<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, 1998
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 76-0327659
(state or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
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 September 30, 1998, there were 4,370,922 shares of Common Stock, par value
$0.50 per share, outstanding and no shares of Preferred Stock, par value $0.50
per share, were outstanding.
Page 1 of 18
<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 Sheet 3
Consolidated Statements of Operations 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
PART II. OTHER INFORMATION
- -------- -----------------
Item 1. Legal Proceedings 16
Item 2. Changes in Securities 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a
Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
- ----------
</TABLE>
Page 2 of 18
<PAGE> 3
STRIKER INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
Assets 1998 1997
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 84,886 151,941
Restricted cash 71,963 --
Accounts receivable:
Trade 195,335
Employee 65,554 180,000
Other, net of bad debt allowance of 489,671
for December 31, 1997 4,006 4,006
Inventories:
Raw materials 20,298 1,365
Finished goods 142,209
Prepaid expenses and other current assets 222,570 158,130
------------ ------------
Total current assets 806,821 495,442
Property and equipment, net 13,659,899 13,988,832
Deferred costs and other, net 295,522 72,782
------------ ------------
Total assets $ 14,762,242 14,557,056
============ ============
Liabilities and Stockholders' Deficit
Current liabilities:
Current portion of long term debt $ 441,755 746,624
Current obligations under capital leases 7,854 7,650
Trade accounts payable 2,546,872 2,875,965
Accrued liabilities 938,752 703,113
------------ ------------
Total current liabilities 3,935,233 4,333,352
Long-term liabilities:
Zero coupon notes payable 13,542,523 10,507,965
Term loans, net of current portion 677,299 920,450
Subordinated term loan, net of current portion 742,797 --
Capital lease obligation 4,956 10,919
Subsidiary equity repurchase obligation 451,633 --
Minority Interest in subsidiary 1,650,761 --
------------ ------------
Total long-term liabilities 17,069,969 11,439,334
------------ ------------
Stockholders' deficit:
Preferred stock, $.20 par value, 5,000,000 shares authorized,
none issued -- --
Common stock, $0.50 par value, 25,000,000 shares authorized,
4,370,922 shares issued and outstanding 2,187,862 2,187,862
Stock subscriptions receivable (275,000) (275,000)
Warrants 667 --
Additional paid-in capital 12,879,413 14,938,085
Accumulated deficit (20,595,365) (17,632,301)
Foreign currency translation adjustment (365,537) (359,276)
Less treasury stock at cost; 4,800 shares (75,000) (75,000)
------------ ------------
Total stockholders' deficit (6,242,960) (1,215,630)
Commitments and contingencies
------------ ------------
Total liabilities and stockholders' deficit $ 14,762,242 14,557,056
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
Page 3 of 18
<PAGE> 4
STRIKER INDUSTRIES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the periods ended September 30, 1998 and 1997
<TABLE>
<CAPTION>
For the Quarter Year to Date
Ended September 30, Ended September 30,
--------------------------- ---------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues $ 267,658 $ 11,262 $ 267,658 $ 1,506,399
Cost of sales 902,982 234,960 1,915,309 2,582,767
----------- ----------- ----------- -----------
Gross margin (635,324) (223,698) (1,647,651) (1,076,368)
Selling, general and administrative expenses 494,932 783,549 1,343,727 2,557,138
----------- ----------- ----------- -----------
Operating loss (1,130,256) (1,007,247) (2,991,378) (3,633,506)
----------- ----------- ----------- -----------
Other income (expense):
Interest expense, net (243,412) (241,689) (586,291) (1,225,949)
Gain on fully reserved debt settlement -- -- 110,380 --
Minority interest in net loss of consolidated subsidiary 177,647 -- 407,911 --
Other income/(expense) -- -- 96,315 --
----------- ----------- ----------- -----------
Loss before income taxes (1,196,021) (1,248,936) (2,963,063) (4,859,455)
Income taxes -- -- -- --
----------- ----------- ----------- -----------
Net loss $(1,196,021) $(1,248,936) $(2,963,063) $(4,859,455)
=========== =========== =========== ===========
Basic and diluted net loss per common share $ (.27) $ (.29) $ (.68) $ (1.11)
=========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
Page 4 of 18
<PAGE> 5
STRIKER INDUSTRIES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended September 30, 1998 and 1997
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1998 1997
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss (3,370,975) (4,859,455)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 633,271 505,529
Amortization 399,557 717,081
Changes in assets and liabilities:
Increase in accounts receivable (80,889) (120,963)
(Increase) decrease in inventories (161,142) 181,801
(Increase) decrease in prepaid expenses and other current assets (90,165) 101,801
Increase (decrease) in accounts payable and accrued liabilities (247,374) 758,776
------------ ------------
Net cash used in operating activities (2,917,717) (2,715,430)
------------ ------------
Cash flows from investing activities:
Purchases of property and equipment (304,339) (131,826)
Proceeds from disposition of property and equipment -- 75,000
Purchase of certificate of deposit (71,963) --
------------ ------------
Net cash used in investing activities (376,302) (56,826)
------------ ------------
Cash flows from financing activities:
Repayment of original issue discount notes (373,652) (1,978,000)
Proceeds from Canadian subordinated loan agreement 1,082,861 --
Proceeds from revolving lines of credit -- 1,807,562
Repayment of revolving lines of credit -- (1,895,069)
Repayments of fixed asset line of credit (233,301) (332,400)
Principal payments on capital leases (5,759) (25,637)
Deferred and other costs paid (223,852) (167,528)
Proceeds from the issuance of warrants 667 --
Proceeds from subordinated notes payable -- 5,081,532
Proceeds from issuance of zero coupon notes payable 2,980,000 --
------------ ------------
Net cash provided by financing activities 3,226,964 2,490,460
------------ ------------
Net increase (decrease) in cash (67,055) (281,796)
Cash and cash equivalents, beginning of period 151,941 292,485
------------ ------------
Cash and cash equivalents, end of quarter 84,886 10,689
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
Page 5 of 18
<PAGE> 6
STRIKER INDUSTRIES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Striker Industries, Inc., its wholly owned subsidiaries and its 75 percent
ownership interest in the accounts of its indirect Canadian subsidiary. All
material intercompany accounts and transactions have been eliminated. The
minority interest reflected on the Balance Sheet and in the Statement of
Operations reflect a 25% equity position of an unrelated third party in the
Company's indirect Canadian Subsidiary, Striker Paper Canada, Inc. only.
