<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ................ TO ..............
COMMISSION FILE NUMBER 0-2901
KRUG INTERNATIONAL CORP.
------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Ohio 31-0621189
---- ----------
(STATE OR OTHER JURISDICTION OF INCORPORATION (I.R.S. EMPLOYER
OR ORGANIZATION) IDENTIFICATION NO.)
1290 Hercules Drive Suite 120 Houston, Texas 77058
- ---------------------------------------------- -----
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(281)212-1233
-------------
(REGISTRANT'S TELEPHONE NUMBER INCLUDING AREA CODE)
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
filings requirements for the past 90 days.
Yes [X] No [ ]
The number of Common Shares, without par value, outstanding as of July 31, 1997
was 5,157,270.
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
KRUG INTERNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
June 30, March 31,
1997 1997
---------- ----------
<S> <C> <C>
ASSETS
Current Assets:
Cash $ 714 $ 105
Receivables - net 20,713 21,631
Inventories (Note B) 12,097 11,103
Prepaid expenses 1,433 1,058
---------- ----------
Total Current Assets 34,957 33,897
---------- ----------
Property, Plant and Equipment 19,209 18,488
Less accumulated depreciation 8,064 7,650
---------- ----------
11,145 10,838
---------- ----------
Pension Asset 3,046 2,966
Deferred Tax Assets 1,470 2,041
Other Assets 431 225
---------- ----------
$ 51,049 $ 49,967
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Bank borrowings $ -- $ 1,161
Accounts payable 11,819 11,650
Accrued expenses (Note D) 6,458 6,176
Income taxes 484 451
Net current liabilities of discontinued
operations (Note E) 450 450
Current maturities of long-term debt 2,967 2,922
---------- ----------
Total Current Liabilities 22,178 22,810
---------- ----------
Long-Term Debt 9,582 9,173
Net Non-Current Liabilities of Discontinued
Operations (Note E) 24
---------- ----------
Total Liabilities 31,760 32,007
---------- ----------
Shareholders' Equity:
Common Shares, no par value:
issued and outstanding, 5,151,206 at
June 30, 1997 and March 31, 1997 2,576 2,576
Additional paid-in capital 4,399 4,399
Retained earnings 11,051 9,966
Foreign currency translation adjustment 1,263 1,019
---------- ----------
Total Shareholders' Equity 19,289 17,960
---------- ----------
Total Liabilities and Shareholders' Equity $ 51,049 $ 49,967
========== ==========
</TABLE>
See notes to consolidated financial statements
<PAGE> 3
KRUG INTERNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands, except per share)
<TABLE>
<CAPTION>
Three Months Ended
June 30,
------------------------------
1997 1996
----------- -----------
<S> <C> <C>
Revenues $ 30,508 $ 26,507
Costs and Expenses:
Cost of goods sold 26,057 22,442
Selling and administrative 2,474 2,268
Interest expense 318 290
Other income -- net (4) (64)
----------- -----------
28,845 24,936
----------- -----------
Earnings before Income Taxes 1,163 1,571
Income Taxes (Note C) 578 522
----------- -----------
Net Earnings $ 1,085 $ 1,049
=========== ===========
Net Earnings Per Share $ 0.21 $ 0.20
=========== ===========
Average Common and Common Equivalent
Shares Outstanding 5,183 5,174
=========== ===========
</TABLE>
See notes to consolidated financial statements
<PAGE> 4
KRUG INTERNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
June 30,
--------------------------
1997 1996
--------------------------
<S> <C> <C>
Net Cash Provided by Operating Activities $ 1,953 $ 3,794
---------- ----------
Cash Flows From Investing Activities:
Expenditures for property, plant and equipment (214) (88)
Proceeds from sale of assets 31 --
---------- ----------
Net Cash Used in Investing Activities (183) (88)
---------- ----------
Cash Flows From Financing Activities:
Bank borrowings - net (1,158) (31)
Payments on long-term debt (13) (1,230)
Proceeds from exercise of stock options -- 137
---------- ----------
Net Cash Provided by (Used in)
Financing Activities (1,171) (1,124)
---------- ----------
Effect of Exchange Rate Changes on Cash 10 53
---------- ----------
Net Increase in Cash 609 2,635
Cash at Beginning of Period 105 439
---------- ----------
Cash at End of Period $ 714 $ 3,074
========== ==========
Cash Paid For:
Income Taxes $ -- $ --
========== ==========
Interest $ 326 $ 329
========== ==========
