KRUG INTERNATIONAL CORP, 10-K405, 1996-07-01

KRUG INTERNATIONAL CORP
10-K405, 1996-07-01
COMMERCIAL PHYSICAL & BIOLOGICAL RESEARCH

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<PAGE> 1

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]

FOR THE FISCAL YEAR ENDED MARCH 31, 1996

COMMISSION FILE NO. 0-2901

KRUG INTERNATIONAL CORP.
------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

OHIO 31-0621189
-------------------- -------------------------------
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)

6 N. Main Street Suite 500, Dayton, Ohio 45402-1900
---------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)

Registrant's telephone number, including area code: (513) 224-9066

Securities Registered Pursuant to Section 12(b) of the Act:
NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON SHARES WITHOUT PAR VALUE

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]

At the close of business on June 19, 1996:

<TABLE>
<S> <C>
Number of Common Shares without par
value outstanding .................. 5,126,206
Aggregate market value of Common
Shares without par value, held by
non-affiliates of the Corporation... $13,888,591
</TABLE>

INDEX TO EXHIBITS at page 33 of this Report.
<PAGE> 2

DOCUMENTS INCORPORATED BY REFERENCE

1. KRUG International Corp. Proxy Statement for its Annual Meeting of
Shareholders on July 16, 1996, definitive copies of which were filed with the
Commission within 120 days after the end of the Corporation's last fiscal
year. Only such portions of the Proxy Statement as are specifically
incorporated by reference under Part III of this Report shall be deemed filed
as part of this Report.
<PAGE> 3

PART I

ITEM 1. BUSINESS

KRUG International Corp., an Ohio corporation organized in June 1959, and
its subsidiaries (sometimes collectively called the "Corporation") operate
primarily in three business segments: Life Sciences and Engineering, Leisure
Marine and Housewares. Information concerning the revenues, operating profit and
identifiable assets of the three business segments for the fiscal years ended
March 31, 1996, 1995 and 1994 is set forth at Note K of the Notes to
Consolidated Financial Statements of the Corporation, which is incorporated
herein by this reference.

LIFE SCIENCES AND ENGINEERING

The Life Sciences and Engineering (formerly Aerospace) business is
comprised of the Corporation's KRUG Life Sciences Inc. subsidiary with
operations in Houston and San Antonio, Texas and the Technology/Scientific
Services, Inc. subsidiary in Dayton, Ohio. KRUG Life Sciences Inc. was organized
by the Corporation as a subsidiary in May 1990 to carry on the business formerly
done by its Technology Life Sciences Division and Technology Services Division.

KRUG LIFE SCIENCES INC. -- HOUSTON OPERATIONS

KRUG Life Sciences has been conducting biomedical research, technology
development, and flight crew operations support at the National Aeronautics and
Space Administration Lyndon B. Johnson Space Center continuously since 1967.
From the original work of developing specialized cardiovascular monitoring
instrumentation, the research and development activities have expanded to
encompass those sciences necessary to assure that man has the capability and
capacity to explore and exploit the frontiers of space. Such activities include
the conceptualization and implementation of ground based and in-flight medical
experiments to develop the health care and physiological deconditioning
countermeasures required to offset the microgravity of space and ensure the
well-being and productivity of the flight crews.

In March 1991, KRUG Life Sciences began work on a new $136 million five
year contract with NASA, replacing the one which previously started in January
1987. This contract has expanded support services provided to the Medical
Sciences Division at the Johnson Space Center. In April 1993, NASA modified the
contract and increased its value to $165 million. This modification covered the
cost of additional test equipment, supplies and services for the remaining three
years of the contract. In February 1996, this contract was extended for a
nine-month period to November 30, 1996. See further discussion of this contract
in Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations.

Performance under this contract includes the areas of neurosensory
physiology, cardiovascular physiology, musculoskeletal physiology, regulatory
systems physiology, electrophysiology, cell biology, pharmacodynamics, remote
health care, bioengineering, applications of knowledge based systems and
clinical laboratory operations. KRUG's work for the Johnson Space Center is
spread over a wide variety of programs, none of which comprise more than 20% of
the contract. Some of the major areas are Shuttle support, joint Russian MIR
space ventures, Shuttle extended duration mission research, Manned Flight
research and development, Space Station research and biotechnology research.
Prior to the current contract, KRUG Life Sciences began work in January 1987 on
a $35 million, multi-year contract with NASA at the Johnson Space Center. The
value of that contract more than doubled during the contract period to a final
value of $76.5 million when it was completed in February 1991.

KRUG LIFE SCIENCES INC. -- SAN ANTONIO OPERATIONS

KRUG Life Sciences also provides professional research support services to
the United States Air Force and commercial customers in the San Antonio area.
Such services include research into human tolerance to gravitational forces
generated by rapid onset and increasing acceleration. As advances in aircraft
development lead to increases in speed and mobility, this research becomes
increasingly more important. Engineering programs include the design and
production of variable profile breathing simulators, therapeutic oxygen

1
<PAGE> 4

manifold systems and other similar devices. KRUG Life Sciences also does repair,
maintenance and calibration of sophisticated ground and airborne electronics
equipment.

TECHNOLOGY/SCIENTIFIC SERVICES, INC.

Technology/Scientific Services provides a wide variety of engineering and
technical support services in various on-site governmental research and
experimental programs. Current activities are principally contract services in
support of laboratories at Wright-Patterson Air Force Base and involve computer
networking using fiber optics, satellite communications, aircraft structural and
environmental testing, microelectronics, fabrication techniques for composite
materials and aircraft vulnerability investigations.

GENERAL

In its Life Sciences and Engineering Segment, the Corporation competes with
practically all the large and small aerospace companies, including other local
companies competing for local services. The areas of competition vary from
contract to contract but most contracts are price sensitive. Some business is
obtained on a sole source basis, such as follow-on business, where a unique
capability or product has been developed and the limited market precludes the
development of a second source by the government.

The majority of the Corporation's Life Sciences and Engineering business is
with agencies of the U.S. Government and prime government contractors (revenues
from agencies of the U.S. Government amounted to $44.1 million during fiscal
1996) and, as a result, is subject to possible termination.

The order backlog of the Life Sciences and Engineering Segment was $60.4
million at March 31, 1996 and $89.1 million at March 31, 1995. Approximately 49%
of the backlog at March 31, 1996 is expected to result in revenue during fiscal
1997.

LEISURE MARINE

Sowester Limited ("Sowester"), formerly South Western Marine Factors
Limited, a subsidiary of KRUG International (U.K.) Ltd., is engaged in the
Leisure Marine business. Sowester, located in the port of Poole, Dorset,
England, distributes sail and power boat equipment for the leisure marine
market. Sowester handles six principal product lines: marine chandlery, a wide
range of boat fittings, equipment and clothing; Mercury outboard engines;
Mercury Mercruiser sterndrive and inboard engines; Sea Doo personal watercraft;
Morse controls, a comprehensive line of steering systems and controls for power
and sail boats; and diesel engines which provide auxiliary power for sailing
yachts. Sowester is the exclusive distributor of Mercury engines and Morse
controls in the United Kingdom and the Republic of Ireland.

Sowester sells its products in two principal markets -- boat manufacturers
and marine retailers. It has a network of over 100 sales and service dealers.
The marine products business tends to be seasonal, with the highest sales
occurring in spring and summer.

Order backlog is not a factor in the Leisure Marine Segment since virtually
all orders are shipped within days of receipt.

HOUSEWARES

Beldray Limited ("Beldray"), a subsidiary of KRUG International (U.K.)
Ltd., operates the Corporation's Housewares business. Beldray, located in
Bilston, West Midlands, England, manufactures consumer durable products sold
under the "Beldray" name. Its products include ironing tables and accessories,
domestic aluminum ladders and work platforms, garden equipment, shower screens,
indoor and outdoor racks for drying clothes and child safety gates. These
products are marketed through major retailers, wholesalers and mail order
companies to the housewares, do-it-yourself and garden markets. Beldray is a
long established name with significant awareness among the buying public
throughout the United Kingdom.

The Housewares Segment's firm order backlog is typically less than one
month's sales.

2
<PAGE> 5

GENERAL INFORMATION

The Corporation owns a number of patents and patent applications but it is
not possible to estimate their value. None of the Corporation's present business
is materially dependent on any patents or patent applications.

In the fiscal year ended March 31, 1996, revenues from agencies of the U.S.
Government were $44.1 million or 46.0% of consolidated revenues.

As of May 31, 1996, the Corporation employed 442 persons in the United
States and 454 in the United Kingdom. The Corporation's Life Sciences and
Engineering Segment employs numerous highly trained persons holding bachelors
and in some cases advanced degrees, in one or more of the following
disciplines -- engineering, medicine, mathematics, physics and biology. None of
the Corporation's United States employees is represented by unions.

Compliance with federal, state, and local laws regulating the discharge of
materials into the environment or otherwise relating to the protection of the
environment has had no material effect upon the capital expenditures, earnings,
and competitive position of the Corporation. To the best of management's
knowledge, the Corporation is in compliance with federal, state and local
environmental regulations.

ITEM 2. PROPERTIES

The principal properties of the Corporation as of June 12, 1996 are listed
below:

<TABLE>
<CAPTION>
OWNED OR SQUARE
LOCATION LEASED FOOTAGE USE AND SEGMENT
- ------------------------- ----------- --------- ------------------------------
<S> <C> <C> <C>
A. UNITED STATES
Knoxville, Tennessee Leased 387,000 Plant-Subleased (1)
Houston, Texas Leased 62,300 Offices & Laboratories
Life Sciences & Eng.
San Antonio, Texas Leased 2,700 Offices -- Life
Sciences & Eng.
Dayton, Ohio Owned 67,600 Offices -- Life
Sciences & Eng. (2)
B. ENGLAND
Bilston, West Midlands Leased 105,000 Plant -- Housewares
Owned 85,000 Plant -- Housewares
Poole, Dorset Owned 71,000 Distribution-Leisure Marine

C. CANADA
Toronto, Ontario Leased 62,900 Plant-Subleased (3)

- ---------------
<FN>

(1) 32% of this property is subleased and the remainder is available for
sublease.

(2) This property is subject to a $2.0 million mortgage granted under the
Corporation's Credit Agreement with its U.S. Banks dated November 14, 1991
and subsequently amended under amendments 1 thru 4 with the final amendment
#4 dated March 16, 1995, putting the mortgage into place. This property is
excess to the Corporation's space needs and is listed for sale.

(3) This facility is no longer needed and the Corporation has subleased this
property.
</TABLE>

The Corporation maintains its plants and offices in good repair. In the
opinion of management, the various facilities are adequate to the needs of the
businesses conducted therein.

ITEM 3. LEGAL PROCEEDINGS

Neither the Corporation nor any of its subsidiaries is a party to any
material legal proceedings.

3
<PAGE> 6

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

EXECUTIVE OFFICERS OF THE REGISTRANT

The executive officers of the Corporation, as of June 12, 1996, their
positions with the Corporation and their ages are as follows:

<TABLE>
<CAPTION>
NAME OFFICES AGE
- --------------------- ------------------------------------------------------------- ------
<S> <C> <C>
Maurice F. Krug Chairman of the Board of Directors 67
Charles L. Haslam President, Chief Executive Officer and Director 52
Thomas W. Kemp Vice President-Finance/Treasurer 60
W. E. Greenhalgh KRUG International (UK) Ltd. subsidiaries' Chairman and 65
Director
T. Wayne Holt KRUG Life Sciences Inc. President and Director 69
James J. Mulligan Secretary and Director 74
</TABLE>

All officers of the Corporation are elected annually by the Board of
Directors.

Mr. Krug is a founder of the Corporation and has been Chairman of the Board
since 1959. From 1959 to May 1996, he also served as Chief Executive Officer of
the Corporation. From 1959 until 1987, and from 1989 to May 1996, he also served
as President of the Corporation.

Mr. Haslam was elected President and Chief Executive Officer in May 1996.
He has practiced law in Washington, D.C. from 1980 to the present.

Mr. Kemp was elected Vice President-Finance/Treasurer of the Corporation in
May 1990. He previously was employed by Kodak Mining Company as Vice President
of Finance from 1977 to 1989. Prior thereto, Mr. Kemp was employed by Mead
Technology Laboratories as Vice President of Finance and Administration.

Mr. Greenhalgh was elected Chairman of Sowester Limited and Beldray
Limited, subsidiaries of KRUG International (UK) Ltd., in March 1985. He was
Chief Executive Officer of KRUG International (UK) Ltd. from March 1985 to April
1989 and has been a Director of KRUG International (UK) Ltd. since 1970.

Mr. Holt was named President of KRUG Life Sciences Inc., a position he had
previously held, in April 1995. He was involved continuously with the
Corporation's life sciences, aerospace and engineering operations for 22 years
commencing with his initial employment in 1971, until his initial retirement in
1993. He held a number of positions, including Vice President -- Aerospace Group
from 1981 to 1988, Assistant to the Chairman, Aerospace Group, from 1988 to
1990, Vice President from May 1990 to February 1991, Executive Vice President
from February 1991 to December 31, 1992, and Advisor to the Chairman, Life
Sciences and Engineering from January 1, 1993 to May 1, 1993.

Mr. Mulligan has been a member of the law firm of Mulligan & Mulligan since
January 1993. He was a member of the law firm of Smith & Schnacke from 1953 to
1989 and a member of the law firm of Thompson, Hine & Flory from 1989 until his
retirement in 1991. He became Secretary of the Corporation in 1966.

4
<PAGE> 7

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS

KRUG International's common stock and warrants are traded in the NASDAQ
National Market System under Symbol KRUG and KRUGW, respectively. The table
below includes the high and low sales prices for the Common shares for fiscal
1996 and 1995. The number of shareholders of record was 1,035 as of March 31,
1996. A 10% stock dividend was paid in December 1994. No cash dividends were
paid in fiscal 1996 or 1995. Warrants to purchase common shares were distributed
on January 31, 1995 to shareholders of record on December 23, 1994. One warrant
was issued for every five common shares.

<TABLE>
<CAPTION>
QUARTER 4TH 3RD 2ND 1ST
- ------------------------- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
1996..................... High $4.00 $3.75 $3.37 $4.87
Low 2.63 2.87 2.63 2.78
1995..................... High $4.75 $5.00 $4.25 $4.25
Low 3.38 3.38 3.00 2.50
</TABLE>

ITEM 6. SELECTED FINANCIAL DATA

The following table summarizes certain selected financial data, which
should be read in conjunction with the Corporation's Consolidated Financial
Statements and related Notes and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere herein.

<TABLE>
<CAPTION>
FISCAL YEARS 1996 1995 1994 1993 1992
- ------------------------------------ ------- ------- ------- ------- -------
(All dollar amounts in thousands, except for per share amounts)
<S> <C> <C> <C> <C> <C>
Revenues............................ $95,821 $91,766 $90,188 $97,155 $99,145
Earnings from
Continuing Operations............. 1,171 2,012 2,870 2,608 1,387(1)
Net Earnings........................ 1,171 2,012 1,418 2,608 1,516(1)
Earnings Per Share from
Continuing Operations............. 0.23 0.40 0.57 0.52 0.28(1)
Net Earnings Per Share.............. 0.23 0.40 0.28 0.52 0.30(1)
Total Assets........................ 42,371 44,169 43,225 46,034 46,380
Long-Term Debt...................... 11,982 13,162 12,932 14,912 16,622
Subordinated Long-Term Debt......... 300 300

- ---------------
<FN>

(1) The Corporation applied the provisions of Statement of Financial Accounting
Standards No. 109 "Accounting for Income Taxes," in fiscal 1992. This change
in method increased fiscal 1992 net earnings by $583 ($.13) per share.
</TABLE>

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

RESULTS OF OPERATIONS

Fiscal 1996 revenues of $95.8 million increased by 4% from fiscal 1995.
Fiscal 1995 revenues of $91.8 million increased by 2% from fiscal 1994. In
fiscal 1996, revenues in the U.S. were $44.3 million, and revenues in the U.K.
were $51.5 million.

Fiscal 1996 U.K. revenues of $51.5 million increased by $3.7 million for an
8% increase from fiscal 1995. Of this increase, $3.3 million was due to
increased sales volume with the remainder due to favorable currency translation.
Fiscal 1996 U.K. Leisure Marine Segment revenues increased by $4.1 million to
$25.0 million, of which $3.9 million was due to increased sales volume and the
remainder to favorable currency translation. All Leisure Marine product groups
had increases in revenue except for inboard engines. Chanderly and Sea Doo
personnel watercraft sales increased significantly due to new products and
increased demand. Fiscal 1996 U.K. Housewares Segment revenue decreased by $0.4
million to $26.5 million, of which $0.6 million was due to decreased volume
partially offset by $0.2 million of favorable currency translation. Sales of
ironing tables,

5
<PAGE> 8

rotary dryers and wire airers decreased during the year. Ironing tables sales
decreased 3% in fiscal 1996 due to consumers buying tables with lower selling
prices. The rotary dryers and wire airer sales decreased as a result of losing a
significant customer. These decreases were partially offset by the introduction
of child safety gates during the year.

Fiscal 1995 U.K. revenues of $47.8 million were $2.1 million higher than
fiscal 1994. Of this increase, $0.6 million was due to increased volume with the
remainder due to favorable currency translation. Fiscal 1995 U.K. Leisure Marine
Segment revenue increased by $1.1 million, of which $0.4 million was due to
increased sales volume with the remainder of the increase due to favorable
foreign currency translation. All Leisure Marine product groups had increases in
revenue except outboard engines, for which there was decreased demand. Fiscal
1995 U.K. Housewares Segment revenue increased by $1.0 million, of which $0.2
million was due to increased demand with the remainder due to favorable currency
translation. Ironing tables and indoor airer product groups had sales increases
during the year. These increases were partially offset by decreased ladder sales
which were caused by lower consumer demand and increased competition.

Revenues for the U.S. Life Sciences and Engineering Segment (LS&E) were
$44.3 million in fiscal 1996, $44.0 million in fiscal 1995 and $44.5 million in
fiscal 1994, respectively. In fiscal 1996, increased labor services and
subcontract support provided under our contract with the National Aeronautics
and Space Administration's (NASA) Johnson Space Center resulted in the increased
fiscal 1996 revenue. These increases were partially offset by decreased material
purchases and labor services provided under U.S. government support services
contracts by the Corporation's Technology/Scientific Services, Inc. (T/SSI)
subsidiary. The decrease in fiscal 1995 revenue as compared to fiscal 1994
resulted from decreased material purchases and subcontract support services
provided by T/SSI under contracts with the U.S. government and the elimination
of revenues of the Alpha Net Division which was sold in late fiscal 1994.

LS&E order backlog at March 31, 1996 was $60.4 million compared to $89.1
million at March 31, 1995 and $129.8 million at March 31, 1994. During fiscal
1996, KRUG Life Sciences Inc. signed an extension of its current Medical
Operations and Research Support Contract with NASA's Johnson Space Center. The
agreement provided for a nine-month contract extension which began on March 1,
1996. This extension added approximately $25.0 million to order backlog. The
original Support contract was a $136 million five-year contract. With this
extension, the contract will end on November 30, 1996. This contract represents
approximately one-third of the Corporation's revenues and a corresponding
percentage of its net earnings. The Corporation has held contracts for this type
of work or similar work at the Johnson Space Center continuously since 1967. The
Corporation intends to aggressively seek the follow-on contract to our existing
contract at the Johnson Space Center. In fiscal 1995, T/SSI was awarded a $20.4
million contract for support and maintenance services at Wright-Patterson Air
Force Base, consisting of a one-year base period with four additional one-years
options. In the Leisure Marine and Housewares Segment, backlog is not meaningful
due to the short time between order placement and shipment.

Gross profit margins were 12.6%, 13.7% and 13.3% in fiscal 1996, 1995 and
1994, respectively. The decrease in gross profit margin in fiscal 1996 is
primarily due to decreased margins in the Housewares Segment. Depressed selling
prices caused by competitive market conditions and increased raw material prices
for aluminum and steel that were not fully recovered through higher selling
prices were the causes of the Housewares margin decrease. During the fourth
quarter of fiscal 1996, these conditions partially abated providing for some
increased Housewares Segment margin. The Leisure Marine Segment gross profit
margin increased slightly in fiscal 1996 as a result of selling more higher
margin products. The gross margin of the LS&E Segment decreased slightly during
fiscal 1996 because we supplied increased subcontract service on U.S. government
contracts for which we received no additional profit. The increase in gross
profit margin in fiscal 1995 was primarily due to the favorable resolution of
certain LS&E prior year contract issues. The gross margin of LS&E increased only
slightly with the favorable effect of these resolutions. The margins of the
Housewares Segment decreased in fiscal 1995 due to competitive market conditions
and because of very significant increases in the cost of aluminum used in the
ladder product group. The Leisure Marine Segment gross profit margin remained
constant in fiscal 1995 compared to the prior year.

