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, 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 - 6,996,450 shares outstanding as of February 4, 2003.
Transitional Small Business Disclosure Format: Yes ___ No _X_
DRYCLEAN USA, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
- -----------------------------------------------------------------------------------------------------------------
For the six months For the three months
ended December 31, ended December 31,
2002 2001 2002 2001
(Unaudited) (Unaudited)
- -----------------------------------------------------------------------------------------------------------------
Sales $6,925,989 $6,503,166 $3,335,684 $3,190,335
Franchise and license fees,
commissions and other income 355,649 506,522 134,281 287,190
------------- ------------ ------------- -------------
Total revenues 7,281,638 7,009,688 3,469,965 3,477,525
Cost of goods sold 5,066,450 4,788,001 2,511,583 2,210,436
Selling, general and administrative
expenses 1,877,835 1,931,929 946,507 979,304
Research and development 20,444 17,224 8,175 9,317
------------- ------------ ------------- -------------
Total operating expenses 6,964,729 6,737,154 3,466,265 3,199,057
Operating income 316,909 272,534 3,700 278,468
Other income (expenses)
Interest income 12,872 5,780 11,712 1,666
Interest expense (16,191) (33,982) (7,468) (14,386)
------------- ------------ ------------- -------------
Total (3,319) (28,202) 4,244 (12,720)
Earnings from continuing operations
before taxes 313,590 244,332 7,944 265,748
Provision for income taxes 125,436 97,733 3,178 106,299
------------- ------------ ------------- -------------
Net earnings from continuing
operations 188,154 146,599 4,766 159,449
Net (loss) earnings from
discontinued operations (12,173) 24,877
Net gain on settlement of liabilities
associated with discontinued
operations 39,976 39,976
------------- ------------ ------------- -------------
Net earnings $ 228,130 $ 134,426 $ 44,742 $ 184,326
Basic and diluted earnings per share from
continuing operations $ .03 $ .02 $ .00 $ .02
Basic and diluted (loss) earnings
per share from discontinued
operations $ .00 $ .00 $ .01 $ .01
------------- ------------ ------------- -------------
Basic and diluted earnings
per share $ .03 $ .02 $ .01 $ .03
Weighted average number
of shares outstanding
Basic and diluted 6,996,450 7,000,777 6,996,450 7,000,303
See Notes to Condensed Consolidated Financial Statements
2
DRYCLEAN USA, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, 2002 June 30, 2002
----------------- -------------
(Unaudited)
ASSETS
- ------
CURRENT ASSETS
Cash and cash equivalents $ 1,397,117 $ 1,264,357
Accounts and trade notes
receivable, net of allowance for
doubtful accounts of $205,000
and $130,000 at December 31,
2002 and June 30, 2002, respectively 1,390,840 1,542,691
Inventories 2,794,822 2,918,472
Note receivable (Note 2) 157,143 -
Lease receivables 119,878 37,290
Refundable income taxes 97,081 225,167
Deferred income taxes 240,351 240,351
Other assets, net 172,761 185,631
Current assets of discontinued
Operations - 745,000
- ------------------------------------------------------------------------------------------
Total current assets 6,369,993 7,158,959
Lease, and trade notes receivables,
due after one year 91,857 681
Note receivable due after
one year 353,571
Equipment and improvements- net of
accumulated depreciation and
amortization 244,208 274,124
Franchise, trademarks and other
intangible assets, net 432,018 455,104
Deferred income taxes 8,869 8,869
Non-current assets of discontinued
operations 15,000
- ------------------------------------------------------------------------------------------
$ 7,500,516 $ 7,912,737
==========================================================================================
See Notes to Condensed Consolidated Financial Statements
3
DRYCLEAN USA, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, 2002 June 30, 2002
----------------- -------------
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 1,183,471 $ 1,736,393
Current portion of bank loan 320,000 320,000
Customer deposits 612,057 539,486
- -------------------------------------------------------------------------------------------------
Total current liabilities 2,115,528 2,595,879
Long term debt, less current portion 320,000 480,000
- -------------------------------------------------------------------------------------------------
Total liabilities 2,435,528 3,075,879
SHAREHOLDERS' EQUITY
Common stock, $.025 par value; 15,000,000
shares authorized; 7,027,500 shares
issued at December 31, and June 30, 2002,
including shares held in treasury 175,688 175,688
Additional paid-in capital 2,048,570 2,048,570
Retained earnings 2,843,750 2,615,620
Treasury stock, 31,050 shares
at cost (3,020) (3,020)
- -------------------------------------------------------------------------------------------------
Total shareholders' equity 5,064,988 4,836,858
=================================================================================================
$ 7,500,516 $ 7,912,737
=================================================================================================
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, December 31,
2002 2001
(Unaudited) (Unaudited)