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, 1998, the consolidated
results of operations for the three and nine months ended September 30, 1998 and
1997 and cash flows for the nine months ended September 30, 1998 and 1997.
Earnings (Loss) Per Common Share
In 1997, the Company adopted the provisions of SFAS No. 128, "Earnings Per
Share." SFAS No. 128 established standards for computing and presenting income
(loss) per common share. It replaces primary and fully diluted income (loss) per
common share with basic and diluted income (loss) per common share. Basic income
(loss) per common share excludes dilution and is computed by dividing income
(loss) available to common stockholders by the weighted average number of common
shares outstanding for the period. Diluted income (loss) per common share
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock. When dilutive, stock options and
warrants are used in the computation of diluted earnings (loss) per common share
as share equivalents using the treasury stock method.
The number of weighted average shares outstanding used in computing the earnings
(loss) per share was 4,370,922 for the three and nine months ended September 30,
1998 and 4,365,026 and 4,365,026 for the three and nine months ended September
30, 1997, respectively. Basic and diluted earnings (loss) per share are the same
for each of these quarters.
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 6 of 18
<PAGE> 7
2. DEBT:
<TABLE>
<CAPTION>
The Company's debt consisted of the following at: September 30, December 31,
1998 1997
-------------- --------------
<S> <C> <C>
Zero Coupon Notes, 2.25% due 12/31/05 $ 14,323,500 $ 10,702,500
Unamortized Discount on Zero Coupon Notes (780,977) (194,535)
Original Issue Discount Notes 37,551 380,276
Stephens Facility:
Term loan, prime (8.5%) +3.5%, due 5/31/01 446,000 534,650
Revolving line of credit, prime + 3.5% 61,004 23,148
Canadian Facilities:
Term loan, prime (6.0%)+ 2.5% due 4/01/01 574,499 729,000
Subordinated term loan, 20.0% due 4/14/01 1,082,861
Unamortized Discount of
subordinated term loan (340,064)
Capitalized lease obligations bearing interest at
rates from 10% to 24% maturing between 1998
and 2000, secured by underlying machinery
and computer equipment 12,810 18,569
-------------- --------------
15,417,184 12,193,608
Less- Current maturities (449,609) (754,274)
-------------- --------------
$ 14,967,575 $ 11,439,334
============== ==============
</TABLE>
CREDIT FACILITIES:
On March 13, 1998, the Company (as guarantor) and its indirect Canadian
subsidiary, Striker Paper Canada, Inc. ("Striker Canada") accepted a
supplemented and amended Offer of Finance from Striker Canada's term loan
lender, Laurentian Bank of Canada. Under the amended Offer of Finance, the
maturity date on Striker Canada's term loan facilities with the lender remains
April 1, 2001. In addition, Striker Canada was required to prepay all principal
and interest requirements of the term loans through July 31, 1998. Striker
Canada resumed monthly principal and interest payments beginning August 1, 1998.
On March 20, 1998, the Company's indirect Canadian subsidiary, Striker Paper
Canada, Inc. ("Striker Canada"), executed (i) a Subordinated Loan Agreement with
First Ontario Labour Sponsored Investment Fund Ltd. ("FOF") providing a three
year term credit facility to Striker Canada in the maximum principal amount of
$1,500,000 Canadian and (ii) a Commercial Demand Line of Credit Agreement with
Credit Union Central of Ontario Limited and So-Use Credit Union Limited
providing a revolving line of credit to Striker Canada in the aggregate amount
of $800,000 Canadian based on eligible accounts receivable. The first advance in
the amount of $1,250,000 Canadian under the FOF term loan facility was received
by Striker Canada on April 14, 1998.
Page 7 of 18
<PAGE> 8
As a condition of the Subordinated Loan Agreement, FOF was issued 3,756,912
shares of common stock of Striker Canada, which represents a 25% equity position
in Striker Canada. In connection with the FOF financing, the Company formed a
new wholly-owned Canadian subsidiary, Striker Holdings Canada, Inc. (Holdings
Canada), to which the Company transferred its remaining seventy-five percent
ownership position in Striker Canada. In addition, the Company signed a
guarantee requiring that, upon default under the Subordinated Loan Agreement or
at maturity of the FOF credit facility, the Company repurchase FOF's 25%
ownership interest in Striker Canada for a minimum of $1,000,000 Canadian.
The Subordinated Loan Agreement provides for payment of interest at the rate of
20% per annum on all outstanding amounts but, giving effect to the discount
amortization and the guarantee repurchase obligation amortization, the effective
interest rate increases to 46.67% for the first year reducing the second and
third years based on a reduction of the term credit facility. It also provides
for a twelve-month grace period on principal payments and for the reduced
payment of one-half of the monthly-accrued interest during the grace period.
In addition, the Subordinated Loan Agreement requires Striker Canada to pay FOF
a monthly monitoring fee of $3,000 Canadian during the term of the credit
facility. FOF is also entitled to elect two board members to Striker Canada's
Board of Directors.
On August 18, 1998, the Subordinated Loan Agreement was amended to reflect an
increase of $150,000 Canadian in the maximum principal amount of the three year
term credit facility, making the new maximum principal amount of the facility
$1,650,000 Canadian. In addition, the Amendment provided for (i) waiver and/or
an amended schedule for additional advances to Striker Canada under the credit
facility, (ii) an amended principal repayment schedule, (iii) amended credit
facility advance conditions, (iv) certain additional borrower reporting
conditions, and (v) certain revised financial convenants. As of the date of this
Report, Striker Canada has received additional advances aggregating $325,000
Canadian under the amended Subordinated Loan Agreement. Striker Canada
anticipates that the additional $75,000 Canadian available will be received
prior to December 1, 1998.
In conjunction with the amendment of the Subordinated Loan Agreement, the Share
Pledge Agreement dated March 20, 1998 was also amended on August 18, 1998 to
provide for the pledge to FOF by Holdings Canada, parent corporation of Striker
Canada, of all additional common shares of Striker Canada issued to Holdings
Canada, which shares are to be held by FOF under the same terms and conditions
as other pledged shares of Striker Canada are held by FOF under the Share Pledge
Agreement.