6
<PAGE> 9

Selling and administrative expenses were $9.2 million, $8.8 million and
$8.3 million in fiscal 1996, 1995 and 1994, respectively. The increase in fiscal
1996 is due primarily to increased expenses at the Leisure Marine Segment caused
by the increased sales volume, increased pension expense in the U.K. and the
expense for the retiring Chairman's new agreement which replaced his prior
pension agreement. The increase in fiscal 1995 was due primarily to an increase
in LS&E bid and proposal expenses, increased Leisure Marine selling expenses and
a $0.2 million unfavorable currency translation effect.

Interest expense decreased by $0.2 million in fiscal 1996 due to decreasing
levels of debt in both the U.K. and U.S. and decreases in interest rates of 1%
in the U.K. and 3/4% in the U.S. Interest expense increased by $0.2 million in
fiscal 1995 compared to fiscal 1994 due to increased interest rates of 2 3/4% in
the U.S. and 2% in the U.K.

Other income was $0.1 million, $0.5 million and $1.4 million in fiscal
1996, 1995 and 1994, respectively. No significant other income items in fiscal
1996 resulted in the decrease from fiscal 1995. The decrease in other income in
fiscal 1995 as compared to fiscal 1994 was due to less gain on asset sales and
the absence of foreign currency transaction gains.

The effective income tax rate was 38.2% for fiscal 1996, 31.0% for fiscal
1995 and 25.6% in fiscal 1994. The effective tax rate for fiscal 1996 was higher
than the statutory U.S. tax rate due to U.K. pension expense in excess of
deductible amounts, amortization of intangibles and other non-deductible
expenses in the U.K. The effective tax rate for fiscal 1995 was slightly lower
than the U.S. tax rate primarily due to adjustments for long-term deferred
items.

Earnings from continuing operations were $1.2 million in fiscal 1996, a
decrease of $0.8 million from fiscal 1995. The decrease was due to the
Housewares gross profit margin decline and the absence of significant other
items. Earnings from continuing operations were $2.0 million in fiscal 1995, a
$0.9 million decrease from fiscal 1994, due to less other income in fiscal 1995.

DISCONTINUED OPERATIONS

In fiscal 1989, the Corporation discontinued the operations of its
Industrial Segment. In fiscal 1989 and 1990, provisions for losses on
discontinued operations were taken and substantially all of the net assets were
sold. The remaining obligations related to this Segment include a leased
property in Knoxville, Tennessee, a leased property in Toronto, Canada and
product liability claims related to products manufactured and sold prior to the
sale of the domestic Industrial Segment.

In October 1993, the Corporation's major tenant of its leased facility in
Knoxville filed for bankruptcy. The potential loss of the future sublease rental
income from this property caused the Corporation to determine that an additional
provision for expense related to discontinued operations was required.
Accordingly, an after tax loss of $1.5 million was recorded in fiscal 1994. At
this time, the Corporation does not foresee the need for any further additions
to this reserve.

LIQUIDITY AND CAPITAL RESOURCES

Under the Corporation's revolving credit facility with a U.S. business
credit corporation, the Corporation had a loan of $4.6 million at March 31,
1996. Availability under the revolving credit facility is based upon the amount
of billed and unbilled accounts receivable of its U.S. operations and is limited
to a maximum amount of $10.0 million. The credit facility expires March 15,
2000. Under the agreement, the Corporation had additional borrowing capacity of
$0.8 million available at March 31, 1996. At March 31, 1996 the Corporation had
a $2.0 million mortgage outstanding on its Dayton, Ohio real property. The
mortgage was provided by five U.S. banks and matures on March 31, 1998. In
fiscal 1996, the Corporation's U.K. subsidiaries put in place two ten year term
loans with a U.K. bank totaling $6.3 million. In addition, the Corporation had
available a $3.82 million U.K. operating line of credit with $3.79 million
unused at March 31, 1996. The Corporation believes it has adequate financing in
both the U.S. and U.K. to support its current level of operations.

The Corporation generated cash of $2.5 million, $1.2 million and $0.4
million from operating activities for fiscal 1996, 1995 and 1994, respectively.
The $1.3 million increase in cash generated from operating activities

7
<PAGE> 10

in fiscal 1996 compared to fiscal 1995 was due primarily to cash generated from
decreased inventory levels in the U.K. and decreased cash used by discontinued
operations. The $0.8 million increase in cash generated from operating
activities in fiscal 1995 compared to fiscal 1994 was principally due to lower
working capital needs.

Capital expenditures in fiscal 1996, 1995 and 1994 were $0.3 million, $0.4
million and $0.8 million, respectively. The capital expenditures for all three
fiscal years represent normal replacement expenditures. At March 31, 1996, there
were no significant capital commitments.

The Corporation monitors the effect of inflation on its businesses.
Inflation did not have a significant impact on operations during the past three
years and is not expected to have a significant impact in the foreseeable
future.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Index to Financial Statements and Supplementary Data

<TABLE>
<CAPTION>
PAGE
------
<S> <C>
Independent Auditors' Report............................................. 9
Consolidated Balance Sheets -- March 31, 1996 and 1995................... 10-11
Consolidated Statements of Earnings --
for the fiscal years ended March 31, 1996, 1995 and 1994............... 12
Consolidated Statements of Shareholders' Equity --
for the fiscal years ended March 31, 1996, 1995 and 1994............... 13
Consolidated Statements of Cash Flows --
for the fiscal years ended March 31, 1996, 1995 and 1994............... 14
Notes to Consolidated Financial Statements --
for the fiscal years ended March 31, 1996, 1995 and 1994............... 15-24
Selected Quarterly Financial Data --
for the fiscal years ended March 31, 1996 and 1995..................... 24
</TABLE>

8
<PAGE> 11

INDEPENDENT AUDITORS' REPORT

Board of Directors
KRUG International Corp.
Dayton, Ohio

We have audited the accompanying consolidated balance sheets of KRUG
International Corp. and subsidiaries as of March 31, 1996 and 1995 and the
related consolidated statements of earnings, shareholders' equity and cash flows
for each of the three years in the period ended March 31, 1996. These financial
statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of KRUG International Corp. and
subsidiaries at March 31, 1996 and 1995, and the results of their operations and
their cash flows for each of the three years in the period ended March 31, 1996,
in conformity with generally accepted accounting principles.

DELOITTE & TOUCHE LLP

Dayton, Ohio
May 17, 1996

9
<PAGE> 12

KRUG INTERNATIONAL CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
MARCH 31, 1996 AND 1995
(ALL DOLLAR AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
ASSETS (NOTE D) 1996 1995
------- -------
<S> <C> <C>
CURRENT ASSETS:
Cash..................................................................... $ 439 $ 363
Receivables (Note B)..................................................... 18,309 17,205
Inventories (Note C)..................................................... 8,635 9,992
Prepaid expenses......................................................... 627 699
------- -------
TOTAL CURRENT ASSETS....................................................... 28,010 28,259
PROPERTY, PLANT AND EQUIPMENT -- At cost (Note I):
Land..................................................................... 2,079 2,202
Buildings and improvements............................................... 6,291 6,555
Equipment................................................................ 7,331 7,804
------- -------
15,701 16,561
Less accumulated depreciation............................................ 6,444 6,256
------- -------
9,257 10,305
OTHER ASSETS:
Deferred tax assets (Note G)............................................. 2,508 3,078
Pension asset (Note H)................................................... 2,316 2,185
Other.................................................................... 280 342
------- -------
5,104 5,605
------- -------
TOTAL ASSETS............................................................... $42,371 $44,169
======= =======
</TABLE>

See notes to consolidated financial statements.

10
<PAGE> 13

KRUG INTERNATIONAL CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS -- CONTINUED
MARCH 31, 1996 AND 1995
(ALL DOLLAR AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY 1996 1995
------- -------
<S> <C> <C>
CURRENT LIABILITIES:
Bank borrowings (Note D)................................................. $ 31 $ 1,106
Accounts payable......................................................... 8,205 7,529
Accrued payroll and related taxes........................................ 2,347 2,341
Other accrued expenses................................................... 3,187 2,951
Income taxes............................................................. 218 567
Net current liabilities of discontinued operations (Note J).............. 500 600
Current maturities of long-term debt (Note D)............................ 1,166 1,364
------- -------
TOTAL CURRENT LIABILITIES.................................................. 15,654 16,458
LONG-TERM DEBT (Note D).................................................... 11,982 13,162
NET LONG-TERM LIABILITIES OF
DISCONTINUED OPERATIONS (Note J)......................................... 205 481
CONTINGENCIES (Note I).....................................................
------- -------
TOTAL LIABILITIES.......................................................... 27,841 30,101
SHAREHOLDERS' EQUITY (Note E):
Preferred Shares, authorized and unissued, 2,000,000 shares
Common Shares, no par value; authorized, 12,000,000 shares;
issued and outstanding, 5,076,950 at March 31, 1996 and
5,011,523 at March 31, 1995........................................... 2,538 2,506
Additional paid-in capital............................................... 4,224 4,090
Retained earnings........................................................ 7,870 6,699
Foreign currency translation adjustment.................................. (102) 773
------- -------
TOTAL SHAREHOLDERS' EQUITY................................................. 14,530 14,068
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY................................. $42,371 $44,169
======= =======
</TABLE>

11
<PAGE> 14

KRUG INTERNATIONAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED MARCH 31, 1996, 1995 AND 1994
(ALL DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
REVENUES (Note K)........................................... $ 95,821 $ 91,766 $ 90,188
COSTS AND EXPENSES:
Cost of goods sold (Note K)............................... 83,701 79,214 78,219
Selling and administrative................................ 9,151 8,816 8,327
Interest expense.......................................... 1,126 1,307 1,135
Other income -- net (Note F).............................. (51) (485) (1,353)
--------- --------- ---------
EARNINGS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES..... 1,894 2,914 3,860
INCOME TAXES (Note G)....................................... 723 902 990
--------- --------- ---------
EARNINGS FROM CONTINUING OPERATIONS......................... 1,171 2,012 2,870
LOSS FROM DISCONTINUED OPERATIONS (Note J).................. (1,452)
--------- --------- ---------
NET EARNINGS................................................ $ 1,171 $ 2,012 $ 1,418
======== ======== ========
PER COMMON AND COMMON EQUIVALENT SHARE:
Earnings from continuing operations....................... $ 0.23 $ 0.40 $ 0.57
Loss from discontinued operations......................... (0.29)
--------- --------- ---------
Net earnings................................................ $ 0.23 $ 0.40 $ 0.28
======== ======== ========
AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING
(Note E).................................................. 5,067,483 5,046,743 5,077,948
======== ======== ========
</TABLE>

See notes to consolidated financial statements.

12
<PAGE> 15

KRUG INTERNATIONAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED MARCH 31, 1996, 1995 AND 1994
(ALL DOLLAR AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
FOREIGN
COMMON SHARES ADDITIONAL CURRENCY
------------------ PAID-IN RETAINED TRANSLATION
SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENT
--------- ------ ---------- -------- ----------
<S> <C> <C> <C> <C> <C>
MARCH 31, 1993........................... 4,999,395 $2,500 $4,065 $3,274 $ 69
Net earnings........................... 1,418
Cash in lieu of fractional shares (Note
E).................................. (2)
Foreign currency translation
adjustment.......................... (708)
--------- ------ ---------- -------- ----------
MARCH 31, 1994........................... 4,999,395 2,500 4,065 4,690 (639)
Net earnings........................... 2,012
Cash in lieu of fractional shares (Note
E).................................. (3)
Common Shares issued................... 12,128 6 25
Foreign currency translation
adjustment.......................... 1,412
--------- ------ ---------- -------- ----------
MARCH 31, 1995........................... 5,011,523 2,506 4,090 6,699 773
Net earnings........................... 1,171
Common Shares issued................... 65,427 32 134
Foreign currency translation
adjustment.......................... (875)
--------- ------ ---------- -------- ----------
MARCH 31, 1996........................... 5,076,950 $2,538 $4,224 $7,870 $ (102)
======== ======= ========= ======== ==========
</TABLE>

See notes to consolidated financial statements.

13
<PAGE> 16

KRUG INTERNATIONAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 1996, 1995 AND 1994
(ALL DOLLAR AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
INCREASE (DECREASE) IN CASH 1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings....................................................... $1,171 $2,012 $1,418
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation.................................................. 1,117 1,060 941
Amortization of intangibles................................... 60 (26) (13)
Deferred income taxes......................................... 164 219 59
Loss from discontinued operations............................. 1,452
Gain on sale of assets........................................ (31) (360) (654)
Change in assets and liabilities:
Receivables................................................ (1,589) 320 2,586
Inventories................................................ 804 (288) (756)
Prepaid expenses and other assets.......................... 154 (22) 83
Accounts payable and accrued expenses...................... 985 24 (2,532)
Income taxes............................................... 13 (757) (1,116)
Net cash used in discontinued operations...................... (377) (935) (1,092)
------ ------ ------
Net cash provided by operating activities.................. 2,471 1,247 376
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of assets...................................... 108 448 687
Expenditures for property, plant and equipment..................... (250) (425) (802)
------ ------ ------
Net cash provided by (used in) investing activities........ (142) 23 (115)
CASH FLOWS FROM FINANCING ACTIVITIES:
Sale of Common Shares.............................................. 166 31
Bank borrowings -- net............................................. (1,037) (229) 380
Additions to long-term debt........................................ 7,243
Payments on long-term debt......................................... (1,381) (9,140) (2,052)
------ ------ ------
Net cash used in financing activities...................... (2,252) (2,095) (1,672)
EFFECT OF EXCHANGE RATE CHANGES ON CASH.............................. (1) 2 (6)
------ ------ ------
NET INCREASE (DECREASE) IN CASH...................................... 76 (823) (1,417)
CASH AT BEGINNING OF YEAR............................................ 363 1,186 2,603
------ ------ ------
CASH AT END OF YEAR.................................................. $ 439 $ 363 $1,186
====== ====== ======
CASH PAID FOR:
Income taxes....................................................... $ 575 $1,328 $2,227
====== ====== ======
Interest........................................................... $1,095 $1,362 $1,186
====== ====== ======
NON-CASH INVESTING AND FINANCING ACTIVITY -- Capital leases.......... $ 414 $ 139 $ 530
====== ====== ======
</TABLE>

See notes to consolidated financial statements.

14
<PAGE> 17

KRUG INTERNATIONAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1996, 1995 AND 1994
(ALL DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------

A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION -- The consolidated financial statements
include the accounts of the Corporation and its domestic and foreign
subsidiaries. All significant intercompany transactions and balances have been
eliminated.

REVENUE RECOGNITION -- Revenues from fixed-price contracts are generally
recognized using the percentage-of-completion method for financial accounting
purposes. Revenues from cost reimbursement and time and material contracts are
recorded as costs are incurred and include estimated earned fees in the
proportion that costs incurred to date bear to total estimated costs at
completion. Claims for recovery of additional contract costs are recognized only
to the extent that the recoverable amounts can be determined with reasonable
certainty. Costs not recoverable upon completion of contracts are immediately
charged against earnings.

USE OF 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 those estimates.

INVENTORIES -- Inventories are valued at the lower of cost or market using
the first-in, first-out method.

DEPRECIATION -- Property, plant and equipment, including capital leases, is
depreciated over its estimated useful life principally by the straight-line
method.

NET EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE -- Net earnings per
share is computed by dividing net earnings by the weighted average number of
Common Shares outstanding during each period, adjusted for the dilutive effect,
if any, of stock options and stock warrants.

FOREIGN CURRENCY TRANSLATION -- The assets and liabilities of the
Corporation's wholly-owned U.K. subsidiary are translated using exchange rates
in effect at the balance sheet date, and amounts for the consolidated statements
of earnings are translated using average exchange rates for the period.
Translation gains and losses are recorded in shareholders' equity and
transaction gains and losses are included in the consolidated statement of
earnings for the period.

B. RECEIVABLES

<TABLE>
<CAPTION>
MARCH 31,
-------------------
1996 1995
------- -------
<S> <C> <C>
Trade accounts receivable...................................... $ 9,087 $ 8,652
Contract receivables:
Amounts billed............................................... 8,019 6,749
Recoverable costs and accrued profit on work completed
but not yet billed........................................ 1,696 2,290
Other.......................................................... 165 109
------- -------
18,967 17,800
Less allowance for doubtful accounts........................... (658) (595)
------- -------
$18,309 $17,205
======= =======
</TABLE>

15
<PAGE> 18

KRUG INTERNATIONAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
YEARS ENDED MARCH 31, 1996, 1995 AND 1994
(ALL DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------

C. INVENTORIES

<TABLE>
<CAPTION>
MARCH 31,
-------------------
1996 1995
------- -------
<S> <C> <C>
Finished goods................................................. $ 6,352 $ 7,105
Work-in-progress............................................... 1,101 1,107
Raw materials and supplies..................................... 1,182 1,780
------- -------
$ 8,635 $ 9,992
======= =======
</TABLE>

D. LONG-TERM DEBT

<TABLE>
<CAPTION>
MARCH 31,
-------------------
1996 1995
------- -------
<S> <C> <C>
U.S. Revolving Credit Line..................................... $ 4,638 $ 4,879
U.S. Mortgage.................................................. 2,017 2,350
U.K. Term Loans................................................ 5,805 6,484
Capital leases................................................. 688 813
------- -------
13,148 14,526
Less current maturities........................................ (1,166) (1,364)
------- -------
$11,982 $13,162
======= =======
</TABLE>

The U.S. Revolving Credit Line is a revolving credit facility with a U.S.
business credit corporation which provides up to $10 million. The credit
facility expires March 15, 2000. Interest is paid monthly at the lender's base
rate plus 2%, (10 1/4% at March 31, 1996). Availability under the facility is
based upon the billed and unbilled accounts receivable of its U.S. operations.
At March 31, 1996, additional availability under the revolving credit facility
was $800. Under the terms of the credit facility, the Corporation is restricted
from declaring or paying cash dividends without the consent of the lender.

The U.S. Mortgage is collateralized by the Corporation's Dayton, Ohio real
property. The mortgage termination date is March 31, 1998. Interest is paid
monthly at the bank's base rate plus 2% (10 1/4% at March 31, 1996). Annual
payments under the mortgage are as follows: 1997 -- $183, and 1998 -- $1,834.

Substantially all U.S. assets (except shares of foreign subsidiaries and
all related assets) are pledged as collateral for the revolving credit line and
mortgage.

The U.K. Term Loans are two ten year term loans with a U.K. bank which were
put in place in July 1995. The loans have quarterly principal payments which
total $153, plus interest, at the bank's base rate plus 1 1/2% (7 3/4% at March
31, 1996). Substantially all U.K. assets (except shares of the U.K. subsidiaries
and all related assets) are pledged as collateral for these loans. The U.K. Term
Loans include certain tangible net worth requirements specific to the U.K.
subsidiaries. In addition, the Corporation has a $3,819 U.K. operating line of
credit with $3,788 unused at March 31, 1996. Interest is paid quarterly on the
operating line of credit at the bank's base rate plus 1 1/2% (7 3/4% at March
31, 1996).

Annual payments of long-term debt, including capital leases, for the next
five years are as follows: 1997 -- $1,166; 1998 -- $2,709; 1999 -- $663;
2000 -- $5,250 and 2001 -- $611. The carrying value of long-term debt
approximates fair value at March 31, 1996 and 1995.

16
<PAGE> 19

KRUG INTERNATIONAL CORP. AND SUBSIDIARIES

E. SHAREHOLDERS' EQUITY

The Corporation has four stock option plans permitting the grant of options
to purchase common shares to officers and key employees, namely, the 1981
Incentive Stock Option Plan, the 1985 Incentive Stock Option Plan, the 1985
Incentive Stock Option Scheme for U.K. Employees and the 1995 Incentive Stock
Option Plan. The 1985 U.K. Scheme has been administered as part of the 1985
Incentive Stock Option Plan. The authority to grant options under the 1981 Plan
and the 1985 Plans has expired; however, 30,320 options granted under the 1981
Plan and 30,320 options granted under the 1985 Plans are still outstanding.
Under the 1995 Plan, the grant of options to purchase up to 250,000 Common
Shares is authorized through May 2005, and 66,000 options are outstanding.
Option grants are made at the fair market value on the date of grant and expire
five to ten years later. At March 31, 1996, there were 126,640 options
outstanding with an exercise price of $2.57 to $3.14 per share, of which 54,574
were exercisable at $2.57 to $3.14 per share. Options granted under the Plans
will expire through November 2005. On April 30, 1996, the Board of Directors
approved the immediate vesting of all outstanding stock options.

