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, 2005
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 - 7,024,450 shares outstanding as of May 2, 2005.
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,
2005 2004 2005 2004
(Unaudited) (Unaudited)
- ------------------------------------------------------------------------------------------------------------------------
Sales $ 13,145,479 $ 10,500,193 $ 4,254,976 $ 3,391,164
Development, franchise and license fees,
commissions and other income 647,881 502,682 163,589 170,539
Total revenues 13,793,360 11,002,875 4,418,565 3,561,703
Cost of goods sold 9,835,990 7,608,745 3,127,459 2,459,083
Selling, general and
administrative expenses 3,044,125 2,766,009 1,009,418 946,247
Research and development 34,250 32,934 18,925 14,059
Total operating expenses 12,914,365 10,407,688 4,155,802 3,419,389
Operating income 878,995 595,187 262,763 142,314
Interest income 8,751 19,436 2,314 6,897
Earnings before taxes 887,746 614,623 265,077 149,211
Provision for income taxes 355,098 245,845 106,031 59,680
Net earnings $ 532,648 $ 368,778 $ 159,046 $ 89,531
- ------------------------------------------------------------------------------------------------------------------------
Basic and diluted earnings per share $ .08 $ .05 $ .02 $ .01
- ------------------------------------------------------------------------------------------------------------------------
Weighted average number of shares
Basic 7,022,711 7,007,446 7,024,450 7,014,450
Diluted 7,036,942 7,033,314 7,041,717 7,028,696
========================================================================================================================
See Notes to Condensed Consolidated Financial Statements
2
DRYCLEAN USA, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 2005 June 30, 2004
-------------- -------------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,970,837 $ 1,742,251
Accounts and trade notes receivable, net 1,681,429 1,600,087
Inventories 3,094,164 2,971,803
Note receivable 107,143 157,143
Lease receivables 21,375 35,172
Deferred income taxes 97,618 97,618
Other assets, net 270,124 112,375
- -----------------------------------------------------------------------------------------------------------------
Total current assets 7,242,690 6,716,449
Lease receivables, due after one year 1,000 10,000
Note receivable, less current portion - 67,857
Equipment and improvements - net of
accumulated depreciation and amortization 227,758 217,200
Franchise, trademarks and other intangible assets, net 374,580 385,756
Deferred tax asset 26,859 26,859
- -----------------------------------------------------------------------------------------------------------------
$ 7,872,887 $ 7,424,121
===================================================================================================================
See Notes to Condensed Consolidated Financial Statements
3
DRYCLEAN USA, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
March 31, 2005 June 30, 2004
-------------- -------------
(Unaudited)
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 1,166,418 $ 1,228,062
Income taxes payable 11,970 1,871
Customer deposits and unearned income 929,172 550,042
Dividends payable 245,857 -
- -------------------------------------------------------------------------------------------------------------
Total current and total liabilities 2,353,417 1,779,975
SHAREHOLDERS' EQUITY
Common stock, $.025 par value; 15,000,000 shares
authorized; 7,055,500 and 7,045,500 shares issued
and outstanding at March 31, 2005 and June 30, 2004,
respectively, including shares held in treasury 176,388 176,138
Additional paid-in capital 2,075,870 2,066,120
Retained earnings 3,270,232 3,404,908
Treasury stock, 31,050 shares at cost (3,020) (3,020)
- -------------------------------------------------------------------------------------------------------------
Total shareholders' equity 5,519,470 5,644,146
- -------------------------------------------------------------------------------------------------------------
$ 7,872,887 $ 7,424,121
=============================================================================================================
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, 2005 March 31, 2004
(Unaudited) (Unaudited)
----------- -----------
Operating activities:
Net earnings $ 532,648 $ 368,778
Adjustments to reconcile net earnings to net cash (used)
provided by operating activities:
Bad debt expense 21,181 10,296
Depreciation and amortization 87,861 86,811
(Increase) decrease in operating assets:
