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 March 31, 2002 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 May 10, 2002. DRYCLEAN USA, Inc. CONDENSED CONSOLIDATED STATEMENTS OF INCOME
- -------------------------------------------------------------------------------------------------------------------- For the nine months ended For the three months ended March 31, March 31, 2002 2001 2002 2001 (Unaudited) (Unaudited) - -------------------------------------------------------------------------------------------------------------------- Sales $11,257,519 $13,549,820 $3,634,931 $4,613,841 Franchise and license fees, commissions and other income 654,053 656,130 147,531 119,574 ----------- ----------- ---------- ---------- Total revenues 11,911,572 14,205,950 3,782,462 4,733,415 Cost of goods sold 8,246,699 9,867,432 2,593,245 3,451,341 Selling, general and administrative expenses 3,150,855 3,450,752 961,866 1,079,910 Research and development 41,822 93,076 7,400 33,554 ----------- ----------- ---------- ---------- Total operating expenses 11,439,376 13,411,260 3,562,511 4,564,805 Operating income 472,196 794,690 219,951 168,610 Other income (expenses) Interest income 9,779 25,082 3,999 5,140 Interest expense (44,303) (111,140) (10,321) (35,798) ----------- ----------- ---------- ---------- Total (34,524) (86,058) (6,322) (30,658) Earnings before taxes 437,672 708,632 213,629 137,952 Provision for income taxes 175,068 283,453 85,451 55,181 Net earnings $262,604 $425,179 $128,178 $82,771 =================================================================================================================== Basic earnings per share $ .04 $ .06 $ .02 $ .01 Diluted earnings per share $ .04 $ .06 $ .02 $ .01 Weighted average number of shares outstanding Basic 6,999,334 7,001,250 6,996,450 7,001,250 Diluted 6,999,334 7,170,335 6,996,450 7,049,881 ===================================================================================================================
See Notes to Condensed Consolidated Financial Statements. 2 DRYCLEAN USA, Inc. CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 2002 June 30, 2001 -------------- ------------- (Unaudited) ASSETS CURRENT ASSETS Cash and cash equivalents $ 546,147 $ 375,912 Accounts and notes receivable, net 1,821,593 2,122,493 Inventories 4,290,607 4,373,519 Current portion of lease receivables 43,841 39,494 Refundable income taxes 257,363 Deferred income taxes 69,337 69,337 Prepaid expenses and other 149,787 190,548 ----------- ----------- Total current assets 6,921,312 7,428,666 Lease, and mortgages receivables due after one year 6,771 5,238 Equipment and improvements- net of Accumulated depreciation and amortization 365,261 329,511 Franchise, trademarks and other intangible assets, net 522,473 551,718 Deferred tax asset 12,786 12,786 ----------- ----------- $7,828,603 $8,327,919 ----------- -----------
See Notes to Condensed Consolidated Financial Statements. 3 DRYCLEAN USA, Inc. CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 2002 June 30, 2001 -------------- ------------- (Unaudited) LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable and accrued expenses $1,076,320 $1,474,733 Current portion of bank loan 320,000 1,160,000 Customer deposits 444,938 573,298 Income taxes payable 47,872 0 ---------- ---------- Total current liabilities $1,889,130 $3,208,031 Long term loan less current portion 560,000 0 ---------- ---------- Total liabilities 2,449,130 3,208,031 SHAREHOLDERS' EQUITY Common stock, $.025 par value; 15,000,000 shares authorized; 7,027,500 shares issued and outstanding at each of March 31, 2002 and June 30, 2001, including 31,050 and 26,250 shares held in treasury at March 31, 2002 and June 30, 2001, respectively 175,688 175,688 Additional paid-in capital 2,045,551 2,048,570 Retained earnings 3,158,234 2,895,630 ---------- ---------- Total shareholders' equity 5,379,473 5,119,888 ---------- ---------- $7,828,603 $8,327,919 ---------- ----------
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, 2002 March 31, 2001 (Unaudited) (Unaudited) ----------- ----------- Operating activities: Net earnings $ 262,604 $ 425,179 Adjustments to reconcile net earnings to net cash provided (used) by operating activities: Bad debt expense 45,033 180,241 Depreciation and amortization 125,893 118,455 Net changes in operating assets and liabilities: (Increase) decrease in: Accounts, mortgages and lease receivables 249,987 (317,539) Inventories 82,912 (230,672) Prepaid expenses and other assets 40,761 92,779 Refundable income taxes 257,363 Increase (decrease) in: Accounts payable and accrued expenses (398,413) (231,870) Customer deposits (128,360) 81,426 Income taxes payable 47,872 (281,944) ------------ ----------- Net cash provided (used) by operating activities 585,652 (163,945) ------------ ----------- Investing activities: Capital expenditures (132,397) (147,206) ------------ ----------- Net cash used by investing activities (132,397) (147,206) ------------ ----------- Financing activities Payments on term loan (280,000) (360,000) Proceeds from exercise of stock options 11,250 Purchase of treasury stock (3,020) ------------ ----------- Net cash used by financing activities (283,020) (348,750) ------------ ----------- Net increase (decrease) in cash and cash equivalents 170,235 (659,901) Cash and cash equivalents at beginning of period 375,912 982,588 ------------ ----------- Cash and cash equivalents at end of period $ 546,147 $ 322,687 =========================================================================================================== Supplemental information: Cash paid for interest $ 44,303 $ 111,140 Cash paid for income taxes 86,000 635,950 - -----------------------------------------------------------------------------------------------------------
