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, 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
--- ---.
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes No X
--- ---.
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 February 9, 2006.
Transitional Small Business Disclosure Format: Yes No X
--- ---
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DRYCLEAN USA, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
- ----------------------------------------------- ----------------------------------- ----------------------------------
For the six months ended December For the three months ended
31, December 31,
2005 2004 2005 2004
(Unaudited) (Unaudited)
- ----------------------------------------------------------------------------------------------------------------------
Sales $ 8,084,834 $ 8,890,503 $4,953,431 $ 4,845,330
Development, franchise and license fees,
commissions and other income 526,362 484,291 223,465 296,893
- ----------------------------------------------------------------------------------------------------------------------
Total revenues 8,611,196 9,374,794 5,176,896 5,142,223
Cost of goods sold 5,935,527 6,708,531 3,620,321 3,632,595
Selling, general and
administrative expenses 2,072,911 2,034,705 1,125,814 1,069,425
Research and development 8,975 15,325 6,350 7,775
- ----------------------------------------------------------------------------------------------------------------------
Total operating expenses 8,017,413 8,758,561 4,752,485 4,709,795
- ----------------------------------------------------------------------------------------------------------------------
Operating income 593,783 616,233 424,411 432,428
Interest income 21,065 6,436 16,791 2,678
- ----------------------------------------------------------------------------------------------------------------------
Earnings before taxes 614,848 622,669 441,202 435,106
Provision for income taxes 233,642 249,068 167,657 174,043
- ----------------------------------------------------------------------------------------------------------------------
Net earnings 381,206 373,601 273,545 261,063
======================================================================================================================
- ----------------------------------------------------------------------------------------------------------------------
Basic and diluted earnings per share $ .05 $ .05 $ .04 $ .04
======================================================================================================================
Weighted average number of shares
Basic 7,024,450 7,021,841 7,024,450 7,024,450
Diluted 7,034,015 7,034,554 7,033,611 7,037,722
======================================================================================================================
See Notes to Condensed Consolidated Financial Statements
2
DRYCLEAN USA, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
- ----------------------------------------------------------------------------------------------------------------------
December 31, June 30,
2005 2005
(Unaudited)
- ----------------------------------------------------------------------------------------------------------------------
Current Assets
Cash and cash equivalents $ 2,549,016 $ 1,582,116
Accounts and trade notes receivable, net 2,175,576 1,949,750
Inventories 3,303,986 3,090,017
Note receivable - 67,857
Lease receivables 5,838 14,995
Deferred income taxes 103,031 103,031
Other assets, net 198,278 118,930
- ----------------------------------------------------------------------------------------------------------------------
Total current assets 8,335,725 6,926,696
Equipment and improvements - net of
accumulated depreciation and amortization 197,417 230,352
Franchise, trademarks and other intangible assets, net 341,759 373,779
Deferred tax asset 10,248 10,248
- ----------------------------------------------------------------------------------------------------------------------
$ 8,885,149 $ 7,541,075
======================================================================================================================
See Notes to Condensed Consolidated Financial Statements
3
DRYCLEAN USA, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND
SHAREHOLDERS' EQUITY
- ----------------------------------------------------------------------------------------------------------------------
December 31, June 30, 2005
2005
(Unaudited)
- ----------------------------------------------------------------------------------------------------------------------
Current Liabilities
Accounts payable and accrued expenses $ 1,023,028 $ 679,505
Income taxes payable 208,468 -
Accrued employee expenses 277,872 295,440
Unearned income 268,325 289,712
Customer deposits 1,308,251 577,440
- ----------------------------------------------------------------------------------------------------------------------
Total current liabilities 3,085,944 1,842,097
Total liabilities 3,085,944 1,842,097
Shareholders' Equity
Preferred Stock, $1.00 par value:
Authorized shares - 200,000; none issued
and outstanding - -
Common stock, $.025 par value; Authorized shares -
15,000,000; 7,055,500, shares issued and outstanding,