Non-Cash Investing and Financing Activities-
Capital leases $ 367 $ 47
========== ==========
</TABLE>
See notes to consolidated financial statements
<PAGE> 5
KRUG INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
QUARTER ENDED JUNE 30, 1997
(DOLLARS IN THOUSANDS)
NOTE A -- BASIS OF PRESENTATION
The unaudited Condensed Consolidated Financial Statements for the three
months ended June 30, 1997 have been prepared in accordance with Rule 10-01
of Regulation S-X of the Securities and Exchange Commission and, as such, do
not include all information required by generally accepted accounting
principles. These Condensed Consolidated Financial Statements should be read in
conjunction with the consolidated financial statements included in the
Corporation's Annual Report on Form 10-K filed on June 16, 1997. In the opinion
of management, the Condensed Consolidated Financial Statements include all
adjustments, consisting only of normal recurring adjustments, necessary to
present fairly the financial position and results of operations for the periods
indicated. The results of operations for the three months ended June 30, 1997
are not necessarily indicative of the results that may be expected for the
entire fiscal year or any interim period.
NOTE B-- INVENTORIES
<TABLE>
<CAPTION>
June 30, March 31,
1997 1997
---------- ----------
<S> <C> <C>
Finished goods $ 8,752 $ 8,171
Work-in-process 1,138 1,291
Raw materials and supplies 2,207 1,641
---------- ----------
$ 12,097 $ 11,103
========== ==========
</TABLE>
NOTE C-- INCOME TAXES
The provision for income taxes is composed of the following:
<TABLE>
<CAPTION>
Three Months Ended June 30, 1997 1996
- --------------------------- ------- -------
<S> <C> <C>
Domestic $ 17 $ 65
Foreign 561 457
------- -------
$ 578 $ 522
======= =======
</TABLE>
<PAGE> 6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE D -- RESTRUCTURING CHARGE
In September 1996, the Corporation closed its executive offices in Dayton,
Ohio and consolidated its headquarters activities with its primary operations
facility adjacent to the NASA Johnson Space Center in Houston, Texas. At June
30, 1997, accrued expenses included the accrued restructuring charge of $298
which relates primarily to rent (net of expected sublease rental income) and
other expenses payable through June 1999, the lease termination date of the
offices in Dayton, Ohio vacated by the Corporation.
NOTE E -- DISCONTINUED OPERATIONS
In prior years, the Corporation discontinued the operations and disposed
of substantially all of the net assets of its Industrial Segment. Remaining
obligations related to this Segment include leased property in Knoxville,
Tennessee and in Toronto, Canada, and product liability claims related to
products sold prior to the disposal of the Industrial Segment.
NOTE F -- RECENT ACCOUNTING STANDARDS
In February 1997, Statement of Financial Accounting Standards No. 128,
"Earnings per Share" ("SFAS NO. 128") was issued. This statement requires dual
presentation of basic and diluted earnings per share on the face of the
statement of earnings for entities with complex capital structures. SFAS No.
128 is effective for financial statements for periods ending after December 15,
1997, including interim periods. Implementation of this pronouncement is not
expected to have a material effect on reported earnings per share.
In June 1997, SFAS No. 130, "Reporting Comprehensive Income" ("SFAS No.
130") was issued. This statement requires that all components of comprehensive
income and total comprehensive income be reported on one of the following: (1)
the statement of operations, (2) the statement of shareholders' equity or (3) a
new separate statement of comprehensive income. Comprehensive income is
comprised of net income and all changes to shareholders' equity, except for
those due to investments by owners (changes in paid in capital) and
distributions to owners (dividends). This statement is effective for fiscal
years beginning after December 15, 1997 although earlier application is
permitted. SFAS No. 130 does not change the current accounting treatment for
components of comprehensive income (i.e. changes in unrealized gains or losses
on securities). Implementation of SFAS No. 130 is not expected to have a
material impact on the Corporation's Consolidated Financial Statements.
