<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 DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
------------------- -------------------
COMMISSION FILE NUMBER 0-2901
KRUG INTERNATIONAL CORP.
------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
Ohio 31-0621189
---- ----------
(STATE OR OTHER JURISDICTION OF INCORPORATION (I.R.S. EMPLOYER
OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
900 Circle 75 Parkway, Suite 1300, Atlanta, Georgia 30339
---------------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(ZIP CODE)
(770) 933-7000
--------------
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
1290 Hercules Drive, Suite 120 Houston, Texas 77058
---------------------------------------------------
(FORMER ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
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 February 3,
1999 was 4,977,530.
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
KRUG INTERNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1998
------------ ---------
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents $10,454 $ 4,205
Receivables - net 8,285 10,314
Inventories (Note C) 4,608 5,000
Prepaid expenses 777 664
Net current assets of discontinued operations (Note H) -- 4,527
------- -------
Total Current Assets 24,124 24,710
Property, Plant and Equipment, At Cost 11,596 10,461
Less accumulated depreciation 5,802 4,863
------- -------
Property, Plant and Equipment - Net 5,794 5,598
Pension Asset 1,560 1,557
Deferred Tax Assets 1,982 2,529
Other Assets 1,578 5,185
------- -------
Total Assets $35,038 $39,579
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $10,024 $ 9,482
Accrued expenses (Note F) 5,074 4,972
Income taxes 157 323
Net current liabilities of discontinued operations (Note H) 450 --
Current maturities of long-term debt 1,568 1,238
------- -------
Total Current Liabilities 17,273 16,015
Long-term Debt 5,051 5,465
Net Non-Current Liabilities of Discontinued Operations (Note H) 826 --
------- -------
Total Liabilities 23,150 21,480
Shareholders' Equity:
Common shares, no par value:
Issued and outstanding, 5,256,230 at December 31, 1998
and 5,198,730 at March 31, 1998 2,628 2,599
Additional paid-in capital 4,829 4,590
Retained earnings 5,314 10,222
Treasury shares, at cost, 278,700 shares at December 31, 1998 (1,363) --
Accumulated other comprehensive income -
Foreign currency translation adjustment 1,097 1,305
Minimum pension liability adjustment (617) (617)
------- -------
Total Shareholders' Equity 11,888 18,099
------- -------
Total Liabilities and Shareholders' Equity $35,038 $39,579
======= =======
</TABLE>
See notes to condensed consolidated financial statements
<PAGE> 3
KRUG INTERNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
--------------------------
1998 1997
---- ----
<S> <C> <C>
Revenues $11,976 $27,220
Cost of Goods Sold 11,347 24,692
Selling and Administrative Expenses 2,655 2,729
Restructuring Charges -- 547
------- -------
Operating Loss (2,026) (748)
Other Income (Expense):
Interest expense (147) (338)
Interest income 134 --
Other income - net -- 802
------- -------
Loss From Continuing Operations
Before Income Taxes (2,039) (284)
Income Tax Expense (Note D) 21 39
------- -------
Loss From Continuing Operations (2,060) (323)
Loss From Discontinued Operations
(Note H) -- (73)
------- -------
Net Loss $(2,060) $ (396)
======= =======
Loss Per Share:
Continuing Operations:
Basic $ (0.41) $ (0.06)
======= =======
Diluted $ (0.41) $ (0.06)
======= =======
Net Loss:
Basic $ (0.41) $ (0.08)
======= =======
Diluted $ (0.41) $ (0.08)
======= =======
Average Common Shares Outstanding:
Basic 4,978 5,170
======= =======
Diluted 4,980 5,208
======= =======
</TABLE>
See notes to condensed consolidated financial statements
<PAGE> 4
KRUG INTERNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31,
---------------------------
1998 1997
-------- -------
<S> <C> <C>
Revenues $37,088 $69,571
Cost of Goods Sold 35,269 63,153
Selling and Administrative Expenses 7,078 5,518
Restructuring Charges -- 547
------- -------
Operating Profit (Loss) (5,259) 353
Other Income (Expense):
Interest expense (455) (840)
Interest income 433 --
Equity in loss of Wyle Laboratories, Inc. (123) --
Other income - net (Note E) 176 854
------- -------
Earnings (Loss) From Continuing Operations
Before Income Taxes (5,228) 367
Income Tax Expense (Note D) 28 276
------- -------
Earnings (Loss) From Continuing Operations (5,256) 91
Earnings From Discontinued Operations (Note H) 348 1,369
------- -------
Net Earnings (Loss) $(4,908) $ 1,460
======= =======
Earnings (Loss) Per Share:
Continuing Operations:
Basic $ (1.04) $ 0.02
======= =======
Diluted $ (1.04) $ 0.02
======= =======
Net Earnings (Loss):
Basic $ (0.97) $ 0.28
======= =======
Diluted $ (0.97) $ 0.28
======= =======
Average Common Shares Outstanding:
Basic 5,067 5,160
======= =======
Diluted 5,075 5,195
======= =======
</TABLE>
See notes to condensed consolidated financial statements
<PAGE> 5
KRUG INTERNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31,
-------------------------
1998 1997
------- -------
<S> <C> <C>
Net Cash Provided by Operating Activities $ 195 $ 2,517
Cash Flows From Investing Activities:
Purchase of U.K. subsidiary -- (3,878)
Expenditures for property, plant and equipment (352) (828)
Proceeds from sale of Sowester Limited - net 8,380 --
Proceeds from sale of property, plant and equipment 188 1,493
Purchases of treasury shares (1,363) --
Other investments (132) --
------- -------
Net Cash Provided by (Used in) Investing Activities 6,916 (3,213)
Cash Flows From Financing Activities:
Payments on long-term debt (920) (2,441)
New long-term debt 6,143
Proceeds from exercise of stock options 268 141
Bank borrowings - net -- (1,161)
------- -------
Net Cash Provided by (Used in) Financing Activities (652) 2,682
Effect of Exchange Rate Changes on Cash (15) 10
------- -------
Net Increase in Cash 6,249 1,996
Cash at Beginning of Period 4,205 105
------- -------
Cash at End of Period $10,454 $ 2,101
======= =======
Cash Paid For:
Income Taxes $ 325 $ 439
======= =======
Interest $ 471 $ 926
======= =======
Non-Cash Investing and Financing Activities:
Capital leases $ 884 $ 591
======= =======
</TABLE>
See notes to condensed consolidated financial statements
<PAGE> 6
KRUG INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED DECEMBER 31, 1998
(DOLLARS IN THOUSANDS)
NOTE A -- BASIS OF PRESENTATION
The unaudited Condensed Consolidated Financial Statements for the three
and nine months ended December 31, 1998 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, 1998. In the opinion
of management, the Condensed Consolidated Financial Statements, which are
unaudited, 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
and nine months ended December 31, 1998 are not necessarily indicative of the
results that may be expected for the entire fiscal year or any other interim
period.
