<PAGE> 1
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant [X]
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Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to sec. 240.14a-11(c) or sec. 240.14a-12
KRUG International Corp.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and
0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
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[ ] Fee paid previously with preliminary materials.
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was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
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<PAGE> 2
KRUG INTERNATIONAL CORP.
1290 HERCULES DRIVE, SUITE 120
HOUSTON, TEXAS 77058
June 20, 1997
Dear Shareholder:
You are cordially invited to attend the Annual Meeting of Shareholders
which will be held at 10:30 a.m., on Friday, July 18, 1997, at the American
Stock Exchange, 86 Trinity Place, New York, New York.
The accompanying Notice of the Annual Meeting and Proxy Statement contain
detailed information concerning the matters to be considered and acted upon at
the Meeting. The Corporation's 1997 Annual Report to Shareholders is also
enclosed.
We hope you will be able to attend the Meeting and meet and talk with
your Corporation's management. As in the past, we will report on the
operations of the Corporation and comment on matters of current interest.
Whether or not you plan to attend the Annual Meeting, it would be most
helpful if you would execute and return the enclosed proxy card at your
earliest convenience. That way you will be sure to be represented at the
Meeting. If you later find you can attend the Meeting, you may then withdraw
your proxy and vote in person.
Sincerely,
/s/ CHARLES LINN HASLAM
CHARLES LINN HASLAM
Chairman
<PAGE> 3
KRUG INTERNATIONAL CORP.
1290 HERCULES DRIVE, SUITE 120
HOUSTON, TEXAS 77058
----------
NOTICE OF 1997 ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON JULY 18, 1997
----------
TO THE SHAREHOLDERS OF KRUG INTERNATIONAL CORP.:
The Annual Meeting of Shareholders of KRUG INTERNATIONAL CORP. will be
held at 10:30 a.m., Eastern Daylight Savings Time, on Friday, July 18, 1997, at
the American Stock Exchange, 86 Trinity Place, New York, New York, for the
purpose of considering and voting upon:
1. Election of four directors for a two-year term;
2. Approval of the 1997 Employee Stock Purchase Plan described in the
accompanying Proxy Statement; and
3. Such other business as may properly come before the meeting or any
adjournment thereof.
Whether or not you expect to be present, please mark, sign, date and
return the enclosed proxy promptly in the envelope provided. Giving the proxy
will not affect your right to vote in person if you attend the meeting.
By order of the Board of Directors.
JAMES J. MULLIGAN
Secretary
June 20, 1997
2
<PAGE> 4
KRUG INTERNATIONAL CORP.
1290 HERCULES DRIVE, SUITE 120
HOUSTON, TEXAS 77058
----------
PROXY STATEMENT
FOR 1997 ANNUAL MEETING OF SHAREHOLDERS
----------
This proxy statement is furnished in connection with the solicitation by
the Board of Directors of KRUG INTERNATIONAL CORP., an Ohio corporation (the
"Corporation"), of proxies to be used at the Annual Meeting of Shareholders to
be held on July 18, 1997 and any adjournment thereof. The close of business on
June 9, 1997 has been fixed as the record date for the determination of the
holders of Common Shares entitled to vote at the meeting and each such
shareholder is entitled to one vote per share. There were 5,151,206 Common
Shares outstanding at the close of business on June 9, 1997.
All shares represented by properly executed proxies received by the Board
of Directors pursuant to this solicitation will be voted in accordance with the
shareholder's directions specified on the proxy. If no directions have been
specified by marking the appropriate places on the accompanying proxy card, the
shares will be voted in accordance with the Board's recommendations which are
FOR the election of Charles Linn Haslam, Robert M. Thornton, Jr., T. Wayne Holt
and James J. Mulligan as directors of the Corporation and FOR adoption of the
1997 Employee Stock Purchase Plan. A shareholder signing and returning the
accompanying proxy has power to revoke it at any time prior to its exercise by
delivering to the Corporation a later dated proxy or by giving notice to the
Corporation in writing or in open meeting but without affecting any vote
previously taken.
The presence, in person or by properly executed proxy, of the holders of
a majority of the Corporation's outstanding shares is necessary to constitute a
quorum at the Annual Meeting. Shares represented by proxies received by the
Corporation will be counted as present at the Annual Meeting for the purpose of
determining the existence of a quorum, regardless of how or whether such shares
are voted on a specific proposal. Abstentions will be treated as votes cast on
a particular matter as well as shares present at the Annual Meeting. Where
nominee shareholders do not vote on specific issues because they did not
receive specific instructions on such issues from the beneficial owners of such
shares ("Broker Nonvotes"), such Broker Nonvotes will not be treated as either
votes cast or shares present.
This proxy statement and the accompanying proxy card were first mailed
to shareholders on or about June 20, 1997.
3
<PAGE> 5
ELECTION OF DIRECTORS
The Corporation's Board of Directors is presently comprised of seven
persons and is divided into two classes, with one class having four members and
the other class three members. One class of directors is elected at each
Annual Meeting of Shareholders for a term of two years.
At the 1997 Annual Meeting, shareholders will elect four directors who
will hold office until the Annual Meeting of Shareholders in 1999. The Board
of Directors has nominated Charles Linn Haslam, Robert M. Thornton, Jr., T.
Wayne Holt and James J. Mulligan, all of whom are presently directors of the
Corporation, for election to a term of office expiring at the 1999 Annual
Meeting.
It is the intention of the proxy agents named in the proxy, unless
otherwise directed, to vote such proxy for the election of Messrs. Haslam,
Thornton, Holt and Mulligan. Should any of them be unable to accept the office
of director, an eventuality which is not anticipated, proxies may be voted with
discretionary authority for a substitute nominee or nominees designated by the
Board of Directors. The four nominees receiving the highest number of votes
cast will be elected directors.
The following table sets forth certain information about the nominees for
election and the directors whose terms of office will continue after the
meeting.
<TABLE>
<CAPTION>
COMMON SHARES
BENEFICIALLY OWNED
AS OF 6/9/97
NAME AND OFFICES PRESENTLY DIRECTOR -------------------------
HELD WITH CORPORATION SINCE NUMBER (1) % OF CLASS
--------------------- ----- ---------- ----------
NOMINEES FOR TERM OF OFFICE EXPIRING IN 1999:
---------------------------------------------
<S> <C> <C> <C>
Charles Linn Haslam(2) . . . . . . . . . . . . . . 1996 100(3) (7)
Director, Chairman and
Chief Executive Officer
Robert M. Thornton, Jr.(2) . . . . . . . . . . . . 1996 67,800(3)(4) 1.3
Director and President
T. Wayne Holt . . . . . . . . . . . . . . . . . . 1993 15,931 (7)
Director
James J. Mulligan . . . . . . . . . . . . . . . . . 1966 32,285(5) (7)
Director and Secretary
DIRECTORS WHOSE TERM OF OFFICE EXPIRES IN 1998:
-----------------------------------------------
W. E. Greenhalgh . . . . . . . . . . . . . . . . . 1993 0 0
Director
Karen Brenner(2) . . . . . . . . . . . . . . . . . 1996 134,900(3)(6) 2.6
Director
Bernee D. L. Strom(2) . . . . . . . . . . . . . . 1996 0 0
Director
</TABLE>
4
<PAGE> 6
(1) This column shows the number of Common Shares of the Corporation
beneficially owned as of June 9, 1997 as confirmed by each nominee or
director and includes, where applicable, shares owned by members of the
individual's household. Unless otherwise indicated, each individual has
voting power and investment power which are exercisable solely by such
individual or are shared by such individual with members of his or her
household.
(2) Mses. Brenner and Strom and Messrs. Haslam and Thornton were recommended
for election as directors by the Fortuna Group (as defined below).
(3) Ms. Brenner and Messrs. Haslam and Thornton each have significant equity
interests in one or more of the Fortuna Group entities.
(4) Includes 23,000 shares that may be acquired upon the exercise of
warrants.
(5) Includes 5,380 shares that may be acquired upon the exercise of warrants.
(6) Includes (a) 126,280 shares (which includes 8,330 shares which may be
acquired upon the exercise of warrants) over which Ms. Brenner, as a
registered investment advisor, has shared investment power and (b)
warrants to purchase an additional 220 shares.
(7) Less than 1%.
Certain information concerning each person listed in the above table,
including his or her principal occupation for at least the last five years, is
set forth below.
