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 September 30, 2008

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

DRYCLEAN USA, 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)   (Zip code)

(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 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 Exchange Act). Yes o   No x

 

As of November 10, 2008, the registrant had 7,033,875 outstanding shares of Common Stock, $.025 par value per share, which is registrant’s only class of common stock.

 

 

 

 

----

 

 

 

 

| **PART I – FINANCIAL INFORMATION** |
|------------------------------------------|
|                                     |   |   |
| Item 1.                                  | Financial Statements | 3 |
|                                     |   |   |
|                                     | Condensed Consolidated Statements of Income (Unaudited)                        for the three months ended September 30, 2008 and 2007 | 3 |
|                                     |   |   |
|                                     | Condensed Consolidated Balance Sheets at September 30, 2008 (Unaudited)                        and June 30, 2008 | 4 |
|                                     |   |   |
|                                     | Condensed Consolidated Statements of Cash Flows (Unaudited)                        for three months ended September 30, 2008 and 2007 | 6 |
|                                     |   |   |
|                                     | Notes to the Condensed Consolidated Financial Statements (Unaudited) | 7 |
|                                     |   |   |
| Item 2.                                  | Management’s Discussion and Analysis of Financial Condition and                        Results of Operations | 13 |
|                                     |   |   |
| Item 3.                                  | Quantitative and Qualitative Disclosures About Market Risk | 13 |
|                                          |    |  |
| Item 4.                                  | Controls and Procedures | 18 |
|                                     |   |   |
|                                     |   |   |
| **PART II – OTHER INFORMATION**    | 18 |
|                                     |   |   |
| Item 6.                                  | Exhibits | 18 |
|                                     |   |   |
| Signatures                               | 19 |
|                                     |   |
| Exhibit Index                            | 20 |
|                                     |   |

 

 

 

2

 

 

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**PART I. FINANCIAL INFORMATION**

| **Item 1.** | **Financial Statements** |
|-------------|--------------------------|

DRYCLEAN USA, Inc. and Subsidiaries

**Condensed Consolidated Statements of Income**

 

 

|                                                                       |   | For the three months endedSeptember 30, |          |
|----------------------------------------------------------------------------|--------|-----------------------------------------|---------------|
|                                                                       |   | **2008**                                |          | 2007 |   |
|                                                                       |   | **(Unaudited)**                         |          | (Unaudited) |   |
| Net sales                                                                  |   | **$**                                   | **6,644,145** |   | $ | 4,568,051 |   |
| Development fees, franchise and license fees, commissions and other income |   |                                    | **106,672**   |   |   | 168,593 |   |
| Total revenues                                                             |   |                                    | **6,750,817** |   |   | 4,736,644 |   |
|                                                                       |   |                                    |          |   |   |   |   |
| Cost of sales                                                              |   |                                    | **5,265,620** |   |   | 3,462,795 |   |
| Selling, general and administrative expenses                               |   |                                    | **1,181,489** |   |   | 1,146,156 |   |
| Total cost of sales and operating expenses                                 |   |                                    | **6,447,109** |   |   | 4,608,951 |   |
| Operating income                                                           |   |                                    | **303,708**   |   |   | 127,693 |   |
| Interest income                                                            |   |                                    | **26,278**    |   |   | 48,879 |   |
| Earnings before income taxes                                               |   |                                    | **329,986**   |   |   | 176,572 |   |
| Provision for income taxes                                                 |   |                                    | **120,985**   |   |   | 63,528 |   |
| Net earnings                                                               |   | **$**                                   | **209,001**   |   | $ | 113,044 |   |
|                                                                       |   |                                    |          |   |   |   |   |
| Basic and diluted earnings per share                                       |   | **$**                                   | **.03**       |   | $ | .02 |   |
|                                                                       |   |                                    |          |   |   |   |   |
| Weighted average number of sharesof common stock outstanding:              |   |                                    |          |   |   |   |   |
| Basic                                                                      |   |                                    | **7,033,875** |   |   | 7,034,307 |   |
| Diluted                                                                    |   |                                    | **7,033,875** |   |   | 7,037,585 |   |

 

 

 

*The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.*

 

 

 

 

 

3

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DRYCLEAN USA, Inc. and Subsidiaries

**Condensed Consolidated Balance Sheets**

 

**ASSETS**

 