Page 8 of 18
<PAGE> 9
SUBORDINATED DEBT:
Striker Industries, Inc. Notes:
With respect to the Original Issue Discount Note (the"OID Notes") issued by the
Company to finance the failed Transaction, (See Note 3 to Notes To Consolidated
Financial Statements below) as of the date of this Report, the Company has one
$37,551 partial payment remaining to be paid. It is expected that this payment
will be made before December 31, 1998. The OID Notes balance of $37,551 and
$380,276 has been classified as current debt at September 30, 1998 and December
31, 1997, respectively. The OID Notes are secured by a second and subordinate
lien and security interest on the assets of each of the Company's U.S.
subsidiaries, including its Stephens, Arkansas plant, junior in priority to the
lien on the same assets held by its senior lender. This lien and security
interest will be released upon payment of the $37,551 remaining of the debt. The
OID Notes are also guaranteed by each of the Company's U.S. subsidiaries. It is
also secured by a lien and security interest on the assets of the Company's
indirect Canadian subsidiary, either junior in time or subordinated to the
subsidiary's senior lenders in Canada.
Subsidiary Zero Coupon Notes Due 12/31/05:
In July, August and September 1998, subsidiaries of the Company booked $821,000
of additional indebtedness owing to holders of their Zero Coupon Notes due
December 31, 2005. The Zero Coupon Notes carry a minimum interest rate of 2.25%,
with a maximum interest rate of 10.25%, solely dependent upon the discretion of
the Board of Directors. Principal and interest are not due until maturity of the
Notes.
Interest paid for all debt instruments for the three and nine months ended
September 30, 1998 was $36,534 and $110,417, respectively. Interest paid for all
debt instruments for the three and nine months ended September 30, 1997 was
$21,146 and $137,060, respectively.
3. CONTINGENCIES:
On April 25, 1996, the Company signed an agreement to combine in a merger
transaction (the Transaction) with the indirect parent corporation of one of the
largest privately owned manufacturers of asphalt shingles and built up roofing
(GS Roofing). The closing of the transaction had been extended in writing by
mutual agreement of the parties to April 21, 1997, provided that (i) a
Registration Statement required to raise the equity component of the financing
required for closing was filed with the Securities and Exchange Commission
(which document was filed with the Securities and Exchange Commission December
26, 1996) and (ii) the merger became effective on or before April 21, 1997 or
within incremental five business day periods of time thereafter so long as bona
fide marketing efforts were being conducted by the underwriters with a view to
such Registration Statement becoming effective on or before April 30, 1997.
Page 9 of 18
<PAGE> 10
On or about February 4, 1997, via facsimile transmission the President of GS
Roofing sent a notice to the Company of GS Roofing's repudiation of the
Transaction. Subsequent to that date, the Company made protracted attempts to
reinstate the Transaction, without success. Accordingly, management ultimately
retained counsel and filed a suit styled Striker Industries, Inc., David A.
Collins and Matthew D. Pond vs. Newgen Holdings, Inc., Gen Holdings, Inc., GS
Roofing Products Company, Inc., Donald F. Smith and Maredon-I, Ltd. pending at
the date of this Report in the 133rd Judicial District Court of Harris County,
Texas alleging, among other things, a breach of contract by the defendants
resulting from the defendants' repudiation of the binding agreements between the
Company and the defendants providing for the Transaction, which action by the
defendants severely impaired the Company's ability to complete the equity and
debt offerings which were a critical part of the Transaction. Pre-trial
discovery has commenced and depositions have begun. A date for trial has been
set for early January, 1999. The Company is unable at present to express any
opinion regarding the probable outcome of this litigation.
In addition, following extensive negotiations and the inability of the Company's
Canadian subsidiary to reach agreement on an employment termination package with
the former manager of the Thorold Mill, suit was filed on or about April 7, 1997
in Ontario Province, Canada by the former Mill manager against Striker Paper
Canada, Inc. claiming damages of $142,000 Canadian for alleged wrongful
dismissal and $50,000 Canadian for alleged mental distress. Striker Canada filed
a Statement of Defense and Counterclaim on September 30, 1997. The Counterclaim
seeks damages in the amount of $150,000 Canadian from the plaintiff for his
fraudulent or negligent misrepresentation in failing to disclose information
within his knowledge to Striker Canada during the negotiations for Striker
Canada's purchase of the Thorold Mill. No further action has been taken in this
proceeding as of the date of this Report.
4. SUSPENSION OF OPERATIONS AT THE STEPHENS MILL:
As of the date of this Report, operations at the Company's Stephens Mill remain
suspended. It is Management's present intention to resume operations at the
Stephens Mill in due course. Management is reviewing capital improvement
projects that would allow the Stephens Mill to operate efficiently and
profitably upon reactivation. The resumption of operations is subject to the
Company raising the funds necessary to complete the capital improvements and
repairs and maintenance that will enable the Stephens Mill to operate
efficiently and profitably. Management is reviewing alternative methods of
resuming operations at the Stephens Mill including strategic partnerships or
joint ventures. While Management is reviewing all available options to
accomplish its objective, there can be no assurances that it will be successful
and that the Stephens Mill will be able to resume operations
5. RESUMPTION OF OPERATIONS AT THE THOROLD MILL:
On January 16, 1997, the Company experienced a fire at its Thorold Mill. The
fire-damaged repairs were completed on or about May 30, 1997. Prior to resuming
operations, capital projects were identified that Management believes will
increase operating efficiencies in an
Page 10 of 18
<PAGE> 11
effort to achieve profitable operations. During the period from late April, 1998
to early July, 1998, the Company completed repairs and maintenance that were
necessary prior to start-up. In addition, during this same time period,
previously identified capital projects with an immediate benefit were completed.
The Company was able to resume operations on or about July 9, 1998. Striker
Canada received the first tranche funding of $1,250,000 Canadian on April 14,
1998 pursuant to the terms of the Subordinated Loan Agreement in order to
facilitate the cash requirements of the Thorold Mill start-up.
6. OTHER INCOME:
During March 1998, the Company entered into a Settlement and Mutual Release
Agreement with the owners of the Company's former subsidiary (sold April 1,
1996), Striker Services Corporation (SSC) and related parties on all outstanding
claims of the Company against all parties. As the balance owed the Company by
SSC had been fully reserved and expensed to bad debt effective December 31,
1996, the Company recognized a gain on the consideration received of
approximately $110,000 for the quarter ended March 31, 1998.
In response to vendor's collection efforts, the Company has negotiated several
settlements of outstanding balances due vendors at amounts less than face value.
These vendor concessions, a total of approximately $96,000, have been treated as
other income on the statement of operations for the quarter ended September 30,
1998.