including shares held in treasury 176,388 176,388
Additional paid-in capital 2,075,870 2,075,870
Retained earnings 3,549,967 3,449,740
Treasury stock, 31,050 shares at cost (3,020) (3,020)
- ----------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 5,799,205 5,698,978
- ----------------------------------------------------------------------------------------------------------------------
$ 8,885,149 $ 7,541,075
======================================================================================================================
See Notes to Condensed Consolidated Financial Statements
4
DRYCLEAN USA, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
- ----------------------------------------------------------------------------------------------------------------------
Six months ended
December 31, 2005 December 31, 2004
(Unaudited) (Unaudited)
- ----------------------------------------------------------------------------------------------------------------------
Operating activities:
Net earnings $ 381,206 $ 373,601
Adjustments to reconcile net earnings to net cash (used)
provided by operating activities:
Bad debt expense - 21,181
Depreciation and amortization 70,375 58,106
(Increase) decrease in operating assets:
Accounts, trade notes and lease receivables (216,669) (565,196)
Inventories (213,969) (286,252)
Other current assets (79,348) (43,230)
Increase (decrease) in operating liabilities:
Accounts payable and accrued expenses 343,523 (101,349)
Accrued employee expenses (17,568) -
Unearned income (21,387) -
Customer deposits 730,811 (29,706)
Income taxes payable 208,468 76,068
- ----------------------------------------------------------------------------------------------------------------------
Net cash (used) provided by operating activities 1,185,442 (496,777)
- ----------------------------------------------------------------------------------------------------------------------
Investing activities:
Proceeds from note receivable 67,857 78,571
Capital expenditures (4,113) (30,866)
Patent and trademark expenditures (1,308) (16,594)
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by investing activities 62,436 31,111
- ----------------------------------------------------------------------------------------------------------------------
Financing activities:
Dividends paid (280,978) (421,467)
Proceeds from exercise of stock options - 10,000
- ----------------------------------------------------------------------------------------------------------------------
Net cash used by financing activities (280,978) (411,467)
- ----------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 966,900 (877,133)
Cash and cash equivalents at beginning of period 1,582,116 1,742,251
- ----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 2,549,016 $ 865,118
======================================================================================================================
Supplemental information:
Cash paid for income taxes - $ 153,000
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, 2005. The June 30, 2005 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 six months ended December 31, 2005 and 2004 are computed as follows:
For the six months ended For the three months ended
December 31, December 31,
2005 2004 2005 2004
- -------------------------------------------------------------------------------------------------------------
Basic
- -----
Net earnings $ 381,206 $ 373,601 $ 273,545 $ 261,063
Weighted average shares
outstanding 7,024,450 7,021,841 7,024,450 7,024,450
- -------------------------------------------------------------------------------------------------------------
Basic earnings per share $ .05 $ .05 $ .04 $ .04
- -------------------------------------------------------------------------------------------------------------
Diluted
- -------
Net earnings $ 381,206 $ 373,601 $ 273,545 $ 261,063
Weighted average shares
outstanding 7,024,450 7,021,841 7,024,450 7,024,450
Plus incremental shares
from assumed exercise of
stock options 9,565 12,713 9,161 13,272
- -------------------------------------------------------------------------------------------------------------
Diluted weighted average 7,034,015 7,034,554 7,033,611 7,037,722
common shares
- -------------------------------------------------------------------------------------------------------------
Diluted earnings per $ .05 $ .05 $ .04 $ .04
share
=============================================================================================================
No shares subject to stock options were excluded at December 31, 2005 or 2004.
6
NOTE (3) - REVOLVING CREDIT LINE: On October 30, 2005, the Company received an
extension, until October 30, 2006, of its existing $2,250,000 revolving line of
credit facility. In addition, the related Loan Agreement was amended to
eliminate the requirement that 51% of the stock of the Company be owned by the
Steiner family or any Steiner trust. On October 28, 2004, the Loan Agreement,
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 of the Company's and its subsidiaries'
assets. No amounts were outstanding at December 31, 2005 and June 30, 2005.
