SECURITIES AND EXCHANGE COMMISSION

 

Washington, D. C. 20549

 

FORM        10-QSB

 

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

For the quarterly period ended December 31, 2007,

 

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.   Yesx   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    Nox.

         

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 February 7, 2008.

         

|   | Transitional Small Business Disclosure Format: | Yes  o | Nox |
|--------|------------------------------------------------|------------------|-----|

         

 

 

 

----

**PART        1. FINANCIAL INFORMATION**

 

**Item        1.  Financial Statements**

 

DRYCLEAN        USA, Inc.

CONDENSED        CONSOLIDATED STATEMENTS OF INCOME

 

|                                                                                   |   | For the six                    months ended                    December 31, |       | For the                    three months ended                    December 31, |   |
|----------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------|--------|
|                                                                                   |   | 2007                                                                        |       | 2006                                                                          |   | 2007 |   | 2006 |   |
|                                                                                   |   | (Unaudited)                                                                 |       | (Unaudited)                                                                   |   |
| Net sales                                                                              |   | $                                                                           | 10,029,432 |                                                                          | $      | 11,957,217 |   | $ | 5,461,381 |   | $ | 6,167,477 |   |
| Development fees, franchise and license fees, commissions and                    other |   |                                                                        | 352,092    |                                                                          |   | 297,783 |   |   | 183,499 |   |   | 175,325 |   |
| Total revenues                                                                         |   |                                                                        | 10,381,524 |                                                                          |   | 12,255,000 |   |   | 5,644,880 |   |   | 6,342,802 |   |
|                                                                                   |   |                                                                        |       |                                                                          |   |   |   |   |   |   |   |   |   |
| Cost of goods sold                                                                     |   |                                                                        | 7,662,742  |                                                                          |   | 9,297,725 |   |   | 4,199,947 |   |   | 4,797,786 |   |
| Selling, general and administrative expenses                                           |   |                                                                        | 2,352,837  |                                                                          |   | 2,319,473 |   |   | 1,209,321 |   |   | 1,180,844 |   |
| Research and development                                                               |   |                                                                        | 2,640      |                                                                          |   | 24,075 |   |   | — |   |   | 13,550 |   |
| Total operating expenses                                                               |   |                                                                        | 10,018,219 |                                                                          |   | 11,641,273 |   |   | 5,409,268 |   |   | 5,992,180 |   |
|                                                                                   |   |                                                                        |       |                                                                          |   |   |   |   |   |   |   |   |   |
| Operating income                                                                       |   |                                                                        | 363,305    |                                                                          |   | 613,727 |   |   | 235,612 |   |   | 350,622 |   |
| Interest income                                                                        |   |                                                                        | 98,516     |                                                                          |   | 80,579 |   |   | 48,890 |   |   | 42,427 |   |
| Interest expense                                                                       |   |                                                                        | (747       | )                                                                             |   | — |   |   | — |   |   | — |   |
|                                                                                   |   |                                                                        |       |                                                                          |   |   |   |   |   |   |   |   |   |
| Earnings before taxes                                                                  |   |                                                                        | 461,074    |                                                                          |   | 694,306 |   |   | 284,502 |   |   | 393,049 |   |
| Provision for income taxes                                                             |   |                                                                        | 168,764    |                                                                          |   | 264,348 |   |   | 105,236 |   |   | 149,870 |   |
| Net earnings                                                                           |   | $                                                                           | 292,310    |                                                                          | $      | 429,958 |   | $ | 179,266 |   | $ | 243,179 |   |
|                                                                                   |   |                                                                        |       |                                                                          |   |   |   |   |   |   |   |   |   |
|                                                                                   |   |                                                                        |       |                                                                          |   |   |   |   |   |   |   |   |   |
| Basic and diluted earnings per share                                                   |   | $                                                                           | .04        |                                                                          | $      | .06 |   | $ | .03 |   | $ | .03 |   |
| Weighted average number of shares                                                      |   |                                                                        |       |                                                                          |   |   |   |   |   |   |   |   |   |
| Basic                                                                                  |   |                                                                        | 7,034,307  |                                                                          |   | 7,034,450 |   |   | 7,034,307 |   |   | 7,034,450 |   |
| Diluted                                                                                |   |                                                                        | 7,037,472  |                                                                          |   | 7,037,818 |   |   | 7,037,333 |   |   | 7,038,532 |   |

 

See Notes        to Condensed Consolidated Financial Statements

 

2

 

 

----

DRYCLEAN        USA, Inc.

