<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------------------------
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
---------------------------------
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition from to
-------------------- --------------------
Commission file number 0-4979
---------
SQUARE INDUSTRIES, INC.
- -------------------------------------------------------------------------------
(Exact name of Registrant as specified in its Charter)
NEW YORK 13-2610905
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
921 Bergen Avenue, Jersey City, New Jersey 07306
- ------------------------------------------- ------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (201) 798-0090
-----------------
Not Applicable
- -------------------------------------------------------------------------------
Former name, former address and former fiscal year,
if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the issuer was
required to file such reports), and (2) has been subject to filing requirements
for the past 90 days.
Yes X No
----- -----
Shares of Common Stock outstanding at June 30, 1996: 1,179,156
<PAGE>
SQUARE INDUSTRIES, INC. AND SUBSIDIARIES
INDEX
PART I.
Page No.
--------
Consolidated Balance Sheets -
June 30, 1996 (unaudited) and December 31,
1995 (audited) 2-3
Consolidated Statements of Operations - for
the six and three months ended June 30, 1996
and 1995 (unaudited) 4
Consolidated Statements of Cash Flows for
the six months ended June 30, 1996 and 1995
(unaudited) 5-6
Notes to Consolidated Financial Statements 7-12
Management's Discussion and Analysis of Results of
Operations and Financial Condition 13-16
PART II.
Other Information 17
SIGNATURES 18
1
<PAGE>
SQUARE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, 1996 December 31, 1995
(Unaudited) (Audited)
------------ -----------------
<S> <C> <C>
ASSETS
Current Assets:
Cash $ 3,272,000 $ 1,533,000
Trade and other receivables 1,059,000 1,346,000
Prepaid expenses 2,358,000 2,804,000
Other current assets 443,000 479,000
Prepaid and refundable income tax -0- 135,000
----------- -----------
Total current assets 7,132,000 6,297,000
----------- -----------
Property, Equipment and Improvements, net 25,448,000 24,633,000
----------- -----------
Other Assets:
Deferred tax asset 1,801,000 1,401,000
Deferred expenses (net of amortization) 2,475,000 2,571,000
Security deposits and other assets 2,623,000 2,320,000
----------- -----------
$39,479,000 $37,222,000
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
2
<PAGE>
SQUARE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, 1996 December 31, 1995
(Unaudited) (Audited)
------------- ---------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $1,188,000 $1,449,000
Accrued expenses 4,583,000 4,347,000
Accrued local rent tax (Note 4) 1,306,000 1,252,000
Current portion of long-term debt (Note 2) 1,461,000 785,000
Deferred tax liability 333,000 333,000
Other liabilities 635,000 465,000
----------- -----------
Total current liabilities 9,506,000 8,631,000
----------- -----------
Deferred Rent 3,451,000 3,247,000
----------- -----------
Long-Term Debt-less current portion (Note 2) 18,188,000 18,474,000
----------- -----------
Security Deposits - Customers 296,000 292,000
----------- -----------
Stockholders' Equity:
Common stock, $.01 par value;
authorized 2,000,000 shares;
issued 1,231,189 shares and 1,218,389 shares 12,000 12,000
Additional paid-in capital 3,322,000 3,278,000
Retained earnings 5,150,000 3,768,000
Less:
Treasury stock at cost, 52,033 shares 236,000 236,000
Cumulative translation adjustment 210,000 244,000
----------- -----------
8,038,000 6,578,000
----------- -----------
$39,479,000 $37,222,000
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE>
SQUARE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
For The Six Months Ended For The Three Months Ended
June 30, June 30,
------------------------- ---------------------------
1996 1995 1996 1995
------ ------- ------ -----
<S> <C> <C>
Parking service revenue $30,265,000 $30,704,000 $15,239,000 $15,372,000
Service station revenue 2,145,000 1,971,000 1,143,000 1,012,000
----------- ----------- ----------- -----------
