UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549
 
 
FORM 10-Q
 
x
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the quarterly period ended March 31, 2011
 
 
OR
 
o
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 001-14757
 
EnviroStar, Inc.
(Exact name of Registrant 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
(Registrant’s Telephone Number, Including Area Code)
 
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  o   No  o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):                
 
 Large accelerated filer o  Accelerated filer o  Non-accelerated filer  o  Smaller reporting company x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes  o  No x
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:  Common Stock, $.025 par value per share – 7,033,732 shares outstanding as of May 13, 2011.

 
 
 

 
 

 



PART I – FINANCIAL INFORMATION
     
 
     
 
3
     
 
4
     
 
6
     
 
7
     
11
     
15
     
16
     
     
PART II – OTHER INFORMATION
 
     
16
     
17
   
18
   




 
 
 
 
 
 
 
-2-

 

PART 1.  FINANCIAL INFORMATION

Item 1.              Financial Statements

EnviroStar, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF INCOME

 
   
For the nine months
ended
March 31,
 
For the three months ended
March 31,
   
2011
 
2010
 
2011
 
2010
   
(Unaudited)
 
(Unaudited)
Net sales
  $ 14,606,488     $ 13,549,531     $ 4,714,447     $ 3,893,022  
Development fees, franchise and license fees, commission income and other revenue
    276,341       295,043       50,123       201,621  
Total revenues
    14,882,829       13,844,574       4,764,570       4,094,643  
                                 
Cost of sales, net
    11,224,431       10,308,173       3,599,500       2,920,269  
Selling, general and administrative expenses
    3,181,187       3,195,200       1,022,099       1,069,733  
Total operating expenses
    14,405,618       13,503,373       4,621,599       3,990,002  
                                 
Operating income
    477,211       341,201       142,971       104,641  
Interest income
    16,572       8,719       4,506       2,099  
Income before income taxes
    493,783       349,920       147,477       106,740  
Provision for income taxes
    187,876       133,548       55,636       40,561  
Net income
  $ 305,907     $ 216,372     $ 91,841     $ 66,179  
                                 
Net earnings per share – basic and diluted
  $ .04     $ .03     $ .01     $ .01  
Weighted average number of basic and diluted
                               
common shares outstanding
    7,033,732       7,033,732       7,033,732       7,033,732  

See Notes to Condensed Consolidated Financial Statements
 
 

 
 
 
 
 
 
 
-3-

 

EnviroStar, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS

 
ASSETS
           
   
March 31,
2011
(Unaudited)
 
June 30,
2010
(Audited)
Current Assets
               
Cash and cash equivalents
 
$
7,402,649
   
$
6,061,378
 
Accounts and trade notes receivable, net
   
889,738
     
1,185,039
 
Inventories
Refundable income taxes
   
  2,305,622
       26,942
     
  1,823,059
-
 
Deferred income taxes
   
     134,266
     
148,718
 
Lease and mortgage receivables
   
38,011
     
63,229
 
Other assets
   
77,404
     
70,189
 
Total current assets
   
10,874,632
     
9,351,612
 
 
Lease and mortgage receivables-due after one year
   
       86,261
     
50,393
 
Equipment and improvements, net
   
146,549
     
174,848
 
Franchise, trademarks and other intangible assets, net
   
80,774
     
93,739
 
Deferred income taxes
   
61,980
     
59,942
 
                 
   
$
11,250,196
   
$
9,730,534
 

See Notes to Condensed Consolidated Financial Statements
 
 


 
 
 
 
 
 
 
-4-

 

EnviroStar, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS

LIABILITIES AND
SHAREHOLDERS’ EQUITY
         
     March 31,
2011
(Unaudited)
 
June 30,
2010
(Audited)
Current Liabilities
               
Accounts payable and accrued expenses
 
$
752,565
   
$
813,046
 
Accrued employee expenses
   
352,342
     
599,475
 
Income taxes payable
   
                -
     
6,096
 
Unearned income
     28,763        -  
Customer deposits
   
                2,277,729
     
779,027
 
Total current liabilities
   
3,411,399
     
2,197,644
 
                 
Total liabilities
   
3,411,399
     
2,197,644
 
                 
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; 7,065,500,
shares issued and outstanding, including shares held in treasury
   
176,638
     
176,638
 
Additional paid-in capital
   
2,095,069
     
2,095,069
 
Retained earnings
   
5,571,028
     
5,265,121
 
Treasury stock, 31,768 shares, at cost
   
(3,938
)
   