Accounts, trade notes and lease receivables (79,727) 138,782
Inventories (122,362) (324,814)
Other current assets (157,750) 17,633
Refundable income taxes - (2,226)
Increase (decrease) in operating liabilities:
Accounts payable and accrued expenses (61,646) (268,618)
Customer deposits and unearned income 379,129 60,228
Income taxes payable 10,098 (112,925)
- -------------------------------------------------------------------------------------------------------------
Net cash provided (used) by operating activities 609,432 (26,055)
- -------------------------------------------------------------------------------------------------------------
Investing activities:
Proceeds from note receivable 117,857 104,761
Capital expenditures (55,281) (13,115)
Patent and trademark expenditures (31,955) (33,248)
- -------------------------------------------------------------------------------------------------------------
Net cash provided by investing activities 30,621 58,398
- -------------------------------------------------------------------------------------------------------------
Financing activities:
Dividends paid (421,467) (350,723)
Proceeds from exercise of stock options 10,000 18,000
- -------------------------------------------------------------------------------------------------------------
Net cash used by financing activities (411,467) (332,723)
- -------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 228,586 (300,380)
Cash and cash equivalents at beginning of period 1,742,251 1,614,141
- -------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 1,970,837 $ 1,313,761
=============================================================================================================
Supplemental information:
Cash paid for income taxes $ 325,000 $ 361,000
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 accounting principles generally
accepted in the United States of America 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 accounting principles generally
accepted in the United States 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, 2004. The June 30, 2004 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) - EARNINGS PER SHARE: Basic and diluted earnings per share for the
three and nine months ended March 31, 2005 and 2004 are computed as follows:
For the nine months ended For the three months ended
March 31, March 31,
2005 2004 2005 2004
- -----------------------------------------------------------------------------------------------------------------------
Basic
- -----
Net earnings $ 532,648 $ 368,778 $ 159,046 $ 89,531
Weighted average shares outstanding 7,022,711 7,007,446 7,024,450 7,014,450
Basic earnings per share $ .08 $ .05 $ .02 $ .01
Diluted
- -------
Net earnings $ 532,648 $ 368,778 $ 159,046 $ 89,531
Weighted average shares outstanding 7,022,711 7,007,446 7,024,450 7,014,450
Plus incremental shares from assumed exercise of
stock options 14,231 25,868 17,267 14,246
- -----------------------------------------------------------------------------------------------------------------------
Diluted weighted average common shares 7,036,942 7,033,314 7,041,717 7,028,696
- -----------------------------------------------------------------------------------------------------------------------
Diluted earnings per share $ .08 $ .05 $ .02 $ .01
=======================================================================================================================
There were 20,000 shares subject to outstanding stock options at March 31, 2004
that were excluded in the computations of earnings per share because the
exercise prices of the options were at least the average market prices of the
Company's common stock during these periods. No shares subject to stock options
were excluded at March 31, 2005.
NOTE (3) - REVOLVING CREDIT LINE: On October 28, 2004, the Company received an
extension, until October 30, 2005, of its existing $2,250,000 revolving line of
credit facility. In addition, on October 28, 2004, the Loan Agreement, dated as
of December 19, 2001, as amended, under which the revolving line of credit
facility was established, was amended to eliminate the borrowing base
restriction on borrowings under the revolving credit facility, thereby enabling
the Company to borrow up to the full $2,250,000 amount available under the
facility regardless of the Company's levels of accounts receivable and
inventories. The Company's obligations under the facility continue to be
guaranteed by the Company's subsidiaries and collateralized by substantially all
the Company's and its subsidiaries' assets.