Total revenues 32,410,000 32,675,000 16,382,000 16,384,000
----------- ----------- ----------- -----------
Costs and expenses:
Cost of parking services 24,730,000 25,304,000 12,265,000 12,592,000
Operating costs - service station 2,142,000 2,026,000 1,128,000 1,051,000
General and administrative expenses 4,331,000 3,561,000 2,338,000 1,712,000
Provision for local rent tax (Note 4) 30,000 30,000 15,000 15,000
Interest 977,000 1,020,000 487,000 532,000
Reimbursement of previously
incurred fixed costs (Note 7) (1,049,000 ) -0- (1,049,000) -0-
----------- ----------- ----------- -----------
Total costs and expenses 31,161,000 31,941,000 15,184,000 15,902,000
----------- ----------- ----------- -----------
Earnings from Parking and
Service Station Operations 1,249,000 734,000 1,198,000 482,000
Gain from litigation settlement (Note 7) 651,000 -0- 651,000 -0-
----------- ----------- ----------- -----------
Earnings before provision for
income taxes 1,900,000 734,000 1,849,000 482,000
Provision For Income Taxes
(Note 6) 518,000 380,000 678,000 234,000
----------- ----------- ----------- -----------
Net Earnings $1,382,000 $ 354,000 $1,171,000 $ 248,000
=========== =========== =========== ===========
Earnings Per Share (Note 5) $ 0.94 $ 0.28 $ 0.79 $ 0.21
=========== =========== =========== ===========
Computation of Shares -
Weighted average of common stock
outstanding (Note 5) 1,480,530 1,245,131 1,486,049 1,166,356
=========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements
4
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SQUARE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For The Six Months Ended
June 30,
1996 1995
----------- -----------
<S> <C> <C>
Cash Flows From Operating Activities:
Net earnings 1,382,000 354,000
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Amortization of:
Refinancing costs 162,000 -0-
Deferred expenses 15,000 20,000
Lease acquisition costs 9,000 9,000
Interest accrual 422,000 -0-
Depreciation and amortization 660,000 789,000
Deferred tax asset (400,000) -0-
Equity adjustment for foreign currency translations 34,000 (2,000)
Increase (decrease) in cash from
changes in assets and liabilities:
Prepaid expenses and other current assets 311,000 (191,000)
Prepaid and refundable income taxes 135,000 (84,000)
Deferred expenses, net 81,000 (1,222,000)
Security deposits and other assets (303,000) (205,000)
Accounts payable, accrued expenses,
accrued local rent tax and other liabilities (223,000) 279,000
Deferred rent 204,000 288,000
Security deposits - customers 4,000 23,000
--------- ---------
Net cash provided by operating activities 2,780,000 444,000
--------- ---------
</TABLE>
5
<PAGE>
SQUARE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For The Six Months Ended
June 30,
-----------------------------
1996 1995
----------- -----------
<S> <C> <C>
Cash Flows From Investing Activities:
Additions to land, buildings, equipment
and improvements $(1,475,000) $(780,000)
----------- ----------
Net cash used in investing activities (1,475,000) (780,000)
----------- ----------
Cash Flows From Financing Activities:
Proceeds from borrowings 454,000 1,700,000
Payments and current maturities on long-term debt (64,000) (1,081,000)
Proceeds from exercise of stock options and warrants 44,000 1,000
----------- ----------
Net cash provided by financing activities 434,000 620,000
----------- ----------
Net Increase in Cash 1,739,000 284,000
Cash, Beginning of Period 1,533,000 1,226,000
----------- ----------
Cash, End of Period $3,272,000 $1,510.000
========== ==========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest 868,000 1,005,000
Income taxes, net of refunds received 592,000 574,000
Supplemental Schedule of Noncash Financing Activities:
</TABLE>
In March 1995, an officer/stockholder agreed to satisfy the balance of his note
receivable to the Company including accrued interest of $57,637 by transferring
as of March 16, 1995, 39,196 shares of common stock to the Company. The market
value of the stock at the date of the transfer was $176,382. As a result of this
payment, the Company issued to the officer/stockholder 12,500 shares of common
stock.
