SECURITIES AND EXCHANGE COMMISSION

 

Washington, D. C. 20549

 

FORM        10-QSB

 

| x | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES                        EXCHANGE ACT OF 1934 |
|---|----------------------------------------------------------------------------------------------------------|

For the quarterly period ended March 31, 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 small business issuer as specified in its charter)

 

| DELAWARE                        | 11-2014231          |
|---------------------------------|---------------------|
| (State of other jurisdiction of | (I.R.S. Employer    |
| incorporation or organization)  | Identification No.) |

 

290 N.E.        68 Street, Miami, Florida 33138

(Address        of principal executive offices)

 

(305)        754-4551

(Issuer’s telephone number)

 

Not        Applicable

(Former        name)

 

Check whether the issuer: (1) filed all reports required to be filed by        Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter        period that the registrant was required to file such reports), and (2) has been subject to        such filing requirements for the past 90 days.        Yes x  No        o.

 

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.

         

State the number of shares outstanding of each of the issuer’s classes        of common equity as of the latest practicable date: Common Stock, $.025 par value per share        – 7,034,307 shares outstanding as of May 9, 2008.

         

Transitional Small Business Disclosure Format:         Yes o No x.

         

         

         

 

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**PART        1.   FINANCIAL INFORMATION**

 

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

DRYCLEAN        USA, Inc.

CONDENSED        CONSOLIDATED STATEMENTS OF INCOME

 

|                                                                                   |   | For the nine months ended                    March 31, |       | For the three months ended                    March 31, |   |
|----------------------------------------------------------------------------------------|--------|--------------------------------------------------------|------------|---------------------------------------------------------|--------|
|                                                                                   |   |                                                   | 2008       |                                                    |   | 2007 |   |   | 2008 |   |   | 2007 |   |
|                                                                                   |   | (Unaudited)                                            |       | (Unaudited)                                             |   |
| Net sales                                                                              |   | $                                                      | 14,605,215 |                                                    | $      | 16,944,641 |   | $ | 4,575,783 |   | $ | 4,987,424 |   |
| Development fees, franchise and                    license fees, commissions and other |   |                                                   | 470,497    |                                                    |   | 492,303 |   |   | 118,405 |   |   | 194,520 |   |
| Total revenues                                                                         |   |                                                   | 15,075,712 |                                                    |   | 17,436,944 |   |   | 4,694,188 |   |   | 5,181,944 |   |
|                                                                                   |   |                                                   |       |                                                    |   |   |   |   |   |   |   |   |   |
| Cost of goods sold                                                                     |   |                                                   | 11,121,243 |                                                    |   | 13,068,747 |   |   | 3,458,501 |   |   | 3,771,022 |   |
| Selling, general and administrative                    expenses                        |   |                                                   | 3,501,884  |                                                    |   | 3,393,425 |   |   | 1,149,047 |   |   | 1,073,952 |   |
| Research and development                                                               |   |                                                   | 2,640      |                                                    |   | 32,770 |   |   | — |   |   | 8,695 |   |
| Total operating expenses                                                               |   |                                                   | 14,625,767 |                                                    |   | 16,494,942 |   |   | 4,607,548 |   |   | 4,853,669 |   |
|                                                                                   |   |                                                   |       |                                                    |   |   |   |   |   |   |   |   |   |
| Operating income                                                                       |   |                                                   | 449,945    |                                                    |   | 942,002 |   |   | 86,640 |   |   | 328,275 |   |
| Interest income                                                                        |   |                                                   | 131,243    |                                                    |   | 114,101 |   |   | 32,727 |   |   | 33,522 |   |
| Interest expense                                                                       |   |                                                   | (747       | )                                                       |   | — |   |   | — |   |   | — |   |
|                                                                                   |   |                                                   |       |                                                    |   |   |   |   |   |   |   |   |   |
| Income before taxes                                                                    |   |                                                   | 580,441    |                                                    |   | 1,056,103 |   |   | 119,367 |   |   | 361,797 |   |
| Provision for income taxes                                                             |   |                                                   | 212,213    |                                                    |   | 403,017 |   |   | 43,449 |   |   | 138,669 |   |
| Net income                                                                             |   | $                                                      | 368,228    |                                                    | $      | 653,086 |   | $ | 75,918 |   | $ | 223,128 |   |
|                                                                                   |   |                                                   |       |                                                    |   |   |   |   |   |   |   |   |   |
|                                                                                   |   |                                                   |       |                                                    |   |   |   |   |   |   |   |   |   |
| Basic and diluted earnings per share                                                   |   | $                                                      | .05        |                                                    | $      | .09 |   | $ | .01 |   | $ | .03 |   |
| Weighted average number of shares                                                      |   |                                                   |       |                                                    |   |   |   |   |   |   |   |   |   |
| Basic                                                                                  |   |                                                   | 7,034,307  |                                                    |   | 7,034,418 |   |   | 7,034,307 |   |   | 7,034,355 |   |
| Diluted                                                                                |   |                                                   | 7,036,989  |                                                    |   | 7,037,871 |   |   | 7,036,162 |   |   | 7,038,197 |   |

 

See Notes        to Condensed Consolidated Financial Statements

 

2

 

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DRYCLEAN        USA, Inc.