7. YEAR 2000:
The Company has reviewed its business software and hardware which has resulted
in plans to either replace or upgrade all essential software and hardware at an
estimated cost of $75,000. The Company does not believe that its vendors and
customers year 2000 compliance issues will have any material effect or impact
the respective relationships.
8. FORWARD-LOOKING STATEMENTS:
The words "anticipate," "believe," "expect," "plan," "intend," "estimate,"
"project," "will," "may" and similar expressions are intended to identify
forward-looking statements. Although the Company believes that the expectations
reflected in such forward-looking statements are reasonable, it can give no
assurance that such expectations will prove to be correct.
9. SUBSEQUENT EVENTS:
The Union representing the wage based employees at the Thorold Mill notified
Management of the Union's desire to begin negotiations in order to ratify a new
collective agreement as the existing collective agreement is set to expire at
December 31, 1998. There have been no formal discussions as of the date of this
Report. Management anticipates that a new collective agreement will be agreed to
and ratified by the union members. Management does not anticipate any material
changes from the collective agreement currently existing.
Page 11 of 18
<PAGE> 12
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,
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue $ 267,658 $ 11,262 $ 267,658 $ 1,506,399
Cost of Sales 902,982 234,960 1,915,309 2,582,767
----------- ----------- ----------- -----------
Gross Margin (635,324) (223,698) (1,647,651) (1,076,368)
Selling, general and
administrative 494,932 783,549 1,343,727 2,557,138
----------- ----------- ----------- -----------
Operating loss (1,130,256) (1,007,247) (2,991,378) (3,633,506)
Interest Expense, net (243,412) (241,689) (586,291) (1,225,949)
Other income -- -- 206,695 --
Minority interest in net loss of
consolidated subsidiary 177,647 -- 407,911 --
----------- ----------- ----------- -----------
Net loss before income taxes (1,196,021) (1,248,936) (2,963,063) (4,859,455)
=========== =========== =========== ===========
</TABLE>
COMPARISON OF QUARTERS ENDED SEPTEMBER 30, 1998 AND 1997
Sales for the quarter ended September 30, 1998 totaled $267,658 as compared to
sales of $11,262 for the quarter ended September 30, 1997. For the quarter ended
September 30, 1998, operations were resumed at the Thorold Mill only and sales
began in September. The Stephens Mill remained idle for the entire quarter. For
the quarter ended September 30, 1997, both Mills were idled for the entire
quarter with the Stephens Mill generating minor sales from existing inventory.
Gross margin decreased to negative $635,324 for the quarter ended September 30,
1998 from negative gross margin of $223,698 for the quarter ended September 30,
1997. The decrease in gross margin is primarily due to unabsorbed production
costs incurred during the resumption of operations coupled with sales not
beginning until the end of the quarter.
Page 12 of 18
<PAGE> 13
Selling, general and administrative expenses decreased by $288,617 to $494,932
for the quarter ended September 30, 1998, from $783,549 for the quarter ended
September 30, 1997. This decrease is primarily due to (i) a decrease in the
professional fees in 1998 and (ii) a reduction in office expenses and reduced
salary and related expenses due to the reduced operations in 1998.
Interest expense, net, increase slightly to $243,412 for the quarter ended
September 30, 1998, from $241,689 for the quarter ended September 30, 1997. This
increase is primarily due to the interest, deferred financing cost amortization
and discount amortization related to the new Canadian Subordinated Loan
Agreement coupled with an increase in the principal amount of the Zero Coupon
Notes.
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
Sales for the nine months ended September 30, 1998 totaled $267,658 as compared
to sales of $1,506,399 for the nine months ended September 30, 1997. For the
nine months ended September 30, 1998, operations were resumed at the Thorold
Mill only during the quarter and sales began in September. The Stephens Mill
remained idle for the entire nine months. For the nine months ended September
30, 1997, the Thorold Mill was idled for the entire period and the Stephens Mill
was idled for four months of the period.
Gross margin decreased to a negative $1,647,651 for the nine months ended
September 30, 1998 from a negative gross margin of $1,076,368 for the nine
months ended September 30, 1997. The decrease in gross margin is primarily due
to no sales until September in 1998 and unabsorbed production costs related to
the resumption of operations at the Thorold Mill and as a result of both mills
being idled for most of 1998.
Selling, general and administrative expenses decreased by $1,213,411 to
$1,343,727 for the nine months ended September 30, 1998, from $2,557,138 for the
nine months ended September 30, 1997. This decrease is primarily due to (i) a
decrease in the professional fees in 1998 and (ii) a reduction in office
expenses and reduced salary and related expenses due to the reduced operations
in 1998.
Interest expense, net, decreased to $586,291 for the nine months ended September
30, 1998, from $1,225,949 for the nine months ended September 30, 1997. This
decrease is due to the reduction of interest rates related to the Zero Coupon
Notes, a decrease in credit facility activity and a decrease in the amortization
of deferred financing costs partially offset by interest related to the new
Subordinated Loan Agreement in Canada.
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.
Page 13 of 18
<PAGE> 14
CASH FLOWS - COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1998 AND SEPTEMBER
30, 1997
Cash flows used by operating activities increased to $2,917,717 for the nine
months ended September 30, 1998 from $2,715,430 for the nine months ended
September 30, 1997. This increase is primarily due to the increases in accounts
receivable, inventory and prepaid assets. These increases primarily relate to
the resumption of operations at the Thorold Mill.
Cash flows used by investing activities increased to $376,302 for the nine
months ended September 30, 1998 from cash flows used in investing activities of
$56,826 for the nine months ended September 30, 1997. This increase is primarily
due to the purchases of machinery and equipment related to the start-up of the
Thorold Mill.
Cash flows provided by financing activities increased to $3,226,964 for the nine
months ended September 30, 1998 from $2,490,460 for the nine months ended
September 30, 1997. This increase is primarily due to the funding of the new
Canadian Subordinated Loan Agreement.
LIQUIDITY AND CAPITAL RESOURCES
For the quarter ended September 30, 1998, the Company had an operating loss and
continues to experience liquidity concerns.
For the nine months ended September 30, 1998, the Company raised over $3,500,000
of subordinated debt to fund working capital needs and retire a substantial
portion of the OID Notes. In addition, approximately $1,200,000 of the
subordinated debt was used in association with the term credit facility
described below to assist in attaining the resumption of operations at the
Thorold Mill.
