UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2005
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-9040
DRYCLEAN USA, Inc.
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(Name of small business issuer in its charter)
Delaware 11-2014231
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
290 N.E. 68th Street, Miami, Florida 33138
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: 305-754-4551
Securities registered under Section 12(b) of the Exchange Act: Common Stock,
$.025 par value
Securities registered under Section 12(g) of the Exchange Act: None
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 [_]
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes [_] No [X]
The Company's revenues from continuing operations for its fiscal year
ended June 30, 2005 were $18,389,009.
The aggregate market value as at September 23, 2005 of the Common Stock
of the issuer, its only class of voting stock, held by non-affiliates was
approximately $5,696,060 based on the closing price of the Company's Common
Stock on the American Stock Exchange on that date. Such market value excludes
shares owned by all executive officers and directors (and their spouses). This
should not be construed as indicating that all such persons are affiliates.
The number of shares outstanding of the issuer's Common Stock as at
September 23, 2005 was 7,024,450.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the issuer's Proxy Statement relating to its 2005 Annual Meeting of
Stockholders are incorporated by reference into Items 10, 11, 12 and 14 in Part
III of this Report.
Transitional Small Business Disclosure Format Yes [_] No [X]
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 and suppliers are located; industry
conditions and trends; technology changes; competition and other factors which
may affect prices which the Company may charge for its products and its profit
margins; the availability and cost of the equipment purchased by the Company;
relative values of the United States currency to currencies in the countries in
which the Company's customers, suppliers and competitors are located; changes
in, or the failure to comply with, government regulation, principally
environmental regulations; and the Company's ability to successfully introduce,
market and sell at acceptable profit margins its new Green Jet(R)
dry-wetcleaning(TM) machine and Multi-Jet(TM) dry cleaning machine; the
Company's ability to implement changes in its business strategies and
development plans; and the availability, terms and deployment of debt and equity
capital if needed for expansion. These and certain other factors are discussed
in this Report and from time to time in other Company reports filed with the
Securities and Exchange Commission. The Company does not assume an obligation to
update the factors discussed in this Report or such other reports.
PART I
Item 1. Description of Business.
General
The Company was incorporated under the laws of the State of Delaware on
June 30, 1963 under the name Metro-Tel Corp. and changed its name to DRYCLEAN
USA, Inc. on November 7, 1999. Since November 1, 1998, when Steiner-Atlantic
Corp. ("Steiner") was merged with and into, and therefore became, a wholly-owned
subsidiary of the Company, the Company's principal business has been as a
supplier of commercial and industrial dry cleaning equipment, laundry equipment
and steam boilers and related activities.
Unless the context otherwise requires, as used in this Report, the
"Company" includes DRYCLEAN USA, Inc. and its subsidiaries.
The Company, through Steiner, supplies commercial and industrial dry
cleaning equipment, laundry equipment and steam boilers in the United States,
the Caribbean and Latin American markets. This aspect of the Company's business
services includes:
o distributing commercial and industrial laundry and dry
cleaning machines and steam boilers manufactured by others;
o selling the Company's own proprietary lines of laundry and dry
cleaning machines under its Aero-Tech(R), Multi-Jet(TM) and
Green Jet(R) brand names;
o designing and planning "turn-key" laundry and/or dry cleaning
systems to meet the layout, volume and budget needs of a
variety of institutional and retail customers;
2
o supplying replacement equipment and parts to its customers;
o providing warranty and preventative maintenance through
factory-trained technicians and service managers; and
o selling process steam systems and boilers.
The Company's wholly-owned subsidiary, Steiner-Atlantic Brokerage Corp.
("Steiner Brokerage"), acts as a business broker to assist others seeking to buy
or sell existing dry cleaning stores and coin laundry businesses. Some of the
Company's existing customers have become Steiner Brokerage clients, utilizing
the Company's staff and ability to assist them in the sale of their businesses
and associated real property.
The Company, through its DRYCLEAN USA LICENSE CORP. wholly-owned
subsidiary, owns the worldwide rights to the name DRYCLEAN USA, along with
existing franchise and license agreements. DRYCLEAN USA is one of the largest
franchise and license operations in the dry cleaning industry, currently
consisting of over 400 franchised and licensed locations in the United States,
the Caribbean and Latin America.
Through DRYCLEAN USA Development Corp. ("DRYCLEAN USA Development"), a
wholly-owned subsidiary, the Company also develops new turn-key dry cleaning
establishments for resale to third parties.
Available Information
The Company files Annual Reports on Form 10-KSB and Quarterly Reports
on Form 10-QSB, files or furnishes Current Reports on Form 8-K, files or
furnishes amendments to those reports, and files proxy and information
statements with the Securities and Exchange Commission (the "SEC"). These
reports and statements may be read and copied at the SEC's Public Reference Room
at 100 F Street, N.E., Room 580, Washington, DC 20549. You may obtain
information on the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. These reports and statements, as well as beneficial ownership
reports filed by the Company's officers, directors and beneficial owners of more
than 10% of the Company's common stock, may be obtained without charge through
the Company's Internet site http://www.drycleanusa.com as soon as reasonably
practicable after such materials are filed with, or furnished to, the SEC.
Product Lines
The Company sells a broad line of commercial and industrial laundry and
dry cleaning equipment and steam boilers, as well as parts and accessories
therefor.
The commercial and industrial laundry equipment distributed by the
Company features washers and dryers, including coin-operated machines, boilers,
water reuse and heat reclamation systems, flatwork ironers, automatic folders
and feeders. The Company's dry cleaning equipment includes commercial dry
cleaning machines sold primarily under the Aero-Tech(R), Multi-Jet(TM) and Green
Jet(R) names, as well as garment presses, finishing equipment, sorting and
storage conveyors and accessories distributed for others.
The Company's proprietary environmentally friendly Green Jet(R)
dry-wetcleaning(TM) machine not only cleans garments efficiently, but also
eliminates the use of perchloroethylene (Perc) in the dry cleaning process,
thereby eliminating the health and environmental concerns that Perc poses to
customers and their landlords. It also alleviates flammability, odor and cost
issues inherent in alternative solvents and cleaning processes. In May 2005
patents were granted to the Company from the United States to protect this
innovative approach to garment cleaning. Patents from other countries are still
pending. In
3
August 2003, the Company introduced its Multi-Jet(TM) dry cleaning machine which
can use a number of environmentally safe solvents and will replace certain
existing products.
The products sold by the Company are positioned and priced to appeal to
customers in each of the high-end, mid-range and value priced markets. These
products are offered under a wide range of price points to address the needs of
a diverse customer base. Suggested prices for most of the Company's products
range from approximately $5,000 to $100,000. The products supplied by the
Company afford the Company's customers a "one-stop shop" for commercial and
industrial laundry and dry cleaning machines, boilers and accessories. By
providing "one-stop" shopping, the Company believes it is better able to attract
and support potential customers who can choose from the Company's broad product
line. Product sales accounted for approximately 96% of revenues in each of
fiscal 2005 and 2004.
The Company seeks to establish customer satisfaction by offering:
o an on-site training and preventive maintenance program
performed by factory trained technicians and service managers;
o design and layout assistance;
o maintenance of a comprehensive parts and accessories inventory
and same day or overnight availability;
o competitive pricing; and
o a toll-free support line to resolve customer service problems.
In addition, the Company, under the name DRYCLEAN USA, currently
franchises and licenses over 400 retail drycleaning stores in the United States,
the Caribbean and Latin America, making it one of the largest retail drycleaning
license and franchise operations in the dry cleaning industry. During fiscal
2005 and 2004, the Company's license and franchise segment contributed
approximately 2.0% and 1.9%, respectively, of the Company's revenues.
Through its Steiner Brokerage subsidiary, the Company acts as a
business broker to assist others seeking to buy or sell existing dry cleaning
and laundry businesses. Some of the Company's existing customers have become
Steiner Brokerage clients, utilizing the Company's staff and ability to assist
them in the sale of their businesses and associated real property. This business
contributed less than 1% of the Company's revenues during fiscal 2005 and 2004,
respectively.
The Company, through its DRYCLEAN USA Development subsidiary, develops
new turn-key dry cleaning establishments for resale to third parties. During
each of fiscal 2005 and 2004, DRYCLEAN USA Development contributed less than 1%
of the Company's revenues, respectively.
Sales, Marketing and Customer Support
The laundry and dry cleaning equipment products marketed by the Company
are sold by it to its customers in the United States, the Caribbean and Latin
America, as well as customers of its DRYCLEAN USA licensing subsidiary. The
Company employs sales executives to market its proprietary and distributed
products, including its Aero-Tech(R), Multi-Jet(TM) and Green Jet(R) products,
in the United States and in international markets. The Company supports product
sales by advertising in trade publications, participating in trade shows and
engaging in regional promotions and sales incentive programs. A substantial
portion of equipment and parts sales orders are obtained by telephone, e-mail
and fax inquiries originated by the customer or by representatives of the
Company, and significant repeat sales are derived from existing customers.
4
Additionally, the Company's Aero-Tech(R) machines are sold through
distributors and dealers throughout the United States, the Caribbean and Latin
America. The Company continues to develop distributor relationships in North
America for the distribution of its Green Jet(R) dry-wetcleaning(TM) machine and
its Multi-Jet(TM) drycleaning machine. To date, it has entered into
distributorship arrangements for its Green Jet(R) dry-wetcleaning(TM) machines
with approximately 12 distributors in North America.
The Company trains its sales and service employees to provide service
and customer support. The Company uses specialized classroom training,
instructional videos and vendor sponsored seminars to educate employees about
product information. In addition, the Company's technical staff has prepared
comprehensive training manuals, written in English and Spanish, relating to
specific training procedures. The Company's technical personnel are continuously
retrained as new technology is developed. The Company monitors service
technicians' continued educational experience and fulfillment of requirements in
order to evaluate their competence. All of the Company's service technicians
receive service bulletins, service technicians' tips and continued training
seminars.
Customers and Markets
The Company's customer base consists of approximately 750 customers in
the United States, the Caribbean and Latin America, including independent and
franchise dry cleaning stores and chains, hotels, motels, cruise lines,
hospitals, nursing homes, government institutions and distributors. In June
2004, as another distributor ceased operations, the Company obtained an
expansion of the territory in which it acts as a distributor for certain laundry
products manufactured by certain manufacturers from southern Florida to
encompass most of Florida, the Company's principal domestic market. No customer
accounted for more than 10% of the Company's revenues during the years ended
June 30, 2005 or June 30, 2004.
Foreign Sales
Export sales of laundry and dry cleaning equipment were approximately
$2,833,000 and $2,209,000 during the years ended June 30, 2005 and June 30,
2004, respectively, and were made principally to Latin America and the
Caribbean. See "Customers and Markets".
All of the Company's export sales require the customer to make payment
in United States dollars. Accordingly, foreign sales may be affected by the
strength of the United States dollar relative to the currencies of the countries
in which their customers and competitors are located, as well as the strength of
the economies of the countries in which the Company's customers are located.
Sources of Supply
The Company purchases laundry and dry cleaning machines, boilers and
the other products supplied by it from a number of manufacturers, none of which
accounted for more than 20% of the Company's purchases for the years ended June
30, 2005 or June 30, 2004. The Company's major suppliers are Pellerin Milnor
Corporation, Chicago Dryer Company and Unipress Corporation. Historically, the
Company has not experienced difficulty in purchasing products it distributes for
others and believes it has good working relationships with its suppliers.
The supplier of a significant portion of the Company's laundry
equipment and spare parts for their laundry equipment is located near New
Orleans. This supplier has reported to us that its plant was slightly damaged by
Hurricane Katrina with no water damage and limited wind damage; however, its
power and employee availability have been disrupted. The Company has some
inventory of this equipment and spare parts and has contacted customers with
pending orders, who have expressed a willingness to cooperate with the Company.
The Company expects some disruption in its business in the near term but
believes that its full year results will not be materially effected thereby.
The Company's proprietary Green Jet(R) dry-wetcleaning(TM) machines are
currently manufactured exclusively for the Company by one manufacturer in the
United States. Substantially all of the
5
Company's dry cleaning equipment sold under the Aero-Tech(R) and Multi-Jet(TM)
labels is currently manufactured exclusively for the Company by two
manufacturers in Italy.