CONDENSED        CONSOLIDATED BALANCE SHEETS

 

| **ASSETS**                                                                |   |                     |                              |   |   |
|---------------------------------------------------------------------------|--------|--------------------------|-----------------------------------|--------|--------|
|                                                                      |   | March 31,2008(Unaudited) | June 30,2007                      |
|                                                                      |   |                     |                              |        |   |   |   |   |
| Current Assets                                                            |   |                     |                              |        |   |   |   |   |
| Cash and cash equivalents                                                 |   | $                        | 4,148,718                         |        |   | $ | 4,296,415 |   |
| Accounts and trade notes receivable, net                                  |   |                     | 1,579,557                         |        |   |   | 1,454,987 |   |
| Inventories                                                               |   |                     | 3,412,751                         |        |   |   | 2,912,524 |   |
| Deferred income taxesRefundable income taxes                              |   |                     | 104,948                    74,230 |        |   |   | 99,140                    64,131 |   |
| Other assets, net                                                         |   |                     | 170,042                           |        |   |   | 98,353 |   |
| Total current assets                                                      |   |                     | 9,490,246                         |        |   |   | 8,925,550 |   |
|                                                                      |   |                     |                              |        |   |   |   |   |
| Equipment and improvements, net                                           |   |                     | 259,105                           |        |   |   | 261,872 |   |
| Franchise, trademarks and other intangible assets,                    net |   |                     | 201,174                           |        |   |   | 246,812 |   |
| Deferred tax asset                                                        |   |                     | —                           |        |   |   | 9,340 |   |
|                                                                      |   |                     |                              |        |   |   |   |   |
|                                                                      |   | $                        | 9,950,525                         |        |   | $ | 9,443,574 |   |

 

See Notes        to Condensed Consolidated Financial Statements

 

3

 

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DRYCLEAN        USA, Inc.

CONDENSED        CONSOLIDATED BALANCE SHEETS

 

| **LIABILITIES ANDSHAREHOLDERS’ EQUITY**                                                                                                                                    |   |                     |                             |   |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------|----------------------------------|--------|--------|
|                                                                                                                                                                             |   |                     |                             |   |   |
|                                                                                                                                                                             |   | March 31,2008(Unaudited) | June 30,                    2007 |
| Current Liabilities                                                                                                                                                              |   |                     |                             |   |   |   |   |
| Accounts payable and accrued expenses                                                                                                                                            |   | $                        | 950,781                          |   | $      | 1,076,300 |   |
| Accrued employee expenses                                                                                                                                                        |   |                     | 170,556                          |   |   | 605,383 |   |
| Unearned income                                                                                                                                                                  |   |                     | 62,081                           |   |   | 124,162 |   |
| Customer deposits                                                                                                                                                                |   |                     | 2,397,365                        |   |   | 1,365,623 |   |
| Total current liabilities                                                                                                                                                        |   |                     | 3,580,783                        |   |   | 3,171,468 |   |
| Deferred tax liability                                                                                                                                                           |   |                     | 10,780                           |   |   | — |   |
| Total liabilities                                                                                                                                                                |   |                     | 3,591,563                        |   |   | 3,171,468 |   |
|                                                                                                                                                                             |   |                     |                             |   |   |   |   |
| 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                                                                                                                                                                |   |                     | 4,090,568                        |   |   | 4,003,712 |   |
| Treasury stock, 31,193 shares at cost                                                                                                                                            |   |                     | (3,313                           | )      |   | (3,313 | ) |
| Total shareholders’ equity                                                                                                                                                 |   |                     | 6,358,962                        |   |   | 6,272,106 |   |
|                                                                                                                                                                             |   | $                        | 9,950,525                        |   | $      | 9,443,574 |   |

 

 

See Notes        to Condensed Consolidated Financial Statements

 

4

 

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DRYCLEAN        USA, Inc.