NOTE B -- ACQUISITION OF KLIPPAN LIMITED
On October 2, 1997, the Corporation's U.K. Housewares and Child Safety
Products subsidiary purchased all the issued capital shares of Klippan Limited,
a manufacturer of children's automobile safety seats and accessories in the
United Kingdom and Scandinavia, for a purchase price of approximately $3,900.
The acquisition was financed under the Corporation's U.K. bank credit facility.
The acquisition was accounted for using the purchase method of accounting.
Pro-forma financial information of Klippan Limited is included in the
Corporation's Form 10-K for the fiscal year ended March 31, 1998.
NOTE C -- INVENTORIES
<TABLE>
<CAPTION>
December 31, March 31,
1998 1998
------------ ---------
<S> <C> <C>
Finished goods $1,076 $1,599
Work-in-process 1,077 1,194
Raw materials and supplies 2,455 2,207
------ ------
$4,608 $5,000
====== ======
</TABLE>
NOTE D -- INCOME TAXES
The provision for income taxes is composed of the following:
<TABLE>
<CAPTION>
Three Months Ended December 31,
-------------------------------
1998 1997
---- -----
<S> <C> <C>
Domestic $-- $ 268
Foreign 21 (229)
--- -----
$21 $ 39
=== =====
</TABLE>
<PAGE> 7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE D -- INCOME TAXES (CONTINUED)
<TABLE>
<CAPTION>
Nine Months Ended December 31,
------------------------------
1998 1997
---- -----
<S> <C> <C>
Domestic $ -- $ 357
Foreign 28 (81)
---- -----
$ 28 $ 276
==== =====
</TABLE>
NOTE E -- OTHER INCOME -- NET
During the nine months ended December 31, 1998, the Corporation sold
land in Dayton, Ohio for a pre-tax gain of $176. This property was excess to the
Corporation's needs and had been listed for sale. The net proceeds of the sale
were used for working capital. During the quarter ended December 31, 1997, the
Corporation sold a building and land in Dayton, Ohio for a pre-tax gain of $803.
NOTE F -- RESTRUCTURING CHARGES AND ACCRUED EXPENSES
In January 1998, the Corporation announced the restructuring of its
Housewares and Child Safety Products Segment, including the consolidation of two
U.K. manufacturing facilities and the relocation of its German sales offices. At
December 31, 1998, accrued expenses included restructuring charges of $727 which
related primarily to rent and lease exit costs payable through June 1999 for a
leased manufacturing facility in England which is no longer in use, and $102 of
restructuring charges which relate primarily to rent (net of expected sublease
rental income) and other expenses payable through June 1999, on the Dayton,
Ohio, offices vacated by the Corporation in 1996.
NOTE G -- MERGER OF SUBSIDIARIES
In March 1998, the Corporation merged its Life Sciences and Engineering
subsidiaries, KRUG Life Sciences Inc. and Technology/Scientific Services, Inc.,
with Wyle Laboratories, Inc. ("Wyle"). The Corporation received convertible
preferred shares equal to thirty-eight percent of the combined entity plus cash
and the assumption of the subsidiaries' working capital debt. The transaction
has been accounted for as a "tax-free" merger, and the Corporation reports its
investment in Wyle on the equity method of accounting. During the nine months
ended December 31, 1998, the Corporation reported a loss of $123 relating to its
equity in Wyle. The Corporation currently has no investment in Wyle recorded on
its books and, accordingly, will report future profits or losses of Wyle only
when its investment account exceeds zero. At September 30, 1998, Wyle reported
aggregate equity of $4,355 on its balance sheet.
NOTE H -- DISCONTINUED OPERATIONS
On April 16, 1998, the Corporation sold its Leisure Marine Subsidiary
to a company formed by the management of the Segment. The purchase price
consisted of approximately $15,000 comprised of approximately $8,400 in cash,
deferred payments of $400 due within one year and the assumption of
approximately $6,200 of debt. As a result of the disposal, the Corporation
reported a gain of $348 under discontinued operations for the nine months ended
December 31, 1998.
