<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES ACT OF 1934
For the Quarterly Period Ended September 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________.
Commission File Number 0-10096
STRIKER INDUSTRIES, INC.
(Exact name of Company as specified in its charter)
DELAWARE 84-0834953
(state or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
ONE RIVERWAY, SUITE 2450
HOUSTON, TEXAS 77056
(Address of principal executive offices)
(Zip Code)
(713) 622-4092
(Company's telephone number, including area code)
NOT APPLICABLE
(Former name if changed since last report)
Indicate by check mark whether the Company (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 Company was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
------ ------
As of November 14, 1996, there were 10,924,564 shares of Common Stock, par
value $0.20 per share, outstanding and no shares of Preferred Stock, par value
$0.20 per share, were outstanding.
Page 1 of 22
<PAGE> 2
INDEX TO QUARTERLY REPORT ON FORM 10-Q
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NO.
- -------- --------------------- --------
<S> <C> <C>
Item 1. Financial Statements
Consolidated Balance Sheets 3
Consolidated Statements of Operations 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 2. Changes in Securities 20
Item 3. Defaults Upon Senior Securities 20
Item 4. Submission of Matters to a
Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 21
SIGNATURES 22
</TABLE>
Page 2 of 22
<PAGE> 3
PART I - FINANCIAL INFORMATION
Item 1: Financial Statements
STRIKER INDUSTRIES, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 184,218 $ 141,557
Cash, restricted as to use 360,000 360,000
Accounts receivable -
Trade 832,841 403,742
Affiliates 563,945 152,731
Other 361,408 --
Short term note receivable 489,723 --
Inventories -
Raw materials 45,031 41,073
Finished goods 182,274 130,910
Spare parts and supplies 245,288 247,875
Prepaid expenses and other current assets 346,790 262,757
----------- -----------
Total current assets 3,611,518 1,740,645
PROPERTY AND EQUIPMENT, net 16,256,685 16,295,437
DEFERRED COSTS AND OTHER, net 2,031,455 286,362
----------- -----------
Total assets $21,899,658 $18,322,444
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable $ 2,489,098 $ 2,438,271
Accrued liabilities 609,985 215,602
Revolving lines of credit 722,460 875,909
Current portion of term loans 828,200 338,069
Current obligations under capital leases 49,844 51,902
----------- -----------
Total current liabilities 4,699,587 3,919,753
LONG-TERM LIABILITIES:
Subordinated notes payable to affiliates 5,300,000 1,200,000
Term loans, net of current portion 1,368,200 1,188,230
Capital leases 30,754 68,717
----------- -----------
Total long term liabilities 6,698,954 2,456,947
STOCKHOLDERS' EQUITY:
Common stock, $0.20 par value, 25,000,000 shares
authorized, 10,924,564 and 10,599,564 shares issued,
respectively 2,184,913 2,119,913
Stock Subscriptions Receivable -- (236,000)
Stock Subscriptions Receivable - employees (275,000) --
Additional paid-in capital 14,098,119 13,688,119
Accumulated deficit (5,528,422) (3,559,011)
Foreign currency translation adjustment 21,507 (67, 277)
----------- -----------
Total stockholders' equity 10,501,117 11,945,744
----------- -----------
COMMITMENTS AND CONTINGENCIES
----------- -----------
Total liabilities and stockholders' equity $21,899,658 $18,322,444
=========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
Page 3 of 22
<PAGE> 4
STRIKER INDUSTRIES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES $ 2,042,873 $ 2,407,595 $ 5,105,334 $ 6,506,151
COST OF SALES 2,028,688 1,869,473 4,970,706 5,192,065
----------- ----------- ------------ -----------
Gross margin 14,185 538,122 134,628 1,314,086
SELLING, GENERAL AND
ADMINISTRATIVE 787,008 644,218 1,622,614 1,399,758
----------- ----------- ------------ -----------
Operating profit/(loss) (772,823) (106,096) (1,487,486) (85,672)
OTHER INCOME (EXPENSE):
Interest expense, net (240,826) (65,753) (481,424) (135,464)
Other income, net - 774 - 18,405
----------- ----------- ------------ -----------
LOSS BEFORE INCOME TAXES (1,013,649) (171,075) (1,969,410) (202,731)
INCOME TAXES - - - -
----------- ----------- ------------ -----------
NET LOSS $(1,013,649) $ (171,075) $ (1,969,410) $ (202,731)
=========== =========== ============ ===========
NET LOSS PER SHARE $ (0.09) $ (0.02) $ (0.18) $ (0.02)
=========== =========== ============ ===========
AVERAGE NUMBER OF
COMMON SHARES
OUTSTANDING 10,924,564 10,599,563 10,793,638 9,640,868
=========== =========== ============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Page 4 of 22
<PAGE> 5
STRIKER INDUSTRIES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1996 1995
------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET LOSS $ (1,969,410) $ (202,731)
Adjustments to reconcile net income/(loss) to net cash used in operating
activities -
Depreciation and amortization 608,542 548,264
Changes in assets and liabilities -
Increase in accounts receivable (1,201,722) (910,029)
Increase in inventories (52,736) (81,498)
Increase in prepaid expenses and other current assets (84,033) (287,555)
Increase in accounts payable and accrued liabilities 206,831 1,183,170
------------- -------------
Total adjustments to net income (loss) (523,118) 452,352
------------- -------------
Net cash (used in) provided by operating activities (2,492,528) 249,621
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Gain on pulp hedge contract -- (467,774)
Purchase of marketable securities -- (50,000)
Purchase certificate of deposit -- (363,774)
Purchases of property and equipment (968,262) (3,145,857)
Increase in deferred acquisition costs paid (691,653) --
------------- -------------
Net cash used in investing activities (1,659,914) (4,027,405)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from subordinated notes 4,585,000 1,200,000
Proceeds from issuance of warrants -- 879,000
Proceeds from exercise of warrants -- 973,336
Proceeds from issuance of common stock 200,000 --
Shareholder advances -- 1,188,500
Repayment of advances from shareholders -- (2,005,618)
Proceeds from revolving line of credit 5,148,405 1,116,399
Repayments of revolving line of credit (5,301,853) --
Deferred financing and other costs paid (817,529) (583,532)
Payments received on stock subscriptions receivable 236,000 --
Proceeds from term loans 517,500 1,275,000
Repayments of term loans (332,400) (29,550)
Principal payments under capital leases (40,020) (32,868)
------------- -------------
Net cash provided by financing activities 4,195,103 3,980,667
------------- -------------
NET INCREASE (DECREASE) IN CASH 42,661 202,883
CASH, and cash equivalents beginning of period 141,557 18,739
------------- -------------
CASH, and cash equivalents end of period $ 184,218 $ 221,622
============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Page 5 of 22
<PAGE> 6
STRIKER INDUSTRIES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1996 1995
----------------------------
<S> <C> <C>
Supplemental schedule of noncash investing and financing activities:
Issuance of common stock in consideration of acquisition of Thorold -- 7,307,681
Mill
Reimbursement of executive salaries from an affiliate in the form of -- 99,000
forgiveness of notes payable
Acquisition of property and equipment under noncancelable long-term -- 34,441
capital leases
Sale of Subsidiary's assets for note receivable 489,723 --
------- ---------
489,723 7,441,122
======= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Page 6 of 22
<PAGE> 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Striker and its wholly owned subsidiaries. All material intercompany accounts
and transactions have been eliminated.
Interim Financial Information
The consolidated interim financial statements included herein are unaudited;
however, they include all adjustments of a normal recurring nature which, in
the opinion of management, are necessary to present fairly the consolidated
financial position of the Company at September 30, 1996 and the consolidated
results of operations and the cash flows for the nine months ended September
30, 1996 and 1995.
Inventories
Inventories are stated at the lower of cost or market using the average cost
method. The finished goods inventories include materials, direct labor and
plant overhead.
Property and Equipment
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, Accounting for the Impairment of
Long-lived Assets and for Long-lived Assets to be Disposed of (FAS 121). The
Company has adopted FAS 121 and the adoption of FAS 121 did not materially
affect the Company's consolidated results of operations or its financial
condition.