The Company has established long-standing relationships with these
manufacturers. The Company's management believes its supplier relationships for
the products it distributes for others and its proprietary products provide the
Company with a substantial competitive advantage, including exclusivity for
certain products and certain areas and favorable prices and terms. Therefore,
the loss of certain of these vendor relationships could adversely affect the
Company's business.
The Company has a formal contract with a few of its equipment suppliers
and manufacturers and relies on its long-standing relationship with its other
suppliers and manufacturers. The Company collaborates in the design and closely
monitors the quality of its manufactured product. The Company must place its
orders with its United States manufacturer of the Green Jet(R)
dry-wetcleaning(TM) machine and with its Italian manufacturers of its
Aero-Tech(R) and Multi-Jet(TM) dry cleaning machines prior to the time the
Company has received all of its orders and, in certain instances, places orders
for products it distributes in advance of its receipt of sales orders. However,
because of the Company's close working relationship with its suppliers and
manufacturers, the Company can usually adjust orders rapidly and efficiently to
reflect a change in customer demands. The Company believes that if, for any
reason, its arrangements with the manufacturers of its proprietary products were
to cease, or in the event the cost of these products were to be adversely
affected, it will be able to have these products manufactured by other
suppliers.
Under its arrangement with one of its Italian manufacturers, the
Company purchases dry cleaning machines in Euros. The Company's current bank
revolving credit facility includes a $250,000 foreign exchange subfacility for
the purpose of enabling the Company to mitigate its currency exposure in
connection with its import activities through spot foreign exchange and forward
exchange contracts. There were no open foreign exchange contracts at either June
30, 2005 or 2004.
Imports into the United States are also affected by the cost of
transportation, the imposition of import duties and increased competition from
greater production demands abroad. The United States, Italy and the European
Union may, from time to time, impose quotas, duties, tariffs or other
restrictions or adjust prevailing quotas, duties or tariff levels, which could
affect the Company's margins on its Aero-Tech(R) and Multi-Jet(TM) machines.
Customs duties, imposed by the United States, were less than 1% of invoice cost
for the Company's imported dry cleaning machines during each of fiscal 2005 and
2004.
Competition
The commercial and industrial laundry and dry cleaning equipment
distribution business is highly competitive and fragmented with over 100
full-line or partial-line equipment distributors in the United States. The
Company's management believes that no one distributor has a major share of the
market and that substantially all distributors are independently owned and, with
the exception of several regional distributors, operate primarily in local
markets. Competition is based primarily on price, product quality, delivery and
support services provided to the customer. In Florida, the Company's principal
domestic market, the Company's primary competition is derived from a number of
full line distributors, which operate throughout Florida. In the export market,
the Company competes with several distributors and anticipates increased
competition as the export market grows. The Company's proprietary dry cleaning
equipment competes with over a dozen manufacturers of dry cleaning equipment
whose products are distributed nationally. In all geographic areas, the Company
competes by offering an extensive product selection, value-added services, such
as product inspection and quality assurance, a toll-free customer support line,
reliability, warehouse location, price, competitive special features and, with
respect to certain products, as to which the Company acts as distributor,
exclusivity.
As a franchisor/licensor of retail dry cleaning stores, DRYCLEAN USA
competes with several other franchisors and turn-key suppliers of dry cleaning
stores primarily on the basis of trademark recognition and reputation. As a
broker in the purchase and sale of retail dry cleaning stores and coin laundry
businesses, Steiner Brokerage competes with business brokers generally, as well
as with other
6
professionals with contacts in the retail dry cleaning and coin laundry
business. Competition in this latter area is primarily based on reputation,
advertising and, to a lesser degree, on the level of fees charged.
Research and Development
The Company has designed and introduced its new Green Jet(R)
dry-wetcleaning(TM) and Multi-Jet(TM) drycleaning machines and continues to
improve these products. The amounts of research and development expenses for the
years ended June 30, 2005 and 2004 were $44,825 and $41,184 respectively.
Patents and Trademarks
The Company is the owner of United States service mark registrations
for the names Aero-Tech(R) and Green Jet(R), which are used in connection with
its laundry and dry cleaning equipment, and of DRYCLEAN USA(R), which is
licensed by it to retail dry cleaning establishments. The Company has applied
for registration of its Multi-Jet(TM) tradename. The Company intends to use and
protect these or related service marks, as necessary. The Company believes its
trademarks and service marks have significant value and are an important factor
in the marketing of its products. Patents were granted in May 2005 for the
protection of the Company's new Green Jet(R) dry-wetcleaning(TM) machine in the
United States which will expire in May 2021 and patents have been applied for in
certain foreign countries.
On January 3, 2005, the Company entered into a Patent License Agreement
with Whirlpool Corporation ("Whirlpool") in which the Company granted Whirlpool
an exclusive license until December 31, 2008 and thereafter a non-exclusive
license to make and sell laundry appliances incorporating the Company's patent
applications and other intellectual property related to fabric treatment
technology for improving the drying and refreshing of garments in home clothes
dryers. In consideration for the grant of the exclusive license through December
31, 2008, Whirlpool paid the Company $350,000, of which $331,100 was for the
exclusive license fee. In addition, Whirlpool is to pay the Company a per unit
royalty for dryers using the licensed technology that are sold during the three
year period following the first sale following commercial production of dryers
using the license technology.
Compliance with Environmental and Other Government Laws and Regulations
Over the past several decades in the United States, federal, state and
local governments have enacted environmental protection laws in response to
public concerns about the environment, including with respect to
perchloroethylene (Perc), the primary cleaning agent historically used in the
commercial and industrial dry cleaning process. A number of industries,
including the commercial and industrial dry cleaning and laundry equipment
industries, are subject to these evolving laws and implementing regulations. As
a supplier to the industry, the Company serves customers who are primarily
responsible for compliance with environmental regulations. Among the federal
laws that the Company believes are applicable to the industry are the
Comprehensive Environmental Response, Compensation and Liability Act of 1980
("CERCLA"), which provides for the investigation and remediation of hazardous
waste sites; the Resource Conservation and Recovery Act of 1976, as amended
("RCRA"), which regulates the generation and transportation of hazardous waste
as well as its treatment, storage and disposal; and the Occupational Safety and
Health Administration Act ("OSHA"), which regulates exposure to toxic substances
and other health and safety hazards in the workplace. Most states and a number
of localities have laws that regulate the environment which are at least as
stringent as the federal laws. In Florida, for example, in which a significant
amount of the Company's dry cleaning and laundry equipment sales are made,
environmental matters are regulated by the Florida Department of Environmental
Protection which generally follows the Environmental Protection Agency's ("EPA")
policy in the EPA's implementation of CERCLA and RCRA and closely adheres to
OSHA's standards.
The Company believes its Aero-Tech(R), Multi-Jet(TM) and Green Jet(R)
dry cleaning machines exceed environmental regulation standards set by safety
and environmental regulatory agencies.
7
The Company does not believe that compliance with Federal, state and
local environmental and other laws and regulations which have been adopted have
had, or will have, a material effect on its capital expenditures, earnings or
competitive position.
The Company is also subject to Federal Trade Commission (the "FTC")
regulations and various state laws regulating the offer and sale of franchises.
The FTC and various state laws require the Company to, among other things,
furnish to prospective franchisees a franchise offering circular containing
prescribed information. Certain states in the United States require separate
filings in order to offer and sell franchises in those states. The Company
believes that it is in compliance in all material respects with these laws.
Employees
The Company currently employs 35 employees on a full-time basis, of
whom 4 serve in executive management capacities, 11 are engaged in sales and
marketing, 13 are administrative and clerical personnel, and 7 serve as
warehouse support. None of the Company's employees are subject to a collective
bargaining agreement, nor has the Company experienced any work stoppages. The
Company believes that its relations with employees are satisfactory.
Item 2. Description of Properties.
The Company's executive offices and the main distribution center for
its products are housed in three leased adjacent facilities totaling
approximately 45,000 square feet in Miami, Florida. The Company believes its
facilities are adequate for its present and anticipated future needs. The
following table sets forth certain information concerning the leases at these
facilities:
Approximate
Facility Sq. Ft. Expiration
-------- ------- ----------
Miami, Florida (1) 27,000 October 2008
Miami, Florida 8,000 March 2006 (2)
Miami, Florida 10,000 December 2005
--------------
(1) Leased from William K. Steiner, a director of the Company. The Company
and Mr. Steiner entered into a new lease on September 9, 2005 for a
three-year period beginning November 1, 2005. The new lease contains
two three-year renewal options in favor of the Company.
(2) The Company has a two-year renewal option.
Item 3. Legal Proceedings.
The Company is not a party to any material pending legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
8
PART II
Item 5. Market for the Common Equity and Related Stockholder Matters.
The Company's Common Stock is traded on the American Stock Exchange
(the "Amex") and on the Chicago Stock Exchange, each under the symbol "DCU." The
following table sets forth, for the Company's Common Stock, the high and low
sales prices on the Amex, as reported by Amex, for the periods reflected below.
High Low
---- ---
Fiscal 2004
First Quarter $ 1.46 $ .60
Second Quarter 2.04 1.03
Third Quarter 2.10 1.50
Fourth Quarter 1.95 1.55
Fiscal 2005
First Quarter $ 3.30 $ 1.40
Second Quarter 2.54 1.80
Third Quarter 3.50 2.25
Fourth Quarter 3.19 2.23
As of September 23, 2005, there were approximately 488 holders of
record of the Company's Common Stock.
The Company paid a $.05 per share annual dividend on October 31, 2003
to stockholders of record on October 17, 2003; an annual dividend of $.06 per
share on November 1, 2004 to stockholders of record on October 15, 2004; and a
$.035 per share semi-annual dividend on May 2, 2005 to stockholders of record on
April 15, 2005. On September 23, 2005 the Board of Directors declared a $.04 per
share semi-annual dividend payable on November 1, 2005 to stockholders of record
on October 14, 2005. The Company is a party to a Loan and Security Agreement
with a commercial bank, which, among other things, provides that the Company may
declare or pay dividends only to the extent that the dividend payment would not
reasonably likely result in a failure by the Company to maintain specified
consolidated debt service or short-term debt to equity ratios.
The Company did not sell any equity securities during the year ended
June 30, 2005 that were not registered under the Securities Act of 1933, as
amended.
Item 6. Management's Discussion and Analysis or Plan of Operation.
General
The following discussion should be read in conjunction with the
Consolidated Financial Statements and Notes thereto which appear in Item 7 of
this Report.
Overview
In June 2004, the Company obtained an expansion of territory in which
it acts as a distributor for certain laundry products to cover most of Florida.
The Company also added two experienced sales engineers and hired a new Executive
Vice President and Chief Operating Officer to cover the expanded territory and
to expand sales of the other products marketed by the Company in that
geographical area.
9
During the twelve month period ended June 30, 2005, in which the
Company has operated with the expanded territory, sales increased by 25.3% over
last year. Gross margins, however, were reduced by 2.6 percentage points due to
the larger volume of sales and the increased size of each order, which carry
smaller margins in order to remain competitive. The increased sales volume more
than offset the decrease in margins. Selling, general and administrative
expenses increased by 10.9% for the twelve-month period of fiscal 2005 mostly
due to the larger sales staff and increased volume of sales.
The supplier of a significant portion of the Company's laundry
equipment and spare parts for their laundry equipment is located near New
Orleans. This supplier has reported to us that its plant was slightly damaged by
Hurricane Katrina with no water damage and limited wind damage; however, its
power and employee availability have been disrupted. The Company has some
inventory of this equipment and spare parts and has contacted customers with
pending orders, who have expressed a willingness to cooperate with the Company.
The Company expects some disruption in its business in the near term but
believes that its full year results will not be materially effected thereby.
Inventory levels at June 30, 2005 increased by $118,214 or 4.0% from
June 30, 2004 and are expected to increase to a higher level in order to
maintain increased sales and the greater number of customers associated with the
expanded territory.
Cash on hand has been adequate to fund the expansion although cash
decreased by $160,135 at June 30, 2005 from a year ago. The Company paid a $.06
per share annual dividend (an aggregate of $421,467) paid on November 1, 2004
and the $.035 per share semi-annual dividend (an aggregate of $245,857) paid on
May 2, 2005.