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 final costs under leases
of property in Knoxville, Tennessee (which expired
<PAGE> 8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE H -- DISCONTINUED OPERATIONS (CONTINUED)
December 31, 1998) and Toronto, Canada (which expired March 31, 1998), and
product liability claims related to products sold before the disposal of the
Industrial Segment.
Income tax expense from discontinued operations was as follows:
<TABLE>
<CAPTION>
Three months ended December 31, Nine months ended December 31,
1998 1997 1998 1997
----- ---- ---- ----
<S> <C> <C> <C>
$0 $(41) $55 $740
== ==== === ====
</TABLE>
In connection with settling the final obligations under the leases in
Knoxville, Tennessee, in December 1998, the landlord filed a lawsuit concerning
the maintenance obligations of the Corporation and one of its subsidiaries and
requesting relief from payment of a $200,000 promissory note due the Corporation
by the landlord. In January 1999, the Corporation filed suit against the
landlord requesting payment of the promissory note, other damages due to breach
of contract and unjust enrichment and a declaration regarding a payment from a
former sub-tenant of the Corporation at the Knoxville location. Based upon an
evaluation of information currently available and consultation with legal
counsel, the Corporation is unable to determine what effect, if any, the outcome
of these claims under litigation would have on the financial position of the
Corporation.
NOTE I -- COMPREHENSIVE INCOME
Effective April 1, 1998, the Corporation adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income." This Statement
requires that all items recognized under accounting standards as components of
comprehensive earnings be reported in financial statements. This Statement also
requires that an entity classify items of other comprehensive earnings by their
nature in an annual financial statement. Other comprehensive earnings for the
Corporation includes foreign currency translation adjustments. Total
comprehensive loss for the following periods were as follows:
<TABLE>
<CAPTION>
Three Months Ended
----------------------------
December 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
Net earnings (loss): $(2,060) $(396)
Other comprehensive
earnings net of tax:
Change in equity due to
foreign currency
translation adjustments (238) 335
------- -----
Comprehensive loss $(2,298) $ (61)
======= =====
</TABLE>
<PAGE> 9
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE I -- COMPREHENSIVE INCOME (CONTINUED)
<TABLE>
<CAPTION>
Nine Months Ended
------------------------------
December 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
Net earnings (loss): $(4,908) $1,460
Other comprehensive
earnings net of tax:
Change in equity due to
foreign currency
translation adjustments (208) 71
------- ------
Comprehensive earnings (loss) $(5,116) $1,531
======= ======
</TABLE>
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
FINANCIAL SUMMARY
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
December 31, December 31,
------------------------------- ------------------------------
1998 1997 1998 1997
------------------------------- ------------------------------
<S> <C> <C> <C> <C>
REVENUES:
Housewares and Child Safety $11,976 $13,464 $37,088 $33,584
Life Sciences and Engineering 13,756 35,987
------------------------------- ------------------------------
$11,976 $27,220 $37,088 $69,571
=============================== ==============================
EARNINGS (LOSS) FROM
CONTINUING OPERATIONS
BEFORE INCOME TAXES:
Housewares and Child Safety $(1,580) $(543) $(3,971) $(348)
Life Sciences and Engineering 689 2,302
Restructuring charge (547) (547)
------------------------------- ------------------------------
(1,580) (401) (3,971) 1,407
Corporate expense (446) (347) (1,288) (1,054)
------------------------------- ------------------------------
Operating Profit (Loss) (2,026) (748) (5,259) 353
Other income - net 802 176 854
Interest income (expense) - net (13) (338) (22) (840)
Equity in loss of
Wyle Laboratories, Inc. (123)
------------------------------- ------------------------------
Earnings (Loss) before Income Taxes
$(2,039) $(284) $(5,228) $367
=============================== ==============================
CAPITAL ADDITIONS:
Housewares and Child Safety $ 133 $ 281 $ 336 $764
Life Sciences and Engineering 28 44
Other 17
------------------------------- ------------------------------
$ 133 $ 309 $ 353 $808
=============================== ==============================
</TABLE>
GENERAL
During March 1998, the Corporation merged KRUG Life Sciences Inc. and
Technology/Scientific Services, Inc., its two subsidiaries which comprised the
Life Sciences and Engineering Segment, with Wyle Laboratories, Inc. in exchange
for a 38% equity interest in Wyle plus cash and the assumption of debt. The
Corporation is reporting for the nine months ended December 31, 1998 its equity
in Wyle's losses as a single line item in its condensed consolidated statements
of earnings pursuant to APB No. 18. For the three and nine months ended December
31, 1997, the Life Sciences and Engineering Segment is reported as continuing
operations in the condensed consolidated statements of earnings.
In April 1998, the Corporation sold its Leisure Marine subsidiary and
the results of operations of the Segment are included in discontinued operations
for the three and nine months ended December 31, 1998 and 1997, respectively.
<PAGE> 11
RESULTS OF OPERATIONS
Revenues of the U.K. Housewares and Child Safety Products Segment (the
Corporation's continuing operations segment) for the third quarter of fiscal
1999 decreased by $1,488 or 11% to $11,976 from $13,464 for the same quarter in
fiscal 1998. The decreased sales were due to lower housewares product sales by
the Beldray Limited subsidiary and discontinuance of the industrial and office
products lines of Hago Products Limited in March 1998 when Hago's manufacturing
operations were consolidated into Beldray's manufacturing facility. The
favorable effect of currency translation contributed $167 of revenue to the
Segment for the third quarter of fiscal 1999. Sales at Beldray decreased $2,395
in the quarter, primarily the Corporation believes, because of significant
operating inefficiencies which lead to missed customer delivery schedules at the
manufacturing plant near Birmingham, England. Revenues of Klippan Limited, which
manufactures children's automobile safety seats, increased $908 in the third
quarter of fiscal 1999. During fiscal 1999, Klippan redesigned its children's
automobile safety seats and began shipping the redesigned seats to customers in
October 1998. The new models received a favorable response from customers and
resulted in increased revenues compared to the prior year's third quarter.
