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, 2003
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 May 5, 2003.
Transitional Small Business Disclosure Format: Yes No X
-------- -----
DRYCLEAN USA, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
- --------------------------------------------------------------------------------------------------------------------
For the nine months ended For the three months ended
March 31, March 31,
2003 2002 2003 2002
(Unaudited) (Unaudited)
- --------------------------------------------------------------------------------------------------------------------
Sales $ 10,024,123 $ 9,898,327 $ 3,098,134 $ 3,395,161
Franchise and license fees,
commissions and other income 450,672 654,053 95,023 147,531
------------ ----------- ----------- -----------
Total revenues 10,474,795 10,552,380 3,193,157 3,542,692
Cost of goods sold 7,245,990 7,119,900 2,179,540 2,331,899
Selling, general and
administrative expenses 2,749,578 2,811,114 871,743 878,585
Research and development 34,009 24,624 13,565 7,400
------------ ----------- ----------- -----------
Total operating expenses 10,029,577 9,955,638 3,064,848 3,217,884
Operating income 445,218 596,742 128,309 324,808
Other income (expenses)
Interest income 20,046 9,779 7,174 3,999
Interest expense (22,295) (44,303) (6,104) (10,321)
------------ ----------- ----------- -----------
Total (2,249) (34,524) 1,070 (6,322)
Earnings from continuing operations
before taxes 442,969 562,218 129,379 318,486
Provision for income taxes 177,188 224,886 51,752 127,394
------------ ----------- ----------- -----------
Net earnings from continuing operations 265,781 337,332 77,627 191,092
Net loss from discontinued operations - (74,728) - (62,914)
Net gain on settlement of liabilities
associated with discontinued operations 39,976 - - -
- --------------------------------------------------------------------------------------------------------------------
Net earnings $ 305,757 $ 262,604 $ 77,627 $ 128,178
Basic and diluted earnings per share from
continuing operations $ .04 $ .05 $ .01 $ .03
Basic and diluted loss per share from
discontinued operations $ .00 $ (.01) $ .00 $ (.01)
- --------------------------------------------------------------------------------------------------------------------
Basic and diluted earnings per share $ .04 $ .04 $ .01 $ .02
Weighted average number of shares
outstanding basic and diluted 6,996,450 6,999,334 6,996,450 6,996,450
======================================================================================================================
See Notes to Condensed Consolidated Financial Statements
2
DRYCLEAN USA, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 2003 June 30, 2002
--------------- -------------
(Unaudited)
ASSETS
- ------
CURRENT ASSETS
Cash and cash equivalents $ 1,311,137 $ 1,264,357
Accounts and trade notes receivable, net of allowance for
doubtful accounts of $205,000 and $130,000 at March 31,
2003 and June 30, 2002, respectively 1,287,217 1,542,691
Inventories 2,769,640 2,918,472
Note receivable (Note 2) 157,143
Lease receivables 138,807 37,290
Refundable income taxes 45,329 225,167
Deferred income taxes 240,351 240,351
Other assets, net 185,379 185,631
Current assets of discontinued operations 745,000
- ------------------------------------------------------------------ --------------------------- -----------------------
Total current assets 6,135,003 7,158,959
Lease and trade notes receivables,
due after one year 96,999 681
Note receivable due after one year (Note 2) 264,286 -
Equipment and improvements - net of
accumulated depreciation and
amortization 230,541 274,124
Franchise, trademarks and other
intangible assets, net 424,819 455,104
Deferred tax asset 8,869 8,869
Non-current assets of discontinued operations - 15,000
- ------------------------------------------------------------------ --------------------------- -----------------------
$ 7,160,517 $ 7,912,737
================================================================== =========================== =======================
See Notes to Condensed Consolidated Financial Statements
3
DRYCLEAN USA, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
March 31, 2003 June 30, 2002
--------------- -------------
(Unaudited)
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 1,085,047 $ 1,736,393
Current portion of bank loan 560,000 320,000
Customer deposits 372,855 539,486
- ------------------------------------------------------------------ --------------------------- -----------------------
Total current liabilities 2,017,902 2,595,879
Long term debt, less current portion - 480,000
- ------------------------------------------------------------------ --------------------------- -----------------------
Total liabilities 2,017,902 3,075,879
SHAREHOLDERS' EQUITY
Common stock, $.025 par value; 15,000,000 shares authorized; 7,027,500 shares
issued and outstanding at March 31, 2003 and June 30, 2002, respectively,
including shares held in
treasury 175,688 175,688
Additional paid-in capital 2,048,570 2,048,570
Retained earnings 2,921,377 2,615,620