 

|                                                  |   | **September 30, 2008** |           | June 30,2008 |   |
|-------------------------------------------------------|--------|------------------------|----------------|--------------|--------|
|                                                  |   | **(Unaudited)**        |           |         |   |
| Current Assets                                        |   |                   |           |         |   |   |   |
| Cash and cash equivalents                             |   | **$**                  | **4,255,278**  |         | $      | 3,889,736 |   |
| Accounts and trade notes receivable, net              |   |                   | **1,791,160**  |         |   | 2,671,438 |   |
| Inventories                                           |   |                   | **4,525,166**  |         |   | 3,891,592 |   |
| Deferred income taxes                                 |   |                   | **94,069**     |         |   | 124,880 |   |
| Other assets, net                                     |   |                   | **151,932**    |         |   | 128,590 |   |
| Total current assets                                  |   |                   | **10,817,605** |         |   | 10,706,236 |   |
|                                                  |   |                   |           |         |   |   |   |
| Equipment and improvements, net                       |   |                   | **230,098**    |         |   | 245,086 |   |
| Franchise, trademarks and otherintangible assets, net |   |                   | **165,847**    |         |   | 183,489 |   |
| Deferred tax asset                                    |   |                   | **30,356**     |         |   | 32,675 |   |
|                                                  |   |                   |           |         |   |   |   |
| Total assets                                          |   | **$**                  | **11,243,906** |         | $      | 11,167,486 |   |

 

 

 

*The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.*

 

 

 

 

4

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DRYCLEAN USA, Inc. and Subsidiaries

**Condensed Consolidated Balance Sheets**

 

**LIABILITIES AND**

**SHAREHOLDERS’ EQUITY**

 

 

|                                                                                                                                            |   | **September 30,****2008** |           | June 30,2008 |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------|----------------|--------------|--------|
|                                                                                                                                            |   | **(Unaudited)**           |           |         |   |
| Current Liabilities                                                                                                                             |   |                      |           |         |   |   |   |
| Accounts payable and accrued expenses                                                                                                           |   | **$**                     | **1,767,345**  |         | $      | 1,487,041 |   |
| Accrued employee expenses                                                                                                                       |   |                      | **304,666**    |         |   | 600,311 |   |
| Unearned income                                                                                                                                 |   |                      | **20,694**     |         |   | 41,387 |   |
| Customer deposits                                                                                                                               |   |                      | **2,270,587**  |         |   | 2,429,989 |   |
| Income taxes payable                                                                                                                            |   |                      | **79,537**     |         |   | 16,682 |   |
| Total current liabilities                                                                                                                       |   |                      | **4,442,829**  |         |   | 4,575,410 |   |
|                                                                                                                                            |   |                      |           |         |   |   |   |
| Total liabilities                                                                                                                               |   |                      | **4,442,829**  |         |   | 4,575,410 |   |
|                                                                                                                                            |   |                      |           |         |   |   |   |
| Shareholders’ Equity                                                                                                                      |   |                      |           |         |   |   |   |
| Preferred Stock, $1.00 par value: Authorized shares – 200,000; none issued and outstanding                                                |   |                      | **—**    |         |   | — |   |
| Common stock, $0.025 par value:Authorized shares – 15,000,000; 7,065,500 shares issued and outstanding, including shares held in treasury |   |                      | **176,638**    |         |   | 176,638 |   |
| Additional paid-in capital                                                                                                                      |   |                      | **2,095,069**  |         |   | 2,095,069 |   |
| Retained earnings                                                                                                                               |   |                      | **4,533,193**  |         |   | 4,324,192 |   |
| Treasury stock, 31,625 shares at cost                                                                                                           |   |                      | **(3,823**     | )            |   | (3,823 | ) |
|                                                                                                                                            |   |                      |           |         |   |   |   |
| Total shareholders’ equity                                                                                                                |   |                      | **6,801,077**  |         |   | 6,592,076 |   |
|                                                                                                                                            |   |                      |           |         |   |   |   |
|                                                                                                                                            |   | **$**                     | **11,243,906** |         | $      | 11,167,486 |   |

 

 

 

*The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.*

 

 

 

 

5

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DRYCLEAN USA, Inc. and Subsidiaries

**Condensed Consolidated Statements of Cash Flows**

 