Charles Linn Haslam, 53, has been Chairman of the Board since July 16,
1996, Chief Executive Officer since May 17, 1996 and was President of the
Corporation from May 17, 1996 until July 16, 1996. Mr. Haslam practiced law in
Washington, D.C., from January 1980 to May 1996. He was General Counsel,
United States Department of Commerce during the Carter Administration (January
1977 to December 1979) and University Counsel and Adjunct Professor of Law at
Duke University from 1974 to 1977.
Robert M. Thornton, Jr., 48, has been President of the Corporation since
July 16, 1996. From October 1994 to the present, he has been a private
investor and, since March 1995, Chairman and Chief Executive Officer of
CareVest Capital, LLC, a private investment and management services firm. Mr.
Thornton was President, Chief Operating Officer, Chief Financial Officer and a
Director of Hallmark Healthcare Corporation from November 1993 until Hallmark's
merger with Community Health Systems, Inc. in October 1994. From October 1987
until November 1993, Mr. Thornton was Executive Vice President, Chief Financial
Officer, Secretary and Treasurer and a Director of Hallmark.
T. Wayne Holt, 70, was involved continuously with the Corporation's life
sciences, aerospace and engineering operations for 22 years commencing with his
initial employment in
5
<PAGE> 7
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. Holt came out of retirement and was President of
KRUG Life Sciences Inc., a position he previously held, from April 15, 1995
until his second retirement on April 15, 1997.
James J. Mulligan, 75, 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 LLP from 1989 until his retirement in 1991. Mulligan & Mulligan is
general counsel to the Corporation and received $99,055 for legal services
rendered during the Corporation's last fiscal year.
W. E. Greenhalgh, 66, has been associated continuously with KRUG
International (UK) Ltd. (formerly Butterfield Harvey PLC) from 1960 to the
present. He has served in a variety of capacities, including as Chief
Executive Officer from 1983 until his retirement in 1989, and as a
non-executive director and consultant from 1989 to the present. He has also
served as the non-executive Chairman of Beldray Ltd. and Sowester Ltd. from
1989 to the present.
Karen Brenner, 44, has been President of Fortuna Advisors, Inc., an
investment advisory firm located in Newport Beach, California since 1993.
Fortuna Advisors, Inc. succeeded to the business of Karen Brenner Registered
Investment Advisor which was formed by Ms. Brenner in 1984 and operated by her
from 1984 to 1993. Ms. Brenner is a director of DDL Electronics, Inc.
Bernee D. L. Strom, 50, has been President and Chief Executive Officer
since April 1995 of USA Digital Radio, L.P. (a partnership between Gannett
Co., Inc. and Westinghouse Electric Corporation). From 1990 to 1995, she was
President and Chief Executive Officer of the Strom Group, a management
consulting and business advisory firm. From 1990 to 1992, she was President
and Chief Executive Officer of MBS Technologies, Inc., a computer software
company. Ms. Strom is a director of Polaroid Corporation and DDL Electronics,
Inc. and is a member of the Board of Advisors of the J. L. Kellogg Graduate
School of Management at Northwestern University and the Board of Advisors of
Entrepreneurial Center of Columbia University.
INFORMATION CONCERNING THE BOARD OF DIRECTORS
The Board of Directors held 5 meetings during fiscal 1997. The Board has
an Executive Committee, an Audit Committee and an Executive Compensation
Committee, but no nominating committee. The Audit Committee held 2 meetings
and the Executive Compensation Committee held 1 meeting in fiscal 1997.
6
<PAGE> 8
The Executive Committee is empowered to exercise all of the authority of
the Board of Directors except as to matters not delegable to a committee under
the General Corporation Law of Ohio. The members of the Committee are Messrs.
Haslam (Chairman), Thornton and Holt.
The Audit Committee meets with Corporation personnel and representatives
of the Corporation's independent public accountants to review internal
accounting controls, internal auditing procedures and matters relating to the
annual audit of the Corporation's financial statements. The Committee reports
its findings and recommendations to the Board of Directors. The members of the
Committee are Mr. Mulligan (Chairman) and Mses. Strom and Brenner.
The Executive Compensation Committee acts in an advisory capacity to the
Board of Directors with respect to compensation of the Corporation's
executives. The members of the Committee are Mses. Strom (Chairman) and
Brenner and Mr. Mulligan.
Each non-employee director receives a monthly fee of $700 for services as
a director. In addition, he or she receives $850 for attendance at a meeting
of the Board of Directors, $500 for attending a committee meeting and $400 for
participating in telephone meetings. In fiscal 1997, all directors attended
all of the meetings of the Board of Directors and of the committees on which
they served.
PRINCIPAL HOLDERS OF COMMON SHARES
Set forth below is certain information concerning the only persons known
by the Board of Directors of the Corporation to be the beneficial owners of
more than 5% of the outstanding Common Shares of the Corporation as of June 9,
1997.
<TABLE>
<CAPTION>
COMMON SHARES AND WARRANTS TO PURCHASE
COMMON SHARES BENEFICIALLY OWNED AS OF 6/9/97(1)
------------------------------------------------
NAME AND ADDRESS NUMBER
---------------- --------------------
SHARES WARRANTS % OF CLASS
------ -------- ----------
<S> <C> <C> <C>
FORTUNA ACQUISITION 1,494,774 296,722 32.9
PARTNERS, L.P.(2)
100 Wilshire Boulevard
Fifteenth Floor
Santa Monica, CA 90401
STROME-SUSSKIND 200,000 64,252 5.1
HEDGECAP FUND, L.P.(3)
100 Wilshire Boulevard
Fifteenth Floor
Santa Monica, CA 90401
</TABLE>
- -----------------------
7
<PAGE> 9
(1) Under applicable Securities and Exchange Commission regulations, shares
are treated as "beneficially owned" if a person has or shares voting or
investment power with respect to the shares or has a right to acquire the
shares within 60 days of June 9, 1997. Unless otherwise indicated, sole
voting power and sole investment power are exercised by the named person.
In calculating "% of Class" for a person, shares which may be acquired by
the person within such 60-day period are treated as owned by the person
and as outstanding shares.
(2) The shares and warrants beneficially owned by Fortuna Acquisition
Partners, L.P. include 264,252 shares (including warrants to purchase
64,252 shares) beneficially owned by Strome-Susskind Hedgecap Fund, L.P.,
100 Wilshire Boulevard, Fifteenth Floor, Santa Monica, CA 90401.
Strome-Susskind Hedgecap Fund, L.P. has granted an irrevocable proxy to
vote its shares, subject to certain conditions, to Fortuna Acquisition
Corp., the general partner of FC Partners, L.P., which is the general
partner of Fortuna Acquisition Partners, L.P.
FC Partners, L.P., 100 Wilshire Boulevard, Fifteenth Floor, Santa Monica,
CA 90401, is the general partner of Fortuna Acquisition Partners, L.P.
Fortuna Acquisition Corp., 100 Wilshire Boulevard, Fifteenth Floor, Santa
Monica, CA 90401, is the general partner of FC Partners, L.P., and has
sole voting power with respect to all of the shares of the Corporation
beneficially owned by Fortuna Acquisition Partners, L.P., and sole
investment power with respect to 1,527,244 of said shares.
Ronald J. Vannuki, 100 Wilshire Boulevard, Fifteenth Floor, Santa Monica,
CA 90401, Karen Brenner, 1300 Bristol Street North, Suite 230, Newport
Beach, CA 92660, C. L. Haslam, 1290 Hercules Drive, Suite 120, Houston,
TX 77058, and Robert M. Thornton, Jr., 1090 Northchase Parkway, Suite 200
South, Marietta, GA 30067-6402, own all of the outstanding shares of
Fortuna Acquisition Corp. Mr. Vannuki and Ms. Brenner are the directors
and officers of said corporation.
(3) Strome-Susskind Investment Management, L.P., 100 Wilshire Boulevard,
Fifteenth Floor, Santa Monica, CA 90401 ("SSIM"), is investment adviser
and general partner of Strome-Susskind Hedgecap Fund, L.P. and, as such,
it has sole investment power with respect to these shares. SSCO, Inc.,
100 Wilshire Boulevard, Fifteenth Floor, Santa Monica, CA 90401, is the
general partner of SSIM. Mark E. Strome, 100 Wilshire Boulevard,
Fifteenth Floor, Santa Monica, CA 90401, is the settlor and trustee of
The Strome Family Trust which is the controlling shareholder of SSCO,
Inc.
Richard Fechtor, 155 Federal Street, Boston, MA 02110, beneficially owns
169,169 shares of the Corporation.