CONDENSED        CONSOLIDATED STATEMENTS OF CASH FLOWS

 

|                                                                                                       |   |   

Nine Months                        Ended                                                    |
|------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------------|
|                                                                                                       |   |                           
                        March 31, 2008                        (Unaudited) |   |                           
                        March 31, 2007                        (Unaudited) |
| Operating activities:                                                                                      |   |                                                                                                           |   |   |   |   |   |
| Net income                                                                                                 |   | $                                                                                                              | 368,228 |   | $ | 653,086 |   |
| Adjustments to reconcile net earnings to net cash                        provided by operating activities: |   |                                                                                                           |   |   |   |   |   |
| Bad debt expense                                                                                           |   |                                                                                                           | 6,369 |   |   | 10,538 |   |
| Depreciation and amortization

                        Provision for deferred income taxes                 |   |                                                                                                           | 99,259                        14,312 |   |   | 89,706                        14,458 |   |
| (Increase) decrease in operating assets:                                                                   |   |                                                                                                           |   |   |   |   |   |
| Accounts and trade notes receivables                                                                       |   |                                                                                                           | (130,939 | ) |   | 378,204 |   |
| Inventories                                                                                                |   |                                                                                                           | (500,227 | ) |   | (155,821 | ) |
| Other current assets                                                                                       |   |                                                                                                           | (71,689 | ) |   | 139,167 |   |
| Refundable income taxes                                                                                    |   |                                                                                                           | (10,099 | ) |   | — |   |
| Increase (decrease) in operating liabilities:                                                              |   |                                                                                                           |   |   |   |   |   |
| Accounts payable and accrued expenses                                                                      |   |                                                                                                           | (125,519 | ) |   | (4,406 | ) |
| Accrued employee expenses                                                                                  |   |                                                                                                           | (434,827 | ) |   | (200,595 | ) |
| Unearned income                                                                                            |   |                                                                                                           | (62,081 | ) |   | (62,081 | ) |
| Customer deposits                                                                                          |   |                                                                                                           | 1,031,742 |   |   | (107,927 | ) |
| Income taxes payable                                                                                       |   |                                                                                                           | — |   |   | (64,592 | ) |
| Net cash provided by operating activities                                                                  |   |                                                                                                           | 184,529 |   |   | 689,737 |   |
| Investing activities:                                                                                      |   |                                                                                                           |   |   |   |   |   |
| Capital expenditures                                                                                       |   |                                                                                                           | (50,854 | ) |   | (83,525 | ) |
|                                                                                                       |   |                                                                                                           |   |   |   |   |   |
| Net cash used by investing activities                                                                      |   |                                                                                                           | (50,854 | ) |   | (83,525 | ) |
| Financing activities:                                                                                      |   |                                                                                                           |   |   |   |   |   |
| Dividends paid                                                                                             |   |                                                                                                           | (281,372 | ) |   | (281,378 | ) |
| Purchase of treasury stock                                                                                 |   |                                                                                                           | — |   |   | (293 | ) |
| Net cash used by financing activities                                                                      |   |                                                                                                           | (281,372 | ) |   | (281,671 | ) |
|                                                                                                       |   |                                                                                                           |   |   |   |   |   |
| Net (decrease) increase in cash and cash equivalents                                                       |   |                                                                                                           | (147,697 | ) |   | 324,541 |   |
| Cash and cash equivalents at beginning of period                                                           |   |                                                                                                           | 4,296,415 |   |   | 3,106,703 |   |
| Cash and cash equivalents at end of period                                                                 |   | $                                                                                                              | 4,148,718 |   | $ | 3,431,244 |   |
| Supplemental information:                                                                                  |   |                                                                                                           |   |   |   |   |   |
| Cash paid for income taxes                                                                                 |   | $                                                                                                              | 208,000 |   | $ | 453,151 |   |
| Dividend declared but not paid                                                                             |   | $                                                                                                              | — |   | $ | 281,372 |   |

 

See Notes        to Condensed Consolidated Financial Statements

 

 

5

 

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**DRYCLEAN USA, Inc.**

 

**NOTES        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

**Note        (1) - General:**The accompanying unaudited condensed consolidated        financial statements have been prepared in accordance with accounting principles generally        accepted in the United States of America for interim financial statements and the        instructions to Form 10-QSB related to interim period financial statements. Accordingly,        these condensed consolidated financial statements do not include certain information and        footnotes required by accounting principles generally accepted in the United States for        complete financial statements. However, the accompanying unaudited condensed consolidated        financial statements contain all adjustments (consisting only of normal recurring accruals)        which, in the opinion of management, are necessary in order to make the financial        statements not misleading. The results of operations for interim periods are not        necessarily indicative of the results to be expected for the full year. For further        information, refer to the Company’s financial statements and footnotes thereto        included in the Company’s Annual Report on Form 10-KSB for the year ended June 30,        2007. The June 30, 2007 balance sheet information contained herein was derived from the        audited consolidated financial statements included in the Company’s Annual Report on        Form 10-KSB as of that date.