In June 1997, SFAS No. 131, "Disclosure and Segments of an Enterprise and
Related Information" ("SFAS No. 131") was issued. This statement requires
public companies to report certain information about their operating segments
in their annual financial statements and quarterly reports issued to
shareholders. It also requires public companies to report certain information
about their products and services, the geographic areas in which they operate
and their major customers. This statement is effective for fiscal years
beginning after December 15, 1997 although earlier application is encouraged.
Implementation of SFAS No. 131 is not expected to have a material effect on the
Corporation's Consolidated Financial Statements.
<PAGE> 7
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL SUMMARY
<TABLE>
<CAPTION>
THREE MONTHS ENDED
June 30,
--------------------------
1997 1996
---------- ----------
<S> <C> <C>
REVENUES:
Leisure Marine $ 10,802 $ 9,654
Housewares 9,595 6,572
Life Sciences and Engineering 10,111 10,281
---------- ----------
$ 30,508 $ 26,507
========== ==========
OPERATING PROFIT:
Leisure Marine $ 1,467 $ 1,167
Housewares 111 141
Life Sciences and Engineering 692 815
---------- ----------
2,270 2,123
Corporate expense (293) (326)
---------- ----------
Operating profit 1,977 1,797
Other income - net 4 64
Interest expense (318) (290)
---------- ----------
Earnings before Income Taxes $ 1,663 $ 1,571
========== ==========
CAPITAL ADDITIONS:
Leisure Marine $ 0 $ 12
Housewares 198 62
Life Sciences and Engineering 16 14
---------- ----------
$ 214 $ 88
========== ==========
</TABLE>
RESULTS OF OPERATIONS
First quarter revenues for fiscal 1998 of $30.5 million increased $4.0 million
or 15% from the comparable quarter of fiscal 1997. The U.K. Leisure Marine
Segment revenue increased by $1.1 million from the same period in fiscal 1997.
A $0.4 million increase in sales volume, resulting from increased chandlery and
personal watercraft sales offset somewhat by decreased outboard and inboard
engine sales, and $0.7 million favorable effect of foreign currency translation
combined for the increase in revenues. The U.K. Housewares Segment revenue
increased by $3.0 million from the comparable period of fiscal 1997. Of the
increase, $2.5 million was due to revenues of Hago Products Limited (Hago)
which was purchased on October 31, 1996, $0.4 million was due to the favorable
effect of foreign currency translation and $0.1 million was due to increases in
sales volume. Sales volume in child safety gates and garden products increased
while ladder sales decreased. The Life Sciences and Engineering Segment (LS&E)
revenue decreased by $0.1 million from the first quarter of fiscal 1997.
Decreased material purchases on contracts with NASA at the Johnson Space Center
in Houston, Texas partially offset by increased labor revenue and material
purchases under contracts with the U.S. Air Force resulted in the decreased
LS&E revenue.
The LS&E order backlog at June 30, 1997 was $139.9 million compared with $106.9
million at March 31, 1997 and $48.2 million at June 30, 1996. In June 1997,
KRUG Life Sciences Inc. (KLSI) was awarded a new five-year, $40.1 million NASA
contract for biotechnology and bioengineering services
<PAGE> 8
with NASA at the Johnson Space Center. A total of approximately $110 million of
order backlog relating to three NASA contracts has been awarded since the
beginning of calendar 1997.
Operating profit (revenues less cost of goods sold and selling and
administrative expenses) increased $0.18 million or approximately 10% over the
same quarter of the previous year due primarily to increased operating profit in
the Leisure Marine Segment resulting from increased chandlery and personal
watercraft sales and increased margins on engine parts sales. Operating profit
of the LS&E Segment declined $0.12 million in the fiscal 1998 quarter due to a
favorable contract settlement in the prior year's quarter of $0.14 million.