----------- -----------
Operating activities:
Net earnings from continuing operations $ 188,154 $ 146,599
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Bad debt expense 75,651 41,513
Depreciation and amortization 64,252 55,959
(Increase) decrease in operating assets:
Accounts, trade notes and lease receivables (97,564) 234,960
Inventories 123,650 171,968
Other current assets 12,870 1,077
Refundable income taxes 128,086 257,363
Increase (decrease) in:
Accounts payable and accrued expenses (552,922) (655,218)
Customer deposits 72,571 (89,472)
Income taxes payable - 33,555
- ------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 14,748 198,304
- ------------------------------------------------------------------------------------------------------
Discontinued operations:
Net loss - (12,173)
Decrease in operating assets - 17,979
Net gain on settlement of liabilities
associated with discontinued operations 39,976
- ------------------------------------------------------------------------------------------------------
Cash provided by discontinued operations 39,976 5,806
- ------------------------------------------------------------------------------------------------------
Investing activities:
Net proceeds from disposal of business 210,000 -
Payments received on note receivable 39,286
Capital expenditures - (86,692)
Patent expenditures (11,250) (5,000)
- ------------------------------------------------------------------------------------------------------
Net cash provided (used) by investing activities 238,036 (91,692)
- ------------------------------------------------------------------------------------------------------
Financing activities
Payments on term loan (160,000) (200,000)
Borrowings under line of credit - 4,306
Purchase of treasury stock - (840)
- ------------------------------------------------------------------------------------------------------
Net cash used by financing activities (160,000) (196,534)
- ------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 132,760 (84,116)
Cash and cash equivalents at beginning of period 1,264,357 375,912
- ------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 1,397,117 $ 291,796
======================================================================================================
Supplemental information:
Cash paid for interest $16,191 $33,982
Cash paid for income taxes 24,000 -
See Notes to Condensed Consolidated Financial Statements
5
DRYCLEAN USA INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE (1) GENERAL: The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally accepted accounting
principles for interim financial statements and the instructions to Form 10-QSB
related to interim period financial statements. Accordingly, these condensed
consolidated financial statements do not include certain information and
footnotes required by generally accepted accounting principles for complete
financial statements. However, the accompanying unaudited condensed consolidated
financial statements contain all adjustments (consisting only of normal
recurring accruals) which, in the opinion of management, are necessary in order
to make the financial statements not misleading. The results of operations for
interim periods are not necessarily indicative of the results to be expected for
the full year. For further information, refer to the Company's financial
statements and footnotes thereto in the Company's Annual Report on Form 10-KSB
for the year ended June 30, 2002. The June 30, 2002 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) - DISCONTINUED OPERATIONS: As a result of a reduction of revenues and
increasing losses and the Company's determination that the telecommunications
segment was not part of its core business, effective July 31, 2002, the Company
sold substantially all of the operating assets (principally inventory, equipment
and intangible assets, including tradenames) of its Metro-Tel telecommunications
segment to an unaffiliated third party. The Company retained all of the cash,
accounts receivable and liabilities of the segment. The sales price was
$800,000, of which $250,000 was paid in cash on August 2, 2002 and the remaining
$550,000 is evidenced by the purchaser's promissory note that bears interest at
the prevailing prime rate plus 1% per annum and is payable in 42 equal monthly
installments commencing October 1, 2002. Payment and performance of the
promissory note is guaranteed by two companies affiliated with the purchaser and
the three principal stockholders of purchaser and the affiliated companies, and
is collateralized by substantially all of the operating assets of the purchaser
and the affiliated companies. The Company has agreed to subordinate payment of
the promissory note, the obligations of the affiliated companies under their
guarantees and the collateral granted by the purchaser and the affiliated
companies to the obligations of the purchaser and the affiliated companies to
two bank lenders, subject to the Company's right to receive installment payments
under the promissory note as long as the purchaser and the affiliated companies
are not in default of their obligations to the applicable lender. The Company
agreed to a three-year covenant not to compete with the purchaser.