See accompanying notes to financial statements
6
<PAGE>
SQUARE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
NOTE 1 - Summary of Significant Accounting Policies
The accompanying consolidated balance sheet as of June 30, 1996
and the consolidated statements of operations for the six and
three months ended June 30, 1996 and 1995 and the consolidated
statements of cash flows for the six months ended June 30, 1996
and 1995, respectively, are unaudited, but in the opinion of the
Company, all adjustments (consisting of normal recurring
adjustments) necessary to present fairly the results of
operations for such periods have been made. The financial
statements should be read in conjunction with the Annual Report
on Form 10-K of the Company, for the year ended December 31,
1995.
The accompanying consolidated financial statements include the
accounts of a foreign subsidiary and all domestic subsidiaries.
All significant intercompany accounts and transactions have been
eliminated.
The results of operations for the six and three months ended June
30, 1996 and 1995 are not necessarily indicative of the results
to be expected for the full year.
NOTE 2 - Long-Term Debt
Long-term debt consisted of the following:
Interest Rate June 30, 1996
------------- -------------
Credit Agreement:
Facility I Prime + 2% $11,730,000
Facility II Prime + 2% 1,688,000
Notes payable 8.5% - 12.837% 1,560,000
Notes payable to officers Prime + 2% 500,000
Mortgages payable 7% - 11% 4,171,000
-----------
19,649,000
Less current portion 1,461,000
-----------
$18,188,000
===========
7
<PAGE>
NOTE 2 - (continued)
Facility I provides for a line of credit of $12,800,000, and is
subject to the aggregate face amount of outstanding letters of
credit plus unpaid drawings not exceeding $1,500,000. Borrowings
under the letter of credit facility reduce amounts available for
borrowings under the line of credit. Facility II is a term loan
that was payable in consecutive quarterly payments of $225,425.
On October 31, 1995, Amendment No. 10 to the Company's bank loan
agreement was executed. The amendment provides for an extension
of the maturity dates of the Facility I principal to June 30,
1998 with respect to $61,900, to September 30, 1998 with respect
to $150,000 and to December 31, 1998 with respect to $11,518,208
and extends the quarterly installment payment dates for Facility
II to calendar quarters ending in the period June 30, 1996 to
June 30, 1998. The amendment provides for prepayment of principal
to the extent of 50% of the Company's cash flow above designated
levels. The amendment also provides that commencing November 1,
1995 interest is to be paid at the rate of 4% per annum with the
balance of the interest rate (the Bank's prime plus 2% per annum)
to be accrued and deferred. The portion deferred will be paid or
forgiven depending on the Company achieving reductions in its
operating expenses from those for the year ended December 31,
1994 as follows: if the amount of the reduction as of December
31, 1995 is at least $500,000, the amounts deferred during
November and December 1995 will be forgiven; if the amount of the
reduction as of December 31, 1996 is at least $600,000, the
amounts deferred during 1996 will be forgiven; and if the amount
of the reduction as of December 31, 1997 is at least $700,000,
the amounts deferred during 1997 and 1998 will be forgiven. The
failure to achieve the designated level of reduction for any
period will result in the obligation to pay the amount deferred
during the applicable period. The Company achieved the targeted
reduction as of December 31, 1995 resulting in forgiveness of
interest of $145,000 for the two months ended December 31, 1995.
The amount of the deferral for the six months ended June 30, 1996
was $422,000.
In July 1995, the Company entered into a one-year agreement with
another bank providing for a $1,000,000 line of credit, which was
increased to $1,750,000 in June, 1996, of which $200,000 was
borrowed during the six months ended June 30, 1996.