CONDENSED        CONSOLIDATED BALANCE SHEETS

 

| **ASSETS**                                                                |   |                                                                |      |                             |   |
|---------------------------------------------------------------------------|--------|---------------------------------------------------------------------|-----------|----------------------------------|--------|
|                                                                      |   | December 31,                    2007                    (Unaudited) |      | June 30,                    2007 |   |
| Current Assets                                                            |   |                                                                |      |                             |   |   |   |
| Cash and cash equivalents                                                 |   | $                                                                   | 3,580,072 |                             | $      | 4,296,415 |   |
| Accounts and trade notes receivable, net                                  |   |                                                                | 1,285,126 |                             |   | 1,454,987 |   |
| Inventories                                                               |   |                                                                | 2,895,982 |                             |   | 2,912,524 |   |
| Deferred income taxes                                                     |   |                                                                | 77,460    |                             |   | 99,140 |   |
| Refundable income taxes                                                   |   |                                                                | 55,346    |                             |   | 64,131 |   |
| Other assets                                                              |   |                                                                | 130,806   |                             |   | 98,353 |   |
| Total current assets                                                      |   |                                                                | 8,024,792 |                             |   | 8,925,550 |   |
|                                                                      |   |                                                                |      |                             |   |   |   |
| Equipment and improvements, net                                           |   |                                                                | 246,224   |                             |   | 261,872 |   |
| Franchise, trademarks and other intangible assets,                    net |   |                                                                | 214,072   |                             |   | 246,812 |   |
| Deferred tax asset                                                        |   |                                                                | —   |                             |   | 9,340 |   |
|                                                                      |   |                                                                |      |                             |   |   |   |
|                                                                      |   | $                                                                   | 8,485,088 |                             | $      | 9,443,574 |   |

 

See Notes        to Condensed Consolidated Financial Statements

 

3

 

 

----

DRYCLEAN        USA, Inc.

CONDENSED        CONSOLIDATED BALANCE SHEETS

 

**LIABILITIES AND        SHAREHOLDERS' EQUITY**

 

|                                                                                                                                                                             |   | December 31,2007(Unaudited) |      | June 30,2007 |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------|-----------|--------------|--------|
| Current Liabilities                                                                                                                                                              |   |                        |      |         |   |   |   |
| Accounts payable and accrued expenses                                                                                                                                            |   | $                           | 881,990   |         | $      | 1,076,300 |   |
| Accrued employee expenses                                                                                                                                                        |   |                        | 443,601   |         |   | 605,383 |   |
| Unearned income                                                                                                                                                                  |   |                        | 82,775    |         |   | 124,162 |   |
| Customer deposits                                                                                                                                                                |   |                        | 789,719   |         |   | 1,365,623 |   |
| Total current liabilities                                                                                                                                                        |   |                        | 2,198,085 |         |   | 3,171,468 |   |
| Deferred tax liability                                                                                                                                                           |   |                        | 3,959     |         |   | — |   |
| Total liabilities                                                                                                                                                                |   |                        | 2,202,044 |         |   | 3,171,468 |   |
|                                                                                                                                                                             |   |                        |      |         |   |   |   |
| Shareholders’ Equity                                                                                                                                                       |   |                        |      |         |   |   |   |
| Preferred stock, $1.00 par value:                                                                                                                                                |   |                        |      |         |   |   |   |
| Authorized shares – 200,000; none issuedand 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                                                                                                                                                                |   |                        | 4,014,650 |         |   | 4,003,712 |   |
| Treasury stock, 31,193 shares, at cost                                                                                                                                           |   |                        | (3,313    | )            |   | (3,313 | ) |
| Total shareholders’ equity                                                                                                                                                 |   |                        | 6,283,044 |         |   | 6,272,106 |   |
|                                                                                                                                                                             |   | $                           | 8,485,088 |         | $      | 9,443,574 |   |

 

See Notes        to Condensed Consolidated Financial Statements

 

4

 

 

----

DRYCLEAN        USA, Inc.