Property and equipment are recorded at cost. Expenditures for major renewals
and betterments, which extend the original estimated economic useful lives of
the applicable assets, are capitalized. Expenditures for normal repairs and
maintenance are charged to expense as incurred. Due to the trend in market
prices of saturated felt paper and the increase in raw material costs through
the first eight months of 1994, management elected to temporarily suspend
manufacture of saturated felt in August 1994 and redirect production and sales
efforts to dry felt. Management believes that the current market prices and
raw material costs of dry felt offer the Company its best opportunity to
achieve profitable operations. Management also believes, however, that its
investment in its two saturated lines of approximately $1.5 million is fully
realizable because it intends to restart production of saturated felt when the
market conditions for saturated felt paper and its related raw materials
improve. There is no assurance that market conditions will improve in the
foreseeable future or that the Company can successfully negotiate long-term
contracts to enable it to manufacture saturated felt paper at profitable
levels. Management will continue to evaluate its investment in the saturated
felt production equipment and record adjustments to the carrying value, if any,
in the period in which it were to determine that such carrying value is
permanently impaired.
Page 7 of 22
<PAGE> 8
Deferred Costs and Other, Net
Deferred costs and other, net, include organization costs and deferred
acquisition and financing costs in 1996 and 1995. The organization costs are
being amortized over a five-year period on a straight-line basis. As of
September 30, 1996, the Company's organizational costs have been fully
amortized. The deferred acquisition costs will be added to the cost of the
assets acquired after the acquisition is completed (see Note 10). Deferred
financing costs are being amortized over the life of the related respective
financing obtained.
Income Taxes
The Company files a consolidated federal income tax return using the accrual
basis of accounting. Income taxes include deferred taxes arising from the
recognition of revenues and expenses in different periods for income tax and
financial statement purposes. The Company accounts for income taxes in
accordance with Statement of Financial Accounting Standards (SFAS) No. 109,
"Accounting for Income Taxes."
Revenue Recognition
The Company generally recognizes revenue when products are shipped or when the
customer has accepted the product.
Earnings (Loss) Per Common Share
The computation of earnings or loss per share in each year is based on the
weighted average number of common shares outstanding. When dilutive, stock
options and warrants are included as share equivalents using the treasury stock
method. The number of shares used in computing the earnings (loss) per share
was 10,924,564 and 10,793,638 for the quarter and nine months ended September
30, 1996, respectively and 10,599,563 and 9,640,868 for the quarter and nine
months ended September 30, 1995. Primary and fully diluted earnings per share
are the same for each of these years.
Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles 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 financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from the estimates.
Cash Flow Information
For purposes of reporting cash flows, cash and cash equivalents include cash
and short-term investments which mature within three months of their date of
purchase.
Page 8 of 22
<PAGE> 9
2. PROPERTY AND EQUIPMENT, NET:
The Company's property and equipment consisted of the following:
<TABLE>
<CAPTION>
September 30, December 31,
Useful Life 1996 1995
----------- ---- ----
<S> <C> <C> <C>
Machinery, equipment and vehicles 5 - 12 years $16,373,727 $15,839,193
Buildings 25 years 774,419 855,216
Computer and office equipment 5 years 722,764 711,244
Land improvements 5 years 212,880 140,427
Machinery, equipment and vehicles 2 - 5 years 236,703 236,703
under capital leases
Land 150,000 215,000
----------- -----------
18,470,493 17,997,783
Less- Accumulated depreciation and amortization (2,213,808) (1,702,346)
----------- -----------
$16,256,685 $16,295,437
=========== ===========
</TABLE>
3. DEFERRED COSTS AND OTHER, NET:
The Company's deferred costs and other, net, consisted of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
---- ----
<S> <C> <C>
Deferred acquisition costs $ 937,037 $ 11,004
Deferred financing costs, net 1,027,507 170,404
Deposits 43,276 73,190
Patents 25,454 25,029
Less- Accumulated amortization - patents (3,819) --
Organization costs 78,025 82,291
Less- Accumulated amortization -
organizational costs (78,025) (75,556)
------------- -----------
$ 2,031,455 $ 286,362
============= ===========
</TABLE>
Page 9 of 22
<PAGE> 10
4. DEBT:
<TABLE>
<CAPTION>
The Company's debt consisted of the following at: September 30, December 31,
1996 1995
---- ----
<S> <C> <C>
Subordinated notes due 12/31/98, 10.25% interest payable $5,300,000 $1,200,000
quarterly
Subordinated notes at 10% interest due earlier of (i) 2/01/97, $ 485,000 --
or (ii) closing of any public or private debt or equity
financing exceeding $10.5 million
STEPHENS:
Term loan, prime (8.25%) +3.5% interest, due 5/31/98 682,400 846,050
Revolving line of credit, prime + 3.5% interest 356,719 520,274
CANADIAN FACILITY:
Term loan, Canadian prime (6.50%) + 2.5% interest,
due 4/01/01 1,029,000 680,250
Revolving line of credit, prime +2.5% interest 365,741 355,635
Capitalized lease obligations bearing interest at rates from
10% to 18% maturing between 1996 and 2000, secured by
underlying machinery, vehicles and computer equipment. 80,598 120,619
---------- ----------
8,299,458 3,722,828
Less- Current maturities (1,600,504) (1,265,881)
---------- ----------
$6,698,954 $2,456,947
========== ==========
</TABLE>
On February 16, 1996, the Company issued $1,300,000 in aggregate principal
amount of 10.25 % Subordinated Notes (the "1996 Notes") to seven international
investors, five of which are stockholders. The 1996 Notes mature on December
31, 1998 and interest is payable quarterly beginning July 1, 1996. The
proceeds of the 1996 Notes were used for working capital needs.
On June 5, 1996, the Company issued $1,300,000 in aggregate principal amount of
10.25 % Subordinated Notes (the "1996 B Notes") to twelve international
investors, five of which are stockholders. The 1996 B Notes mature on December
31, 1998 and interest is payable quarterly beginning July 1, 1996. The
proceeds of the 1996 B Notes were used for working capital needs.
On July 10, 1996, the Company issued $1,500,000 in aggregate principal amount
of 10.25 % Subordinated Notes (the "1996 C Notes") to nine international
investors, six of which are stockholders. The 1996 C Notes mature on December
31, 1998 and interest is payable quarterly beginning July 1, 1996. The
proceeds of the 1996 C Notes were used for working capital needs.
The Company issued $485,000 in aggregate principal amount of Subordinated Notes
(the "1996 D Notes") to several investors. The 1996 D Notes mature at the
earlier of (i) 2/01/97, or (ii) closing of any public or private debt or equity
financing exceeding $10.5 million. The proceeds of the 1996 D Notes were used
for working capital needs.
Page 10 of 22
<PAGE> 11
During the quarter ended June 30, 1995, the Company entered into a financing
agreement consisting of a term loan based upon the liquidation value of certain
of the Company's fixed assets at the Stephens mill and a revolving line of
credit based upon eligible accounts receivable assets (collectively "the
Stephens Facility"). Advances under the Facility are limited to $2,500,000 in
the aggregate and bear interest at prime plus 3.5%.
On July 28, 1995, the Company's Canadian Subsidiary, Striker Paper Canada Inc.
("Striker Canada"), entered into a financing agreement with a Canadian lender
consisting of a term loan based upon the liquidation value of certain of
Striker Canada's fixed assets and a revolving line of credit based upon
eligible accounts receivable (collectively "the Canadian Facility"). Advances
under the Canadian Facility are limited to $2,000,000 Canadian in the aggregate
and bear interest at Canadian prime + 2.5%.
The Canadian Lender temporarily suspended principal on the Canadian Facility
and refunded Striker Canada all principal payments made (covering a period from
December, 1995 through April, 1996) totaling $125,000 Canadian. This principal
refund was prompted by the Canadian mill being idled during this period while
capital improvement projects were completed. Principal payments resumed May 1,
1996.
Interest paid for the nine months ended September 30, 1996 and 1995, was
$160,464 and $10,982, respectively.