The Corporation measures compensation cost for stock options issued to
employees using the intrinsic value based method of accounting prescribed by
Accounting Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued
to Employees." In October 1995, the Financial Accounting Standards Board issued
SFAS No. 123, "Accounting for Stock-Based Compensation," which requires adoption
no later than fiscal years beginning after December 15, 1995. Pursuant to the
new standard, companies are encouraged, but not required, to adopt the fair
value method of accounting for stock options and similar equity instruments. The
Corporation has elected to continue measuring compensation cost in accordance
with APB Opinion No. 25 and will adopt the disclosure of SFAS No. 123 in fiscal
1997.

The Corporation issued warrants to shareholders of record on December 23,
1994. For each five common shares held, the Corporation distributed one warrant
which may be used to purchase one common share. The warrants entitle the holders
to purchase in the aggregate 999,487 common shares. The purchase price is $7.125
per share through January 31, 1997, and $8.625 from February 1, 1997 through
January 31, 1998. The Corporation may reduce the purchase price at any time.

In October 1995, the Corporation issued warrants to outside consulting
firms to purchase 125,000 common shares at $3.031 per share. The warrants expire
in October 1998.

The Corporation distributed a 10% stock dividend in fiscal 1995 and a 5%
stock dividend in fiscal 1994. These transactions have been reflected in the
financial statements retroactively for all periods presented.

F. OTHER INCOME -- NET

<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------
1996 1995 1994
---- ----- ------
<S> <C> <C> <C>
Gain on sale of assets.................................... $ 31 $ 360 $ 654
Foreign currency transaction gain......................... 309
U.K. tax rebates related to intercompany dividends........ 110 307
Other..................................................... 20 15 83
---- ----- ------
$ 51 $ 485 $1,353
==== ===== ======
</TABLE>

17
<PAGE> 20

KRUG INTERNATIONAL CORP. AND SUBSIDIARIES

G. INCOME TAXES

The provisions for income taxes include the following:

<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------
1996 1995 1994
---- ----- ------
<S> <C> <C> <C>
Domestic -- deferred...................................... $198 $ 324 $ (7)
---- ----- ------
Foreign:
Current................................................. 573 683 931
Deferred................................................ (48) (105) 66
---- ----- ------
Total foreign tax provision............................... 525 578 997
---- ----- ------
$723 $ 902 $ 990
==== ===== ======
</TABLE>

Deferred tax assets recorded in the balance sheets include the following
tax effects:

<TABLE>
<CAPTION>
MARCH 31,
-------------------
1996 1995
------- -------
<S> <C> <C>
Domestic:
Contract accounting.......................................... $ 206 $ 370
Net operating loss carryforwards............................. 4,091 4,259
Provision for loss on discontinued operations................ 482 700
Other........................................................ 155 (99)
------- -------
4,934 5,230
Less valuation allowance....................................... (3,796) (3,921)
------- -------
Total domestic deferred tax assets............................. 1,138 1,309
------- -------
Foreign:
Capital loss carryforward.................................... 2,223 2,359
Tax prepayments not currently utilized....................... 1,842 2,313
Depreciation expense......................................... (568) (662)
Other........................................................ 96 118
------- -------
3,593 4,128
Less valuation allowance....................................... (2,223) (2,359)
------- -------
Total foreign deferred tax assets.............................. 1,370 1,769
------- -------
$ 2,508 $ 3,078
======= =======
</TABLE>

At March 31, 1996, the Corporation has accumulated domestic net operating
loss carryforwards (expiring in 2005 through 2009) of approximately $12,000
available to offset future domestic taxable income.

18
<PAGE> 21

KRUG INTERNATIONAL CORP. AND SUBSIDIARIES

The differences between income taxes at the federal statutory rate and the
effective tax rate are as follows:

<TABLE>
<CAPTION>
YEAR ENDED MARCH 31
-------------------------
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
Income taxes at federal statutory rate..................... 34.0% 34.0% 34.0%
Foreign tax rate differential.............................. (0.7) (0.7) (1.0)
U.K. pension............................................... 2.3 0.5 0.1
U.K. amortization of intangibles........................... 0.9 (0.5) (0.3)
Non-taxable gain on sale of a U.K. building................ (3.8)
Currency................................................... (2.6)
Other...................................................... 1.7 (2.3) (0.8)
----- ----- -----
Effective tax rate......................................... 38.2% 31.0% 25.6%
===== ===== =====
</TABLE>

Earnings from continuing operations before income taxes includes $1,312,
$1,962, and $3,882 in 1996, 1995 and 1994, respectively, of foreign earnings.

Domestic income taxes have not been provided on undistributed earnings of
the foreign subsidiaries aggregating $15,900 at March 31, 1996. Determination of
the amount of the unrecognized deferred tax liability for these undistributed
earnings is not practicable.

H. RETIREMENT PLANS

The Corporation has defined benefit retirement plans covering substantially
all of its employees. The domestic plan is non-contributory and the foreign
plans are contributory. Benefits are principally based upon years of service and
level of earnings. For the domestic plan, the Corporation funds at a rate that
meets or exceeds the minimum amounts required by ERISA. The Corporation's
contributions to the foreign plans are funded monthly based on actuarial
determined contribution rates. Employee contributions to the foreign plans are
voluntary. The components of net pension expense for all plans are as follows:

<TABLE>
<CAPTION>
YEAR ENDED MARCH 31
-----------------------------------------------------------------
1996 1995 1994
------------------- ------------------- -------------------
DOMESTIC FOREIGN DOMESTIC FOREIGN DOMESTIC FOREIGN
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Service cost................... $477 $ 425 $492 $383 $444 $342
Interest cost.................. 446 663 429 563 450 473
Actual (return) loss on
assets....................... (732) (1,476) (438) (566) 38 (458)
Net amortization and
deferral..................... 324 1,035 33 134 (475) 69
-------- -------- -------- -------- -------- --------
Pension expense................ $515 $ 647 $516 $514 $457 $426
======== ======== ======== ======== ======== ========
</TABLE>

19
<PAGE> 22

KRUG INTERNATIONAL CORP. AND SUBSIDIARIES

Summary information for the funded plans is as follows:

<TABLE>
<CAPTION>
MARCH 31
------------------------------------------
1996 1995
------------------- -------------------
DOMESTIC FOREIGN DOMESTIC FOREIGN
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Vested benefit obligation.......................... $4,398 $5,732 $3,603 $5,779
======== ======== ======== ========
Accumulated benefit obligation..................... $4,819 $5,732 $4,171 $5,779
======== ======== ======== ========
Projected benefit obligation....................... $6,311 $7,640 $5,483 $7,680
Fair value of plan assets.......................... 6,112 8,243 4,786 6,852
-------- -------- -------- --------
Plan assets greater (less) than projected benefit
obligation....................................... (199) 603 (697) (828)
Reconciliation of financial status of plans to
amounts recorded in the balance sheets:
Unamortized plan assets in excess of plan
liabilities (overfunding) to be recognized
as a reduction of future years' pension
expense..................................... (169) (726) (305) (843)
Unrecognized net loss (gain) from experience
different than plan assumptions............. 391 825 592 2,452
Unamortized prior service cost from change in
benefit formula............................. 360 1,231 455 1,404
-------- -------- -------- --------
Pension asset included in the balance sheets....... $ 383 $1,933 $ 45 $2,185
======== ======== ======== ========
</TABLE>

For the domestic plan, the weighted average discount rate used was 7.5% in
1996 and 1995. Where appropriate, the projected rate of compensation increases
was 4.5% in 1996 and 1995. The expected long-term rate of return on plan assets
was 8% in 1996 and 1995.

Domestic plan assets are primarily invested in listed stocks and bonds and
U.S. government obligations. Approximately 9% of the fair value of the assets at
March 31, 1996 is comprised of Common Shares of the Corporation.

For the foreign plans, the weighted average discount rate used was 9% in
1996 and 1995. The projected rate of compensation increases was 7% in 1996 and
1995. The expected long-term rate of return on plan assets was 9% in 1996 and
1995. Foreign plan assets are invested in managed fund units in the United
Kingdom.

The Company had an unfunded pension agreement with its Chairman with a
projected benefit obligation (which approximated the accumulated benefit
obligation) of $546 at March 31, 1995. In connection with the Chairman's
announced retirement plans in February 1996 and negotiations to sell his shares
to a private investor group, which were finalized in April 1996, this pension
agreement was terminated and replaced with a new agreement. The total amount due
under the new agreement of $700 is accrued at March 31, 1996. The amount accrued
under the pension agreement was $354 at March 31, 1995.

The Corporation has a defined contribution 401(k) savings plan covering
substantially all domestic employees. The Corporation's policy is to contribute
a specified percentage of the employees' contribution as determined periodically
by the Corporation. Plan expense was $169 in 1996, $170 in 1995 and $135 in
1994.

20
<PAGE> 23

KRUG INTERNATIONAL CORP. AND SUBSIDIARIES

I. LEASES AND CONTINGENCIES

The Corporation leases various land, buildings and equipment (principally
for the U.K. companies) under capital and operating lease obligations with
non-cancelable terms ranging from 2 to 30 years. Minimum lease commitments as of
March 31, 1996 are:

<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
---------- ----------
<S> <C> <C>
1997..................................................... $402 $ 840
1998..................................................... 285 834
1999..................................................... 57 805
2000..................................................... 667
2001..................................................... 619
Later years.............................................. 6,316
---------- ----------
Total minimum lease payments............................. 744 $ 10,081
==========
Amount representing interest............................. (56)
----------
Present value of minimum lease payments.................. 688
Less current maturities of capital leases................ 371
----------
Long-term portion of capital leases...................... $317
==========
</TABLE>

At March 31, 1996 and 1995, buildings and equipment under capital leases of
$2,297 and $2,772 (less accumulated depreciation of $1,295 and $1,592),
respectively, is included in property, plant and equipment. Rent expense under
operating leases was $993, $922 and $928 for the years ended March 31, 1996,
1995 and 1994, respectively.

The overhead rates for cost reimbursement and time and material contracts
are subject to possible renegotiation. Management does not believe any
renegotiations will have a material effect on the consolidated financial
statements.

The Corporation is a party to other claims and litigation incidental to its
business. It is not possible to determine the ultimate liability, if any, in
these matters. Based upon an evaluation of information currently available and
consultation with legal counsel, management is of the opinion that such
litigation is not likely to have a material effect on the financial position or
results of operations of the Corporation.

J. DISCONTINUED OPERATIONS

In fiscal 1989, the Corporation discontinued the operations of its
Industrial Segment. In fiscal 1989 and 1990, provisions for losses on
discontinued operations were recorded. Subsequently, the Corporation disposed of
substantially all of the net assets of the Segment; however, remaining
obligations related to this Segment include a leased property in Knoxville,
Tennessee, a leased property in Toronto, Canada, and product liability claims
related to products sold prior to the sale of the domestic Industrial Segment.

In fiscal 1994, the Corporation's major tenant of the leased facility in
Knoxville filed for bankruptcy. The potential loss of future rental income from
this property caused the Corporation to determine that an additional provision
for loss related to discontinued operations was required. Accordingly, an
after-tax charge of $1,452 (net of a tax benefit of $748) was recorded in the
year ended March 31, 1994. The Corporation does not anticipate any further
additions to this reserve.

21
<PAGE> 24

KRUG INTERNATIONAL CORP. AND SUBSIDIARIES

In the year ended March 31, 1994, the provision for losses on disposal
increased by the $2,200 charge previously discussed. Charges to the provision
for the settlement of liabilities was $1,236 resulting in a remaining balance of
$2,572 at March 31, 1994. During the year ended March 31, 1995, the provision
for losses on disposal increased by $700 as a result of the favorable settlement
with the bankruptcy court related to the major tenant who filed bankruptcy in
1994. Charges to the provision for the settlement of liabilities was $1,212
leaving a balance of $2,060 at March 31, 1995. In the year ended March 31, 1996,
the provision for losses on disposal increased $140 from asset sales and
decreased $781 from charges to the provision for settlement of liabilities,
leaving a balance of $1,419 at March 31, 1996.

The Corporation is directly or contingently liable for lease and other
minimum commitments related to property formerly used by its discontinued
operations. Net of minimum sublease rentals to be received, commitments are as
follows: 1997 -- $479; 1998 -- $539 and 1999 -- $274.

K. INDUSTRY SEGMENTS

The Corporation's operations consist of three segments.

- Leisure Marine equipment distribution in the U.K.
- Housewares manufacturing and distribution in the U.K.
- Life Sciences and Engineering in the U.S.

The Leisure Marine distribution segment sells to boat manufacturers and
marine retailers more than 4,000 items of marine equipment including hardware
and electronics, outboard, inboard and stern drive engines, personal watercraft,
engine controls, steering systems and associated replacement parts. They are the
exclusive distributor in the U.K. and Ireland for many well-known brand names
such as Mercury, MerCruiser and Sea Doo.

The Housewares manufacturing segment manufactures and markets ironing
tables, household ladders, rotary dryers, indoor airers, child safety gates and
garden equipment. Customers include do-it-yourself retailers, supermarkets, mail
order catalogs, wholesalers and department stores, primarily in the U.K. and
Ireland.

The Life Sciences and Engineering segment is engaged in basic and applied
biotechnological research and supplies engineering technical services pursuant
to contracts primarily with agencies of the United States Government.

22
<PAGE> 25

KRUG INTERNATIONAL CORP. AND SUBSIDIARIES

Information concerning the Corporation's operations in different industry
segments is presented in the following table:

<TABLE>
<CAPTION>
YEAR ENDED MARCH 31
-----------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
REVENUES FROM UNAFFILIATED CUSTOMERS(1):
Leisure Marine............................................... $25,034 $20,923 $19,835
Housewares................................................... 26,442 26,891 25,882
Life Sciences and Engineering(2)............................. 44,345 43,952 44,471
------- ------- -------
$95,821 $91,766 $90,188
======= ======= =======
OPERATING PROFIT:
Leisure Marine............................................... $ 1,932 $ 1,021 $ 1,225
Housewares................................................... (847) 599 1,310
Life Sciences and Engineering................................ 3,786 3,894 2,949
------- ------- -------
4,871 5,514 5,484
Other income -- net.......................................... 51 485 1,353
Interest expense............................................. (1,126) (1,308) (1,135)
Corporate expense............................................ (1,902) (1,777) (1,842)
------- ------- -------
Earnings from continuing operations before income taxes........ $ 1,894 $ 2,914 $ 3,860
======= ======= =======
IDENTIFIABLE ASSETS:
Leisure Marine............................................... $15,900 $15,904 $15,433
Housewares................................................... 10,167 11,583 10,415
Life Sciences and Engineering................................ 10,723 10,331 10,370
Other........................................................ 5,581 6,351 7,007
------- ------- -------
$42,371 $44,169 $43,225
======= ======= =======
DEPRECIATION:
Leisure Marine............................................... $ 377 $ 363 $ 276
Housewares................................................... 559 507 466
Life Sciences and Engineering................................ 150 163 171
Other........................................................ 31 27 28
------- ------- -------
$ 1,117 $ 1,060 $ 941
======= ======= =======
CAPITAL ADDITIONS:
Leisure Marine............................................... $ 298 $ 87 $ 660
Housewares................................................... 349 341 502
Life Sciences and Engineering................................ 17 83 161
Other........................................................ 53 9
------- ------- -------
$ 664 $ 564 $ 1,332
======= ======= =======
- ---------------
<FN>

(1) Revenues from tangible products were $59,384, $57,747 and $60,225, and
revenues from services were $36,437, $34,019 and $29,963 for the years ended
March 31, 1996, 1995 and 1994, respectively. Related cost of goods sold for
tangible products was $51,245, $49,317 and $51,531, and related cost of
services was $32,456, $29,897 and $26,688, respectively.

(2) Includes revenues from the U.S. Government of $44,091 in 1996, $43,637 in
1995 and $42,406 in 1994.
</TABLE>

23
<PAGE> 26

KRUG INTERNATIONAL CORP. AND SUBSIDIARIES

L. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

<TABLE>
<CAPTION>
FISCAL
YEAR
ENDED
MARCH FOURTH THIRD SECOND FIRST
31 QUARTER QUARTER QUARTER QUARTER
------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
REVENUES.................................. 1996 $ 24,717 $ 22,175 $ 23,904 $ 25,025
1995 24,027 22,698 23,217 21,824
GROSS PROFIT.............................. 1996 3,127 2,640 3,114 3,239
1995 2,780 3,013 3,370 3,389
NET EARNINGS.............................. 1996 210 156 419 386
1995 252 405 604 751
NET EARNINGS PER SHARE.................... 1996 0.04 0.03 0.08 0.08
1995 0.05 0.08 0.12 0.15
AVERAGE COMMON AND COMMON EQUIVALENT
SHARES.................................. 1996 5,121,388 5,058,907 5,051,409 5,038,213
OUTSTANDING............................. 1995 5,053,210 5,058,017 5,043,539 5,031,926
</TABLE>

* * * * * *

24
<PAGE> 27

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by this Item 10 is incorporated herein by
reference from the Corporation's Proxy Statement for its Annual Meeting of
Shareholders on July 16, 1996, except for certain information concerning the
executive officers of the Corporation which is set forth in Part I of this
Report.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this Item 11 is set forth in the Corporation's
Proxy Statement for its Annual Meeting of Shareholders on July 16, 1996, and is
incorporated herein by this reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this Item 12 is set forth in the Corporation's
Proxy Statement for its Annual Meeting of Shareholders on July 16, 1996, and is
incorporated herein by this reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this Item 13 is set forth in the Corporation's
Proxy Statement for its Annual Meeting of Shareholders on July 16, 1996, and is
incorporated herein by this reference.

25
<PAGE> 28

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) (1) Financial Statements

The following consolidated financial statements of the Corporation and its
subsidiaries are incorporated by reference as part of this Report at Item 8
hereof.

Independent Auditors' Report.

Consolidated Balance Sheets -- March 31, 1996 and 1995.

Consolidated Statements of Earnings -- for the fiscal years ended March 31,
1996, 1995 and 1994.

Consolidated Statements of Shareholders' Equity -- for the fiscal years
ended March 31, 1996, 1995 and 1994.

Consolidated Statements of Cash Flows -- for the fiscal years ended March
31, 1996, 1995 and 1994.

Notes to Consolidated Financial Statements -- for the fiscal years ended
March 31, 1996, 1995 and 1994.

(a) (2) Financial Statement Schedules

<TABLE>
<S> <C>
Independent Auditors' Report --..... At page 28 of this Report.
Schedule I --....................... Condensed financial information of registrant
(at pages 29-31 of this Report)
Schedule II --...................... Valuation and qualifying accounts (at page 32
of this Report)
</TABLE>

The information required to be submitted in Schedules III, IV and V for
KRUG International Corp. and consolidated subsidiaries has either been shown in
the financial statements or notes, or is not applicable or required under
Regulation S-X, and, therefore, those schedules have been omitted.

(b) Reports on Form 8-K

During the quarter ended March 31, 1996, no Reports on Form 8-K were
filed by the Corporation.

26
<PAGE> 29

SIGNATURES

PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, KRUG INTERNATIONAL CORP. HAS DULY CAUSED THIS REPORT TO BE
SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, ON THIS 24TH
DAY OF JUNE, 1996.
KRUG INTERNATIONAL CORP.

By: /s/ CHARLES LINN HASLAM
--------------------------------
Charles Linn Haslam
President and Chief Executive
Officer

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF KRUG
INTERNATIONAL CORP. AND IN THE CAPACITIES AND ON THE DATES INDICATED:

<TABLE>
<S> <C> <C>
/s/ CHARLES LINN HASLAM President & Chief Executive Officer
- ------------------------------------ and Director
Charles Linn Haslam

/s/ THOMAS W. KEMP Vice President -- Finance/Treasurer
- ------------------------------------ (Principal Financial and Accounting Officer)
Thomas W. Kemp

/s/ JAMES J. MULLIGAN Director
- ------------------------------------
James J. Mulligan

* W. EDWARD GREENHALGH Director June 24, 1996
- ------------------------------------
W. Edward Greenhalgh

* T. WAYNE HOLT Director
- ------------------------------------
T. Wayne Holt

* ROBERT M. THORNTON, JR. Director
- ------------------------------------
Robert M. Thornton, Jr.
</TABLE>

*The undersigned, by signing his name hereto, executes this Report on Form
10-K for the fiscal year ended March 31, 1996 pursuant to powers of attorney
executed by the above-named persons and filed with the Securities and Exchange
Commission.
/s/ CHARLES LINN HASLAM
------------------------------------
Charles Linn Haslam
Their Attorney-in-Fact

<PAGE> 30

INDEPENDENT AUDITORS' REPORT

Board of Directors
KRUG International Corp.
Dayton, Ohio

We have audited the consolidated financial statements of KRUG International
Corp. and subsidiaries as of March 31, 1996 and 1995, and for each of the three
years in the period ended March 31, 1996, and have issued our report thereon
dated May 17, 1996; such report is included elsewhere in this Form 10-K. Our
audits also included the consolidated financial statement schedules of KRUG
International Corp. and subsidiaries, listed in Item 14. These consolidated
financial statement schedules are the responsibility of the Corporation's
management. Our responsibility is to express an opinion based on our audits. In
our opinion, such consolidated financial statement schedules, when considered in
relation to the basic financial statements taken as a whole, present fairly in
all material respects the information set forth therein.