CONDENSED        CONSOLIDATED STATEMENTS OF CASH FLOWS

 

|                                                                                                          |   | Six months ended                                 |      |
|---------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------|-----------|
|                                                                                                          |   | December 31, 2007                    (Unaudited) |      | December 31, 2006                    (Unaudited**)** |   |
| Operating activities:                                                                                         |   |                                             |      |   |   |   |   |
| Net earnings                                                                                                  |   | $                                                | 292,310   |   | $ | 429,958 |   |
| Adjustments to reconcile net earnings to net cash (used)                    provided by operating activities: |   |                                             |      |   |   |   |   |
| Bad debt expense                                                                                              |   |                                             | 6,369     |   |   | 10,538 |   |
| Depreciation and amortization                                                                                 |   |                                             | 66,577    |   |   | 59,942 |   |
| Provision (benefit) for deferred income taxes                                                                 |   |                                             | 34,979    |   |   | (11,304 | ) |
| (Increase) decrease in operating assets:                                                                      |   |                                             |      |   |   |   |   |
| Accounts, and trade notes receivables                                                                         |   |                                             | 163,492   |   |   | (309,775 | ) |
| Inventories                                                                                                   |   |                                             | 16,542    |   |   | (589,094 | ) |
| Other current assets                                                                                          |   |                                             | (32,453   | ) |   | 97,273 |   |
| Refundable income taxes                                                                                       |   |                                             | 8,785     |   |   | — |   |
| Increase (decrease) in operating liabilities:                                                                 |   |                                             |      |   |   |   |   |
| Accounts payable and accrued expenses                                                                         |   |                                             | (194,310  | ) |   | 717,061 |   |
| Accrued employee expenses                                                                                     |   |                                             | (161,782  | ) |   | (117,108 | ) |
| Unearned income                                                                                               |   |                                             | (41,387   | ) |   | (41,387 | ) |
| Customer deposits                                                                                             |   |                                             | (575,904  | ) |   | 97,552 |   |
| Income taxes payable                                                                                          |   |                                             | —   |   |   | (14,499 | ) |
| Net cash (used) provided by operating activities                                                              |   |                                             | (416,782  | ) |   | 329,157 |   |
| Investing activities:                                                                                         |   |                                             |      |   |   |   |   |
| Capital expenditures                                                                                          |   |                                             | (18,189   | ) |   | (79,969 | ) |
| Net cash used by investing activities                                                                         |   |                                             | (18,189   | ) |   | (79,969 | ) |
| Financing activities:                                                                                         |   |                                             |      |   |   |   |   |
| Dividends paid                                                                                                |   |                                             | (281,372  | ) |   | (281,378 | ) |
| Net cash used by financing activities                                                                         |   |                                             | (281,372  | ) |   | (281,378 | ) |
|                                                                                                          |   |                                             |      |   |   |   |   |
| Net decrease in cash and cash equivalents                                                                     |   |                                             | (716,343  | ) |   | (32,190 | ) |
| Cash and cash equivalents at beginning of period                                                              |   |                                             | 4,296,415 |   |   | 3,106,703 |   |
| Cash and cash equivalents at end of period                                                                    |   | $                                                | 3,580,072 |   | $ | 3,074,513 |   |
| Supplemental information:                                                                                     |   |                                             |      |   |   |   |   |
| Cash paid for income taxes                                                                                    |   | $                                                | 125,000   |   | $ | 290,151 |   |
|                                                                                                          |   |                                             |      |   |   |   |   |

         

 

See Notes        to Condensed Consolidated Financial Statements

 

 

5

 

 

----

**DRYCLEAN USA, Inc.**

 