 

|                                                                                             |   | For the three months endedSeptember 30, |          |
|--------------------------------------------------------------------------------------------------|--------|-----------------------------------------|---------------|
|                                                                                             |   | **2008**                                |          | 2007 |   |
|                                                                                             |   | **(Unaudited)**                         |          | (Unaudited) |   |
| Operating activities:                                                                            |   |                                    |          |   |   |   |   |
| Net earnings                                                                                     |   | **$**                                   | **209,001**   |   | $ | 113,044 |   |
| Adjustments to reconcile net earnings to net cash provided by (used in) by operating activities: |   |                                    |          |   |   |   |   |
| Depreciation and amortization                                                                    |   |                                    | **32,630**    |   |   | 34,565 |   |
| Bad debt expense                                                                                 |   |                                    | **(534**      | **)** |   | 333 |   |
| Provision for deferred income taxes                                                              |   |                                    | **33,130**    |   |   | 3,742 |   |
| (Increase) decrease in operating assets:                                                         |   |                                    |          |   |   |   |   |
| Accounts, trade notes and lease receivables                                                      |   |                                    | **880,812**   |   |   | (644,604 | ) |
| Inventories                                                                                      |   |                                    | **(633,574**  | **)** |   | (660,023 | ) |
| Refundable income taxes                                                                          |   |                                    | **—**   |   |   | 41,036 |   |
| Other current assets                                                                             |   |                                    | **(23,342**   | **)** |   | (59,071 | ) |
| Increase (decrease) in operating liabilities:                                                    |   |                                    |          |   |   |   |   |
| Accounts payable and accrued expenses                                                            |   |                                    | **280,304**   |   |   | 200,812 |   |
| Customer deposits and other                                                                      |   |                                    | **(159,402**  | **)** |   | 74,910 |   |
| Income taxes payable                                                                             |   |                                    | **62,855**    |   |   | — |   |
| Unearned income­                                                                             |   |                                    | **(20,693**   | **)** |   | (20,693 | ) |
| Accrued employee expenses                                                                        |   |                                    | **(295,645**  | **)** |   | (316,994 | ) |
| Net cash provided by (used in) by operating activities                                           |   |                                    | **365,542**   |   |   | (1,232,943 | ) |
| Investing activities:                                                                            |   |                                    |          |   |   |   |   |
| Capital expenditures, net                                                                        |   |                                    | **—**   |   |   | (9,537 | ) |
| Net cash used in investing activities                                                            |   |                                    | **—**   |   |   | (9,537 | ) |
| Net increase (decrease) in cash and cash equivalents                                             |   |                                    | **365,542**   |   |   | (1,242,480 | ) |
| Cash and cash equivalents at beginning of period                                                 |   |                                    | **3,889,736** |   |   | 4,296,415 |   |
|                                                                                             |   |                                    |          |   |   |   |   |
| Cash and cash equivalents at end of period                                                       |   | **$**                                   | **4,255,278** |   | $ | 3,053,935 |   |
|                                                                                             |   |                                    |          |   |   |   |   |
| Supplemental disclosures of cash flowinformation:                                                |   |                                    |          |   |   |   |   |
| Income taxes paid                                                                                |   | **$**                                   | **40,000**    |   | $ | 125,000 |   |
| Dividends declared but not yet paid                                                              |   | **$**                                   | **—**   |   | $ | 281,372 |   |

 

 

 

*The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.*

 

 

 

6

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**DRYCLEAN USA, Inc. and Subsidiaries**

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2008

(Unaudited)

 

**Note (1) – Basis of Presentation:**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-Q 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, 2008. The June 30, 2008 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. Certain prior        period amounts have been reclassified to conform to the current period presentation.

**Note (2) – Earnings Per Share:**Basic and diluted earnings per share for the three months ended September 30, 2008 and 2007 are computed as follows:

 

 

|                                                         |   | **For the three months ended****September 30,** |      |
|--------------------------------------------------------------|--------|-------------------------------------------------|-----------|
|                                                         |   | **2008**                                        |      | **2007** |   |
| Basic                                                        |   |                                            |      |   |   |   |   |
| Net earnings                                                 |   | $                                               | 209,001   |   | $ | 113,044 |   |
| Weighted average sharesoutstanding                           |   |                                            | 7,033,875 |   |   | 7,034,307 |   |
| Basic earnings per share                                     |   | $                                               | .03       |   | $ | .02 |   |
|                                                         |   |                                            |      |   |   |   |   |
| Diluted                                                      |   |                                            |      |   |   |   |   |
| Net earnings                                                 |   | $                                               | 209,001   |   | $ | 113,044 |   |
| Weighted average shares outstanding                          |   |                                            | 7,033,875 |   |   | 7,034,307 |   |
| Plus incremental shares fromassumed exercise of stockoptions |   |                                            | —   |   |   | 3,278 |   |
| Diluted weighted average common shares                       |   |                                            | 7,033,875 |   |   | 7,037,585 |   |
| Diluted earnings pershare                                    |   | $                                               | .03       |   | $ | .02 |   |

 

 

7

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**DRYCLEAN USA, Inc. and Subsidiaries**

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2008

(Unaudited)

 

At September 30, 2008 and 2007, there were outstanding options to purchase 20,000 and 10,000 shares, respectively, of the Company’s common stock which were excluded in the computation of earnings per share because the exercise price of the options was at least the average market price of the Company’s common stock for the period.