DELOITTE & TOUCHE LLP

Dayton, Ohio
May 17, 1996

28
<PAGE> 31

KRUG INTERNATIONAL CORP. AND SUBSIDIARIES

SCHEDULE I -- CONDENSED FINANCIAL INFORMATION
OF REGISTRANT, KRUG INTERNATIONAL CORP.

BALANCE SHEETS
(AMOUNTS IN THOUSANDS)

<TABLE>
<CAPTION>
================================================================================================
MARCH 31, MARCH 31,
1996 1995
<S> <C> <C>
- ------------------------------------------------------------------------------------------------
ASSETS
Current assets......................................................... $ 798 $ 780
Property, plant & equip. -- net........................................ 751 836
Receivable from subsidiaries........................................... 4,646 4,087
Investment in subsidiaries on the equity method........................ 27,186 27,255
Other assets........................................................... 1,574 1,642
--------- ---------
$34,955 $34,600
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities.................................................... $ 1,892 $ 1,726
Payable to subsidiaries................................................ 11,497 10,977
Subsidiary liability guaranteed by registrant.......................... 564 934
Long-term debt......................................................... 6,472 6,895
--------- ---------
Total liabilities................................................. 20,425 20,532
--------- ---------
Shareholders' equity:
Common shares........................................................ 2,538 2,506
Additional paid-in capital........................................... 4,224 4,090
Retained earnings.................................................... 7,870 6,699
Foreign currency translation adjustment.............................. (102) 773
--------- ---------
Total shareholders' equity........................................ 14,530 14,068
--------- ---------
$34,955 $34,600
======== ========
</TABLE>

29
<PAGE> 32

KRUG INTERNATIONAL CORP. AND SUBSIDIARIES

SCHEDULE I -- CONDENSED FINANCIAL INFORMATION
OF REGISTRANT, KRUG INTERNATIONAL CORP.

STATEMENTS OF EARNINGS AND RETAINED EARNINGS
(AMOUNTS IN THOUSANDS)

<TABLE>
<CAPTION>
==============================================================================================
FISCAL YEAR ENDED
MARCH 31,
--------------------------
1996 1995 1994
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------
Revenues:
Net sales....................................................... $ 143 $ 187 $1,985
Dividend income from Krug International (UK) LTD................ 1,595 4,462
Dividend income from Krug Life Sciences Inc..................... 1,099 4,614
------ ------ ------
Total revenues............................................. 1,242 6,396 6,447
Costs and expenses:
Costs of goods sold............................................. (282) (201) 2,501
Selling and administrative...................................... 1,938 1,697 1,712
Interest expense................................................ 938 1,284 1,272
Other (income), net............................................. (20) (448) (434)
------ ------ ------
Earnings before income taxes and equity in undistributed net
earnings (loss) of subsidiaries................................. (1,332) 4,064 1,396
Income taxes -- provided on separate return basis................. (374) 1,315 475
------ ------ ------
Earnings before equity in undistributed net earnings (loss) of
subsidiaries.................................................... (958) 2,749 921
Equity in undistributed net earnings (loss) of subsidiaries....... 2,129 (737) 497
------ ------ ------
Net earnings...................................................... 1,171 2,012 1,418
Retained earnings, beginning of year.............................. 6,699 4,690 3,274
Cash paid in lieu of fractional shares............................ (3) (2)
------ ------ ------
Retained earnings, end of year.................................... $7,870 $6,699 $4,690
====== ====== ======
</TABLE>

30
<PAGE> 33

KRUG INTERNATIONAL CORP. AND SUBSIDIARIES

SCHEDULE I -- CONDENSED FINANCIAL INFORMATION
OF REGISTRANT, KRUG INTERNATIONAL CORP.

STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)

<TABLE>
<CAPTION>
==============================================================================================
FISCAL YEAR ENDED
MARCH 31,
-----------------------------
1996 1995 1994
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------
Cash flows provided by (used in) operating activities:
Net earnings................................................. $ 1,171 $ 2,012 $ 1,418
Adjustments to reconcile earnings to cash provided by (used
in) operating activities:
Accounts receivable....................................... 40 424 130
Other..................................................... (675) (62) (1,355)
------- ------- -------
Net cash provided by operating activities...................... 536 2,374 193
------- ------- -------
Cash flows provided by (used in) financing activities:
Increase (decrease) in net payable to subsidiaries........... (39) (371) 304
Bank borrowing -- net........................................ (1,000) 100
Additions to long-term debt.................................. 4,879
Payments on long-term debt................................... (573) (8,746) (1,665)
Sale of common shares........................................ 166 31
------- ------- -------
Net cash (used in) financing activities........................ (446) (5,207) (1,261)
------- ------- -------
Cash flows provided by (used in) investing activities:
Additions to property, plant and equipment................... (5) (14)
Proceeds from sale of assets................................. 422 39
Cash dividends received from subsidiaries.................... 1,595 967
------- ------- -------
Net cash provided by (used in) investing activities............ (5) 2,017 992
------- ------- -------
Net increase (decrease) in cash................................ 85 (816) (76)
Cash at beginning of year...................................... 345 1,161 1,237
------- ------- -------
Cash at end of year............................................ $ 430 $ 345 $ 1,161
======= ======= =======
</TABLE>

31
<PAGE> 34

KRUG INTERNATIONAL CORP. AND SUBSIDIARIES

SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS

(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
============================================================================================================
COL. A COL. B COL. C COL. D
- ------------------------------------------------------------------------------------------------------------
ADDITIONS
---------------------------------------
CURRENCY
ALLOWANCE FOR BALANCE AT CHARGED TO TRANSLATION DEDUCTIONS BALANCE
DOUBTFUL BEGINNING COSTS AND /FOREIGN FROM AT END
ACCOUNTS OF YEAR EXPENSES ACQUISITION RESERVES YEAR
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year Ended
March 31, 1996........................... $ 595 $ 144 $ (37) $ 44 $ 658
======== ======== ======== ======== ======
Year Ended
March 31, 1995........................... $ 634 $ (7) $ 54 $ 86 $ 595
======== ======== ======== ======== ======
Year Ended
March 31, 1994........................... $ 597 $ 155 $ (19) $ 99 $ 634
======== ======== ======== ======== ======
</TABLE>

<TABLE>
<CAPTION>
============================================================================================================
COL. A COL. B COL. C COL. D
- ------------------------------------------------------------------------------------------------------------
DEFERRED INCOME CURRENCY
TAX ASSET BALANCE AT ADDITIONS TRANSLATION DEDUCTIONS BALANCE
VALUATION BEGINNING TO /FOREIGN FROM AT END
ALLOWANCE OF YEAR RESERVES ACQUISITION RESERVES OF YEAR
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year Ended
March 31, 1996............................ $ 6,280 $ 0 $ (136) $ 125 $ 6,019
======== ======= ======== ======== ======
Year Ended
March 31, 1995............................ $ 6,800 $ 0 $ 198 $ 718 $ 6,280
======== ======= ======== ======== ======
Year Ended
March 31, 1994............................ $ 7,028 $ 0 $ (40) $ 188 $ 6,800
======== ======= ======== ======== ======
</TABLE>

32
<PAGE> 35

INDEX TO EXHIBITS

<TABLE>
<CAPTION>
LOCATED AT
NUMBERED PAGE
-------------
<S> <C> <C> <C>
(3) ARTICLES OF INCORPORATION AND BY-LAWS:
3.1 Articles of Incorporation of KRUG International Corp., as
amended, was filed as Exhibit 3.1 to the Corporation's Report on
Form 10-K for the year ended March 31, 1992..................... *
3.2 Code of Regulations of KRUG International Corp., as amended, was
filed as Exhibit 3.2 to the Corporation's Report on Form 10-K
for the year ended March 31, 1991............................... *
(4) INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS,
INCLUDING INDENTURES:
4.1 Credit Agreement among KRUG International Corp.,
Technology/Scientific Services, Inc., KRUG Life Sciences Inc.
and Society Bank, N.A., The Central Trust Company, N.A.,
Comerica Bank, CoreStates Bank, N.A. and Security Pacific
National Bank dated November 14, 1991 was filed as Exhibit 4.1
to the Corporation's Report on Form 8-K dated November 25, 1991,
as well as the following related documents: (i) Amendment No. 1
to the Credit Agreement, dated November 22, 1991; (ii) Form of
Term Note, dated November 14, 1991; (iii) Form of Revolving
Credit Note, dated November 14, 1991; (iv) Form of Security
Agreement, dated November 14, 1991; (v) Amendment No. 1 to
Security Agreement; (vi) Open-End Mortgage, dated November 14,
1991 and Amendment No. 1 to Open-End Mortgage, dated November
22, 1991........................................................ *
4.2 Amendment No. 2 to the Credit Agreement (listed at 4.1
immediately above) dated July 31, 1992 was filed as Exhibit 4.4
to the Corporation's Report on Form 10-K for the year ended
March 31, 1993.................................................. *
4.3 Amendment to the Credit Agreement (listed at 4.1 above) dated
May 25, 1993 was filed as Exhibit 4.5 to the Corporation's
Report on Form 10-K for the year ended March 31, 1993........... *
4.4 Amendment No. 2 to the Credit Agreement (listed at 4.1 above)
dated June 10, 1994 was filed as Exhibit 4.6 to the
Corporation's Report on Form 8-K dated June 17, 1994............ *
4.5 Amendment No. 4 to the Credit Agreement (listed at 4.1 above)
dated March 16, 1995 was filed as Exhibit 4.7 to the
Corporation's Report on Form 10-K for the year ended March 31,
1995............................................................ *
4.6 Loan and Security Agreement dated March 16, 1995 among KRUG
International Corp., KRUG Life Sciences Inc.,
Technology/Scientific Services, Inc. and Transamerica Business
Credit Corporation was filed as Exhibit A on Form 8-K dated
March 17, 1995.................................................. *
4.7 Amendment No. 1 to the Loan and Security Agreement (listed at
4.6 above) dated September 26, 1995 is filed as an Exhibit to
this Report..................................................... 35
4.8 Loan Facility dated December 8, 1994 among KRUG International
(UK) Limited, Sowester Limited and National Westminster Bank is
filed as an Exhibit to this Report.............................. 37
4.9 Loan Facility dated December 8, 1994 among KRUG International
(UK) Limited, Beldray Limited and National Westminster Bank is
filed as an Exhibit to this Report.............................. 57
</TABLE>

33
<PAGE> 36

<TABLE>
<CAPTION>
LOCATED AT
NUMBERED PAGE
-------------
<S> <C>
MATERIAL CONTRACTS:
10.1 1981 Incentive Stock Option Plan, as amended was filed as
Exhibit 10.1 to the Corporation's Report on Form 10-K for the
year ended March 31, 1993....................................... *
10.2 1985 Incentive Stock Option Plan, as amended was filed as
Exhibit 10.2 to the Corporation's Report on Form 10-K for the
year ended March 31, 1993....................................... *
10.3 1995 Incentive Stock Option Plan is filed as an Exhibit to this
Report.......................................................... 76
10.4 Consulting Agreement between KRUG International Corp. and
Maurice F. Krug dated April 30, 1996 is filed as an Exhibit to
this Report..................................................... 81
(21) SUBSIDIARIES:
The active subsidiaries of KRUG International Corp. are listed
below, do business under the name under which they are
organized, and are included in the consolidated financial
statements of the Corporation. The names, jurisdiction of
incorporation of such subsidiaries, and percentage of voting
securities owned by the Corporation are set forth below.
</TABLE>

<TABLE>
<CAPTION>
PERCENTAGE OF
JURISDICTION IN VOTING SECURITIES
NAME OF SUBSIDIARY WHICH INCORPORATED OWNED
- --------------------------------- ------------------ -----------------
<S> <C> <C>
Technology/Scientific Services,
Inc. Ohio 100%
KRUG Life Sciences Inc. Ohio 100%
KRUG Properties Inc. Ohio 100%(1)
KRUG Properties Ltd. Ontario, Canada 100%(1)
KRUG International (U.K.) Ltd. United Kingdom 100%
Beldray Limited United Kingdom 100%(2)
Sowester Limited United Kingdom 100%(2)
</TABLE>

----------------------

(1) Subsidiaries included within discontinued operations.

(2) Subsidiaries of KRUG International (U.K.) Ltd.

<TABLE>
<S> <C>
(23) CONSENTS OF EXPERTS AND COUNSEL:
23.1 Consent of Deloitte & Touche LLP dated June 27, 1996 with
respect to material incorporated by reference into KRUG
International Corp. Post-Effective Amendment No. 1 to the
Registration Statement on Form S-8 (No. 2-81404) relating to the
Corporation's 1981 Incentive Stock Option Plan, the Registration
Statement on Form S-8 (No. 33-22847) relating to the
Corporation's 1985 Incentive Stock Option Plan, the Registration
Statement on Form S-8 (No. 33-67920) relating to the
Corporation's Incentive Share Option Scheme 1985 and the
Registration Statement on Form S-8 (No. 333-06129) relating to
the Corporation's 1995 Incentive Stock Option Plan 90
(24) POWER OF ATTORNEY:
Powers of attorney of any person who signed this Report on Form
10-K by authorizing another person to sign on his behalf
pursuant to said power of attorney 91
(27) FINANCIAL DATA SCHEDULE:
Financial Data Schedule for the fiscal year ended March 31, 1996 94
</TABLE>

- ---------------

* Indicates that this Exhibit is incorporated by reference into this Annual
Report on Form 10-K from a previous filing with the Commission.

<PAGE> 1

AMENDMENT NO. 1 TO LOAN AND SECURITY AGREEMENT
----------------------------------------------

AMENDMENT NO. 1, dated as of September 26, 1995, between TRANSAMERICA
BUSINESS CREDIT CORPORATION ("Lender"), and KRUG INTERNATIONAL CORP.
("Borrower") and Borrower's wholly-owned Subsidiaries, KRUG LIFE SCIENCES INC.
("Life Sciences") and TECHNOLOGY/SCIENTIFIC SERVICES, INC. ("TSSI") (Life
Sciences and TSSI hereinafter referred to individually as a "Borrowing
Subsidiary", and collectively as "Borrowing Subsidiaries").

Lender and Borrower and Borrowing Subsidiaries are parties to a Loan
and Security Agreement, dated as of March 16, 1995 (the "Loan and Security
Agreement"). Lender, Borrower and Borrowing Subsidiaries desire to amend the
Loan and Security Agreement in certain respects and, accordingly, the parties
hereto agree as follows:

1. DEFINITIONS. Except as otherwise provided herein, the terms
defined in the Loan and Security Agreement are used herein as defined therein.

2. AMENDMENT. For the period October 1, 1995 to and including
September 30, 1996, the definition of "Borrowing Base" in Section 3.1(a) of the
Loan and Security Agreement is restated as follows:

"The 'Borrowing Base' shall mean, at any particular time, an
amount equal to (a) ninety percent (90%), or such other percentage as
Lender, in its sole discretion, exercised in a commercially reasonable
manner, shall from time to time consider appropriate, of Eligible
Accounts - Billed, plus (b) the lesser of (x) Four Million, Five
Hundred Thousand Dollars ($4,500,000) or (y) eighty percent (80%), or
such other percentage as Lender, in its sole discretion, exercised in
a commercially reasonable manner, shall from time to time consider
appropriate, of Eligible Accounts - Estimated, provided that Lender
shall give Borrower thirty (30) days prior written notice of any
change to such percentages."

From and after October 1, 1996, the definition of "Borrowing Base" shall be
restated as originally stated in the Loan and Security Agreement as follows:

"The 'Borrowing Base' shall mean, at any particular time, an
amount equal to (a) eighty-five percent (85%), or such other
percentage as Lender, in its sole discretion, exercised in a
commercially reasonable manner, shall from time to time consider
appropriate, of Eligible Accounts - Billed, plus (b) the lesser of (x)
Four Million, Five Hundred Thousand Dollars ($4,500,000) or (y)
seventy percent (70%), or such other percentage as Lender, in its sole
discretion, exercised in a commercially reasonable manner, shall from
time to time consider appropriate, of Eligible Accounts - Estimated,
provided that Lender shall give Borrower thirty (30) days prior
written notice of any change to such percentages."

3. REPRESENTATION AND WARRANTY. Borrower and each Borrowing
Subsidiary represents and warrants to Lender that the execution and delivery by
Borrower and each Borrowing Subsidiary of this Amendment No. 1 are within
Borrower's and each Borrowing Subsidiary's corporate power, have been duly
authorized by all necessary or proper corporate action, are not in
contravention of any provision of Borrower's or either Borrowing Subsidiary's

<PAGE> 2
Articles or Certificate of Incorporation or Regulations, will not violate any
law or regulation, or any order or decree of any court or governmental
instrumentality, will not conflict with or result in the breach or termination
of, constitute a default under, or accelerate any performance required by, any
indenture, mortgage, deed of trust, lease, agreement or other instrument to
which Borrower or either Borrowing Subsidiary is a party or by which Borrower
or either Borrowing Subsidiary or any of its property is bound and do not
require the consent or approval of any governmental body, agency, authority or
any other person.

4. NO DEFAULT. Borrower and each Borrowing Subsidiary represents
and warrants that no Default or Event of Default exists as of the date hereof.

5. MISCELLANEOUS. Except as herein provided, the Loan and
Security Agreement shall remain unchanged and in full force and effect. This
Amendment No. 1 may be executed in any number of separate counterparts, each of
which shall, collectively and separately, constitute one agreement. This
Amendment No. 1 and the obligations arising hereunder shall be governed by, and
construed and enforced in accordance with, the laws of the State of Illinois
applicable to contracts made and performed in such state, without regard to the
principles thereof regarding conflict of laws, and any applicable laws of the
United States of America.

IN WITNESS WHEREOF, this Amendment No. 1 has been duly executed as of
the day and year specified at the beginning hereof.

TRANSAMERICA BUSINESS CREDIT KRUG INTERNATIONAL CORP.
CORPORATION

By:_________________________________ By:__________________________________
Name: Matthew N. McAlpine Name: Thomas W. Kemp
Title: Senior Account Executive Title: Vice-President - Finance

KRUG LIFE SCIENCES INC.

By:__________________________________
Name: Thomas W. Kemp
Title: Vice-President - Finance

TECHNOLOGY/SCIENTIFIC
SERVICES, INC.

By:__________________________________
Name: Thomas W. Kemp
Title: Vice-President - Finance

<PAGE> 1

National Westminster Bank
---------------------------------------------------------------------
SOUTH-WEST SURREY BUSINESS CENTRE
P O Box No 1 Your ref
1 Stoke Road
Guildford Our ref PA.SDC.FJB
Surrey GU1 3ZR
Date 8 December 1994
Telephone (0483) 734747
Direct line (0483) 734728 Facsimile (0483) 734741

The Directors, Krug International (UK) Limited, and
The Directors, Sowester Limited
Collier House
163/169 Brompton Road
LONDON
SW3 1PY

Dear Sirs

We are pleased to inform you that we are prepared to place a
loan facility at your disposal on the following terms and
conditions:

1. DEFINITIONS

In this letter, the expressions defined in the Appendix hereto
shall have the meanings respectively ascribed to them therein.

2. FACILITY AMOUNT

pound sterling 2,500,000 (Two Million, Five Hundred Thousand pounds).

3. PURPOSE

The Facility is to be used for the purpose of refinancing the
cost of purchase of land and development of a building at Stinsford
Road, Poole.