Excluding this favorable contract settlement, LS&E had a slight increase in
operating profit in the current year. The lower operating profit reported by the
Housewares Segment resulted from decreased gross profit (revenues less cost of
goods sold) margin. For the quarter ended June 30, 1997, the operating profit
margin for the Corporation decreased to 6.5% from 6.8% in the same quarter of
the previous year primarily as a result of lower gross profit margin in the
Housewares Segment.
Selling and administrative expense increased by $0.2 million in the first
quarter of fiscal 1998 as compared to the first quarter of fiscal 1997. Of the
increase, $0.1 million was due to the unfavorable effect of currency
translation. Increased Leisure Marine Segment selling expense, resulting from
increased volume, and the addition of Hago to the current year's results also
increased selling and administrative expenses. These increases were partially
offset by decreased LS&E segment bid and proposal expenses.
Interest expense for the first quarter of fiscal 1998 increased by $0.03
million compared to the first quarter of fiscal 1997 due to increased U.S. and
U.K. interest rates and higher U.K. debt levels.
Net earnings were $1.09 million for the first quarter of fiscal 1998 compared
to $1.05 million for the comparable period of fiscal 1997 . The increase in
earnings is primarily due to the increased revenue and gross profit margin of
the Leisure Marine Segment.
DISCONTINUED OPERATIONS
The adequacy of the provision for losses related to the discontinued Industrial
Segment was reviewed by the Corporation during the first three months of fiscal
1998 and no changes were deemed appropriate.
LIQUIDITY AND CAPITAL RESOURCES
Under the Corporation's revolving credit facility with a U.S. business credit
corporation, the Corporation had a loan outstanding of $4.2 million at June 30,
1997. Availability under the revolving credit facility is based upon the amount
of billed and unbilled U.S. accounts receivable and is limited to a maximum of
$10.0 million. The credit facility expires March 15, 2000. At June 30, 1997,
the Corporation had a $1.7 million mortgage loan outstanding on its Dayton,
Ohio real property. The mortgage loan was provided by five U.S. banks and
matures on March 31, 1998. The Corporation's U.K. subsidiaries at June 30, 1997
had two term loans outstanding totaling $5.5 million. The term loans require
quarterly principal payments and mature in fiscal 2005. In addition, the
Corporation has an unused line of credit of $4.2 million available at June 30,
1997 for its U.K. subsidiaries. The Corporation believes it has adequate
financing in both the U.S. and U.K. to support its current level of operations.
During the first quarter of 1998, the Corporation expended $0.21 for capital
additions compared to $0.09 million for the comparable quarter in fiscal 1997.
Capital additions were primarily for equipment purchases by the Corporation's
Housewares Segment.
The Corporation generated $1.95 million from operating activities in the first
three months of fiscal 1998. compared to $3.8 million for the first three
months of fiscal 1997. The decrease in cash generated from operating activities
in the current year was due primarily to increased inventory in the U.K. and
decreased cash generated from receivables in the U.S.
<PAGE> 9
CERTAIN CAUTIONARY STATEMENTS
In addition to historical information, Item 2 of this document contains certain
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995 which may include, without limitation, statements
regarding management's outlook for each of its businesses and the sufficiency
of the Corporation's liquidity and sources of capital. These forward-looking
statements are subject to certain risks, uncertainties and other factors which
could cause actual results to differ materially from those anticipated,
including, without limitation, restrictions imposed by debt agreements,
competition in the Housewares and Leisure Marine businesses and for government
services provided by the Life Sciences and Engineering Segment, governmental
and budgetary constraints, the regulatory environment for the Corporation's
businesses, consolidation trends in the Corporation's businesses, competition
in the acquisition market, changes in exchange rates, increases in raw material
prices, the purchasing practices of significant customers, the availability of
qualified management and staff personnel in each business segment and claims
for product liability from continuing and discontinued operations.
<PAGE> 10
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On July 18, the Corporation held its Annual Meeting of Shareholders.
At the meeting four directors, Charles Linn Haslam, Robert M.