Revenues of the Housewares and Child Safety Products Segment increased $3,504 or
10% to $37,088 for the nine months ended December 31, 1998 from the same period
last year. Klippan sales were $11,288 for the current period, an increase of
$8,153 while sales at Beldray Limited decreased $4,779 for this nine-month
period due to the previously mentioned difficulties at its manufacturing plant.
The operating loss of $1,580 incurred by the Housewares and Child
Safety Segment for the quarter ended December 31, 1998, resulted primarily from
continued operating inefficiencies and missed customer delivery schedules in
connection with the consolidation of the Hago manufacturing operations into the
Beldray facility. Since this consolidation was completed in April 1998, the
facility has experienced increased cost of goods sold and lower than anticipated
sales. The Corporation made significant operational and organizational changes
at the facility to address the operating difficulties during the quarter and in
connection therewith recorded a pre-tax charge of $153 for severance and other
expenses relating to the organizational changes. Beldray has implemented a cost
reduction program to bring the facility's costs in line with its current and
anticipated revenue levels. The Corporation believes its actions will result in
improved performance at the facility but is uncertain if its Beldray
manufacturing operations will return to profitability in the fourth quarter of
fiscal 1999. During fiscal 1999, Klippan undertook a comprehensive product
redevelopment program for its children's automobile safety seats and six new
models of the seats were introduced in late August 1998. The Corporation
commenced shipments of five new models in October 1998 and one in January 1999.
While the new products increased sales during the third quarter of fiscal 1999,
Klippan was not profitable for the quarter as sales have not yet increased to a
level which cover Klippan's costs. Corporate expense for the current year's
third quarter increased from the prior year due to increased legal and other
professional fees.
The operating loss of $5,259 for the nine months ended December 31,
1998 resulted from losses incurred by both of the Housewares and Child Safety
Segment subsidiaries. The losses at Beldray resulted from the significant
operating inefficiencies and missed customer delivery schedules described above.
The losses at Klippan resulted from low sales volume, product development costs
related to the new children's automobile safety seats and higher marketing costs
as a result of the reorganization of the German and French sales operations
during the current fiscal year.
<PAGE> 12
During the first nine months of fiscal 1999, the Corporation recognized
its portion of Wyle's loss, which resulted primarily from certain of Wyle's
fixed-priced hardware contracts. Also included in the first nine months results
is a pre-tax gain of $176 from the sale of excess land in Dayton, Ohio. The
third quarter of fiscal 1998 included a pre-tax gain of $802 from the sale of
land and a building in Dayton, Ohio.
Interest expense decreased $191 for the third quarter and $385 for the
nine months ended December 31, 1998 compared to the comparable periods of the
previous fiscal year. These decreases are due to decreased debt levels in the
current year because of the April 1998 sale of the Leisure Marine Segment and
the debt assumed by Wyle in the Wyle merger. The Corporation has earned interest
income of $134 for the third quarter and $433 for the nine months ending
December 31, 1998 on cash received from the Wyle merger and the sale of the
Leisure Marine Segment.
The Corporation recorded income tax expense of $21 and $28 in the
fiscal 1999 third quarter and nine months, respectively. The tax expense is due
to income taxes payable on profits of certain European subsidiaries of Klippan.
No tax benefit has been recorded for the U.K. or German tax losses from the
Housewares and Child Safety Products Segment nor the U.S. tax losses from the
U.S. corporate headquarters. Such losses resulted in tax loss carryforwards in
the United Kingdom ($1,921), Germany ($331) and the United States ($1,185),
which may be available to offset a portion of future income, if any.
The net loss was $2,060 ($0.41 per share) in the third quarter of
fiscal 1999 compared to a net loss of $396 ($0.08 per share) in the third
quarter of fiscal 1998. The loss in the third quarter of fiscal 1999 was due
primarily to operating losses in the Housewares and Child Safety Products
Segment. Fiscal 1998 third quarter results includes a $547 restructuring charge
for the then anticipated consolidation of the Hago operations into the Beldray
facility. The net loss for the nine months ending December 31, 1998 was $4,908
($0.97 per share) compared to net earnings of $1,460 ($0.28 per share) for the
same period last year. The gain of $348 from the sale of the Corporation's
Leisure Marine Segment is presented as "Earnings From Discontinued Operations"
in the current year's results.
The Corporation has approximately $900 of prepaid U.K. taxes,
classified as a long-term tax asset, which arose due to advance corporation
taxes paid on prior years' inter-company dividends. These prepaid taxes are
available to offset U.K. income taxes payable, subject to certain yearly limits,
and currently have no expiration date. Recent changes in the U.K. tax law may
make the use of these tax prepayments more difficult in future years, but does
not affect the ultimate use of the prepaid taxes and, accordingly, no valuation
allowance against this component of the long-term income tax asset is considered
necessary.