4. AVAILABILITY

The Facility Amount will become available for drawing by the
Borrower subject to the prior receipt by the Bank of the
following in form and substance acceptable to the Bank:-

a. the enclosed duplicate of this letter with
the Memorandum of Acceptance thereon duly
signed on behalf of the Borrower;
<PAGE> 2
The Directors, Krug International (UK) Limited, and 8 December 1994
The Directors, Sowester Limited

- -2-

b. a certified copy of the Resolution of the
Board of Directors of the Borrower
authorising acceptance of the terms and
conditions of the Facility and authorising
the person or persons signing the Memorandum
of Acceptance to sign the same on behalf of
the Borrower and authorising a person or
persons to take all such other action on
behalf of the Borrower as may be necessary
for the purposes of this letter (including,
without limitation, the acceptance of
Quotations and agreement as to the manner of
such acceptance and the making of any drawing
hereunder);

c. the Borrower's Memorandum and Articles of
Association, certified as up to date by the
Secretary or a Director of the Borrower
(including if relevant copies of all amending
resolutions);

d. the Security specified in Clause 15(b).

5. DRAWDOWN

a. The Facility may be drawn down with interest
either at a fixed rate (pursuant to Clause 6)
or related to LIBOR, (pursuant to Clause 7)
as specified in the Borrower's drawdown
notice.

b. If the amount, drawn or deemed drawn, is less
than the Facility Amount, the remaining
balance shall be cancelled and no longer
available under the Facility.

6. DRAWINGS : FIXED RATE

a. At any time during the period of 90 days
commencing on the Agreement Date, the
Borrower may request the Bank to provide
quotations for a drawing of not more than the
Facility Amount, a term not exceeding 10
years from the Drawdown Date, and repayment
either in full on the last day of such term
or by specified periodic instalments ending
on such last day.
<PAGE> 3
The Directors, Krug International (UK) Limited, and 8 December 1994
The Directors, Sowester Limited

- -3-

b. Where any Quotation permits repayment by
specified instalments, the Bank may quote
different interest rates by reference to the
proposed periodicity of repayment.

c. Any Quotation must be accepted or declined
immediately upon it being provided by the
Bank. Any Quotation which is not accepted to
the Bank's satisfaction by close of business
on the Quotation Date (i.e. on the date it is
given) shall, unless the Bank otherwise
agrees, be deemed to have been declined. The
Bank will normally confirm in writing the
term of any accepted Quotation and any
Interest Payment Dates agreed in relation to
such confirmation, for whatever reason, shall
not affect the obligations of the Borrower in
respect of any accepted Quotation.

d. Acceptance of any Quotation (whether by
telephone, telex or in any other manner)
shall be binding and shall oblige the
Borrower to draw the funds in full in a
single tranche, in accordance with the terms
of this letter and of such Quotation, not
later than ten business days after the
Quotation Date. If on the expiry of such ten
business day period no instructions have been
received by the Branch in relation to such
accepted Quotation, the Bank will be entitled
to debit the amount thereof to a current
account in the name of the Borrower at the
Branch and the Borrower shall thereby be
deemed to have made a drawing thereof for the
purposes of this letter.

7. DRAWINGS : LIBOR-LINKED

At any time during the period of 90 days commencing on the
Agreement Date, the Borrower may notify the Bank of its wish to draw
the Facility with interest linked to LIBOR. Such notice must be
received not later than 11am on the date of intended drawing, must
be in writing (or by telex or telephone, in each case immediately
confirmed in writing) specifying the date (which must be a Business
Day), Fixture Period and amount (not exceeding the Facility Amount)
of the proposed drawing and a term not exceeding 10 years from the
Drawdown Date, and shall be irrevocable and oblige the Borrower to
draw the funds in full in a single tranche in accordance with the
terms of this letter on the date specified in the notice.
<PAGE> 4
The Directors, Krug International (UK) Limited, and 8 December 1994
The Directors, Sowester Limited

- -4-

8. INTEREST

a. Where the Facility has been drawn pursuant to
Clause 6, the rate of interest payable shall
be the rate stated in the Quotation accepted
by the Borrower in accordance with Clause 6.

b. Where the Facility has been drawn pursuant to
Clause 7, the rate of interest shall be fixed
for successive periods of 3, 6 or 12 months
as selected by the Borrower, or such other
Fixture Periods as may be necessary to ensure
that any repayment instalment takes place at
the end of a Fixture Period (or,
exceptionally, such other Fixture Period as
the Bank may agree). If any Fixture Period
would end on a day which is not a Business
Day it shall be extended to the next
succeeding Business Day. If the Borrower
fails to select a Fixture Period, the period
of three months (or such other period
necessary as aforesaid) shall apply. The
rate of interest for each Fixture Period
shall be the aggregate (rounded up to the
nearest one-sixteenth per cent) of:-

i. 1.25 per cent per annum;

ii. the LIBOR for such Fixture
Period for a corresponding
amount on the first Business
Day of such Fixture Period;
and

iii. the MLA Costs.

c. Interest, calculated on the basis of a year
of 365 days and the actual number of days
elapsed, will be paid in arrears on each
Interest Payment Date. The Borrower
authorises the Bank (but without any
obligation on the Bank to do so, and without
prejudice to any of the Bank's rights in
respect thereof to debit any such interest to
a current account in the name of the Borrower
at the Branch on each Interest Payment Date.

9. ADDITIONAL INTEREST
<PAGE> 5
The Directors, Krug International (UK) Limited, and 8 December 1994
The Directors, Sowester Limited

- -5-

a. Where the Facility has been drawn pursuant to
Clause 7, if at any time during the existence
of the Facility any change takes place in the
operation or structure of the London
Inter-Bank Market for sterling deposits so as
to make such deposits no longer available in
the said Market or so that the offered rate
of interest for such deposits is on a basis
which is, in the opinion of the Bank,
unreasonable for the calculation of the rate
of interest payable on the Facility, then
(without prejudice to Clause 10) the
provisions hereunder shall apply:-

i. The Bank shall within a
reasonable period notify the
Borrower that such change has
taken place.

ii. On the next Interest Payment
Date immediately following
such change the Bank, at its
absolute discretion, shall
apply a rate of interest to
the Facility for a period of
three months from such
interest payment date ('the
negotiating period') but so
that the revised rate of
interest shall not exceed the
aggregate (rounded-up to the
nearest one- sixteenth per
cent) of:

a. 1.25 per cent per annum;

b. the rate at which the Bank
shall be able at such time
to purchase sterling funds
of a comparable amount and
tenor; and

c. the MLA Costs.

iii. During the negotiating period
the Borrower and the Bank
shall by negotiation attempt
to agree a new basis for the
calculation of the rate of
interest applicable to the
Facility and if so agreed a
rate calculated on the said
new basis shall apply from
the first day following the
end of the negotiating
period.

iv. In the event of the Borrower
and the Bank not being able
within the negotiating period
to agree on a new basis for
the calculation of the
interest rate, then all
moneys outstanding advanced
under the Facility, together
with all
<PAGE> 6
The Directors, Krug International (UK) Limited, and 8 December 1994
The Directors, Sowester Limited

- -6-

interest accrued due thereon
(if any) shall become repayable on
the first day following the end of
the negotiating period during which
agreement has not been reached and
the Facility shall be cancelled.

10. FIXED RATE SWITCH

a. Where the Facility has been drawn pursuant to
Clause 7, the Borrower may, by giving not
less than one Business Day's prior notice,
request the Bank to provide Quotations for a
fixed rate of interest to apply to the
Facility from the next Interest Payment Date
following such notice for the remainder of
the term, and for repayment either in full on
the last day of such term or by specified
periodic instalments ending on such last day.

b. The Bank may, at its sole option, either
decline or agree to any such request; if the
Bank so agrees, the provisions of Clause
6(b), (c) and (d) shall apply, provided that
where the Borrower accepts any Quotation, the
Facility shall thereafter be treated as if
drawn pursuant to Clause 6 on the Interest
Payment Date referred to in sub-clause (a)
above, and the fourteen day period referred
to in Clause 6(d) shall not apply.

11. REPAYMENT

a. Where the Facility has been drawn pursuant
to Clause 6:-

i. The Facility will be repaid by the
Borrower in the manner specified in
the accepted Quotation, that is,
either in full on the last day of
the term specified therein or by
instalments (if permitted in the
Quotation) of the amounts and on
the days specified therein, but
not, in either case, before such
day or days (subject to sub-clause
(ii) below).

ii. If the Borrower wishes to repay the
Facility or (where applicable) any
instalments earlier than is
specified in the accepted
Quotation, it may make a request to
the Bank to do so. The Bank may,
at its absolute discretion, either
<PAGE> 7
The Directors, Krug International (UK) Limited, and 8 December 1994
The Directors, Sowester Limited

- -7-

decline such request or agree
on such terms as the Bank may
prescribe (including, without
limitation) for the payment of
compensation to the Bank in
respect of any loss which may be
caused by such early repayment.

iii. No amount repaid may be redrawn.

b. Where the Facility has been drawn pursuant
to Clause 7 (and has not been switched
pursuant to Clause 10):-

i. The principal amount of the
Facility will be repaid by the
Borrower in equal quarterly
instalments commencing 3 months
after the Drawdown Date, with the
final instalment, comprising all
amounts then outstanding under the
Facility, payable on the last day
of the term specified in the
drawdown notice under Clause 7.

ii. The Borrower may, by giving to the
Bank not less than five Business
Days' irrevocable written notice,
prepay the whole or any part of the
Facility before the expiry of such
term provided that, in the event of
a Fixture Period thereby being
broken, the Borrower will pay to
the Bank an additional amount
calculated by reference to
prevailing London Inter-Bank Market
rates of interest, to compensate
the Bank for the loss (if any) it
may incur in replacing the prepaid
funds in the Market for the
remainder of the relative Fixture
Period.

iii. No amount prepaid under paragraph
(ii) above may be reborrowed.

iv. In the event of prepayment under
paragraph (ii) above being of part
only of the Facility, the amount so
prepaid shall be credited (at the
Bank's sole option) either in the
same order, or in inverse order, or
pro rata, to each of the repayment
instalments scheduled to be made
under paragraph (i) above.

12. PAYMENTS
<PAGE> 8
The Directors, Krug International (UK) Limited, and 8 December 1994
The Directors, Sowester Limited

- -8-

All payments due to be made by the Borrower to the Bank
hereunder shall be made to the Bank in full without any
deduction or withholding (whether in respect of set-off,
counterclaim, duties, taxes, charges or otherwise howsoever).

13. OVERDUE PAYMENTS

If and to the extent that full payment of any amount due
hereunder is not made by the Borrower on the due date, then,
without prejudice to the Bank's other rights, interest will be
charged on such overdue amount from the date of such default
to the date upon which payment is received by the Bank (as
well after as before judgement) calculated on the basis of a
year of 365 days and the actual number of days elapsed, at the
rate comprising the aggregate of:-

a. one per cent per annum; and

b. the cost to the Bank of funding such overdue
amount during such period (as determined by the
Bank in its discretion) expressed as an annual
percentage rate.

14. OVERRIDING EVENTS

a. If at any time the Bank shall be of the opinion
that the effect of the introduction of, change
in, or change in the interpretation or
application of, any law, regulation, directive or
request from any governmental or other regulatory
authority (whether or not having the force of
law) including, without limitation, any such
introduction or change that relates to the
taxation of the Bank (other than taxation on its
overall net income) or to the application or
modification of any reserve, deposit or similar
requirement or to any extent to which the Bank
allocates capital resources to its obligations,
is to:

i. impose a cost on, or increase the cost
to, the Bank in relation to its having
entered into this agreement and/or its
obligations hereunder and/or their
performance and/or its assuming or
maintaining any commitment hereunder
and/or its making available or
maintaining the Facility; or

ii. reduce, or prevent the Bank from
obtaining, the rate of return on all or
any of its capital that it has been
achieving
<PAGE> 9
The Directors, Krug International (UK) Limited, and 8 December 1994
The Directors, Sowester Limited

- -9-

or would, in its sole opinion, have been
able to achieve but for its having
entered into this agreement and/or its
obligations hereunder and/or their
performance and/or its assuming or
maintaining any commitment hereunder
and/or its making available or
maintaining the Facility; or

iii. reduce the amount of any sum receivable
by the Bank,

then the Borrower shall, from time to time,
promptly pay to the Bank on demand such
additional amounts which will, in the sole
opinion of the Bank, compensate the Bank in such
respect. A certificate of the Bank specifying
the amount of such compensation, shall, in the
absence of manifest error, be conclusive.

b. The provision of sub-clause (a) above shall not
have effect in relation to any reserve assets
and/or special deposit or liquidity requirements
of the Bank of England when the Facility has been
drawn pursuant to Clause 6 to which the Bank is
subject at the date of this letter, and for so
long and to the extent that the cost of
compliance with the same shall not, in the
opinion of the Bank, have materially altered.

15. SECURITY

a. The Bank has already taken Security from the
Borrower in the form of Cross Guarantees
incorporating Krug International (UK) Ltd and its
subsidiaries for the discharge on demand of all
present and/or future and actual and/or
contingent liabilities of the Borrower to the
Bank.

b. The Bank requires in addition the undermentioned,
in form and substance satisfactory to the Bank,
to be given as Security for such liabilities:-

i. A First and Only Legal Mortgage over the
Borrower's freehold land and warehouse
situated at Stinsford Road, Poole.

ii. A First and only Mortgage Debenture over
the Borrower's assets incorporating a
Specific Charge over book debts,
<PAGE> 10
The Directors, Krug International (UK) Limited, and 8 December 1994
The Directors, Sowester Limited

- -10-

c. The Borrower undertakes to provide to the Bank
any additional documentation in respect of such
Security as the Bank may reasonably require.

16. REPRESENTATIONS AND WARRANTIES

a. The Group represents and warrants that it has
full power to accept and be bound by the terms
and conditions set out in this letter and to make
drawings under the Facility, and has taken all
necessary steps and obtained all necessary
consents and authorisation so to do, and that
accordingly this letter constitutes a legal,
valid and binding obligation of the Group, fully
enforceable in accordance with its terms.

b. The Group represents and warrants as follows:-

i. The Group is duly incorporated and
validly existing under the laws of
England;

ii. The latest audited accounts of the Group
have been prepared in accordance with
generally accepted accounting principles
and practices consistently applied and
fairly represent the financial condition
of the Group at that date and the
results of its operations for the
accounting period ended on that date,
and there has been no adverse change in
such condition since that date which
would materially affect the ability of
the Group to perform and observe the
obligations and provisions binding on it
under this letter;

iii. No Member of the Group is in default
under any agreement to which it is party
or by which it may be bound and no
litigation, arbitration or
administrative proceedings are presently
current or pending or, to its knowledge,
threatened which would materially affect
the ability of the Group to perform and
observe the obligations and provisions
binding upon it under this letter;

iv. No Event of Default has occurred or is
outstanding and no event has occurred
which, with the giving of notice or the
lapse of time, would constitute an Event
of Default; and
<PAGE> 11
The Directors, Krug International (UK) Limited, and 8 December 1994
The Directors, Sowester Limited

- -11-

v. All information, exhibits and reports
furnished to the Bank by the Group in
connection with the Facility were and
remain true and accurate in all respects
and do not omit any fact thereby
rendering misleading any statement
contained therein.

c. The representations and warranties set out above
other than those in 16(b)(v) shall survive the
Group's acceptance of this letter and the drawing
of the Facility and shall be deemed to be
repeated on each day throughout the subsistence
of the Facility with reference to the facts and
circumstances for the time being then obtaining.

17. COVENANTS

a. The Borrower hereby covenants and undertakes that
until the Facility has been repaid:-

i. It will not, without the prior written
consent of the Bank, create, extend or
increase any lien, pledge, charge,
mortgage or other encumbrance upon the
whole or any part of its undertaking,
property or assets (including uncalled
capital) whether present or future other
than (a) liens arising in the ordinary
course of business or by operation of
law where in each case the obligations
secured by the relevant lien have not
been outstanding for a period longer
than such liens are left outstanding in
the normal course of business, and (b)
retention of title provisions where such
provisions relate to assets not
exceeding (in each case) L35,000 in
value;

ii. Tangible Net Worth will not be less than
pound sterling 5,000,000;

iii. The ratio of Total Borrowing to Tangible
Net Worth will not exceed 0.6 to 1;

iv. The Borrower confirms that it will not,
without the prior written consent of the
Bank, permit the repayment of the loan
stock repayable by 2001, until the
facility has been repaid;
<PAGE> 12
The Directors, Krug International (UK) Limited, and 8 December 1994
The Directors, Sowester Limited

- -12-

v. The ratio of its Profit to its Borrowing
Costs will not be less than 3.5 to 1
until May 1995; 4 to 1 thereafter until
the facility has been repaid;

Additionally Krug International (UK) Ltd (the
parent company) hereby undertakes until the
facility has been repaid:-

vi. Its Tangible Net Worth will not be less
than pound sterling 11 million;

vii. The ratio of its total borrowing to its
Tangible Net Worth will not exceed 0.6
to 1.

viii. The ratio of its profits to its
borrowing costs will not be less than
3.5 to 1 until May 1995; and 4 to 1
thereafter until the facility has been
repaid.

ix. Cash generation will be a minimum of
twice its borrowing costs in any
financial year of the parent company.

b. The Borrower hereby undertakes to provide to the
Bank such financial and other information
relating to the Group as the Bank may reasonably
require including (without limitation) copies of
the audited accounts of the borrower and
Subsidiary not later than 6 months after the end
of the accounting period to which they relate,
management accounts and cash flow forecasts for
any obligor.

c. The Borrower will forthwith notify the Bank of
any company which becomes or ceases to be a
Subsidiary or a wholly owned Subsidiary after the
date of this letter.

18. DEFAULT

a. On the occurrence of any of the events
specified below, the Bank may terminate
all or any of its obligations hereunder
and demand immediate repayment of any
indebtedness and all accrued interest,
charges, costs and expenses and execute
all or any of its rights under any
security:-

i. any default in the payment on the due
date by any Obligor of any sum due and
payable to the Bank or
<PAGE> 13
The Directors, Krug International (UK) Limited, and 8 December 1994
The Directors, Sowester Limited

- -13-

any other member of the National
Westminster Group, whether under the
Facility or otherwise where such payment
has not been made within two Business
Days of the due date thereof;

ii. any breach by an Obligor of any term or
condition (including any covenant) of
this letter;

iii. if the Security or any part thereof
shall, for whatever reason, cease to be
fully enforceable in accordance with its
terms or, with effect from the date on
which determination of the continuing
nature of the Security or any part
thereof occurs, such continuing nature
is determined, whether such
determination be actual or constructive
notice or be deemed to have occurred or
if any binding undertaking comprised in
the Security or any part thereof shall
be breached;

iv. if any written representation, warranty
or statement made to the Bank in
connection with the Facility is breached
or is untrue in any material particular
or if the Borrower has failed or fails
to disclose any fact of defect which in
the opinion of the Bank is material to
the Facility;

v. any default by any Obligor in the
performance of any other agreement for
borrowed moneys (whether with the Bank
or any other lender) whereby the due
date of repayment thereunder is rendered
capable of acceleration, or any
indebtedness of any Obligor becomes or
is declared by the holder or lender
thereof to be due and payable prior to
its stated maturity, or such
indebtedness is not repaid in full at
its stated maturity or, if repayable on
demand, is not repaid in full forthwith
upon such demand being made, or if any
guarantee or indemnity given by any
Obligor is not honored when due and
called upon;
<PAGE> 14
The Directors, Krug International (UK) Limited, and 8 December 1994
The Directors, Sowester Limited

- -14-

vi. if a petition is presented for
appointment of an administrator in
relation to any Obligor or to wind up
any Obligor, or if a resolution is
passed to wind up any Obligor, or if any
Obligor makes or seeks to make any
composition or arrangement with its
creditors;

vii. if any Obligor ceases or threatens to
cease to carry on its business or sells,
transfers or otherwise disposes of, in
any one transaction or series of related
transactions, any substantial part of
its assets;

viii. if there has occurred any material
adverse change in the business, assets
or financial condition of the Group
which in the sole opinion of the Bank
may adversely affect the ability of the
Borrower to comply with its obligations
hereunder;

ix. if any Obligor is unable to pay its
debts (whether within the meaning of
Section 123 of the Insolvency Act 1986
or otherwise) or an encumbrancer takes
possession of, or a receiver or an
administrative receiver is appointed
over the whole or any part of its
assets;

x. if any judgement, distress, warrant of
attachment, writ of execution or similar
process is issued, levied, or enforced
upon any asset of any Obligor, or if any
asset held by the Bank as security for
the Facility is charged or becomes
encumbered elsewhere;

xi. if there shall occur, in the Bank's
opinion, a material effective change of
control (as defined by Section 840 of
the Income and Corporation Taxes Act
1988) of any Obligor.

b. The Borrower hereby agrees to notify the Bank
as soon as it becomes aware that there has
occurred an Event of Default or an event
which, with the giving of notice or lapse of
time or both, would be an Event of Default.
<PAGE> 15
The Directors, Krug International (UK) Limited, and 8 December 1994
The Directors, Sowester Limited

- -15-

19. COSTS AND EXPENSES

The Borrower will pay all costs, charges and expenses arising
in connection with the preservation and/or enforcement of the
rights of the Bank hereunder and will indemnify the Bank
against any and all losses, costs and expenses occasioned by
the occurrence of an Event of Default.