On March 20, 1998, Striker Canada executed (i) a Subordinated Loan Agreement
with First Ontario Labour Sponsored Investment Fund Ltd. ("FOF") providing a
three year term credit facility to Striker Canada in the maximum principal
amount of $1,500,000 Canadian and (ii) a Commercial Demand Line of Credit
Agreement with Credit Union Central of Ontario Limited and So-Use Credit Union
Limited providing a revolving line of credit to Striker Canada in the aggregate
amount of $800,000 Canadian based on eligible accounts receivable. On August 18,
1998, the Subordinated Loan Agreement was amended to reflect an increase of
$150,000 Canadian in the credit facility, making the new maximum principal
amount of the facility $1,650,000 Canadian. See Note 2 to Notes To Consolidated
Financial Statements above for a more complete description of the August 18,
1998 Amendment to the Subordinated Loan Agreement.
Although the Company has experienced a decrease in current liabilities for the
nine months ended September 30, 1998 from the year ended December 31, 1997, the
Company has a working capital deficit of $3,128,412 at September 30, 1998. The
decrease in current liabilities
Page 14 of 18
<PAGE> 15
is primarily due to a substantial reduction in the OID notes due to repayment
and a reduction in accounts payable.
On January 16, 1997, the Company experienced a fire at its Thorold Mill. The
repairs and rebuilding of the plant and its equipment were completed on or about
May 30, 1997. The Company completed the additional repairs and capital projects
necessary to commence resumption of operations on or about July 9, 1998.
As of the date of this Report, only the Company's Stephens Mill is idled.
Management has identified several substantial capital projects that are
necessary at the Stephens Mill in order to commence operation and attain
efficiencies needed for profitable operation. However, for the Company to
benefit fully from improvements made or to be made to its plants, they must
operate at capacity. Management is committed to seek and obtain the necessary
financing to resume operations, but not to resume operations in any instance
until the financing for each plant is in place and the capital projects have
been completed.
Several events from the prior year continue to affect the Company. During 1996
and early 1997, the Company devoted substantial amounts of cash to acquisition
activities for the Transaction. The Company raised over $3,000,000 in
subordinated debt to pay for the costs of the Transaction. Due to the
substantial amounts of cash used for acquisition activities and the intention to
pay all of the payables at the Transaction closing, accounts payable were aged
beyond their terms. Due to the significant resources devoted to the Transaction
and the subsequent repudiation of the Transaction, the Company's ability to
repay debt, pay past-due accounts payable, finance needed capital projects and
continue operations has been gravely impaired.
The factors listed above have led to the ongoing working capital deficit. The
Company must closely monitor operations and continue to identify and implement
capital projects that will improve efficiencies and lower costs. However, there
can be no assurance that such cost reductions will allow the Company to achieve
profitability.
Management does not believe its existing funds and its existing financial
arrangements will adequately fund the cash needs of the Company's operations
during the next year and for the start-up of the Stephens Mill. To meet working
capital requirements and expand its business, the Company will need to borrow
additional amounts and/or restructure its existing debt. The Company currently
has three existing credit lines, two consisting of a revolving line of credit
and a term loan collateralized by receivables, inventories, and fixed assets and
one consisting of a term loan collateralized by fixed assets. The Company is
pursuing additional financing arrangements that might include private or public
sales of equity or debt securities. However, there can be no assurance that any
of these strategies will be achieved or that the Company will be able to exist
as a going concern.
Page 15 of 18
<PAGE> 16
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
During the quarter ended September 30, 1998, pre-trial discovery, including the
taking of depositions of the parties, continued in Cause No. 97-07032, styled
Striker Industries, Inc., David A. Collins and Matthew D. Pond v. Newgen
Holding, Inc., Gen Holding, Inc., GS Roofing Products Company, Inc., Donald F.
Smith, and Maredon-I, Ltd., pending in the 133rd Judicial District Court of
Harris County, Texas. See Note 3 to Notes to Consolidated Financial Statements
for a description of the factual basis underlying the alleged wrongful
repudiation of the Transaction more fully described therein and made the basis
of this pending legal proceeding.
Item 2. Changes in Securities.
None.
Item 3. Defaults Upon Senior Securities.
None reportable under this Item 3 of the Company's Quarterly Report for
the quarter ended September 30, 1998.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Page 16 of 18
<PAGE> 17
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
4.1 Amendment to Subordinated Loan Agreement dated August 18, 1998
between the Company's indirect Canadian subsidiary, Striker
Paper Canada, Inc. ("Striker Canada"), and First Ontario
Labour Sponsored Investment Fund Ltd. ("FOF"), amending the
Subordinated Loan Agreement dated March 20, 1998 between
Striker Canada and FOF (filed as Exhibit 4.2 to the Company's
Form 10-Q for the quarter ended June 30, 1998 and incorporated
herein by reference).
4.2 Amendment to Share Pledge Agreement dated August 18, 1998
between the Company's indirect Canadian subsidiary, Striker
Paper Canada, Inc. ("Striker Canada"), and First Ontario
Labour Sponsored Investment Fund Ltd. ("FOF"), amending the
Share Pledge and Proxy Arrangement Agreement dated March 20,
1998 between Striker Canada and FOF (filed as Exhibit 4.7 to
the Company's Form 10-Q for the quarter ended June 30, 1998
and incorporated herein by reference).
27 Financial Data Schedule
(b) Reports on Form 8-K:
No reports on Form 8-K were filed by the Company during the quarter ended
September 30, 1998:
Page 17 of 18
<PAGE> 18
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 19, 1998 BY: David A. Collins
------------------------------ -------------------------------
David A. Collins
Chief Executive Officer
DATE: November 19, 1998 BY: Paul B. Edmiston
------------------------------ -------------------------------
Paul B. Edmiston
Chief Financial Officer
Page 18 of 18
<PAGE> 19
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- -------- -----------
<S> <C>
4.1 Amendment to Subordinated Loan Agreement dated August 18, 1998
between the Company's indirect Canadian subsidiary, Striker
Paper Canada, Inc. ("Striker Canada"), and First Ontario
Labour Sponsored Investment Fund Ltd. ("FOF"), amending the
Subordinated Loan Agreement dated March 20, 1998 between
Striker Canada and FOF (filed as Exhibit 4.2 to the Company's
Form 10-Q for the quarter ended June 30, 1998 and incorporated
herein by reference).