On March 31, 1998, the Corporation approved an amendment to its
domestic defined benefit retirement plan to terminate the plan. Management
expects that, subject to required regulatory approvals, final payment of the
plan termination benefits will be made by the end of July 1999. The Corporation
has reflected an additional minimum liability of $617, net of related tax
benefits, as a reduction of shareholders' equity because such amount exceeds the
amount of unrecognized prior service costs. This additional minimum liability
will be charged against earnings upon settlement of the domestic plan. An
additional contribution to the domestic retirement plan of approximately $1,100
will likely be required to be made by the Corporation at the time of the final
distribution of the plan assets, based on current interest rates applicable to
the calculation of the termination liability.
<PAGE> 13
DISCONTINUED OPERATIONS
On April 16, 1998, the Corporation sold its Leisure Marine Subsidiary
to a company formed by the management of the Segment. The purchase price
consisted of approximately $15,000 comprised of approximately $8,400 in cash,
deferred payments of $400 due within one year and the assumption of
approximately $6,200 of debt. As a result of the disposal, the Corporation
reported a gain of $348 under discontinued operations for the nine months ended
December 31, 1998.
In fiscal 1989, the Corporation discontinued the operations of its
Industrial Segment and subsequently disposed of substantially all related net
assets. However, obligations remain relating to final costs under leases in
Knoxville, Tennessee (lease expired December 31, 1998) and Toronto, Canada
(lease expired March 31, 1998), and product liability claims for products
manufactured and sold before the disposal of the Segment. The Corporation
reviewed the provision for losses from such discontinued operations during the
quarter and no changes were deemed necessary.
In connection with settling the final obligations under the leases in
Knoxville, Tennessee, in December 1998, the landlord filed a lawsuit concerning
the maintenance obligations of the Corporation and one of its subsidiaries and
requesting relief from payment of a $200,000 promissory note due the Corporation
by the landlord. In January 1999, the Corporation filed suit against the
landlord requesting payment of the promissory note, other damages due to breach
of contract and unjust enrichment and a declaration regarding a payment from a
former sub-tenant of the Corporation at the Knoxville location. See Part II,
Item 1. Legal Proceedings of this Form 10-Q for more information regarding these
lawsuits. Based upon an evaluation of information currently available and
consultation with legal counsel, the Corporation is unable to determine what
effect, if any, the outcome of these claims under litigation would have on the
financial position of the Corporation.
LIQUIDITY AND CAPITAL RESOURCES
The Corporation generated $195 of cash from operating activities during
the first nine months of fiscal 1999. Cash was generated from the sale of
certain tax credits to the Corporation's former Leisure Marine Segment
subsidiary for which the Corporation received $560. The increase in the cash
balance from March 31, 1998 to December 31, 1998 is due primarily to the cash
proceeds of the sale of Sowester Limited in April 1998, net of debt paid off in
connection with the sale.
In April 1998, the Corporation announced that it would repurchase for
cash in the open market up to 200,000 of its common shares, and in August 1998,
the Corporation's Board of Directors authorized the purchase of an additional
100,000 shares. As of February 3, 1999, the Corporation had repurchased a total
of 278,700 shares.
At December 31, 1998, the Corporation had outstanding debt of $5,209
under a variable rate loan and a term loan with an U.K. bank. The debt is
payable in quarterly installments and matures in fiscal 2005. In addition, the
Corporation has a $3,300 line of credit for its U.K. subsidiaries with an U.K.
bank, all of which was unused at December 31, 1998. The U.K. loan agreements are
collateralized by substantially all of the Corporation's U.K. assets, including
approximately $8,300 of cash proceeds of the sale of the Leisure Marine Segment.
A portion of such cash is restricted pending the renegotiation of the U.K. bank
debt. The agreements contain affirmative and negative covenants (including
financial covenants relating to cash flow and tangible net worth requirements)
and are cross-guaranteed by the U.K. subsidiaries. The Corporation is currently
in violation of certain of the financial covenants, but has received a waiver of
the covenant violations from its bank. The Corporation expects to renegotiate
its U.K. bank debt agreements in calendar 1999 and reduce the outstanding
amount. At December 31, 1998, the Corporation had no outstanding U.S. debt. The
Corporation believes it has adequate financing in both the U.S. and U.K. to
support its current level of operations.
<PAGE> 14
IMPACT OF THE YEAR 2000 ISSUE
Some older computer programs and systems were written using two digits
rather than four to define the applicable year (for example, 98 to denote 1998).
As a result, those computer programs have software which may recognize a date
using "00" as the year 1900 rather than the year 2000. This may result in a
computer system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices, engage in manufacturing processes, or continue similar normal
business activities.
State of Readiness - The Corporation recognizes the importance of the
Year 2000 issues and has given it high priority. The Corporation has underway a
Year 2000 project to identify the programs and infrastructure that could be
affected by the Year 2000 issues and is implementing a plan to resolve the
problems identified on a timely basis. The Corporation's Year 2000 plan may be
broken into five interrelated phases: (i) evaluating existing information
technology (IT) and non-IT systems of the Corporation, (ii) implementing
corrective actions to such systems (including testing), (iii) evaluating the
Corporation's exposure to third parties' failures to adequately address Year
2000 issues, (iv) developing contingency plans with respect to such exposure,
and (v) on-going vigilance with respect to Year 2000 developments. As mentioned,
the scope of the Year 2000 project includes (i) IT systems such as software and
hardware; (ii) non-IT systems or embedded technology such as micro-controllers
contained in various manufacturing systems; and (iii) the readiness of key third
parties, including suppliers and customers, and electronic data interchange with
those key third parties. The evaluation phase of the Year 2000 project includes
identifying products and IT and non-IT systems or components that might
malfunction or fail at the end of the millennium.