6
NOTE (4) - 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. See Note 7. 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:
For the nine months For the three months
ended March 31, ended March 31,
2005 2004 2005 2004
- -------------------------------------------------------------------------------------------------------------------------
Net earnings, as reported $ 532,648 $ 368,778 $ 159,046 $ 89,531
Less: Fair value of employee stock compensation - (4,500) - (1,500)
- -------------------------------------------------------------------------------------------------------------------------
Pro forma net earnings $ 532,648 $ 364,278 $ 159,046 $ 88,031
Earnings per common share:
Net earnings as reported - Basic and diluted $ .08 $ .05 $ .02 $ .01
Net earnings, pro forma - Basic and diluted $ .08 $ .05 $ .02 $ .01
There were no options granted during the three and nine months ended March 31,
2005 and 2004. In August 2004, a director exercised an option to purchase 10,000
shares of the Company's common stock at an exercise price of $1.00 per share. In
January 2005, 10,000 options expired unexercised. In October 2003, two employees
exercised options to purchase 18,000 shares of the Company's common stock for
$1.00 per share. In November 2003, 389,000 stock options expired unexercised.
NOTE (5) - CASH DIVIDENDS: On March 23, 2005, the Company's Board of Directors
declared a $.035 per share cash dividend (an aggregate of $245,857) payable on
May 2, 2005 to shareholders of record on April 15, 2005. On September 27, 2004,
the Company's board of Directors declared a $.06 per share cash dividend (an
aggregate of approximately $421,467) which was paid on November 1, 2004 to
shareholders of record on October 15, 2004. On September 26, 2003, the Company's
Board of Directors declared a $.05 per share cash dividend (an aggregate of
approximately $350,000) which was paid on October 31, 2003 to shareholders of
record on October 17, 2003.
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 marketing strategies. The
Company primarily evaluates the operating performance of its segments based on
the categories noted in the table below. The Company has no sales between
segments.
Financial information for the Company's business segments is as follows:
7
- -----------------------------------------------------------------------------------------------------------------------
For the nine months ended For the three months ended March
March 31, 31,
2005 2004 2005 2004
(Unaudited) (Unaudited)
- -----------------------------------------------------------------------------------------------------------------------
Revenues:
Commercial and industrial laundry and
dry cleaning equipment $ 13,476,732 $ 10,776,790 $ 4,334,304 $ 3,512,029
License and franchise operations 316,628 226,085 84,261 49,674
- -----------------------------------------------------------------------------------------------------------------------
Total revenues $ 13,793,360 $ 11,002,875 $ 4,418,565 $ 3,561,703
=======================================================================================================================
Operating income (loss)
Commercial and industrial laundry and
dry cleaning equipment $ 884,233 $ 643,505 $ 280,785 $ 181,876
License and franchise operations 244,380 146,808 65,515 29,242
Corporate (249,618) (195,126) (83,537) (68,804)
- -----------------------------------------------------------------------------------------------------------------------
Total operating income $ 878,995 $ 595,187 $ 262,763 $ 142,314
=======================================================================================================================
March 31, 2005 June 30, 2004
(Unaudited)
Identifiable assets:
Commercial and industrial laundry and
dry cleaning equipment $ 6,810,384 $ 6,348,504
License and franchise operations 798,100 655,744
Corporate 264,403 419,873
- -----------------------------------------------------------------------------------------------------------------------
Total assets $ 7,872,887 $ 7,424,121
=======================================================================================================================
NOTE (7) - NEW ACCOUNTING PRONOUNCEMENTS: In December 2004, the FASB issued SFAS
No. 123 (Revised 2004) (SFAS 123(R)) "Share-based payment". SFAS 123(R) will
require compensation costs related to share-based payment transactions to be
recognized in the financial statements. With limited exceptions, the amount of
compensation cost will be measured based on the grant-date fair value of the
equity or liability instruments issued. In addition, liability awards will be
re-measured each reporting period. Compensation cost will be recognized over the
period that an employee provides service in exchange for the award. FASB 123(R)
replaces FASB 123, Accounting for Stock-Based Compensation and supersedes APB
Opinion No. 25, Accounting for Stock Issued to Employees. This guidance is
effective as of the first interim or annual reporting period beginning after
December 15, 2005 for Small Business filers such as the Company.