Thornton, Jr., T. Wayne Holt and James J. Mulligan, were elected to
two-year terms of office expiring at the Annual Meeting of
Shareholders in 1999. 3,005,439 shares were voted in favor of
electing Mr. Haslam and 3,663 shares were withheld, 3,005,439 shares
were voted in favor of electing Mr. Thornton and 3,663 shares were
withheld, 3,003,962 shares were voted in favor of electing Mr. Holt
and 5,140 shares were withheld, and 3,003,653 shares were voted in
favor of electing Mr. Mulligan and 5,449 shares were withheld.
Also at the meeting, the shareholders voted to adopt the
Corporation's 1997 Employee Stock Purchase Plan (the 1997 Plan). In
general, the 1997 Plan allows employees of the Corporation to receive
an option to buy a maximum of 200 shares of the Corporation at a
price equal to 85% of the fair market value of the shares on either
January 1, 1997 or December 31, 1997, whichever is the lower. The
shares are paid for through a payroll deduction program and
participants earn 7% interest on the amount of accumulated payroll
deductions and on any additional cash payments made. A participant
may elect at any time to abandon all or any part of the option and,
upon such abandonment, the Corporation will pay to the participant
the amount of the payroll deduction or cash payment applicable to the
abandoned shares, plus interest. The 1997 Plan commenced on January
1, 1997 and terminates on December 31, 1997. The Board of Directors
may renew the 1997 Plan for four one-year periods. 2,980,784 shares
were voted in favor of adoption of the 1997 Plan, 13,281 shares were
voted against and the holders of 15,037 shares abstained from voting.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibit 10.1 - Amendment dated May 27, 1997 to Employment
Agreement between KRUG International Corp. and Charles Linn
Haslam dated May 17, 1996 is filed as an exhibit to this report.
(B) Exhibit 10.2- Amendment dated May 27, 1997 to Consulting and
Employment Agreement between KRUG International Corp. and Robert
M. Thornton, Jr. dated May 17, 1996 is filed as an exhibit to
this report.
(C) Exhibit 10.3 - Employment Agreement between KRUG Life Sciences
Inc. and Joseph P. Kerwin dated April 1, 1997 is filed as an
exhibit to this report.
(D) Exhibit 10.4 - Summary of verbal Consulting Agreement between
KRUG Life Sciences Inc. and T. Wayne Holt dated April 16, 1997
is filed as an exhibit to this report.
(E) Exhibit 10.5 - Amendment No. 3 to Loan and Security Agreement
between KRUG International Corp., KRUG Life Sciences Inc.,
Technology/Sciences Services, Inc. and Transamerica Business
Credit Corporation dated February 10, 1997 is filed as an
exhibit to this report.
<PAGE> 11
(F) Exhibit 10.6 - Amendment No. 4 to Loan and Security Agreement
between KRUG International Corp., KRUG Life Sciences Inc.,
Technology/Sciences Services, Inc. and Transamerica Business
Credit Corporation dated April 21, 1997 is filed as an exhibit
to this report.
(G) Exhibit 27 - Financial Data Schedule
<PAGE> 12
SIGNATURES
Pursuant to the requirements 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.
KRUG International Corp.
By: /s/ Robert M. Ellis
----------------------------------
Robert M. Ellis
Principal Accounting Officer
Dated : August 14, 1997
<PAGE> 13
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
10.1 -Amendment dated May 27, 1997 to Employment Agreement
between KRUG International Corp. and Charles Linn Haslam
dated May 17, 1996 is filed as an exhibit to this report.
10.2 -Amendment dated May 27, 1997 to Consulting and Employment
Agreement between KRUG International Corp. and Robert M.
Thornton, Jr. dated May 17, 1996 is filed as an exhibit to
this report.
10.3 -Employment Agreement between KRUG Life Sciences Inc. and
Joseph P. Kerwin dated April 1, 1997 is filed as an exhibit
to this report.
10.4 -Summary of verbal Consulting Agreement between KRUG Life
Sciences Inc. and T. Wayne Holt dated April 16, 1997 is
filed as an exhibit to this report.