8
<PAGE> 10
Fortuna Investment Partners, L.P., 100 Wilshire Boulevard, Fifteenth
Floor, Santa Monica, CA 90401, beneficially owns 84,475 shares (including
warrants to purchase 74,475 shares of the Corporation). Fortuna Capital
Management, Inc., 100 Wilshire Boulevard, Fifteenth Floor, Santa Monica, CA
90401 is the general partner of Fortuna Investment Partners, L.P. Ronald J.
Vannuki is the sole shareholder and President of Fortuna Capital Management,
Inc. Fortuna Advisors, Inc. is an advisor to Fortuna Investment Partners, L.P.
Fortuna Advisors, Inc., 1300 Bristol Street North, Suite 230, Newport
Beach, CA 92660, a registered investment adviser, is the beneficial owner of
126,280 shares (including warrants to purchase 8,330 shares) held in clients'
accounts. Karen Brenner is the sole shareholder and President of Fortuna
Advisors, Inc. Ms. Brenner also beneficially owns an additional 8,620 shares
(including warrants to purchase 220 shares) of the Corporation.
CareVest Capital, LLC ("CareVest"), 1090 Northchase Parkway, Suite 200
South, Marietta GA 30067-6402, beneficially owns 62,800 shares (including
warrants to purchase 23,000 shares). Robert M. Thornton, Jr., owns a majority
of the outstanding shares of CareVest. Mr. Thornton also beneficially owns an
additional 5,000 shares of the Corporation.
The parties listed above in this section have filed with the Securities
and Exchange Commission, as a group, a Schedule 13D and amendments thereto
under the Securities Exchange Act of 1934 relating to their beneficial
ownership of shares of the Corporation. Much of the information set forth
herein with respect to beneficial ownership of shares of the Corporation was
obtained from Amendment No. 3 to Schedule 13D dated March 6, 1997. The parties
listed above are sometimes referred to as the "Fortuna Group". As a group, the
Fortuna Group beneficially owns 2,247,840 shares (including warrants to
purchase 402,747 shares) or 40.4% of the outstanding shares of the Corporation.
COMMON SHARES OWNED BY MANAGEMENT
The following table sets forth the number of Common Shares of the
Corporation beneficially owned as of June 9, 1997 by each named executive
listed in the Summary Compensation Table and by all directors, nominees and
executive officers as a group.
<TABLE>
<CAPTION>
COMMON SHARES BENEFICIALLY
OWNED AS OF 6/9/97
--------------------------------
NAME NUMBER % OF CLASS
---- ------ ----------
<S> <C> <C>
Maurice F. Krug (1) 0 0
C. L. Haslam 100 (4)
Robert M. Thornton, Jr. 67,800(2) 1.3
T. Wayne Holt 15,931 (4)
Robert M. Ellis 0 0
Directors, Nominees and Executive 251,016(3) 4.8
Officers as a Group (8 persons)
</TABLE>
- --------------
9
<PAGE> 11
(1) Mr. Krug served as President and Chief Executive Officer until May 17,
1996 and Chairman until July 16, 1996.
(2) Includes 23,000 shares that may be acquired upon the exercise of
warrants.
(3) Includes 36,930 shares that may be acquired upon the exercise of
warrants.
(4) Less than 1%.
EXECUTIVE COMPENSATION
The following sections of this Proxy Statement set forth compensation
information relating to the Chief Executive Officer and the other executive
officers of the Corporation at March 31, 1997, whose salary and bonus for
fiscal year 1997 exceeded $100,000.
SUMMARY COMPENSATION TABLE
The following table presents for the three fiscal years ended
March 31, 1997, the compensation of the Chief Executive Officer and the other
executive officers at March 31, 1997, whose salary and bonus in fiscal 1997
exceeded $100,000.
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
------------------------------
AWARDS PAYOUTS
------------------------------
ANNUAL COMPENSATION Long
------------------- Securi- Term
Other Re- ties Incen-
Annual stricted Under- tive All Other
Compen- Stock lying Plan Compen-
Name and Salary Bonus sation Award(s) Options Payouts sation
Principal Position Year ($) ($) ($) ($) (#) ($) ($)
- ------------------ -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Maurice F. Krug . 1997 $ 42,462 $ 0 $ 0 $ 0 0 $ 0 $ 250,637(3)
Former Chief Executive 1996 320,000 0 0 0 0 0 2,273
Officer(1) 1995 320,000 0 0 0 0 0 2,133
C. L. Haslam . . . . 1997 $156,875 0 0 0 0 0 $1,125(4)
Chairman and 1996 0 0 0 0 0 0 0
Chief Executive 1995 0 0 0 0 0 0 0
Officer(1)
Robert M. 1997 $106,250 0 0 0 0 0 $ 25,979(5)
Thornton, Jr. . . . . 1996 0 0 0 0 0 0 0
President(2) 1995 0 0 0 0 0 0 0
T. Wayne Holt . . 1997 $148,952 $20,000 0 0 10,000 0 $2,796(4)
President, KRUG Life 1996 130,000 0 0 0 25,000 0 1,873
Sciences Inc. 1995 0 12,000 0 0 0 0 0
Robert M. Ellis . . 1997 $93,362 $18,040 0 0 10,000 0 $20,712(6)
Principal 1996 89,340 10,000 0 0 0 0 489
Accounting 1995 86,584 8,000 0 0 0 0 479
Officer
</TABLE>
- ---------------
10
<PAGE> 12
(1) Mr. Haslam succeeded Mr. Krug as Chief Executive Officer on May 17, 1996.
(2) Mr. Thornton succeeded Mr. Haslam as President on July 16, 1996.
(3) This amount includes $250,000 paid to Mr. Krug under a Consulting
Agreement and $637 contributed by the Corporation under the 401(k) plan.
(4) These amounts were contributed by the Corporation under the 401(k) plan
for the benefit of the named executive.
(5) This amount includes $24,479 paid to Mr. Thornton under a Consulting
Agreement from May 17, 1996 to July 16, 1996 and $1,500 contributed by
the Corporation under the 401(k) plan.
(6) This amount includes $17,952 paid to Mr. Ellis for unused accrued
vacation time, $838 for employee awards and $1,922 contributed by the
Corporation under the 401(k) plan.
OPTION GRANTS IN LAST FISCAL YEAR
The following table shows, for the named executive officers, additional
information about option grants for the fiscal year ended March 31, 1997.
<TABLE>
<CAPTION>
Individual Grants
-------------------------------------------------------
% of Total Potential Realizable Value at Assumed
Number of Options Annual Rates of Stock Price Appreciation for
Shares Granted to Option Term(1)
Underlying Employees Exercise or Expira- --------------
Options in Fiscal Base Price tion
Name Granted (#) Year ($/Shares) Date 0%($) 5%($) 10%($)
---- ----------- ---- ---------- ---- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Maurice F. NA NA NA NA NA NA
Krug
C. L. Haslam NA NA NA NA NA NA
Robert M. NA NA NA NA NA NA
Thorton
T. Wayne 10,000 13.3 $4.50 11/8/99 $ 0 $7,100 $14,900
Holt
Robert M. 10,000 13.3 $4.50 11/8/99 $ 0 $7,100 $14,900
Ellis
</TABLE>
- ------------------
(1) Potential Realizable Value is based on the assumed annual growth rates
for the three-year option term. Actual gains, if any, on stock option
exercises will depend on the future performance of the stock and there is
no assurance that the amounts reflected in this table will be achieved.
11
<PAGE> 13
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
The following table shows information about stock option exercises during
fiscal 1997 and unexercised stock options at 1997 fiscal year end for the named
executive officers.
<TABLE>
<CAPTION>
Number of
Shares Value of
Underlying Unexercised
Unexercised In-The-Money
Options Options
At Fiscal At Fiscal
Year-End (#) Year-End ($)
Shares
Acquired on Value Exercisable/ Exercisable/
Name Exercise (#) Realized ($) Unexercisable Unexercisable
---- ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C>
Maurice F. Krug 0 $ 0 0/0 $0/$0
C. L. Haslam 0 $ 0 0/0 $0/$0
Robert M. Thornton, Jr. 0 $ 0 0/0 $0/$0
T. Wayne Holt 25,000 $53,750 0/10,000 $0/$6,250
Robert M. Ellis 0 $ 0 0/10,000 $0/$6,250
</TABLE>
- ------------------
RETIREMENT PLAN
The following table shows the estimated maximum annual retirement
benefits payable at normal retirement age (65) under the Corporation's
Retirement Plan at selected earnings levels after various years of service.