(3,938
)
Total shareholders’ equity
   
7,838,797
     
7,532,890
 
   
$
11,250,196
   
$
 9,730,534
 



 
 
 
 
 
 
 
-5-

 
 

 
EnviroStar, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended
         
   
March  31,
2011
(Unaudited)
 
March  31,
2010
(Unaudited)
Operating activities:
               
Net income
 
$
305,907
   
$
216,372
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
   
43,192
     
61,489
 
Bad debt expense
   
10,929
     
(25,357
)
Inventory reserve
   
(45,015)
     
-
 
Provision  for deferred income taxes
   
12,414
     
682
 
(Increase) decrease in operating assets:
               
Accounts and trade notes receivables
   
284,372
     
44,064
 
Inventories
   
(437,550
)
   
699,227
 
Refundable income taxes
   
(26,942
)
   
(2,135
)
Lease and mortgage receivables
   
   (10,650
)
   
-
 
Other current assets
   
(7,215
)
   
91,760
 
Increase (decrease) in operating liabilities:
               
Accounts payable and accrued expenses
   
(60,481
)
   
38,184
 
Accrued employee expenses
   
(247,133
)
   
(173,123
)
Income taxes payable
   
(6,096
)
   
-
 
Unearned income
   
28,763
     
              -
 
Customer deposits
   
1,498,702
     
(678,150
)
Net cash provided by operating activities
   
1,343,197
     
273,013
 
Investing activities:
               
Capital expenditures
   
(1,926
)
   
(15,048
)
Net cash used by investing activities
   
(1,926
)
   
(15,048
)
Net increase in cash and cash equivalents
   
1,341,271
     
257,965
 
Cash and cash equivalents at beginning of period
   
6,061,378
     
5,460,954
 
Cash and cash equivalents at end of period
 
$
7,402,649
   
$
5,718,919
 
Supplemental information:
               
Cash paid for income taxes
 
$
208,500
   
$
125,000
 
                 

See Notes to Condensed Consolidated Financial Statements



 
 
 
 
 
-6-

 
EnviroStar, Inc. and Subsidiaries
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
(Unaudited)


Note (1) - General:  The accompanying unaudited condensed consolidated financial statements include the accounts of EnviroStar, Inc. and its subsidiaries (the “Company”).  All material intercompany balances and transactions have been eliminated in consolidation.
 
Effective December 1, 2009, the Company changed its name from “DRYCLEAN USA, Inc.” to “EnviroStar, Inc.”
 
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial statements and the instructions to Form 10-Q related to interim period financial statements. Accordingly, these condensed consolidated financial statements do not include certain information and footnotes required by GAAP 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. The condensed consolidated financial statements should be read in conjunction with the Summary of Significant Accounting Policies and other footnotes included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2010. The June 30, 2010 balance sheet information contained herein was derived from the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K as of that date.
 
The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes.  Actual results could differ from those estimates.
 
Note (2) - Earnings Per Share:  Basic earnings per share for the nine and three months ended March 31, 2011 and 2010 are computed as follows:

   
For the nine months ended
March 31,
   
For the three months ended
March 31,
 
   
2011
(Unaudited)
   
2010
(Unaudited)
   
2011
(Unaudited)
   
2010
(Unaudited)
 
                         
Net income
  $ 305,907     $ 216,372     $ 91,841     $ 66,179  
Weighted average shares outstanding
    7,033,732       7,033,732       7,033,732       7,033,732  
Basic and fully diluted earnings per share
  $ .04     $ .03     $ .01     $ .01  

At March 31, 2011, the Company had no outstanding options to purchase shares of the Company’s common or other dilutive securities.
 

 
 
 
 
 
 
 
-7-

 
EnviroStar, Inc. and Subsidiaries
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
(Unaudited)


Note  (3) - Lease and Mortgage Receivables:  Lease and mortgage receivables result from customer leases of equipment under arrangements which qualify as sales type leases.  At March 31, 2011, future lease payments, net of deferred interest ($16,763 at March 31, 2011), due under these leases was $107,510.  At June 30, 2010, future lease payments, net of deferred interest ($13,679 at June 30, 2010), due under these leases was $113,622.  The Company did not have any material lease or mortgage receivables at March 31, 2010.
 