 

**Note (3) – Revolving Credit Line:**On October 10, 2008, the Company received an extension until October 30, 2009 of its existing $2,250,000 revolving line of credit facility. 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 September 30, 2008 or June 30, 2008.

 

**Note (4) - Stock-Based Compensation Plans:**The Company’s 2000 Stock Option Plan and 1994 Non-Employee Director Stock Option Plan are the Company’s only stock-based compensation plans. The 2000 Stock Option Plan authorizes the grant (until May 2, 2010) of options to purchase up to 500,000 shares of the Company’s common stock to employees, directors and        consultants, of which no options were outstanding on September 30, 2008. The 1994 Non-Employee Director Stock Option Plan terminated as to future grants on August 23, 2004, but options to purchase 20,000 shares remain outstanding thereunder.

Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (revised), “Share-Based Payment” (“SFAS 123(R)”), utilizing the modified prospective approach. Under the modified prospective approach, SFAS 123(R) applies to new grants after December 15, 2005 and to grants that were outstanding on December 31, 2005 to the extent not yet vested. Since        no new options were granted during the three months ended September 30, 2008 and 2007 and all outstanding options were fully vested at December 31, 2005, no compensation cost for share-based payments was recognized under SFAS 123(R) during the three months ended September 30, 2008 and 2007.

**Note (5) - Cash Dividends:**The following table sets forth information concerning the cash dividends declared by the Company’s Board of Directors during the periods covered by this Report:

 

| DeclarationDate    | PaymentDate      | RecordDate       | Per ShareAmount | TotalAmount |
|--------------------|------------------|------------------|-----------------|-------------|
| September 25, 2007 | November 1, 2007 | October 12, 2007 | $.04            | $281,372    |
|               |             |             |            |        |

 

 

On February 8, 2008, the Company announced that it was eliminating the payment of dividends.

 

8

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**DRYCLEAN USA, Inc. and Subsidiaries**

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2008

(Unaudited)

 

**Note (6) – Income Taxes:**As of September 30, 2008 and June 30, 2008, the Company had deferred tax assets of approximately $124,425 million and $157,555, respectively.

Consistent with the provisions of SFAS No. 109, “Accounting for Income Taxes,” the Company regularly estimates its ability to recover deferred tax assets, and establishes a valuation allowance against deferred tax assets that is determined to be “more-likely-than not” 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 September 30, 2008, 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 our deferred tax assets over the periods during which temporary differences reverse.

Effective July 1, 2007, the Company adopted the provisions of the FIN 48, “Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109” (“FIN 48”) to clarify the requirements of SFAS No. 109, “Accounting for Income Taxes”, relating to the recognition of tax benefits. FIN 48 contains a two-step approach to recognizing and measuring uncertain tax        positions accounted for in accordance with SFAS No. 109. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount which is more than 50% likely of being realized upon ultimate settlement. The Company considers        many factors when evaluating and estimating its tax positions and tax benefits, which may require periodic adjustments and which may not accurately anticipate actual outcomes. The adoption of FIN 48 did not result in any adjustment to the Company’s provision for income taxes.

**Note (7) - 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.

 

9

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**DRYCLEAN USA, Inc. and Subsidiaries**

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2008

(Unaudited)

 

Financial information for the Company’s business segments is as follows:

 

 

|                                                         |   | **For the three months ended****September 30,** |           |
|--------------------------------------------------------------|--------|-------------------------------------------------|----------------|
|                                                         |   | **2008**                                        |           | **2007** |   |
|                                                         |   | **(Unaudited)**                                 |           | **(Unaudited)** |   |
| Revenues:                                                    |   |                                            |           |   |   |   |   |
| Commercial and industrial laundry and dry cleaning equipment |   | **$**                                           | **6,706,440**  |   | $ | 4,659,934 |   |
| License and franchise operations                             |   |                                            | **44,377**     |   |   | 76,710 |   |
| Total revenues                                               |   | **$**                                           | **6,750,817**  |   | $ | 4,736,644 |   |
|                                                         |   |                                            |           |   |   |   |   |
| Operating income (loss):                                     |   |                                            |           |   |   |   |   |
| Commercial and industrial laundry and dry cleaning equipment |   | **$**                                           | **367,432**    |   | $ | 162,987 |   |
| License and franchise operations                             |   |                                            | **24,539**     |   |   | 53,302 |   |
| Corporate                                                    |   |                                            | **(88,263**    | **)** |   | (88,596 | ) |
| Total operating income                                       |   | **$**                                           | **303,708**    |   | $ | 127,693 |   |
|                                                         |   |                                            |           |   |   |   |   |
|                                                         |   |                                            |           |   |   |   |   |
|                                                         |   | **September 30,****2008**                       |           | June 30,