20. NOTICES

a. Save is otherwise provided herein, each notice,
request, demand or other communication to be
given or made hereunder shall be given in writing
addressed:-

i. in the case of the Borrower, to its
address stated at the head of this letter
or its address last known to the Bank
(and shall be considered as having been
duly made whether or not the same is
returned undelivered) or to any officer
of the Borrower at any place;

ii. in the case of the Bank, to its address
stated at the head of this letter or such
other address as the Bank may notify to
the Borrower in writing from time to
time.

b. Any notice, request, demand or other
communication to be given or made to the Borrower
shall be deemed to have been delivered:

i. if by post, seventy-two hours after
having been posted first class prepaid in
an envelope addressed as aforesaid; or

ii. if to an officer, at the time of delivery
to such officer; or

iii. if by facsimile or telex, when
despatched.

21. SEVERANCE

If at any time one or more of the provisions contained in this
letter is or becomes invalid, illegal or unenforceable in any
respect, the validity, legality or enforceability of the
remaining provisions hereof shall not in any way be affected
or impaired thereby.
<PAGE> 16
The Directors, Krug International (UK) Limited, and 8 December 1994
The Directors, Sowester Limited

- -16-

22. NON-WAIVER

No failure by the Bank to exercise and no delay by the Bank in
exercising any right, power or privilege hereunder shall
operate as a waiver thereof nor shall any single or partial
exercise of any right, power or privilege preclude any other
or further exercise thereof or the exercise of any other
right, power or privilege. The rights and remedies herein
provided are cumulative and not exclusive of any rights or
remedies provided by law.

23. LAW

This letter shall be governed by and construed in accordance
with the laws of England.

24. INTERPRETATION

a. All expressions in this letter bearing a plural
meaning shall (where the context so admits) also
bear the singular thereof, and vice versa.

b. All references in this letter to any statutory
provision shall be deemed to include any
statutory modification or re-enactment thereof.

c. All clause headings in this letter are for ease
of reference only, and shall not affect the
interpretation of the clauses which they head.

d. The Appendix hereto shall be deemed to be an
integral part of this letter.

25. ACCEPTANCE

The Borrower's acceptance of the terms and conditions
contained in this letter shall be effected by the receipt by
the Bank within 60 days of the date of this letter of the
documents specified in Clause 4, and if such acceptance has
not been effected within this period, the offer comprised in
this letter shall lapse.

Yours faithfully
<PAGE> 17
The Directors, Krug International (UK) Limited, and 8 December 1994
The Directors, Sowester Limited

- -17-

For and on behalf of
National Westminster Bank PLC

MEMORANDUM OF ACCEPTANCE

We hereby accept the Facility on the above terms and
conditions.

.........................................
For and on behalf of NATIONAL WESTMINSTER BANK PLC

Dated ........................

We hereby accept the Facility on the above terms and
conditions.

...........................................
For and on behalf of KRUG INTERNATIONAL (UK) LIMITED AND
SOWESTER LIMITED

Dated ........................
<PAGE> 18
The Directors, Krug International (UK) Limited, and 8 December 1994
The Directors, Sowester Limited

- -18-

"the Agreement Date" shall mean the date upon which the
Borrower's acceptance of the terms and conditions of this
letter is effected in accordance with clause 25.

"the Bank" shall mean National Westminster Bank PLC.

"the Borrower" shall mean Sowester Ltd (registered in England
No. 463358).

"Borrowing Costs" shall mean all continuing, regular or
periodic costs, charges and expenses (including, but not
limited to, interest) incurred by the parent company or the
Borrower as the case may be in effecting, servicing or
maintaining Total Borrowing but shall not include
inter-company management charges.

"the Branch" shall mean the Bank's Guildford, Guildhall
Branch at 135 High Street, Guildford, Surrey GUI 3AB.

"Business Day" shall mean a day on which banks in
general are open in the City of London for the transaction of
business of the nature contemplated by the context in which
the expression appears.

"the Drawdown Date" shall mean the date upon which the
Facility is drawndown (or deemed to be drawndown under Clause
6 (d)), unless previously drawndown pursuant to Clause 10.

"Event of Default" shall mean any event specified in
Clause 18 (a).

"the Facility" shall mean the facility which the Bank
has agreed to make available upon the terms and subject to the
conditions set out in this letter, and save where the context
otherwise requires, shall be deemed to include all sums from
time to time outstanding under the provisions hereof,
including principal, interest, fees, costs and expenses.

"Fixture Period" shall mean a period fixed for the
calculation of the applicable interest rate in accordance with
the provisions of Clause 8 (b).

"the Group" shall mean the Borrower and the Subsidiaries
taken as a whole (and, save where the context does not admit,
any of them individually). If there are no subsidiaries for
the time being, references to the Group shall be taken to be
references to the Borrower itself.

"Guarantor" shall mean any person, company or other body
which has undertaken or at any time during the existence
of the Facility undertakes to guarantee or secure payment to
the Bank of any liability of any member of the Group or to
indemnify the Bank against non-payment thereof or has given or
gives the Bank any other binding
<PAGE> 19
The Directors, Krug International (UK) Limited, and 8 December 1994
The Directors, Sowester Limited

- -19-

undertaking (whether in the nature of suretyship or otherwise)
in relation to the Group or in relation to any member of the
Group.

"Interest Payment Date" shall mean (where the Facility is
drawn pursuant to Clause 6) each day falling at six monthly
intervals after Drawdown Date or (where the Facility is drawn
pursuant to Clause 7 and has not been switched pursuant to
Clause 10) the last day of each Fixture Period (and, if any
Fixture Period is for longer than six months, the day falling
six months after the first day of such Fixture Period).

"LIBOR" shall mean the rate at which sterling deposits are
offered to the Bank in the London Inter-Bank Market.

"Loan Stock" shall mean interest free unsecured Loan Stock
held by Krug International (UK) Ltd and is repayable at par on
31 March 2001 but may be repaid earlier at the option of the
company.

"MLA Costs" shall mean such Costs, if any, as the Bank shall
determine to be necessary to compensate the Bank for complying
with any reserve asset and/or any special deposit or liquidity
requirements, or other requirements having the same or a
similar purpose, of the Bank of England or other UK Government
authority, whether or not such requirements have the force of
law.

"Obligor" shall mean any of the Borrower or any Subsidiary.

"Profit" shall mean the amount of profit of the Group before
management charges taxation, interest payable, and any
unusual, extraordinary or exceptional items.

"Quotation" shall mean a statement by the Bank, in response to
a request under Clause 6(a), of a period and an interest rate
and such other relevant terms upon which the Bank is willing
to make the Facility available.

"Security" shall mean all liens, pledges, charges, mortgages
or other security interests created by the Borrower or any
Guarantor or subsisting over any of their respective
undertakings, rights or assets, and all guarantees,
indemnities and like obligations undertaken by any Guarantor
securing or guaranteeing, or indemnifying the Bank against
non-payment of, any liability of any member of the Group
whatsoever from time to time, and all other binding
undertakings given by any Guarantor to the Bank in relation to
any member of the Group, in any such case whether created,
subsisting or undertaken at the Agreement Date or thereafter
during the existence of the Facility.
<PAGE> 20
The Directors, Krug International (UK) Limited, and 8 December 1994
The Directors, Sowester Limited

- -20-

"Subsidiary" shall mean any subsidiary (as defined by Section
736 of the Companies' Act 1985) for the time being of the
Borrower, "the Subsidiaries" shall mean all of them from time
to time, and "wholly-owned Subsidiary" shall have the meaning
given to it by Section 736 of the Companies' Act (1985).

"Tangible Net Worth" shall mean the amount for the time being
paid up or credited as paid up on the issued share capital of
the Borrower or the parent company as the context may require,
plus all reserves which would, in accordance with the
principles applied in the Reference Accounts, be classified as
shareholders' capital, plus retained earnings, but deducting
assets of the Borrower or parent company which would, in
accordance with such principles, be classified as intangible
assets.

"Total Borrowing" shall mean the total outstanding principal
amounts of all borrowings or moneys otherwise raised by the
Borrower or the parent company, as the context may require
from all sources whatever, whether by way of debenture,
mortgage, unsecured loan, overdraft or in any other manner,
plus the aggregate face amount of all discounted acceptance
credits (excluding after the loan stock, in each case, taking
into account any balances standing to the credit of the
Borrower or the Parent company, as the context may require on
any current account with the Bank).

<PAGE> 1

National Westminster Bank

SOUTH-WEST SURREY BUSINESS CENTRE
P O Box No 1 Your ref
1 Stoke Road
Guildford Our ref PA.SDC.FJB
Surrey GU1 3ZR Date 8 December 1994
Telephone (0483)734747
Direct line (0483)734728 Facsimile (0483) 734741

The Directors, Krug International (UK) Limited, and
The Directors, Beldray Limited
Collier House
163/169 Brompton Road
LONDON
SW3 1PY

Dear Sirs

We are pleased to inform you that we are prepared to place a loan facility at
your disposal on the following terms and conditions:

1. DEFINITIONS

In this letter, the expressions defined in the Appendix hereto shall have the
meanings respectively ascribed to them therein.

2. FACILITY AMOUNT

Pounds sterling 1,500,000 (One Million, Five Hundred Thousand pounds).

3. PURPOSE

The Facility is to be used for the purpose of refinancing the cost of purchase
of factory premises and capital expenditure to the company's freehold premises
at Etruria Way, Mount Pleasant, Bilston, West Midlands.

4. AVAILABILITY

The Facility Amount will become available for drawing by the Borrower subject
to the prior receipt by the Bank of the following in form and substance
acceptable to the Bank:-
<PAGE> 2
The Directors, Krug International (UK) Limited, and 8 December 1994
The Directors, Beldray Limited

- -2-

a. the enclosed duplicate of this letter with the Memorandum of
Acceptance thereon duly signed on behalf of the Borrower;

b. a certified copy of the Resolution of the Board of Directors of the
Borrower authorising acceptance of the terms and conditions of the
Facility and authorising the person or persons signing the
Memorandum of Acceptance to sign the same on behalf of the Borrower
and authorising a person or persons to take all such other action on
behalf of the Borrower as may be necessary for the purposes of this
letter (including, without limitation, the acceptance of Quotations
and agreement as to the manner of such acceptance and the making of
any drawing hereunder);

c. the Borrower's Memorandum and Articles of Association, certified as
up to date by the Secretary or a Director of the Borrower (including
if relevant copies of all amending resolutions);

d. the Security specified in Clause 15(b).

5. DRAWDOWN

a. The Facility may be drawn down with interest either at a fixed rate
(pursuant to Clause 6) or related to LIBOR, (pursuant to Clause 7)
as specified in the Borrower's drawdown notice.

b. If the amount, drawn or deemed drawn, is less than the Facility
Amount, the remaining balance shall be cancelled and no longer
available under the Facility.

6. DRAWINGS: FIXED RATE

a. At any time during the period of 90 days commencing on the Agreement
Date, the Borrower may request the Bank to provide quotations for a
drawing of not more than the Facility Amount, a term not exceeding
10 years from the Drawdown Date, and repayment either in full on the
last day of such term or by specified periodic instalments ending on
such last day.
<PAGE> 3
The Directors, Krug International (UK) Limited, and 8 December 1994
The Directors, Beldray Limited

- -3-

b. Where any Quotation permits repayment by specified instalments, the
Bank may quote different interest rates by reference to the proposed
periodicity of repayment.

c. Any Quotation must be accepted or declined upon it being provided by
the Bank. Any Quotation which is not accepted to the Bank's
satisfaction by close of business on the Quotation Date (i.e. on the
date it is given) shall, unless the Bank otherwise agrees, be deemed
to have been declined. The Bank will normally confirm in writing
the term of any accepted Quotation and any Interest Payment Dates
agreed in relation to such confirmation, for whatever reason, shall
not affect the obligations of the Borrower in respect of any
accepted Quotation.

d. Acceptance of any Quotation (whether by telephone, telex or in any
other manner) shall be binding and shall oblige the Borrower to draw
the funds in full in a single tranche, in accordance with the terms
of this letter and of such Quotation, not later than ten business
days after the Quotation Date. If on the expiry of such ten
business day period no instructions have been received by the Branch
in relation to such accepted Quotation, the Bank will be entitled to
debit the amount thereof to a current account in the name of the
Borrower at the Branch and the Borrower shall thereby be deemed to
have made a drawing thereof for the purposes of this letter.

7. DRAWINGS: LIBOR-LINKED

At any time during the period of 90 days commencing on the Agreement Date, the
Borrower may notify the Bank of its wish to draw the Facility with interest
linked to LIBOR. Such notice must be received not later than 11am on the date
of intended drawing, must be in writing (or by telex or telephone, in each case
immediately confirmed in writing) specifying the date (which must be a Business
Day), Fixture Period and amount (not exceeding the Facility Amount) of the
proposed drawing and a term not exceeding 10 years from the Drawdown Date, and
shall be irrevocable and oblige the Borrower to draw the funds in full in a
single tranche in accordance with the terms of this letter on the date
specified in the notice.
<PAGE> 4
The Directors, Krug International (UK) Limited, and 8 December 1994
The Directors, Beldray Limited

- -4-

8. INTEREST

a. Where the Facility has been drawn pursuant to Clause 6, the rate of
interest payable shall be the rate stated in the Quotation accepted
by the Borrower in accordance with Clause 6.

b. Where the Facility has been drawn pursuant to Clause 7, the rate of
interest shall be fixed for successive periods of 3, 6 or 12 months
as selected by the Borrower, or such other Fixture Periods as may be
necessary to ensure that any repayment instalment takes place at the
end of a Fixture Period (or, exceptionally, such other Fixture
Period as the Bank may agree). If any Fixture Period would end on a
day which is not a Business Day it shall be extended to the next
succeeding Business Day. If the Borrower fails to select a Fixture
Period, the period of three months (or such other period necessary
as aforesaid) shall apply. The rate of interest for each Fixture
Period shall be the aggregate (rounded up to the nearest
one-sixteenth per cent) of:-

i. 1.25 per cent per annum;

ii. the LIBOR for such Fixture Period for a corresponding amount
on the first Business Day of such Fixture Period; and

iii. the MLA Costs.

c. Interest, calculated on the basis of a year of 365 days and the
actual number of days elapsed, will be paid in arrears on each
Interest Payment Date. The Borrower authorises the Bank (but
without any obligation on the Bank to do so, and without prejudice
to any of the Bank's rights in respect thereof) to debit any such
interest to a current account in the name of the Borrower at the
Branch on each Interest Payment Date.

9. ADDITIONAL INTEREST

a. Where the Facility has been drawn pursuant to Clause 7, if at any
time during the existence of the Facility any change takes place in
the operation or structure of the London Inter-Bank Market for
sterling deposits so as to make such deposits no longer available in
the said Market or so that the offered rate of interest for such
deposits is on a
<PAGE> 5
The Directors, Krug International (UK) Limited, and 8 December 1994
The Directors, Beldray Limited

- -5-

basis which is, in the opinion of the Bank, unreasonable for the
calculation of the rate of interest payable on the Facility, then
(without prejudice to Clause 10) the provisions hereunder shall
apply:-

i. The Bank shall within a reasonable period notify the Borrower
that such change has taken place.

ii. On the next Interest Payment Date immediately following such
change the Bank, at its absolute discretion, shall apply a
rate of interest to the Facility for a period of three months
from such interest payment date ('the negotiating period') but
so that the revised rate of interest shall not exceed the
aggregate (rounded-up to the nearest one-sixteenth per cent)
of:

a. 1.25 per cent per annum;

b. the rate at which the Bank shall be able at such time to
purchase sterling funds of a comparable amount and tenor;
and

c. the MLA Costs.

iii. During the negotiating period the Borrower and the Bank shall
by negotiation attempt to agree a new basis for the
calculation of the rate of interest applicable to the Facility
and if so agreed a rate calculated on the said new basis shall
apply from the first day following the end of the negotiating
period.

iv. In the event of the Borrower and the Bank not being able
within the negotiating period to agree on a new basis for the
calculation of the interest rate, then all moneys outstanding
advanced under the Facility, together with all interest
accrued due thereon (if any) shall become repayable on the
first day following the end of the negotiating period during
which agreement has not been reached and the Facility shall be
cancelled.

10. FIXED RATE SWITCH

a. Where the Facility has been drawn pursuant to Clause 7, the Borrower
may, by giving not less than one Business Day's prior notice,
request
<PAGE> 6
The Directors, Krug International (UK) Limited, and 8 December 1994
The Directors, Beldray Limited

- -6-

the Bank to provide Quotations for a fixed rate of interest to apply
to the Facility from the next Interest Payment Date following such
notice for the remainder of the term, and for repayment either in
full on the last day of such term or by specified periodic
instalments ending on such last day.

b. The Bank may, at its sole option, either decline or agree to any
such request; if the Bank so agrees, the provisions of Clause 6(b),
(c) and (d) shall apply, provided that where the Borrower accepts
any Quotation, the Facility shall thereafter be treated as if drawn
pursuant to Clause 6 on the Interest Payment Date referred to in
sub-clause (a) above, and the fourteen day period referred to in
Clause 6(d) shall not apply.

11. REPAYMENT

a. Where the Facility has been drawn pursuant to Clause 6:-

i. The Facility will be repaid by the Borrower in the manner
specified in the accepted Quotation, that is, either in full
on the last day of the term specified therein or by
instalments (if permitted in the Quotation) of the amounts and
on the days specified therein, but not, in either case, before
such day or days (subject to sub-clause (ii) below).

ii. If the Borrower wishes to repay the Facility or (where
applicable) any instalments earlier than is specified in the
accepted Quotation, it may make a request to the Bank to do
so. The Bank may, at its absolute discretion, either decline
such request or agree on such terms as the Bank may prescribe
(including, without limitation) for the payment of
compensation to the Bank in respect of any loss which may be
caused by such early repayment.

iii. No amount repaid may be redrawn.

b. Where the Facility has been drawn pursuant to Clause 7 (and has not
been switched pursuant to Clause 10):-

i. The principal amount of the Facility will be repaid by the
Borrower in equal quarterly instalments commencing 3 months
<PAGE> 7
The Directors, Krug International (UK) Limited, and 8 December 1994
The Directors, Beldray Limited

- -7-

after the Drawdown Date, with the final instalment, comprising
all amounts then outstanding under the Facility, payable on
the last day of the term specified in the drawdown notice
under Clause 7.

ii. The Borrower may, by giving to the Bank not less than five
Business Days' irrevocable written notice, prepay the whole or
any part of the Facility before the expiry of such term
provided that, in the event of a Fixture Period thereby being
broken, the Borrower will pay to the Bank an additional amount
calculated by reference to prevailing London Inter-Bank Market
rates of interest, to compensate the Bank for the loss (if
any) it may incur in replacing the prepaid funds in the Market
for the remainder of the relative Fixture Period.

iii. No amount prepaid under paragraph (ii) above may be
reborrowed.

iv. In the event of prepayment under paragraph (ii) above being of
part only of the Facility, the amount so prepaid shall be
credited (at the Bank's sole option) either in the same order,
or in inverse order, or pro rata, to each of the repayment
instalments scheduled to be made under paragraph (i) above.

12. PAYMENTS

All payments due to be made by the Borrower to the Bank hereunder shall be made
to the Bank in full without any deduction or withholding (whether in respect of
set-off, counterclaim, duties, taxes, charges or otherwise howsoever).

13. OVERDUE PAYMENTS

If and to the extent that full payment of any amount due hereunder is not made
by the Borrower on the due date, then, without prejudice to the Bank's other
rights, interest will be charged on such overdue amount from the date of such
default to the date upon which payment is received by the Bank (as well after
as before judgement) calculated on the basis of a year of 365 days and the
actual number of days elapsed, at the rate comprising the aggregate of:-

a. one per cent per annum; and
<PAGE> 8
The Directors, Krug International (UK) Limited, and 8 December 1994
The Directors, Beldray Limited

- -8-

b. the cost to the Bank of funding such overdue amount during such
period (as determined by the Bank in its discretion) expressed as an
annual percentage rate.