Note  (4) – Revolving Credit Line:  Effective November 1, 2010, the Company’s existing $2,250,000 revolving line of credit facility was extended to October 30, 2011. The Company’s obligations under the facility are guaranteed by the Company’s subsidiaries and collateralized by substantially all of the Company’s and its subsidiaries’ assets. No amounts were outstanding under this facility at March 31, 2011 or June 30, 2010 nor were there any amounts outstanding at any time during the first nine months of fiscal 2011 or during fiscal 2010.
 
Note (5) - Income Taxes:  Income tax expense varies from the federal corporate income tax rate of 34%, primarily due to state income taxes, net of federal income tax effect, and permanent differences.
 
As of March 31, 2011 and June 30, 2010, the Company had deferred tax assets of $196,246 and $208,660, respectively.  Consistent with the guidance of the Financial Accounting Standards Board (the “FASB”) regarding accounting for income taxes, the Company regularly estimates its ability to recover deferred tax assets and establishes a valuation allowance against deferred tax assets to reduce the balance to amounts expected to be recoverable.  This evaluation considers several factors, including an estimate of the likelihood of generating sufficient taxable income in future periods over which temporary differences reverse, the expected reversal of deferred tax liabilities, past and projected taxable income and available tax planning strategies.  As of March 31, 2011, management believes that it is more-likely-than not that the results of future operations will generate sufficient taxable income to realize the net amount of the Company’s deferred tax assets over the periods during which temporary differences reverse.
 
The Company follows Accounting Standards Codification (“ASC”) Topic 740-10-25, “Accounting for Uncertainty in Income Taxes” (“Topic 740”).  Topic 740 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.  During the nine and three months ended March 31, 2011, this did not result in any adjustment to the Company’s provision for income taxes.
 
As of March 31, 2011, the Company was subject to potential Federal and State tax examinations for the tax years 2007 through 2010.
 

 

 
 
 
 
 
 
 
 
-8-

 
EnviroStar, Inc. and Subsidiaries
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
(Unaudited)


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 nine months ended
March 31,
 
For the three months ended
March 31,
 
   
2011
 
2010
 
2011
 
2010
 
   
(Unaudited)
 
(Unaudited)
 
Revenues:
                         
Commercial and industrial laundry and dry cleaning equipment and boilers
 
$
14,773,242
 
$
13,746,262
 
$
4,721,354
 
$
4,055,727
 
License and franchise operations
   
109,587
   
98,312
   
43,216
   
38,916
 
Total revenues
 
$
14,882,829
 
$
13,844,574
 
$
4,764,570
 
$
4,094,643
 
Operating income (loss):
                         
Commercial and industrial laundry and dry cleaning equipment and boilers
 
$
645,516
 
$
511,746
 
$
184,568
 
$
169,497
 
License and franchise operations
   
87,252
   
111,318
   
32,865
   
29,744
 
Corporate
   
(255,557
)
 
(281,863
)
 
(74,462
)
 
(94,600
)
Total operating income
 
$
477,211
 
$
341,201
 
$
142,971
 
$
104,641
 

   
March 31, 2010
   
June 30, 2010
 
   
(Unaudited)
   
(Audited)
 
Identifiable assets:
           
Commercial and industrial laundry and dry cleaning equipment and boilers
  $ 10,729,833     $ 9,108,375  
License and franchise operations
    316,624       408,462  
Corporate
    203,739       213,697  
Total assets
  $ 11,250,196     $ 9,730,534  


 
Note (7) - Recently Adopted Accounting Guidance:
 
In October 2009, the FASB issued Accounting Standards Update (“ASU”) No. 2009-13, “Revenue Recognition (Topic 605) – Multiple-Deliverable Revenue Arrangements,” which amends the revenue recognition for multiple-element arrangements and expands the disclosure requirements related to such arrangements.  The new guidance amends the criteria for separating consideration in multiple-deliverable arrangements, establishes a selling price hierarchy for determining the selling price of a deliverable, eliminates the residual method of allocation, and requires the application of relative selling price method in allocating the arrangement consideration to all deliverables.  The Company adopted this accounting guidance beginning July 1, 2010.  The adoption of this accounting guidance did not have a material impact on the Company’s financial statements.
 