In January 2005, the Company signed an exclusive license agreement with
Whirlpool Corporation, licensing the use of the Company's patent technology on
home appliances. Whirlpool paid to the Company $350,000, including $331,100 as a
one time up front fee for the exclusive license, and is to pay royalties during
the three year period following the introduction of Whirlpool manufactured
products using the licensed technology. After this period, Whirlpool will retain
a non-exclusive license and the Company is free to license its technology to
other manufacturers. The $331,100 fee for the exclusive license was classified
as unearned income and is being amortized over 48 months, the life of the
contract.
Liquidity and Capital Resources
For the twelve month period ended June 30, 2005, cash decreased by
$160,135 compared to an increase of $128,110 for the same period of 2004. The
primary reason for the decrease was dividend payments in November of 2004 and
May 2005 aggregating $667,324. This use of cash was partially offset by a
$350,000 one-time payment received from Whirlpool in accordance with the license
agreement and the Company's net earnings of $706,263. The increase in fiscal
2004 was primarily attributable to the Company's net earnings of $536,217
offset, in part, by a dividend payment of $350,722.
The following table summarizes the Company's Consolidated Statement of
Cash Flows:
Years Ended June 30,
2005 2004
---------------------------------------------------- --------------------------- ----------------------------
Net cash provided (used) by:
---------------------------------------------------- --------------------------- ----------------------------
Operating activities $460,462 $391,611
Investing activities 36,727 69,221
Financing activities (657,324) (332,722)
Cash provided by operating activities increased by $68,851 in fiscal
2005 compared to cash provided by operating activities in fiscal 2004. Continued
surveillance of our accounts receivable kept
10
bad debts in line when compared to fiscal 2004. Accounts, notes and lease
receivables and inventories increased by $369,333 and $118,214, respectively, in
fiscal 2005 mostly attributable to the expanded territory and the increased
number of customers. There were also increases in these components at year end
in fiscal 2004 due to the start up and support of the expanded territory which
began in June 2004. Accounts payable and accrued expenses decreased in fiscal
2005 by $231,875 as the Company took advantage of any discounts available. This
compared to an increase of $34,918 in fiscal 2004 due to the increased inventory
purchased in June to support the expanded territory. The Whirlpool payment of
$331,100 received in January 2005 for a four-year exclusive license to employ
the Company's technology in Whirlpool products was treated as unearned income
and is being amortized over 48 months. Accrued employee expenses decreased by
$23,113 due to a reduction in employee bonus expense.
Investing activities provided cash of $36,727 in fiscal 2005 compared
to $69,221 provided in fiscal 2004. Fiscal 2005 contained an extra monthly
payment on the outstanding note associated with the sale of the
telecommunications segment compared to fiscal 2004. All monthly payments were
current at fiscal 2005 year end. The Company increased its capital expenditures
in fiscal 2005 for renovating and restructuring its main offices and acquiring
updated software licenses for its business programs. Patent expenditures
remained substantially the same for both fiscal years.
Financing activities used cash of $657,324 in fiscal 2005, mostly due
to increased dividend payments compared to fiscal 2004 ($667,324 compared to
$350,722). Expenditures for both years were partially offset by the exercise of
stock options to purchase 10,000 shares in fiscal 2005 and 18,000 shares in
fiscal 2004 at $1.00 per share.
On September 27, 2004, the Company's Board of Directors declared a $.06
per share annual dividend (or an aggregate of $421,467) payable on November 1,
2004 to shareholders of record on October 15, 2004. On March 23, 2005, the
Company's Board of Directors declared a $.035 per share semi-annual dividend (or
an aggregate of $245,857) payable on May 2, 2005 to shareholders of record on
April 15, 2005. On September 23, 2005 the Board of Directors declared a $.04 per
share semi-annual dividend (or an aggregate of $280,978) payable on November 1,
2005 to stockholders of record on October 14, 2005.
On October 28, 2004, the Company received an extension until October
30, 2005 of its existing $2,250,000 revolving line of credit facility. In
addition, the Loan Agreement was amended to eliminate the borrowing base
restriction on borrowings under the revolving credit facility, thereby enabling
the Company to borrow up to the full $2,250,000 amount available under that
facility regardless of the Company's levels of accounts receivable and
inventories. The Company's obligations under the facility continue to be
guaranteed by the Company's subsidiaries and collateralized by substantially all
of the Company's and its subsidiaries' assets. The Company believes it will be
able to renew this facility with the same lender on similar terms.
The Company believes that its present cash position, the cash it
expects to generate from operations and cash borrowings available under its line
of credit will be sufficient to meet its presently contemplated 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.
11
Results of Operations
Year Ended June 30,
2005 2004
---------------------------------------------------- ------------------ ------------------- -----------
Net sales $17,564,559 $14,020,703 +25.3%
Development fees, franchise and license
fees, commissions and other 824,450 651,562 +26.5%
---------------------------------------------------- ------------------ ------------------- -----------
Total revenues $18,389,009 $14,672,265 +25.3%
---------------------------------------------------- ------------------ ------------------- -----------
Revenues for the year ended June 30, 2005 increased by $3,716,744
(25.3%) over fiscal 2004. Increases in sales were experienced in commercial
laundry and dry cleaning machines, mostly attributable to the expansion of the
territory since June 2004 and the increased number of sales staff. Increased
revenues of 8.9% were also reported by the Company's development business, which
develops turn-key cleaning establishments for resale to third parties; however,
the broker business experienced a reduction of 31.3% in revenues. Both these
subsidiaries account for less than 1% of the Company's revenues. For fiscal
2005, sales of parts increased by 11.1%, laundry equipment sales increased
75.8%, boiler sales increased 26.9% and dry cleaning equipment sales increased
3.3%.
Franchise and license fees increased by $89,656 (32.5%) in fiscal 2005
compared to fiscal 2004, attributable to an improved domestic economy.
Overall expenses of the Company, including costs of sales, were 93.9%
of total revenues in fiscal 2005, compared to 94.3% in fiscal 2004. The
decrease, as a percentage of revenues, reflects relatively stable overall costs
spread over increased revenues.
Year Ended June 30,
---------------------------------------------------------------- ----------------------------------------
2005 2004
---------------------------------------------------------------- -------------------- -------------------
As a percentage of net sales:
Cost of sales 74.9% 72.3%
As a percentage of revenues:
Selling, general and administrative expenses 22.1% 25.0%
Research and development .2% .3%
Total expenses 93.9% 94.3%
---------------------------------------------------------------- -------------------- -------------------
Cost of goods sold, expressed as a percentage of sales, increased to
74.9% in fiscal 2005 compared to 72.3% in fiscal 2004. The increased costs were
due to the larger volume of sales and the increased size of each order, which
carry smaller margins in order to remain competitive.
Selling, general and administrative expenses increased by $399,499
(10.9%), but improved as a percentage of revenues to 22.1% in fiscal 2005 from
25.0% in fiscal 2004. Most of the increase was due to a 9.8% increase in payroll
expenses associated with the increased sales staff. Increases were also
experienced in insurance (13.2%), professional fees (40.3%) and supplies
(26.2%), but were offset by decreases in commissions (20.5%) and telephone
expenses (15.2%). Most other expenses in this category showed slight increases
in line with inflation and to support the increased volume of sales.
Research and development expenses remained essentially flat and are a
small part of the Company's total operating expenses. These expenses relate to
ongoing research on the Company's Green-Jet(R) technologies and the application
of these technologies to smaller dry-cleaning machines.
Interest income decreased by $13,118 (55.1%), primarily due to the
lower outstanding principal balance of the note received by the Company as part
of the consideration for the sale of its telecommunications segment in July
2002, offset by the rise in interest rates.
12
The Company's effective income tax rate of 37.7% in fiscal 2005
approximated its effective income tax rate of 37.2% in fiscal 2004.
Inflation
Inflation has not had a significant effect on the Company's operations
during any of the reported periods.
Transactions with Related Parties
The Company leases 27,000 square feet of warehouse and office space
from William K. Steiner, a principal shareholder, Chairman of the Board of
Directors and a director of the Company. The Company and Mr. Steiner entered
into a new lease on September 9, 2005 for a three-year period beginning 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 is to bear
real estate taxes, utilities, maintenance, non-structural repairs and insurance.
The new 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.
In addition, in fiscal 2005, the Company paid two law firms, in which a
director is of counsel, an aggregate of $81,500 for legal services performed.
Critical Accounting Policies
Securities and Exchange Commission Financial Reporting Release No. 60
encourages all companies to include a discussion of critical accounting policies
or methods used in the preparation of financial statements. Management believes
the following critical accounting policies affect the significant judgments and
estimates used in the preparation of the Company's financial statements:
Revenue Recognition and Accounts and Notes Receivable
Equipment and replacement parts are generally shipped FOB from the
Company's warehouse or drop shipped FOB factory at which time risk of loss and
title passes to the purchaser and the sale is recorded. Commissions and
development fees are recorded when earned, generally when the services are
performed or the transaction is closed. Individual franchise arrangements
include a license and provide for payment of initial fees, as well as continuing
service fees. Initial franchise fees are generally recorded upon the opening of
the franchised store, which is evidenced by a certificate from the franchisee,
indicating that the store has opened, and collectibility is reasonably assured.
Continuing services fees represent regular contractual payments received for the
use of the "Dryclean USA" marks, which are recognized as revenue when earned,
generally on a straight line basis.
Accounts and trade notes receivable are customer obligations due under
normal trade terms. The Company sells its products primarily to independent
dryclean and laundry stores. The Company's note receivable represents the
amounts due from the sale of the telecommunications business. The Company
performs continuing credit evaluations of its customers' financial condition and
depending on the term of credit, the amount of the credit granted and
management's past history with a customer, the Company may require the debtor to
pledge the purchased equipment as collateral for the receivable. Senior
management reviews accounts and notes receivable on a regular basis to determine
if any such amounts will potentially be uncollectible. The Company includes any
balances that are determined to be uncollectible, along with a general reserve
based on older aged amounts, in its overall allowance for doubtful accounts.
After all attempts to collect a receivable have failed, the receivable is
written off. The Company's non-trade note receivable is collateralized by the
assets sold and is subject to personal guarantees by the principals of the
debtor. All payments on that note are current. Based on the information
available to management, it believes the Company's allowance for doubtful
accounts as of June 30, 2005 is adequate. However, actual write-offs might
exceed the recorded allowance.
13
Franchise License Trademark and Other Intangible Assets
The franchise license, trademark, patents and trade name are stated at
cost less accumulated amortization. Those assets are amortized on a
straight-line basis over the estimated future periods to be benefited (10-15
years). The patents are amortized over the shorter of the patents' useful life
or legal life from the date such patents are granted. The Company reviews the
recoverability of intangible assets based primarily upon an analysis of
undiscounted cash flows from the intangible assets. In the event the expected
future net cash flows should become less than the carrying amount of the assets,
an impairment loss will be recorded in the period such determination is made,
based on the fair value of the related assets.
Use of Estimates
The preparation of financial statements requires management to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. On an ongoing basis, management evaluates these estimates,
including those related to allowances for doubtful accounts receivable, the
carrying value of inventories and long-lived assets, the timing of revenue
recognition for initial license and franchise fees from sales of franchise
arrangements and continuing license and franchise service fees, as well as sales
returns. Management bases these estimates on historical experience and on
various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the recognition of revenues and expenses and the carrying value of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or conditions.
New Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 123 (Revised
2004) (SFAS 123(R)) "Share-based payment". SFAS 123(R) will require compensation
costs related to share-based payment transactions to be recognized in the
financial statements. With limited exceptions, the amount of compensation cost
will be measured based on the grant-date fair value of the equity or liability
instruments issued. In addition, liability awards will be re-measured each
reporting period. Compensation cost will be recognized over the period that an
employee provides service in exchange for the award. SFAS 123(R) replaces FASB
123, Accounting for Stock-Based Compensation and supersedes APB Opinion No. 25,
Accounting for Stock Issued to Employees. This guidance is effective as of the
first interim or annual reporting period beginning after December 15, 2005 for
Small Business filers such as the Company. SFAS 123(R) does not affect the
Company at the present time but may effect the Company if it issues share-based
compensation in the future.