**NOTES        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS        (Unaudited)**

 

**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 six and three months ended December 31, 2007 and 2006 are computed as        follows:

 

|                                                                                |   | For the six months ended                        December 31, |      | For the three months ended                        December 31, |   |
|-------------------------------------------------------------------------------------|--------|--------------------------------------------------------------|-----------|----------------------------------------------------------------|--------|
|                                                                                |   | 2007                        (Unaudited)                      |      | 2006                        (Unaudited)                        |   | 2007                        (Unaudited) |   | 2006                        (Unaudited) |   |
| Basic                                                                               |   |                                                         |      |                                                           |   |   |   |   |   |   |   |   |   |
| Net earnings                                                                        |   | $                                                            | 292,310   |                                                           | $      | 429,958 |   | $ | 179,266 |   | $ | 243,179 |   |
| Weighted average sharesoutstanding                                                  |   |                                                         | 7,034,307 |                                                           |   | 7,034,450 |   |   | 7,034,307 |   |   | 7,034,450 |   |
| Basic earnings per share                                                            |   | $                                                            | .04       |                                                           | $      | .06 |   | $ | .03 |   | $ | .03 |   |
| Diluted                                                                             |   |                                                         |      |                                                           |   |   |   |   |   |   |   |   |   |
| Net earnings                                                                        |   | $                                                            | 292,310   |                                                           | $      | 429,958 |   | $ | 179,266 |   | $ | 243,179 |   |
| Weighted average sharesoutstanding                                                  |   |                                                         | 7,034,307 |                                                           |   | 7,034,450 |   |   | 7,034,307 |   |   | 7,034,450 |   |
| Plus incremental sharesfrom assumed exercise ofstock                        options |   |                                                         | 3,165     |                                                           |   | 3,368 |   |   | 3,026 |   |   | 4,082 |   |
| Diluted weighted averagecommon shares                                               |   |                                                         | 7,037,472 |                                                           |   | 7,037,818 |   |   | 7,037,333 |   |   | 7,038,532 |   |
| Diluted earnings pershare                                                           |   | $                                                            | .04       |                                                           | $      | .06 |   | $ | .03 |   | $ | .03 |   |

 

At        December 31, 2007 and 2006, 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

 

 

----

**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 December        31, 2007 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        December 31, 2007. 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        (“SFAS”) 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 six months ended December 31, 2007 and 2006 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 six months ended December 31, 2007 and        2006.

**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 ShareAmount | TotalAmount |
|------------------------------|--------------------------|------------------|-----------------|-------------|
| September 25, 2007           | November 1, 2007         | October 12, 2007 | $.04            | $281,372    |
| March 29, 2007               | May 1, 2007              | April 13, 2007   | $.04            | $281,372    |
| September 26, 2006           | November 1, 2006         | October 13, 2006 | $.04            | $281,378    |
| March 31, 2006               | May 1, 2006              | April 14, 2006   | $.04            | $280,978    |

 

 

7

 

 

----

**Note        (6) – Segment Information:**The Company’s reportable        segments are strategic businesses that offer different products and services. They are        managed separately because each business requires different marketing strategies. The        Company primarily evaluates the operating performance of its segments based on the        categories noted in the table below. The Company has no sales between segments. Financial        information for the Company’s business segments is as follows:

|                                                                            |   | For the six months endedDecember 31, |       | For the three months ended                    December 31, |   |
|---------------------------------------------------------------------------------|--------|--------------------------------------|------------|------------------------------------------------------------|--------|
|                                                                            |   | 2007                                 |       | 2006                                                       |   | 2007 |   | 2006 |   |
|                                                                            |   | (Unaudited)                          |       | (Unaudited)                                                |   |
| Revenues:                                                                       |   |                                 |       |                                                       |   |   |   |   |   |   |   |   |   |
| Commercial and industrial laundry and dry cleaning                    equipment |   | $                                    | 10,203,437 |                                                       | $      | 12,084,501 |   | $ | 5,543,503 |   | $ | 6,224,011 |   |
| License and franchise operations                                                |   |                                 | 178,087    |                                                       |   | 170,499 |   |   | 101,377 |   |   | 118,791 |   |
| Total revenues                                                                  |   | $                                    | 10,381,524 |                                                       | $      | 12,255,000 |   | $ | 5,644,880 |   | $ | 6,342,802 |   |
| Operating income (loss):                                                        |   |                                 |       |                                                       |   |   |   |   |   |   |   |   |   |
| Commercial and industrial laundry and dry cleaning                    equipment |   | $                                    | 400,439    |                                                       | $      | 646,890 |   | $ | 237,452 |   | $ | 339,246 |   |
| License and franchise operations                                                |   |                                 | 135,198    |                                                       |   | 132,943 |   |   | 81,896 |   |   | 97,305 |   |
| Corporate                                                                       |   |                                 | (172,332   | )                                                          |   | (166,106 | ) |   | (83,736 | ) |   | (85,929 | ) |
| Total operating income                                                          |   | $                                    | 363,305    |                                                       | $      | 613,727 |   | $ | 235,612 |   | $ | 350,622 |   |

 

|                                                                                | December 31, 2007                  | June 30, 2007           |
|-------------------------------------------------------------------------------------|------------------------------------|-------------------------|
|                                                                                | (Unaudited)                        |                    |
| Identifiable assets:                                                                |                               |
| Commercial and industrial laundry and dry cleaning                        equipment | $    8,209,986 | $   8,712,151 |
| License and franchise operations                                                    |  194,806                      | 554,518                 |
| Corporate                                                                           | 76,337                             | 176,905                 |
| Total assets                                                                        | $    8,481,129 | $   9,443,574 |

 

 

 

8

 

 

----

**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

 

 

----

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

 

**Overview**

 

Revenues        for the six months and second quarter ended December 31, 2007 decreased by 15.3% and 11.0%,        respectively, from the same periods of fiscal 2007. In the fiscal 2007 periods, revenues        included some large laundry equipment orders which, due to a slowing economy, were absent        in our sales mix during the first half of fiscal 2008. Although during the second quarter        of fiscal 2008, dry cleaning equipment sales increased by 56.1 %, for the six month period        ended December 31, 2007, sales of dry cleaning equipment decreased by 6.4%. We do not        expect overall sales of dry cleaning equipment to grow as dry cleaning establishments        consolidate and fashions continue to change to a more casual mode. Most of the reduction in        sales during the first half and second quarter of fiscal 2008 is attributable to reduced        laundry equipment sales which declined 27.2% and 26.7%, respectively, from the same periods        of fiscal 2007.

Cash on        hand continues to be substantial, even though customer deposits decreased reflecting a        reduction in backlog. The Company’s cash position enabled it to maintain inventory        levels at approximately year end levels.

On        September 25, 2007, the Board of Directors declared a $.04 per share semi-annual dividend        (an aggregate of $281,372) payable on November 1, 2007 to shareholders of record on October        12, 2007.

**Liquidity and Capital Resources**

 

Cash        decreased by $716,343 during the first six months of fiscal 2008 compared to a decrease of        $32,190 during the same period of fiscal 2007. The following summarizes the Company’s        Condensed Consolidated Statements of Cash Flows:

|                         | Six Months Ended December 31, |
|------------------------------|-------------------------------|
|                         | 2007

(Unaudited)             | 2006

(Unaudited) |
| Net cash (used) provided by: |                          |   |
| Operating activities         | $   (416,782)  | $   329,157 |
| Investing activities         | (18,189)                      | (79,969) |
| Financing activities         |  (281,372)               |  (281,378) |

 