NOTE (8) - On January 3, 2005, the Company entered into a Patent License
Agreement with Whirlpool Corporation ("Whirlpool") in which the Company granted
Whirlpool an exclusive license until December 31, 2008 and thereafter a
non-exclusive license to make and sell laundry appliances incorporating the
Company's patent applications and other intellectual property related to fabric
treatment technology for improving the drying and refreshing of garments in home
clothes dryers. In consideration for the grant of
8
the license, Whirlpool has paid the Company a $350,000 fee. Approximately
$331,100 of the payment was classified as unearned income and is being amortized
over 48 months, the life of the agreement. In addition, Whirlpool is to pay the
Company a per unit royalty for dryers using the licensed technology that are
sold during the three year period following the first sale following commercial
production of dryers using the license technology, as well as a to-be-negotiated
royalty with respect to the sale of licensed after market kits (to retrofit
existing home dryers) for which the Company has retained marketing rights but
granted Whirlpool a non-exclusive license.
9
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
OVERVIEW
- --------
In June 2004, the Company obtained an expansion of the territory in which it
acts as a distributor for certain laundry products to cover most of Florida. The
Company added two experienced sales engineers to cover the expanded territory
and to expand sales of the other products marketed by the Company in that
geographical area.
During the nine and three month periods ended March 31, 2005, in which the
Company has operated with the expanded territory, sales increased by 25.2% and
25.5%, respectively. For the nine and three month periods in fiscal 2005, gross
profit margins were reduced by 2.3 and 1.0 percentage points, respectively, from
the comparable periods of fiscal 2004 due to the larger volume of sales which
carry smaller margins in order to remain competitive and obtain sales in the
early part of our expansion into our new territory.
Inventory levels at March 31, 2005 increased by $122,361 from June 30, 2004;
however, they are expected to increase to a higher level in order to maintain
increased sales and the greater number of customers due to the expanded
territory. Selling, general and administrative expenses increased by 10.0% for
the nine month period, and 6.7% for the third quarter, of fiscal 2005 and are
mostly attributable to the larger sales staff.
Cash on hand has been adequate to fund this expansion, having risen to
$1,970,837 on March 31, 2005. The Company's Board of Directors declared a
semi-annual dividend of $.035 per share (an aggregate of $245,857) paid on May
2, 2005 to shareholders of record on April 15, 2005. Although future inventory
levels will absorb some of the cash, management does not expect to borrow
against the Company's existing credit facility.
In January 2005, the Company signed an exclusive license agreement with
Whirlpool Corporation, licensing the use of the Company's patent technology on
home appliances. In February 2005, Whirlpool paid to the Company a $350,000 one
time up front fee and is to pay royalties during the three year period following
the introduction of Whirlpool manufactured products using the licensed
technology. After this period, Whirlpool will retain a non-exclusive license and
the Company is free to license its technology to other manufacturers.
Approximately $331,100 of the payment was classified as unearned income and is
being amortized over 48 months, the life of the contract.
LIQUIDITY AND CAPITAL RESOURCES
For the nine month period ended March 31, 2005, cash increased by $228,586
compared to a decrease in cash of $300,380 for the same period of fiscal 2004.
The primary reason for the increase was due to the one-time payment of $350,000
received from Whirlpool in accordance with the license agreement and the
Company's net earnings of $532,648. This income was offset in part by the
payment of $421,467 in dividends in November 2004. The decrease in cash in
fiscal 2004 was attributable to the payment of $350,723 in cash dividends in
October 2003.
10
The following summarizes the Company's Consolidated Statement of Cash Flows.