On June 28, 1995 two officers loaned the Company $500,000 with
interest payable at the same rate as the Facility I loan. As a
condition of Amendment No. 10, the officers agreed to a revision
of their loans, changing the terms from demand loans to loans to
be repaid following the payment of the credit agreement loans
with provisions for prepayment to the extent of 50% of the
8
<PAGE>
principal payments paid to the Bank under the credit agreement
after the Bank has received post - October 31, 1995 principal
payments of at least $1,000,000 and for the deferral of the
interest in excess of 3.99% per annum (the loan interest rate to
December 31, 1995 is 10.25% and prime plus 2% thereafter) until
the Facility loans have been paid in full. Under their amended
loan agreement, the officers surrendered their rights to
collateral which was to be provided under the original loan
agreement and subordinated their loans to the Company's
obligations under the Credit Agreement. In consideration of the
original extension of the loans and the foregoing amendment, the
Company issued to each of the officers a five year
non-transferable Warrant to purchase 75,000 shares of the
Company's Common Stock at a price of $6.40 per share, the average
of the closing sales prices of the Common Stock on NASDAQ for
June 28, 1995, and the two immediately prior days in which trades
were effected in the stock.
Certain subsidiaries of the Company periodically acquire land/or
buildings with a view to their future use in whole or in part as
parking facilities. The properties are generally purchased
subject to long-term mortgages. The mortgages vary in their
payment terms and interest rates, some requiring only the payment
of interest during the first five years.
The mortgages payable are collateralized by the underlying assets
which have a book value of $6,048,000. The two facility loans are
collateralized by the stock of subsidiaries of the Company,
except those whose stock may not be pledged because of
prohibitions in leases and mortgages.
Debt covenants under the Credit Agreement as amended, include a
limitation on indebtedness under mortgage obligations and
financial covenants as to maintenance of minimum net worth, total
liabilities to net worth and operating cash flow ratios. The
Company is in compliance with its debt covenants.
Aggregate maturities on long-term debt are as follows:
Year Ending June 30,
--------------------
1997 $1,461,000
1998 908,000
1999 13,045,000
2000 3,897,000
2001 76,000
Remainder 262,000
---------
$19,649,000
9
<PAGE>
NOTE 3 - Foreign Operations (Canada)
Summarized information relating to the Canadian operation is as
follows:
June 30, 1996 December 31, 1995
------------- -----------------
Total assets $1,180,000 $ 769,000
Total liabilities 2,092,000 1,672,000
Deficiency in assets (912,000) (903,000)
For the six month periods ended June 30, 1996 and June 30, 1995,
net loss for the Canadian operation was $45,000 and $108,000,
respectively.
NOTE 4 - Local Rent Tax
The Company received notices of determination from a municipal
local authority assessing the Company an aggregate of
approximately $480,000 of local taxes for the periods of June 1,
1981 through May 31, 1987 plus interest. The Supreme Court of the
State of New York in one proceeding upheld in February, 1996
assessments of $207,000 for commercial rent tax by the Finance
Department of the City of New York for the period of June 1, 1981
through May 31, 1984. No determination of the amount of the
interest payable on the claim, other than it will materially
exceed, possibly to the extent of being a multiple of the
principal amount, has been made. The Company believes that the
accrued amount of $1,232,000 which covers these assessments,
possible future assessments, and related expenses through June
30, 1996 is adequate.
NOTE 5 - Earnings Per Share
For the six and three month periods ended June 30, 1996 and June
30, 1995, earnings per share has been computed using the weighted
average number of shares of common stock outstanding and the
dilutive effect of common stock equivalents.
NOTE 6 - Income Taxes
The provision for income taxes of $518,000 for the six month
period ended June 30, 1996 is based on the effective tax rate
expected for the year and includes (i) the partial realization of
deferred tax assets, (ii) federal income taxes, (iii) income
taxes of state and local jurisdictions for which the Company's
operations were profitable and for which no net operating loss
benefit is available and (iv) minimum corporate taxes for certain
subsidiaries. The realization of the deferred tax assets relates
directly to the Company's ability to generate taxable income for
Federal, state, and foreign tax purposes. Management has
10
<PAGE>
concluded that partial realization of these deferred tax assets
is more likely than not as a result of the Company's earnings
history for the past two years, and has thus reduced the
valuation allowance accordingly. Additional reductions to the
valuation allowance will be recorded when, in the opinion of
management, the utilization of such is more likely than not.