14. OVERRIDING EVENTS

a. If at any time the Bank shall be of the opinion that the effect of
the introduction of, change in, or change in the interpretation or
application of, any law, regulation, directive or request from any
governmental or other regulatory authority (whether or not having
the force of law) including, without limitation, any such
introduction or change that relates to the taxation of the Bank
(other than taxation on its overall net income) or to the
application or modification of any reserve, deposit or similar
requirement or to any extent to which the Bank allocates capital
resources to its obligations, is to:

i. impose a cost on, or increase the cost to, the Bank in
relation to its having entered into this agreement and/or its
obligations hereunder and/or their performance and/or its
assuming or maintaining any commitment hereunder and/or its
making available or maintaining the Facility; or

ii. reduce, or prevent the Bank from obtaining, the rate of return
on all or any of its capital that it has been achieving or
would, in its sole opinion, have been able to achieve but for
its having entered into this agreement and/or its obligations
hereunder and/or their performance and/or its assuming or
maintaining any commitment hereunder and/or its making
available or maintaining the Facility; or

iii. reduce the amount of any sum receivable by the Bank, then the
Borrower shall, from time to time, promptly pay to the Bank on
demand such additional amounts which will, in the sole opinion
of the Bank, compensate the Bank in such respect. A
certificate of the Bank specifying the amount of such
compensation, shall, in the absence of manifest error, be
conclusive.

b. The provision of sub-clause (a) above shall not have effect in
relation to any reserve assets and/or special deposit or liquidity
requirements of the Bank of England when the Facility has been drawn
pursuant to
<PAGE> 9
The Directors, Krug International (UK) Limited, and 8 December 1994
The Directors, Beldray Limited

- -9-

Clause 6 to which the Bank is subject at the date of this letter,
and for so long and to the extent that the cost of compliance with
the same shall not, in the opinion of the Bank, have materially
altered.

15. SECURITY

a. The Bank has already taken Security from the Borrower in the form of
Cross Guarantees incorporating Krug International (UK) Ltd and its
subsidiaries for the discharge on demand of all present and/or
future and actual and/or contingent liabilities of the Borrower to
the Bank.

b. The Bank requires in addition the undermentioned, in form and
substance satisfactory to the Bank, to be given as Security for such
liabilities:-

i. A First and Only Legal Mortgage over the Borrower's freehold
premises at Etruria Way, Mount Pleasant, Bilston, West
Midlands.

ii. A First and only Mortgage Debenture over the Borrower's assets
incorporating a Specific Charge over book debts.

c. The Borrower undertakes to provide to the Bank any additional
documentation in respect of such Security as the Bank may reasonably
require.

16. REPRESENTATIONS AND WARRANTIES

a. The Group represents and warrants that it has full power to accept
and be bound by the terms and conditions set out in this letter and
to make drawings under the Facility, and has taken all necessary
steps and obtained all necessary consents and authorisation so to
do, and that accordingly this letter constitutes a legal, valid and
binding obligation of the Group, fully enforceable in accordance
with its terms.

b. The Group represents and warrants as follows:-

i. The Group is duly incorporated and validly existing under the
laws of England;
<PAGE> 10
The Directors, Krug International (UK) Limited, and 8 December 1994
The Directors, Beldray Limited

- -10-

ii. The latest audited accounts of the Group have been prepared in
accordance with generally accepted accounting principles and
practices consistently applied and fairly represent the
financial condition of the Group at that date and the results
of its operations for the accounting period ended on that
date, and there has been no adverse change in such condition
since that date which would materially affect the ability of
the Group to perform and observe the obligations and
provisions binding on it under this letter;

iii. No member of the Group is in default under any agreement to
which it is party or by which it may be bound and no
litigation, arbitration or administrative proceedings are
presently current or pending or, to its knowledge, threatened
which would materially affect the ability of the Group to
perform and observe the obligations and provisions binding
upon it under this letter;

iv. No Event of Default has occurred or is outstanding and no
event has occurred which, with the giving of notice or the
lapse of time, would constitute an Event of Default; and

v. All information, exhibits and reports furnished to the Bank by
the Group in connection with the Facility were and remain true
and accurate in all respects and do not omit any fact thereby
rendering misleading any statement contained therein.

c. The representations and warranties set out above other than those in
16(b)(v) shall survive the Group's acceptance of this letter and the
drawing of the Facility and shall be deemed to be repeated on each
day throughout the subsistence of the Facility with reference to the
facts and circumstances for the time being then obtaining.

17. COVENANTS

a. The Borrower hereby covenants and undertakes that until the Facility
has been repaid:-

- -11-

property or assets (including uncalled capital) whether
present or future other than (a) liens arising in the ordinary
course of business or by operation of law where in each case
the obligations secured by the relevant lien have not been
outstanding for a period longer than such liens are left
outstanding in the normal course of business, and (b)
retention of title provisions where such provisions relate to
assets not exceeding (in each case) pounds sterling 35,000
in value;

ii. Tangible Net Worth will not be less than pounds sterling
3,500,000;

iii. The ratio of Total Borrowing to Tangible Net Worth will not
exceed 0.6 to 1;

iv. The Borrower confirms that it will not, without the prior
written consent of the Bank, permit the repayment of the loan
stock repayable by 2001, until the facility has been repaid;

v. The ratio of its Profit to its Borrowing Costs will not be
less than 3.5 to 1 until May 1995; 4 to 1 thereafter until the
facility has been repaid;

Additionally Krug International (UK) Ltd (the parent company) hereby
undertakes until the facility has been repaid:-

vi. Its Tangible Net Worth will not be less than pounds sterling
11 million;

vii. The ratio of its total borrowing to its Tangible Net Worth
will not exceed 0.6 to 1.

viii. The ratio of its profits to its borrowing costs will not be
less than 3.5 to I until May 1995; and 4 to 1 thereafter
until the facility has been repaid.

ix. Cash generation will be a minimum of twice its borrowing costs
in any financial year of the parent company.

b. The Borrower hereby undertakes to provide to the Bank such financial
and other information relating to the Group as the Bank may
reasonably require including (without limitation) copies of the
audited
<PAGE> 12
The Directors, Krug International (UK) Limited, and 8 December 1994
The Directors, Beldray Limited

- -12-

accounts of the borrower and Subsidiary not later than 6 months
after the end of the accounting period to which they relate,
management accounts and cash flow forecasts for any obligor.

c. The Borrower will forthwith notify the Bank of any company which
becomes or ceases to be a Subsidiary or a wholly owned Subsidiary
after the date of this letter.

18. DEFAULT

a. On the occurrence of any of the events specified below, the Bank may
terminate all or any of its obligations hereunder and demand
immediate repayment of any indebtedness and all accrued interest,
charges, costs and expenses and execute all or any of its rights
under any security:-

i. any default in the payment on the due date by any Obligor of
any sum due and payable to the Bank or any other member of the
National Westminster Group, whether under the Facility or
otherwise where such payment has not been made within two
Business Days of the due date thereof;

ii. any breach by an Obligor of any term or condition (including
any covenant) of this letter;

iii. if the Security or any part thereof shall, for whatever
reason, cease to be fully enforceable in accordance with its
terms or, with effect from the date on which determination of
the continuing nature of the Security or any part thereof
occurs, such continuing nature is determined, whether such
determination be actual or constructive notice or be deemed to
have occurred or if any binding under-taking comprised in the
Security or any part thereof shall be breached;

iv. if any written representation, warranty or statement made to
the Bank in connection with the Facility is breached or is
untrue in any material particular or if the Borrower has
failed or fails to disclose any fact of defect which in the
opinion of the Bank is material to the Facility;
<PAGE> 13
The Directors, Krug International (UK) Limited, and 8 December 1994
The Directors, Beldray Limited

- -13-

v. any default by any Obligor in the performance of any other
agreement for borrowed moneys (whether with the Bank or any
other lender) whereby the due date of repayment thereunder is
rendered capable of acceleration, or any indebtedness of any
Obligor becomes or is declared by the holder or lender thereof
to be due and payable prior to its stated maturity, or such
indebtedness is not repaid in full at its stated maturity or,
if repayable on demand, is not repaid in full forthwith upon
such demand being made, or if my guarantee or indemnity given
by any Obligor is not honoured when due and called upon;

vi. if a petition is presented for appointment of an administrator
in relation to any Obligor or to wind up any Obligor, or if a
resolution is passed to wind up any Obligor, or if any Obligor
makes or seeks to make any composition or arrangement with its
creditors;

vii. if any Obligor ceases or threatens to cease to carry on its
business or sells, transfers or otherwise disposes of, in any
one transaction or series of related transactions, any
substantial part of its assets;

viii. if there has occurred any material adverse change in the
business, assets or financial condition of the Group which
in the sole opinion of the Bank may adversely affect the
ability of the Borrower to comply with its obligations
hereunder;

ix. if any Obligor is unable to pay its debts (whether within the
meaning of Section 123 of the Insolvency Act 1986 or
otherwise) or an encumbrancer takes possession of, or a
receiver or an administrative receiver is appointed over the
whole or any part of its assets;

x. if any judgement, distress, warrant of attachment, writ of
execution or similar process is issued, levied, or enforced
upon any asset of any Obligor, or if any asset held by the
Bank as security for the Facility is charged or becomes
encumbered elsewhere;
<PAGE> 14
The Directors, Krug International (UK) Limited, and 8 December 1994
The Directors, Beldray Limited

- -14-

xi. if there shall occur, in the Bank's opinion, a material
effective change of control (as defined by Section 840 of the
Income and Corporation Taxes Act 1988) of any Obligor.

19. COSTS AND EXPENSES

The Borrower will pay all costs, charges and expenses arising in connection
with the preservation and/or enforcement of the rights of the Bank hereunder
and will indemnify the Bank against any and all losses, costs and expenses
occasioned by the occurrence of an Event of Default.

20. NOTICES

a. Save as otherwise provided herein, each notice, request, demand or
other communication to be given or made hereunder shall be given in
writing addressed:-

i. in the case of the Borrower, to its address stated at the head
of this letter or its address last known to the Bank (and
shall be considered as having been duly made whether or not
the same is returned undelivered) or to any officer of the
Borrower at any place;

ii. in the case of the Bank, to its address stated at the head of
this letter or such other address as the Bank may notify to
the Borrower in writing from time to time.

b. Any notice, request, demand or other communication to be given or
made to the Borrower shall be deemed to have been delivered:

i. if by post, seventy-two hours after having been posted first
class prepaid in an envelope addressed as aforesaid; or

ii. if to an officer, at the time of delivery to such officer; or
<PAGE> 15
The Directors, Krug International (UK) Limited, and 8 December 1994
The Directors, Beldray Limited

- -15-

iii. if by facsimile or telex, when despatched.

21. SEVERANCE

If at any time one or more of the provisions contained in this letter is or
becomes invalid, illegal or unenforceable in any respect, the validity,
legality or enforceability of the remaining provisions hereof shall not in any
way be affected or impaired thereby.

22. NON-WAIVER

No failure by the Bank to exercise and no delay by the Bank in exercising any
right, power or privilege hereunder shall operate as a waiver thereof nor shall
any single or partial exercise of any right, power or privilege preclude any
other or further exercise thereof or the exercise of any other right, power or
privilege. The rights and remedies herein provided are cumulative and not
exclusive of any rights or remedies provided by law.

23. LAW

This letter shall be governed by and construed in accordance with the laws of
England.

24. INTERPRETATION

a. All expressions in this letter bearing a plural meaning shall (where
the context so admits) also bear the singular thereof, and vice
versa.

b. All references in this letter to any statutory provision shall be
deemed to include any statutory modification or re-enactment
thereof.

c. All clause headings in this letter are for ease of reference only,
and shall not affect the interpretation of the clauses which they
head.

d. The Appendix hereto shall be deemed to be an integral part of this
letter.

<PAGE> 16
The Directors, Krug International (UK) Limited, and 8 December 1994
The Directors, Beldray Limited

- -16-

25. ACCEPTANCE

The Borrower's acceptance of the terms and conditions contained in this letter
shall be effected by the receipt by the Bank within 60 days of the date of this
letter of the documents specified in Clause 4, and if such acceptance has not
been effected within this period, the offer comprised in this letter shall
lapse.

Yours faithfully

For and on behalf of
National Westminster Bank PLC

MEMORANDUM OF ACCEPTANCE

We hereby accept the Facility on the above terms and conditions.

.........................................

For and on behalf of NATIONAL WESTMINSTER BANK PLC

Dated ..............................

We hereby accept the Facility on the above terms and conditions.

...........................................

For and on behalf of KRUG INTERNATIONAL (UK) LIMITED AND BELDRAY LIMITED

Dated ..............................
<PAGE> 17
"the Agreement Date" shall mean the date upon which the Borrower's acceptance
of the terms and conditions of this letter is effected in accordance with
clause 25.

"the Bank" shall mean National Westminster Bank PLC.

"the Borrower" shall mean Beldray Ltd (registered in England No. 62665).

"Borrowing Costs" shall mean all continuing, regular or periodic costs, charges
and expenses (including, but not limited to, interest) incurred by the parent
company or the Borrower as the case may be in effecting, servicing or
maintaining Total Borrowing but shall not include inter-company management
charges.

"the Branch" shall mean the Bank's Guildford, Guildhall Branch at 135 High
Street, Guildford, Surrey GU1 3AB.

"Business Day" shall mean a day on which banks in general are open in the City
of London for the transaction of business of the nature contemplated by the
context in which the expression appears.

"the Drawdown Date" shall mean the date upon which the Facility is drawndown
(or deemed to be drawndown under Clause 6 (d)), unless previously drawndown
pursuant to Clause 10.

"Event of Default" shall mean any event specified in Clause 18 (a).

"the Facility" shall mean the facility which the Bank has agreed to make
available upon the terms and subject to the conditions set out in this letter,
and save where the context otherwise requires, shall be deemed to include all
sums from time to time outstanding under the provisions hereof, including
principal, interest, fees, costs and expenses.

"Fixture Period" shall mean a period fixed for the calculation of the
applicable interest rate in accordance with the provisions of Clause 8 (b).

"the Group" shall mean the Borrower and the Subsidiaries taken as a whole (and,
save where the context does not admit, any of them individually). If there are
no subsidiaries for the time being, references to the Group shall be taken to
be references to the Borrower itself.

"Guarantor" shall mean any person, company or other body which has undertaken
or at any time during the existence of the Facility undertakes to guarantee or
secure payment to the Bank of any liability of any member of the Group or to
indemnify the Bank against non-payment thereof or has given or
<PAGE> 18
The Directors, Krug International (UK) Limited, and 8 December 1994
The Directors, Beldray Limited

- -18-

gives the Bank any other binding undertaking (whether in the nature of
suretyship or otherwise) in relation to the Group or in relation to any member
of the Group.

"Interest Payment Date" shall mean (where the Facility is drawn pursuant to
Clause 6) each day falling at six monthly intervals after Drawdown Date or
(where the Facility is drawn pursuant to Clause 7 and has not been switched
pursuant to Clause 10) the last day of each Fixture Period (and, if any Fixture
Period is for longer than six months, the day falling six months after the
first day of such Fixture Period).

"LIBOR" shall mean the rate at which sterling deposits are offered to the Bank
in the London Inter-Bank Market.

"Loan Stock" shall mean interest free unsecured Loan Stock held by Krug
International (UK) Ltd and is repayable at par on 31 March 2001 but may be
repaid earlier at the option of the company.

"MLA Costs" shall mean such Costs, if any, as the Bank shall determine to be
necessary to compensate the Bank for complying with any reserve asset and/or
any special deposit or liquidity requirements, or other requirements having the
same or a similar purpose, of the Bank of England or other UK Government
authority, whether or not such requirements have the force of law.

"Obligor" shall mean any of the Borrower or any Subsidiary.

"Profit" shall mean the amount of profit of the Group before management charges
taxation, interest payable, and any unusual, extraordinary or exceptional
items.

"Quotation" shall mean a statement by the Bank, in response to a request under
Clause 6(a), of a period and an interest rate and such other relevant terms
upon which the Bank is willing to make the Facility available.

"Accounts" shall mean the audited consolidated accounts of the parent company
for the accounting period ended 31 March 1994 or as the case may be the Audited
Accounts of the Borrower for the accounting period ended 31 March 1994.
<PAGE> 19
The Directors, Krug International (UK) Limited, and
8 December 1994
The Directors, Beldray Limited

- -19-

"Security" shall mean all liens, pledges, charges, mortgages or other security
interests created by the Borrower or any Guarantor or subsisting over any of
their respective undertakings, rights or assets, and all guarantees,
indemnities and like obligations undertaken by any Guarantor securing or
guaranteeing, or indemnifying the Bank against non-payment of, any liability of
any member of the Group whatsoever from time to time, and all other binding
undertakings given by any Guarantor to the Bank in relation to any member of
the Group, in any such case whether created, subsisting or undertaken at the
Agreement Date or thereafter during the existence of the Facility.

"Subsidiary" shall mean any subsidiary (as defined by Section 736 of the
Companies' Act 1985) for the time being of the Borrower, "the Subsidiaries"
shall mean all of them from time to time, and "wholly-owned Subsidiary" shall
have the meaning given to it by Section 736 of the Companies' Act (1985).

"Tangible Net Worth" shall mean the amount for the time being paid up or
credited as paid up on the issued share capital of the Borrower or the parent
company as the context may require, plus all reserves which would, in
accordance with the principles applied in the Reference Accounts, be classified
as shareholders' capital, plus retained earnings, but deducting assets of the
Borrower or parent company which would, in accordance with such principles, be
classified as intangible assets.

"Total Borrowing" shall mean the total outstanding principal amounts of all
borrowings or moneys otherwise raised by the Borrower or the parent company, as
the context may require from all sources whatever, whether by way of debenture,
mortgage, unsecured loan, overdraft or in any other manner, plus the aggregate
face amount of all discounted acceptance credits (excluding after the loan
stock, in each case, taking into account any balances standing to the credit of
the Borrower or the Parent company, as the context may require on any current
account with the Bank).

<PAGE> 1

KRUG INTERNATIONAL CORP.
1995 INCENTIVE STOCK OPTION PLAN
--------------------------------

Section 1. Purposes.
- --------------------

The purposes of the 1995 Incentive Stock Option Plan (the
"Plan") are (a) to provide incentives to officers and other key employees of
the Corporation upon whose judgment, initiative and efforts the long-term
growth and success of the Corporation is largely dependent; (b) to assist the
Corporation in attracting and retaining key employees of proven ability; and
(c) to increase the identity of interests of such key employees with those of
the Corporation's shareholders by providing such employees options to acquire
Common Shares, without par value, of the Corporation and thereby participate in
the growth and development of the Corporation.

Section 2. Definitions.
- -----------------------

(a) "Board" means the Board of Directors of the Corporation.

(b) "Corporation" means KRUG International Corp.; when used
in the Plan with reference to employment, "Corporation" shall include any
Subsidiary of the Corporation.

(c) "Fair Market Value" means (1) if the Shares are listed on
the NASDAQ National Market, the last sale price of a Share on the National
Market on the date the value of a Share is to be determined or, if there are no
sales on such date, the mean of the bid and asked prices for Shares on the
National Market at the close of business on such date; or (2) if the Shares are
not listed on the NASDAQ National Market, the value determined by such
reasonable method as shall be approved by the Board.

(d) "Incentive Stock Option" means an option granted under
the Plan which qualifies as an incentive stock option under Section 422 of the
Internal Revenue Code of 1986, as amended.

(e) "Rule 16b-3" means Rule 16b-3 promulgated under the
Securities Exchange Act of 1934 as the same may be amended from time to time.

(f) "Share" or "Shares" means the Common Shares, without par
value, of the Corporation.

(g) "Subsidiary" means any company more than 50% of the
voting stock of which is owned or controlled, directly or indirectly, by the
Corporation.
<PAGE> 2
Section 3. Administration.
- --------------------------

(a) ADOPTION. The Plan was approved by the Board on May 19,
1995 and will become effective upon its approval by the holders of a majority
of the shares constituting a quorum and present, in person or by proxy, at the
1995 Annual Meeting of Shareholders. The Plan will terminate on May 19, 2005,
and no options may be granted under the Plan after termination.

(b) AMENDMENT. The Plan and options granted under the Plan
may be amended, modified or terminated by the Board, provided that:

(1) No action with respect to an outstanding option may be taken
that would adversely affect the rights of the holder of such option
without such holder's consent; and

(2) No amendment to the Plan shall become effective without
approval by the holders of a majority of the Shares present, in person
or by proxy, at an annual or special shareholders meeting at which a
quorum is present if such amendment would:

(i) increase the number of shares with respect to
which options may be granted under the Plan; or

(ii) extend the term of the Plan; or

(iii) materially increase the benefits accruing to or
modify eligibility requirements for participants in the Plan.

(c) OPTION GRANTS. Subject to the provisions of the Plan,
except as provided in Section 5, the Board shall, in its sole discretion,
determine the persons to whom, and the times at which, options are granted, the
number of Shares subject to each option, the option price per Share, and any
other terms of options.