Nine Months Ended March 31,
2005 2004
- -------------------------------------------------------------------------------
Net cash provided (used) by:
Operating activities $ 609,432 $ (26,055)
Investing activities 30,621 58,398
Financing activities (411,467) (332,723)
For the first nine months of fiscal 2005 operating activities provided cash of
$609,432 as a result of the Company's net earnings of $532,648, the non-cash
expenses for depreciation and amortization of $87,861 and the $21,181 provision
for bad debts. Changes in operating assets and liabilities used cash of $32,258,
mostly to support an increase in inventory ($122,362), accounts trade notes and
lease receivables ($79,727), other current assets ($157,750) and a decrease in
accounts payable and accrued expenses ($61,646). These uses were offset by an
increase in customer deposits and unearned income of $379,129 due to the
Whirlpool payment and income taxes payable of $10,098. Except for the unearned
income resulting from the one time up front payment from Whirlpool, these
fluctuations in assets and liabilities are the result of normal transactions and
in supporting the expanded sales territory
For the first nine months of fiscal 2004, operating activities used cash of
$26,055. The Company's net earnings of $368,778, coupled with non-cash expenses
for depreciation and amortization of $86,811, provided most of the cash. This
was offset by changes in operating assets and liabilities which used cash of
$491,940 mostly to support an increase in inventories ($324,814) and a decrease
in accounts payable and accrued expenses ($268,618). Additional cash was used by
a decrease in income taxes payable ($112,925) which was offset by an increase in
customer deposits and unearned income of $60,228 and a decrease in other assets
of $17,633.
For the first nine months of fiscal 2005, investing activities provided cash of
$30,621 mainly as a result of payments ($117,857) received on a note from the
sale of the Company's telecommunications segment, offset, in large part, by
capital expenditures of $55,281 and patent and trademark work ($31,955). For the
same period of fiscal 2004, investing activities provided cash of $58,398,
mostly as a result of payments received on the note ($104,761), offset, in part,
by capital expenditures of $13,115 and $33,248 for patent and trademark work.
For the nine months ended March 31, 2005, financing activities used cash of
$411,467, as the result of a $.06 per share cash dividend ($421,467) paid on
November 1, 2004, slightly offset by $10,000 received from the exercise of a
stock option to purchase 10,000 shares of the Company' common stock at the
exercise price of $1.00 per share by a director of the Company. Financing
activities during the first half of fiscal 2004 used cash of $332,723 to pay a
$.05 per share cash dividend ($350,723) on October 31, 2003, partially offset by
the receipt of $18,000 from the exercise of employee stock options in October
2003. On March 23, 2005, the Company's Board of Directors declared a $.035
semi-annual dividend, payable on May 2, 2005 to shareholders of record on April
15, 2005. The previous cash dividend of $.06 per share, distributed on November
1, 2004, was an annual dividend
On October 28, 2004, the Company received an extension until October 30, 2005 of
its existing $2,250,000 revolving line of credit facility. In addition, on
October 28, 2004, the Loan Agreement, dated as of December 19, 2001, as amended,
under which the revolving line of credit facility was established, was amended
to eliminate the borrowing base restriction on borrowings under the revolving
credit facility, thereby enabling the Company to borrow up to the full
$2,250,000 amount available under that facility regardless of the Company's
levels of accounts receivable and inventories. The Company's obligations under
the facility continue to be guaranteed by the Company's subsidiaries and
collateralized by substantially all of the Company's and its subsidiaries'
assets.
11
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 operational needs.
OFF-BALANCE SHEET FINANCING
The Company has no off-balance sheet financing arrangements within the meaning
of item 303(c) of Regulation S-B
RESULTS OF OPERATIONS
Nine months ended Percent Three months ended Percent
March 31, increase March 31, increase
2005 2004 2005 2004
- -----------------------------------------------------------------------------------------------------------------------------
Net sales $ 13,145,479 $ 10,500,193 25.2% $ 4,254,976 $ 3,391,164 25.5%
Development fees,
franchise and license
fees, commissions and
other income 647,881 502,682 28.9% 163,589 170,539 (4.1)%
- -----------------------------------------------------------------------------------------------------------------------------
Total revenues $ 13,793,360 $ 11,002,875 25.4% $ 4,418,565 $ 3,561,703 24.1%
Revenues for the nine and three month periods ended March 31, 2005, increased by
$2,790,485 (25.4%) and $856,862 (24.1%), respectively, from the same periods of
fiscal 2004.