4.2 Amendment to Share Pledge Agreement dated August 18, 1998
between the Company's indirect Canadian subsidiary, Striker
Paper Canada, Inc. ("Striker Canada"), and First Ontario
Labour Sponsored Investment Fund Ltd. ("FOF"), amending the
Share Pledge and Proxy Arrangement Agreement dated March 20,
1998 between Striker Canada and FOF (filed as Exhibit 4.7 to
the Company's Form 10-Q for the quarter ended June 30, 1998
and incorporated herein by reference).
27 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 4.1
AMENDMENT TO SHARE PLEDGE AGREEMENT
This amending agreement dated as of the 18th day of August, 1998
BETWEEN:
STRIKER HOLDINGS (CANADA) INC., a corporation incorporated pursuant to
the laws of Ontario (hereinafter referred to as "Holdings")
- and -
FIRST ONTARIO LABOUR SPONSORED INVESTMENT FUND LTD., a corporation
incorporated pursuant to the laws of Ontario (hereinafter referred to
as "First Ontario")
CONTEXT OF THIS AGREEMENT
A. Holdings and First Ontario entered into a certain share pledge and proxy
arrangement agreement dated as of the 20th day of March, 1998 in respect of the
shares in Striker Paper Canada Inc.
held by Holdings (the "Share Pledge Agreement").
B. Holdings, as of the 20th day of March, 1998, held 11,270,737 common shares in
the capital of Striker Paper Canada Inc.
C. Holdings, as of the date hereof, has agreed to subscribe for additional
common shares of Striker Paper Canada Inc. and to pledge to First Ontario all
the additional common shares to be issued to Holdings pursuant to the equity
financing by Holdings under the same terms and conditional as the common shares
of Striker Paper Canada Inc. held on March 20, 1998.
NOW THEREFORE THIS AGREEMENT WITNESSES THAT, in consideration of the premises,
covenants and agreements herein contained, the parties have mutually agreed upon
certain amendments and revisions to certain terms and conditions contained in
the Share Pledge Agreement and wish to record their said agreements herein.
PART 1.0 - INTERPRETATION
1.1 DEFINITIONS. Except as specifically provided herein to the contrary, all
terms set out herein in initial upper case letters shall have the meanings
ascribed to such terms in the Share Pledge Agreement.
1.2 ALL OTHER TERMS REMAIN UNAMENDED. Except as specifically amended herein, all
other terms, conditions and provisions of the Share Pledge Agreement remain in
full force and effect and unamended.
1.3 INCORPORATION BY REFERENCE. To the extent possible, the provisions of this
agreement shall be interpreted by incorporation into the Share Pledge Agreement
as if recited therein, mutatis mutandis, and any reference to the Share Pledge
Agreement herein shall be a reference to the Share Pledge Agreement as revised
and amended by the terms hereof.
<PAGE> 2
- 2 -
PART 2.0 - SPECIFIC AMENDMENTS
2.1 DEFINITION OF PLEDGES SHARES. The definition of Pledged Shares in
section 1.1 of the Share Pledge Agreement is deleted in its entirety and
substituted with the following:
"Pledges Shares" means all of the shares in the capital of the
Corporation held by Holdings;
2.2 DELIVERY OF POSSESSION. Section 2.3 of the Share Pledge Agreement is
deleted in its entirety and substituted with the following:
DELIVERY OF POSSESSION. Contemporaneously with the execution and
delivery of this Agreement, and promptly upon the issue or transfer of
any additional Pledged Shares to Holdings, Holdings shall cause share
certificates evidencing the Pledged Shares to be delivered to First
Ontario duly endorsed for transfer into the name of First Ontario and
shall take all steps necessary or desirable to cause the interest of
First Ontario as registered owner of the shares to be duly recorded in
the records of the Corporation and to cause the Corporation to issue
new share certificates representing the Pledged Shares in the name of
First Ontario.
PART 3.0 - ARTICLE THREE - GENERAL MATTERS
3.1 GOVERNING LAW. This amending agreement shall be construed in accordance
with and governed by the laws of the Province of Ontario.
3.2 SUCCESSORS AND ASSIGNS. This amending agreement shall enure to the
benefit of and be binding upon the respective successors and assigns of the
parties hereto.
IN WITNESS WHEREOF the parties have executed this agreement as of the day and
year first above written.
STRIKER HOLDINGS (CANADA) INC.
Per:
---------------------------------
Matthew Pond
FIRST ONTARIO LABOUR SPONSORED
INVESTMENT FUND LTD.
Per:
---------------------------------
Name: Ken Delaney
Title: President
<PAGE> 1
EXHIBIT 4.2
AMENDMENT TO
SUBORDINATED LOAN AGREEMENT
This amending agreement dated as of the 18th day of August, 1998
BETWEEN:
STRIKER PAPER CANADA, INC., a corporation incorporated
pursuant to the laws of the Province of Ontario,
(hereinafter referred to as the "Borrower")
- and -
FIRST ONTARIO LABOUR SPONSORED INVESTMENT FUND LTD., a
corporation incorporated pursuant to the laws of the
Province of Ontario,
(hereinafter referred to as the "Lender")
CONTEXT OF THIS AGREEMENT
A. The Borrower and the Lender entered into a certain subordinated loan
agreement dated as of the 20th day of March, 1998 (the "Subordinated Loan
Agreement").
B. The Borrower and the Lender have agreed to amend the Subordinated Loan
Agreement to recapitalize and increase the liquidity of the Borrower, as more
particularly described in paragraphs C to G below, upon certain conditions being
met.
C. The Lender has agreed to waive the second advance conditions described in
paragraphs (b) and (c) of section 5.2 of the Subordinated Loan Agreement and
advance $200,000 of the second advance upon certain conditions.
D. The Lender has agreed to waive the second advance conditions described in
paragraphs (b) and (c) of section 5.2 of the Subordinated Loan Agreement and
advance the remaining $50,000 of the second advance on August 24, 1998 upon
certain conditions.
E. The Lender has agreed to increase the credit facility to $1.65 million by
providing a third advance of $150,000 on which the Borrower may draw subject to
certain conditions.
F. The parties have agreed to amend the financial covenants described in
paragraphs (a), (b) and (c) of section 7.2 of the Subordinated Loan Agreement.
G. The parties have agreed to amend the scheduled principal repayment
described in section 3.1.
NOW THEREFORE THIS AGREEMENT WITNESSES THAT, in consideration of the premises,
covenants and agreements herein contained, the parties have mutually agreed upon
certain amendments and revisions to certain terms and conditions contained in
the Subordinated Loan Agreement and wish to record their said agreements herein.