10.5 -Amendment No. 3 to Loan and Security Agreement between KRUG
International Corp., KRUG Life Sciences Inc.,
Technology/Sciences Services, Inc. and Transamerica Business
Credit Corporation dated February 10, 1997 is filed as an
exhibit to this report.
10.6 -Amendment No. 4 to Loan and Security Agreement between KRUG
International Corp., KRUG Life Sciences Inc.,
Technology/Sciences Services, Inc. and Transamerica Business
Credit Corporation dated April 21, 1997 is filed as an exhibit
to this report.
27 -Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 10.1
May 27, 1997
C. L. Haslam, Esq.
4620 Sedgwick Street, N.W.
Washington, DC 20016
Dear Mr. Haslam:
KRUG International Corp. ("Corporation") hereby offers to amend
Section 2 of the Employment Agreement dated May 17, 1996 between you and the
Corporation to increase your monthly salary to $16,000, effective June 1, 1997.
If this is agreeable to you, please sign the enclosed copy of this
letter and return it to me.
Very truly yours,
KRUG International Corp.
By /s/ James J. Mulligan
-----------------------------
Secretary
Agreed:
/s/ C. L. Haslam
- ---------------------------------
C. L. Haslam
<PAGE> 1
EXHIBIT 10.2
May 27, 1997
Mr. Robert M. Thornton, Jr.
1090 Northchase Parkway
Suite 200 South
Marietta, GA 30067-6402
Dear Mr. Thornton:
KRUG International Corp. ("Corporation") hereby offers to amend
Section 2 of the Consulting and Employment Agreement dated May 17, 1996 between
you and the Corporation to increase your monthly salary to $13,500, effective
June 1, 1997.
If this is agreeable to you, please sign the enclosed copy of this
letter and return it to me.
Very truly yours,
KRUG International Corp.
By /s/ James J. Mulligan
-------------------------------
Secretary
Agreed:
/s/ Robert M. Thornton, Jr.
- ---------------------------------
Robert M. Thornton, Jr.
<PAGE> 1
EXHIBIT 10.3
EMPLOYMENT AGREEMENT
This Agreement, effective April 1, 1997, is entered into between KRUG LIFE
SCIENCES, INC., an Ohio corporation (the "Corporation"), and Joseph P. Kerwin,
M.D. ("KERWIN", or the "Employee"), under the following circumstances:
A. The Corporation desires to secure KERWIN's services over the next two
years; and
B. KERWIN desires the security of an employment agreement and is willing
to enter into such an agreement 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. TERM OF EMPLOYMENT. The Corporation hereby agrees to employ
KERWIN, and KERWIN hereby agrees to be employed by the Corporation, for a
period of two (2) years beginning April 1, 1997 and expiring on March 31, 1999.
SECTION 2. POSITION AND DUTIES
(a) During KERWIN's term of employment hereunder, the Corporation shall
employ KERWIN as, and KERWIN shall serve as, the President of the Corporation
with his duties, authority and responsibilities to be of the same character and
importance as those normally performed and exercised by a corporate president.
(b) KERWIN shall devote his full-time efforts to the business and affairs
of the Corporation and shall perform his duties as President faithfully,
diligently, and to the best of his ability. He shall act in conformity with the
policies of the Corporation and under and subject to such reasonable directions
and instructions as the Board of Directors may issue from time to time.
SECTION 3. SALARY AND BONUS
(a) During the term of this Agreement, the Corporation shall pay KERWIN a
base salary at a rate of One Hundred and Forty Thousand Dollars ($140,000) per
year, payable in approximately equal instalments in accordance with the normal
pay schedule for officers of the Corporation.
(b) In addition to his base salary, KERWIN shall be eligible to receive an
incentive
[Page 1 of 4]
<PAGE> 2
bonus of up to 12% of his base salary for each fiscal year, based upon annual
performance criteria approved by the Board of Directors within sixty (60) days
after the beginning of the fiscal year. Any such bonus shall be paid in a lump
sum, subject to appropriate tax and other withholdings, and shall be paid
within a reasonable time after it is earned and the corporation's financial
statements for the fiscal year are published.