<TABLE>
<CAPTION>
Average Annual Earnings
During Highest Five
Consecutive Years Estimated Annual Retirement Benefits
of Employment For Specified Years of Service
- ---------------------- ------------------------------
10 Years 20 Years 30 Years
-------- -------- --------
<S> <C> <C> <C>
$ 50,000 $ 8,000 $ 16,000 $ 24,000
100,000 18,000 35,000 53,000
150,000 27,000 55,000 82,000
</TABLE>
- ------------------
The Corporation has a noncontributory Retirement Plan for officers and
other covered employees. Retirement benefits under the plan are calculated on
the basis of the employee's average annual earnings for the highest five
consecutive years of employment and years of credited service up to a maximum
of thirty years. No benefits are payable in respect of annual earnings in
excess of $150,000. The Retirement Plan was amended, effective February 28,
1997,
12
<PAGE> 14
to provide that no employee would become eligible to participate in the Plan
after February 28, 1997 and that neither compensation nor years of service
earned after that date would be used in determining the accrued retirement
benefit.
Earnings for the purpose of calculating retirement benefits include
salary and bonus. Such earnings are shown in the Summary Compensation Table.
The credited years of service for the persons named in the Summary Compensation
Table who participate in the plan are Mr. Haslam - 1 year, Mr. Thornton -
1 year, Mr. Holt - 2 years and Mr. Ellis - 30 years. Amounts shown are
straight life annuity amounts and are not subject to any deduction for Social
Security benefits.
OTHER
Mr. Krug resigned as President and Chief Executive Officer of the
Corporation effective May 17, 1996. During the fiscal year ended March 31,
1996, he was employed by the Corporation under the terms of an Amended
Founder's Agreement pursuant to which he received a salary of $320,000 during
the year. On May 17, 1996, the Amended Founder's Agreement was terminated and
the Corporation entered into a Consulting Agreement with Mr. Krug. The
principal provisions of the Consulting Agreement call for payments of $300,000
during the first year, $200,000 during the second year, $100,000 during the
third year, and $25,000 per year for the next four years, plus continuation of
his medical insurance and group life insurance. While such payments are being
made, Mr. Krug is prohibited from competing with the Corporation. Such
payments are guaranteed by Fortuna Acquisition Partners, L.P.
Mr. Haslam, Chairman and Chief Executive Officer of the Corporation, is
currently employed by the Corporation under the terms of an Employment
Agreement effective May 17, 1996. The Agreement provides for a monthly salary
of $15,000, which was increased to $16,000 per month effective June 1, 1997.
The Agreement is terminable by either party on the last day of any month upon
30 days prior written notice.
Mr. Thornton, President of the Corporation, is currently employed by the
Corporation under the terms of an Employment Agreement also effective May 17,
1996. The Agreement provides for a monthly salary of $12,500, which was
increased to $13,500 per month effective June 1, 1997. The Agreement is
terminable by either party on the last day of any month upon 30 days prior
written notice.
PERFORMANCE GRAPH
The following graph compares the cumulative total shareholder return on
the Corporation's Common Shares for its last five fiscal years with the
cumulative total return of the NASDAQ Market Index, a NASDAQ traded market
capitalization based peer group index, the American
13
<PAGE> 15
Stock Exchange Market Index and an American Stock Exchange listed market
capitalization based peer group index over the same period (assuming the
investment of $100 in each vehicle on March 31, 1992 and reinvestment of all
dividends). The NASDAQ peer group index is comprised of 276 companies and
includes all non-financial NASDAQ companies with a market capitalization of
between $15-$20 million, which were publicly traded throughout the five-year
period. The American Stock Exchange peer group index is comprised of 104
companies and includes all non-financial American Stock Exchange companies with
a market capitalization of between $20-40 million, which were publicly traded
throughout the five-year period. The peer group indexes were developed by an
independent agency. On December 30, 1996, the Corporation's shares were listed
and began trading on the American Stock Exchange. Due to this change and the
fact that the Corporation's shares have been trading at higher levels, the
Corporation believes it is appropriate to compare its return with other
companies on the American Stock Exchange and with companies that have a larger
market capitalization. The Corporation is not aware of any appropriate
industry or line-of-business index with which to compare itself because of the
diversity of the Corporation's businesses and, therefore, it believes a market
capitalization index is appropriate.
[CHART]
14
<PAGE> 16
PERFORMANCE DATA
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
KRUG International Corp. $100 $131.30 $110.34 $137.92 $128.73 $188.50
NASDAQ Peer Group Index $100 $ 83.51 $ 71.00 $ 50.66 $ 43.02 $ 28.43
AmEx Peer Group Index $100 $104.84 $106.16 $ 94.50 $ 92.18 $ 88.97
Broad NASDAQ Market Index $100 $111.91 $129.33 $137.21 $184.56 $206.47
Broad AmEx Market Index $100 $107.57 $110.85 $116.91 $141.34 $142.76
</TABLE>
- ------------------
FISCAL 1997 NASDAQ PEER GROUP
The NASDAQ Peer Group is made up of NASDAQ non-financial companies with a
market value of between $15 and $20 million. The only companies meeting this
criteria for Fiscal 1997 are the following:
<TABLE>
<S> <C> <C>
4FRONT SOFTWARE INTL INC BALTEK CORP CHANTAL PHARMACEUTICAL
ABC DISPENSING TECH INC BANCA QUADRUM SA SPN ADR CHATCOM INC
ABRAMS INDUSTRIES INC BARBER HAIRSTYLING M&W CHEMTRAK INC
ACCENT SOFTWARE INT LTD BATTERY TECHNOLOGIES INC COBRA ELECTRONICS CORP
ACCUGRAPH CORP CL A BERGER HOLDINGS INC LTD COMMUNITY CARE OF AMER
ADVANCED DEPOSITION TECH BIOCONTROL TECHNOLOGY COMMUNITY MED TRANSPORT
ADVANCED MACHINE VSN CLA BIOPOOL INTERNAT INC COMPANY DOCTOR (THE)
AFP IMAGING CORP BIOSPECIFICS TECHNOL CP COMPUTER OUTSOURCING SVC
AID AUTO STORES INC BIRD CORP CONSOLIDATED STAINLESS
AIR METHODS CORP BLUE DOLPHIN ENERGY CO CRYENCO SCIENCES INC
ALL AMER SEMICONDUCTOR BLYVOOR GOLD MINING ADR CRYOMEDICAL SCIENCES INC
ALL-COMM MEDIA CORP BUTLER NATIONAL CORP CSP INC
ALPHA MICROSYSTEMS C BREWER HOMES INC CLA D&K WHOLESALE DRUG
ALPHA TECHNOLOGIES GROUP CALNETICS CORP DAKTRONICS INC
ALPNET INC CAMBRIDGE SOUNDWORKS INC DATAFLEX CORP
AMEDISYS INC CANNON EXPRESS INC CL A DATAWATCH CORP
AMERICAN HEALTHCHOICE CANTAB PHARMACEUTICALS DELTA PETROLEUM CORP
AMERICAN INTERNAT PETROL CANTERBURY CORPORATE SVC DEP CORP
AMERICAN RESOURCES OF DE CAPITAL ASSOCIATES INC DETREX CORPORATION
AMERICAN VANGUARD CORP CARE GROUP INC (THE) DIEHL GRAPHSOFT INC
AMERICAN VANTAGE CO CARETENDERS HEALTHCORP DIGITAL SOUND CORP
AMERIGON INC CL A CASINO RESOURCE CORP DISC GRAPHICS INC
AMISTAR CORP CAYMAN WATER CO LTD ORD DYNATEC INTERNATIONAL
APERTUS TECHNOLOGIES INC CECO ENVIRONMENTAL CORP EAGLE POINT SOFTWARE CP
ARI NETWORK SERVICES INC CELLEGY PHARMACEUTICALS EDUSOFT LTD