The Corporation currently has three primary operating locations
(Birmingham England, Carlisle England and Vantaa Finland) and at each location a
person is responsible for coordinating Year 2000 issues for that location. At
the largest location, the IT system is less than two years old and the
information technology for this system when purchased was reviewed for Year 2000
compliance. The other two locations are smaller and will require new IT systems
(local area networks) for approximately 25 users at each location. Such new IT
systems will be installed by the end of 1999. The non-IT systems identified are
primarily manufacturing and assembly systems which will require testing for Year
2000 compliance. Key third parties will be contacted to minimize the disruptions
in the relationship between the Corporation and these important third parties
because of the Year 2000 issue. While the Corporation cannot guarantee
compliance of third parties, the Corporation will consider alternate sources of
supply in the event a key supplier cannot demonstrate its systems or products
are Year 2000 compliant.
The Year 2000 project will require the Corporation to devote
considerable internal resources and hire consultants to assist with the
implementation and monitoring of the plan, and will require the replacement of
certain equipment and replacement or modification of certain software. The
Corporation will also be working with its customers and suppliers to ensure
business continuity during the potential problem period.
Costs to Address the Year 2000 Issue - The Corporation currently
estimates that the total cost of its Year 2000 project will be approximately
$150 which has been or will be expensed as incurred and approximately $350 of
capital expenditures. These costs include approximately $200 of normal system
software and equipment upgrades and replacements, which the Corporation
anticipated incurring in the ordinary course regardless of the Year 2000 issue.
These costs will be incurred during the fourth quarter of fiscal 1999 and during
fiscal 2000.
Risks to the Corporation of the Year 2000 Issue - If the Corporation's
plan to address the Year 2000 issue is not successful or not timely implemented,
the Corporation may need to devote more resources to the process and additional
costs may be incurred, which could have a
<PAGE> 15
material adverse effect on the Corporation's financial condition and results of
operations. Problems encountered by the Corporation's vendors and customers with
the Year 2000 issue may also have a material adverse effect of an uncertain
magnitude on the Corporation's financial condition and results of operations.
The Corporation's Contingency Plans - At present, the Corporation is
not able to describe its most reasonably likely worst case Year 2000 scenarios
because it does not presently have adequate information from its suppliers and
customers and has not completed evaluating its non-IT systems. The Corporation
has devoted resources to the analysis of this uncertainty and will continue to
devote resources to addressing this uncertainty. As a component of its Year 2000
project, the Corporation is developing contingency plans to mitigate the effects
of problems experienced by it, key vendors or service providers and customers in
the timely implementation of solutions to Year 2000 problems. At present,
however, the Corporation has not completed contingency plans, but plans to do so
by March 31, 1999.
The estimated costs of the Corporation's Year 2000 project and the date
on which the Corporation plans to complete the Year 2000 compliance program are
based on management's best estimates and reflect assumptions regarding the
availability and cost of personnel trained in this area, the compliance plans of
third parties, and similar uncertainties. However, due to the complexity and
pervasiveness of the Year 2000 issues and in particular the uncertainty
regarding the compliance programs of third parties, no assurance can be given
that these estimates can be achieved, and actual results could differ materially
from those anticipated.
THE EURO CONVERSION
On January 1, 1999, eleven of the fifteen member countries of the
European Union (EU) established fixed conversion rates through the European
Central Bank (ECB) between their existing local currencies and the Euro, the
EU's future single currency. The participating countries adopted the Euro as
their common legal currency on that date. The Euro currently trades on currency
exchanges and is available for non-cash transactions.
The Corporation currently operates in three countries which adopted the
Euro (Finland, France and Germany) and sells from the United Kingdom to certain
countries which adopted the Euro. The British pound appears to have strengthened
in anticipation of the Euro adoption and has continued strong compared to other
currencies and the Corporation believes the strength of the pound has adversely
affected sales from the U.K. to certain European countries. The Corporation is
not able at this time to anticipate what effect the adoption of the Euro will
have on its businesses.
CERTAIN CAUTIONARY STATEMENTS
In addition to historical information, Items 1 and 2 of this document
as well as certain information disseminated by the Corporation in the form of
press releases, presentations, investor relations material and otherwise,
contain 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 Child Safety Products business and
for government and commercial services provided by Wyle, the regulatory
environment for the Corporation's businesses, consolidation trends in the
Corporation's businesses, competition
<PAGE> 16
in the acquisition market, changes in exchange rates, Euro conversion, increases
in raw material prices and labor rates, the purchasing practices of significant
customers, the availability of qualified management and staff personnel in each
business segment, claims for product liability from continuing and discontinued
operations and Year 2000 software related malfunctions.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
<PAGE> 17
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On December 31, 1998, Springdale Partners Ltd., an Ohio Limited
Liability Company, and Mada Corporation (Mada) filed a Compliant in the
Chancery Court of Knox County, Tennessee naming KRUG International
Corp. and KRUG Properties, Inc. (KRUG Properties) as defendants. The
suit relates to a piece of industrial property in Knoxville, Tennessee
that the Corporation sold to Springdale Partners, an Ohio General
Partnership, in December 1983. As part of the transaction, KRUG
Properties leased a portion of the property back from Springdale
Partners and the Corporation and KRUG Properties guaranteed the
obligations of Mada, the lessee of the other portion of the property.
