the consolidated net
income after tax for the applicable fiscal year, plus (2) consolidated
depreciation and amortization for the applicable fiscal year, less (3) dividends
declared or paid by the Company during the applicable fiscal year to (ii)
current maturities of long-term debt, including capitalized leases but excluding
outstanding loans under the revolving credit facility at the end of the
applicable fiscal year, of at least 1.0 to 1.0 at June 30, 2002 and at least
1.25 to 1.0 at the end of each fiscal year of the Company thereafter; and (b) a
ratio of consolidated total liabilities (as defined) to consolidated tangible
net worth (as defined) of at least 2.0 to 1.0 at all times. The Company's fiscal
year ends on June 30. The Company may declare or pay dividends or distributions
and may redeem or otherwise acquire any stock or other equity interests only to
the extent that such payments would not reasonably likely result in a failure to
maintain such ratios. The Loan Agreement also contains limitations on the extent
to which the Company and its subsidiaries may incur additional indebtedness,
guarantee indebtedness of others, grant liens, sell assets and make investments.
Item 6. Exhibits and Reports on Form 8-K.
- ------- ---------------------------------
(a) Exhibits
4.1(a) Loan and Security Agreement, dated as of December 19, 2001,
from the Company in favor of First Union National Bank.
4.1(b) Term Note, dated as of December 19, 2001, from the Company in
favor of First Union National Bank.
4.1(c) Revolving Credit Note, dated as of December 19, 2001, from
the Company in favor of First Union National Bank.
4.1(d) Guaranty and Security Agreement, dated as of December 19, 2001,
from the Company in favor of First Union National Bank.
(b) Reports on Form 8-K
No Reports on Form 8-K were filed during the quarter covered by this
Report.
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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 14, 2002 DRYCLEAN USA, Inc.
By: /s/ Venerando J. Indelicato
------------------------------
Venerando J. Indelicato,
Treasurer and Chief Financial
Officer
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EXHIBIT INDEX
-------------
Exhibit
Number Description
- ------ -----------
4.1(a) Loan and Security Agreement, dated as of December 19, 2001,
from the Company in favor of First Union National Bank.
4.1(b) Term Note, dated as of December 19, 2001, from the Company in
favor of First Union National Bank.
4.1(c) Revolving Credit Note, dated as of December 19, 2001, from
the Company in favor of First Union National Bank.
4.1(d) Guaranty and Security Agreement, dated as of December 19, 2001,
from the Company in favor of First Union National Bank.
18