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, 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 March 31, 2002, the net carrying amount of other intangible assets was $522,473. Amortization expense during the nine months ended March 31, 2002 and 2001 was $58,057 and $70,760, respectively, and during the three months ended March 31, 2002 and 2001 was $19,502 and $23,587, respectively. There was no goodwill at March 31, 2002. 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. 6 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. Financial information for the Company's business segments is as follows: 7
For the nine months ended For the three months ended March 31, March 31, 2002 2001 2002 2001 (Unaudited) (Unaudited) - ----------------------------------------------------------------------------------------------------------------- Revenues: Commercial and industrial laundry and dry cleaning equipment $10,310,481 $11,642,493 $3,479,562 $3,930,987 Manufacturing and sales of telephone test equipment 1,359,192 2,186,645 239,770 731,276 License and franchise operations 241,897 376,812 63,130 71,152 - ----------------------------------------------------------------------------------------------------------------- Total revenues $11,911,572 $14,205,950 $3,782,462 $4,733,415 ================================================================================================================= Operating income (loss) Commercial and industrial laundry and dry cleaning equipment $ 525,172 $ 708,184 $ 316,496 $ 173,487 Manufacturing and sales of telephone test equipment (175,413) (169,509) (119,494) (37,195) License and franchise operations 122,437 256,015 22,949 32,318 - ----------------------------------------------------------------------------------------------------------------- Total operating income $ 472,196 $ 794,690 $ 219,951 $ 168,610 ================================================================================================================= March 31, 2002 June 30, 2001 (Unaudited) Identifiable assets: Commercial and industrial laundry and $ 5,140,435 $ 5,076,391 dry cleaning equipment Manufacturing and sales of telephone 1,900,475 2,452,098 test equipment License and franchise operations 787,693 799,430 Total assets $ 7,828,603 $ 8,327,919
Note (4) - Credit Agreement: In December 2001, the Company entered into a bank loan agreement to replace its then existing bank credit facility. The new facility consists of a term loan of $960,000 and a revolving credit facility of $2,250,000, 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 (1.90% at March 31, 2002), 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 $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 March 31, 2002, there were no outstanding borrowings under either the present line of credit or 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. 8 MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- For the nine-month period ended March 31, 2002, cash increased by $170,235 compared to a decrease of $659,901 for the nine month period ended March 31, 2001. Operating activities for the nine months ended March 31, 2002 provided cash of $585,652. Of this amount, $262,604 was provided by net earnings, and $125,893 and $45,033 was provided by non-cash expenses for depreciation and amortization and a provision for bad debts, respectively. Additional cash was provided by decreases in accounts, mortgages and lease receivables ($249,987), inventories ($82,912), pre-paid expenses and other ($40,761) and the receipt of income tax refunds ($257,363), along with an increase in income taxes payable ($47,872). The cash generated was partially used to decrease accounts payable and accrued expenses ($398,413) and by a decrease in customer deposits ($128,360). 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). Investing activities used cash of $132,397 for the first nine months of fiscal 2002, principally to purchase equipment ($110,862) and to fund patent work ($21,435) associated with the Company's new environmentally safe Green Jet (R) dry-wet cleaning machine and the Company's new 8-XX hand telephone test set. For the same period of fiscal 2001, investing activities used cash of $147,206, principally to purchase equipment. For the nine month period ended March 31, 2002, financing activities used cash of $283,020, mostly to make monthly payments on the Company's term loan ($280,000) and to purchase treasury stock ($3,020) under the Company's stock repurchase plan authorized by the Board of Directors in fiscal 2001. During the same period of fiscal 2001, financing activities used cash of $348,750, mostly to make monthly installments on the Company's term loan ($360,000), which was offset by proceeds from the exercise of stock options ($11,250). In December 2001, the Company entered into a bank loan agreement to replace its then existing bank credit facility. The new facility consists of a term loan of $960,000 and a revolving credit facility of $2,250,000, including a $1,000,000 letter of credit subfacility and a $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 (1.90% at March 31, 2002), are guaranteed by all of the - ---------- Green Jet(R) is a registered trademark of Steiner-Atlantic Corp., a subsidiary of the Company. 