ATEC GROUP INC CENTRAL RESERVE LIFE CP ELECTRONIC CLEAR HOUSE
ATHEY PRODUCTS CORP CENTURY CASINOS INC EMCEE BROADCAST PROD INC
ATLANTIC PHARMACEUTICALS EMONS TRANSPORTATION GRP
BADGER PAPER MILLS INC
</TABLE>
15
<PAGE> 17
<TABLE>
<S> <C> <C>
ENERGY WEST INC JAPAN AIRLINES LTD PHOENIX GOLD INTERNAT
ENSCOR INC JB OXFORD HOLDINGS INC POLYDEX PHARMACEUTICALS
ENTERACTIVE INC KATZ DIGITAL TECHNOLOGIES PRECISION STANDARD INC
EQUUS GAMING L.P. CL A KUSHNER-LOCKE CO PRESIDENT CASINOS INC
EUROPA CRUISES CORP LACLEDE STEEL CO PRO-DEX INC CO
EVEREST MEDICAL CORP LAS VEGAS ENTERTAIN NTWK PROPHET 21 INC
FARREL CORP LIFEQUEST MEDICAL INC QUEST INTERNAT RESCS CP
FEMRX INC LIFEWAY FOODS INC RADIUS INC
FIBERSTARS INC LIGHTPATH TECH INC CL A REPLIGEN CORP
FLAGSTAR COMPANIES INC LINDAL CEDAR HOMES INC REUNION INDUSTRIES INC
FOILMARK INC LORONIX INFORMATION SYST REXHALL INDUSTRIES INC
FOREFRONT GROUP INC LUCOR INC CL A RHEOMETRICS SCIENTIFIC
FRONTIER NATURAL GAS CP LUKENS MEDICAL CORP ROSES STORES INC
FUEL-TECH N.V. MAKITA CORP SPONS ADR ROYALE ENERGY INC
GALAGEN INC MALLON RESOURCES CORP SA TELECOMMUNICATIONS
GANTOS INC MARINA L.P. SAGE LABORATORIES INC
GEERLINGS & WADE INC MARK SOLUTIONS INC SANTA FE FINANCIAL CORP
GENERAL ACCEPTANCE CORP MAYS J.W. INC SASOL LTD ADR
GENERAL MAGNAPLATE CORP MCM CORP SBE INCSCORE BOARD INC
GIBRALTAR PACKAGING GRP MEADOW VALLEY CORP SECOM GENERAL CORP
GISH BIOMEDICAL INC MEDICAL DYNAMICS INC SECTOR COMMUNICATIONS
GLOBAL OUTDOORS INC MEDICALCONTROL INC SEL-LEB MARKETING INC
GLOBAL TELECOM SOLUTIONS MEDIWARE INFO SYSTEMS SHOWSCAN ENTERTAIN
GOLD STANDARD INC MIAMI SUBS CORP SIGMA CIRCUITS INC
GOLDEN EAGLE GROUP INC MICRO COMPONENT TECH INC SIRCO INTERNAT CORP
GRAND HAVANA ENTERPRISES MICROS-TO MAINFRAMES INC SIRENA APPAREL GR INC
GRILL CONCEPTS MIDDLE BAY OIL CO INC SOFTECH INC
GROUND ROUND RESTAURANTS MILTOPE GROUP INC SOFTQUAD INTERNAT INC
GROUP TECHNOLOGIES CORP MIZAR INC SOMANETICS CORP
H.D. VEST INC MONTEREY PASTA CO SONESTA INTERNAT HOTELS
HANOVER GOLD CO INC MOTO PHOTO INC SPEIZMAN INDUSTRIES INC
HEALTHTECH INTERNAT INC NATHANS FAMOUS INC SPIRE CORP
HECTOR COMMUNICATIONS NAVARRE CORP SPORT CHALET INC
HEMASURE INC NETEGRITY INC STAKE TECHNOL LTD
HI-TECH PHARMACAL CO INC NETFRAME SYSTEMS INC STAR MULTI CARE SVCS
HILITE INDUSTRIES INC NEUROBIOLOGICAL TECH STREAMLOGIC CORPORATION
HOWTEK INC NEWS COMMUNICATION INC STROUDS INC
HUDSON HOTELS CORPORATN NEXTHEALTH INC STUART ENTERTAINMENT INC
HYCOR BIOMEDICAL INC NSC CORP STV GROUP
IDM ENVIRONMENTAL CORP NYER MEDICAL GROUP INC SUMMA INDUSTRIES
IIS INTELIG INFO SYS LTD OCG TECHNOLOGY INC SUNDANCE HOMES INC
INDUSTRIAL TRAINING CORP OI CORP SWISHER INTERNAT INC
INFINITE MACHINES CORP OMEGA ENVIRONMENTAL INC TATHAM OFFSHORE INC
INFINITY INC ON-POINT TECHNOLOGY SYST TAYLOR DEVICES INC
INFODATA SYSTEMS OPINION RESEARCH CORP TECHDYNE INC
INLAND CASINO CORP ORYX TECHNOLOGY CORP TELE-COMM INC A LIBERTY
INNOVATIVE TECH SYSTEMS P&F INDUSTRIES CL A TELEVIDEO INC
INNOVUS CORP PACE HEALTH MGMT SYSTS TEMTEX INDUSTRIES INC
INSIGNIA SYSTEMS INC PACER TECHNOLOGY TFC ENTERPRS INC
INTEGRAMED AMERICA INC PANHANDLE ROYALTY A VOT TIMBER LODGE STEAKHOUSE
IONIC FUEL TECHNOLOGY PDK LABS INC TOPRO INC
IPI INC PENTECH INTERNAT INC TOUCHSTONE SOFTWARE CORP
IRVINE SENSORS CORP PERMA-FIX ENVIRON SVC TRANS GLOBAL SERVICES
ISRAMCO INC PERSONNEL MANAGEMENT INC TRANS-INDUSTRIES INC
IVI PUBLISHING INC PHARMHOUSE CORP TRANSCOR WASTE SERVICES
</TABLE>
16
<PAGE> 18
<TABLE>
<S> <C> <C>
TRIDEX CORP US WATS INC VODAVI TECHNOLOGY INC
TRIMARK HOLDINGS INC US-CHINA INDUSTRIAL EXCH VSE CORP
U.S. GOLD CORP USMX INC WALNUT FINANCIAL SVC INC
U.S. SERVIS INC USP REAL EST INVSTRS TR WATERFORD WEDGEWOOD ADR
UFP TECHNOLOGIES INC VESTRO NATURAL FOODS INC WATSON GENERAL CORP
ULTIMATE ELECTRONICS INC VIDEO DISPLAY CORP WEGENER CORP
UNIDIGITAL INC VIE DE FRANCE CORPVISION WESTERN PWR & EQUIPMENT
UNITED HERITAGE CORP SCIENCES INC WESTERN SYSTEMS CP (THE)
UNIVERSAL AMERICAN FIN VISTA INFO SOLUTIONS INC
</TABLE>
FISCAL 1997 AMEX PEER GROUP
The AmEx Peer Group is made up of American Stock Exchange non-financial
companies with a market value of between $20-40 million. The only companies
meeting this criteria for Fiscal 1997 are the following:
<TABLE>
<S> <C> <C>
ALLIED DIGITAL TECH EASTERN CO NUVEEN MO PREMIUM IMF
ALLOU HEALTH&BEAUTY CARE ECOLOGY & ENVIRONMENT A NUVEEN WA PREMIUM IMF
AMERICAN INSURED MTG 84 EMERSON RADIO CORP ONCORMED INC
AMERICAN RESTAURANTS PRT ENVIRONMENTAL TECTONICS ONE LIBERTY PROPS INC
AUDITS & SURVEYS INC FLORIDA PUBLIC UTILITIES ORIOLE HOMES CL A
AUTOTOTE CORP CL A FOODARAMA SUPERMARKETS OSHMAN'S SPORTING GOODS
AZCO MINING INC FORTUNE PETROLEUM CORP PACIFIC GATEWAY PROPS
BALCHEM CORP FRIEDMAN INDUSTRIES INC PERINI CORP
BARNWELL INDUSTRIES INC GENERAL EMPLOYMENT ENT PRESIDENTIAL REALTY CL A
BAYOU STEEL CORP GLOBALINK INC PROVIDENCE & WORCESTR RR
BLACKROCK BROAD INV 2009 GO-VIDEO INC PUBLIC STORAGE PROP XI
BODDIE-NOELL PROPERTIES GRAHAM CORP PUBLIC STORAGE PROP XX
BOGEN COMMUNICATIONS INTL HAMPTON INDUSTRIES INC PUTNAM NY INV GRD MUN TR
CABLETEL COMMUNICATIONS HEARTLAND PARTNERS L.P. REFAC TECHNOLOGY DEVELP
CARMEL CONTAINER SYSTEM HI-SHEAR TECHNOLOGY CORP RF POWER PRODUCTS
CET ENVIRONMENTAL INC HIGHLANDER INCOME FUND SCHEIB, EARL INC
CHARLES JW FINANCIAL SVC HOWELL INDUSTRIES INC SHEFFIELD MEDICAL TECH
CHASE CORP HUNGARIAN TEL & CABLE CP SKYLINE CHILI INC
CHICAGO RIVET & MACHINE INTEGRATED ORTHOPAEDICS SOFTNET SYSTEMS INC
COGNITRONICS CORP INTERNAT LOTTERY INC SULCUS COMPUTER CORP
COHN & STEELS RLTY IF INTERNAT REMOTE IMAG SYS SWING N SLIDE CORP
COLUMBUS ENERGY CORP INTERSTATE GENERAL L.P. TECH-OPS SEVCON INC
COMPTEK RESEARCH INC KINARK CORP UNAPIX ENTERTAINMENT INC
CONCORD FABRICS INC A MAINE PUBLIC SERVICE CO UNI-MARTS INC
CONTINENTAL MATERIALS CP MARLTON TECHNOLOGIES INC UNIFLEX INC
CRUISE AMERICA INC MASSACHUSETTS H&E TRUST UNILAB CORP
CYCOMM INTERNATIONAL INC MC SHIPPING INC UNITED FOODS INC CL B
DAIRY MART CONV CL A MCRAE INDUSTRIES CL A VAN KAMPEN AM CAP CA MT
DATAMETRICS CORP MICHAEL ANTHONY JEWELERS VAN KAMPEN AM CAP FL MOT
DECORATOR INDUSTRIES INC MINNESOTA MUN TERM TR II VAN KAMPEN AM CAP MA VMI
DENAMERICA CORPORATION MOORE MEDICAL CORP VAN KAMPEN AM CAP NJ VMI
DIXON TICONDEROGA CO MORGAN GROUP INC CL A VAN KAMPEN AM CAP OH VMI
DREYFUS NY MUNI INC FUND NEW YORK TAX EXEMPT INC VOYAGEUR FL INS MUNI INC
NORTHERN TECHNOLOGY VOYAGEUR MN MUNI INC FD
NOVAVAX INC VOYAGEUR MN MUNI INC FD3
WEBCO INDUSTRIES INC
</TABLE>
17
<PAGE> 19
EXECUTIVE COMPENSATION COMMITTEE REPORT
ON EXECUTIVE COMPENSATION
The Executive Compensation Committee of the Board of Directors is
comprised of three directors who are not employees or former employees of the
Corporation (Mr. Mulligan was Secretary of the Corporation during the last
fiscal year). The Committee's stated function is to act in an advisory capacity
to the Board with respect to compensation of executives of the Corporation. The
Committee does not have the authority to fix the compensation of any employee,
officer or director of the Corporation. However, since the Committee's creation
in 1977, the Board has only on rare occasions not completely adopted the
recommendations of the Committee and on those occasions only minor changes were
made.