For the nine and three month periods of fiscal 2005, revenues of the commercial
laundry and dry cleaning segment increased by $2,699,942 (25.1%) and $822,275
(23.4%), respectively, from the comparable periods of fiscal 2004. Increases in
sales were experienced in commercial laundry and dry cleaning machines, mostly
attributable to the expansion of the territory, since June 2004, in which the
Company acts as a distributor for certain laundry products to cover most of
Florida when another distributor ceased operations, and the increased number of
sales staff. Increased revenues were also reported by the Company's development
business which develops turn-key dry cleaning establishments for resale to third
parties and broker business which assists others seeking to buy or sell dry
cleaning stores and coin laundries. For the nine month period of fiscal 2005,
sales of parts increased by 13.8%, laundry equipment increased 24.7%, boilers
increased 28.4% and dry cleaning equipment increased 6.6%. Similar results were
achieved for the three month period ended March 31, 2004, with increases of
11.9% in parts sales, coupled with increases in laundry equipment sales of
53.6%, and dry clean equipment of 20.6%; however, boiler sales decrease, by
11.5%.
Franchise and license fees increased by $90,543 (40.0%) and $34,587 (69.6%) for
the nine and three month periods, respectively, of fiscal 2005 when compared to
the same periods of fiscal 2004. This improved performance was attributable to
an improved domestic economy resulting in new licensees.
12
Nine months ended Three months ended
March 31, March 31,
2005 2004 2005 2004
- ----------------------------------------------------------------------------------------------------
As a percentage of sales
Cost of goods sold 74.8% 72.5% 73.5% 72.5%
As a percentage of revenue
Selling, general and
administrative expenses 22.1% 25.1% 22.8% 26.6%
Research and development .2% .3% .4% .4%
Total expenses 93.6% 94.6% 94.1% 96.0%
Cost of goods sold, expressed as a percentage of sales increased to 74.8% from
72.5% and 73.5% from 72.5% for the nine and three month periods, respectively,
of fiscal 2005 compared to the same periods of fiscal 2004. The increased costs
were due to larger sales which carry a smaller margin and a strategically
planned sales campaign to increase the Company's market share in the new
territory.
Selling, general and administrative expenses increased by $278,116 (10.1%) and
$63,171 (6.7%) for the nine and three month periods, respectively, of fiscal
2005 when compared to the same periods in fiscal 2004 due to the increased sales
and service expenses which were planned in connection with the increased sales.
However, as a percentage of revenue these categories of expenses decreased from
25.1% to 22.1% for the nine month period and from 26.6% to 22.8% for the three
month period due to the significant sales increases.
Research and development expenses, as a percentage of revenues, remained
essentially stable and are a very small part of the total company operating
expenses. These expenses relate to the on-going research on the Green-Jet(R)
technologies and the application of these technologies to smaller machines for
the dry cleaning and hotel industry.
The overall expenses of the Company, as a percentage of revenues, decreased for
the first nine months of fiscal 2005 to 93.6% from 94.6%. For the three month
period these expenses decreased to 94.1% from 96.0%. Except for the increased
sales and service expenses which were planned in connection with the increased
sales, most expenses in this category did not increase to the same degree as the
increase in sales.
Interest income declined for both periods of fiscal 2005 when compared to fiscal
2004 due to the lower outstanding balance on the note receivable received in
connection with the sale of the telecommunications segment effective July 31,
2002. These reductions were partially offset by an increase in the interest rate
applicable to this note.
The effective tax rate used in each period 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 2005. Annual
rental under this lease is approximately $83,200. The Company
13
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, 2004. 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 December 2004, the FASB issued SFAS No. 123 (Revised 2004) (SFAS 123(R))
"Share-based payment". SFAS 123(R) will require compensation costs related to
share-based payment transactions to be recognized in the financial statements.