2008 |   |
|                                                         |   | **(Unaudited)**                                 |           |   |   |
| Identifiable assets:                                         |   |                                            |           |   |   |   |   |
| Commercial and industrial laundry and dry cleaning equipment |   | **$**                                           | **10,969,167** |   | $ | 10,509,519 |   |
| License and franchise operations                             |   |                                            | **133,987**    |   |   | 495,648 |   |
| Corporate                                                    |   |                                            | **140,752**    |   |   | 162,319 |   |
| Total assets                                                 |   | **$**                                           | **11,243,906** |   | $ | 11,167,486 |   |

 

 

 

10

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**DRYCLEAN USA, Inc. and Subsidiaries**

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2008

(Unaudited)

 

**Note (8) -**New Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (“FASB”) Issued Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurement” (“SFAS 157”) which defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and provides for additional fair value        disclosures. In February 2008, the FASB issued FASB Staff Positions (“FSP”) SFAS No. 157-1, “Application of FASB Statement No. 157 to FASB Statement No. 13 and Its Related Interpretive Accounting Pronouncements That Address Leasing Transactions,” and FSP SFAS No. 157-2, “Effective Date of FASB Statement No. 157.” FSP SFAS 157-1 removes leasing transactions from the scope of SFAS No. 157, while SFAS No. 157-2 defers the effective date of SFAS 157 to        fiscal years beginning after November 15, 2008 for nonfinancial assets and nonfinancial liabilities that are to be recognized or disclosed at fair value in the financial statements on a nonrecurring basis. FSP SFAS 157-2 does not defer recognition and disclosure requirements for financial assets and financial liabilities which is effective for fiscal years beginning after November 15, 2007, or for nonfinancial assets and nonfinancial liabilities that are to be remeasured at least        annually. The Company does not believe SFAS 157 will have a material effect on its consolidated financial statements.

In February 2007, the FASB issued SFAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities Including an Amendment of FASB No. 115,” which permits, at specified election dates, all entities to choose to measure eligible items at fair value. A business entity is to report unrealized gains and losses on items for which the fair value option has been elected in earnings        at each subsequent reporting date. Upfront costs and fees related to items for which the fair value option is elected is to be recognized in earnings as incurred and not deferred. SFAS 159 is effective as of the beginning of an entity’s fiscal year beginning on or after November 15, 2007 with early application permitted as of the beginning of a fiscal year beginning on or before November 15, 2007 if an entity also elects to apply the provisions of SFAS 157. Retrospective        application is not permitted unless early adoption is adopted. FSAS 159 did not have a material effect on the Company’s consolidated financial statements.

In December 2007, the Securities and Exchange Commission published Staff Accounting Bulletin (“SAB”) No. 110, which amends SAB No. 107, to allow for the continued use, under certain circumstances, of the “simplified” method in developing an estimate of the expected term of so-called “plain vanilla” stock options accounted for under SFAS 123(R) beyond December 31, 2007.        Companies can use the simplified method if they conclude that their stock option exercise experience does not provide a reasonable basis upon which to estimate expected term. The Company has concluded that its stock option exercise experience provides a reasonable basis upon which to estimate expected term, and therefore, has refined its method to calculate estimates of the expected term of stock options.

 

11

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**DRYCLEAN USA, Inc. and Subsidiaries**

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2008

(Unaudited)

 

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS 141(R)”). SFAS 141(R) establishes principles and requirements for how an acquirer in a business combination recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree and the goodwill acquired.        SFAS 141(R) also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. SFAS 141(R) is effective for fiscal years beginning after December 15, 2008. The Company will assess the impact of SFAS 141(R) if and when a future acquisition occurs.

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS No. 162”). SFAS No. 162 is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with accounting principles generally        accepted in the United States of America for nongovernmental entities. SFAS No. 162 is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board’s amendments to AU Section 411,” “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles.” Any effect of applying the provisions of SFAS No. 162 is to be reported as a change in accounting principle in accordance with SFAS No. 154,        “Accounting Changes and Error Corrections – a replacement of APB Opinion No. 20 and FASB Statement No. 3.” The Company will adopt SFAS No. 162 once it is effective. The Company is currently evaluating the effect the adoption may have on its consolidated financial statements.