The income tax provision of $380,000 for the six month period
ended June 30, 1995 is based on the effective tax rate for the
year and includes (i) federal income taxes, (ii) income taxes of
state and local jurisdictions for which the Company's operations
were profitable and for which no net operating loss benefit is
available and (iii) minimum corporate taxes for certain
subsidiaries.
NOTE 7 - Contingencies
Litigation:
Various lawsuits against the Company have arisen in the course of
the Company's business. In certain of these matters, large and/or
indeterminate amounts are sought. In the opinion of the Company,
any uninsured ultimate liability which could result from such
litigation would not have a material adverse effect on the
Company's financial position or the results of its operations.
On March 29, 1996, the United States District Court for the
Eastern District of Pennsylvania approved a net cash settlement
of $1,700,000 plus interest payable to the Company as one of
several plaintiffs in a class action brought against the owner,
manager, and tenant of a building in midtown Philadelphia which
suffered a fire in February 1991 causing substantial disruption
of the operations of the plaintiffs. The settlement was received
by the Company in May, 1996. The portion of the proceeds
representing recovery of costs previously charged ($1,049,000)
has been recorded as a reduction of total costs and expenses. The
remainder of the settlement ($651,000) has been recorded as a
gain from litigation settlement.
Letters of Credit:
As of June 30, 1996, the Company's contingent debt amounted to
approximately $1,025,500 under standby Letters of Credit issued
pursuant to terms of its line of credit (Facility I).
11
<PAGE>
NOTE 8 - Subsequent Event
On July 31, 1996, the Company purchased a property for $2.4
million, consisting of a $1.0 million mortgage note to the seller
and a cash payment of $1.4 million, which was obtained via a
drawdown of a line of credit of the Company.
12
<PAGE>
SQUARE INDUSTRIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
Results of Operations
- ---------------------
The Company's operating results for the three months and six months ended
June 30, 1996 (respectively, the "Second 1996 Quarter" and the "1996 Six-Month
Period" ) benefitted from (i) the receipt in May 1996 of cash of $1,700,000 plus
interest from the settlement of a class action in which it was a plaintiff
resulting from the disruption of business operations in Center City in
Philadelphia from a fire in 1991 in a major office building; and (ii) the
realization of an additional $400,000 of the net deferred tax assets, $200,000
as of March 31, 1996 and $200,000 as of June 30, 1996. The cash settlement was
recorded as the $1,049,000 reimbursement of previously incurred fixed costs and
a gain from the settlement of $651,000.
Parking service revenues were $133,000 (0.9%) and $439,000 (1.4%) lower for
the Second 1996 Quarter and the 1996 Six-Month Period as compared respectively
with the parking service revenues for the three months and six month ended June
30, 1995 (respectively, the "Second 1995 Quarter" and the "1995 Six-Month
Period" ) despite an increase in parking capacity. The operations for the first
quarter of 1996 were adversely impacted by the record snowfalls in the Company's
areas of operation. The amount of revenues for the Second 1996 Quarter were
adversely affected by a reduction in the capacity operated under lease
agreements (the parking capacity under management agreements increased) and an
approximately $100,000 aggregate decrease in the revenues for June 1996 as
compared to June 1995 of four locations as a result of the fewer events
scheduled during the month at the entertainment facility serviced by one
location and the reduction of capacity or elimination of certain required
parking services at three other locations. The impact of the foregoing was
partially mitigated by the continued success of the Company's promotion and
discount programs and the continuing improvement of the economies of the
principal regions in which the Company operates.
The Company anticipates further material increases in parking service
revenues with the addition of its long term lease for the 750 car Rockefeller
Center garage in July 1996 and the move in January 1996 to the management of the
6,600 car lot at the Corel Centre, the home of the Ottawa Senators of the
National Hockey League, from the 1,930 car facility servicing the Civic Centre,
the original home of the team.