The goal of the Committee has been to adopt a compensation approach
that is basically simple, internally equitable and externally competitive, and
that attracts, motivates and retains qualified people capable of contributing
to the growth, success and profitability of the Corporation, thereby
contributing to long-term shareholder value. Given the size of the Corporation
and the limited number of its executive officers, the Committee has
traditionally chosen to evaluate each executive individually and on a
subjective basis, without resort to mathematical performance formulas. The
principle followed is to provide what the Committee believes is suitable
compensation based on its subjective evaluation of the executive's contribution
to the profitability of the Corporation.
The three key elements of executive compensation are base salary,
short-term incentives and long-term incentives.
The Corporation's base salaries are intended to be consistent with its
understanding of competitive practices, level of responsibility, qualifications
necessary for the particular position, and experience. Salary increases reflect
the Corporation's belief as to competitive trends, the performance of the
individual and the overall financial performance of the Corporation.
The short-term incentive for an executive is the opportunity to earn
an annual cash bonus. In line with the Corporation's discretionary approach,
the Committee considers all relevant facts and circumstances in evaluating an
executive. The Committee considers performance over a period of time, not
merely performance in the most recent year. However, in general, the most
important consideration is how well the executive has met his individual goals
as set forth in the most recent operating plan. Generally, the second most
important consideration is the Corporation's overall financial performance in
the most recent year. The Committee also considers factors beyond the
executive's
18
<PAGE> 20
control, such as, general economic conditions, industry trends, inflation,
changes in government policies, etc., which may have had a material effect
(positive or negative) on an individual's overall performance. After
considering all of these factors, the Committee recommends whether or not a
particular executive should be awarded a bonus and, if so, the amount.
While salary and short-term incentives are primarily designed to
compensate current and past performance, the main purpose of the long-term
incentive compensation program is to directly link management compensation with
the long-term interests of shareholders. The Corporation is currently using,
as it has for many years, stock options to provide that link. Options are
intended to provide strong incentives for superior long-term future
performance. In the past, the Corporation has granted options for five, six and
ten year terms. Recently, however, the Board of Directors concluded that
options for shorter terms should provide incentives for more immediate improved
performance. Accordingly, options recently granted under the 1995 Incentive
Stock Option Plan have been for three year terms; they may not be exercised
during the first year after grant and then become exercisable one-half per year
in the second and third years, respectively. The Directors also decided to
grant options to more key employees than in the past.
The Committee believes the base salaries of Messrs. Haslam and
Thornton are at the low end for positions requiring similar competence,
dedication, experience and leadership abilities and accordingly, recommended
salary increases for Messrs. Haslam and Thornton of 6.7% and 8%, respectively,
which were approved by the Directors.
The Corporation's fiscal 1997 results exceeded the Committees'
expectations and the Committee considered recommending the award of bonuses to
Messrs. Haslam and Thornton. The Committee believes Messrs. Haslam and Thornton
commenced a number of important initiatives toward increasing shareholder value
but concluded that the award of bonuses should be deferred until a significant
milestone event has been achieved. The Directors agreed with this conclusion.
No consideration was given to awarding stock options to Messrs. Haslam
and Thornton because they have agreed not to accept stock options from the
Corporation as part of the agreement pursuant to which they each acquired a
significant indirect equity interest in the Corporation by purchasing a
substantial number of shares of Fortuna Acquisition Corp., the ultimate general
partner of Fortuna Acquisition Partners, L.P., which is the beneficial owner of
1,791,496 shares or 32.9% of the outstanding shares of the Corporation.
This report has been submitted by the Executive Compensation
Committee:
Bernee D. L. Strom Karen Brenner James J. Mulligan
19
<PAGE> 21
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Executive Compensation Committee are Mses. Strom
(Chairman) and Brenner and Mr. Mulligan. Mr. Mulligan is Secretary of the
Corporation and is a member of the law firm of Mulligan & Mulligan, the general
counsel of the Corporation. Mulligan & Mulligan received $99,055 for legal
services rendered during the Corporation's last fiscal year.
APPROVAL OF EMPLOYEE STOCK PURCHASE PLAN
Shareholders of the Corporation are also being asked to consider and act
upon approval of the Corporation's 1997 Employee Stock Purchase Plan (the "1997
Plan"). The 1997 Plan, which was approved by the Board of Directors on
November 8, 1996, will become effective if approved by a majority of the shares
represented at the meeting. THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR
APPROVAL OF THE 1997 PLAN. A description of the essential features of the 1997
Plan appears below.
The purpose of the 1997 Plan is to grant options to purchase Common
Shares of the Corporation to certain employees of the Corporation at prices
below the fair market value of the shares so as to increase the identity of
interests of such employees with those of the shareholders of the Corporation.
A maximum of 80,000 shares may be issued under the 1997 Plan.
OPTIONS AND ELIGIBLE EMPLOYEES
Any employee of the Corporation who was employed by the Corporation on
December 1, 1996 and also on the date of his election to participate in the
Plan is eligible to participate in the 1997 Plan. An employee may not exercise
an option granted under the plan unless he remains continuously in the employ
of the Corporation until December 31, 1997. Eligible employees may place under
option up to a maximum of 200 shares and the option price of the shares will be
85% of the fair market value of the shares on either January 2, 1997 or
December 31, 1997, whichever is the lower.
The election by an employee to place shares under option does not
constitute an obligation to purchase any of the shares, it merely notifies the
Corporation of the number of shares to be held available under option for the
employee.
Options are not transferable by an employee nor are they exercisable by
any person other than the employee.
20
<PAGE> 22
PAYMENT AND RIGHT TO ABANDON
Concurrently with election to participate in the 1997 Plan, the employee
must authorize a payroll deduction of an amount sufficient to pay for all of
the shares the employee holds under option by December 31, 1997, subject to
adjustment as necessary from time to time.
Payroll deductions commence as of the first payroll following election to
participate in the 1997 Plan and continue until the employee has paid in full
for the number of shares he elects to hold under option or until the employee
elects to abandon this option, whichever event occurs first. The employee may
make cash payments for the shares at any time. The employee may also elect to
abandon any or all of the shares under option.