9 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. In April 2002, the Company's Steiner-Atlantic Corp. subsidiary entered into a two-year lease for approximately 8,800 square feet of warehouse space for the Company's commercial and industrial laundry dry cleaning equipment segment, with options to renew the lease, for two additional two year terms. The annual rental under the new lease is $27,600. Future monthly rent can be increased based on increases in the Consumer Price Index. This lease replaces a month to month lease covering approximately 6,000 square feet in a different warehouse at a monthly rental of $1,877. On May 1, 2002, the telecommunications segment of the Company moved into smaller quarters under a one year lease, with a one-year extension right exercisable by July 1, 2002 and, if extended, an option to renew the lease for an additional two year term. The new lease covers approximately 8,440 square feet of manufacturing and office space at an annual rental of $101,292, plus common area charges. The segment's former lease covered approximately 21,500 square feet of space at an annual rental of $180,624, plus common area charges. CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS - -------------------------------------------------- The following sets forth a schedule of payments required, as of March 31, 2002 under the Company's contractual obligations described below:
DUE BY PERIOD ----------------------------------------------------------------- LESS THAN AFTER CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR 1 - 3 YEARS 4 - 5 YEARS 5 YEARS - ----------------------- ----- ------ ----------- ----------- ------- Term loan $ 880,000 $ 320,000 $ 560,000 $ - $ - Operating leases $ 308,391 $ 230,752 $ 77,639 ------------- ------------- ------------- ------------- ------------- Total contractual cash obligations $ 1,188,391 $ 550,752 $ 637,639 $ - $ -
The Company's only other commercial commitment is under three leases for future dry cleaning stores that it anticipates assigning to dry cleaning franchisees or other customers when the leased facilities are available for occupancy. The maximum potential payment commitment is $114,600 in annual base rent per year for five years beginning upon completion of site building. Although the actual completion date is presently uncertain, it is probable that completion of each location will be in fiscal 2003. TRANSACTIONS WITH RELATED PARTIES - --------------------------------- The Company leases 27,000 square feet of warehouse and office space from William K. Steiner, a principal stockholder, Chairman of the Board of Directors and a director of the Company, under a lease which expires in October 2004. Annual rental under this lease is approximately $83,200. The Company believes that the terms of the lease are comparable to terms that would be obtained from an unaffiliated third party for similar property in a similar locale. 10 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 nine and three month periods ended March 31, 2002 decreased by $2,294,378 (16.2%) and $950,953 (20.1%), respectively, from the same periods of fiscal 2001. For the nine month period, revenues of the commercial laundry and dry cleaning segment decreased by $1,332,012 (11.4%), while for the three month period revenues of this segment decreased by $451,425 (11.5%), in each case from the comparable prior year periods. These decreases were due to a reduction in sales of most categories of equipment attributable to the downturn in the economy, especially on hotels and cruise lines, which are significant customers of this segment, although sales of the Company's new environmentally safe Green Jet dry-wet cleaning machine increased sales of dry cleaning machines by approximately $323,046, or 55%, for the quarter. The Company's license and franchise segment experienced decreases in revenue of $134,915 (35.8%) and $8,022 (11.3%) for the nine 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 $827,453 (37.8%) and $491,506 (67.2%) for the nine and three month periods, respectively, of fiscal 2002 when compared to the same periods of fiscal 2001. The decreases were attributable to the severe downturn in the telecommunications market. Sales of telecommunications equipment are not expected to improve during the balance of the fiscal year and may continue at a slow pace, probably through the first two quarters of fiscal 2003. The Company has taken steps to reduce expenses of this segment by moving to a