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
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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
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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.
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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
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Venerando J. Indelicato,
Treasurer and Chief Financial
Officer
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