 
 
 
 
 
 
-9-

 
EnviroStar, Inc. and Subsidiaries
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
(Unaudited)


In October 2009, the FASB issued ASU No. 2009-14, “Software (Topic 985) – Certain Revenue Arrangements That Include Software Elements,” which changes the accounting model for revenue arrangements that include both tangible products and software elements that function together to deliver the product’s essential functionality.  The accounting guidance is designed to more closely reflect the underlying economics of these transactions.  The Company adopted this accounting guidance beginning July 1, 2010.  The adoption of this accounting guidance did not have a material impact on the Company’s financial statements.
 
In January 2010, the FASB issued ASU No. 2010-06, “Fair Value Measurements and Disclosures (Topic 820):  Improving Disclosures about Fair Value Measurements” (“ASU No. 2010-06”).  ASU No. 2010-06 amends ASC 820 and clarifies and provides additional disclosure requirements on the transfers of assets and liabilities between Level 1 (quoted prices in active market for identical assets or liabilities) and Level 2 (significant other observable inputs) of the fair value measurement hierarchy, including the reasons for and the timing of the transfers.  Additionally, the guidance requires a roll forward of activities on purchases, sales, issuance, and settlements of the assets and liabilities measured using significant unobservable inputs (Level 3 fair value measurements).  The ASU became effective for the first interim or annual reporting period beginning December 15, 2009, except for the gross presentation of the Level 3 roll forward, which is required for annual reporting periods beginning after December 15, 2010 and for interim reporting periods within those years.  Early application is permitted and comparative disclosures are not required in the period of initial adoption.  The adoption of this ASU did not have a material impact on the Company’s financial statements.
 
In July 2010, the FASB issued ASU 2010-20, “Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Loss” (“ASU 2010-20”).  The ASU 2010-20 amends ASC Topic 310, “Receivables” to enhance disclosures about the credit quality of financing receivables and the allowance for credit losses by requiring an entity to provide a greater level of disaggregated information and to disclose credit quality indicators, past due information, and modifications of its financing receivables.  ASU 2010-20 is effective for interim or annual fiscal years beginning after December 15, 2010.  The Company’s adoption of ASU 2010-20 did not have a material impact on its consolidated financial statements.
 
 


 
 
 
 
 
-10-

 

Item 2.              Management’s Discussion and Analysis or Plan of Operations

Overview

Revenues for the nine and three month periods ended March 31, 2011 increased by 7.5% and 16.4%, respectively, over the same periods of fiscal 2010. Incoming orders during the current year nine month period have been trending higher, increasing the Company’s backlog notwithstanding the increased shipments during the third quarter; however, the economy is still a factor which could affect our future business.  Selling, general and administrative expenses were reduced despite increased revenues.  Net earnings also increased by 41.4% and 38.8% for the nine and three month periods, respectively, over the same periods of fiscal 2010.
 
The Company’s financial position and cash flow continue to improve even though inventories increased to support current orders.
 
Liquidity and Capital Resources
 
Cash increased by $1,341,271 during the nine month period of fiscal 2011, compared to an increase of $257,965 during the same period of fiscal 2010.  The following summarizes the Company’s Consolidated Statements of Cash Flows:

 
Nine Months Ended
March 31,
 
2011
(Unaudited)
2010
(Unaudited)
Net cash provided (used) by:
           
Operating activities
  $ 1,343,197     $ 273,013  
Investing activities
    (1,926 )     (15,048 )

For the nine month period ended March 31, 2011, operating activities provided cash of $1,343,197 compared to $273,013 of cash provided during the same period of fiscal 2010.  The cash provided by operating activities for the nine month period of fiscal 2011 was primarily due to an increase of $1,498,702, compared to a decrease of $678,150 in the nine months ended March 31, 2010, in customer deposits.  The increase in the fiscal 2011 period was the result of incoming orders increasing during this period. The decrease in customer deposits in the nine month period of fiscal 2010 was due to orders lagging behind shipments during the period.  Cash was also provided in the nine month period of fiscal 2011 by the Company’s net income of $305,907, supplemented by non-cash expenses for depreciation and amortization of $43,192, bad debts of $10,929 and a $12,414 provision for deferred taxes. Additional cash was generated by a decrease of $284,372 in accounts and trade notes receivable as [some] shipments were paid through the application of customer deposits which, therefore, did not generate a full account receivable.  An increase in inventories reduced cash by $437,550 to support the increased level of business, and cash was further reduced by $45,015 due to a reduction in inventory reserves. This reserve was placed against returned inventory in prior years which the Company resold during the first quarter of fiscal 2011.  In addition, cash was reduced by $247,133 due to a decrease in employee accrued expenses resulting from the payment of accrued commissions and by a $60,481 decrease in accounts payable and accrued expenses. Cash was also reduced by $10,650 due to an increase in lease and mortgage receivables as the Company continues to finance some small leasing contracts.
 