**Note        (2) - Earnings Per Share:**Basic and diluted earnings per share        for the nine and three months ended March 31, 2008 and 2007 are computed as        follows:

|                                                         |   | For the nine months endedMarch 31, |      | For the three months ended                    March 31, |
|--------------------------------------------------------------|--------|------------------------------------|-----------|---------------------------------------------------------|
|                                                         |   | 2008(Unaudited)                    |      | 2007(Unaudited)                                         |   | 2008(Unaudited) |   | 2007(Unaudited) |
|                                                         |   |                               |      |                                                    |   |   |   |   |
| Basic                                                        |   |                               |      |                                                    |   |   |  |   |   |   |   |   |   |
| Net income                                                   |   | $                                  | 368,228   |                                                         |   | $ | 653,086 |  

  |   | $ | 75,918 |  |   | $ | 223,128 |  |
| Weighted averagecommon shares outstanding                    |   |                               | 7,034,307 |                                                         |   |   | 7,034,418 |  |   |   | 7,034,307 |  |   |   | 7,034,355 |  |
| Basic earnings per share                                     |   | $                                  | .05       |                                                         |   | $ | .09 |  |   | $ | .01 |  |   | $ | .03 |  |
|                                                         |   |                               |      |                                                         |   |   |   |  |   |   |   |  |   |   |   |  |
| Diluted                                                      |   |                               |      |                                                         |   |   |   |  |   |   |   |  |   |   |   |  |
| Net income                                                   |   | $                                  | 368,228   |                                                         |   | $ | 653,086 |  |   | $ | 75,918 |  |   | $ | 223,128 |  |
| Weighted averagecommon shares outstanding                    |   |                               | 7,034,307 |                                                         |   |   | 7,034,418 |  |   |   | 7,034,307 |  |   |   | 7,034,355 |  |
| Plus incremental sharesfrom assumed exercise ofstock options |   |                               | 2,682     |                                                         |   |   | 3,453 |  |   |   | 1,855 |  |   |   | 3,842 |  |
| Diluted weighted averagecommon shares outstanding            |   |                               | 7,036,989 |                                                         |   |   | 7,037,871 |  |   |   | 7,036,162 |  |   |   | 7,038,197 |  |
| Diluted earnings per share                                   |   | $                                  | .05       |                                                         |   | $ | .09 |  |   | $ | .01 |  |   | $ | .03 |  |

 

At March        31, 2008 and 2007, there were outstanding options to purchase 10,000 shares 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.

 

6

 

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**Note        (3) – Revolving Credit Line:**On October 18, 2007, the        Company received an extension until October 30, 2008 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 at March        31, 2008 and June 30, 2007.

**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        March 31, 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 nine months        ended March 31, 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 and nine months ended March 31, 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:

| Declaration Date                                                                                    | Payment Date                                                                                               | Record Date                                                                                 | Per Share

Amount | Total

Amount      |
|-----------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------|-------------------|--------------------|
| September 25, 2007

March 29,                        2007        | November 1, 2007

May 1,                        2007          | October 12, 2007

April 13,                        2007       | $.04

$.04        | $281,372

$281,372 |
| September 26, 2006                                                                                  | November 1, 2006                                                                                           | October 13, 2006                                                                            | $.04              | $281,378           |

 

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

 

7

 

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**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 endedMarch 31, | For the three months endedMarch 31, |
|---------------------------------------------------------------------------------|--------|------------------------------------|-------------------------------------|
|                                                                            |   | 2008                               | 2007                                | 2008 | 2007 |
|                                                                            |   | (Unaudited)                        | (Unaudited)                         |
| Revenues:                                                                       |   |                               |                                |   |   |   |   |   |   |   |   |   |   |
| Commercial and industrial laundry and dry cleaning                    equipment |   | $                                  | 14,837,248                          |   | $ | 17,217,903 |   | $ | 4,633,811 |   | $ | 5,133,402 |   |
| License and franchise operations                                                |   |                               | 238,464                             |   |   | 219,041 |   |   | 60,377 |   |   | 48,542 |   |
| Total revenues                                                                  |   | $                                  | 15,075,712                          |   | $ | 17,436,944 |   | $ | 4,694,188 |   | $ | 5,181,944 |   |
| Operating income (loss):                                                        |   |                               |                                |   |   |   |   |   |   |   |   |   |   |
| Commercial and industrial laundry and dry cleaning                    equipment |   | $                                  | 536,767                             |   | $ | 1,015,523 |   | $ | 136,328 |   | $ | 368,633 |   |
| License and franchise operations                                                |   |                               | 176,283                             |   |   | 156,184 |   |   | 41,085 |   |   | 23,241 |   |
| Corporate                                                                       |   |                               | (263,105                            | ) |   | (229,705 | ) |   | (90,773 | ) |   | (63,599 | ) |
| Total operating income                                                          |   | $                                  | 449,945                             |   | $ | 942,002 |   | $ | 86,640 |   | $ | 328,275 |   |