Due principally to the lower revenues and the implementation of operating
economies, parking service operating costs were $327,000 (2.6%) lower for the
three month and $574,000 (2.3%) lower for the six month comparative periods,
with the 1996 Six-Month Period also benefitting from the reversal during the
first quarter of a $300,000 provision for additional labor and
13
<PAGE>
occupancy costs which was no longer required in view of a new collective
bargaining agreement and a final tax determination. The Company did experience
increased costs from added locations during 1996 and the new collective
bargaining agreement. As a percentage of parking service revenues, the parking
service operating costs were relatively stable, 80.5% and 81.7% for the Second
1996 Quarter and the 1996 Six-Month Period as compared with 81.9% and 82.4% for
the 1995 Second Quarter and the 1995 Six-Month Period.
The Company's gasoline station operations improved slightly, recording
$131,000 (12.9%) and $174,000 (8.8%) increases in service station revenues due
principally to increased patronage and higher retail gas prices for the Second
1996 Quarter and the 1996 Six-Month Period over those for the corresponding 1995
periods while the operating costs increased by only $77,000 (7.3%) and $116,000
(5.7%). As a result, for the 1996 periods the station, which remains marginal
due to intense competition, produced operating profits of $15,000 and $3,000
for the three and six months periods of 1996 as compared to operating losses of
($39,000) and ($55,000) for the three and six month periods of 1995.
General and administrative expenses increased by $626,000 (36.6%) and
$770,000 (21.6%) for the Second 1996 Quarter and the 1996 Six-Month Period, over
those for the corresponding periods of 1995, and as a percentage of parking
service revenues (gasoline station operations require an insignificant amount of
such expenses) increased to 15.3% and 14.3% for the 1996 periods from 11.1% and
11.6% for the 1995 periods. The increases were the result of the material
increase in the accruals for executive officers bonuses arising from the
improved pre-tax earnings, higher health care claims and professional fees, and
the expenses related to the Company s operations in two new regions-Atlanta and
Indianapolis where the Company commenced operations after the First 1995
Quarter.
The reductions of $45,000 and $43,000 for the Second 1996 Quarter and the
1996 Six-Month Period in interest expense reflect lower interest rates and
interest income generated from the settlement proceeds.
There was no change in the provision for local rent tax - an accrual of
$15,000 per quarter for each year.
As a result of the foregoing, earnings from parking and service station
operations before the gain of $651,000 from the settlement and before provision
for income taxes were $1,198,000 and $1,249,000 for the Second 1996 Quarter and
the 1996 Six-Month Period, respectively, as compared to $482,000 and $734,000
for the corresponding 1995 periods.
The lower provisions for income tax, 36.7% for the Second 1996 Quarter and
27.3% for the 1996 Six-Month Period, as compared with 48.5% and 51.8% for the
1995 three and six month periods, respectively, despite the materially greater
earnings are the result of a combination of the realization of an additional
$200,000 of the net deferred tax assets as of each of March 31, 1996 and June
30, 1996 and the large provision for income taxes for the 1995 periods,
14
<PAGE>
principally the result of the exclusion of losses of approximately ($53,000) and
($108,00) for the three and six months ended June 30, 1995, respectively, from
the Canadian operations in the determination of the provision for income taxes.
Liquidity and Capital Resources
- -------------------------------
As of June 30, 1996 the Company had a working capital deficit of
($2,374,000), a slight increase from the working capital deficit of ($2,334,000)
as of December 31, 1995.
The Company's Credit Agreement with its principal bank lender has been
amended several times to avoid or cure defaults in the agreement. A June 13,
1994 amendment, effective as of February 28, 1994, extended the maturity to June
30, 1995, increased the interest rate as of July 31, 1994 by 1/2% per annum,
modified the financial covenants as to the maintenance of minimum net worth,
total liabilities to net worth and operating cash flow to be in compliance with
the covenants as of February 28, 1994 and through June 13, 1994. On October 11,
1994, the Company's agreement was further amended to, among other things, extend
the maturity to May 31, 1997, increase the interest rate as of October 11, 1994
to prime plus 2%, modify certain financial covenants retroactive to August 31,
1994, and provide for the payment of an additional $50,000 fee to the lender.