In December 2004, the FASB issued FASB Statement No.151, "Inventory
Costs," which clarifies the accounting for abnormal amounts of idle facility
expense, freight, handling costs, and wasted material (spoilage). Under this
Statement, such items will be recognized as current-period charges. In addition,
the Statement requires that allocation of fixed production overheads to the
costs of conversion be based on the normal capacity of the production
facilities. This Statement is effective for inventory costs incurred during
fiscal years beginning after June 15, 2005 and must be applied prospectively.
Adoption of this statement is not expected to impact the Company's financial
position or results of operations because the Company does not manufacture
inventory.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of
Nonmonetary Assets," which amends APB Opinion No. 29, "Accounting for
Nonmonetary Transactions." The amendments made by SFAS 153 are based on the
principle that exchanges of nonmonetary assets should be measured based on the
fair value of the assets exchanged. Further, the amendments eliminate the narrow
exception for nonmonetary exchanges of similar productive assets and replace it
with a broader exception for exchanges of nonmonetary assets that do not have
"commercial substance." Previously, Opinion 29 required that the accounting for
an exchange of a productive asset for a similar productive asset or an
equivalent interest in
14
the same or similar productive asset should be based on the recorded amount of
the asset relinquished. The provisions in SFAS 153 are effective for nonmonetary
asset exchanges occurring in fiscal periods beginning after June 15, 2005.
Adoption of this pronouncement will not materially impact the Company's
financial position or results of operations.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and
Error Corrections - A Replacement of APB No. 20 and FASB Statement No. 3." Among
other changes, SFAS 154 requires that a voluntary change in accounting principle
be applied retrospectively with all prior period financial statements presented
on the new accounting principle, unless it is impracticable to do so. SFAS 154
also provides that (1) a change in method of depreciating or amortizing a
long-lived nonfinancial asset be accounted for as a change in estimate
(prospectively) that was effected by a change in accounting principle, and (2)
correction of errors in previously issued financial statements should be termed
a "restatement." The new standard is effective for accounting changes and
correction of errors made in fiscal years beginning after December 15, 2005.
Early adoption of this standard is permitted for accounting changes and
correction of errors made in fiscal years beginning after June 1, 2005. Adoption
of this pronouncement is not expected to materially impact the Company.
15
Item 7. Financial Statements.
DRYCLEAN USA, Inc. and Subsidiaries
Index to Consolidated Financial Statements
Page
Reports of Independent Registered Public Accounting Firms 17-18
Consolidated Balance Sheets at June 30, 2005 and 2004 19
Consolidated Statements of Operations for the years ended
June 30, 2005 and 2004 20
Consolidated Statements of Shareholders' Equity for the years ended
June 30, 2005 and 2004 21
Consolidated Statements of Cash Flows for the years ended
June 30, 2005 and 2004 22
Summary of Accounting Policies 23
Notes to Consolidated Financial Statements 28
16
Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
DRYCLEAN USA, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheet of DRYCLEAN USA,
Inc. and subsidiaries as of June 30, 2005, and the related consolidated
statements of operations, shareholders' equity and cash flows for the year then
ended. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The Company
was not required to have, nor were we engaged to perform, an audit of the
Company's internal control over financial reporting. Our audit included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company's
internal control over financial reporting. Accordingly, we express no such
opinion. An audit also includes examining, on a test basis, evidence supporting
the amounts and disclosures in the consolidated financial statements, assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
DRYCLEAN USA, Inc. and subsidiaries as of June 30, 2005 and the consolidated
results of their operations and their cash flows for the year then ended in
conformity with accounting principles generally accepted in the United States of
America.
MORRISON, BROWN, ARGIZ & FARRA LLP
Miami, Florida
September 2, 2005, except for the
second paragraph of Note 6 and
the second paragraph of Note 11 as to
which the date is September 23, 2005
17
Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
DRYCLEAN USA, Inc.
Miami, Florida
We have audited the accompanying consolidated balance sheet of DRYCLEAN USA,
Inc. and subsidiaries as of June 30, 2004, and the related consolidated
statements of operations, shareholders' equity and cash flows for the year then
ended. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
DRYCLEAN USA, Inc. and subsidiaries as of June 30, 2004, and the consolidated
results of their operations and their cash flows for the year then ended in
conformity with accounting principles generally accepted in the United States of
America.
Miami, Florida BDO Seidman, LLP
September 1, 2004, except for
Note 11 as to which the date is
September 27, 2004
18
DRYCLEAN USA, Inc. and Subsidiaries
Consolidated Balance Sheets
June 30, 2005 2004
----------------------------------------------------------------------------------------------------------------
Assets (Note 5)
Current assets
Cash and cash equivalents $ 1,582,116 $ 1,742,251
Accounts and trade notes receivable, net of allowance for
doubtful accounts of $130,000 1,949,750 1,600,087
Lease receivables (Note 2) 14,995 35,172
Inventories 3,090,017 2,971,803
Deferred income taxes (Note 4) 103,031 97,618
Note receivable-current (Note 13) 67,857 157,143
Other current assets 118,930 112,375
---------------------------------------------------------------------------------------------------------------
Total current assets 6,926,696 6,716,449
Lease receivables - due after one year (Note 2) - 10,000
Note receivable, less current portion (Note 13) - 67,857
Equipment and improvements, net (Note 3) 230,352 217,200
Franchise license, trademarks and other intangible assets, net
(Note 1) 373,779 385,756
Deferred income taxes (Note 4) 10,248 26,859
---------------------------------------------------------------------------------------------------------------
$ 7,541,075 $ 7,424,121
---------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable and accrued expenses $ 679,505 $ 911,380
Accrued employee expenses 295,440 318,553
Unearned income 289,712 -
Customer deposits 577,440 550,042
---------------------------------------------------------------------------------------------------------------
Total current liabilities 1,842,097 1,779,975
---------------------------------------------------------------------------------------------------------------
Total liabilities 1,842,097 1,779,975
---------------------------------------------------------------------------------------------------------------
Commitments and contingencies (Notes 6, 8 and 9)
---------------------------------------------------------------------------------------------------------------
Shareholders' equity (Notes 11 and 12)
Preferred Stock, $1.00 par value:
Authorized shares - 200,000; none
issued and outstanding - -
Common stock, $0.025 par value:
Authorized shares - 15,000,000; 7,055,500 and 7,045,500,
shares issued and outstanding at 2005 and 2004,
respectively, including shares held in treasury 176,388 176,138
Additional paid-in capital 2,075,870 2,066,120
Retained earnings 3,449,740 3,404,908
Treasury stock, 31,050 shares at cost (3,020) (3,020)
---------------------------------------------------------------------------------------------------------------
Total shareholders' equity 5,698,978 5,644,146
---------------------------------------------------------------------------------------------------------------
$ 7,541,075 $ 7,424,121
---------------------------------------------------------------------------------------------------------------
See accompanying summary of accounting policies and notes to consolidated
financial statements.
19
DRYCLEAN USA, Inc. and Subsidiaries
Consolidated Statements of Operations
Years ended June 30, 2005 2004
-----------------------------------------------------------------------------------------------------
Revenues:
Net sales $17,564,559 $14,020,703
Development fees, franchise and license fees, commissions
and other 824,450 651,562
-----------------------------------------------------------------------------------------------------
Total 18,389,009 14,672,265
-----------------------------------------------------------------------------------------------------
Cost of sales 13,157,427 10,137,623
Selling, general and administrative expenses 4,063,140 3,663,641
Research and development expenses 44,825 41,184
-----------------------------------------------------------------------------------------------------
Total 17,265,392 13,842,448
-----------------------------------------------------------------------------------------------------
Operating income 1,123,617 829,817
-----------------------------------------------------------------------------------------------------
Other income:
Interest income 10,692 23,810
-----------------------------------------------------------------------------------------------------
Earnings before income taxes 1,134,309 853,627
Provision for income taxes (Note 4) 428,046 317,410
-----------------------------------------------------------------------------------------------------
Net earnings $ 706,263 $ 536,217
-----------------------------------------------------------------------------------------------------
Net earnings per share (Note 10):
Basic $ .10 $ .08
Diluted $ .10 $ .08
-----------------------------------------------------------------------------------------------------
Weighted average number of shares of common stock outstanding:
Basic 7,023,146 7,009,188
Diluted 7,037,921 7,032,060
-----------------------------------------------------------------------------------------------------
See accompanying summary of accounting policies and notes to consolidated
financial statements.
20
DRYCLEAN USA, Inc. and Subsidiaries
Consolidated Statements of Shareholders' Equity
Common Stock Additional Treasury Stock
--------------------------- Paid-in --------------------- Retained
Shares Amount Capital Shares Cost Earnings Total
Balance at June 30, 2003 7,027,500 $ 175,688 $ 2,048,570 31,050 $ (3,020) $ 3,219,413 $ 5,440,651
Stock options exercised 18,000 450 17,550 - - - 18,000
Dividends paid ($.05 per share) (350,722) (350,722)
Net earnings - - - - - 536,217 536,217
------------------------------------- ------------- ------------- -------------- ---------- ---------- -------------- --------------
Balance at June 30, 2004 7,045,500 176,138 2,066,120 31,050 (3,020) 3,404,908 5,644,146
Stock options exercised 10,000 250 9,750 - - - 10,000
Tax benefit from stock option
exercise - - - - - 5,893 5,893
Dividends paid ($.06 per share) - - - - - (421,467) (421,467)
Dividends paid ($.035 per share) - - - - - (245,857) (245,857)
Net earnings - - - - - 706,263 706,263
------------------------------------- ------------- ------------- -------------- ---------- ---------- -------------- --------------
Balance at June 30, 2005 7,055,500 $ 176,388 $ 2,075,870 31,050 $ (3,020) $ 3,449,740 $ 5,698,978
------------------------------------- ------------- ------------- -------------- ---------- ---------- -------------- --------------
See accompanying summary of accounting policies and notes to consolidated
financial statements.
21
DRYCLEAN USA, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Years ended June 30, 2005 2004
---------------------------------------------------------------------------------------------------------------
Operating activities:
Net income $ 706,263 $ 536,217
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 119,242 114,946
Bad debt expense 49,846 42,782
Provision for deferred income taxes 11,198 22,589
Tax benefit for stock option exercise 5,893 -
(Increase) decrease in operating assets:
Accounts, trade notes and lease receivables (369,333) (251,761)
Inventories (118,214) (394,865)
Other current assets (6,555) 56,719
Increase (decrease) in operating liabilities:
Accounts payable and accrued expenses (231,875) 34,918
Accrued employee expenses (23,113) 15,230
Unearned income 289,712 -
Customer deposits 27,398 214,836
---------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 460,462 391,611
---------------------------------------------------------------------------------------------------------------
Investing activities:
Payments received on note receivable 157,143 144,048
Capital expenditures (88,461) (40,905)
Patent expenditures (31,955) (33,922)
---------------------------------------------------------------------------------------------------------------
Net cash provided by investing activities 36,727 69,221
---------------------------------------------------------------------------------------------------------------
Financing activities:
Proceeds from exercise of stock options 10,000 18,000
Dividends paid (667,324) (350,722)
---------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (657,324) (332,722)
---------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (160,135) 128,110
Cash and cash equivalents at beginning of year 1,742,251 1,614,141
---------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 1,582,116 $ 1,742,251
---------------------------------------------------------------------------------------------------------------
Supplemental Information:
Cash paid for:
Income taxes $ 438,000 $ 406,000
---------------------------------------------------------------------------------------------------------------
See accompanying summary of accounting policies and notes to consolidated
financial statements.
22
DRYCLEAN USA, Inc. and Subsidiaries
Summary of Accounting Policies
Nature of Business DRYCLEAN USA, Inc. and subsidiaries
(collectively, the "Company") sell
commercial and industrial laundry and dry
cleaning equipment, boilers and replacement
parts; sell individual and area franchises
under the DRYCLEAN USA name; and act as a
business broker in connection with the
purchase and sale of retail dry cleaning
stores and coin laundries.
The Company primarily sells to customers
located in the United States, the Caribbean
and Latin America.