The results of operations of the Company's Metro-Tel segment have been
classified as discontinued operations. An estimated loss on the sale of
approximately $555,000 was accrued for in the Company's financial statements for
the year ended June 30, 2002.
6
The net gain on settlement of liabilities associated with discontinued
operations of $39,976 (net of approximately $27,000 in taxes) for the three
months ended December 31, 2002 resulted from the settlement of certain
discontinuance costs at amounts lower than initially estimated.
NOTE (3) - EARNINGS PER SHARE: There were 447,750 and 462,750 stock options
outstanding at December 31, 2002 and December 31, 2001, respectively, that were
excluded in the computations of earnings per share for such periods because the
exercise prices of the options were less than the average market prices of the
Company's common stock during these periods.
NOTE (4) - REVOLVING CREDIT LINE: On October 11, 2002, the Company received an
extension, until October 30, 2003, of its existing $2,250,000 revolving line of
credit facility. 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. As of December 31, 2002, the Company had no outstanding
borrowings under the line of credit.
7
NOTE (5) - 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:
For the six months For the three months
ended December 31, ended December 31,
2002 2001 2002 2001
(Unaudited) (Unaudited)
----------------- ---------------- ----------------- -------------------
Revenues:
Commercial and industrial laundry and
dry cleaning equipment $ 7,161,434 $ 6,830,921 $ 3,396,625 $ 3,383,177
License and franchise operations 120,204 178,767 73,340 94,348
- ----------------------------------------------------------------------------------------------------------------------------
Total revenues $ 7,281,638 $ 7,009,688 $ 3,469,965 $ 3,477,525
============================================================================================================================
Operating income (loss)
Commercial and industrial laundry and
dry cleaning equipment $ 432,288 $ 281,168 $ 55,462 $ 284,703
License and franchise operations 17,487 99,558 29,817 42,095
Corporate (132,866) (108,192) (81,579) (48,330)
- ----------------------------------------------------------------------------------------------------------------------------
Total operating income (loss) $ 316,909 $ 272,534 $ 3,700 $ 278,468
============================================================================================================================
December 31, 2002 June 30, 2002
(Unaudited)
Identifiable assets:
Commercial and industrial laundry and
dry cleaning equipment $ 5,738,719 $ 5,585,225
License and franchise operations 882,121 789,179
Corporate 879,676 778,333
Discontinued operations (Note 2) -- 760,000
- ----------------------------------------------------------------------------------------------------------------------------
Total assets $ 7,500,516 $ 7,912,737
============================================================================================================================
8
NOTE (6) - 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 and prohibits the use of the pooling-of-interests 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, 2002, the net carrying amount of
intangible assets is $432,018. Amortization expense during the six month period
ended December 31, 2002 and 2001 was $29,092 and $29,579, respectively. There
was no goodwill at December 31, 2002. The adoption of SFAS 141 and SFAS 142 did
not have a significant impact on its financial position or results of
operations.
In August 2001, the FASB issued SFAS 144, Accounting for 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
9
of this Statement are effective for financial statements issued for fiscal years
beginning after December 15, 2001, and interim periods within those fiscal
years, with early application encouraged. The provisions of this Statement
generally are to be applied prospectively. The adoption of SFAS 144 did not have
a significant impact on its financial position or results of operations.
In June 2002, the FASB issued SFAS 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS 146 requires companies to
recognize costs associated with exit or disposal activities generally when they
are incurred rather than at the date of a commitment to an exit or disposal
plan. This statement supercedes the guidance provided by Emerging Issues Task
Force 94-3, "Liability Recognition for Certain Costs Incurred in a
Restructuring)." SFAS 146 is required to be adopted for exit or disposal
activities initiated after December 31, 2002. The Company does not believe the
adoption of SFAS 146 will have a significant impact on its financial position or
results of operations.