The covenant modifications permitted the Company to comply with the covenants as
of August 31, 1994 and through May 1995. A further amendment was effected on
October 31, 1995 to provide more favorable terms with respect to principal,
interest payments and the financial covenants. The maturity dates of the
Facility I credit loan principal were extended to June 30, 1998 with respect to
$61,900, September 30, 1998 with respect to $150,000 and December 31, 1998 with
respect to the balance, which amounted to $11,518,208, and the quarterly
installment payment dates for the Facility II term loan in the aggregate
principal amount of $1,688,100 were deferred to the calendar quarters ending in
the period June 30, 1996 to June 30, 1998. The amendment provides for prepayment
of principal to the extent of 50% of the Company's cash flow above designated
levels and that commencing November 1, 1995 interest is to be paid at the rate
of 4% per annum, with the balance of the interest rate (the Bank's prime plus 2%
per annum) to be accrued but deferred. The portion deferred will be paid or
forgiven depending on the Company achieving reductions in its operating expenses
from those for the year ended December 31, 1994 as follows: if the amount of the
reduction as of December 31, 1995 is at least $500,000, the amounts deferred
during November and December 1995 will be forgiven; if the amount of the
reduction as of December 31, 1996 is at least $600,000, the amounts deferred
during 1996 will be forgiven; and if the amount of the reduction as of December
31, 1997 is at least $700,000, the amounts deferred during 1997 and 1998 will be
forgiven. The failure to achieve the designated level of reduction for any
period will result in the obligation to pay the amount deferred during the
applicable period at the end of such period. The Company achieved the targeted
reduction as of December 31, 1995 resulting in forgiveness of interest of
$145,000 for the two months ended December 31, 1995. The amounts of the deferral
for the Second 1996 Quarter and the 1996 Six-Month Period were $212,000 and
$422,000, respectively.
On June 28, 1995, the Company borrowed $500,000 in the form of demand loans
from the Chairman and Assistant Chairman of the Company. The loans, which bear
15
<PAGE>
interest at the equivalent rate to the Facility loan, were amended at, and as a
condition to, the execution of the October 31, 1995 amendment to the Credit
Agreement, to provide for deferral of the payment of principal and interest in
excess of 3.99% per annum until certain principal and interest payments are made
to the bank lender.
The Company has borrowed as of July 31, 1996 $1,600,000 under a line of
credit from another bank pursuant to an agreement which in June 1996 was amended
to increase the facility from $1,000,000 to $1,750,000 and to extend the
expiration date to June 1, 1997.
Net cash provided by operating activities amounted to $2,780,000 for the
six months ended June 30, 1996 as compared to $444,000 for the six months ended
June 30, 1995. The principal reasons for the improvement were the $1,028,000
increase in net earnings; the $81,000 increase in cash as compared with a
$1,222,000 decrease in cash due to deferred expenses, net, the result of rent
adjustments; the accrual of $422,000 of interest under the Company's principal
Credit Facility agreement which may be forgiven if a designated level of
operating economies is achieved for 1996; and the $311,000 increase in cash in
1996 as compared with a $191,000 decrease in cash in 1995 due to prepaid
expenses and other current assets, partially offset by the $400,000 realization
of the deferred tax asset.
The $695,000 increase in net cash used in investing activities ($1,475,000
for the 1996 and $780,000 for the 1995 six month periods) reflects major lease
acquisitions and renewals and equipment costs. The Company anticipates capital
expenditures of approximately $4,500,000 for the six months ended December 31,
1996 of which $2,700,000 were expended in July 1996, principally in connection
with the new Rockefeller Center Garage lease and improvements and the
acquisition on July 31, 1996 of a building in New York City for $2,400,000, of
which $1,400,000 was paid in cash and $1,000,000 was represented by a purchase
money mortgage note. The Company intends to lease the building to a national
company pursuant to a multi-year net net lease.
The $186,000 lower amount of net cash provided by financing activities
($434,000 vs. $630,000) was principally the result of $619,000 of net proceeds
of borrowings after payments and current maturities on long term debt for the
1995 six month period as compared with a net borrowing increase of $390,000 for
the 1996 six month period.