Principles of Consolidation The accompanying consolidated financial
statements include the accounts of DRYCLEAN
USA, Inc. and its wholly-owned subsidiaries.
Intercompany transactions and balances have
been eliminated in consolidation.
Revenue Recognition Sales of products are generally shipped FOB
origin and revenue is recorded as they are
shipped. Shipping, delivering and handling
fee income of approximately $303,000 and
$245,000 for the years ended June 30, 2005
and 2004, respectively, are included as net
sales in the consolidated financial
statements. Shipping, delivering and
handling costs are included in cost of
sales. Commissions and development fees are
recorded when earned. Individual franchise
arrangements include a license and provide
for the payment of initial fees for the
granting of the franchise. Royalty fees are
generated for the use of the name DRYCLEAN
USA(R). Initial franchise fees are generally
recorded upon the opening of the franchise
store. Continuing royalty fees are recorded
when earned. Royalty fees recognized in
fiscal 2005 and 2004 were $223,350 and
$207,402, respectively.
Customer deposits represent primarily
amounts received from customers for future
delivery of equipment or services. In
January 2005, the Company signed an
exclusive license agreement with Whirlpool
Corporation, licensing the use of the
Company's patent technology on home
appliances. Whirlpool Corporation paid to
the Company $350,000, including $331,100 as
a one time up front fee for the exclusive
license, and is to pay royalties during the
three year period following the introduction
of Whirlpool Corporation manufactured
products using the licensed technology.
After this period, Whirlpool Corporation
will retain a non-exclusive license and the
Company is free to license its technology to
other manufacturers. Unearned income
represents the $331,100 fee for the
exclusive license which is being amortized
over 48 months, the life of the contract. At
June 30, 2005, $289,712 remained to be
amortized.
Accounts and Trade Notes
Receivable Accounts and trade notes receivable are
customer obligations due under normal trade
terms. The Company sells its products
primarily to independent drycleaning and
laundry stores. The non-trade note
receivable represents the amounts due from
the sale of the telecommunications segment
as further discussed in Note 13. The Company
performs continuing credit evaluations of
its customers' financial condition and,
depending on the terms of credit, the amount
of the credit granted and management's
history with a customer, the Company may
require the customer to pledge the purchased
equipment as collateral for the receivable.
Senior management reviews accounts and notes
receivable on
23
DRYCLEAN USA, Inc. and Subsidiaries
Summary of Accounting Policies
a regular basis to determine if any such
amounts will potentially be uncollectible.
The Company includes any balances that are
determined to be uncollectible, along with a
general reserve, in its overall allowance
for doubtful accounts. After all attempts to
collect a receivable have failed, the
receivable is written off. The Company's
non-trade note receivable is collateralized
by the assets sold and is supported by
personal guarantees by the principals of the
debtor. All payments on such note are
current. Based on the information available,
management believes the Company's allowance
for doubtful accounts as of June 30, 2005
and 2004 is adequate. However, actual
write-offs might exceed the recorded
allowance.
Inventories Inventories consist principally of equipment
and spare parts. Equipment is valued at the
lower of cost, determined on the specific
identification method, or market. Spare
parts are valued at the lower of average
cost or market.
Equipment, Property and equipment are stated at cost.
Improvements and Depreciation and amortization are calculated
Depreciation on accelerated and straight-line methods
over lives of five to seven years for
furniture and equipment and the lesser of
ten years or the life of the lease for
leasehold improvements for both financial
reporting and income tax purposes, except
that leasehold improvements are amortized
over 31 years for income tax purposes.
Repairs and maintenance costs are expensed
as incurred.
Asset Impairments The Company accounts for long-lived assets
in accordance with the provisions of the
Financial Accounting Standards Board
("FASB") Statement of Financial Accounting
Standard ("SFAS") No. 144, "Accounting for
the Impairment or Disposal of Long-Lived
Assets." This statement requires that
long-lived assets and certain identifiable
intangibles be reviewed for impairment
whenever events or changes in circumstances
indicate that the carrying amount of an
asset may not be recoverable. Recoverability
of assets to be held and used is measured by
a comparison of the carrying amount of an
asset to future net cash flows expected to
be generated by the asset. If such assets
are considered to be impaired, the
impairment to be recognized is measured by
the amount by which the carrying amount of
the assets exceeds the fair value of the
assets. Assets to be disposed of are
reported at the lower of the carrying amount
or fair value less estimated costs to sell.
The Company has determined that no assets
had been impaired as of June 30, 2005 and
2004.
Income Taxes The Company utilizes the asset and liability
method wherein deferred taxes are recognized
for differences between consolidated
financial statement and income tax bases of
assets and liabilities.
Cash Equivalents Cash equivalents include all highly liquid
investments with original maturities of
three months or less.
Estimates The preparation of consolidated financial
statements in conformity with accounting
principles generally accepted in the United
States of America requires management to
make estimates and assumptions that affect
the reported amounts of assets and
liabilities and disclosure of contingent
assets and liabilities at the date of the
consolidated financial statements and
24
DRYCLEAN USA, Inc. and Subsidiaries
Summary of Accounting Policies
the reported amounts of revenues and
expenses during the reporting period. Actual
results could differ from those estimates.
Stock Based Compensation SFAS No. 123, "Accounting for Stock-Based
Compensation," as amended by SFAS No. 148,
"Accounting for Stock-Based Compensation -
Transition and Disclosure - An Amendment of
FASB Statement No. 123." requires the
Company to provide pro forma information
regarding net earnings and net earnings per
share as if compensation cost for the
Company's stock options had been determined
in accordance with the fair value based
method prescribed in SFAS No. 123. The
Company estimates the fair value of each
stock option at the grant date by using the
Black-Scholes option-pricing model. No
options were granted in fiscal years 2005 or
2004. Based on these assumptions, under the
accounting provisions of SFAS No. 123, the
Company's net earnings and net earnings per
common share would have been as follows:
Year ended June 30, 2005 2004
------------------------------------------------------- ------------- ---------------
Net earnings, as reported $ 706,263 $ 536,217
Less: Total stock-based employee compensation
expense determined under fair value based
method for all awards - (4,500)
------------------------------------------------------- ------------- ---------------
Pro forma earnings from continuing operations $ 706,263 $ 531,717
------------------------------------------------------- ------------- ---------------
Earnings per common share:
Basic - As reported $ .10 $ .08
Pro forma .10 .08
Diluted - As Reported .10 .08
Pro forma .10 .08
------------------------------------------------------- ------------- ---------------
All stock options were fully vested as of
June 30, 2004. Thus, there was no pro forma
compensation expense for 2005.
Earnings Per Share Basic earnings per share are computed on the
basis of the weighted average number of
common shares outstanding during each year.
Diluted earnings per share are computed on
the basis of the weighted average number of
common shares and dilutive securities
outstanding during each year. Securities
having an anti-dilutive effect on earnings
per share are excluded from the
calculations.
Advertising Costs The Company expenses the cost of advertising
as of the first date the advertisement is
run. The Company expensed approximately
$145,000 and $157,000 of advertising costs
for the years ended June 30, 2005 and 2004,
respectively.
Fair Value of Financial The Company's financial instruments consist
Instruments principally of cash and cash equivalents,
accounts and trade notes receivable, lease
receivables, notes receivable, accounts
payable and accrued expenses. Due to their
relatively short-term nature or variable
rates, the carrying amounts of such
financial instruments, as reflected in the
accompanying consolidated balance sheets,
approximate their estimated fair value.
Their estimated fair value is not
necessarily indicative of the amounts the
Company could realize in a
25
DRYCLEAN USA, Inc. and Subsidiaries
Summary of Accounting Policies
current market exchange or of future
earnings or cash flows.
Customer Deposits Customer deposits represent advances paid by
certain customers when placing orders for
equipment with the Company. These deposits
are generally non-refundable.
Franchise License, Franchise license, trademark, and other
Trademark and Other intangible assets are stated at cost less
Intangible Assets accumulated amortization. These assets are
amortized on a straight-line basis over the
estimated future periods to be benefited
(10-15 years). Patents are amortized over
the shorter of the patent's useful life or
legal life from the date such patent is
granted. The Company reviews the
recoverability of intangible assets based
primarily upon an analysis of undiscounted
cash flows expected to be generated from the
acquired assets. In the event the expected
future net cash flows should become less
than the carrying amount of the assets, an
impairment loss will be recorded in the
period such determination is made, based on
the fair value of the related assets.
Reclassifications Certain prior year amounts have been
reclassified to conform to the current year
presentation.
New Accounting In December 2004, the FASB issued SFAS No.
Pronouncements 123 (Revised 2004) (SFAS 123(R))
"Share-based payment". SFAS 123(R) will
require compensation costs related to
share-based payment transactions to be
recognized in the financial statements. With
limited exceptions, the amount of
compensation cost will be measured based on
the grant-date fair value of the equity or
liability instruments issued. In addition,
liability awards will be re-measured each
reporting period. Compensation cost will be
recognized over the period that an employee
provides service in exchange for the award.
SFAS 123(R) replaces FASB 123, Accounting
for Stock-Based Compensation and supersedes
APB Opinion No. 25, Accounting for Stock
Issued to Employees. This guidance is
effective as of the first interim or annual
reporting period beginning after December
15, 2005 for Small Business filers such as
the Company. SFAS 123(R) does not affect the
Company at the present time but may affect
share-based compensation in the future.
In December 2004, the FASB issued FASB
Statement No.151, "Inventory Costs," which
clarifies the accounting for abnormal
amounts of idle facility expense, freight,
handling costs, and wasted material
(spoilage). Under this Statement, such items
will be recognized as current-period
charges. In addition, the Statement requires
that allocation of fixed production
overheads to the costs of conversion be
based on the normal capacity of the
production facilities. This Statement is
effective for inventory costs incurred
during fiscal years beginning after June 15,
2005 and must be applied prospectively.
Adoption of this statement is not expected
to impact the Company's financial position
or results of operations because the Company
does not manufacture inventory.
In December 2004, the FASB issued FASB
Statement No. 153, "Exchanges of Nonmonetary
Assets," which amends APB Opinion No. 29,
"Accounting for Nonmonetary Transactions."
The amendments made by Statement 153 are
based on the principle that exchanges of
nonmonetary assets should be measured based
on the fair value of the assets exchanged.
Further, the amendments eliminate the narrow
exception for nonmonetary
26
exchanges of similar productive assets and
replace it with a broader exception for
exchanges of nonmonetary assets that do not
have "commercial substance." Previously,
Opinion 29 required that the accounting for
an exchange of a productive asset for a
similar productive asset or an equivalent
interest in the same or similar productive
asset should be based on the recorded amount
of the asset relinquished. The provisions in
Statement 153 are effective for nonmonetary
asset exchanges occurring in fiscal periods
beginning after June 15, 2005. Adoption of
this pronouncement will not materially
impact the Company's financial position or
results of operations.
In May 2005, the FASB issued FASB Statement
No. 154, "Accounting Changes and Error
Corrections - A Replacement of APB No. 20
and FASB Statement No. 3." Among other
changes, Statement 154 requires that a
voluntary change in accounting principle be
applied retrospectively with all prior
period financial statements presented on the
new accounting principle, unless it is
impracticable to do so. Statement 154 also
provides that (1) a change in method of
depreciating or amortizing a long-lived
nonfinancial asset be accounted for as a
change in estimate (prospectively) that was
effected by a change in accounting
principle, and (2) correction of errors in
previously issued financial statements
should be termed a "restatement." The new
standard is effective for accounting changes
and correction of errors made in fiscal
years beginning after December 15, 2005.
Early adoption of this standard is permitted
for accounting changes and correction of
errors made in fiscal years beginning after
June 1, 2005. Adoption of this pronouncement
is not expected to materially impact the
Company.
27
DRYCLEAN USA, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. Intangible Assets Franchise license, trademark and other
intangible assets consist of the following:
-------------------------------------------------------------------------------------
Estimated
Useful Lives June 30, June 30,
(in years) 2005 2004
-------------------------------------------------------------------------------------
Franchise license agreements 10 $ 529,500 $ 529,500
Trademarks, patents and
tradenames 10-15 210,417 139,864
-------------------------------------------------------------------------------------
739,917 669,364
Less accumulated amortization (366,138) (283,608)
-------------------------------------------------------------------------------------
$ 373,779 $ 385,756
-------------------------------------------------------------------------------------
Amortization expense amounted to $64,444 in
fiscal 2005 and $57,472 in fiscal 2004.