SECTION 4. STOCK OPTION. Subject to the prior approval of the Executive
Committee of the Board of Directors of Krug International Corp., the
Corporation hereby grants to KERWIN, effective April 1, 1997, an option to
purchase 15,000 Common Shares of the Corporation under the 1995 Incentive Stock
Option Plan of the Corporation (a copy of which is attached hereto).
SECTION 5. AUTOMOBILE ALLOWANCE. Upon the execution of this Agreement,
KERWIN shall receive a Six Thousand Dollar ($6,000) payment as an automobile
allowance.
SECTION 6. VACATION. KERWIN shall be entitled to fifteen (15) working days
of paid vacation per year.
SECTION 7. OTHER BENEFITS. In addition to the base salary and incentive
bonus compensation payable pursuant to Section 3, the Corporation shall also
provide to KERWIN, on an equivalent basis, the same fringe benefits (including,
but not limited to, health insurance, group life insurance, 401(k) retirement
plan, and other similar personal benefits) that are received generally by other
employees of the Corporation.
SECTION 8. EXPENSE REIMBURSEMENT. KERWIN shall be entitled to
reimbursement from the Corporation for reasonable "out-of-pocket" expenses
incurred with the approval of the Corporation in the performance of his duties
hereunder, in accordance with the Corporation's expense reimbursement policy.
SECTION 9. NON-DISCLOSURE. Without the Corporation's prior express written
consent, KERWIN 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 an employee, (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, KERWIN shall surrender any such
tangible confidential information, including all copies thereof, to the
Corporation immediately upon the Corporation's written request. KERWIN 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 information ceases to
be confidential or becomes part of the public domain through no fault
[Page 2 of 4]
<PAGE> 3
of KERWIN.
SECTION 10. 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
1290 Hercules Drive, Suite 120
Houston, TX 77058
KERWIN:
Joseph P. Kerwin, M.D.
1802 Royal Fern Court
Houston TX 77062
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.
SECTION 11. 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 12. AMENDMENT. This Agreement may be modified or amended if the
amendment is made in writing and signed by both parties.
SECTION 13. 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 14. WAIVER OF CONTRACTUAL RIGHT. The Failure of either party to
enforce any prevision of this Agreement shall not be construed asa waiver or
limitation of that party's right to subsequently enforce and compel strict
compliance with every provision of this Agreement.
IN WITNESS WHEREOF, the undersigned have set their hands hereto effective
on
[Page 3 of 4]
<PAGE> 4
the date first set forth above.
/s/ Joseph P. Kerwin
---------------------------------------
JOSEPH P. KERWIN, M.D.
KRUG LIFE SCIENCES, INC.
By:/s/ C. L. Haslam
---------------------------------------
Charles Linn Haslam, Chairman
[Page 4 of 4]
<PAGE> 1
EXHIBIT 10.4
Effective April 16, 1997, KRUG Life Sciences Inc. (KLSI) and T. Wayne Holt
entered into a verbal Consulting Agreement whereby Mr. Holt would serve as a
consultant to KLSI for the recompetition of KLSI's contract at Armstrong
Laboratories, Brooks AFB, San Antonio, Texas. Under the terms of the Agreement,
Mr. Holt is to be paid $7,000 per month and reimbursed for reasonable expenses
that he incurs. The Agreement may be terminated at any time by either party,
upon written notice.
<PAGE> 1
EXHIBIT 10.5
AMENDMENT NO. 3 TO LOAN AND SECURITY AGREEMENT
AMENDMENT NO. 3, dated as of February 10, 1997, 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, as amended by an Amendment No.
1 to Loan and Security Agreement dated as of September 26, 1995, and by an
Amendment No. 2 to Loan and Security Agreement dated July 16, 1996 (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. Effective as of December 31, 1996, Sections 7.2(K) and
7.3(A) of the Loan and Security are amended and restated as follows:
Section 7.2 (K) Permit the aggregate of all Accounts owing from U.K.