<PAGE> 2
-2-
PART 1.0 - INTERPRETATION
1.1 DEFINITIONS. Except as specifically provided herein to the contrary, all
terms set out herein in initial upper case letters shall have the meanings
ascribed to such terms in the Subordinated Loan Agreement.
1.2 ALL OTHER TERMS REMAIN UNAMENDED. Except as specifically amended herein,
all other terms, conditions and provisions of the Subordinated Loan Agreement
remain in full force and effect and unamended.
1.3 INCORPORATION BY REFERENCE. To the extent possible, the provisions of this
agreement shall be interpreted by incorporation into the Subordinated Loan
Agreement as if recited therein, mutatis mutandis, and any reference to the
Subordinated Loan Agreement herein shall be a reference to the Subordinated Loan
Agreement as revised and amended by the terms hereof.
PART 2.0 - SPECIFIC AMENDMENTS
2.1 CREDIT FACILITY. Section 2.1 of the Subordinated Loan Agreement is hereby
deleted in its entirety and substituted with the following:
CREDIT FACILITY. Subject to the provisions of this Agreement, the Lender
agrees to make available to the Borrower a non-revolving term facility in
the maximum principal amount of $1,650,000 available by way of advances as
follows:
(a) an advance in the amount of $1,250,000 on the Closing Date
(the "First Advance");
(b) an advance in the amount of $200,000 upon satisfaction of
the conditions set out in section 5.2 of the Subordinated
Loan Agreement (the "Second Advance");
(c) an advance in the amount of $50,000 on August 24, 1998 upon
satisfaction of the conditions set out in section 5.2 of
the Subordinated Loan Agreement (the "Third Advance");
(d) an advance in the amount of $75,000 on August 24, 1998 upon
satisfaction of the conditions set out in section 5.2 of
the Subordinated Loan Agreement (the "Fourth Advance"); and
(e) an advance in the amount of $75,000 on September 14, 1998
upon satisfaction of the conditions set out in section 5.2
of the Subordinated Loan Agreement (the "Fifth Advance").
2.2 SCHEDULED PRINCIPAL REPAYMENT. Section 3.1 of the Subordinated Loan
Agreement is hereby deleted in its entirety and substituted with the following:
SCHEDULED PRINCIPAL REPAYMENT. Unless the Outstanding Borrowing, or any
part thereof, shall have been required to be paid on an earlier date
pursuant to the terms hereof, the Borrower shall repay the principal
portion of the Outstanding Borrowing in twenty-four (24) consecutive equal
monthly installments commencing on September 30, 1999.
<PAGE> 3
-3-
2.3 SUBSEQUENT ADVANCE CONDITIONS. Section 5.2 of the Subordinated Loan
Agreement is hereby deleted in its entirety and substituted with the following:
SUBSEQUENT ADVANCE CONDITIONS. The obligation of the Lender to make any of
the Second Advance, the Third Advance, the Fourth Advance and the Fifth
Advance is subject to the terms and conditions of this Agreement and is
conditional upon satisfactory evidence being given to the Lender and its
counsel as to compliance with the following conditions on the date of the
advance of monies pursuant to the Second Advance, the Third Advance, the
Fourth Advance or the Fifth Advance, as applicable (with the exception of
any condition which is only required to be satisfied after the date of the
particular advance of monies):
(a) in addition to the equity investment described in paragraph
(m) of section 5.1 of the Subordinated Loan Agreement, the
Lender shall have received evidence to its satisfaction of
the completion by Striker Holdings (Canada) Inc. of
additional common share equity investments in the Borrower
in the amounts of $200,000, $250,000, $442,000 and $642,000
as of the date of the advance of monies pursuant to the
Second Advance, the Third Advance, the Fourth Advance or
the Fifth Advance, respectively; for greater certainty, the
amounts of the additional common share equity investments
are cumulative;
(b) the Borrower shall have achieved each of the financial
covenants set forth in section 7.2 hereof throughout the
said three month period ended on the date of the particular
advance of monies;
(c) the Lender shall have received a binding commitment from
Striker Holdings (Canada) Inc. and from Striker Industries,
Inc., to invest an aggregate amount of $642,000 on or prior
to September 14, 1998 as additional equity in the Borrower
in addition to the equity investment described in paragraph
(m) of section 5.1 of this Agreement, which commitment
remains in effect;
(d) Striker Holdings (Canada) Inc. shall have been be issued no
more than 1 common share in the Borrower upon each of the
dates of a subscription payment or payments described in
paragraph (a) above;
(e) the Lender shall have been be issued, for a nominal amount,
1 common share in the Borrower upon each of the dates of a
subscription payment or payments described in paragraph (a)
above;
(f) the Lender shall hold that number of the common shares of
the capital stock of the Borrower equal to at least 25% of
all the fully participating equity of the Borrower
(calculated on a fully diluted basis);
(g) the Borrower shall have delivered to the Lender a revised
first year business plan satisfactory to the Lender,
including monthly cash flow statements, balance sheets and
income statements;
(h) the Board of Directors of the Borrower shall be fully
constituted in accordance with the Shareholders Agreement
and the first Board Meeting shall have taken place;
<PAGE> 4
-4-
(i) on or prior to August 24, 1998, the Lender shall have
received from the Borrower evidence to its satisfaction
that the Senior Term Lender and the Senior Operating Lender
have adjusted financial ratio tests in their Senior Term
Loan Agreement and Senior Operating Loan Agreement
respectively to reflect the revised business plan described
in paragraph (g) above;
(j) the Lender shall have received such certificates or other
instruments of the Borrower or of the officers of the
Borrower as the Lender's counsel may reasonably think
necessary in order to establish that the terms, covenants
and conditions contained in this Agreement have been
performed or complied with by the Borrower at or prior to
the time of the particular advance of monies;
(k) the Lender shall have received, duly executed and in form
and substance satisfactory to it:
(i) a copy of the resolutions of the board of directors
of the Borrower authorizing the execution, delivery
and performance of this Agreement and any other
instruments contemplated hereunder, certified by an
appropriate officer of the Borrower; and
(ii) such additional supporting documents as the Lender
or its counsel may reasonably request;
(l) no Default or Event of Default has occurred and is
continuing and the Borrower has not received any notice
(written or otherwise), and is not otherwise aware, of any
event or circumstances, whether existing or pending, which
would cause any Default or Event of Default to occur with
the lapse of time; and
(m) upon satisfactory evidence being given to the Lender and
its counsel as to compliance with each of the other
conditions set out in this Agreement, and all amendments
hereto, including compliance with each of the conditions
set out in section 5.1 hereof on the date of the particular
advance of monies.