 

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| **Item 2.** | **Management’s Discussion and Analysis of Financial Condition and Results of Operations** |
|-------------|------------------------------------------------------------------------------------------------------|

**Overview**

Revenues for the first quarter of fiscal 2009 increased by 42.5% and net earnings increased by 84.9% over the same period of fiscal 2008. The increase in revenues was primarily attributable to the shipping of the Company’s accumulated backlog. Although the Company received new orders in the quarter at traditional levels, they did not fully replace the backlog used. The Company has received larger        contracts which historically carry lower margins, as a result of which gross profit margins declined to 20.7% of net sales in the first quarter of fiscal 2009 from 24.2% in the same fiscal 2008 period. This trend is expected to continue, especially since projects that can be financed in the current economic environment have become more competitive. Foreign sales continued to be strong, increasing by 221.8% in the first quarter of fiscal 2009 over the same period of fiscal        2008.

Cash on hand increased during the quarter by $365,542, as the larger than normal accounts receivable level at June 30, 2008 was reduced; however, inventories have increased during the period to support scheduled shipments, using some of the cash that was generated from operations and the collection of receivables.

**Liquidity and Capital Resources**

The following summarizes the Company’s Consolidated Statement of Cash Flows:

 

 

|                               |   | Three Months Ended September 30, |        |
|------------------------------------|--------|----------------------------------|-------------|
|                               |   | 2008(Unaudited)                  |        | 2007(Unaudited) |   |
| Net cash provided by (used in) by: |   |                             |        |   |   |   |   |
| Operating activities               |   | $                                | 365,542     |   | $ | (1,232,943 | ) |
| Investing activities               |   |                             | **—** |   |   | (9,537 | ) |

 

For the three month period ended September 30, 2008, operating activities provided cash of $365,542 compared to cash of $1,232,943 used by operating activities during the same period of fiscal 2008. Cash was provided in the fiscal 2009 quarter by net earnings of $209,001 and non-operating expenses for depreciation and amortization of $32,630 and a provision of $33,130 for deferred taxes, together with        $91,315 provided by changes in assets and liabilities. Several offsetting factors contributed to thenet cash provided by changes of assets and liabilities. First, cash was positively impacted by a decrease of $880,812 in accounts, trade notes and lease receivables resulting primarily from the collection of accounts receivable that arose from the heavy shipments at the end of fiscal 2008, partially offset by a decrease of $159,402 in customer deposits applied to the heavy shipments        during the quarter. An increase in income taxes payable also provided cash of $62,855. On the other hand, cash was negatively impacted by an increase in inventories of $633,574 needed to support the Company’s current backlog, partially offset by a $280,304 increase in accounts payable and accrued expenses. Additional cash was used to reduce accrued employee expenses ($295,645) and unearned income ($20,693) associated with the amortization of the initial fee received by the Company        from Whirlpool Corporation in January 2005 (which fee is being amortized over a four year period ending December 31, 2008).

 

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For the three month period ended September 30, 2007, operating activities used cash of $1,232,943 compared to cash of $219,480 used by operating activities during the same period of fiscal 2007. Cash was provided by the Company’s net earnings ($113,044) and non-operating expenses for depreciation and amortization ($34,565). However, this cash was offset by cash used as a result of changes in assets        and liabilities of $1,384,627 during the three month period ended September 30, 2007, principally to support an increase in accounts and trade notes receivable ($664,604) due to heavy shipments in September 2007 which had not yet been paid for and an increase in inventories ($660,023) to support future shipments. Cash was additionally used for an increase in other assets ($59,071) and decreases in unearned income ($20,693) and accrued employee expenses ($316,994). These additional cash        uses was substantially offset by increases in accounts payable and accrued expenses ($200,812) and customer deposits ($74,910) and a decrease in refundable income taxes ($41,036).

There were no investing activities for the first three months of fiscal 2009, but the Company expended $9,537 for capital expenditures during the first quarter of fiscal 2008.

There were no financing activities during the first quarters of fiscal 2009 and 2008.

On October 10, 2008, the Company received an extension until October 30, 2009 of its existing $2,250,000 revolving line of credit facility. 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 September 30, 2008        or June 30, 2008.