With limited exceptions, the amount of compensation cost will be measured based
on the grant-date fair value of the equity or liability instruments issued. In
addition, liability awards will be re-measured each reporting period.
Compensation cost will be recognized over the period that an employee provides
service in exchange for the award. FASB 123 (R) replaces FASB 123, Accounting
for Stock-Based Compensation and supersedes APB Opinion No. 25, Accounting for
Stock Issued to Employees. This guidance is effective as of the first interim or
annual reporting period after December 15, 2005 for Small Business filers such
as the Company.
FORWARD LOOKING STATEMENTS
- --------------------------
Certain statements in this Report are "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. When used in
this Report, words such as "may," "should," "seek," "believe," "expect,"
anticipate," "estimate," "project," "intend," "strategy" and similar expressions
are intended to identify forward-looking statements regarding events, conditions
and financial trends that may affect the Company's future plans, operations,
business strategies, operating results and financial position. Forward-looking
statements are subject to a number of known and unknown risks and uncertainties
that may cause actual results, trends, performance or achievements of the
Company, or industry trends and results, to differ materially from the future
results, trends, performance or achievements expressed or implied by such
forward-looking statements. Such risks and uncertainties include, among others:
general economic and business conditions in the United States and other
countries in which the Company's customers are located; industry conditions and
trends, including supply and demand; changes in business strategies or
development plans; the availability, terms and deployment of debt and equity
capital; technology changes; competition and other factors which may affect
prices which the Company may charge for its products and its profit margins; the
availability and cost of the equipment purchased by the Company; relative values
of the United States currency to currencies in the countries in which the
Company's customers, suppliers and competitors are located; changes in, or the
failure to comply with, government regulation, principally environmental
regulations; and the Company's ability to successfully introduce, market and
sell at acceptable profit margins its new Green Jet(R) dry-wetcleaning(TM)
machine and Multi-Jet(TM) dry cleaning machine. These and certain other factors
are discussed in this Report and from time to time in other Company reports
filed with the Securities and Exchange Commission. The Company does not assume
an obligation to update the factors discussed in this Report or such other
reports.
14
ITEM 3. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, management of the Company,
with the participation of the Company's President and principal executive
officer and the Company's principal financial officer, evaluated the
effectiveness of the Company's "disclosure controls and procedures," as defined
in Rule 13a-15(e) under the Securities Exchange Act of 1934. 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 provide
reasonable assurance that information required to be disclosed in the Company's
periodic filings under the Securities Exchange Act of 1934 is accumulated and
communicated to our management, including those officers, to allow timely
decisions regarding required disclosure. It should be noted that a control
system, no matter how well designed and operated, can provide only reasonable,
not absolute, assurance that it will detect or uncover failures within the
Company to disclose material information otherwise required to be set forth in
the Company's periodic reports.
During the period covered by this Report, there were no changes in the Company's
internal control over financial reporting that have materially affected, or are
reasonably likely to materially affect, the Company's internal control over
financial reporting.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS
31.01 Certification of principal executive officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002 promulgated under the
Securities Exchange Act of 1934.
31.02 Certification of principal financial officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002 promulgated under the
Securities Exchange Act of 1934.
32.01 Certification of Principal Executive Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
32.02 Certification of Principal Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
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 16, 2005
DRYCLEAN USA, Inc.
By: /s/ Venerando J. Indelicato
-------------------------------------
Venerando J. Indelicato,
Treasurer and Chief Financial Officer
15
EXHIBIT INDEX
31.01 Certification of principal executive officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002 promulgated under the
Securities Exchange Act of 1934.
31.02 Certification of principal financial officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002 promulgated under the
Securities Exchange Act of 1934.
32.01 Certification of Principal Executive Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
32.02 Certification of Principal Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
16