In order to minimize the Corporation's and KRUG Properties' obligations
under the guarantee, Mada was required to use all reasonable efforts to
sublease its portion of the property on terms and conditions approved
by the Corporation. As part of the purchase price, Springdale Partners
executed a $200,000 promissory note payable to the Corporation on
December 31, 1998, which Springdale has failed to pay. As part of its
obligations, the Corporation was required to maintain the portion of
the property that it leased and return said portion on December 31,
1998 in as good condition as it was in at the beginning of the lease,
excluding ordinary wear and tear and obsolescence. The plaintiffs have
requested a declaration from the Court concerning the maintenance
obligations of the Corporation and KRUG Properties and the status of
the $200,000 promissory note. The Corporation and KRUG Properties have
filed a Motion to Dismiss this action.
Related to this action, on January 25, 1999, the Corporation and KRUG
Properties filed a Complaint in the Common Pleas Court of Montgomery
County, Ohio, naming Springdale Partners, its general partners and Mada
as defendants. This case involves substantially the same factual
situation as the Knox County, Tennessee case. The Corporation requested
the following relief:
Payment of the (1) $200,000 promissory note; (2) damages due to breach
of contract and unjust enrichment and (3) a declaration that the final
payment of $98,545 from Carolina Steel Corp. relating to its sublease
from KRUG Properties belongs to the Corporation and KRUG Properties.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibit 10.1 - Employment Agreement between KRUG International
Corp. and Robert M. Thornton, Jr. dated November 9, 1998 is
filed as an exhibit to this report.
(B) Exhibit 27 - Financial Data Schedule (for SEC use only).
(C) Reports on Form 8-K - None.
<PAGE> 18
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/ Mark J. Stockslager
-----------------------------------------
Mark J. Stockslager
Principal Accounting Officer
Dated: February 9, 1999
<PAGE> 1
EXHIBIT 10.1
EMPLOYMENT AGREEMENT
THIS AGREEMENT is entered into between KRUG INTERNATIONAL CORP., an
Ohio corporation (the "Corporation"), and ROBERT M. THORNTON, JR. ("Mr.
Thornton"), under the following circumstances:
A. Mr. Thornton has been employed as President of the Corporation since
July 16, 1996 under the terms of a Consulting and Employment Agreement dated May
17, 1996 and amended May 27, 1997 (the "Thornton Employment Agreement");
B. On July 18, 1997, Mr. Thornton was elected Chief Financial Officer
of the Corporation and on September 10, 1998, he was elected to the additional
offices of Chairman and Chief Executive Officer; and
C. Mr. Thornton is willing to continue employment upon the terms and
conditions stated herein.
NOW, THEREFORE, IN CONSIDERATION OF THE RESPECTIVE COVENANTS OF THE
PARTIES CONTAINED HEREIN, THE PARTIES HERETO AGREE AS FOLLOWS:
Section 1. Termination of Thornton Employment Agreement. The Thornton
Employment Agreement is hereby terminated effective July 31, 1998.
Section 2. Term of Employment. The Corporation hereby agrees to employ
Mr. Thornton and Mr. Thornton hereby agrees to be employed by the Corporation
for an initial period beginning on August 1, 1998 and terminating on July 31,
1999. After July 31, 1999, the Agreement shall continue in force until such time
as either party shall give four (4) months written notice to the other party
terminating this Agreement.
<PAGE> 2
Section 3. Position and Duties. (a) During Mr. Thornton's term of
employment hereunder, the Corporation shall employ Mr. Thornton as, and Mr.
Thornton shall serve as, the Chairman, President, Chief Executive Officer and
Chief Financial Officer of the Corporation with his duties, authority and
responsibilities to be of the same character and importance as those being
performed and exercised by Mr. Thornton at the time of entering into this
Agreement.
(b) Mr. Thornton shall devote his full-time efforts to the business and
affairs of the Corporation and shall perform his duties as Chairman, President,
Chief Executive Officer and Chief Financial Officer faithfully, diligently, and
to the best of his ability and in conformity with the policies of the
Corporation and under and subject to such directions and instructions as the
Board of Directors may issue from time to time, but nothing in this Agreement
shall preclude Mr. Thornton from devoting reasonable periods of time to handling
his own affairs so long as such activities do not interfere with his obligations
to the Corporation.
Section 4. Compensation. From June 1, 1998 until July 31, 1998, the
Corporation shall pay Mr. Thornton a base salary at the rate of $178,200 per
year. Commencing August 1, 1998, the Corporation shall pay Mr. Thornton a base
salary at the rate of $210,000 per year. Mr. Thornton's salary will be paid in
approximately equal installments in accordance with the normal pay schedule for
officers of the Corporation. The Board of Directors shall review Mr. Thornton's
compensation on an annual basis and may, at its discretion, increase Mr.
Thornton's base salary.
Mr. Thornton shall receive a bonus equal to twenty-five percent (25%)
of his annual base salary if goals, agreed to by the parties for the
Corporation's future fiscal years, including fiscal 1999, are met.
Section 5. Other Benefits. In addition to the base salary and any bonus
compensation payable pursuant to Section 4, Mr. Thornton shall, during the term
of his employment, be eligible
<PAGE> 3
to participate in any stock option or compensation plan or arrangement adopted
by the Corporation for its officers. During the term of Mr. Thornton's
employment hereunder, the Corporation shall extend to Mr. Thornton the fringe
benefits which it establishes from time to time for its most highly compensated
executives.