 

|                                                                            |   | March 31, 2007 | June 30, 2007 |
|---------------------------------------------------------------------------------|--------|----------------|---------------|
|                                                                            |   | (Unaudited)    |          |   |
| Identifiable assets:                                                            |   |           |          |   |   |   |   |
| Commercial and industrial laundry and dry cleaning                    equipment |   | $              | 9,577,210     |   | $ | 8,712,151 |   |
| License and franchise operations                                                |   |           | 185,224       |   |   | 554,518 |   |
| Corporate                                                                       |   |           | 188,091       |   |   | 176,905 |   |
| Total assets                                                                    |   | $              | 9,950,525     |   | $ | 9,443,574 |   |

8

 

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**New        Accounting Pronouncements**

In        September 2006, the 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. SFAS 157 is effective for fiscal years beginning after November 15, 2007. The        Company does not believe SFAS 157 will have a material effect on its consolidated financial        statements.

In        September 2006, the Staff of the Securities and Exchange Commission issued Staff Accounting        Bulletin No. 108, “Considering the Effect of Prior Year Misstatements when        Quantifying Misstatements in Current Year Financial Statements” (“SAB        108”). SAB 108 requires the use of two approaches in quantitatively evaluating        the materiality of misstatements. If the misstatement as quantified under either approach        is material to the current year financial statements, the misstatement must be corrected.        If the effect of correcting a prior year misstatement in the current year income statement        is material, the prior year financial statements should be corrected. The Company does not        expect SAB 108 to have an impact on the Company’s consolidated financial        statements.

In        February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for        Financial Assets and Financial Liabilities” which permits, at specified election        dates, all entities to choose to measure eligible items at fair value. 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 159. The Company did not elect early application of SFAS No. 159. Retrospective        application is not permitted unless early adoption is adopted. The Company is evaluating        the effect, if any, the adoption of SFAS 159 will have on the Company’s        consolidated financial statements.

 

9

 

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| **Item 2:** | **Management’s Discussion and Analysis or Plan of                        Operations** |
|-------------|---------------------------------------------------------------------------------------------|

 

**Overview**

 

Revenues        for the nine month and three month periods ended March 31, 2008 decreased by 13.5% and        9.4%, respectively, from the corresponding periods of fiscal 2007. Most of the reductions        for both periods was attributable to lower laundry equipment sales caused by the slowing        domestic economy and difficult credit conditions experienced in financing large dollar        installations. However, foreign sales increased 31.1% during the nine month period of        fiscal 2008, which partially offset the sales reduction in that period.

During the        third quarter of fiscal 2008, the Company increased its backlog by obtaining a number of        large contract orders, most of which the company expects to ship in fiscal 2009. These        orders have substantially increased customer deposits, enabling the Company to maintain its        cash position at a level that is more than adequate to support the increase in        inventories.

On        February 7, 2008, in light of the tightening economy, the Board of Directors felt it        prudent to eliminate the dividend that the Company had been paying        semi-annually.

**Liquidity and Capital Resources**

 

Cash        decreased by $147,697 during the first nine months of fiscal 2008 compared to an increase        of $324,541 during the corresponding period of fiscal 2007. The following summarizes the        Company’s Condensed Consolidated Statement of Cash Flows:

 

|                         |   | Nine Months Ended March 31, |
|------------------------------|--------|-----------------------------|
|                         |   |                        | 2008                    (Unaudited) |   | 2007                    (Unaudited) |
| Net cash (used) provided by: |   |                        |   |   |   |   |   |
| Operating activities         |   | $                           | 184,529 |   | $ | 689,737 |   |
| Investing activities         |   |                        | (50,854 | ) |   | (83,525 | ) |
| Financing activities         |   |                        | (281,372 | ) |   | (281,671 | ) |

For the        nine months ended March 31, 2008, operating activities provided cash of $184,529 compared        to $689,737 provided during the first nine months fiscal 2007.