(d) INTERPRETATION. The Board will have the sole discretion
and authority to interpret the Plan and to decide all questions arising under
the Plan.

Section 4. Option Shares.
- -------------------------

(a) NUMBER. The maximum number of Shares that may be issued
upon exercise of options granted under the Plan is 250,000 Shares. Such Shares
may be authorized and unissued Shares or treasury Shares.

2
<PAGE> 3
(b) ADJUSTMENT. The Board will appropriately adjust the
number of Shares subject to the Plan and the number and option price of Shares
subject to outstanding options in the event of any change in outstanding Shares
by reason of a share dividend, recapitalization, merger, consolidation,
split-up, combination, exchange of shares or other similar corporate change.

(c) UNEXERCISED OPTIONS. Shares subject to unexercised
options which terminate will thereupon become available for the grant of
additional options.

Section 5. Eligible Employees.
- ------------------------------

Options may be granted by the Board to officers and other key
employees of the Corporation, except that options to officers and other key
employees who are also members of the Board may only be granted by a committee
comprised of three or more directors, each of whom is a disinterested person
within the meaning of Rule 16b-3.

Section 6. Options and Option Terms.
- ------------------------------------

(a) DESIGNATION OF OPTIONS. Options granted under the Plan
are intended to qualify as Incentive Stock Options. The Board may, however, in
its discretion, grant options under the Plan which would not qualify as
Incentive Stock Options.

(b) OPTION AGREEMENT. The terms of each option will be set
forth in a stock option agreement approved by the Board.

(1) No option may be granted under the Plan at an option price
which is less than the Fair Market Value of a Share on the date of
grant.

(2) Each option shall be for a term of 10 years after the date
of grant.

(3) No option will be exercisable either in whole or in part
within two years after the date on which it is granted. Thereafter,
each option may be exercised as follows: one-third of the total
number of Shares covered thereby may be purchased during the third
year after grant of the option, an additional one-third during the
fourth year and an additional one-third during the fifth year. To the
extent that any Shares are not purchased during the third, fourth or
fifth year periods after the grant of the option, they may be
purchased during the remaining period or periods of the option.
Notwithstanding the foregoing, the Board may, either

3
<PAGE> 4
before or after the grant of an option, provide that an option may be
exercised at any time (including during the first two years after the
grant of the option), either as to an increased number of Shares or as
to all Shares, in such cases as the Board may deem appropriate,
including without limitation, in the event the optionee retires with
the approval of the Corporation or in the event of a proposed merger
or consolidation to which the Corporation may be a party or a sale of
substantially all the assets of the Corporation.

(4) No option may be exercised under the Plan unless the
optionee has been continuously employed by the Corporation from the
date of grant to the date of exercise except that an option may be
exercised within one year after the termination of the optionee's
employment, to the extent the option was exercisable on the date of
termination, if the cause of termination was death.

(d) ADDITIONAL PROVISIONS RELATING TO INCENTIVE STOCK
OPTIONS. The following additional terms and provisions shall apply to
Incentive Stock Options granted under the Plan:

(1) No Incentive Stock Option shall be granted to an employee
who possesses at the time of grant more than 10% of the voting power
of all classes of stock of the Corporation unless the option price is
at least 110% of the Fair Market Value of the Shares subject to the
option on the date the option is granted and the option is not
exercisable after the expiration of five years from the date of grant.

(2) No Incentive Stock Option may be exercisable in an amount
exceeding the limitation of Section 422(d) of the Internal Revenue
Code of 1986, as amended.

Section 7. Procedure for Exercise and Payment.
- ----------------------------------------------

An option granted under the Plan may be exercised by the
optionee giving written notice of exercise to the President (or the designee of
the President) of the Corporation. The option price for the Shares purchased
shall be paid in full at the time such notice is given. An option shall be
deemed exercised on the date the Corporation receives written notice of
exercise, together with full payment for the Shares purchased. The option
price may be paid to the Corporation either in cash, by delivery to the
Corporation of Shares already-owned by the optionee or by any combination of
cash and such Shares. The Board may, however, at any time and in its
discretion, adopt guidelines limiting or restricting the use of already-owned
Shares to pay all or any portion of the option price. In the event
already-owned Shares are

4
<PAGE> 5
used to pay all or a portion of the option price, the amount credited to
payment of the option price shall be the Fair Market Value of the already-owned
Shares on the date the option is exercised. In no case may an option be
exercised for a fraction of a Share.

Section 8. Non-Transferability.
- -------------------------------

Options may not be sold, pledged, assigned, hypothecated, or
transferred except by will, by the laws of descent and distribution or pursuant
to a qualified domestic relations order as defined in Rule 16b-3.

Section 9. Conditions Upon Granting of Options and Issuance of Certificates.
- ----------------------------------------------------------------------------

No option shall be granted and Shares shall not be issued upon
the exercise of an option unless the grant of options, the exercise of such
option, and the issuance and delivery of Shares pursuant thereto shall comply
with all relevant provisions of Federal and state law, including, without
limitation, the Securities Act of 1933, as amended, the Securities Exchange Act
of 1934, as amended, the rules and regulations promulgated thereunder, and the
requirements of the NASDAQ National Market or any stock exchange upon which the
Shares may then be listed.

Section 10. Notices.
- --------------------

Each notice relating to this Plan shall be in writing and
delivered in person or sent by certified or registered mail to the proper
address. Each notice shall be deemed to have been given on the date it is
delivered or mailed. Each notice to the Corporation shall be addressed as
follows: KRUG International Corp., 6 North Main Street, Suite 500, Dayton,
Ohio 45402-1900, Attention: President. Each notice to the optionee or other
person or persons then entitled to exercise an option shall be addressed to the
optionee or such other person or persons at the optionee's address set forth in
the option. Anyone to whom a notice may be given under this Plan may designate
a new address by written notice to the other party to that effect.

Section 11. Pronouns.
- ---------------------

All pronouns used herein shall be deemed to refer to the
masculine, feminine, singular or plural, as the identity of the person or
persons may require.

Section 12. Effect of Termination of Plan.
- ------------------------------------------

The termination of the Plan shall not adversely affect the
rights of an optionee with respect to any option granted prior to the
termination of the Plan.

<PAGE> 1

CONSULTING AGREEMENT
--------------------

THIS AGREEMENT, dated April 30, 1996, is entered into between KRUG
INTERNATIONAL CORP., an Ohio corporation (the "Corporation"), and MAURICE F.
KRUG (the "Consultant"), under the following circumstances:

A. The Corporation and Consultant are parties to the
Amended Founder's Agreement ("Founder's Agreement"), dated February
14, 1994, pursuant to which, if Consultant ceases to be employed by
the Corporation after a Change in Control of the Corporation as
defined in the Founder's Agreement, Consultant is to be paid $320,000
per year for three years plus a pension of approximately $75,000 per
year for life;

B. Simultaneously with the execution of this Agreement,
Consultant and members of his family are selling substantially all of
the common shares of the Corporation owned by them which will
constitute a Change in Control for purposes of the Founder's
Agreement; and

C. Consultant is willing to give up his rights under the
Founder's Agreement and to act as a consultant to the Corporation upon
the terms and conditions stated herein.

NOW, THEREFORE, IN CONSIDERATION OF THE RESPECTIVE COVENANTS OF THE
PARTIES CONTAINED HEREIN, THE PARTIES HERETO AGREE AS FOLLOWS:

SECTION 1. TERMINATION OF FOUNDER'S AGREEMENT. The Founder's
Agreement is hereby terminated with respect to all rights, duties and
obligations set forth therein, effective at twelve o'clock noon on Friday, May
17, 1996.
<PAGE> 2
SECTION 2. TERM OF CONSULTING AGREEMENT. This Agreement shall
commence at twelve o'clock noon on Friday, May 17, 1996 and shall continue in
force until the expiration of seven (7) years from said date of commencement.

SECTION 3. DUTIES. Consultant shall perform such duties and render
such services to the Corporation as Consultant and the Corporation shall
mutually determine from time to time.

SECTION 4. COMPENSATION. The Corporation shall pay Consultant for
his services a total of Seven Hundred Thousand Dollars ($700,000) as follows:

(1) $300,000 during the first year;
(2) $200,000 during the second year;
(3) $100,000 during the third year; and
(4) $25,000 during each of the last four years.

Each yearly payment shall be payable in approximately equal installments in
accordance with the normal pay schedule the Corporation maintains for its
officers and subject to such withholding as required by applicable Federal and
State laws and regulations. Should Consultant die during the term of this
Agreement the Corporation shall continue to make the payments called for in
this Section 4 to the persons or entities that the Consultant shall have last
designated in writing to the Corporation or if the Consultant shall fail to
designate a person or entity or if the person or entity so designated shall not
be in existence at the time of any payment pursuant to this Section 4, then to
Consultant's estate.

SECTION 5. OTHER BENEFITS.

2
<PAGE> 3
During the term of this Agreement the Corporation shall continue to
provide to Consultant at its expense the following benefits to the same extent
or substantially to the same extent that it presently provides them: (1)
medical and drug insurance and (2) group life insurance ($325,000).

SECTION 6. EXPENSE REIMBURSEMENT. Consultant shall be entitled to
reimbursement from the Corporation for reasonable "out-of-pocket" expenses
incurred with the prior approval of the Corporation in the performance of his
duties hereunder in accordance with the Corporation's expense reimbursement
policy.

SECTION 7. RELATIONSHIP OF PARTIES. It is understood by the parties
that Consultant is an independent contractor with respect to the Corporation
and not an employee of the Corporation. The Corporation will provide no fringe
benefits, other than those called for in Section 5, for the benefit of
Consultant.

SECTION 8. NON-DISCLOSURE. Without the Corporation's prior express
written consent, Consultant will not, whether during or after expiration of
this Agreement, in any manner whatsoever, except as necessary to fulfill any
obligation to the Corporation as a consultant, (i) furnish, disclose or make
accessible to any person or entity, (ii) assist any person or entity in
obtaining or learning, or (iii) use, any confidential or proprietary
information which is owned or held by the Corporation in any form.

After termination of this Agreement, Consultant shall surrender any
such tangible confidential information, including all copies thereof, to the
Corporation immediately upon the Corporation's written request. Consultant
shall continue to adhere to all of his obligations hereunder after any such
return of any tangible confidential information, and shall not thereafter make
use of any such confidential information for any purpose until such

3
<PAGE> 4
information ceases to be confidential or becomes part of the public domain
through no fault of Consultant.

SECTION 9. NON-COMPETITION. Because of Consultant's prior
relationship with the Corporation and his knowledge of its operations and
assets, and to induce the Corporation to enter into this Agreement, Consultant
agrees that during the term of this Agreement, he shall not directly or
indirectly, as a principal or solely or jointly with others as a director,
officer, agent, employee, consultant or partner, stockholder or limited partner
owning more than four percent (4%) of the stock of or equity interest in, or
securities exercisable for or convertible into more than four percent (4%) of
the stock of, or equity interest in, any corporation, limited partnership or
other entity, without the Corporation's prior written consent (i) carry on or
engage in any Competitive Operation; (ii) give advice to, or otherwise act on
behalf of, a Competitive Operation; (iii) lend or allow his name or reputation
to be used in or by a Competitive Operation; or (iv) carry on in any other
manner a Competitive Operation. This covenant shall extend to each county in
any state in the United States in which the business of the Company has ben
carried on, as well as to those other areas of the world where the Company's
business has been conducted. For purposes of this Agreement, "Competitive
Operation" means any enterprise that engages in substantial and direct
competition with any business operation currently conducted by the Corporation
or any of its subsidiaries.

SECTION 10. SUCCESSOR; BINDING AGREEMENT. The Corporation shall
require any successor (whether direct or indirect, by purchase, merger,
consolidation, spin-off or otherwise) to all or a significant part of the
business or assets of the Corporation, by agreement in form and substance
reasonably satisfactory to Consultant, to expressly assume and agree to perform
this Agreement in the same manner and to the same extent that the

4
<PAGE> 5
Corporation would be required to perform it if no such succession had taken
place. As used herein, "Corporation" shall mean KRUG International Corp. and
any successor to its business and/or its assets as aforesaid which executes and
delivers the agreement provided for in this Section 10 or which otherwise
becomes bound by the terms and provisions of this Agreement by operation of
law.

SECTION 11. NO SET-OFF. The obligations of the Corporation under
this Agreement shall be absolute and unconditional. No set-off, counterclaim
or defense of any kind which the Corporation has or may have against Consultant
shall be available to discharge, reduce or otherwise limit the Corporation's
obligations to make payments in accordance with the terms of this Agreement.

SECTION 12. NOTICES. All notices required or permitted under this
Agreement shall be in writing and shall be deemed delivered when delivered in
person or deposited in the United States mail, postage prepaid, addressed as
follows:

Corporation:
KRUG International Corp.
Attention: Chief Executive Officer
6 North Main St. Suite 500
Dayton, OH 45402-1900

Consultant:

Maurice F. Krug
575 Sanctuary Drive, Unit A501
Longboat Key, FL 34228

Such address may be changed from time to time by either party by providing
written notice to the other in the manner set forth above.

5
<PAGE> 6
SECTION 13. ENTIRE AGREEMENT. This Agreement contains the entire
agreement of the parties and there are no other promises or conditions in any
other agreement whether oral or written. This Agreement supersedes any prior
written or oral agreements between the parties.

SECTION 14. AMENDMENT. This Agreement may be modified or amended if
the amendment is made in writing and is signed by both parties.

SECTION 15. SEVERABILITY. If any provision of this Agreement shall
be held to be invalid or unenforceable for any reason, the remaining provisions
shall continue to be valid and enforceable. If a court finds that any
provision of this Agreement is invalid or unenforceable, but that by limiting
such provision it would become valid and enforceable, then such provision shall
be deemed to be written, construed and enforced as so limited.

SECTION 16. WAIVER OF CONTRACTUAL RIGHT. The failure of either party
to enforce any provision of this Agreement shall not be construed as a wavier
or limitation of that party's right to subsequently enforce and compel strict
compliance with every provision of this Agreement.

SECTION 17. APPLICABLE LAW. This Agreement shall be governed by the
laws of the State of Ohio.

IN WITNESS WHEREOF, the undersigned have set their hands hereto on the
date first set forth above.

_________________________________
MAURICE F. KRUG

KRUG INTERNATIONAL CORP.

By: _____________________________

6
<PAGE> 7
GUARANTY
--------

As an inducement to Mr. Krug to sell his shares of the Corporation to the
undersigned, terminate the Founder's Agreement and enter into the Consulting
Agreement, the undersigned hereby agrees as follows:

1. GUARANTY. The undersigned hereby guarantees absolutely and
unconditionally prompt payment when due of all obligations of the Corporation
to Mr. Krug under the Consulting Agreement. In the event of default in the
payment of any such obligations, Guarantor shall pay such obligations within
thirty (30) days of written notice of the Corporation's default. In the event
that Guarantor fails to pay such obligations, Mr. Krug shall be entitled to
recover all costs and expenses which may be incurred by Mr. Krug in any
collection efforts against the Corporation or Guarantor, including reasonable
attorneys' fees.

2. MODIFICATIONS, ETC. None of the Corporation's obligations
under the Consulting Agreement may be modified or supplemented in any manner
that would increase or improve the benefits to Mr. Krug thereunder without the
consent of Guarantor; no other modification or supplement, nor any compromises,
waivers, exchanges or surrenders granted the Corporation by Mr. Krug that do
not increase or improve the benefits to Mr. Krug shall release, affect or
impair Guarantor's liability under this Guaranty. No invalidity of the
Consulting Agreement or any of the Corporation's obligations thereunder shall
affect or impair Guarantor's liability under this Guaranty.

3. ABSOLUTE LIABILITY. The liability of the Guarantor hereunder
is absolute and unconditional, and shall not be affected by reason of any
failure to retain or to preserve rights in any property or against any person
or persons. Guarantor hereby waives any rights

7
<PAGE> 8
to require any such prior enforcement, and agrees that any delay in enforcement
or failure to enforce any such rights shall in no way affect the liability of
Guarantor, even if such rights are thereby lost.

4. BINDING EFFECT. This Guaranty shall be binding upon
Guarantor, its successors and assigns and shall inure to the benefit of Mr.
Krug, his heirs, successors and assigns.

5. ENTIRE AGREEMENT. This Guaranty contains the entire agreement
of the parties and there are no other promises or conditions in any other
agreement whether oral or written. This Guaranty supersedes any prior written
or oral agreements between the parties.

6. AMENDMENT. This Guaranty may be modified or amended if the
amendment is made in writing and is signed by both parties.

7. SEVERABILITY. If any provision of this Guaranty shall be held
to be invalid or unenforceable for any reason, the remaining provisions shall
continue to be valid and enforceable. If a court finds that any provision of
this Guaranty is invalid or unenforceable, but that by limiting such provision
it would become valid and enforceable, then such provision shall be deemed to
be written, construed and enforced as so limited.

8. WAIVER OF CONTRACTUAL RIGHT. The failure of either party to
enforce any provision of this Guaranty shall not be construed as a waiver or
limitation of that party's right to subsequently enforce and compel strict
compliance with every provision of this Guaranty.

9. NOTICES. All notices required or permitted under this
Guaranty shall be in writing and shall be deemed delivered when delivered in
person or deposited in the United States mail, postage prepaid, addressed as
follows:

8
<PAGE> 9
Guarantor:

Ronald J. Vannuki
Fifteenth Floor
100 Wilshire Boulevard
Santa Monica, California 90401

Mr. Krug:

Maurice F. Krug
575 Sanctuary Drive, Unit A501
Longboat Key, FL 34228

Such address may be changed from time to time by either party by
providing written notice to the other in the manner set forth above.

10. APPLICABLE LAW. This Guaranty shall be governed by the laws
of the State of Ohio.

11. CAPTIONS. The captions contained in this Guaranty are for
convenience or reference only and shall not affect the meaning or
interpretation of this Guaranty.

Fortuna Acquisition Partners, L.P.

By: Fortuna Acquisition Corp.,
a general partner

By:_____________________________________
Charles Linn Haslam
President

<PAGE> 1
INDEPENDENT AUDITORS' CONSENT

We consent to the incorporation by reference in the Post-Effective Amendment
No. 1 to Registration Statement No. 2-81404 of KRUG International Corp. on Form
S-8, in Registration Statement No. 33-22847 of KRUG International Corp. on Form
S-8, in Registration Statement No. 33-67920 of KRUG International Corp. on
Form S-8 and in Registration Statement No. 333-06129 of KRUG International
Corp. on Form S-8 of our reports dated May 17, 1996, appearing in the Annual
Report on Form 10-K of KRUG International Corp. for the year ended March 31,
1996.

DELOITTE & TOUCHE LLP

Dayton, Ohio
June 27, 1996

<PAGE> 1

KRUG INTERNATIONAL CORP.

POWER OF ATTORNEY

WHEREAS, KRUG International Corp., an Ohio corporation (the
"Company"), intends to file with the Securities and Exchange Commission its
Annual Report on Form 10-K for the fiscal year ended March 31, 1996;

NOW, THEREFORE, the undersigned, in his capacity as a director of the
Company hereby appoints Charles Linn Haslam, Robert M. Thornton, Jr. and Thomas
W. Kemp, and each of them, to be his true and lawful attorney-in-fact and
agent, with full power of substitution and resubstitution, to execute in his
name, place and stead, the Company's Annual Report on Form 10-K for the fiscal
year ended March 31, 1996 (including any amendment to such report) and any and
all other instruments necessary or incidental in connection therewith, and to
file the same with the Securities and Exchange Commission. Said attorneys
shall have full power and authority to do and perform, in the name and on
behalf of the undersigned, in the aforesaid capacity, every act whatsoever
necessary or desirable to be done, as fully to all intents and purposes as the
undersigned might or could do in person. The undersigned hereby ratifies and
approves the acts of said attorneys.

IN WITNESS WHEREOF, the undersigned has executed this instrument this
24 day of June 1996.

/s/ Robert M. Thornton, Jr.
__________________________________
Robert M. Thornton, Jr.
<PAGE> 2

KRUG INTERNATIONAL CORP.

POWER OF ATTORNEY

IN WITNESS WHEREOF, the undersigned has executed this instrument this
24 day of June 1996.

/s/ T. Wayne Holt
__________________________________
T. Wayne Holt
<PAGE> 3

KRUG INTERNATIONAL CORP.

POWER OF ATTORNEY

IN WITNESS WHEREOF, the undersigned has executed this instrument this
24 day of June 1996.

/s/ W. Edward Greenhalgh
__________________________________
W. Edward Greenhalgh

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<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-START> APR-01-1995
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