5. CUSTOMER CONTRACTS:
During 1995, the Company entered into sales contracts (the Sales Contracts)
with three of its major customers. Under terms of the Sales Contracts, the
customers are required to purchase tonnage in the aggregate which approximates
86% of the Company's production of the Stephens mill, for a period of eighteen
months at prices based upon the mix of raw materials used in the manufacture of
the dry felt and the market price of the raw materials. The Company has
renewed the Sales Contracts with two of the existing contract customers for a
period extending to November 15, 1997.
The Company is currently in negotiation with two of its major customers of the
Thorold mill to enter into sales contracts. These contracts, if consummated,
will require the customers to purchase tonnage in the aggregate which
approximates 92% of the Company's production of the Thorold mill.
6. COMMITMENTS AND CONTINGENCIES:
The Company is not a party to any material legal proceedings, other than
various routine claims and disputes arising in the normal course of the
Company's business. The Company does not believe that such claims and
disputes, individually or in the aggregate, will have a material adverse effect
on the Company's operations or financial condition.
Page 11 of 22
<PAGE> 12
During 1995, the Company entered into an agreement with the Sierra Club
(Sierra) and the Arkansas Department of Pollution Control and Ecology (ADPCE)
to settle claims brought by those parties concerning non-toxic discharges in
excess of state water permits for the Stephens, Arkansas mill. In 1995, the
Company paid a civil penalty to ADPCE and contributed $55,000 to environmental
projects in the state of Arkansas as a result of the agreement with ADPCE and
Sierra. The Company received approval from the ADPCE and the state health
department to construct a closed loop system to bring the Company in compliance
with permit allowances. The closed loop system was completed March 27, 1996.
The Company began testing of the closed loop system in April. On June 27,
1996, an inspector from the ADPCE performed an inspection in accordance with
the provisions of the federal Clean Water Act, the Arkansas Water and Air
Pollution Control Act, and the regulations promulgated thereunder. The
inspection revealed that the Company was in compliance with the terms of its
permit.
In conjunction with the work performed on the closed water loop system, the
Company removed dirt and sludge from the bottom of the filtering ponds at the
Stephens mill. The dirt and sludge removed from the filtering ponds was placed
on an isolated area of land at the mill. The Company notified the ADPCE and
requested approval for clean-up. The Company received approval from the ADPCE
to re-cover and cap the sludge (the digging up and removal was not required).
The Company began work on capping the sludge August 2, 1996. The Company
anticipates that the project will be completed by December 31, 1996. The work
being performed will bring the Company in compliance with provisions of its
permit as provided by the ADPCE.
7. PULP HEDGE CONTRACT:
The Company entered into a pulp hedge contract (the Hedge) effective July 1,
1994, to effectively hedge against rising raw material prices. The terms of
the Hedge provided for a term of five years and for a fixed notional amount
which would be an approximation of Striker Paper's pulp needs for production in
Stephens, Arkansas. The Hedge provided that the amount of net gain or loss, as
applicable, would be equivalent to the difference between the designated strike
price, as set forth in the Hedge contract, and the Company's imputed cost. The
Hedge was canceled by the Company effective July 1, 1995. No activity has been
recorded since July 1, 1995. For the six months ended June 30, 1995, the
Company had a gain from the Hedge of $467,774. In prior periods, the gain from
the Hedge had been recorded as reduction of cost of goods sold. The Company
received payment on December 31, 1995 and December 22, 1995 for the Hedge
balance outstanding.
8. ASSET PURCHASE OF THOROLD MILL
On May 5, 1995, the asset purchase transaction of the land, building and
equipment of Northern Globe Building Materials, Inc.'s idled dry felt mill in
Thorold, Ontario, Canada (the "Thorold Mill") pursuant to the Asset Purchase
Agreement between Northern Globe Building Materials, Inc. (Northern), dated
March 10, 1995 was consummated. The purchase price of the assets purchased was
1,345,790 shares of common stock of the Company and $250,000 cash. The
Page 12 of 22
<PAGE> 13
assets purchased were recorded at the sum of the estimated market value of the
shares of Common Stock issued ($5.50 per share), cash paid and acquisition
costs incurred in connection with the purchase. The physical properties and
assets purchased were recorded at the total consideration paid of $8,323,237.
The physical properties and assets purchased had formerly been used to
manufacture dry felt paper, but had not been in operation and had been idled
and wholly inactive for more than two years preceding their purchase by the
Company. The Company activated the idled dry felt mill in July, 1995 to
produce dry felt at Thorold, Ontario, Canada for sale to parties in the roofing
industry. The dry felt mill's production was stopped so that necessary capital
improvement projects could begin. These projects continued through April, 1996
and have been completed. The Company reactivated the dry felt mill on July 17,
1996 and has continued production through the quarter ended September 30, 1996.
9. SALE OF SUBSIDIARY:
Old Corrugated Cardboard (OCC) has been readily available to the Company over
the last nine months from third parties at prices which are below the collection
costs experienced by Striker Services Corporation (SSC) over the same period.
Like many companies engaged in the collection of recycled fibers, the Company
has elected to reduce its current exposure to the vagaries of OCC pricing
vis-a-vis SSC's current collection cost structure. Management has maintained
relationships with third party OCC vendors and believes it can purchase OCC from
these vendors during the near term at costs below those recently experienced by
SSC.
Effective April 1, 1996, the Company sold 100% of the outstanding shares of its
subsidiary, Striker Services, for consideration equal to the adjusted net book
value of Striker Services after giving affect to the capitalization of the
intercompany account payable owing to the Company by Striker Services.
10. SUBSEQUENT EVENTS:
On April 25, 1996, the Company signed an agreement to combine in a merger
transaction with one of the largest privately- owned manufacturers of asphalt
shingles and built up roofing. The transaction, if completed, would create a
combined company with annual revenues in excess of
Page 13 of 22
<PAGE> 14
$300 million. The transaction is contingent upon completion of due diligence,
approval by stockholders of the combining companies, the securing of $148
million in debt and equity financing to fund the acquisition, including the
assumption and refinancing of debt, and certain governmental approvals.
Following closing of the transaction, stockholders' equity of the combined
companies is projected to be approximately $50 million. The closing of the
transaction has been extended in writing by mutual agreement of the parties
beyond August 1, 1996 to a date no later than February 14, 1997, provided that
(i) the Registration Statement required to raise the equity component of the
financing required for closing is filed with The Securities and Exchange
Commission on or before December 13, 1996, and (ii) the merger transaction
becomes effective on or before February 1, 1997 or within incremental five
business day periods of time thereafter so long as bona fide marketing efforts
are being conducted by the underwriters with a view to such Registration
Statement becoming effective on or before February 14, 1997.
During the quarter ended September 30, 1996, pursuant to a Confidential Private
Placement Memorandum, a wholly owned subsidiary of the Company offered in a
private placement solely to accredited investors (as defined in Rule 501(a) of
Regulation D), for the purpose of obtaining working capital and for general
corporate purposes to assist the Company to conclude the merger combination
transaction referred to in the immediately preceding paragraph of this Note 10,
up to $1million of its Convertible Subordinated Promissory Notes (the "1996 D
Notes"). Each 1996 D Note is convertible at any time from the date of issuance
until the first to occur of (i) the filing of a Registration Statement with
respect to any debt or equity financing of the maker or its direct or indirect
parent corporation exceeding $10.5million, (ii) the prepayment of all or any
part of the unpaid principal thereof, or (iii) the maturity date thereof, but
not thereafter, at the unpaid principal amount thereof into shares of Common
Stock of the Company at the conversion price which is the mean of the high and
low trade prices of a share of Common Stock of the Company as quoted in the
NASDAQ SmallCap market on the 5th trading day prior to the date of the
conversion notice delivered to the maker by the holder. Payment of the 1996 D
Notes is guaranteed by the Company. Each 1996 D Note bears an appropriate
legend restricting its transfer except in a manner permitted under the
Securities Act of 1933, as amended, and applicable blue sky acts. Each 1996 D
Note is payable at the earlier of February 1, 1997 or the closing of any public
or private debt or equity financing of the maker or its direct or indirect
parent corporation exceeding $10.5million. In addition, if a 1996 D Note has
not been converted prior to maturity, at the time of payment thereof at
maturity, the holder shall be entitled to receive restricted shares of Common
Stock or Warrants of the Company or its then parent company under the
circumstances described, and calculated in the manner set forth, in the letter
agreement between the holder and the Company attached to each 1996 D Note as
Exhibit A thereto. At September 30, 1996, the Company's subsidiary had
received aggregate paid cash subscriptions of $485,000 in the private offering
of the 1996 D Notes from a total of thirteen accredited investor subscribers.