 

In the nine        month period of fiscal 2008, an increase in customer deposits of $1,031,742 due to the        increased backlog was partially offset by increases in inventories of $500,227 to support        the higher backlog. Cash provided by the Company’s net earnings of $368,228 and        non-cash expenses for depreciation and amortization of $99,259 and bad debt expense of        $6,369, was more than offset by cash used to support an increase in accounts and trade        notes receivable of $130,929 and a decrease in accrued employee expenses of $434,827 due to        the payment of accrued fiscal 2007 executive bonuses without a similar accrual during        fiscal 2008. Other uses of cash were caused by increases in other assets of $71,689 and        refundable income taxes of $10,199 and reductions in accounts payable and accrued expenses        of $125,519 and unearned income of $62,081.

 

Cash        generated from operating activities during the first nine months of fiscal 2007 was        provided by the Company’s net earnings of $653,086 and non-cash expenses for        depreciation and amortization of $89,706 and bad debts of $10,538. This was partially        offset, in addition to the $107,927 reduction in

 

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customer        deposits, by a net $63,593 use of cash as a result of changes in other operating assets and        liabilities. An increase in inventories of $155,821 and decreases in accrued employee        expenses of $200,595, unearned income of $62,081 and income taxes payable of $64,592 were        other principal uses of cash. These uses of cash were offset by cash generated by        reductions in accounts and trade notes receivable of $378,204, other current assets of        $139,167 and deferred taxes of $14,458.

 

Investing        activities for the first nine months of fiscal 2008 used cash of $50,854 compared to        $83,525 used in the same period of fiscal 2007, in both periods mostly for capital        expenditures for machinery and equipment and leasehold improvements.

Financing        activities used cash of $281,372 and $281,671 for the nine months ended March 31, 2008 and        2007, respectively, to pay cash dividends. On February 8, 2008 the Company announced that        its Board of Directors has determined to eliminate the semi-annual dividend in light of        economic conditions. A table of declared dividends is set forth in Note 5 of the        “Notes to Condensed Consolidated Financial Statements.”

 

On October        18, 2007, the Company received an extension until October 30, 2008 of its existing        $2,250,000 revolving line of credit facility. The Company’s obligations under the        facility continue to be guaranteed by the Company’s subsidiaries and collateralized        by substantially all of the Company’s and its subsidiaries’ assets. No amounts        were outstanding under this facility at March 31, 2008 or June 30, 2007.

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, are 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**

The        following table sets forth certain information with respect to changes in the        Company’s revenues for the periods presented:

Revenues

 

|                                                             |   | Nine months ended |            |    |            | Three months ended |    |   |
|------------------------------------------------------------------|--------|-------------------|-----------------|---------|-----------------|--------------------|---------|--------|
|                                                             |   | March 31,         |            |    |            | March 31,          |    |   |
|                                                             |   | 2008(Unaudited)   | 2007(Unaudited) | %Change | 2008(Unaudited) | 2007(Unaudited)    | %Change |
| Net sales                                                        |   | $                 | 14,605,215      |    | $               | 16,944,641         |    | -13.8  | % | $ | 4,575,783 |   | $ | 4,987,424 |   | -8.3 | % |
| Development fees,franchise and licensefees, commissionsand other |   |              | 470,497         |    |            | 492,303            |    | -4.4   | % |   | 118,405 |   |   | 194,520 |   | -39.1 | % |
| Total revenues                                                   |   | $                 | 15,075,712      |    | $               | 17,436,944         |    | -13.5  | % | $ | 4,694,188 |   | $ | 5,181,944 |   | -9.4 | % |

 

 

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Revenues        for the nine month and three month periods ended March 31, 2008 decreased by $2,361,232        (13.5%) and $487,756 (9.4%), respectively, from the corresponding periods of fiscal 2007.        Most of the decrease was in the commercial and industrial laundry and dry cleaning segment,        which experienced reduced revenues of $2,380,655 (13.8%) and $499,571 (9.7%) for the nine        and three month periods, respectively, of fiscal 2008 from the corresponding periods of        fiscal 2007. For the nine month period commercial laundry equipment sales decreased by        27.5%, while dry cleaning equipment sales were basically flat, decreasing .1%, compared to        the comparable fiscal 2007 period. These decreases were offset by a 5.8% increase in boiler        sales and a 2.2% increase in spare parts sales. The reduction in commercial laundry        equipment sales was attributable to the soft domestic market and the absence of large        contracts. However, foreign sales during the nine month period increased by 31.1% over the        comparable fiscal 2007 period. For the three month period, sales of commercial laundry        equipment decreased 28.3% and boiler sales decreased 23.9% from the comparable fiscal 2007        period. These reductions were partially offset by a 15.4% increase in dry cleaning        equipment sales and an 8.5% increase in spare parts sales.