2. Lease Receivables Lease receivables result from customer
leases of equipment under arrangements which
qualify as sales-type leases. At June 30,
2005 and 2004, future lease payments, net of
deferred interest ($312 and $891 at June 30,
2005 and 2004, respectively), due under
these leases amounted to $14,995 and
$45,172, respectively.
3. Equipment and Improvements Major classes of equipment and improvements
consist of the following:
June 30, 2005 2004
------------------------------------------------------------------------------------
Furniture and equipment $ 745,810 $ 695,836
Leasehold improvements 353,804 330,914
------------------------------------------------------------------------------------
1,099,614 1,026,750
Less accumulated depreciation and
amortization (869,262) (809,550)
------------------------------------------------------------------------------------
$ 230,352 $ 217,200
------------------------------------------------------------------------------------
Depreciation and amortization of equipment
and improvements amounted to $54,798 and
$57,474 for the years ended June 30, 2005
and 2004, respectively.
28
DRYCLEAN USA, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
4. Income Taxes The following are the components of
income taxes (benefit):
Years ended June 30, 2005 2004
------------------------------------------------------------------------------------
Current
Federal $ 353,100 $ 252,183
State 63,748 42,638
------------------------------------------------------------------------------------
416,848 294,821
------------------------------------------------------------------------------------
Deferred
Federal 9,561 19,309
State 1,637 3,280
------------------------------------------------------------------------------------
11,198 22,589
------------------------------------------------------------------------------------
$ 428,046 $ 317,410
------------------------------------------------------------------------------------
The reconciliation of income tax expense
computed at the Federal statutory tax rate of
34% to income taxes (benefit) is as follows:
Years ended June 30, 2005 2004
------------------------------------------------------------------------------------
Tax at the statutory rate $ 385,665 $ 290,233
State income taxes,
net of federal benefit 41,176 31,086
Other 1,205 (3,909)
------------------------------------------------------------------------------------
$ 428,046 $ 317,410
------------------------------------------------------------------------------------
Deferred income taxes reflect the net tax
effect of temporary differences between the
bases of assets and liabilities for
financial reporting purposes and the bases
used for income tax purposes. Significant
components of the Company's current and
noncurrent deferred tax assets and
liabilities are as follows:
Years ended June 30, 2005 2004
------------------------------------------------------------------------------------
Current deferred tax asset (liability):
Allowance for doubtful accounts $ 48,919 $ 48,919
Inventory capitalization 49,739 63,742
Other 4,373 (15,043)
------------------------------------------------------------------------------------
103,031 97,618
------------------------------------------------------------------------------------
Noncurrent deferred tax asset (liability):
Equipment and improvements (31,300) (12,825)
Franchise, trademarks and other
intangible assets 41,548 39,684
------------------------------------------------------------------------------------
10,248 26,859
------------------------------------------------------------------------------------
Total net deferred income tax asset $ 113,279 $ 124,477
------------------------------------------------------------------------------------
29
DRYCLEAN USA, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
5. Credit Agreement In December 2001, the Company entered into a
and Term Loan bank loan agreement for a facility
consisting of a term loan of $960,000 and a
revolving credit facility of $2,250,000,
including a $1,000,000 letter of credit
subfacility and $250,000 foreign exchange
subfacility. In May 2003, the Company
pre-paid the outstanding balance of the term
loan. Prior to October 28, 2004, revolving
credit borrowings were limited by a
borrowing base of 60% of eligible accounts
receivable and 60% of certain, and 50% of
other, eligible inventories. On October 28,
2004, the Loan Agreement was amended to
eliminate the borrowing base restriction
under the revolving credit facility, thereby
enabling the Company to borrow up to the
full $2,250,000 amount available under the
facility regardless of the Company's levels
of accounts receivable and inventories.
Borrowings under the revolving credit
facility bear interest at 2.50% per annum
above the Adjusted LIBOR Market Index Rate,
are guaranteed by all of the Company's
subsidiaries and are collateralized by
substantially all of the Company's and its
subsidiaries' assets. The revolving credit
facility matures October 30, 2005. At June
30, 2005 and 2004, there were no outstanding
borrowings, letters of credit or foreign
exchange contracts outstanding under the
line of credit. The loan agreement requires
maintenance of certain debt service coverage
and leverage ratios and contains other
restrictive covenants, including limitations
on the extent to which the Company and its
subsidiaries may incur additional
indebtedness, pay dividends, guarantee
indebtedness of others, grant liens, sell
assets and make investments.
6. Related Party The Company leases warehouse and office
Transactions space from a principal shareholder of the
Company under an operating lease. Annual
rental expense under this lease was $83,200
in each of fiscal 2005 and 2004.
The Company and the shareholder entered into
a new lease on September 9, 2005 for a
three-year period beginning 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
is to bear real estate taxes, utilities,
maintenance, non-structural repairs and
insurance. The new 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.
In addition, in fiscal 2005, the Company
paid two law firms, in which a director is
of counsel, an aggregate of $81,500 for
legal services performed. In fiscal 2004,
the Company paid one of these law firms
$43,500 for legal services performed.
7. Concentrations of The Company places its excess cash in
Credit Risk overnight deposits with a large national
bank. Concentration of credit risk with
respect to trade and lease receivables is
limited due to a large customer base. Based
on the Company's credit evaluation, trade
receivables may be collateralized by the
equipment sold. The Company's lease
receivable is collateralized by the
equipment under lease. The note receivable
is collateralized by the assets sold and
supported by personal guarantees by the
principals of the debtor.
30
DRYCLEAN USA, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
8. Commitments In addition to the warehouse and office
space leased from a principal shareholder
(see Note 6), the Company leases two
additional office and warehouse spaces from
unrelated third parties under operating
leases expiring in December 2005 and March
2006. As of June 30, 2005, the Company is
also obligated under two leases for future
dry cleaning stores that aggregate $81,000
to $89,000 in annual base rent per year for
the next five years. The Company anticipates
assigning these leases to dry cleaning
franchisees or other customers when the
leased facilities are available for
occupancy.
Minimum future rental commitments for leases
in effect at June 30, 2005 approximates the
following:
Years ending June 30,
------------------------------------------------------------------------------------
2006 $ 211,000
2007 179,000
2008 184,000
2009 120,000
2010 89,000
Thereafter 12,000
------------------------------------------------------------------------------------
Total $ 795,000
------------------------------------------------------------------------------------
Rent expense aggregated $158,044 and
$157,387 for the years ended June 2005 and
2004, respectively.
As of June 30, 2005, the Company had no
outstanding letters of credit.
The Company, through its manufacturers,
provides parts warranties for products sold.
These warranties are the responsibility of
the manufacturer. As such, warranty related
expenses are insignificant to the
consolidated financial statements.
9. Deferred The Company has a participatory deferred
Compensation Plan compensation plan wherein it matches
employee contributions up to 1% of an
eligible employee's yearly compensation.
Employees are eligible to participate in the
plan after three months of service. The
Company contributed approximately $7,000 and
$9,000 to the Plan during fiscal 2005 and
fiscal 2004, respectively. The plan is tax
deferred under Section 401(k) of the
Internal Revenue Code.
31
DRYCLEAN USA, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
10. Earnings Per Share The following reconciles the components of
the earnings per share computation:
Year ended June 30, 2005
------------------------------------------------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
------------------------------------------------------------------------------------
Net earnings $ 706,263 7,023,146 $ .10
Effect of dilutive securities:
Stock options - 14,775 -
------------------------------------------------------------------------------------
Earnings plus assumed dilution $ 706,263 7,037,921 $ .10
------------------------------------------------------------------------------------
Year ended June 30, 2004
Income Shares Per Share
(Numerator) (Denominator) Amount
------------------------------------------------------------------------------------
Net earnings $ 536,217 7,009,188 $ .08
Effect of dilutive securities:
Stock options - 22,872 -
------------------------------------------------------------------------------------
Earnings plus assumed dilution $ 536,217 7,032,060 $ .08
------------------------------------------------------------------------------------
There were outstanding stock options to
purchase 20,000 shares of the Company's
common stock at June 30, 2004 that were
excluded in the computation of earnings per
share for such year because the exercise
prices of the options were at least the
average market price of the Company's common
stock for that year. No options were
excluded in fiscal 2005.
11. Dividends The Company paid a $.05 per share annual
dividend on October 31, 2003 to shareholders
of record on October 17, 2003; a $.06 per
share annual dividend on November 1, 2004 to
shareholders of record on October 15, 2004
declared on September 27, 2004, and a $.035
per share semi-annual dividend on May 2,
2005 to shareholders of record on April 15,
2005.
On September 23, 2005 the Board of Directors
declared a $.04 per share semi-annual
dividend payable on November 1, 2005 to
stockholders of record on October 14, 2005.
12. Stock Options The Company's 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. The Company also
has a 1994 Non-Employee Director Stock
Option Plan which terminated as to future
grants on August 23, 2004, but under which
options to purchase 30,000 shares remain
outstanding.
The Company applies APB Opinion No. 25,
"Accounting for Stock Issued to Employees,"
and related interpretations in accounting
for stock options to employees and
directors. Under APB Opinion No. 25, because
the exercise price of the stock options
equaled or exceeded the market price of
32
DRYCLEAN USA, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
the underlying stock on the date of grant,
no compensation cost has been recognized. No
options have been granted to consultants.
SFAS 123(R), "Share-Based Payment," will
require compensation costs related to share
based payment transactions to be recognized
directly in the Company's consolidated
financial statements beginning January 1,
2006.
Pursuant to the Company's 2000 Stock Option
Plan, the Company may grant incentive stock
options and nonqualified stock options. All
options outstanding under the director plan
are nonqualified stock options. Options
under the 2000 Stock Option Plan may have a
maximum term of 10 years, are not
transferable and must be granted at an
exercise price of at least 100% of the
market value of the Company's common stock
on the date of grant. However, incentive
stock options granted to an individual
owning more than 10% of the total combined
voting power of all classes of stock issued
by the Company must have an exercise price
of at least 110% of the fair market value of
the shares issuable on the date of the grant
and may not have a term of more than five
years. Incentive stock options granted under
the 2000 Stock Option Plan are subject to
the limitation that the aggregate fair
market value (determined as of the date of
grant) of those options which may first
become exercisable in any calendar year
cannot exceed $100,000.
Generally, options granted to date have
become exercisable, on a cumulative basis,
as to one-fourth of the shares covered
thereby on each of the first four
anniversaries of grant. Generally, options
terminate three months following termination
of service (except generally one year in the
case of termination of service by reason of
death or disability). There were no stock
options granted in fiscal 2005 and 2004.
Options granted under the plans also
terminate upon a merger in which the Company
is not the surviving corporation or in which
shareholders before the merger cease to own
at least 50% of the combined voting power in
the elections of directors of the surviving
corporation, the sale of substantially all
of the Company's assets or the liquidation
or dissolution of the Company, unless other
provision is made by the board of directors.
Options under the 1994 Non-Employee Director
Stock Option Plan have a term of 10 years,
are not transferable and are exercisable at
a price equal to 100% of the market value of
the Company's common stock on the date of
grant. Options under this plan are
exercisable as to one-fourth of the shares
covered thereby on each of the first four
anniversaries of grant. Vesting accelerates
upon a change of control of the Company (as
defined in the Plan). Options terminate
three months following termination of
service (except one year in the case of
termination of service by reason of death or
disability).