Page 14 of 22
<PAGE> 15
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This discussion should be read in conjunction with the financial statements of
the Company included elsewhere in this Form 10-Q:
Results of Operations
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
---------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
Revenue $ 2,042,873 $ 2,407,595 $ 5,105,334 $ 6,506,151
Cost of Sales 2,028,688 1,869,473 4,970,706 5,192,065
----------- ----------- ------------- -----------
Gross Margin 14,185 538,122 134,628 1,314,086
Selling, general and 787,008 644,218 1,622,614 1,399,758
administrative ----------- ----------- ------------- -----------
Operating Loss (772,823) (106,096) (1,487,986) (85,672)
Interest expense, net (240,826) (65,753) (481,424) (135,464)
Other income - 774 - 18,405
----------- ----------- ------------- -----------
Net loss before
income taxes $(1,013,649) $ (171,075) $ (1,969,410) $ (202,731)
=========== =========== ============= ============
</TABLE>
COMPARISON OF QUARTERS ENDED SEPTEMBER 30, 1996 AND 1995
First quarter results in the roofing industry are the weakest due to
seasonality of demand. First quarter 1996 was particularly slow due to an
unusually long and cold winter. First quarter 1995 was particularly warm
however, and therefore, sales were stronger than typical. The affects of the
long and cold winter extended into the second quarter of 1996. The roofing
industry built up inventory levels during late 1995 into early 1996. This has
resulted in supplies that exceeded demand resulting in flat realized sales
prices. This has helped to create weaker than typical results. The Company
expects that the remainder of 1996 will be flat due to no significant increase
in demand in excess of supply and continued flat realized sales prices.
Sales for the quarter ended September 30, 1996 were $2,042,873, a decrease of
$364,722 from sales of $2,407,595 for the quarter ended September 30, 1995.
The decrease in sales is primarily due to a decrease in the average realized
sales price of dry felt and in units (tons) sold.
Gross margin decreased to $14,185 (0.7 percent of total sales for the quarter
ended September 30, 1996) from a gross margin of $538,122 (22.4 per cent of
total sales for the quarter ended September 30, 1995). The decrease in gross
margin is primarily due to an increase in utilities, lower realized sales
prices for dry felt and no pulp hedge gain was realized in the 1996 period. In
addition, the Company incurred significant operating expenses associated with
the ongoing refurbishment and July start-up of the Thorold Mill.
Page 15 of 22
<PAGE> 16
Selling, general and administrative expenses increased by $142,790 to $782,008
for the quarter ended September 30, 1996, from $644,218 for the quarter ended
September 30, 1995. This increase is primarily due to an increase in
professional fees partially offset by a reduction in legal fees.
Interest expense, net, increased to $240,826 for the quarter ended September
30, 1996, from $65,753 for the quarter ended September 30, 1995. This increase
is due to the financing agreements (the Stephens facility and the Canadian
facility) and additional subordinated notes payable.
Because the Company has been in a loss position for financial and income tax
reporting purposes, no current or deferred income tax benefits have been
provided due to the uncertainty of realization.
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
Sales for the nine months ended September 30, 1996 were $5,105,334, a decrease
of $1,400,817 from sales of $6,506,151 for the nine months ended September 30,
1995. The decrease in sales is primarily due to a decrease in the average
realized sales price of dry felt and in units (tons) sold. Additionally, for
the nine months ended September 30, 1995, the Company realized approximately
$195,000 of revenue due to the sale of saturated felt products in inventory.
There were no sales of saturated products for the nine months ended September
30, 1996.
Gross margin decreased to $134,628 (2.6 percent of total sales for the nine
months ended September 30, 1996) from a gross margin of $1,314,086 (20.2 per
cent of total sales for the nine months ended September 30, 1995). The
decrease in gross margin is primarily due to an increase in utilities, lower
realized sales prices for dry felt and no pulp hedge gain was realized in the
1996 period. In addition, the Company incurred significant operating expenses
with the July start-up of the Thorold Mill.
Selling, general and administrative expenses increased by $222,856 to
$1,622,614 for the nine months ended September 30, 1996, from $1,399,758 for
the nine months ended September 30, 1995. This increase is primarily due to an
increase in professional fees and payroll costs partially offset by a decrease
in legal fees.
Interest expense, net, increased to $481,424 for the nine months ended
September 30, 1996, from $135,464 for the nine months ended September 30, 1995.
This increase is due to the financing agreements (the Stephens facility and the
Canadian facility) and additional subordinated notes payable.
Page 16 of 22
<PAGE> 17
CASH FLOWS - COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1996 AND SEPTEMBER
30, 1995
Cash flows used by operating activities increased to $2,492,528 for the nine
months ended September 30, 1996 from cash flows provided by operating
activities of $249,621 for the nine months ended September 30, 1995. This
increase in primarily due to the increase in operating losses, an increase in
accounts receivable and a decrease in accounts payable and accrued liabilities.
Cash flows used in investing activities decreased to $1,659,914 for the nine
months ended September 30, 1996 from $4,027,405 for the nine months ended
September 30, 1995. This decrease is primarily due to the reduction in
purchases of property and equipment and the result of no gain recorded from the
pulp hedge contract, however, this decrease was partially offset by the
increase in deferred acquisition costs.
Cash flows provided by financing activities increased to $4,195,103 for the
nine months ended September 30, 1996 from $3,980,667 for the nine months ended
September 30, 1995. This increase is primarily due to an increase in
subordinated note proceeds partially offset by a reduction in shareholder
activity, additional deferred cost payments and term loan and revolving lines
of credit activity.
Liquidity and Capital Resources
For the nine months ended September 30, 1996, the Company had an operating loss
and has experienced continued short term liquidity concerns.
The Company experienced an increase in current liabilities for the nine months
ended September 30, 1996 from the year ended December 31, 1995 resulting in a
working capital deficit of $1,088,069. The balance of current liabilities is
primarily due to capital improvements at the Thorold and Stephens Mills,
corporate development activities and due diligence costs associated with the
planned acquisition not funded by the Company's existing debt facilities.
After having been idled for two years by its previous owners, the Thorold Mill
needed extensive capital improvements, additions and repairs. These necessary
capital improvements, additions and repairs were partially financed. However,
since the plant was idled while the improvements were made, there was no
production. The Company's cash resources were limited and consequently the
balance of the project was financed by increasing current liabilities. The
Canadian projects are complete and production began on July 17, 1996. The
Company began regular shipments in September, 1996 and has continued through
the date of this report. The Company has sales orders that require the Company
to ship the Thorold mill's capacity through November 30, 1996. The Company is
currently in negotiation with two of its major customers that would require the
customers to purchase tonnage in the aggregate which approximates 92% of the
plant's capacity for a period of 12 months.
Page 17 of 22
<PAGE> 18
Several capital improvements were made to the Stephens Mill during the year
ended December 31, 1995 that extended into the six months ended June 30, 1996.
The improvements and additions made were necessary to improve efficiency and
meet regulatory requirements. These improvements were only partially financed.
As of the date of this report, the Company is benefiting from the capital
improvements made as the Company has not experienced any significant
unscheduled downtime for the period ended September 30, 1996. In addition, the
improvements necessary to meet the regulatory requirements have been mostly
completed and those completed were found in compliance with permits from an
ADPCE inspection.
Management believes that the improvements made to the Stephens and Thorold
Mills benefit the operations of the Company. The improvements to the plants
allow production of varying grades of paper (lightweight, medium weight and
heavyweight) more efficiently. This allows the Company to produce paper for
all geographic markets. In addition, the plants are geographically dispersed
to facilitate distribution to the midwest, southwest, southeast and northeast
markets.
The factors listed above have led to the working capital deficit. Management
has continued to monitor its operational realignment that was implemented
during 1994 that included (a) head count reductions, (b) use of lower cost raw
material vendors, (c) obtaining alternative lower cost raw materials sourcing
and (d) a preventative maintenance program to reduce downtime and repairs.