 
 
 
 
 
 
 
-11-

 

For the nine month period ended March 31, 2010, operating activities provided cash of $273,013 compared to $1,394,438 of cash provided during the same period of fiscal 2009.  The cash provided by operating activities for the nine month period was primarily due to a reduction of $699,227 in inventories, as inventories were kept in line with incoming orders after heavy shipments made during the second quarter of fiscal 2010.  Cash was also provided by the Company’s net earnings of $216,372 and non-cash expenses for depreciation and amortization of $61,489, partially offset by the collection of a $35,000 account receivable which resulted in a reversal of a previously recognized bad debt expense.  Additional cash was provided by a decrease of $44,064 in accounts and trade notes receivable, a decrease of $91,760 in other current assets and a $38,184 increase in accounts payable and accrued expenses.  These were partially offset by a $678,150 reduction in customer deposits as new orders lagged behind shipments during the period.  Cash was also used to reduce accrued employee expenses of $173,123.
 
Investing activities used cash of $1,926 and $15,048 during the nine and three month periods ended March 31, 2011 and 2010 respectively, mostly for capital expenditures.
 
There were no financing activities during either the first nine months of fiscal 2011 or the first nine months of fiscal 2010.
 
Effective November 1, 2010, the Company’s existing $2,250,000 revolving line of credit facility was extended to October 30, 2011. The Company’s obligations under the facility are guaranteed by the Company’s subsidiaries and collateralized by substantially all of the Company’s and its subsidiaries’ assets. No amounts were outstanding under this facility at March 31, 2011 or June 30, 2010 nor were there any amounts outstanding at any time during the first nine months of fiscal 2011 or during fiscal 2010.
 
The Company believes that its existing cash, cash equivalents, net cash from operations and sources of liquidity will be sufficient to fund its operations and anticipated capital expenditures for at least the next twelve months and to meet its long term liquidity needs.
 
Off-Balance Sheet Financing
 
The Company has no off-balance sheet financing arrangements within the meaning of Item 303(a)(4) of Regulation S-K.
 
Results of Operations
 
Revenues.

The following table sets forth certain information with respect to changes in the Company’s revenues for the periods presented:
 
 
Nine months ended
     
Three months ended
     
 
March 31,
     
March 31,
     
 
2011
(Unaudited)
2010
(Unaudited)
 
%
Change
2011
(Unaudited)
2010
(Unaudited)
 
%
Change
Net sales
  $ 14,606,488     $ 13,549,531       7.8 %   $ 4,714,447     $ 3,893,022       21.1 %
Development fees, franchise and license fees,
commissions and other income
    276,341       295,043       -6.3 %     50,123       201,621       -75.1 %
Total revenues
  $ 14,882,829     $ 13,844,574       7.5 %   $ 4,764,570     $ 4,094,643       16.4 %
 

 
 
 
 
 
 
-12-

 

Revenues for the nine and three month periods ended March 31, 2011 increased by $1,038,255 (7.5%) and $669,927 (16.4%), respectively, from the same periods of fiscal 2010. The economy, although improving, remains a factor affecting the Company’s sales, although incoming orders have been trending higher during the first nine months of fiscal 2011. For the nine and three month periods of fiscal 2011, sales of laundry equipment increased by 4.7% and 39.6%, respectively, over the same periods of fiscal 2010. Boiler sales increased by 138.9% and 76.5% for the nine and three month periods of fiscal 2011 over the same fiscal 2010 periods. The increase was mostly attributable to a new line of boilers that the Company introduced in late fiscal 2009. Spare parts sales increased by 3.8% and 4.8% for the nine and three months, respectively, in fiscal 2011. The sales increases in laundry equipment, boilers and spare parts were partially offset by decreases in drycleaning equipment sales of 40.6% and 18.5% for the nine and three month periods of fiscal 2011 from the same fiscal periods of fiscal 2010. As previously reported, drycleaning equipment sales continue to contract as fewer drycleaning establishments and plants are opened.
 