A summary of options under the Company's
stock option plans as of June 30, 2005, and
changes during the year then ended is
presented below:
33
DRYCLEAN USA, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Weighted
Average
Exercise
Shares Price
-------------------------------------------------------------------------------
Outstanding at beginning of year 50,000 $1.36
Granted - -
Exercised (10,000) 1.00
Expired (10,000) 2.00
-------------------------------------------------------------------------------
Outstanding at end of year 30,000 $1.27
Options exercisable at year-end 30,000 $1.27
Options available for future grant at year-end 500,000
-------------------------------------------------------------------------------
A summary of options under the Company's
stock option plans as of June 30, 2004, and
changes during the year then ended is
presented below:
Weighted
Average
Exercise
Shares Price
-------------------------------------------------------------------------------
Outstanding at beginning of year 439,000 $1.02
Granted - -
Exercised (18,000) 1.00
Expired (371,000) 1.00
-------------------------------------------------------------------------------
Outstanding at end of year 50,000 $1.36
-------------------------------------------------------------------------------
Options exercisable at year-end 50,000 $1.36
-------------------------------------------------------------------------------
The following table summarizes information
about outstanding stock options at June 30,
2005:
Weighted
Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices at 6/30/05 Life Price at 6/30/05 Price
-------------------------------------------------------------------------------
$ .91 20,000 3.3 years $ .91 20,000 $ .91
$ 2.00 10,000 4.9 years $ 2.00 10,000 $ 2.00
-------------------------------------------------------------------------------
13. Note Receivable On July 31, 2002, the Company sold
substantially all of the operating assets
(principally inventory, equipment and
intangible assets) of its Metro-Tel segment,
which was engaged in the manufacture and
sale of telephone test equipment. The
purchase price was $800,000 which was
payable $250,000 in cash and a $550,000
promissory note, bearing interest at prime +
1%, (7.25% and 5.25% at June 30, 2005 and
2004, respectively) and payable monthly over
42 months commencing October 1, 2002. The
promissory note is guaranteed by certain
companies affiliated with the purchaser and
the purchaser's and the affiliates'
principal shareholders and is collateralized
by the operating assets of the purchaser and
the affiliated companies. The Company has
agreed to subordinate payment of the
promissory note, obligations of the
affiliated companies of the purchaser under
their guarantees and the collateral granted
by the purchaser and the affiliated
34
DRYCLEAN USA, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
companies to the obligations of the
purchaser and the affiliated companies to
two bank lenders. The purchaser prepaid
$50,000 of the note in 2003. As of June 30,
2005, there was $67,857 outstanding under
this note. The remaining principal is due
during fiscal 2006.
14. 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 technology and marketing
strategies.
Steiner-Atlantic Corp., Steiner-Atlantic
Brokerage Corp. and DRYCLEAN USA Development
Corp., wholly-owned subsidiaries of the
Company, comprise the commercial and
industrial laundry and dry cleaning
equipment segment. Steiner-Atlantic Corp. is
a supplier of dry cleaning equipment,
industrial laundry equipment and steam
boilers to customers in the United States,
the Caribbean and Latin American markets.
Steiner-Atlantic Brokerage Corp. acts as a
business broker to assist others seeking to
buy or sell existing dry cleaning and coin
laundry businesses. DRYCLEAN USA Development
Corp. develops turn-key dry cleaning
establishments for resale to third parties.
DRYCLEAN USA License Corp. comprises the
license and franchise operations segment.
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:
Year ended June 30, 2005 2004
-------------------------------------------------------------------------------------
Revenues:
Commercial and industrial laundry and dry
cleaning equipment $ 18,023,119 $ 14,396,031
License and franchise operations 365,890 276,234
-------------------------------------------------------------------------------------
Total revenues $ 18,389,009 $ 14,672,265
-------------------------------------------------------------------------------------
Operating income (loss):
Commercial and industrial laundry
and dry cleaning equipment $ 1,178,238 $ 904,640
License and franchise operations 252,765 170,207
Corporate (307,386) (245,030)
-------------------------------------------------------------------------------------
Total operating income $ 1,123,617 $ 829,817
-------------------------------------------------------------------------------------
Identifiable assets:
Commercial and industrial laundry
and dry cleaning equipment $ 6,525,375 $ 6,325,915
License and franchise operations 781,416 655,744
Corporate 234,284 442,462
-------------------------------------------------------------------------------------
Total assets $ 7,541,075 $ 7,424,121
-------------------------------------------------------------------------------------
35
DRYCLEAN USA, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
For the years ended June 30, 2005 and 2004,
export revenues, principally to the
Caribbean and Latin America, aggregated
approximately $2,973,000 and $2,340,000,
respectively, of which approximately
$2,833,000 and $2,209,000, respectively,
related to the commercial and industrial
laundry and dry cleaning equipment segment.
All such sales are denominated in U.S.
Dollars and, accordingly, the Company is not
exposed to risks of foreign currency
fluctuations as a result of such sales.
No single customer accounted for more than
10% of the Company's revenues in fiscal 2005
or 2004.
36
DRYCLEAN USA, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Item 8. Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure.
Not applicable.
Item 8A. Controls and Procedures.
As of the end of the period covered by this report, management of the
Company, with the participation of the Company's principal executive officer and
the Company's principal financial officer, evaluated the effectiveness of the
Company's "disclosure controls and procedures," as defined in Rule 13a-15(e)
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.
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.
Item 8B. Other Information.
None.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.
The following information is presented with respect to the background
of each of the directors and executive officers of the Company:
Michael S. Steiner, 49, has been President, Chief Executive Officer and
a director of the Company since November 1998 and of Steiner since 1988.
Alan I. Greenstein, 49, has been Executive Vice President and Chief
Operating Officer of the Company since May 2004. From October 1995 until it was
sold in 2000, he was President and principal stockholder of Professional
Cleaners, Inc., an operator of a south Florida chain of drycleaning and laundry
stores. From February 2001 to September 2004, Mr. Greenstein was Vice President
and a principal shareholder of South Florida Transport, Inc., a south Florida
thrifty Car rental franchise. In October 2004, South Florida Transport, Inc.
filed for Chapter 11 Bankruptcy, which subsequently converted to Chapter 7
liquidation. Mr. Greenstein believes the heavy losses from the hurricanes that
hit Florida in the summer of 2004 were the cause for South Florida Transport,
Inc.'s financial problems. Since he joined the Company, Mr. Greenstein has been
a full time employee of the Company.
William K. Steiner, 75, has been a director of the Company since
November 1998 and Chairman of the Board of Steiner since he founded Steiner in
1960.
Venerando J. Indelicato, 72, was President of the Company from December
1967 until November 1998 and has been Treasurer and Chief Financial Officer of
the Company since December 1969.
Lloyd Frank, 80, has been a director of the Company since 1977. Mr.
Frank has been of counsel to the law firm of Troutman Sanders LLP since April
2005. Prior thereto, Mr. Frank was a member of the law firm of Jenkens &
Gilchrist Parker Chapin LLP and its predecessor from 1977 until the end of 2003
and of counsel to that firm from January 2004 until March 2005. The Company
retained
37
Troutman Sanders LLP and Jenkens & Gilchrist Parker Chapin LLP during the
Company's last fiscal year and is retaining Troutman Sanders LLP during the
Company's current fiscal year. Mr. Frank is also a director of Park
Electrochemical Corp. and Volt Information Sciences, Inc.
David Blyer, 45, has served as a director of the Company since November
1998. Mr. Blyer was Chief Executive Officer and President of Vento Software, a
developer of software for specialized business applications, from 1994, when he
co-founded that company, until mid-2002. Since that time, Mr. Blyer has been an
independent consultant.
Alan M. Grunspan, 45, has served as a director of the Company since May
1999. Since 2004, Mr. Grunspan has been a member of the law firm of Carlton
Fields, PA. Prior thereto, Mr. Grunspan was a member of the law firm of Kaufman
Dickstein & Grunspan P. A. from 1991 until 2004.
Stuart Wagner, 73, has served as a director of the Company since
November 1998. Mr. Wagner has been retired since 1999. From 1975 to 1997, Mr.
Wagner served as President of Wagner Products Corp., a manufacturer and
distributor of products in the HVAC industry, a company which he founded, and
served as a consultant to Diversified Corp., which acquired Wagner Products
Corp., from 1997 until 1999 .
Mr. Michael S. Steiner is the son of Mr. William K. Steiner. There are
no other family relationships among any of the directors and executive officers
of the Company. All directors serve until the next annual meeting of
stockholders and until the election and qualification of their respective
successors. All officers serve at the pleasure of the Board of Directors.
The following information is presented with respect to the background
of each person who is not an executive officer but who is expected to continue
to make a significant contribution to the Company:
Ronald London, 72, has served as Vice President, and primarily oversees
sales of the retail Dry Cleaning Equipment Department of Steiner since joining
Steiner in September 1992.
The balance of the information called for by this Item will be
contained in the Company's definitive Proxy Statement with respect to the
Company's 2005 Annual Meeting of Stockholders to be filed pursuant to Regulation
14A under the Securities Exchange Act of 1934, and is incorporated herein by
reference to such information.
Item 10. Executive Compensation.
The information called for by this Item will be contained in the
Company's definitive Proxy Statement with respect to the Company's 2005 Annual
Meeting of Stockholders to be filed pursuant to Regulation 14A under the
Securities Exchange Act of 1934, and is incorporated herein by reference to such
information.
Item 11. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters.
The following table sets forth certain information, as at June 30,
2005, with respect to the Company's equity compensation plans:
38
Number of securities to Weighted-average Number of securities
be issued upon exercise exercise price of remaining available for
of outstanding options, outstanding options, future issuance
Plan Category warrants and rights warrants and rights under equity compensation plans
------------- ------------------- ------------------- -------------------------------
Equity compensation plans approved
by security holders........... 30,000 (a) $1.27 500,000 (b)
Equity compensation plans not
approved by security holders.. 0 -- 0
--------------------------- ----------------------- -----------------------------
Total....................... 30,000 $1.27 500,000
=========================== ======================= =============================
(a) All options were granted under the Company's 1994 Non-Employee Director
Stock Option Plan (the "1994 Plan") under which no future options may
be granted.
(b) Represents shares available for future grant under the Company's 2000
Stock Option Plan (the "2000 Plan"), which permits the grant of options
to employees and directors of, and consultants to, the Company. Upon
the expiration, cancellation or termination of unexercised options,
shares subject to options under the 2000 Plan will again be available
for the grant of options under the 2000 Plan.
The balance of the information called for by this Item will be
contained in the Company's definitive Proxy Statement with respect to the
Company's 2005 Annual Meeting of Stockholders to be filed pursuant to Regulation
14A under the Securities Exchange Act of 1934, and is incorporated herein by
reference to such information.
Item 12. Certain Relationships and Related Transactions.
The information called for by this Item will be contained in the
Company's definitive Proxy Statement with respect to the Company's 2005 Annual
Meeting of Stockholders to be filed pursuant to Regulation 14A under the
Securities Exchange Act of 1934, and is incorporated herein by reference to such
information.
Item 13. Exhibit.
3(a)(1) Certificate of Incorporation of the Company, as filed with the
Secretary of State of the State of Delaware on June 30, 1963.
(Exhibit 4.1(a) to the Company's Current Report on Form 8-K
dated (date of earliest event reported) October 29, 1998, File
No. 0-9040.)
3(a)(2) Certificate of Amendment to the Certificate of Incorporation
of the Company, as filed with the Secretary of State of the
State of Delaware on March 27, 1968. (Exhibit 4.1(b) to the
Company's Current Report on Form 8-K dated (date of earliest
event reported) October 29, 1998, File No. 0-9040.)
3(a)(3) Certificate of Amendment to the Certificate of Incorporation
of the Company, as filed with the Secretary of State of the
State of Delaware on November 4, 1983. (Exhibit 4.1(c) to the
Company's Current Report on Form 8-K dated (date of earliest
event reported) October 29, 1998, File No. 0-9040.)
3(a)(4) Certificate of Amendment to the Certificate of Incorporation
of the Company, as filed with the Secretary of State of the
State of Delaware on November 5, 1986.
39
(Exhibit 4.1(d) to the Company's Current Report on Form 8-K
dated (date of earliest event reported) October 29, 1998, File
No. 0-9040.)
3(a)(5) Certificate of Change of Location of Registered Office and of
Agent, as filed with the Secretary of State of the State of
Delaware on December 31, 1986. (Exhibit 4.1(e) to the
Company's Current Report on Form 8-K dated (date of earliest
event reported) October 29, 1998, File No. 0-9040.)
3(a)(6) Certificate of Ownership and Merger of Design Development
Incorporated into the Company, as filed with the Secretary of
State of the State of Delaware on June 30, 1998. (Exhibit
4.1(f) to the Company's Current Report on Form 8-K dated (date
of earliest event reported) October 29, 1998, File No.