While the Company continues to monitor its program of operational realignment
and cost reductions, there can be no assurance that such cost reductions will
allow the Company to achieve profitability.
For the Quarter Ended September 30, 1996, the Company issued $1,500,000 of
10.25% Subordinated Notes (the 1996 C Notes) to nine purchasers. The proceeds
of the 1996 C Notes were used for working capital needs and acquisition due
diligence.
For the Quarter Ended September 30, 1996, the Company issued $485,000 in
aggregate principal amount of Subordinated Notes (the "1996 D Notes") to
several investors. The proceeds of the 1996 D Notes were used for working
capital needs.
Effective April 1, 1996, the Company sold 100% of the outstanding shares of its
subsidiary, Striker Services, for consideration equal to the adjusted net book
value of Striker Services after giving affect to the capitalization of the
intercompany account payable owing to the Company by Striker Services.
Page 18 of 22
<PAGE> 19
Management believes its existing funds, its cash generated by current operations
and collections on sales its existing financial arrangements and further
operational realignment will adequately fund the cash needs of the Company's
operations during the next year. In order to meet the cash requirements of the
Company's operations during the next year, the Company must maintain production
at the Thorold plant and operate within budget to be able to achieve profitable
margins. In order to remain competitive and improve production efficiencies,
several capital improvement projects will need to be made. The cost of these
capital improvement projects may need to be financed through increases in
existing financing arrangements or new financial arrangements. To continue to
expand its business, the Company may need to borrow additional amounts or obtain
an additional third-party credit facility. The Company currently has two
existing credit lines, consisting of revolving lines of credit and term loans
collateralized by receivables, inventories, and fixed assets. The Company
remains flexible to pursue alternative financing arrangements which might
include private or public sales of equity or debt securities.
The ability of the Company to achieve successful operations and realize its
assets is dependent upon many factors including successful operation of its dry
felt (and ultimately saturating) lines, penetration of existing and new markets
at profitable margin and volume levels and cash liquidity.
Page 19 of 22
<PAGE> 20
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is not a party to any pending proceeding, nor is any of its
property subject to any pending legal proceeding
Item 2. Changes in Securities.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
(1) On February 16, 1996, the Company issued $1,300,000 in aggregate
principal amount of 10.25 % Subordinated Notes (the "1996 Notes") to seven
international investors, five of which are stockholders. The 1996 Notes mature
on December 31, 1998 and interest is payable quarterly beginning July 1, 1996.
The proceeds of the 1996 Notes were used for working capital needs.
(2) On June 5, 1996, the Company issued $1,300,000 in aggregate principal
amount of 10.25 % Subordinated Notes (the "1996 B Notes") to twelve
international investors, five of which are stockholders. The 1996 B Notes
mature on December 31, 1998 and interest is payable quarterly beginning July 1,
1996. The proceeds of the 1996 B Notes were used for working capital needs.
(3) On July 10, 1996, the Company issued $1,500,000 in aggregate principal
amount of 10.25 % Subordinated Notes (the "1996 C Notes") to nine international
investors, six of which are stockholders. The 1996 C Notes mature on December
31, 1998 and interest is payable quarterly beginning July 1, 1996. The
proceeds of the 1996 C Notes were used for working capital needs.
(4) The Company issued $485,000 in aggregate principal amount of
Subordinated Notes (the "1996 D Notes") to several investors. The 1996 D Notes
mature at the earlier of (i) 2/01/97, or (ii) closing of any public or private
debt or equity financing exceeding $10.5 million. The proceeds of the 1996 D
Notes were used for working capital needs.
Page 20 of 22
<PAGE> 21
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
4.1 The Company agrees hereby to furnish to the Commission upon
request a copy of its long term 10.25% Subordinated Notes (the
"1996 C Notes") issued in a private placement pursuant to a
Confidential Private Placement Memorandum to nine accredited
international investors in aggregate principal amount of
$1,500,000 during the quarter ended September 30, 1996.
4.2 Copy of the Convertible Subordinated Promissory Note (the "1996
D Notes") of West Oxford Industries, Inc., a wholly owned
consolidated subsidiary of the Company, including the letter
agreement between the Company and a holder attached as Exhibit A
thereto.
4.3 Copy of the Guaranty of the Company of the 1996 D Notes.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed by the Company during the quarter ended
September 30, 1996:
Page 21 of 22
<PAGE> 22
SIGNATURES:
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Company has duly caused this report to be signed on its behalf by
the undersigned, hereunto duly authorized.
STRIKER INDUSTRIES, INC.
DATE: November 14, 1996 BY: /s/ DAVID A. COLLINS
------------------------------ ------------------------------
David A. Collins
Chief Executive Officer
DATE: November 14, 1996 BY: /s/ MATTHEW D. POND
------------------------------ ------------------------------
Matthew D. Pond
Chief Financial Officer
Page 22 of 22
<PAGE> 23
INDEX TO EXHIBITS
4.1 The Company agrees hereby to furnish to the Commission upon
request a copy of its long term 10.25% Subordinated Notes (the
"1996 C Notes") issued in a private placement pursuant to a
Confidential Private Placement Memorandum to nine accredited
international investors in aggregate principal amount of
$1,500,000 during the quarter ended September 30, 1996.
4.2 Copy of the Convertible Subordinated Promissory Note (the "1996
D Notes") of West Oxford Industries, Inc., a wholly owned
consolidated subsidiary of the Company, including the letter
agreement between the Company and a holder attached as Exhibit A
thereto.
4.3 Copy of the Guaranty of the Company of the 1996 D Notes.
<PAGE> 1
EXHIBIT 4.2
10% CONVERTIBLE SUBORDINATED NOTE
October 28, 1996
ON OR BEFORE the earlier of (i) February 1, 1997 or (ii) the closing of
any public or private debt or equity financing of Maker or its direct or
indirect parent corporation exceeding $10.5 million, for value received, the
undersigned, WEST OXFORD INDUSTRIES, INC., a Texas corporation ("Maker"),
promises to pay to ___________________________, at the corporate offices of
Maker in Houston, Texas, or, at Maker's option, by Maker's check mailed to the
payee herein name at his or its address furnished in writing to Maker the
principal sum of _____________________ THOUSAND ($___,000) DOLLARS, together
with interest on the principal balance hereof from time to time remaining unpaid
from October 15, 1996 until maturity at the rate of 10% per annum, such interest
to be paid by Maker to the payee herein named at maturity contemporaneously with
the then unpaid balance of the principal sum hereof.
This Note is one of a duly authorized issue of Notes of Maker
designated as its 10% Convertible Subordinated Notes issued under that certain
Confidential Private Placement Memorandum of Maker dated July 15, 1996 relating
to a private placement of a maximum of $1,000,000 in aggregate principal sum of
Convertible Subordinated Notes of Maker (the "Convertible Notes"), all of like
tenor and effect, issued in varying denominations of multiples of $25,000 and
maturing as above set forth. Each and all of the Convertible Notes are in parity
and pari passu and no one of the Convertible Notes is senior or junior in right
of payment to the other, but each and all are of equal rank and dignity.
The privilege is reserved to pay or prepay, from time to time and at
any time, all or any part of the principal amount of this Note, without premium
or penalty, provided that a like and
proportionate pay ment or prepayment of principal is made contemporaneously on
all other then outstanding Convertible Notes.
To exercise this prepayment option, Maker shall give written notice at
least 7 days prior to the prepayment date specified in the notice to all holders
of its Convertible Notes then outstanding at the last address of each holder
known to Maker. Upon any partial prepayment of this Note, the holder hereof
shall surrender the same to Maker at its principal office in Houston, Texas for
endorsement hereon of such prepayment, or, at the option of Maker, in exchange,
without charge to the holder for making such exchange, for a new Convertible
Note of Maker in the principal amount of the principal sum hereof remaining
after credit for such prepayment(s), and otherwise having and containing the
same terms and provisions as the Note surrendered.