Treasury stock, 31,050 shares at cost (3,020) (3,020)
- ------------------------------------------------------------------ --------------------------- -----------------------
Total shareholders' equity 5,142,615 4,836,858
- ------------------------------------------------------------------ --------------------------- -----------------------
$7,160,517 $7,912,737
================================================================== =========================== =======================
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, 2003 March 31, 2002
(Unaudited) (Unaudited)
----------- -----------
Operating activities:
Net earnings from continuing operations $ 265,781 $ 337,332
Adjustments to reconcile net earnings to net cash (used)
provided by operating activities:
Bad debt expense 75,673 45,033
Depreciation and amortization 92,519 84,555
(Increase) decrease in operating assets:
Accounts, trade notes and lease receivables (18,034) 249,988
Inventories 148,832 115,101
Other current assets 252 40,761
Refundable income taxes 179,838 257,363
Increase (decrease) in operating liabilities:
Accounts payable and accrued expenses (651,346) (398,413)
Customer deposits (166,631) (128,360)
Income taxes payable - 47,872
- ---------------------------------------------------------------------------------------------------------------------
Net cash (used) provided by operating activities (73,116) 651,232
- ---------------------------------------------------------------------------------------------------------------------
Discontinued operations:
Net loss - (74,728)
Increase in operating assets - (29,482)
Net gain on settlement of liabilities
associated with discontinued operations 39,976
- ---------------------------------------------------------------------------------------------------------------------
Cash provided (used) by discontinued operations 39,976 (104,210)
- ---------------------------------------------------------------------------------------------------------------------
Investing activities:
Net proceeds from disposal of business 210,000
Capital expenditures - (86,692)
Payments received on note receivable 128,571 -
Patent expenditures (18,651) (7,075)
- ---------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by investing activities 319,920 (93,767)
- ---------------------------------------------------------------------------------------------------------------------
Financing activities
Payments on term loan (240,000) (280,000)
Purchase of treasury stock (3,020)
- ---------------------------------------------------------------------------------------------------------------------
Net cash used by financing activities (240,000) (283,020)
- ---------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 46,780 170,235
Cash and cash equivalents at beginning of period 1,264,357 375,912
- ---------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 1,311,137 $ 546,147
=====================================================================================================================
Supplemental information:
Cash paid for interest $ 22,295 $ 44,303
Cash paid for income taxes 24,000 86,000
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 included 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 in the Company's telecommunications segment 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 was payable in 42 equal monthly
installments commencing October 1, 2002. In March 2003, the purchaser prepaid
$50,000 of the outstanding promissory note, which was applied to the last
installments to become due. Payment and performance of the promissory note is
guaranteed by two companies affiliated with the purchaser and the three
principal stockholders of the 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. 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 net gain on settlement of liabilities
associated with discontinued operations of $39,976 (net of approximately
6
$27,000 in taxes) for the nine months ended March 31, 2003 resulted from the
settlement of certain discontinuance costs at amounts lower than initially
estimated.
NOTE (3) - EARNINGS PER SHARE: There were 482,750 and 497,750 stock options
outstanding at March 31, 2003 and March 31, 2002, 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) - BANK CREDIT FACILITY: 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 March 31, 2003, the Company had no outstanding
borrowings under the line of credit. On May 7, 2003, the Company prepaid the
balance ($560,000 at March 31, 2003) of its outstanding term loan, which had
been payable in monthly installments through December 2004.
NOTE (5) - STOCK OPTIONS
The Company accounts for its stock-based compensation plans under Accounting
Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to
Employees. The pro forma information below is based on provisions of Statement
of Financial Accounting Standard ("FAS") No. 123, Accounting for Stock-Based
Compensation, as amended by FAS 148, Accounting for Stock-Based
Compensation-Transition and Disclosure, issued in December 2002.