In December 2002, the FASB issued SFAS 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - An Amendment of FASB Statement 123."
This Statement amends SFAS 123, "Accounting for Stock-Based Compensation," to
provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, this statement amends the disclosure requirements of SFAS 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. This statement requires that
companies follow the prescribed format and provide the additional disclosures in
their annual reports for fiscal years ending after December 15, 2002 and in
financial reports containing condensed financial statements for interim periods
beginning after December 15, 2002.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
GENERAL
The results of operations of the Company's Metro-Tel segment, sold effective
July 1, 2002, are not discussed in detail here as they have been classified as
discontinued operations. The estimated loss on the sale of approximately
$555,000 was accrued for in the Company's financial statements for the year
ended June 30, 2002. The following discussion relates to the Company's
continuing operations.
LIQUIDITY AND CAPITAL RESOURCES
For the six months ended December 31, 2002, cash increased by $132,760, compared
to a decrease of $84,116 for the six months period ended December 31, 2001.
For the first six months of fiscal 2003, operating activities provided cash of
$14,748. The Company's net income from continuing operations of $188,154 and
non-cash expenses of $64,252 for depreciation and amortization and a provision
for bad debts of $75,651
10
provided an aggregate of $328,057 of cash. Additional cash was provided by
changes in current assets and liabilities, consisting of decreases in
inventories ($123,650), other assets ($12,870) and the return of income taxes
($128,086) and an increase in customer deposits ($72,571). The generated cash
was used principally to support an increase in accounts, trade notes and lease
receivables ($97,564) and a decrease in accounts payable and accrued expenses
($552,922).
For the first half of fiscal 2002, operating activities provided cash of
$198,304. Of this amount, $146,599, was provided by net earnings from continuing
operations and $55,959 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, trade notes and lease
receivables ($234,960), inventories ($171,968), 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 a decrease in customer's deposits ($89,472).
Discontinued operations provided cash of $5,806.
Discontinued operations provided a non-cash gain of $39,976, net after taxes, on
the settlement of liabilities associated with accruals of transaction costs
connected with the sale of the Metro-Tel telecommunications segment. These
estimated expenses were accrued for in fiscal 2002. Savings were realized
principally in rent expenses and professional fees and other transaction costs.
Net cash provided by investing activities for the first six months of fiscal
2003 was $238,036, principally as a result of $210,000 provided by the net
proceeds from the sale of the Company's telecommunications division and $39,286
from collections on a note issued in conjunction with that sale. In addition
$11,250 was used to fund patent work. For the same period of fiscal 2002,
investing activities used cash of $91,692 principally for equipment purchases
($86,692) and to fund patent work ($5,000).
Financing activities during the first half of fiscal 2003 used cash of $160,000
to pay monthly installments on the Company's term loan. During the same period
of fiscal 2002, financing activities used cash of $196,534, principally to make
monthly payments on the Company's term loan ($200,000) and to purchase treasury
stock ($840), partially offset by cash of $4,306 provided by borrowings under
the Company's line of credit.
On October 11, 2002, the Company received an extension, until October 30, 2003,
of its existing $2,250,000 revolving line of credit facility. 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. As of
December 31, 2002 the Company had no outstanding borrowings under the line of
credit.
The Company believes that its present cash position and 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 currently anticipated operational
needs.
11
OFF-BALANCE SHEET FINANCING
The Company has no off-balance sheet financing arrangements.
FOREIGN EXCHANGE MARKET RISK
The Company's bank revolving credit facility includes a $250,000 foreign
exchange subfacility for the purpose of enabling the Company to hedge its
currency exposure in connection with its import activities through spot foreign
exchange and forward exchange contracts.
RESULTS OF OPERATIONS
Total revenues for the six month period ended December 31, 2002 increased by
$271,950 (3.9%) from the first half of fiscal 2002. For the three month period
ended December 31, 2002 total revenues decreased by $7,560 (0.2%) from the same
period of fiscal 2002. For the six and three month periods of fiscal 2003,
revenues of the commercial laundry and dry cleaning segment increased by
$330,484 (4.9%) and $13,419 (0.4%), respectively. The increase for the six
months was attributed to sales of the Green-Jet dry-wetcleaning machines since
the early part of the period, which was not in production during the comparable
periods of fiscal 2002.