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." The pro forma information below is based on
provisions of Statement of Financial Accounting Standard ("SFAS") No. 123,
"Accounting for Stock-Based Compensation," as amended by SFAS 148, "Accounting
for Stock-Based Compensation-Transition and Disclosure," issued in December
2002:
For the six months For the three months
ended December 31, ended December 31,
2005 2004 2005 2004
- ----------------------------------------------------------------------------------------------------------
Net earnings, as reported $ 381,206 $ 373,601 $ 273,545 $ 261,063
Less: Fair value of employee stock
compensation - - - -
- ----------------------------------------------------------------------------------------------------------
Pro forma net earnings $ 381,206 $ 373,601 $ 273,545 $ 261,063
Earnings per common share:
Net earnings as reported - Basic
and diluted $ .05 $ .05 $ .04 $ .04
Net earnings, pro forma - Basic
and diluted $ .05 $ .05 $ .04 $ .04
There were no options granted during the six months ended December 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.
NOTE (5) - CASH DIVIDENDS: On September 23, 2005, the Company's Board of
Directors declared a $.04 semi-annual cash dividend (an aggregate of $280,978)
which was paid on November 1, 2005 to shareholders of record on October 14,
2005. On September 27, 2004, the Company's board of Directors declared a $.06
per share annual cash dividend (an aggregate of $421,467) which was paid on
November 1, 2004 to shareholders of record on October 15, 2004.
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 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 ended For the three months ended
December 31, December 31,
2005 2004 2005 2004
(Unaudited) (Unaudited)
- -----------------------------------------------------------------------------------------------------------------------
Revenues:
Commercial and industrial laundry and
dry cleaning equipment $ 8,398,252 $ 9,142,427 $ 5,054,733 $ 5,007,281
License and franchise operations 212,944 232,367 122,163 134,942
- -----------------------------------------------------------------------------------------------------------------------
Total revenues $ 8,611,196 $ 9,374,794 $ 5,176,896 $ 5,142,223
=======================================================================================================================
Operating income (loss)
Commercial and industrial laundry and
dry cleaning equipment $ 589,691 $ 603,449 $ 411,465 $ 436,047
License and franchise operations 167,626 178,865 101,069 99,307
Corporate (163,534) (166,081) (88,123) (102,926)
- -----------------------------------------------------------------------------------------------------------------------
Total operating income $ 593,783 $ 616,233 $ 424,411 $ 432,428
=======================================================================================================================
December 31, 2005 June 30, 2005
(Unaudited)
- -----------------------------------------------------------------------------------------------------------------------
Identifiable assets:
Commercial and industrial laundry and
dry cleaning equipment $ 7,939,665 $ 6,525,375
License and franchise operations 744,052 781,416
Corporate 201,432 234,284
- -----------------------------------------------------------------------------------------------------------------------
Total assets $ 8,885,149 $ 7,541,075
=======================================================================================================================
8
NEW ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("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. SFAS 123(R) replaces SFAS
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. SFAS 123(R) does not affect the
Company at the present time but may effect the Company if it issues share-based
compensation in the future.
In December 2004, the FASB issued SFAS No.151, "Inventory Costs," which
clarifies the accounting for abnormal amounts of idle facility expense, freight,
handling costs, and wasted material (spoilage). Under this statement, such items
will be recognized as current-period charges. In addition, the statement
requires that allocation of fixed production overheads to the costs of
conversion be based on the normal capacity of the production facilities. This
statement is effective for inventory costs incurred during fiscal years
beginning after June 15, 2005 and must be applied prospectively. Adoption of
this statement is not expected to impact the Company's financial position or
results of operations because the Company does not manufacture inventory.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets," which amends APB Opinion No. 29, "Accounting for Nonmonetary
Transactions." The amendments made by SFAS 153 are based on the principle that
exchanges of nonmonetary assets should be measured based on the fair value of
the assets exchanged. Further, the amendments eliminate the narrow exception for
nonmonetary exchanges of similar productive assets and replace it with a broader
exception for exchanges of nonmonetary assets that do not have "commercial
substance." Previously, Opinion 29 required that the accounting for an exchange
of a productive asset for a similar productive asset or an equivalent interest
in the same or similar productive asset should be based on the recorded amount
of the asset relinquished. The provisions in SFAS 153 are effective for
nonmonetary asset exchanges occurring in fiscal periods beginning after June 15,
2005. Adoption of this pronouncement will not materially impact the Company's
financial position or results of operations.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections - A Replacement of APB No. 20 and FASB Statement No. 3." Among other
changes, SFAS 154 requires that a voluntary change in accounting principle be
applied retrospectively with all prior period financial statements presented on
the new accounting principle, unless it is impracticable to do so. SFAS 154 also
provides that (1) a change in method of depreciating or amortizing a long-lived
nonfinancial asset be accounted for as a change in estimate (prospectively) that
was effected by a change in accounting principle, and (2) correction of errors
in previously issued financial statements should be termed a "restatement." The
new standard is effective for accounting changes and correction of errors made
in fiscal years beginning after December 15, 2005. Early adoption of this
standard is permitted for accounting changes and correction of errors made in
fiscal years beginning after June 1, 2005. Adoption of this pronouncement is not
expected to materially impact the Company.