smaller facility and reducing staff. Costs of goods sold, expressed as a percentage of net sales, increased to 73.3% during the first nine months of fiscal 2002 compared to 72.8% for the same period of fiscal 2001. The increase was mostly due to the reduction in sales in the telecommunications segment, which affected the segment's ability to absorb fixed expenses and offset an improvement in margins in the laundry and dry cleaning segment. For the three-month period ended March 31, 2002, cost of goods sold decreased to 71.3% from 74.8% of net sales from the same period of a year ago. This improvement is attributable to the lowering of expenses in the telecommunications segment and the increased shipments of Green Jet wet-dry cleaning machines, which carry a higher margin. Selling, general and administrative expenses decreased by $299,897 (8.7%) and $118,044 (10.9%) for the nine 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 $51,254 (55.1%) and $26,154 (77.9%) for the nine and three month periods, respectively in fiscal 2002 from the comparable periods of fiscal 2001. The reduction for both periods was principally attributable to the 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 Green Jet dry-wet cleaning machine. The expenses for research and development in fiscal 2001 were solely related to the telecommunications segment. 11 Interest income decreased by $15,303 (61.0%) and $1,141 (22.2%) for the nine and three month periods, respectively, of fiscal 2002 from the comparable periods of fiscal 2001, principally as a result of a reduction in interest earned in daily bank balances due to lower average cash balances on hand and lower interest rates. Interest expenses decreased by $66,837 (60.1%) and $25,477 (71.2%) for the nine and three month periods, respectively, in fiscal 2002 over the same periods of fiscal 2001, mostly due to a reduction in outstanding debt and reduced interest rates, partially offset by periodic borrowing 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 periods. CRITICAL ACCOUNTING POLICIES - ---------------------------- Financial Reporting Release No. 60, which was recently released by the U.S. Securities and Exchange Commission, encourages all companies to include a discussion of critical accounting policies or methods used in the preparation of financial statements. Management believes the following critical accounting policies affect the significant judgments and estimates used in the preparation of the financial statements: Revenue Recognition Sales of products are generally recorded as they are shipped. Commissions and management fees are recorded when earned. Individual franchise arrangements include a license and provide for payment of initial fees, as well as continuing service fees. Initial franchise fees are generally recorded upon the opening of the franchised store. Continuing services fees are recorded when earned. Franchise License Trademark and Other Intangible Assets The franchise license, trademark and other intangible assets are stated at cost less accumulated amortization. Those assets are amortized on a straight-line basis over the estimated future periods to be benefited (2-15 years). The Company reviews the recoverability of intangible assets based primarily upon an analysis of undiscounted cash flows from the acquired assets. In the event the expected future net cash flows should become less than the carrying amount of the assets, an impairment loss will be recorded in the period such determination is made based on the fair value of the related assets. Asset Impairment The Company periodically reviews the carrying value of certain of its assets in relation to historical results, current business conditions and trends to identify potential situations in which the carrying value of assets may not be recoverable. If such reviews indicate that the carrying value of such assets may not be recoverable, the Company would estimate the undiscounted sum of the expected future cash flows of such assets or analyze the fair value of the assets to determine if permanent impairment exists. If a permanent impairment exists, the Company would determine the fair value by using quoted market 12 prices, if available, for such assets or, if quoted market prices are not available, the Company would discount the expected future cash flows of such assets. Estimates The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 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 March 31, 2002, the net carrying amount of other intangible assets was $522,473. Amortization expense during the nine months ended March 31, 2002 and 2001 was $58,057 and $70,760, respectively, and during the three months ended March 31, 2002 and 2001 was $19,502 and $23,587, respectively. There was no goodwill at March 31, 2002. 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 13 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. 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 Not Applicable 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 13, 2002 DRYCLEAN USA, Inc. By: /s/ Venerando J. Indelicato --------------------------- Venerando J. Indelicato, Treasurer and Chief Financial Officer 15