Revenues from development fees, franchise and license fees, commission and other income decreased by $18,702 (6.3%) and $151,498 (75.1%) in the nine and three month periods of fiscal 2011 from the same periods of fiscal 2010. The decrease for the three month period in fiscal 2011 was attributable to the absence of substantial commission income received during the third quarter of fiscal 2010 on a sale by another distributor for an installation made in the Company’s territory.
 
Operating Expenses.

   
Nine months ended
 
Three months ended
 
   
March 31,
 
March 31,
 
   
2011
(Unaudited)
 
2010
(Unaudited)
 
2011
(Unaudited)
 
2010
(Unaudited)
 
As a percentage of sales:
                 
Cost of sales
 
76.8%
 
76.1%
 
76.4%
 
75.0%
 
As a percentage of revenue:
                 
Selling, general and administrative expenses
 
21.4%
 
23.1%
 
21.5%
 
26.1%
 
Total expenses
 
96.8%
 
97.5%
 
97.0%
 
97.4%
 

Costs of sales, expressed as a percentage of sales, increased to 76.8% and 76.4% in the nine and three month periods of fiscal 2011, respectively, from 76.1% and 75.0% for the nine and three month period  ended March 31, 2010, respectively. These increases were attributable to product mix and the competitive pricing needed to secure contracts in the current economy.
 
Selling, general and administrative expenses decreased by $14,013 (.4%) and $47,634 (4.5%) in the nine and three month periods of fiscal 2011, respectively, from the same periods in fiscal 2010.  The slight decreases for both periods were partially attributable to lower insurance expenses and professional fees, offset, in part, by higher travel expenses associated with a greater sales effort in Latin America. The lower expenses expressed as a percentage of revenues in both periods was due primarily to the level of sales for the period which affects how fixed and variable expenses are absorbed.
 
Interest income increased by $7,853 (90.1%) and $2,407 (114.7%) for the nine and three month periods of fiscal 2011, respectively, from the same periods of fiscal 2010 due to the investment of some of the Company’s cash to carry equipment leases and mortgages.
 
The Company’s effective tax rate decreased to 38.0% and 37.7% in the nine and three month periods of fiscal 2011, respectively, from 38.2% and 38.0% for the same periods of fiscal 2010. The slight variation in percentage for the periods reflects changes in permanent and temporary adjustments to taxable income.
 
 
 
 
 
 
-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 the Sheila Steiner Revocable Trust under a lease entered into in November 2005.  After giving effect to a three year renewal option exercised by the Company in 2008, the lease presently expires on October 31, 2011, subject to another three year renewal option in favor of the Company.  The lease provides for annual rental increases in November of each year in an amount equal to 3% over the rent in the prior year.  The Company’s rent under the lease for the period November 1, 2009 through October 31, 2010 was $113,806 and increased on November 1, 2010 to $117,220 for the next twelve months.  The Company is to bear the costs of real estate taxes, utilities, maintenance, non-structural repairs and insurance.  The trustees of the Sheila Steiner Revocable Trust are Sheila Steiner, her husband, William K. Steiner, and her son, Michael S. Steiner.  Sheila Steiner, William K. Steiner, who is Chairman of the Board of Directors and a director of the Company, and Michael S. Steiner, who is President and a director of the Company, are trustees of another trust which is a principal shareholder of the Company.  Michael Steiner, individually, is also a principal shareholder 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 remain unchanged from those described in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2010. The Company makes estimates and assumptions that affect the reported amount of assets and liabilities, contingent assets and liabilities, and the reported amounts of revenues and expenses during the reported period. Therefore, there can be no assurance that the actual results will not differ from those estimates.
 
Recently Adopted Accounting Guidance
 
In October 2009, the FASB issued ASU No. 2009-13, “Revenue Recognition (Topic 605) – Multiple-Deliverable Revenue Arrangements,” which amends the revenue recognition for multiple-element arrangements and expands the disclosure requirements related to such arrangements.  The new guidance amends the criteria for separating consideration in multiple-deliverable arrangements, establishes a selling price hierarchy for determining the selling price of a deliverable, eliminates the residual method of allocation, and requires the application of relative selling price method in allocating the arrangement consideration to all deliverables.  The Company adopted this accounting guidance beginning July 1, 2010.  The adoption of this accounting guidance did not have a material impact on the Company’s financial statements
 
In October 2009, the FASB issued ASU No. 2009-14, “Software (Topic 985) – Certain Revenue Arrangements That Include Software Elements,” which changes the accounting model for revenue arrangements that include both tangible products and software elements that function together to deliver the product’s essential functionality.  The accounting guidance is designed to more closely reflect the underlying economics of these transactions.  The Company adopted this accounting guidance beginning July 1, 2010.  The adoption of this accounting guidance did not have a material impact on the Company’s financial statements.
 