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 revolving line of credit facility, 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**

 

|                                                                                            |   | Three Months Ended September 30, |          |            |
|-------------------------------------------------------------------------------------------------|--------|----------------------------------|---------------|-----------------|
|                                                                                            |   | 2008(Unaudited)                  |          | 2007(Unaudited) |   |   |
| Net sales                                                                                       |   | **$**                            | **6,644,145** |            | $ | 4,568,051 |   | +45.4% |
| Development fees, franchise andlicense fees,                        commissions andother income |   |                             | **106,672**   |            |   | 168,593 |   | -36.7% |
| Total revenues                                                                                  |   | **$**                            | **6,750,817** |            | $ | 4,736,644 |   | +42.5% |

 

Revenues for the three month period ended September 30, 2008 increased by $2,014,173 (42.5%) from the same period of fiscal 2008. The increase was attributable to a $2,046,506 (43.9%) increase in revenue in the commercial laundry and dry cleaning segment. Commercial laundry equipment sales increased by 106.9% and parts sales increased by 4.1%; however, these increases were offset in part, by a 23.3%        decrease in sales of boilers and a 48.7% decrease in sales of dry cleaning equipment. The increase in commercial laundry equipment sales reflects the Company’s focus on commercial laundry machine sales as the need for dry cleaning equipment has decreased due to more casual dressing. Revenues of the license and franchise segment decreased on a comparable basis by $32,333 (42.1%) from the first quarter of 2007 which was favorably impacted by certain renewal license fees.

 

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|                                         | Three Months Ended September 30, |
|----------------------------------------------|----------------------------------|
|                                         | 2008(Unaudited)                  | 2007(Unaudited) |
| *As a percentage of net sales:*              |                             |   |
| Cost of sales                                | 79.3%                            | 75.8% |
| *As a percentage of revenues:*               |                             |   |
| Selling, general and administrative expenses | 17.5%                            | 24.2% |
|                                         |                             |   |
| Total cost of sales and operating expenses   | 95.5%                            | 97.3% |

 

Costs of goods sold, expressed as a percentage of sales, increased to 79.3% from 75.8% for the three month period ended September 30, 2008 from the same period of fiscal 2008 mainly due the Company receiving larger contracts which historically carry lower margins due to domestic and foreign competition.

Selling, general and administrative expenses increased by $35,333 (3.1%), but as a percentage of revenues decreased to 17.5% in the first quarter of fiscal 2009 from 24.2% in the first quarter of fiscal 2008. While expenses in these categories were basically flat in the comparable quarters, the decrease as a percentage of revenues in the fiscal 2009 period was due to the increased level of sales which        absorbed greater fixed and semi-variable expenses.

Interest income decreased by $22,601 (46.2%) in the first quarter of fiscal 2009 over the same period of fiscal 2008, due to lower prevailing interest rates which, offset higher account balances.

The Company’s effective tax rate increased to 36.7% from 36.0% due to changes in deferred tax assets and other deductions.

**Inflation**

Inflation has not had a significant effect on the Company’s operations during any of the reported periods.

**TransactionswithRelated Parties**

The Company leases 27,000 square feet of warehouse and office space from Sheila Steiner, who together with her husband, William K. Steiner, Chairman of the Board of Directors and a director of the Company, are the trustees of a trust which is a principal shareholder of the Company. The lease provides for a three year term beginning November 1, 2005 with two three year renewal options in favor of the        Company. On September 29, 2008, the Company exercised the first renewal option that extends the lease until October 31, 2011. The lease provides for an annual rental of $94,500 with annual increases, commencing November 1, 2006, of 3% over the rent in the prior year. The Company bears the costs of real estate taxes, utilities, maintenance, non-structural repairs and insurance. 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.

 

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**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 an Analysis or Plan of Operation section of the Company’s Annual Report on Form 10-KSB for the fiscal year ended June 30, 2008. The Company makes estimates and        assumptions that effect 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.

**New Accounting Pronouncements**

In September 2006, the Financial Accounting Standards Board (“FASB”) Issued Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurement” (“SFAS 157”) which defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and provides for additional fair value        disclosures. In February 2008, the FASB issued FASB Staff Positions (“FSP”) SFAS No. 157-1, “Application of FASB Statement No. 157 to FASB Statement No. 13 and Its Related Interpretive Accounting Pronouncements That Address Leasing Transactions,” and FSP SFAS No. 157-2, “Effective Date of FASB Statement No. 157.” FSP SFAS 157-1 removes leasing transactions from the scope of SFAS No. 157, while SFAS No. 157-2 defers the effective date of SFAS 157 to        fiscal years beginning after November 15, 2008 for nonfinancial assets and nonfinancial liabilities that are to be recognized or disclosed at fair value in the financial statements on a nonrecurring basis. FSP SFAS 157-2 does not defer recognition and disclosure requirements for financial assets and financial liabilities which is effective for fiscal years beginning after November 15, 2007, or for nonfinancial assets and nonfinancial liabilities that are to be remeasured at least        annually. The Company does not believe SFAS 157 will have a material effect on its consolidated financial statements.