Subsidiary at any time to exceed Two Hundred Thousand Dollars ($200,000)
(other than in connection with transactions related to dividends from U.K.
Subsidiary to Borrower), or permit the aggregate of all Accounts owing
from KRUG Properties Inc. to exceed the sum of the amount of such Account
as of March 31, 1995, plus the net expenses of Borrower's discontinued
operations for the Fiscal Years commencing with the Fiscal Year ending
March 31, 1996, but not to exceed Eight Hundred Thousand Dollars
($800,000) for the Fiscal Year ending March 31, 1996, One Million Dollars
($1,000,000) for the Fiscal Year ending March 31, 1997, and Six Hundred
Thousand Dollars ($600,000) for each Fiscal Year thereafter.
Section 7.3 (A) Borrower and U.S. Subsidiaries shall have, on a
consolidated basis, (i) at the end of each of the Fiscal Quarters within
the Fiscal Years ending March 31, 1995, and March 31, 1996, commencing
with the Fiscal Quarter ending March 31, 1995, a Fixed Charge Coverage
Ratio equal to or greater than 0.8 to 1.0, (ii) at the end of each of the
Fiscal Quarters ending June 30, 1996 and September 30, 1996, a Fixed
Charge Coverage Ratio equal to or greater than 1.0 to 1.0, (iii) at the
end of the Fiscal Quarter ending December 31, 1996, a Fixed Charge
Coverage Ratio equal to or greater than 0.8 to 1.0, and (iv) at the end of
each Fiscal Quarter thereafter, a Fixed Charge Coverage Ratio equal to or
greater than 1.0 to 1.0.
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. 3 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 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.
<PAGE> 2
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. 3 may be executed in any number of separate counterparts, each of which
shall, collectively and separately, constitute one agreement. This Amendment
No. 3 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. 3 has been duly executed as of the
day and year specified at the beginning hereof.
TRANSAMERICA BUSINESS CREDIT KRUG INTERNATIONAL CORP.
CORPORATION
By: /s/ Matthew N. McAlpine By: /s/ Robert M. Thornton, Jr.
--------------------------------- ------------------------------------
Name: Matthew N. McAlpine Name: Robert M. Thornton, Jr.
-----------------------------
Title: Vice-President Title: President
-----------------------------
KRUG LIFE SCIENCES INC.
By: /s/ T. Wayne Holt
------------------------------------
Name: T. Wayne Holt
-----------------------------
Title: President
-----------------------------
TECHNOLOGY/SCIENTIFIC
SERVICES, INC.
By: /s/ Robert C. DeLong
------------------------------------
Name: Robert C. DeLong
-----------------------------
Title: President
-----------------------------
2
<PAGE> 1
EXHIBIT 10.6
AMENDMENT NO. 4 TO LOAN AND SECURITY AGREEMENT
AMENDMENT NO. 4, dated as of April 21, 1997, 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, as amended by an Amendment No.
1 to Loan and Security Agreement dated as of September 26, 1995, and by an
Amendment No. 2 to Loan and Security Agreement dated July 16, 1996, and by an
Amendment No. 3 to Loan and Security Agreement dated as of February 10, 1997
(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. The definition of "Borrowing Base" in Section 3.1(a) of the
Loan and Security Agreement is amended and 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) 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. 4 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 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.
<PAGE> 2
5. MISCELLANEOUS. Except as herein provided, the Loan and Security
Agreement shall remain unchanged and in full force and effect. This Amendment
No. 4 may be executed in any number of separate counterparts, each of which
shall, collectively and separately, constitute one agreement. This Amendment
No. 4 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. 4 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: Name:
--------------------------- ---------------------------
Title: Title:
--------------------------- ---------------------------
KRUG LIFE SCIENCES INC.
By: /s/ Robert M. Ellis
----------------------------------
Name: Robert M. Ellis
---------------------------
Title: Vice President
---------------------------
TECHNOLOGY/SCIENTIFIC
SERVICES, INC.
By:
----------------------------------
Name:
---------------------------
Title:
---------------------------
2
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