The Company's license and franchise segment experienced a decrease in revenue of
$58,563 (32.8%) and $21,008 (22.3)% for the six and three month periods,
respectively, as a result of the opening of a fewer number of licensed and
franchised units and lower royalty income attributable to the slower economy in
the United States and Latin America
Costs of goods sold, expressed as a percentage of sales, decreased to 73.2% for
the six month period of fiscal 2003 from 73.6% from the comparable period of a
year ago. The improvement was principally due to sales of the Green-Jet
dry-wetcleaning machines, which has a higher margin than most of the Company's
other products. For the three month period, cost of goods sold increased to
75.3% in fiscal 2003 from 69.3% in fiscal 2002 due to the relative mix of
product sales in the periods.
Selling general and administrative expenses decreased by $54,094 (2.8%) and
$32,797 (3.3%) for the six and three month periods, respectively, in fiscal 2003
from the comparable periods of fiscal 2002. The savings for both periods was
attributable to lower outside commissions, computer services, exhibits and
convention expenses and telephone expenses, which offset increased costs of
insurance and an increased (by $34,138) provision for bad debts.
Research and development expenses increased by $3,220 (18.7%) during the six
month period of fiscal 2003 compared to the same period of fiscal 2002,
principally due to continuing design changes and the development of new models
of the Green-Jet dry-wetcleaning machine. For the three month period, research
and development expenses decreased by $1,142 (12.3%) from the same period of
last year.
12
Interest income increased by $7,092 (122.7%) and $10,046 (603.0%) for the six
and three month periods, respectively, of fiscal 2003 from the comparable
periods of fiscal 2002, mostly due to interest payments received against a note
associated with the sale of the telecommunications division.
The loss from discontinued operations of $12,173, net of tax benefit, in the six
months ended December 31, 2001 and earnings of $24,877, net of tax provision, in
the three months then ended related to the Metro-Tel telecommunications segment
sold effective July 31, 2002. Results of operations have been reclassified to
reflect the Metro-Tel segment as a discontinued operation.
The net gain on the settlement of liabilities associated with the disposal of
discontinued operations was caused by savings realized from accrued transaction
costs, principally in rent expense and professional fees and other transaction
costs, associated with the sale of the Metro-Tel telecommunications segment.
Interest expense decreased by $17,791 (52.4%) and $6,918 (48.1%) for the six and
three month periods, respectively, of fiscal 2003 from the same periods of
fiscal 2002, primarily due to a reduction in outstanding debt and lower
prevailing interest rates.
The effective tax rate used in each of the periods was 40%.
INFLATION
Inflation has not had a significant effect on the Company's operations during
any of the reported periods.
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.
CRITICAL ACCOUNTING POLICIES
The accounting policies that the Company has identified as critical to its
business operations and to an understanding of the Company's results of
operations are described in detail in the Company's Annual Report on Form 10-KSB
for the fiscal year ended June 30, 2002. In many cases, the accounting treatment
of a particular transaction is specifically dictated by accounting principles
generally accepted in the United States of America, with no need for
management's judgment in their application. In other cases, preparation of the
Company's unaudited condensed consolidated financial statements for
13
interim periods requires us to make estimates and assumptions that affect the
reported amount of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported amounts of
revenues and expenses during the reporting period. There can be no assurance
that the actual results will not 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 and prohibits the use of the pooling-of-interests 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, 2002, the net carrying amount of
intangible assets is $432,018. Amortization expense during the six month period
ended December 31, 2002 and 2001 was $29,092 and $29,579, respectively. There
was no goodwill at December 31, 2002. The adoption of SFAS 141 and SFAS 142 did
not have a significant impact on its financial position or results of
operations.
In August 2001, the FASB issued SFAS 144, Accounting for 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,
14
"Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for
the disposal of a segment of a business (as previously defined in that Opinion).