0-9040.)
3(a)(7) Certificate of Amendment to the Company's Certificate of
Incorporation as filed with the Secretary of State of the
State of Delaware on October 30, 1998. (Exhibit 4.1(g) to the
Company's Current Report on Form 8-K dated (date of earliest
event reported) October 29, 1998, File No. 0-9040.)
3(a)(8) Certificate of Amendment to the Company's Certificate of
Incorporation, as filed with the Secretary of State of the
State of Delaware on November 5, 1999. (Exhibit 4.1 to the
Company's Quarterly Report on Form 10-QSB for the quarter
ended September 30, 1999, File No. 0-9040.)
3(b) By-Laws of the Company, as amended. (Exhibit 4.2 to the
Company's Quarterly Report on Form 10-QSB for the quarter
ended September 30, 1999, File No. 0-9040.)
4(a)(1)(A) Loan and Security Agreement, dated as of December 19, 2001,
from the Company in favor of First Union National Bank.
(Exhibit 4.1(a) to the Company's Quarterly Report on Form
10-QSB for the quarter ended December 31, 2001, File No.
0-9040).
4(a)(1)(B) Letter agreement dated September 23, 2002 between the Company
and First Union National Bank (Exhibit 4(a)(1)(B) to the
Company's Annual Report on Form 10-KSB for the year ended June
30, 2002, File No. 0-0904.).
4(a)(1)(C) Letter agreement dated October 11, 2002 between the Company
and Wachovia (Exhibit 4.01 to the Company's Quarterly Report
on Form 10-QSB for the quarter ended September 30, 2002, File
No. 0-9040).
4(a)(1)(D) Letter agreement dated October 22, 2003 between the Company
and First Union National Bank (Exhibit 4.01 to the Company's
Quarterly Report on Form 10-QSB for the quarter ended
September 30, 2003. file No. 0-9040.)
4(a)(2) Revolving Credit Note, dated as of December 19, 2001, from the
Company in favor of First Union National Bank. (Exhibit 4.1(c)
to the Company's Quarterly Report on Form 10-QSB for the
quarter ended December 31, 2001, File No. 0-9040).
4(a)(3) Guaranty and Security Agreement, dated as of December 19,
2001, from Steiner-Atlantic Corp., Steiner-Atlantic Brokerage
Company, DRYCLEAN USA Development Corp. and DRYCLEAN USA
License Corp., subsidiaries of the Company, in favor of First
Union National Bank. (Exhibit 4.1(d) to the Company's
Quarterly Report on Form 10-QSB for the quarter ended December
31, 2001, File No. 0-9040).
10(a)(1)(A) Lease dated October 6, 1995 between Steiner and William, K.
Steiner with respect to Steiner's facilities located 290 N.E.
68th Street, 297 N.E. 67 St. and
40
277 N.E. 67 St., Miami, Florida. (Exhibit 10(a)(2) to the
Company's Transition Report on Form 10-KSB for the transition
period from January 1, 1998 to June 30, 1998, File No.
0-9040.)
*10(a)(1)(B) Commercial lease dated September 9, 2005 between Steiner and
William K. Steiner with respect to Steiner's facilities
located at 290 NE 68 Street, 296 NE 67 Street and 277 NE 67
Street, Miami, Florida.
10(b)(1)+ The Company's 1994 Non-Employee Director Stock Option Plan.
(Exhibit A to the Company's Proxy Statement dated October 14,
1994 used in connection with the Company's 1994 Annual Meeting
of Stockholders, File No. 0-9040.)
10(b)(2)+ The Company's 2000 Stock Option Plan. (Exhibit 99.1 to the
Company's Registration Statement on Form S-8, File No.
333-37582.)
14 Code of Ethics for Principal Executive Officer and Senior
Financial Officers. (Exhibit 14 to the Company's Annual Report
on Form 10-KSB for the year ended June 20, 2004, File No.
0-9040.)
21 Subsidiaries of the Company. (Exhibit 21 to the Company's
Annual Report on Form 10-KSB for the year ended June 30, 2001,
File No. 0-9040.)
*23(a) Consent of Morrison Brown, Argiz & Farra, LLP
*23(b) Consent of BDO Seidman, LLP, Independent Registered Public
Accounting Firm.
*31(a) 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(b) 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(a) Certification of Principal Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
*32(b) Certification of Principal Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
-----------------------
* Filed with this Report. All other exhibits are incorporated herein by
reference to the filing indicated in the parenthetical reference
following the exhibit description.
+ Management contract or compensatory plan or arrangement.
Item 14. Principal Accountant Fees and Services.
The information called for by this Item will be contained in the
Company's definitive Proxy Statement with respect to the Company's 2005 Annual
Meeting of Stockholders to be filed pursuant to Regulation 14A under the
Securities Exchange Act of 1934, and is incorporated herein by reference to such
information.
41
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
DRYCLEAN USA, Inc.
Dated: September 23, 2005
By: /s/ Michael S. Steiner
------------------------------------------
Michael S. Steiner
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Capacity Date
--------- -------- ----
/s/ Michael S. Steiner President, Chief Executive Officer September 23, 2005
-----------------------------------------
Michael S. Steiner (Principal Executive Officer) and
Director
/s/ Venerando J. Indelicato Chief Financial Officer September 23, 2005
-----------------------------------------
Venerando J. Indelicato (Principal Financial and Accounting
Officer) and Director
/s/ David Blyer Director September 23, 2005
-----------------------------------------
David Blyer
/s/ Lloyd Frank Director September 23, 2005
-----------------------------------------
Lloyd Frank
/s/ Alan M. Grunspan Director September 23, 2005
-----------------------------------------
Alan M. Grunspan
/s/ William K. Steiner Director September 23, 2005
-----------------------------------------
William K. Steiner
/s/ Stuart Wagner Director September 23, 2005
-----------------------------------------
Stuart Wagner
42
46
NEWYORK01 1071119v9 357034-000106
EXHIBIT INDEX
Exhibit No. Description
3(a)(1) Certificate of Incorporation of the Company, as filed with the
Secretary of State of the State of Delaware on June 30, 1963.
(Exhibit 4.1(a) to the Company's Current Report on Form 8-K
dated (date of earliest event reported) October 29, 1998, File
No. 0-9040.)
3(a)(2) Certificate of Amendment to the Certificate of Incorporation
of the Company, as filed with the Secretary of State of the
State of Delaware on March 27, 1968. (Exhibit 4.1(b) to the
Company's Current Report on Form 8-K dated (date of earliest
event reported) October 29, 1998, File No. 0-9040.)
3(a)(3) Certificate of Amendment to the Certificate of Incorporation
of the Company, as filed with the Secretary of State of the
State of Delaware on November 4, 1983. (Exhibit 4.1(c) to the
Company's Current Report on Form 8-K dated (date of earliest
event reported) October 29, 1998, File No. 0-9040.)
3(a)(4) Certificate of Amendment to the Certificate of Incorporation
of the Company, as filed with the Secretary of State of the
State of Delaware on November 5, 1986. (Exhibit 4.1(d) to the
Company's Current Report on Form 8-K dated (date of earliest
event reported) October 29, 1998, File No. 0-9040.)
3(a)(5) Certificate of Change of Location of Registered Office and of
Agent, as filed with the Secretary of State of the State of
Delaware on December 31, 1986. (Exhibit 4.1(e) to the
Company's Current Report on Form 8-K dated (date of earliest
event reported) October 29, 1998, File No. 0-9040.)
3(a)(6) Certificate of Ownership and Merger of Design Development
Incorporated into the Company, as filed with the Secretary of
State of the State of Delaware on June 30, 1998. (Exhibit
4.1(f) to the Company's Current Report on Form 8-K dated (date
of earliest event reported) October 29, 1998, File No.
0-9040.)
3(a)(7) Certificate of Amendment to the Company's Certificate of
Incorporation as filed with the Secretary of State of the
State of Delaware on October 30, 1998. (Exhibit 4.1(g) to the
Company's Current Report on Form 8-K dated (date of earliest
event reported) October 29, 1998, File No. 0-9040.)
3(a)(8) Certificate of Amendment to the Company's Certificate of
Incorporation, as filed with the Secretary of State of the
State of Delaware on November 5, 1999. (Exhibit 4.1 to the
Company's Quarterly Report on Form 10-QSB for the quarter
ended September 30, 1999, File No. 0-9040.)
3(b) By-Laws of the Company, as amended. (Exhibit 4.2 to the
Company's Quarterly Report on Form 10-QSB for the quarter
ended September 30, 1999, File No. 0-9040.)
4(a)(1)(A) Loan and Security Agreement, dated as of December 19, 2001,
from the Company in favor of First Union National Bank.
(Exhibit 4.1(a) to the Company's Quarterly Report on Form
10-QSB for the quarter ended December 31, 2001, File No.
0-9040).
4(a)(1)(B) Letter agreement dated September 23, 2002 between the Company
and First Union National Bank (Exhibit 4(a)(1)(B) to the
Company's Annual Report on Form 10-KSB for the year ended June
30, 2002, File No. 0-0904.).
43
4(a)(1)(C) Letter agreement dated October 11, 2002 between the Company
and Wachovia (Exhibit 4.01 to the Company's Quarterly Report
on Form 10-QSB for the quarter ended September 30, 2002, File
No. 0-9040).
4(a)(1)(D) Letter agreement dated October 22, 2003 between the Company
and First Union National Bank (Exhibit 4.01 to the Company's
Quarterly Report on Form 10-QSB for the quarter ended
September 30, 2003. file No. 0-9040.)
4(a)(2) Revolving Credit Note, dated as of December 19, 2001, from the
Company in favor of First Union National Bank. (Exhibit 4.1(c)
to the Company's Quarterly Report on Form 10-QSB for the
quarter ended December 31, 2001, File No. 0-9040).
4(a)(3) Guaranty and Security Agreement, dated as of December 19,
2001, from Steiner-Atlantic Corp., Steiner-Atlantic Brokerage
Company, DRYCLEAN USA Development Corp. and DRYCLEAN USA
License Corp., subsidiaries of the Company, in favor of First
Union National Bank. (Exhibit 4.1(d) to the Company's
Quarterly Report on Form 10-QSB for the quarter ended December
31, 2001, File No. 0-9040).
10(a)(1)(A) Lease dated October 6, 1995 between Steiner and William, K.
Steiner with respect to Steiner's facilities located 290 N.E.
68th Street, 297 N.E. 67 St. and 277 N.E. 67 St. Miami,
Florida. (Exhibit 10(a)(2) to the Company's Transition Report
on Form 10-KSB for the transition period from January 1, 1998
to June 30, 1998, File No. 0-9040.)
*10(a)(1)(B) Commercial lease dated September 9, 2005 between Steiner and
William K. Steiner with respect to Steiner's facilities
located at 290 NE 68 Street, 296 NE 67 Street and 277 NE 67
Street, Miami, Florida.
10(b)(1)+ The Company's 1994 Non-Employee Director Stock Option Plan.
(Exhibit A to the Company's Proxy Statement dated October 14,
1994 used in connection with the Company's 1994 Annual Meeting
of Stockholders, File No. 0-9040.)
10(b)(2)+ The Company's 2000 Stock Option Plan. (Exhibit 99.1 to the
Company's Registration Statement on Form S-8, File No.
333-37582.)
14 Code of Ethics for Principal Executive Officer and Senior
Financial Officers. (Exhibit 14 to the Company's Annual Report
on Form 10-KSB for the year ended June 20, 2004, File No.
0-9040.)
21 Subsidiaries of the Company. (Exhibit 21 to the Company's
Annual Report on Form 10-KSB for the year ended June 30, 2001,
File No. 0-9040.)
*23(a) Consent of Morrison Brown, Argiz & Farra, LLP
*23(b) Consent of BDO Seidman, LLP, Independent Registered Public
Accounting Firm.
*31(a) 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(b) 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(a) Certification of Principal Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
*32(b) Certification of Principal Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
44
-----------------------
* Filed with this Report. All other exhibits are incorporated herein by
reference to the filing indicated in the parenthetical reference
following the exhibit description.
+ Management contract or compensatory plan or arrangement.
45