For the        six months ended December 31, 2007, operating activities used cash of $416,782 compared to        $329,157 provided by operating activities for the first six months of fiscal 2007. Most of        the cash used resulted from a substantial reduction in customer deposits of $575,804 during        the first half of fiscal 2008 attributable to the shipments of orders from backlog compared        to a $97,552 increase in this category in the first six months of fiscal 2007. All of the        other changes in operating assets and liabilities discussed below were in the ordinary        course of business. Cash generated from operating activities during the first six months of        fiscal 2008 was provided by the Company’s net earnings of $292,310 and non-cash        expenses for depreciation and amortization of $66,577 and bad debts of $6,369. This cash        was offset by a net $817,017 used as a result of changes in operating assets and        liabilities. Cash used for operating assets and liabilities resulted mainly from the        reduction in customer deposits as previously mentioned and reductions in accounts payable        and accrued expenses ($194,310), accrued employees expenses ($161,782), unearned income        ($41,387) and an increase in other assets ($32,453). Additional cash was provided by        decreases in accounts, and trade notes receivable ($163,492), inventories ($16,542) and        refundable income taxes ($8,785).

 

10

 

 

----

For the        six months ended December 31, 2006, cash was provided by the Company’s net earnings        of $429,958 and non-cash expenses for depreciation and amortization of $59,942 and bad        debts of $10.538. This cash was offset by a net $159,977 used as a result of changes in        operating assets and liabilities. Cash used for operating assets and liabilities resulted        mainly from increases in inventories ($589,094) and accounts and trade notes receivable        ($309,775) and lower accrued employee expenses ($117,108), partially offset by cash        generated from an increase in accounts payable and accrued expenses ($717,061) and a        decrease in other current assets ($97,273). The increase in inventories was to support        increased orders and the increase in accounts payable related primarily to inventories        purchased but not yet paid for.

Investing        activities for the first half of fiscal 2008 used cash of $18,189 compared to $79,969 used        in the same period of fiscal 2007, mostly for capital expenditures.

Financing        activities used cash of $281,372 and $281,378 for the six month periods ended December 31,        2007 and 2006, respectively, to pay cash dividends. A table of declared and paid dividends        is listed in Note 5 of the “Notes to Consolidated Financial        Statements.”

On October        22, 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 December 31, 2007 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, 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**

 

Revenues.

 

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

 

 

 

|                                                                                             | Six months ended                            |            | Three months ended |            |
|--------------------------------------------------------------------------------------------------|---------------------------------------------|-----------------|--------------------|-----------------|
|                                                                                             | December 31,                                |            | December 31,       |            |
|                                                                                             | 2007(Unaudited)                             | 2006(Unaudited) | %Change            | 2007(Unaudited) | 2006(Unaudited) | %Change |
| Net sales                                                                                        | $10,029,432                                 | $11,957,217     | -16.1%             | $5,461,381      | $6,167,477 | -11.4% |
| Development fees,   franchise and license  fees, commissions

and other | 352,092       | 297,783         | 18.2%              | 183,499         | 175,325 | 4.7% |
| Total revenues                                                                                   | $10,381,524                                 | $12,255,000     | -15.3%             | $5,644,880      | $6,342,802 | -11.0% |

 

 

11

 

 

----

Revenues        for the six and three month periods ended December 31, 2007 decreased by $1,873,476 (15.3%)        and $697,922 (11.0%), respectively, from the same periods of fiscal 2007. Most of the        decrease in revenues is attributable to a reduction of $1,881,064 (15.6%) and $680,508        (10.9%) in the commercial and industrial laundry and dry cleaning equipment segment, for        the six and three month periods, respectively, of fiscal 2008 compared to the same periods        of fiscal 2007. For the six month period, commercial and laundry equipment sales decreased        by 27.2%, dry cleaning equipment decreased by 6.4% and spare parts decreased by 1.1%. These        decreases were partially offset by boiler sales which increased by 20.0%. For the three        month period, sales of commercial laundry dry cleaning equipment decreased by 26.7%, and        spare parts sales decreased by 4.0%. However, boiler sales increased by 56.5% and dry        cleaning equipment sales increased by 56.1%

Revenues        of the license and franchise operations segment increased by $7,588 (4.5%) for the six        month period but decreased by $17,414 (14.7%) for the six month period in fiscal 2008 from        the same periods of fiscal 2007. Revenues from this segment are a small part of the overall        Company revenues and consist mainly of royalty fees paid to the Company by        licensees.