<PAGE> 2
At the option of the holder of this Note, at any time after the date
hereof and prior to the first to occur of (i) the filing of a Registration
Statement with respect to any debt or equity financing of Maker or its direct or
indirect parent corporation exceeding $10.5 million, regarding which filing
Maker shall give the holder hereof written notice at his or its address as
reflected in the books and records of Maker not less than 4 days prior to the
filing date, (ii) the prepayment by Maker of all or any part of the unpaid
principal amount of this Note in accordance with the foregoing terms hereof, or
(iii) the maturity of this Note, but not thereafter, the entire principal amount
of this Note, but not any part thereof, may be converted, with respect to the
event of the filing of a Registration Statement(s), at any time after the date
of the notice of filing until the close of business on the date immediately
preceding the date of filing; with respect to the event of a prepayment of this
Note, at any time after the date of the notice of prepayment until the close of
business on the 3rd day prior to the prepayment date specified in the prepayment
notice given by Maker to all holders of its Convertible Notes; and with respect
to the maturity of this Note, at any time prior to the date immediately
preceding the maturity date hereof, at the then unpaid principal amount of this
Note into shares of Common Stock, $0.20 par value per share, of Maker's parent
corporation, Striker Industries, Inc. ("Striker") having ordinary voting rights
at the conversion price per share which shall be the mean of the high and low
trade prices of a share of Common Stock of Striker as quoted in the NASDAQ
SmallCap market on the 5th trading day prior to the date of the conversion
notice delivered within the applicable conversion period provided herein by the
holder to Maker in accordance with the terms hereof. In order to exercise the
conversion privilege, the holder of this Note shall give written notice in the
form attached to Striker at its corporate offices at One Riverway, Suite 2450,
Houston, Texas 77056 to the effect that the holder elects to convert this Note,
enclosing this Note with such notice and stating therein the name and address in
and to which certificates for shares of Common Stock of Striker shall be
issuable and delivered upon such conversion. As promptly as practicable after
receipt of such notice and surrender of this Note as aforesaid, Striker shall
issue and deliver to the holder, or on his or its written order, a certificate
or certificates for the full number of shares of Common Stock of Striker
issuable upon conversion of this Note in accordance with the provisions hereof,
and such conversion shall be deemed to have been effected on the date on which
such notice of conversion shall be received by Striker and this Note shall have
been surrendered as aforesaid, and the person in whose name any certificate for
shares of Common Stock of Striker shall be issuable upon such conversion shall
be deemed to have become on said date the holder of record of the shares
represented thereby. When this Note is surrendered to Striker for conversion as
aforesaid, it shall promptly be canceled by Maker. No adjustment in respect of
interest or dividends will be made upon any conversion. Striker shall not be
required to issue any fractional shares of its Common Stock upon conversion of
this Note, and all fractional shares shall be rounded up to the nearest whole
share.
In the event of any stock split, stock dividend, combination of shares
or other capital reorganization or reclassification of capital stock of Striker,
or any additional issuance(s) of shares of Striker Common Stock subsequent to
the initial date of issuance of the Convertible Notes, the Board of Directors of
Maker shall determine whether or not, and to the extent that, any adjustment
should be made to the conversion price stated therein and herein, and by
acceptance of this Note, the holder hereby agrees that a determination of
Maker's Board of Directors with respect to any such adjustment, if any, shall be
conclusive and binding; provided, however, that a
<PAGE> 3
stock dividend in an amount equal to 5% or less shall not be deemed to require
any adjustment in the conversion price under any circumstance. Further, prior to
the conversion of this Note under the terms hereof, no adjustment of the
conversion price shall be made with respect to shares of Common Stock of Striker
issuable under (i) options, warrants or other rights to purchase or acquire
Common Stock, including shares under incentive, restricted or qualified stock
options of Striker; (ii) securities of Striker, including shares of its
Preferred Stock, and/or other debt securities of Striker, whether senior or
subordinated debt securities and whether secured or unsecured, which by their
terms are convertible into or exchangeable for Common Stock of Striker; or (iii)
options, warrants or rights to purchase any such convertible or exchangeable
securities of Striker. In the event of any adjustment to the conversion price
provided herein, Maker shall cause a notice of such adjustment to be mailed to
each holder of shares of its Subordinated Notes within 10 days after any such
determination.
Striker shall at all times reserve and keep available out of its
authorized but unissued Common Stock, for the purpose of issuance upon
conversion of Convertible Notes of Maker, such number of shares of its Common
Stock as shall from time to time be sufficient to effect the conversion of all
of Maker's outstanding Convertible Notes and the issuance of shares of its
Common Stock in exchange therefor upon conversion thereof. All shares of Common
Stock of Striker which shall be issued upon conversion of Convertible Notes of
Maker shall, when so issued upon any such conversion, be duly and validly
issued, fully paid and nonassessable shares of Striker's Common Stock. The
issuance of certificates representing shares of Common Stock of Striker upon
conversion of this Note shall be made without charge to the holder hereof.
The indebtedness evidenced by this Note, and any renewal and extension thereof,
is and shall be subordinate and junior in right of payment to Senior
Indebtedness of Striker and its consolidated subsidiaries, including Maker. As
used herein, the term "Senior Indebtedness" means all indebtedness (both
principal and interest), obligations and liabilities of Striker and its
consolidated subsidiaries heretofore, contemporaneously or hereafter incurred
(including, without limitation, any renewals, extensions, amendments or
modifications -thereof, without notice to or the consent of the holders of any
of the Convertible Notes), other than indebtedness evidenced by the Convertible
Notes (each and all of which, as above provided, are in parity and pari passu,
with no one thereof being senior or junior in right of payment to the other and
all of which are of equal rank and dignity), including this Note, unless by the
terms of the instrument or instruments creating or evidencing such indebtedness
it is provided that such indebtedness is not senior to the Convertible Notes.
Without limiting the effect of the foregoing, the term "subordinate and junior"
as used herein shall include within its meanings the following: that (i) in the
event of any insolvency or bankruptcy proceedings, or any receivership,
liquidation, reorganization or other similar proceedings in connection therewith
relative to Striker and its consolidated subsidiaries and its or their creditors
or property, or in the event of any proceedings for voluntary liquidation,
dissolution or other winding-up of Striker and its consolidated subsidiaries,
whether or not involving insolvency or bankruptcy, or in the event of any
assignment for the benefit of creditors or any other marshaling of assets of
Striker and its consolidated subsidiaries, then all Senior Indebtedness shall
first be paid in full, or such payment be provided for, before any payment shall
be made on account of any of the Convertible Notes (but in any of such events,
after the payment of all Senior Indebtedness, payment on account of
<PAGE> 4
the Convertible Notes shall be made before any payment is made or any assets of
Striker or its consolidated subsidiaries are set apart for payment or
distribution to the holders of capital stock of Striker), and (ii) in the event
that the Convertible Notes are declared due and payable in the manner
hereinafter provided because of the occurrence of an Event of Default, holders
of the Convertible Notes shall be entitled to payment only after there shall
first have been paid in full Senior Indebtedness, or such payment shall have
been provided for.