9
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
OVERVIEW
- --------
Sales for the six month period ended December 31, 2005 were 9.1% lower than in
the same period of fiscal 2005, mostly due to the lasting effects of Hurricanes
Katrina and Wilma during our first quarter. Our supplier located in the New
Orleans area is still not fully staffed and shipments have been delayed.
However, conditions improved during the second quarter of fiscal 2006 and sales
for that quarter increased by 2.2% over the same period of fiscal 2005. The
Company expects continued improvement of its performance in the third quarter
and to ship a substantial part of its backlog by the end of fiscal 2006.
Earnings for the three and six month reported periods surpassed last year due to
improved gross profit margins, a lower tax rate and a large commission earned in
the first quarter. As previously reported, a $600,000 shipment is not included
in our revenues since the shipment went directly from the manufacturer to one of
our customers; however, the Company realized a 12% sales commission thereon.
Cash on hand substantially increased during the first half of fiscal 2006,
primarily due to a $730,811 increase in customer deposits, resulting from our
higher backlog. In order to support the backlog, both inventories and accounts
payable have increased.
On September 23, 2005, our Board of Directors declared a $.04 per share
semi-annual cash dividend (an aggregate of $280,978) paid on November 1, 2005 to
shareholders of record on October 14, 2005.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Cash during the first six months of fiscal 2006 increased by $966,900 compared
to a decrease of $877,133 for the same period of fiscal 2005. The following
summarizes the Company's Consolidated Statement of Cash Flows:
Six Months Ended December 31,
2005 2004
- --------------------------------------------------------------------------------
Net cash (used) provided by:
Operating activities $ 1,185,442 $ (496,777)
Investing activities 62,436 31,111
Financing activities (280,978) (411,467)
For the six months ended December 31, 2005, operating activities provided
$1,185,442 of cash compared to a use by operating activities of $496,777 for the
six months ended December 31, 2004. The improvement of $1,682,219 over the same
period of last year was caused primarily by an increase of $730,811 in customer
deposits caused by our increased backlog in the current year's six month period
(a substantial part of which is expected to be shipped during the remainder of
this current fiscal year, with such customer deposits to be proportionately
reduced) compared to a reduction of $29,706 in the prior year's comparable
period, an increase in accounts payable and accrued expenses of $343,523 in the
first six months of fiscal 2006 due to our purchase of inventories to support
our backlog compared to a reduction of $101,349 in the prior year's comparable
period, and an increase in the current year's period over the prior year period
of $132,400 in income taxes payable due to a federal and state moratorium on tax
deposits for companies located in hurricane areas. These cash contributions were
offset by a $216,669 increase in accounts, trade notes and lease receivables due
to heavy shipments in December.
10
Investing activities for the first six months of fiscal 2006 provided cash of
$62,436, mainly as a result of payments received on a note from the sale of the
Company's telecommunications segment ($67,857), which note was fully paid in
November 2005. Capital expenditures of $4,113 and patent and trademark expenses
of $1,308 partially offset the proceeds received from the note receivable. Cash
of $31,111 was provided during the first six months of fiscal 2005 as a result
of payments on the note ($78,571), partially offset by capital expenditures for
equipment ($30,866) and patent and trademark expenditures ($16,594).
For the six months ended December 31, 2005, financing activities used cash of
$280,978 to pay a $.04 per share semi-annual cash dividend on November 1, 2005.