Operating Expenses

|                                                                                                                     | Six months ended  | Three months ended |
|--------------------------------------------------------------------------------------------------------------------------|-------------------|--------------------|
|                                                                                                                     | December 31,      | December 31,       |
|                                                                                                                     | 2007

(Unaudited) | 2006

(Unaudited)  | 2007

(Unaudited) | 2006

(Unaudited) |
| *As a percentage of sales:*                                                                                              |              |               |   |   |
| Cost of goods sold                                                                                                       | 76.4%             | 77.8%              | 76.9% | 77.8% |
|                                                                                                                          |
| *                           As a percentage of revenue:*                                                       |              |               |   |   |
| Selling, general and         administrative                        expenses | 22.7%             | 18.9%              | 21.4% | 18.6% |
| Research and development                                                                                                 | -                 | 0.2%               | - | 0.2% |
| Total expenses                                                                                                           | 96.5%             | 95.0%              | 95.8% | 94.5% |

 

Costs of        goods sold, expressed as a percentage of sales, decreased to 76.4% from 77.8% and to 76.9%        from 77.8% for the six and three month periods, respectively, of fiscal 2008 from the same        periods of fiscal 2007. The improved margins were due to the absence of large contract        shipments in these periods which normally carry a higher cost.

Selling,        general and administrative expenses increased by $33,364 (1.4%) and $28,477 (2.4%) for the        six and three month periods, respectively, of fiscal 2008 from the same periods in fiscal        2007, primarily as a result of increased payroll expenses. The increase as a percentage of        revenues in both periods of fiscal 2008 were due to the decreased level of sales, which        affected 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 our products are distributed for other manufacturers, which perform their own        research and development.

Other Income/Expenses

Interest        income increased by $17,937 (22.3%) and $6,463 (15.2%) for the six and three month periods        of fiscal 2008, respectively, over the same periods of fiscal 2007 as a result of higher        average outstanding bank balances.

 

 

12

 

 

----

The        Company’s effective tax rate decreased to 36.6% from 38.1% and 37.0% from 38.1% for        the six and three month periods of fiscal 2008, respectively, compared to the same periods        of fiscal 2007 due to changes in deferred tax assets and deductions.

 

**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 in 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.

 

13

 

 

----

**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.

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; and changes in, or the        failure to comply with, government regulation, principally environmental regulations. These        and certain other factors are discussed in this Report and from time to time in other        Company reports filed with the Securities and Exchange Commission. The Company does not        assume an obligation to update the factors discussed in this Report or such other        reports.

 

14

 

 

----

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

 

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

 

15

 

 

----

**PART        II. OTHER INFORMATION**

 

**Item 4.        Submission of Matters to a Vote of Securityholders.**

At the        Company’s 2007 Annual Meeting of Stockholders held on November 9, 2007, the        Company’s stockholders reelected the Company’s then existing Board of Directors        by the following votes:

|                    | Votes     |
|-------------------------|-----------|
|                    | For       | Withheld |
| Michael S. Steiner      | 6,604,579 | 19,013 |
| William K. Steiner      | 6,602,779 | 20,813 |
| Venerando J. Indelicato | 6,606,516 | 17,076 |
| David Blyer             | 6,607,273 | 16,319 |
| Lloyd Frank             | 6,607,242 | 16,350 |
| Alan Grunspan           | 6,607,508 | 16,084 |
| Stuart Wagner           | 6,610,061 | 13,531 |
|                    |

 

**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. |
|-------|--------------------------------------------------------------------------------------------------------------------------------|

 

 

**SIGNATURES**

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

 

| Date: February 12, 2008 |                                                                                       | DRYCLEAN USA, Inc.          |
|-------------------------|---------------------------------------------------------------------------------------|-----------------------------|
|                         | By:                                                                                   | /s/ Venerando J. Indelicato |
|                         | Venerando J. Indelicato,                        Treasurer and Chief Financial Officer |

         

16

 

 

----

**Exhibit Index**

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

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

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

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

 

17