This Statement also amends ARB No. 51, "Consolidated Financial Statements" to
eliminate the exception to consolidation for a subsidiary for which control is
likely to be temporary. The provisions of this Statement are effective for
financial statements issued for fiscal years beginning after December 15, 2001,
and interim periods within those fiscal years, with early application
encouraged. The provisions of this Statement generally are to be applied
prospectively. The adoption of SFAS 144 did not have a significant impact on its
financial position or results of operations.
In June 2002, the FASB issued SFAS 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS 146 requires companies to
recognize costs associated with exit or disposal activities generally when they
are incurred rather than at the date of a commitment to an exit or disposal
plan. This statement supercedes the guidance provided by Emerging Issues Task
Force 94-3, "Liability Recognition for Certain Costs Incurred in a
Restructuring)." SFAS 146 is required to be adopted for exit or disposal
activities initiated after December 31, 2002. The Company does not believe the
adoption of SFAS 146 will have a significant impact on its financial position or
results of operations.
In December 2002, the FASB issued SFAS 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - An Amendment of FASB Statement 123."
This Statement amends SFAS 123, "Accounting for Stock-Based Compensation," to
provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, this statement amends the disclosure requirements of SFAS 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. This statement requires that
companies follow the prescribed format and provide the additional disclosures in
their annual reports for fiscal years ending after December 15, 2002 and in
financial reports containing condensed financial statements for interim periods
beginning after December 15, 2002.
ITEM 3. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures
Within 90 days prior to the date of this report, an evaluation was carried out
of the effectiveness of the design and operation of the Company's "disclosure
controls and procedures," as defined in, and pursuant to, Rule 13a-14 of the
Securities Exchange Act of 1934 by the Company's President and principal
executive officer and Treasurer and principal financial officer. Based on that
evaluation, these officers concluded that, as of the date of their evaluation,
the Company's disclosure controls and procedures were effective to ensure that
material information relating to the Company and the Company's subsidiary is
made known to them.
15
(b) Changes in internal controls
There were no significant changes in the Company's internal controls or in other
factors that could significantly affect these internal controls subsequent to
the evaluation discussed above.
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS.
At the Company's 2002 Annual Meeting of Stockholders held on November 15,
2002, the Company's stockholders reelected the Company's then existing Board of
Directors by the following votes:
Votes
--------------------------------
For Withheld
----------- --------
Michael S. Steiner 6,680,484 26,812
William K. Steiner 6,678,684 28,612
Venerando J. Indelicato 6,678,096 29,200
David Blyer 6,680,413 26,883
Lloyd Frank 6,678,096 29,200
Alan Grunspan 6,680,413 26,883
Stuart Wagner 6,680,484 26,812
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
99.01 Certification of Principal Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.02 Certification of Principal Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed by the Company during the
quarter for which this report is filed.
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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 10, 2003 DRYCLEAN USA, Inc.
By: /s/ Venerando J. Indelicato
----------------------------------
Venerando J. Indelicato,
Treasurer and Chief Financial
Officer
17
I, Michael S. Steiner, certify that:
1. I have reviewed this Quarterly Report on Form 10-QSB of DRYCLEAN USA, Inc.;
2. Based on my knowledge, this Quarterly Report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this Quarterly
Report;
3. Based on my knowledge, the financial statements, and other financial
information included in this Quarterly Report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this Quarterly Report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
Quarterly Report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this Quarterly Report (the "Evaluation Date"); and
c) presented in this Quarterly Report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
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b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
Quarterly Report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: February 10, 2003 /s/ Michael S. Steiner
------------------------------------------
Michael S. Steiner,
President and Principal Executive Officer
19
I, Venerando J. Indelicato, certify that:
1. I have reviewed this Quarterly Report on Form 10-QSB of DRYCLEAN USA, Inc.;
2. Based on my knowledge, this Quarterly Report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this Quarterly
Report;
3. Based on my knowledge, the financial statements, and other financial
information included in this Quarterly Report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this Quarterly Report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
Quarterly Report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this Quarterly Report (the "Evaluation Date"); and
c) presented in this Quarterly Report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
20
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
Quarterly Report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: February 10, 2003 /s/ Venerando J. Indelicato
-------------------------------------
Venerando J. Indelicato,
Treasurer and Chief Financial
Officer
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Exhibit Index
99.01 Certification of Principal Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
99.02 Certification of Principal Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
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