 

Revenues of        the license and franchise operations segment increased by $19,423 (8.9%) and $11,835        (24.4%) for the nine and three month periods, respectively, of fiscal 2008 over the same        periods of fiscal 2007. Revenues from this segment are a small part of the overall Company        revenues and consist mainly of royalty and license fees paid to the Company by        licensees.

 

Operating Expenses

 

|                                                                                                          | Nine months ended |                   | Three months ended |
|---------------------------------------------------------------------------------------------------------------|-------------------|-------------------|--------------------|
|                                                                                                          | March 31,         |                   | March 31,          |
|                                                                                                          | 2008

(Unaudited) | 2007

(Unaudited) |                    | 2008

(Unaudited) | 2007

(Unaudited) |
| *As a percentage of sales:*                                                                                   |              |              |                    |   |   |
| Cost of goods sold                                                                                            | 76.1%             | 77.1%             |                    | 75.6% | 75.6% |
| *As a percentage of revenue:*                                                                                 |              |              |                    |   |   |
| Selling, general and        administrative                        expenses | 23.2%             | 19.5%             |                    | 24.5% | 20.7% |
| Research and development                                                                                      | -                 | .2%               |                    | - | .2% |
| Total expenses                                                                                                | 97.0%             | 94.6%             |                    | 98.2% | 93.7% |

 

Costs of        goods sold, expressed as a percentage of sales, decreased to 76.1% from 77.1% for the first        nine months of fiscal 2008 from the same period of fiscal 2007. For the three month        comparative periods margins remained unchanged. The improved margins, as a percentage of        sales, for the nine month period were due to the absence of large contracts which normally        carry lower margins.

 

Selling,        general and administrative expenses increased by $108,459 (3.2%) and $75,095 (7.0%) for the        nine and three month periods, respectively, of fiscal 2008 from the same periods of fiscal        2007, primarily as a result of increased payroll expenses and professional fees. The        increase, as a percentage of revenues, in both periods of fiscal 2008 was due to the        decreased level of revenues, which effected the absorption of fixed and semi-variable        expenses.

 

Research        and development expenses are a small part of the Company’s total operating expenses        and relate to upgrading existing product lines. This category of expense has become minimal        as most of the

 

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Company’s products are distributed for other manufacturers, which        perform their own research and development

Other        Income/Expenses

 

Interest        income increased by $17,142 (15.0%) for the nine months ended March 31, 2008 but decreased        by $795 (2.4%) for the three months ended March 31, 2008 compared to the corresponding        periods of fiscal 2007. For the nine month period higher outstanding bank balances offset        lower interest rates. For the three month period interest rates continued to decline when        compared to the same period of fiscal 2007.

 

The        Company’s effective income tax rate decreased to 36.5% from 38.2% and 36.4% from        38.3% for the nine and three month periods of fiscal 2008, respectively, compared to the        same periods of fiscal 2007 due to changes in deferred tax assets.

 

**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 Sheila Steiner, the        wife of William K. Steiner, a principal shareholder, Chairman of the Board of Directors and        a director of the Company. The lease provides for a three-year term that commenced on        November 1, 2005 at 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 real estate taxes,        utilities, maintenance, non-structural repairs and insurance. The lease contains two        three-year renewal options in favor of the Company. The Company believes that the terms of        the lease are comparable to terms that would be obtained from an unaffiliated third party        for similar property in a similar locale.

**Critical Accounting Policies**

The        accounting policies that the Company has identified as critical to its business operations        and to an understanding of the Company’s results of operations remain unchanged from        those described detail in the Management’s Discussion and Analysis or Plan of        Operation section of the Company’s Annual Report on Form 10-KSB for the fiscal year        ended June 30, 2007. 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.

**New        Accounting Pronouncements:**

**New        Accounting Pronouncements**

In        September 2006, the 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. SFAS 157 is effective for fiscal years beginning after November 15, 2007. The        Company does not believe SFAS 157 will have a material effect on its consolidated financial        statements.

 

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In        September 2006, the Staff of the Securities and Exchange Commission issued Staff Accounting        Bulletin No. 108, “Considering the Effect of Prior Year Misstatements when        Quantifying Misstatements in Current Year Financial Statements” (“SAB        108”). SAB 108 requires the use of two approaches in quantitatively evaluating        the materiality of misstatements. If the misstatement as quantified under either approach        is material to the current year financial statements, the misstatement must be corrected.        If the effect of correcting a prior year misstatement in the current year income statement        is material, the prior year financial statements should be corrected. The Company does not        expect SAB 108 to have an impact on the Company’s consolidated financial        statements.