NINE MONTHS ENDED THERE MONTHS ENDED
MARCH 31, MARCH 31 MARCH 31, MARCH 31
2003 2002 2003 2002
Income from continuing operations, as reported $ 265,781 $ 337,332 $ 77,627 $ 191,092
Less: Fair value of employee stock compensation (10,783) (10,783) (3,594) (3,594)
--------- --------- -------- ---------
Pro forma income from continuing operations $ 254,998 $ 326,549 $ 74,033 $ 187,498
Net Income, as reported $ 305,757 $ 262,604 $ 77,627 $ 128,178
Less: Fair value of employee stock compensation (10,783) (10,783) (3,594) (3,594)
--------- --------- -------- ---------
Pro forma net income $ 294,974 $ 251,821 $ 74,033 $ 124,584
Earning per common share
Continuing operations, as reported-Basic and Diluted $ 0.04 $ 0.05 $ 0.01 $ 0.03
Continuing operations, pro forma-Basic and Diluted $ 0.04 $ 0.05 $ 0.01 $ 0.03
Net income, as reported-Basic and Diluted $ 0.04 $ 0.04 $ 0.01 $ 0.02
Net income, pro forma-Basic and Diluted $ 0.04 $ 0.04 $ 0.01 $ 0.02
There were no options granted during the three and nine months ended March 31,
2003 and 2002.
7
NOTE (6) - 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 nine months ended For the three months ended
March 31, March 31,
2003 2002 2003 2002
(Unaudited) (Unaudited)
- -----------------------------------------------------------------------------------------------------------------------
Revenues:
Commercial and industrial laundry and
dry cleaning equipment $ 10,308,675 $ 10,310,483 $ 3,147,270 $ 3,479,562
License and franchise operations 162,655 241,897 42,451 63,130
Corporate 3,465 3,436
- -----------------------------------------------------------------------------------------------------------------------
Total revenues $ 10,474,795 $ 10,552,380 $ 3,193,157 $ 3,542,692
=======================================================================================================================
Operating income (loss)
Commercial and industrial laundry and
dry cleaning equipment $ 613,291 $ 649,978 $ 181,025 $ 369,040
License and franchise operations 28,255 122,437 10,775 22,949
Corporate (196,328) (175,673) (63,491) (67,181)
- -----------------------------------------------------------------------------------------------------------------------
Total operating income $ 445,218 $ 596,742 $ 128,309 $ 324,808
=======================================================================================================================
March 31, 2003 June 30, 2002
(Unaudited)
Identifiable assets:
Commercial and industrial laundry and
dry cleaning equipment $ 5,512,297 $ 5,585,225
License and franchise operations 817,163 789,179
Corporate 831,057 778,333
Discontinued operations - 760,000
- -----------------------------------------------------------------------------------------------------------------------
Total assets $ 7,160,517 $ 7,912,737
=======================================================================================================================
8
NOTE (7) - NEW ACCOUNTING PRONOUNCEMENTS:
In June 2001, the Financial Accounting Standard Board ("FASB") issued
FASB Statements No. 141, "Business Combinations," and No. 142, "Goodwill and
Other Intangible Assets." 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 is to 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 required 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, 2003, the net carrying amount of intangible
assets is $424,819. Amortization expense during the nine month period ended
March 31, 2003 and 2002 was $43,638 and $44,124, respectively. There was no
goodwill at March 31, 2003. The adoption of SFAS 141 and SFAS 142 did not have a
significant impact on the Company's 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 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 the Company's financial position or results of operations.
9
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 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 March 31, 2003. The Company does not believe the adoption of SFAS 146 will
have a significant impact on its financial position or results of operations.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness to Others," an interpretation of FASB Statements No.
5, 57, and 107 and a rescission of FASB Interpretation No. 34. This
Interpretation elaborates on the disclosures to be made by a guarantor in its
interim and annul financial statements about its obligations under guarantees
issued. The Interpretation also clarifies that a guarantor is required to
recognize, at inception of a guarantee, a liability for the fair value of the
obligation undertaken. The initial recognition and measurement provisions of the
Interpretation are applicable to guarantees issued or modified after December
31, 2002 and are not expected to have a material effect on the Company's
financial statements.
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.
In January 2003, the FASB issued FASB Interpretation No. 46 (" FIN
46"), "Consolidation of Variable Interest Entities." FIN 46 clarifies the
application of Accounting Research Bulletin No. 51, "Consolidated Financial
Statements," to certain entities in which equity investors do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. FIN 46 applies immediately to
variable interest entities ("VIE's") created after January 31, 2003, and to
VIE's in which an enterprise obtains an interest after that date. It applies in
the first fiscal year or interim period beginning after June 15, 2003, to VIE's
in which an enterprise holds a variable interest that it acquired before
February 1, 2003. FIN 46 applies to public enterprises as of the beginning of
the applicable interim or annual period. We have identified no VIE's.