For the first six months of fiscal 2005 financing activities used cash of
$411,467 to pay a $.06 per share annual dividend ($421,467) on November 1, 2004,
partially offset by $10,000 received from the exercise of a stock option to
purchase 10,000 shares of the Company's common stock at the exercise price of
$1.00 per share by a director of the Company.
On October 30, 2005, the Company received an extension until October 30, 2006 of
its existing $2,250,000 revolving line of credit facility. In addition, the Loan
Agreement was amended to eliminate the requirement that 51% of the stock of the
Company be owned by the Steiner family or any Steiner trust. On October 28,
2004, the Loan Agreement, 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.
The Company believes that its present cash position and cash it expects to
generate from operations, as well as, if needed, 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
Six months ended Three months ended
December 31, December 31,
- ----------------------------------------------------------------------------------------------------------------------
2005 2004 2005 2004
Net sales $8,084,834 $8,890,503 -9.1% $4,953,431 $4,845,330 2.2%
Development fees,
franchise and license
fees, commissions and
other income 526,362 484,291 8.7% 223,465 296,893 -24.7%
- ----------------------------------------------------------------------------------------------------------------------
Total revenues $8,611,196 $9,374,794 -8.1% $5,176,896 $5,142,223 .7%
Revenues for the six month period ended December 31, 2005 decreased by $763,598
(8.1%) but increased by $34,673 (.7%) for the three month period ended December
31, 2005 compared to the same periods of fiscal 2005.
For the first half of fiscal 2006, sales of the commercial laundry and dry
cleaning equipment segment decreased by $744,175 (8.1%) compared to the same
periods of fiscal 2005, mostly due to delays in
11
shipments caused by Hurricanes Katrina and Wilma. Sales decreases were also
experienced of dry cleaning equipment (13.8%), laundry equipment (10.8%) and
boilers (46.2%). However, due to our extensive replacement parts inventory,
parts sales were only marginally affected by the hurricanes and increased by
7.4%.
For the three month period ended December 31, 2005, revenues of the commercial
laundry and dry cleaning segment increased by $47,452 (.9%) over the same period
of fiscal 2005. Although conditions improved, shipment delays were still
experienced during the quarter. Increases were achieved in sales of laundry
equipment (18.7%) and parts (5.7%), which were offset by decreases in sales of
drycleaning equipment (17.5%) and boilers (24.4%)
Development fees, franchise and license fees, commissions and other income
increased by $42,071 (8.7%) for the first six months of fiscal 2006, but
decreased by $73,428 (24.7%) for the three month period ended December 31, 2005,
when compared to the corresponding periods of fiscal 2005. The increase during
the six month period was mostly due to increased commissions earned during the
first quarter for shipments sent directly by a manufacturer to customers in our
area.
Six months ended Three months ended
December 31, December 31,
2005 2004 2005 2004
- --------------------------------------------------------------------------------
As a percentage of sales
Cost of goods sold 73.4% 75.5% 73.1% 75.0%
As a percentage of revenue
Selling, general and 24.1% 21.7% 21.7% 20.8%
administrative expenses
Research and development .1% .2% .1% .2%
Total expenses 93.1% 93.4% 91.8% 91.6%
Costs of goods sold, expressed as a percentage of sales improved to 73.4% from
75.5% and to 73.1% from 75.0% for the six and three month periods, respectively,
of fiscal 2006 from the same periods of fiscal 2005. The improved margins were
mainly due to product mix and the ability of the Company to improve margins on
sales made during the periods.
Selling, general and administrative expenses increased by $38,206 (1.9%) and
$56,389 (5.3%) for the six and three month periods, respectively, of fiscal 2006
from the same periods in fiscal 2005, primarily as a result of increased
payroll, insurance and depreciation expenses.
Research and development expenses are a small part of the Company's total
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, expressed as a percentage of revenues,
decreased to 93.1% from 93.4% for the first six month period and increased to
91.8% from 91.6% for the three month period ended December 31, 2005, compared to
the same periods in fiscal 2005. Most of the changes are attributable to the
improved gross profit margins offset, in part, by increased payroll, insurance
and depreciation expenses.