In the event one or more of the following Events of Default shall have occurred
and be continuing (and the term "Event(s) of Default as used herein shall mean
any one or more of the following events or conditions):
(a) Default in the payment by Maker when due of the interest on, or the
principal sum of, any of the Convertible Notes when the same shall be
due and payable under the terms and provisions thereof, and continuance
of such failure for a period of 10 business days;
(b) The filing by Maker, Striker or any wholly-owned subsidiary of Striker
(Maker, Striker and/or any of wholly-owned subsidiary of Striker being
hereinafter in this subparagraph (b)
referred to singly or in the aggregate, as the case may be, as "Striker")
of a petition in voluntary bankruptcy, or the making by Striker of a
general assignment for the benefit of creditors, or the filing by it of
any petition or answer seeking or consenting to a reorganization,
arrangement, adjustment, composition, liquidation, dissolution,
winding-up or any other such relief for itself or its creditors, or the
filing of an answer by Striker admitting the material allegations of the
petition filed against it in any such proceeding, or the consenting by
Striker to, or the acquiescence of Striker in, the appointment of any
receiver, trustee, liquidator (or other person or entity exercising
similar functions) of Striker or of all or any substantial part of the
property of Striker;
then and in each and every such case, unless the principal of all of the
Convertible Notes shall have already become due and payable, holders of
Convertible Notes entitled to payment of at least 75 % in aggregate unpaid
principal amount of the Convertible Notes then outstanding, but not otherwise,
shall, upon 10 days' written notice to Maker of default (such notice to identify
the Event of Default) declare the unpaid principal of, and all accrued and
unpaid interest on, the Convertible Notes then outstanding, including this Note,
to be due and payable and upon any such declaration, the same shall be and
become immediately due and payable. This provision, however, is subject to the
condition that if, at any time before the principal of the Convertible Notes
shall have been so declared due and payable, all Events of Default shall have
been cured, then such Events of Default shall be deemed to have been waived by
the holders of the Convertible Notes. This provision is subject to the further
condition that if, at any time after the unpaid principal of and accrued and
unpaid interest on the Convertible Notes shall have been so declared due and
payable, and before any judgment or decree for the payment of monies due shall
have been obtained or entered, Maker shall pay or shall deposit with a paying
agent a sufficient sum to pay all accrued and unpaid interest upon all of the
Convertible Notes and every other Event of Default hereunder shall have been
made good, then and in every such case, the holders of not less than 75% in
aggregate unpaid principal amount of the Convertible Notes then outstanding, by
written notice to Maker, may waive all defaults and rescind and annul such
<PAGE> 5
declaration and its consequences; but no such waiver or rescission or annulment
shall extend to or shall affect any subsequent Event of Default or impair any
right hereunder consequent thereon. The holder of this Note shall have no right
to institute any suit, action or proceeding in equity or in law for the
execution of any power conferred hereunder or for the appointment of a receiver
or for the enforcement of any other remedy under or upon this Note unless such
holder, with the joinder of other holders of Convertible Notes of Maker entitled
to payment of at least 75% in aggregate unpaid principal amount of the
Convertible Notes then outstanding, including this Note, shall previously have
given Maker written notice of an existing Event of Default and of the
continuance thereof as hereinabove provided. Such notification is hereby
declared in every such case to be a condition precedent to any action or cause
of action hereunder or upon the Convertible Notes or for the appointment of a
receiver or for any other remedy hereunder. No delay or omission of the holder
of Convertible Notes, including this Note, to exercise any right or power of
such holder(s) accruing upon or after occurrence of an Event of Default and
continuance thereof as aforesaid shall impair any such right or power or shall
be construed to be a waiver of any such Event of Default or an acquiescence
therein; and every power and remedy given hereunder to holders of the
Convertible Notes may be exercised from time to time and as often as may be
deemed expedient by the holders of the Convertible Notes. No remedy herein
conferred upon the holders of Convertible Notes, including this Note, is
intended to be exclusive of any other remedy or remedies, but each and every
such remedy shall be cumulative and shall be in addition to every other remedy
given hereunder or now or hereafter existing at law or in equity or by statute,
subject only to the foregoing provisions hereof. Whenever in the Convertible
Notes it is provided that holders of a specified percentage in aggregate unpaid
principal amount of the Convertible Notes then outstanding may take any action
(including the making of any demand or request, the giving of any notice,
consent or waiver or the taking of any other action), the fact that at the time
of taking of any such action the holders of Convertible Notes of such specified
percentage have joined therein may be conclusively evidenced and established by
any instrument or any number of instruments of similar tenor executed by holders
of Convertible Notes in person or by agent or proxy duly and lawfully appointed
in writing. The fact and date of the execution by any holder of a Convertible
Note of any instrument may be proved by the certificate of any Notary Public or
other officer of any jurisdiction within the United States authorized to take
acknowledgment of deeds to be recorded in such jurisdiction, or any United
States consular official, stating therein that the person executing such
instrument acknowledged to him the execution thereof, or by an affidavit of the
witness to such execution sworn to before any such Notary Public or United
States consular official.
Any notice, request, instruction, consent, demand or other communication at any
time required or permitted to be given or furnished hereunder shall be deemed
sufficiently given or furnished if in writing and delivered personally to the
party to be notified or deposited in the United States mail in first class
registered or certified mail form, with return receipt requested, postage
prepaid, or by facsimile transmission, if to Striker, addressed to it at its
address above set forth or by facsimile transmission to (713) 622-9410, and if
to the holder of this Note, at or to his or its address or facsimile number, if
available, as reflected in the books and records of Maker. Notice by personal
delivery shall be effective upon receipt; notice deposited in the United States
mail in the manner aforesaid shall be effective on the date of receipt or the
third day after the same is deposited in the United States mail in such form,
whichever is earlier, and notice sent by
<PAGE> 6
facsimile transmission shall be effective upon confirmation to the notifying
party of receipt of the transmission.
The maker hereof and all endorsers, sureties and guarantors hereof, as
well as all other persons liable or to become liable on this Note, hereby waive
grace, notice, including, but not limited to, notice of acceleration of notice
of intent to accelerate, demand for presentment for payment, notice of
nonpayment, protest, notice of protest and/or dishonor, filing of suit and
diligence in collection, as well as any notice of or defense on account of the
extension of time for payment or change in the method of payment hereof, and
consent to any and all renewals and extensions in the time of payment hereof.
Notwithstanding any foregoing provision of this Note to the contrary,
the indebtedness evdenced by this Note may be satisfied and paid in full, and
shall be canceled, in exchange for and upon issuance to the payee herein named
of a number of shares of Common Stock of Maker's direct or indirect parent
corporation under the circumstances described, and calculated in the manner set
forth, in sections 2 and 3 of that certain letter agreement of even date
herewith between the payee herein named and Maker's parent corporation, Striker
Industries, Inc., a copy of which is attached hereto, marked Exhibit A for
identification and hereby made a part hereof for all pertinent purposes.
THIS NOTE HAS BEEN ACQUIRED BY THE PAYEE HEREIN NAMED FOR HIS OR ITS
OWN ACCOUNT AS PRINCIPLE AND WITHOUT INTENT TO DISTRIBUTE OR RESELL THE SAME, IN
WHOLE OR IN PART. THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED, OR UNDER ANY STATE SECURITIES' LAWS (COLLECTIVELY HEREIN THE
"ACTS"); ACCORDINGLY, IT MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED,
HYPOTHECATED OR OTHERWISE TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT AS TO THE NOTE UNDER ANY OF THE APPLICABLE ACTS, OR AN
OPINION OF COUNSEL SATISFACTORY TO MAKER TO THE EFFECT THAT SUCH REGISTRATIONS
ARE NOT REQUIRED.
WEST OXFORD INDUSTRIES, INC.
By:__________________________________
Matthew D. Pond,
Chief Financial Officer
The signature of Striker Industries, Inc. below is for the purpose
of evidencing its understanding of, agreement and consent to, the provisions of
the above and foregoing Note which relate to issuance of shares of Common Stock
of Striker Industries, Inc. or its parent corporation upon conversion of, or in
full payment and cancellation of and exchange for, the Note, as more fully
provided in the Note and in Exhibit A thereto.
Striker Industries, Inc
By:___________________________
David A. Collins, CEO
<PAGE> 7
CONVERSION NOTICE
Striker Industries, Inc.
One Riverway, Suite 2450
Houston, Texas 77056
The undersigned owner of this Note hereby irrevocably exercises the option to
convert this Note into shares of Common Stock of Striker Industries, Inc. and
directs that the shares issuable and deliverable upon the conversion be issued
in the name of and delivered to the undersigned at the address designated below.
The Note of the undersigned being converted hereby is enclosed herewith for
surrender, cancellation and delivery to the Maker thereof.
---------------------------------------
Name
------------------------------------
Address
------------------------------------
-------------------------------------
Social Security or Federal ID#
Dated______________, 1996 _____________________________________
Signature of Noteholder
<PAGE> 8
Exhibit A
PERSONAL AND CONFIDENTIAL
Mr. David A. Collins
President and CEO
Striker Industries, Inc.