Accordingly, the adoption of FIN 46 is not expected to have a material impact on
the Company's consolidated financial position, liquidity, or results of
operations.
10
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
GENERAL
- -------
The results of operations of the Company's Metro-Tel segment 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. As discussed
below, for the nine months ended March 31, 2003, the Company recorded a net gain
of $39,976 on the settlement of liabilities associated with the discontinued
operation. The following discussion relates to the Company's continuing
operations.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
For the nine months ended March 31,2003, cash increased by $46,780, compared to
an increase of $170,235 in the nine month period ended March 31, 2002.
Operating activities for the nine months ended March 31, 2003 used cash of
$73,116. While the Company's net earnings from continuing operations ($265,781),
together with non-cash expenses for depreciation and amortization ($92,519) and
a provision for bad debts ($75,673), produced an aggregate of $433,973 of cash,
changes in operating assets and liabilities used cash of $507,089. The principal
uses of cash during the first nine months of fiscal 2003 were to reduce accounts
payable by $651,346, customer deposits by $166,631 and to increase accounts,
trade notes and lease receivables by $18,034. These were partially offset by
cash provided primarily by a reduction in the Company's level of inventories
maintained ($148,832) and the collection of refundable income taxes ($179,838)
during the fiscal 2003 nine month period.
For the nine month period ended March 31, 2002, operating activities provided
cash of $651,232. Of this amount $337,332 was provided by net earnings from
continuing operations and $84,555 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, trade notes and lease
receivables ($249,988), inventories ($115,101), other current assets ($40,761)
and the return of income taxes ($257,363). The cash generated was partially used
to decrease accounts payable and accrued expenses ($398,413) and customer
deposits ($128,360). Cash was also provided by an increase in income taxes
payable ($47,872).
Discontinued operations provided a non-cash gain of $39,976, net after taxes, in
the nine months ended March 31, 2003, 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. Discontinued operations for the
nine months of fiscal 2002 used cash of $104,210.
Investing activities for the nine months ended March 31, 2003 provided cash of
$319,920, principally as a result of $210,000 provided by the net proceeds from
the sale of the Company's telecommunications division and $128,571 from payments
received on a note issued in conjunction with that sale. Patent work used cash
of $18,651. For the same period of fiscal
11
2002, investing activities used cash of $93,767 mostly for equipment purchases
($86,692) and to fund patent work ($7,075).
For the nine month period of fiscal 2003, financing activities used cash of
$240,000 to pay monthly installments of the Company's term loan. During the same
period of fiscal 2002, financing activities used cash of $283,020 principally to
make monthly payments of the Company's term loan ($280,000) and to purchase
capital stock for treasury ($3,020).
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
March 31, 2003, the Company had no outstanding borrowings under the line of
credit. On May 7, 2003, the Company prepaid the balance ($560,000 at March 31,
2003) of its outstanding term loan, which had been payable in monthly
installments through December 2004.
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.
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 nine and three month periods ended March 31, 2003
decreased by $77,585 (.7%) and $349,535 (9.9%), respectively, from the same
periods of fiscal 2002. For the nine month period in fiscal 2003, sales of the
commercial laundry and dry cleaning segment remained essentially flat compared
to the same period in fiscal 2002, with a 13.8% decrease in dry cleaning
machines sales being offset by sales increases of laundry equipment (11.7%) and
spare parts (1.2%). For the three month period ended March 31, 2003, sales of
this segment decreased by $332,292 (9.5%) as sales of dry cleaning machines were
down 39.5%. Increased sales of laundry equipment (9.8%) and spare parts (5.1%)
were not sufficient to offset the decrease in dry cleaning machines sales. The
decrease in sales for dry cleaning equipment for both fiscal 2003 reported
periods reflects the downturn in the economy of Latin America and the Caribbean.
While sales of standard dry cleaning machines to the United States market were
also down, they were offset by sales of the Green-Jet(R) dry-wetcleaning(TM)
machines.
The Company's license and franchise segment experienced a decrease in revenues
of $79,242 (32.8%) and $20,679 (32.8%) for the nine and three month periods,
respectively. The decreases
12
for both periods was attributable to lower royalty income due to the slower
economy in the United States and Latin America.