Interest income increased by $14,629 (227.3%) and $14,113 (527.0%) for the three
and six month periods of fiscal 2006, respectively, compared to the same periods
of fiscal 2005 as a result of higher outstanding bank balances.
12
The effective income tax rate used in both periods of fiscal 2006 was 38%
compared to 40% used in both periods of fiscal 2005. The reduction in the
effective rate was made to better conform to the year end tax rate experienced
over the last several years.
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 2008. Annual
rental under this lease is approximately $94,500 with annual increases
commencing November 1, 2006 of 3% over the rent in the prior year. The Company
is also to bear real estate taxes, utilities, maintenance, non-structural
repairs and insurance. The lease contains two three-year renewal options in
favor of the Company. 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, 2005. 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 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 reported period. There can be no assurance that
the actual results will not differ from those estimates.
NEW ACCOUNTING PRONOUNCEMENTS:
- ------------------------------
In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("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. SFAS 123(R) replaces SFAS
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. SFAS 123(R) does not affect the
Company at the present time but may effect the Company if it issues share-based
compensation in the future.
In December 2004, the FASB issued SFAS No.151, "Inventory Costs," which
clarifies the accounting for abnormal amounts of idle facility expense, freight,
handling costs, and wasted material (spoilage). Under this statement, such items
will be recognized as current-period charges. In addition, the statement
requires that allocation of fixed production overheads to the costs of
conversion be based on the normal
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capacity of the production facilities. This statement is effective
for inventory costs incurred during fiscal years beginning after June 15, 2005
and must be applied prospectively. Adoption of this statement is not expected to
impact the Company's financial position or results of operations because the
Company does not manufacture inventory.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets," which amends APB Opinion No. 29, "Accounting for Nonmonetary
Transactions." The amendments made by SFAS 153 are based on the principle that
exchanges of nonmonetary assets should be measured based on the fair value of
the assets exchanged. Further, the amendments eliminate the narrow exception for
nonmonetary exchanges of similar productive assets and replace it with a broader
exception for exchanges of nonmonetary assets that do not have "commercial
substance." Previously, Opinion 29 required that the accounting for an exchange
of a productive asset for a similar productive asset or an equivalent interest
in the same or similar productive asset should be based on the recorded amount
of the asset relinquished. The provisions in SFAS 153 are effective for
nonmonetary asset exchanges occurring in fiscal periods beginning after June 15,
2005. Adoption of this pronouncement will not materially impact the Company's
financial position or results of operations.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections - A Replacement of APB No. 20 and FASB with Statement No. 3." Among
other changes, SFAS 154 requires that a voluntary change in accounting principle
be applied retrospectively with all prior period financial statements presented
on the new accounting principle, unless it is impracticable to do so. SFAS 154
also provides that (1) a change in method of depreciating or amortizing a
long-lived nonfinancial asset be accounted for as a change in estimate
(prospectively) that was effected by a change in accounting principle, and (2)
correction of errors in previously issued financial statements should be termed
a "restatement." The new standard is effective for accounting changes and
correction of errors made in fiscal years beginning after December 15, 2005.
Early adoption of this standard is permitted for accounting changes and
correction of errors made in fiscal years beginning after June 1, 2005. Adoption
of this pronouncement is not expected to materially impact 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
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Securities and Exchange Commission. The Company does not assume an obligation to
update the factors discussed in this Report or such other reports.
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 the Company's 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS.
At the Company's 2005 Annual Meeting of Stockholders held on November 18, 2005,
the Company's stockholders reelected the Company's then existing Board of
Directors by the following votes:
Votes
----------------------------
For Withheld
--------- --------
Michael S. Steiner 6,794,816 3,599
William K. Steiner 6,792,616 5,799
Venerando J. Indelicato 6,793,616 4,799
David Blyer 6,794,358 4,057
Lloyd Frank 6,792,963 5,452
Alan Grunspan 6,795,187 3,228
Stuart Wagner 6,793,358 5,057
ITEM 6. EXHIBITS
(a) 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.
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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 13, 2006 DRYCLEAN USA, Inc.
By: /s/ Venerando J. Indelicato
--------------------------------
Venerando J. Indelicato,
Treasurer and Chief Financial
Officer
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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.
17