In February 2007, the FASB issued SFAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities Including an Amendment of FASB No. 115,” which permits, at specified election dates, all entities to choose to measure eligible items at fair value. A business entity is to report unrealized gains and losses on items for which the fair value option has been elected in earnings        at each subsequent reporting date. Upfront costs and fees related to items for which the fair value option is elected is to be recognized in earnings as incurred and not deferred. SFAS 159 is effective as of the beginning of an entity’s fiscal year beginning on or after November 15, 2007 with early application permitted as of the beginning of a fiscal year beginning on or before November 15, 2007 if an entity also elects to apply the provisions of SFAS 157. Retrospective        application is not permitted unless early adoption is adopted. FSAS 159 did not have a material effect on the Company’s consolidated financial statements.

In December 2007, the Securities and Exchange Commission published Staff Accounting Bulletin (“SAB”) No. 110, which amends SAB No. 107, to allow for the continued use, under certain circumstances, of the “simplified” method in developing an estimate of the expected term of so-called “plain vanilla” stock options accounted for under SFAS 123(R) beyond December 31, 2007.        Companies can use the simplified method if they conclude that their stock option exercise experience does not provide a reasonable basis upon which to estimate expected term. The Company has concluded that its stock option exercise experience provides a reasonable basis upon which to estimate expected term, and therefore, has refined its method to calculate estimates of the expected term of stock options.

 

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In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS 141(R)”). SFAS 141(R) establishes principles and requirements for how an acquirer in a business combination recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree and the goodwill acquired.        SFAS 141(R) also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. SFAS 141(R) is effective for fiscal years beginning after December 15, 2008. The Company will assess the impact of SFAS 141(R) if and when a future acquisition occurs.

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS No. 162”). SFAS No. 162 is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with accounting principles generally        accepted in the United States of America for nongovernmental entities. SFAS No. 162 is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board’s amendments to AU Section 411,” “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles.” Any effect of applying the provisions of SFAS No. 162 is to be reported as a change in accounting principle in accordance with SFAS No. 154,        “Accounting Changes and Error Corrections – a replacement of APB Opinion No. 20 and FASB Statement No. 3.” The Company will adopt SFAS No. 162 once it is effective and is currently evaluating the effect the adoption may have on the Company’s 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; 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 Risk**

Not Applicable.

| **Item 4.** | **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 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.

**PART II. OTHER INFORMATION**

**Item 6.     Exhibits**

| (a) | Exhibits: |
|-----|-----------|

| 4.1 | Letter, dated October 10, 2008, from Wachovia Bank, National Association, among other things, extending the Company’s revolving credit facility. |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------|

| 10.1 | Letter, dated September 29, 2008, from the Company’s wholly-owned subsidiary, Steiner-Atlantic Corp., to Sheila Steiner and William Steiner exercising an option to extend a lease. |
|------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 31.1 | Certification of principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 promulgated under the Securities Exchange Act of 1934. |
|------|---------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 31.2 | Certification of principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 promulgated under the Securities Exchange Act of 1934. |
|------|---------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 32.1 | Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|------|---------------------------------------------------------------------------------------------------------|

| 32.2 | 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: November 14, 2008 | DRYCLEAN USA, Inc. |
|-------------------------|--------------------|
|                    |               |
|                         | By:                | /s/ Venerando J. Indelicato |  |
|                    |               | Venerando J. Indelicato,                    Treasurer and Chief Financial Officer |

 

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**Exhibit Index**

 

| 4.1 | Letter, dated October 10, 2008, from Wachovia Bank, National Association, among other things, extending the Company’s revolving credit facility. |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------|

| 10.1 | Letter, dated September 29, 2008, from the Company’s wholly-owned subsidiary, Steiner-Atlantic Corp., to Sheila Steiner and William Steiner exercising an option to extend a lease. |
|------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 31.1 | Certification of principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 promulgated under the Securities Exchange Act of 1934. |
|------|---------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 31.2 | Certification of principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 promulgated under the Securities Exchange Act of 1934. |
|------|---------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 32.1 | Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|------|---------------------------------------------------------------------------------------------------------|

| 32.2 | Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|------|---------------------------------------------------------------------------------------------------------|

 

 

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