One Riverway, Suite 2450
Houston, Texas 77056
Dear Mr. Collins:
Based on our discussions and a review of the information provided to us on a
confidential basis, we are aware that Striker Industries, Inc.(the "Company") is
currently engaged in efforts to consummate a merger combination transaction with
one of the oldest names in the roofing industry which has a substantial market
share of the national residential roofing market, a vertically integrated
manufacturing process and annual revenues of approximately $300 million. The
existing operations of both the Company and this merger partner would be folded
into a new entity named GSR Industries, Inc..
In order to assist the Company to accomplish such pending merger combination
transaction, the undersigned ("Lender") is prepared to provide and fund at the
Company's direction to its wholly-owned subsidiary, West Oxford Industries, Inc.
(the "Subsidiary"), a bridge loan facility in the amount of $____________ (the
"Loan") to be evidenced by that certain Convertible Subordinated Promissory Note
(the Note") of the Subsidiary in the original principal amount of the Loan to be
issued to Lender on the terms more fully described therein and in that certain
Confidential Private Placement Memorandum of the Subsidiary dated July 15, 1996
and in the Subscription Agreement of Lender with respect thereto executed and
delivered to the Subsidiary of even date herewith.
In consideration of such Loan to the Subsidiary, and as a material inducement to
Lender in connection therewith, the Company hereby agrees with Lender as
follows:
1. If the Note is not converted prior to its maturity date, at the time of
payment of the Note at maturity, or upon prepayment at any time prior to
maturity of all then remaining unpaid principal of the Note, the Company
shall issue and deliver to Lender a number of restricted shares of Common
Stock of the Company (and as used throughout the balance of this letter,
the term "Company" shall include GSR Industries, Inc., the ultimate parent
corporation of Striker Industries, Inc., as appropriate) determined by
dividing the then unpaid principal of the Note by the offering price to the
public of a share of Common Stock of the Company in a public offering of
shares of Common Stock of the Company occurring near- simultaneously with
consummation of the merger combination transaction referred to above. In
addition, within 30 days after the maturity date of the Note, the Company,
at its expense and one time only, will amend, if possible, any existing
Registration Statement on Form S-3, or will file a separate Registration
<PAGE> 9
Statement on Form S-3, with respect to an offering of the shares issued to
Lender pursuant to the preceding sentence and will use its best efforts to
cause such Registration Statement to become effective and to remain
effective for such period of time as is permitted under rules and
regulations promulgated be the SEC.
2. In the event that the Note has not been converted and a public offering of
shares of Common Stock of the Company does not take place prior to maturity of
the Note, at the option of the Company, at maturity of the Note, the Company
shall either (i) cause the Note and all accrued interest thereon (less an amount
equal to the aggregate par value of the shares of the Company's Common Stock
hereinafter mentioned to be issued contemporaneously therewith) to be paid by
the Subsidiary and shall issue and deliver to Lender a number of restricted
shares of Common Stock of the Company, $.20 par value per share, determined by
dividing the unpaid principal balance of the Note at maturity by the mean of the
high and low trade prices of a share of Common Stock of the Company as quoted in
the NASDAQ SmallCap market on the maturity date of the Note, or (ii) the Company
shall issue and deliver to Lender, in full payment and cancellation of and
exchange for the Note, a number of restricted shares of Common Stock of the
Company determined by dividing the original principal amount of the Note by the
lesser of 50% of (x) the mean of the high and low trade prices of a share of
Common Stock of the Company as quoted in the NASDAQ SmallCap market during the
10 trading days immediately following the date of funding of the Loan, or (y)
the mean of the high and low trade prices of a share of Common Stock of the
Company as quoted in the NASDAQ SmallCap market on the date of filing of the
Registration Statement (or amendment thereto) referred to in the last sentence
of this section #2. In the event the mean of the applicable high and low trade
prices of a share of Common Stock of the Company, determined under the
applicable provision of subsection (ii) of the preceding sentence, exceeds $3
per share, such mean per share amount shall be reduced to, and shall then be
deemed to be, $3 for share calculation purposes under said subsection (ii) of
this section 2. In addition, within 30 days after the maturity date of the Note,
the Company, at its expense and one time only, will amend, if possible, any
existing Registration Statement on Form S-3, or will file a separate
Registration Statement on Form S-3, with respect to an offering of the shares
issued to Lender pursuant to the preceding sentence and will use its best
efforts to cause such Registration Statement to become effective and to remain
effective for such period of time as is permitted under rules and regulations
promulgated by the SEC.
3. In the event the Note is not converted and the Company fails to comply with
either #1 or #2 above, whichever is applicable, Lender shall then be
entitled to receive from the Company, in full payment and cancellation of
and exchange for the Note, a Warrant to purchase twice the number of
restricted shares of the Company to which it is entitled under whichever of
#1 or #2 is applicable hereunder at any time during a period of two years
at an exercise price of $.25 per share. Following exercise of the Warrant
by Lender with respect to all shares of Common Stock underlying the
Warrant, the Company will have the same
<PAGE> 10
obligation to amend or file a Registration Statement on Form S-3 with
respect to an offering by Lender of the shares issued to it upon an
exercise of the Warrant as is provided above under #1 and #2.
Please signify your agreement to the foregoing by signing this letter in the
space provided for your signature below and return a fully signed copy hereof to
the undersigned.
Very truly yours,
________________________
By:_____________________
(Title)
AGREED:
Striker Industries, Inc.
BY:______________________ Date: October 28, 1996
David A. Collins, CEO
<PAGE> 1
EXHIBIT 4.3
GUARANTY
THIS GUARANTY is executed as of ________________, 1996, by Striker
Industries, Inc., a Delaware corporation (the "Guarantor"), for the benefit of
each holder (a "Holder") of the Convertible Subordinated Promissory Notes (each
a "Note") issued by West Oxford Industries, Inc. (The "Borrower").
Guarantor guarantees to Holder the prompt payment at maturity (by
acceleration or otherwise), and at all times thereafter, of the Guaranteed Debt
(defined below), as follows:
1. "Guaranteed Debt" shall mean the Notes, including all principal and
interest payable thereon. Unless otherwise stated, terms defined in the Note
have the same meanings when used in this Guaranty.
2. If Guarantor becomes liable for any indebtedness owing by Borrower
to Holder, other than under this Guaranty, such liability will not be in any
manner impaired or affected by this Guaranty, and the rights of Holder under
this Guaranty are cumulative of any and all other rights that Holder may ever
have against Guarantor. The exercise by Holder of any right or remedy under this
Guaranty or otherwise will not preclude the concurrent or subsequent exercise of
any other right or remedy.
3. Holder shall notify Guarantor in writing of any Default or Potential
Default prior to exercising any remedies for such Default and Guarantor shall
have the right to cure any such Default or Potential Default within thirty
Business Days after receiving any such notice. If, while a Default exists,
Borrower fails to pay the entire unpaid balance of the Obligation then due and
payable and Guarantor fails to cure such Default within thirty Business Days
after receiving notice of such Default from Holder, then Guarantor shall, on
demand and without further notice of dishonor and without any notice having been
given to Guarantor previous to such demand of either the acceptance by Holder of
this Guaranty or the creation or incurrence of any Guaranteed Debt, pay the
amount of the Guaranteed Debt then due and payable to Holder, and it is not
necessary for Holder, in order to enforce such payment by Guarantor, first or
contemporaneously to institute suit or exhaust remedies against Borrower or
others liable on such indebtedness or to enforce rights against any collateral
securing such indebtedness.
4. This Guaranty benefits Holder and its successors and permitted
assigns and binds Guarantor and its successors and permitted assigns. The rights
and benefits of the Guaranty may not be transferred.
STRIKER INDUSTRIES, INC.
By: /s/ David A. Collins
-------------------------
Name: David A. Collins
Title: President and CEO
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<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 184,218
<SECURITIES> 0
<RECEIVABLES> 1,758,194
<ALLOWANCES> 0
<INVENTORY> 472,593
<CURRENT-ASSETS> 3,611,518
<PP&E> 18,470,493
<DEPRECIATION> 2,213,808
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0
0
<COMMON> 2,184,913
<OTHER-SE> 8,316,204
<TOTAL-LIABILITY-AND-EQUITY> 21,899,658
<SALES> 5,105,334
<TOTAL-REVENUES> 5,105,334
<CGS> 4,970,706
<TOTAL-COSTS> 1,622,614
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