Costs of goods sold, expressed as a percentage of sales, increased to 72.3% for
the nine month period of fiscal 2003 from 71.9% from the comparable period of a
year ago. For the three month period in fiscal 2003, cost of goods sold
increased to 70.4% from 68.7% in the comparable fiscal 2002 period. The
increases for both reported fiscal 2003 periods was primarily attributable to
the relative mix of products sales in the periods.
Selling, general and administrative expenses decreased by $61,536 (2.2%) and
$6,842 (.8%) for the nine and three month periods, respectively, in fiscal 2003
from the comparable periods of fiscal 2002. During the nine month period, the
decrease was mainly attributable to lower commissions, consulting services,
exhibits and convention expenses and telephone expenses, which offset increases
in insurance expenses and the provision for bad debts. For the three month
period of fiscal 2003 expenses were relatively flat compared to the same period
of fiscal 2002.
Research and development expenses increased by $9,385 (38.1%) and $6,165 (83.3%)
during the nine and three month periods of fiscal 2003, respectively, over the
same periods of a year ago. The increase for both periods was principally due to
continuing design changes and the development of new models of the Green-Jet(R)
dry-wetcleaning(TM) machine.
Interest income increased by $10,267 (105.0%) and $3,175 (79.4%) for the nine
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 Company's Metro-Tel telecommunications division.
Interest expense decreased by $22,008 (49.7%) and $4,217 (40.9%) for the nine
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. On May 7, 2003, the Company prepaid the balance
($560,000 at March 31, 2003) of its outstanding term loan, which had been
payable in monthly installments through December 2004.
The loss from discontinued operations of $74,728 and $62,914, net of tax
benefit, for the nine month and three month periods of fiscal 2002,
respectively, relates 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 $39,976 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 telecommunication
segment.
The effective tax rate used in each period was 40%.
13
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 interim
periods requires us to make estimates and assumptions that effect 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 reported 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 ("FASB") issued
FASB Statements No. 141, "Business Combinations," and No. 142, "Goodwill and
Other Intangible Assets." 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 is to 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 required the Company to complete a transitional
goodwill
14
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, 2003, the net carrying amount of intangible
assets is $424,819. Amortization expense during the nine month period ended
March 31, 2003 and 2002 was $43,638 and $44,124, respectively. There was no
goodwill at March 31, 2003. The adoption of SFAS 141 and SFAS 142 did not have a
significant impact on the Company's 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 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 the Company's 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 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 March 31, 2003. The Company does not believe the adoption of SFAS 146 will
have a significant impact on its financial position or results of operations.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness to Others," an interpretation of FASB Statements No.
5, 57, and 107 and a rescission of FASB Interpretation No. 34. This
Interpretation elaborates on the disclosures to be made by a guarantor in its
interim and annul financial statements about its obligations under guarantees
issued. The Interpretation also clarifies that a guarantor is required to
recognize, at inception of a guarantee, a liability for the fair value of the
obligation undertaken. The initial recognition and measurement provisions of the
Interpretation are applicable to guarantees issued or modified after December
31, 2002 and are not expected to have a material effect on the Company's
financial statements.
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
15
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.
In January 2003, the FASB issued FASB Interpretation No. 46 (" FIN
46"), "Consolidation of Variable Interest Entities." FIN 46 clarifies the
application of Accounting Research Bulletin No. 51, "Consolidated Financial
Statements," to certain entities in which equity investors do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. FIN 46 applies immediately to
variable interest entities ("VIE's") created after January 31, 2003, and to
VIE's in which an enterprise obtains an interest after that date. It applies in
the first fiscal year or interim period beginning after June 15, 2003, to VIE's
in which an enterprise holds a variable interest that it acquired before
February 1, 2003. FIN 46 applies to public enterprises as of the beginning of
the applicable interim or annual period. We have identified no VIE's.
Accordingly, the adoption of FIN 46 is not expected to have a material impact on
the Company's consolidated financial position, liquidity, or results of
operations.
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 Security and 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.
(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.
16
PART II. OTHER INFORMATION
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.
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, 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
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
18
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: May 13, 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
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
20
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: May 13, 2003 /s/ Venerando J. Indelicato
----------------------------------------
Venerando J. Indelicato,
Treasurer and Chief Financial
Officer
21
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.
22