 

 
 
 
 
 
 
 
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In January 2010, the FASB issued ASU No. 2010-06, “Fair Value Measurements and Disclosures (Topic 820):  Improving Disclosures about Fair Value Measurements” (“ASU No. 2010-06”).  ASU No. 2010-06 amends ASC 820 and clarifies and provides additional disclosure requirements on the transfers of assets and liabilities between Level 1 (quoted prices in active market for identical assets or liabilities) and Level 2 (significant other observable inputs) of the fair value measurement hierarchy, including the reasons for and the timing of the transfers.  Additionally, the guidance requires a roll forward of activities on purchases, sales, issuance, and settlements of the assets and liabilities measured using significant unobservable inputs (Level 3 fair value measurements).  The ASU became effective for the first interim or annual reporting period beginning December 15, 2009, except for the gross presentation of the Level 3 roll forward, which is required for annual reporting periods beginning after December 15, 2010 and for interim reporting periods within those years.  Early application is permitted and comparative disclosures are not required in the period of initial adoption.  The adoption of this ASU did not have a material impact on the Company’s financial statements.
 
In July 2010, the FASB issued ASU 2010-20, “Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Loss” (“ASU 2010-20”).  The ASU 2010-20 amends ASC Topic 310, “Receivables” to enhance disclosures about the credit quality of financing receivables and the allowance for credit losses by requiring an entity to provide a greater level of disaggregated information and to disclose credit quality indicators, past due information, and modifications of its financing receivables.  ASU 2010-20 is effective for interim or annual fiscal years beginning after December 15, 2010.  The Company’s adoption of ASU 2010-20 did not have a material impact on its consolidated financial statements.
 
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. These risks and uncertainties include, among others: general economic and business conditions in the United States and other countries in which the Company’s customers and suppliers are located; industry conditions and trends; 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 inventory purchased by the Company; the relative value of the United States dollar 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; the Company’s ability to implement changes in its business strategies and development plans; and the availability, terms and deployment of debt and equity capital if needed for expansion. These and certain other factors are discussed in this Report and from time to time in other Company reports filed with the Securities and Exchange Commission. The Company does not assume an obligation to update the factors discussed in this Report or such other reports.
 

 
 
 
 
 
 
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Item 3.              Quantitative and Qualitative Disclosures About Market Risks
 
All of the Company’s export sales require the customer to make payment in United States dollars.  Accordingly, foreign sales may be affected by the strength of the United States dollar relative to the currencies of the countries in which their customers and competitors are located, as well as the strength of the economies of the countries in which the Company’s customers are located.  The Company has, at times in the past, paid certain suppliers in Euros.  The Company’s bank revolving credit facility contains a $250,000 foreign exchange subfacility for this purpose.  The Company had no foreign exchange contracts outstanding at March 31, 2011 and 2010 nor were there any foreign exchange contracts outstanding at any time during the first nine months of fiscal 2011 or during fiscal 2010.

The Company’s cash and cash equivalents are maintained in interest-bearing bank accounts, including a money market account, and a tax-free municipal fund, each of which bear interest at prevailing interest rates.
 
Item 4.              Controls and Procedures
 
Evaluation of Disclosure 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 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) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”), “disclosure controls and procedures” means controls and other procedures of a company that are designed to ensure that information required to be disclosed by the company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms.  Based on that evaluation, the Company’s principal executive officer and principal financial officer 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 Exchange Act 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.
 

 

 
 
 
 
 
 
-16-

 

PART II. OTHER INFORMATION
 

Item 6.              Exhibits
 
 
(a)
Exhibits
 
 

 
Exhibit
 
Number
Description
   
*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.
 
______________________
*    Filed with this Report.

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, 2011
 
EnviroStar, Inc.
 
     
 
By:
/s/ Venerando J. Indelicato   
   
Venerando J. Indelicato,
   
Treasurer and Chief Financial Officer

 

 
 
 
 
 
 
 
 
-17-

 

Exhibit Index
 

 
Exhibit
 
Number
Description
   
   
   
   
 
______________________
*    Filed with this Report.


-18-