In        February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for        Financial Assets and Financial Liabilities” which permits, at specified election        dates, all entities to choose to measure eligible items at fair value. 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 159. The Company did not elect early application of SFAS No. 159. Retrospective        application is not permitted unless early adoption is adopted. The Company is evaluating        the effect, if any, the adoption of SFAS 159 will 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. Such risks and uncertainties include, among others: general        economic and business conditions in the United States and other countries in which the        Company’s customers are located; industry conditions and trends, including supply and        demand; changes in business strategies or development plans; the availability, terms and        deployment of debt and equity capital; technology changes; competition and other factors        which may affect prices which the Company may charge for its products and its profit        margins; the availability and cost of the equipment purchased by the Company; relative        values of the United States currency to currencies in the countries in which the        Company’s customers, suppliers and competitors are located; changes in, or the        failure to comply with, government regulation, principally environmental regulations; and        the Company’s ability to successfully introduce, market and sell at acceptable profit        margins its new Green Jet® dry-wetcleaningTM machine and Multi-JetTM dry        cleaning machine. These and certain other factors are discussed in this Report and from        time to time in other Company reports filed with the Securities and Exchange Commission.        The Company does not assume an obligation to update the factors discussed in this Report or        such other reports.

 

| **Item 3.** | **Controls and Procedures** |
|-------------|-----------------------------|

As of the        end of the period covered by this Report, management of the Company, with the participation        of the Company’s President and principal executive officer and the Company’s        principal financial officer, evaluated the effectiveness of the Company’s        “disclosure controls and procedures,” as defined in Rule 13a-15(e) under the        Securities Exchange Act of 1934. Based on that evaluation, these officers concluded that,        as of the date of their evaluation, the Company’s disclosure controls and procedures        were

 

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effective        to provide reasonable assurance that information required to be disclosed in the        Company’s periodic filings under the Securities Exchange Act of 1934 is accumulated        and communicated to the Company’s management, including those officers, to allow        timely decisions regarding required disclosure. It should be noted that a control system,        no matter how well designed and operated, can provide only reasonable, not absolute,        assurance that it will detect or uncover failures within the Company to disclose material        information otherwise required to be set forth in the Company’s periodic        reports.

 

During the        period covered by this Report, there were no changes in the Company’s internal        control over financial reporting that have materially affected, or are reasonably likely to        materially affect, the Company’s internal control over financial        reporting.

 

**PART        II. OTHER INFORMATION**

 

**Item 6.        Exhibits**

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

| 31.01 | Certification of Principal Executive Officer pursuant to                        Section 302 of the Sarbanes-Oxley Act of 2002 promulgated under the                        Securities Exchange Act of 1934. |
|-------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 31.02 | Certification of Principal Financial Officer pursuant to                        Section 302 of the Sarbanes-Oxley Act of 2002 promulgated under the                        Securities Exchange Act of 1934. |
|-------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 32.01 | Certification of Principal Executive Officer pursuant to                        Section 906 of the Sarbanes-Oxley Act of 2002. |
|-------|--------------------------------------------------------------------------------------------------------------------------------|

| 32.02 | Certification of Principal Financial Officer pursuant to                        Section 906 of the Sarbanes-Oxley Act of 2002. |
|-------|--------------------------------------------------------------------------------------------------------------------------------|

 

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**SIGNATURES**

In        accordance with the requirements of the Exchange Act, the registrant caused this report to        be signed on its behalf by the undersigned, thereunto duly authorized.

| Date: May 12, 2008 | DRYCLEAN USA, Inc. |
|--------------------|--------------------|

         

|   | By: /s/ Venerando J.                        Indelicato                          |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|        | Venerando J. Indelicato,                        Treasurer and Chief Financial Officer                                                                                                                        |

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**Exhibit Index**

| 31.01 | Certification of                        Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley                        Act of 2002 promulgated under the Securities Exchange Act of                        1934. |
|-------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 31.02 | Certification of                        Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley                        Act of 2002 promulgated under the Securities Exchange Act of                        1934. |
|-------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 32.01 | Certification of                        Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley                        Act of 2002. |
|-------|-------------------------------------------------------------------------------------------------------------------------------------------------------|

| 32.02 | Certification of                        Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley                        Act of 2002. |
|-------|-------------------------------------------------------------------------------------------------------------------------------------------------------|

 

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