2.4 BORROWER REPORTING REQUIREMENTS. The following paragraph is added to
section 7.1 and inserted after paragraph (f):
(f.1) The Borrower shall deliver to First Ontario Management
Ltd., or such other party as the Lender may otherwise from time to
time direct:
(i) a weekly cash report consisting of changes in
financial position and a weekly detailed pro forma
sources and uses of cash for each of the following
six weeks (all prepared in accordance with GAAP)
within 7 days after the end of each week for the
period from August 3, 1998 until the later of
September 30, 1998 and the date on which the
Borrower has produced 400 tons of commercial grade
product per week for three consecutive weeks;
<PAGE> 5
-5-
(ii) a certificate signed by either the President or the
Chief Financial Officer of the Borrower stating
that:
A. the amounts of vacation pay, wages, source
deductions and taxes required to be remitted by
the Borrower (including payroll-related
deductions and contributions for income tax,
employer health tax, CPP, workers compensation
and employment insurance) and those said amounts
not yet due have been or will be so remitted in
a timely fashion and are in good standing since
the date of the last such certificate;
B. the property and Business operations and
activities of the Borrower are to the best
knowledge of such officers in compliance in all
material respects with all Environmental Laws
and Environmental Orders or describing in
reasonable detail any such non-compliance;
C. the property and Business operations and
activities of the Borrower are to the best
knowledge of such officers in compliance in all
material respects with the Occupational Health
and Safety Act (Ontario), the Pay Equity Act
(Ontario), the Labour Relations Act (Ontario)
and the Employment Standards Act (Ontario);
D. no action against the Borrower has been taken by
any trade creditors (except as disclosed in
writing to the Lender); and
E. The Directors and Officers Insurance required
under the terms of the Shareholders Agreement is
in place and the premium payments for such
insurance are current,
such certificate to be delivered either: (1) within
7 days after the end of each week for the period
from August 3, 1998 until the later of September 30,
1998 and the date on which the Borrower has produced
400 tons of commercial grade product per week for
three consecutive weeks; and (2) immediately prior
to each Board Meeting (but not less than quarterly)
for the period thereafter.
2.5 FINANCIAL COVENANTS. Each of paragraphs (a), (b) and (c) of section 7.2 of
the Subordinated Loan Agreement are hereby deleted in its entirety and
substituted with the following:
(a) WORKING CAPITAL RATIO. The Borrower shall at all times
after Closing maintain a Working Capital Ratio of not less
than 1 to 1 provided that for the period commencing on
Closing to and including December 31, 1998, the Working
Capital Ratio may be as low as, but no lower than, 0.40 to
1 and for the period from January 1, 1999 to June 30, 1999,
the Working Capital Ratio may be as low as, but no lower
than, 0.75 to 1. For purposes of this paragraph 2.5(a),
Working Capital shall mean, at any particular time, the
ratio of Current Assets to Current Liabilities
<PAGE> 6
-6-
(excluding the amortized amount of the subordinated debt
held by the Lender).
(b) WORKING CAPITAL. The Borrower shall at all times after May
31, 1999 maintain Working Capital of not less than
$200,000. For purposes of this paragraph 2.5(b), Working
Capital shall mean, at any particular time, the amount by
which the aggregate of Current Assets exceed the amount of
Current Liabilities (excluding the amortized amount of the
subordinated debt held by the Lender).
(c) EFFECTIVE NET WORTH. The Borrower shall at all times
maintain an Effective Net Worth of not less than
$9,500,000.
2.6 GENERAL AMENDMENT TO REFERENCE TO FIRST ADVANCE AND/OR SECOND ADVANCE. The
reference in section 2.2 and in the definition of Borrowing in Schedule A of the
Subordinated Loan Agreement to "the First Advance and the Second Advance" is
amended to "the First Advance, the Second Advance, the Third Advance, the Fourth
Advance and the Fifth Advance" and the reference in section 5.3 of the
Subordinated Loan Agreement to "either of the First Advance or the Second
Advance" is amended to "any of the First Advance, the Second Advance, the Third
Advance, the Fourth Advance or the Fifth Advance".
PART 3.0 - ARTICLE THREE - GENERAL MATTERS
3.1 APPROVAL. This amending agreement is conditional upon the approval of the
Lender's Investment Committee and the Lender's Board of Directors of the
transactions contemplated hereby.
3.2 REIMBURSEMENT OF EXPENSES. The Borrower agrees to pay promptly on demand
all legal fees and expenses incurred by the Lender in connection with the
preparation, negotiation, documentation and operation of this amending
agreement.
3.3 GOVERNING LAW. This amending agreement shall be construed in accordance
with and governed by the laws of the Province of Ontario.
3.4 SUCCESSORS AND ASSIGNS. This amending agreement shall enure to the benefit
of and be binding upon the respective successors and assigns of the parties
hereto.
IN WITNESS WHEREOF the parties have executed this agreement as of the day and
year first above written.
STRIKER PAPER CANADA, INC.
c/s
By:
------------------------------------
Name: Matthew Pond
Title: CFO
FIRST ONTARIO LABOUR SPONSORED
INVESTMENT FUND LTD.
By:
------------------------------------
Name: Ken Delaney
Title: President
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 84,886
<SECURITIES> 0
<RECEIVABLES> 264,895
<ALLOWANCES> 0
<INVENTORY> 162,507
<CURRENT-ASSETS> 806,821
<PP&E> 18,148,436
<DEPRECIATION> 3,884,032
<TOTAL-ASSETS> 14,762,242
<CURRENT-LIABILITIES> 3,182,931
<BONDS> 0
0
0
<COMMON> 2,187,862
<OTHER-SE> (8,430,822)
<TOTAL-LIABILITY-AND-EQUITY> 14,762,242
<SALES> 267,658
<TOTAL-REVENUES> 267,658
<CGS> 1,915,309
<TOTAL-COSTS> 3,230,721
<OTHER-EXPENSES> (28,315)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 586,291
<INCOME-PRETAX> (2,963,063)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,963,063)
<EPS-PRIMARY> (0.68)
<EPS-DILUTED> (0.68)
</TABLE>