Whether or not an employee applies his accumulated payroll deductions or
cash payments to the purchase of shares or elects to withdraw from the 1997
Plan and receive payment of the amount of his accumulated payroll deductions or
cash payments, the amount of each employee's payroll deductions or cash
payments shall constitute indebtedness of the Corporation to him or her until
applied to the purchase of shares or until payment to him or her and such
indebtedness shall bear interest at the rate of 7% per year. If a
participating employee ceases to be employed by the Corporation for any reason
prior to December 31, 1997, the Corporation shall pay to the employee the
accumulated payroll deductions or cash payments, with interest, to the date of
termination.
GENERAL
The term of the 1997 Plan commenced on January 2, 1997 and will end on
December 31, 1997. In the event of a change of control of the Corporation or
any participating subsidiary of the Corporation as determined by the Board, the
1997 Plan shall end and the Corporation shall either (i) pay each affected
participating employee the amount of his or her accumulated payroll deduction
or cash payments, with interest as provided in the Plan, or (ii) have issued to
such employee the number of whole shares fully paid for by such employee to
such date and any excess in cash.
If any share dividend is declared upon the shares, or if there is any
recapitalization of the Corporation with respect to its shares resulting in a
split-up or combination or exchange of shares, the number and kind of shares
then subject to options granted to eligible employees under the 1997 Plan shall
be proportionately and appropriately adjusted by the Board without any change
in the aggregate purchase prices to be paid therefor.
21
<PAGE> 23
The 1997 Plan will be administered by an Employee Stock Purchase Plan
Committee composed of three members to be selected from time to time by the
Board. The Committee may prescribe rules and regulations from time to time for
the administration of the 1997 Plan and may decide questions which may arise
with respect to its interpretation or application. The Committee shall
interpret and apply the 1997 Plan so that it qualifies as an employee stock
purchase plan within the meaning of Section 423 of the Internal Revenue Code of
1986.
The Board may, in its discretion, renew the Plan for four one year
periods with such changes therein as it deems appropriate, provided that the
Plan, as amended, continues to qualify as an employee stock purchase plan
within the meaning of Section 423 of the Internal Revenue Code of 1986. On June
9, 1997, the last sale price for the Corporation's shares reported on the
American Stock Exchange was $5.625.
FEDERAL INCOME TAX CONSEQUENCES
The amounts withheld from a participant's pay under the Plan will be
taxable income to him and must be included in his gross income for federal
income tax purposes in the year in which such amounts otherwise would have been
received.
A participant will not be required to recognize any income for federal
income tax purposes either at the time he is granted an option (that is,
January 2, 1997) or by virtue of the exercise of the option (which would take
place on December 31, 1997). The federal income tax consequences of a sale or
disposition of shares acquired under the Plan depend in part on the length of
time the shares are held by a participant before such sale or disposition. If a
participant sells or otherwise disposes of shares acquired under the Plan
(other than any transfer resulting from his death) within two years after the
date on which the option to purchase such shares is granted to him ("Two-Year
Period") or within one year after the date such shares are transferred (within
the meaning of Section 423 of the Code) to him ("One-Year Period"), he must
recognize ordinary income in the year of such disposition in an amount equal to
the excess of (1) the fair market value of the shares on the date such shares
are transferred (within the meaning of Section 83 of the Code) to him over (2)
the option price. The amount of ordinary income recognized by the participant
will be added to his basis in such shares. Any gain realized on a sale at a
price in excess of his basis (after increasing his basis in such shares by the
amount of the ordinary income recognized) will be taxed as capital gain, and
any loss realized (after increasing his basis in such shares by the ordinary
income recognized) will be a capital loss.
If a participant sells or otherwise disposes of shares acquired under
the Plan after holding such shares for the Two-Year Period and the One-Year
Period or the participant
22
<PAGE> 24
dies, he must include as ordinary income in the year of sale (or his taxable
year ending with his death) an amount equal to the lesser of (1) the excess of
the fair market value of the shares on the date the option was granted over the
option price computed on such date, or (2) the excess of the fair market value
of the shares at the time he sells or otherwise disposes of the shares or on
the date of his death over the option price. Except in the case of a transfer
as a result of death, the amount of ordinary income recognized by the
participant will be added to his basis in such shares. The basis of shares
transferred as a result of the death of a participant will not be increased as
a result of the ordinary income recognized by the deceased participant. Any
gain realized in excess of his basis (after increasing his basis in such shares
by the ordinary income recognized) will be taxed as a long-term capital gain.
Any loss realized (after increasing his basis in such shares by the ordinary
income recognized) will be treated as long-term capital loss. Any and all
dividends, except stock dividends, received by a participant with respect to
shares acquired under the Plan will be treated as ordinary income.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires directors
and certain officers of the Corporation and owners of more than 10% of the
Corporation's Common shares to file an initial ownership report with the
Securities and Exchange Commission and a monthly or annual report listing any
subsequent change in their ownership of Common Shares. The Corporation
believes, based on information provided to the Corporation by the persons
required to file such reports, that all filing requirements applicable to such
persons during the period from April 1, 1996 through March 31, 1997 have been
met, except for the following late filings: Strome Hedgecap Ltd., one report,
five transactions; Strome- Susskind Investment Management, L.P., one report,
five transactions; SSCO, Inc., one report, five transactions; Mark E. Strome,
one report, five transactions; Robert M. Ellis, one report, two transactions;
Mark J. Stockslager, one report, two transactions; Fortuna Investment Partners,
L.P., one report, one transaction; Fortuna Capital Management, Inc., one
report, one transaction; Ronald J. Vannuki, one report, one transaction; Bernee
D. L. Strom, one report, no transaction; Karen Brenner, one report, one
transaction; Richard Fechtor, one report, one transaction; Fortuna Advisors,
Inc., one report, one transaction; Fortuna Acquisition Partners, L.P., one
report, one transaction; FC Partners, L.P., one report, one transaction; and
Fortuna Acquisition Corp., one report, one transaction.
INDEPENDENT PUBLIC ACCOUNTANTS
Deloitte & Touche LLP has performed an audit of the Corporation's
financial statements annually since 1962. It is anticipated that
representatives of Deloitte & Touche LLP will be present at the Annual Meeting
of Shareholders to respond to appropriate questions and to make a statement if
such representatives so desire.
23
<PAGE> 25
The Board of Directors of the Corporation annually appoints the
independent public accountants for the Corporation after receiving the
recommendation of its Audit Committee.
OTHER BUSINESS
The Board of Directors does not intend to present, and has no
knowledge that others will present, any other business at the meeting.
However, if any other matters are properly brought before the meeting, it is
intended that the holders of proxies in the enclosed form will vote thereon in
their discretion.
COST OF SOLICITATION
The cost of solicitation of proxies will be borne by the Corporation. In
addition to the use of the mails, proxy solicitations may be made by officers
and employees of the Corporation, personally or by telephone and telegram,
without receiving additional compensation. It is also anticipated that banks,
brokerage houses and other custodians, nominees and fiduciaries will be
requested to forward soliciting material to their principals and to obtain
authorization for the execution of proxies. The Corporation will reimburse
banks, brokerage houses and other custodians, nominees and fiduciaries for
their out-of-pocket expenses.
SHAREHOLDER PROPOSALS
A proposal by a shareholder intended for inclusion in the Corporation's
proxy statement and form of proxy for the 1998 Annual Meeting of Shareholders
must, in accordance with applicable regulations of the Securities and Exchange
Commission, be received by the Corporation at 1290 Hercules Drive, Suite 120,
Houston, Texas 77058, Attention: Secretary, on or before February 17, 1998 in
order to be eligible for such inclusion.
By order of the Board of Directors.
JAMES J. MULLIGAN
Secretary
Houston, Texas
June 20, 1997
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PROXY
KRUG INTERNATIONAL CORP.
ANNUAL MEETING OF SHAREHOLDERS - JULY 18, 1997
The undersigned holder(s) of Common Shares of KRUG International Corp., an Ohio
corporation (the "Corporation"), hereby appoints C. L. HASLAM and ROBERT M.
THORNTON, JR., and each of them, attorneys of the undersigned, with power of
substitution, to vote all of the Common Shares which the undersigned is
entitled to vote at the Annual Meeting of Shareholders of the Corporation to be
held on Friday, July 18, 1997, at 10:00 a.m., and at any and all adjournments
of said meeting, as follows:
1. ELECTION OF DIRECTORS.
NOMINEES:
Charles Linn Haslam
Robert M. Thornton, Jr.