As a result of the foregoing, the Company increased its cash balance by
$1,739,000 for the six months ended June 30, 1996.
As of August 1, 1996 the Company had borrowed the full amount under its
principal line of credit and all but $150,000 under its smaller but more recent
line of credit. It believes that the funds which are available from time to time
under the latter facility, additional mortgage loans with respect to properties
acquired or developed and funds generated from its operations will be sufficient
to finance its capital and operational requirements for the twelve months ended
June 30, 1997.
16
<PAGE>
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote for Security Holders.
On July 17, 1996, at the Annual Meeting of Shareholders, the shareholders
of the Company elected as Directors to serve until the next Annual Meeting of
Shareholders and the due election and qualification of their successors --
Lowell Harwood, Sanford Harwood, Brett Harwood, Stephen A. Bansak, Jr., Daniel
R. Schein, Leslie Harwood Ehrlich and Leo Silverstein with each nominee
receiving 1,047,700 shares with abstentions of 2,662 shares except Mr. Schein
who received 1,047,579 shares with abstentions of 2,783 shares. The
sharesholders also approved by a vote of 738,539 shares FOR and 23,788 shares
AGAINST (with abstentions of 484 shares) the adoption in August 1995 by the
Board of Directors of an amendment to the Company s Stock Option Plan increasing
the number of shares subject to the Plan by 100,000.
Item 6. Exhibits and Report on Form 8-K
(a) Exhibits
4.1 Amendment to Stock Option Plan increasing by 100,000 the shares
subject to the Plan.
(b) No reports on Form 8-K have been filed during the three months ended
June 30, 1996.
17
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
SQUARE INDUSTRIES, INC.
/s/ Sanford Harwood
------------------------------------
Sanford Harwood
Assistant Chairman
/s/ John Kowal
------------------------------------
John Kowal
Chief Financial Officer
18
<PAGE>
AMENDMENT APPROVED JULY 17, 1996
TO THE
SQUARE INDUSTRIES, INC.
1992 STOCK OPTION PLAN
Paragraph 4 is hereby amended to read as follows:
"4. Stock Reserved for Plan. Subject to adjustment as provided in
paragraph 6 hereof, a total of 525,000 shares of the Common Stock, $.01 par
value, of the Company ("Stock") shall be subject to the Plan (an increase of
100,000 shares from the initial 425,000 shares subject to the Plan). The shares
subject to the Plan shall consist of unissued shares, and such number of shares
which may remain unsold and which are not subject to outstanding options at the
termination of the Plan shall cease to be reserved for the purpose of the Plan,
but until termination of the Plan, the Company shall at all times reserve a
sufficient number of shares to meet the requirements of the Plan. Should any
Option or SAR for any reason expire or be cancelled prior to its exercise or
relinquishment in full, the shares theretofore subject to such Option or SAR may
again be subjected to an Option or SAR under the Plan".
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from the unaudited
consolidated balance sheet as of June 30, 1996 and the unaudited statement of
income for the six months then ended contained in the report on Form 10-Q for
the six months ended June 30, 1996 of Square Industries, Inc. and is qualified
in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 3,272,000
<SECURITIES> 0
<RECEIVABLES> 1,059,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 7,132,000
<PP&E> 32,286,000
<DEPRECIATION> 6,838,000
<TOTAL-ASSETS> 39,479,000
<CURRENT-LIABILITIES> 9,506,000
<BONDS> 19,649,000
0
0
<COMMON> 12,000
<OTHER-SE> 8,026,000
<TOTAL-LIABILITY-AND-EQUITY> 39,479,000
<SALES> 0
<TOTAL-REVENUES> 32,410,000
<CGS> 0
<TOTAL-COSTS> 26,872,000
<OTHER-EXPENSES> 4,289,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 977,000
<INCOME-PRETAX> 1,900,000
<INCOME-TAX> 518,000
<INCOME-CONTINUING> 1,382,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,382,000
<EPS-PRIMARY> 0.94
<EPS-DILUTED> 0.94
</TABLE>