T. Wayne Holt
James J. Mulligan
______ FOR ALL
______ WITHHOLD ALL
______ FOR ALL (EXCEPT NOMINEE(S) WRITTEN BELOW)
__________________________________________________________________
2. Adoption of the 1997 Employee Stock Purchase Plan.
_ FOR _ AGAINST _ ABSTAIN
3. In their discretion, upon such other business as may properly come before
the meeting or at any adjournment thereof.
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THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF THE
CORPORATION. WHEN PROPERLY EXECUTED, THIS PROXY WILL BE VOTED IN THE MANNER
DIRECTED BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS SPECIFIED, THIS
PROXY WILL BE VOTED FOR PROPOSALS 1 AND 2.
Receipt is acknowledged of Notice of the above meeting, the Proxy Statement
relating thereto and the Annual Report to Shareholders for the fiscal year
ended March 31, 1997.
Dated _________________________, 1997
(Signatures)
Shareholders should date this proxy and
sign here exactly as the name appears
at left. If shares are held jointly,
both owners should sign this proxy.
Executors, administrators, trustees,
guardians and others signing in a
representative capacity should indicate
the capacity in which they sign.
PLEASE MARK, SIGN, DATE AND MAIL THIS
CARD PROMPTLY IN THE ENCLOSED ENVELOPE
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APPENDIX
<PAGE> 29
AMENDED FEBRUARY 7, 1997
KRUG INTERNATIONAL CORP.
1997 EMPLOYEE STOCK PURCHASE PLAN
1. Purpose.
The purpose of the 1997 Employee Stock Purchase Plan ("Plan") is to grant
options to certain employees of the Corporation to purchase Common Shares of
the Corporation at prices below the fair market value of the Shares so as to
increase the identity of interests of such employees with those of the
shareholders of the Corporation.
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 Krug Life Sciences
Inc. ("KLSI") and any Subsidiary of the Corporation chosen by the Board to
participate in the Plan.
(c) "Fair Market Value" means (1) if the Shares are listed on the American
Stock Exchange, the last sale price of a Share on the American Stock Exchange
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 American
Stock Exchange at the close of business on such date; or (2) if the Shares are
not listed on the American Stock Exchange, the value determined by such
reasonable method as shall be approved by the Board.
(d) "Share" or "Shares" means the Common Shares, without par value, of the
Corporation.
(e) "Subsidiary" means any company more than 50% of the voting stock of
which is owned or controlled, directly or indirectly, by the Corporation.
(f) "Plan Entry Date" means January 2, 1997.
(g) "Plan Termination Date" means December 31, 1997.
3. Eligibility.
Any employee of the Corporation who was employed by the Corporation on
December 1, 1996 and also on the date of his election to participate in the
Plan shall be eligible to participate herein. An employee may not exercise an
option granted hereunder unless he remains continuously in the employ of the
Corporation until December 31, 1997.
4. Option price.
The option price of the Shares shall be 85% of the Fair Market Value of the
Shares on the Plan Entry Date or the Plan Termination Date, whichever is the
lower.
<PAGE> 30
5. Maximum Number of Shares Subject to Option.
Each eligible employee shall be entitled to place under option any number
of whole Shares up to a maximum of 200 Shares.
6. Employee's Election to Participate.
(a) Within 30 days following the date of notice of the granting of the
option, each eligible employee who elects to place Shares under option shall so
indicate by properly completing and signing the form which shall accompany such
notice and mailing or delivering such form to James W. Hoose, Sr., Human
Resources Director for KLSI.
(b) An election to place Shares under option will not constitute an
obligation to purchase any of the Shares placed under option. Such an election
will merely notify the Corporation of the number of Shares to be held under
option for the employee.
(c) An employee who fails to elect participation in the Plan in the manner
and within the time provided or to authorize and maintain the payroll
deductions hereinafter provided shall have no further rights under the Plan.
(d) An employee electing to participate may do so with respect to all or
any portion of the Shares which he is entitled to place under option.
7. Payroll Deductions.
(a) Concurrently with election to participate in the Plan the employee
must authorize a payroll deduction of an amount sufficient to pay for all of
the Shares the employee holds under option by the Plan Termination Date,
subject to adjustment as necessary from time to time.
(b) Payroll deductions shall commence as of the first payroll following
election to participate in the Plan and shall continue until the employee has
paid in full for the number of Shares he elects to hold under option or until
the employee elects to abandon this option, whichever event shall first occur.
The employee may make cash payments for the Shares at any time.
(c) The application by the employee to participate in the Plan will
contain the following signed statement by the Company; "This counterpart in the
hands of the employee whose signature is affixed above will constitute a
nonassignable certificate of indebtedness subject to all the terms and
provisions of the Plan."
8. Issuance and Delivery of Stock Certificates.
Certificates for shares will be issued and delivered to the employee for
the number of shares paid for as soon as practicable after the Plan Termination
Date. No fractional Shares will be issued.
9. Employee's Right to Abandon Option.
At any time during the term of the Plan an employee may elect to abandon
his option with respect to all or any number of the Shares then under option.
As to any Shares so abandoned, the employee shall have no further option or
right of any nature at any subsequent time. Upon such abandonment, the
Corporation will pay to the employee with interest as hereafter provided the
amount of his payroll deduction or cash payments applicable to the abandoned
shares.
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10. Interest on Payroll Deductions or Cash Payments.
Whether or not an employee applies his accumulated payroll deductions or
cash payments to the purchase of the Shares or elects to withdraw from the Plan
and receive payment of the amount of his accumulated payroll deductions or cash
payments, the amount of each employee's payroll deductions or cash payments
shall constitute indebtedness of the Corporation to him until applied to the
purchase of Shares or until payment to him and such indebtedness shall bear
interest at the rate of 7 percent per annum.
11. Term of the Plan.
The term of the Plan shall commence on the Plan Entry Date and end on the
Plan Termination Date. In the event of a change of control of the Corporation
or any participating subsidiary of the Corporation as determined by the Board,
the Plan shall end and the Corporation shall either (I) pay each affected
participating employee the amount of his accumulated payroll deduction or cash
payments, with interest as provided herein, or (ii) have issued to such
employee the number of whole Shares fully paid for by such employee to such
date and any excess in cash.
12. Termination of Employment.
If a participating employee ceases to be employed for any reason prior to
December 31, 1997, the Corporation shall pay to him his accumulated payroll
deductions or cash payments with interest as provided above to the date of
termination.
13. Options Not Transferable.
Options under this Plan shall not be transferable by any employee nor be
exercisable by any person other than the employee.
14. Share Dividend or Recapitalization.
If any share dividend is declared upon the Shares, or if there is any
recapitalization of the Corporation with respect to its Shares resulting in a
split-up or combination or exchange of Shares the number and kind of shares
then subject to options granted to eligible employees under the Plan shall be
proportionately and appropriately adjusted by the Board without any change in
the aggregate purchase prices to be paid therefor.
15. Administration.
The Plan will be administered by an Employee Stock Purchase Plan Committee
composed of three members to be selected from time to time by the Board. The
Committee may prescribe rules and regulations from time to time for the
administration of the Plan and may decide questions which may arise with
respect to its interpretation or application. The Committee shall interpret
and apply the Plan so that it qualifies as an employee stock purchase plan
within the meaning of Section 423 of the Internal Revenue Code of 1986.
16. Share Ownership.
Notwithstanding anything herein to the contrary, no employee shall be
entitled to place any Shares under option under the Plan if such employee,
immediately after the placing of such Shares under option, owns Shares
(including all shares which may be purchased under
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outstanding options) possessing 5 percent or more of the total combined voting
power or value of all classes of shares of the Corporation or of its parent or
subsidiary corporation. For the foregoing purposes the rules of section 424(d)
of the Internal Revenue Code of 1986 shall apply in determining share
ownership. Also, no employee shall be granted an option under the Plan which
permits his rights to purchase Shares under all Share purchase plans of the
Corporation and its parent and subsidiary corporations to accrue at a rate
which exceeds $25,000 of fair market value of such shares (determined at the
time such option is granted) for each calendar year in which such option is
outstanding at any time.
17. Renewal of the Plan by the Board.
The Board may, in its discretion, renew the Plan for four one year periods
with such changes therein as it deems appropriate provided that the Plan, as
amended, continues to qualify as an employee stock purchase plan within the
meaning of Section 423 of the Internal Revenue Code of 1986.
18. Shareholder Approval.
The Plan is subject to approval by the holders of a majority of the Shares
constituting a quorum and present, in person or by proxy, at a meeting of the
Shareholders of the Corporation held on or before November 7, 1997.
4