Section 6. Termination of Employment; Change in Control. (a) The
Corporation shall have the right to terminate Mr. Thornton's employment
hereunder at any time upon not less than thirty (30) days advance written notice
to Mr. Thornton in the event (i) of such prolonged physical or mental disability
or other condition of Mr. Thornton as, in the reasonable judgment of the Board
of Directors, shall render him incapable of performing the services required of
him hereunder; provided, however, that no disability or condition shall be
considered incapacitating unless it has prevented Mr. Thornton from carrying out
his duties for a consecutive period of at least four months; (ii) that Mr.
Thornton engages in an act or acts of dishonesty constituting a crime and
resulting or intended to result directly or indirectly in Mr. Thornton's
personal gain or enrichment at the expense of the Corporation; (iii) that Mr.
Thornton shall engage in acts or omissions to act that may damage the business
or reputation of the Corporation; or (iv) that Mr. Thornton shall deliberately
and intentionally refuse in a material way to observe or comply with any of the
material terms or provisions hereof (except by reason of total or partial
incapacity due to physical or mental disability or otherwise), provided further,
however, that Mr. Thornton's employment shall not terminate if such disability
or refusal is cured or corrected within the 30 day notice period provided
herein.
(b) Notwithstanding the provisions of Section 2, if a Change in Control
of the Corporation shall occur during the term of this Agreement and Mr.
Thornton's employment is terminated (whether voluntarily by Mr. Thornton or
otherwise) within one year after such
<PAGE> 4
Change in Control, Mr. Thornton shall have the right to immediately terminate
this Agreement and receive from the Corporation, as severance pay, an amount
equal to one year's base salary. The severance payments will be paid in
approximately equal installments in accordance with the normal pay schedule for
officers of the Corporation. If any such severance payment is not mailed to Mr.
Thornton at the address provided for in Section 13 within seven (7) days after
being due, the entire balance shall immediately be due and payable.
(c) Any options which Mr. Thornton holds under any stock option plan of
the Corporation on the date of the termination of this Agreement may be
exercised by Mr. Thornton at any time within ninety (90) days of the termination
of this Agreement, with respect to all of the shares subject to any such options
regardless of whether they were exercisable on the date this Agreement was
terminated. The provisions of this Section 6(c) shall only apply if the
Agreement is terminated by Mr. Thornton pursuant to the provisions of Section
6(b).
(d) A "Change in Control" of the Corporation shall, for purposes of
this Agreement, mean any change in control of a nature that would be required to
be reported in response to Item 6(e) of Schedule 14A of Regulation 14A or Item 1
of Form 8-K promulgated under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"); provided that, without limitation, such a Change in
Control shall be deemed to have occurred if (i) any "person" or "group" (as such
terms are defined in Sections 13(d) and 14(d)(2) of the Exchange Act), other
than Mr. Thornton and/or any entity then controlled by the Corporation or Mr.
Thornton or made up of some or all of the persons listed on a Schedule 13D filed
on or about September 3, 1998 relating to ownership of shares of the
Corporation, is or becomes the beneficial owner, directly or indirectly, of
securities of the Corporation representing 25% or more of the combined voting
power of the Corporation's then outstanding securities; (ii) during any period
of two consecutive years,
<PAGE> 5
individuals who at the beginning of such period constitute the Board of
Directors of the Corporation cease for any reason to constitute at least a
majority thereof unless the election, or the nomination for election, of each
new Director was approved by a vote of at least two-thirds of the Directors then
still in office who were Directors at the beginning of the period; (iii) the
Corporation merges or consolidates with another corporation (other than a
subsidiary or an affiliate of the Corporation); or (iv) a sale, lease, exchange,
or other disposition of all or substantially all of the assets of the
Corporation (other than to a subsidiary or an affiliate of the Corporation)
shall occur.
Section 7. Indemnification. The Corporation agrees to indemnify, save
and hold harmless Mr. Thornton from all losses, expenses, damages, liabilities,
obligations, claims and costs of any kind (including reasonable attorneys' fees
and other legal costs and expenses) that Mr. Thornton may at any time suffer or
incur by reason of any claims, actions or suits brought or threatened to be
brought against Mr. Thornton by any person or entity, as a result of or in
connection with Mr. Thornton's service as an officer of the Corporation or as a
director or officer of KRUG Life Sciences Inc., Technology/Scientific Services,
Inc., KRUG International (U.K.) Ltd., Krug Power and Control Ltd., Bradley
International Holdings Ltd., Beldray Ltd., Hago Products Ltd., Klippan Ltd. or
any of its subsidiaries, Sowester Ltd. or any entity that in the future becomes
a subsidiary or affiliate of the Corporation, except that no indemnification
shall be made if it is proved by clear and convincing evidence in a court of
competent jurisdiction that Mr. Thornton's action or failure to act involved an
act or omission undertaken with deliberate intent to cause injury to the
Corporation or undertaken with reckless disregard for the best interests of the
Corporation. The provisions of this Section 7 shall survive termination of this
Agreement.
<PAGE> 6
Section 8. Non-Disclosure. Without the Corporation's prior express
written consent, Mr. Thornton will not, whether during or after employment with
the Corporation, in any manner whatsoever, except as necessary to fulfill any
obligation to the Corporation as an officer or director, (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.
Upon termination of Mr. Thornton's employment with the Corporation, Mr.
Thornton shall surrender any such tangible confidential or proprietary
information, including all copies thereof, to the Corporation immediately upon
the Corporation's written request. Mr. Thornton shall continue to adhere to all
of his obligations hereunder and shall not thereafter make use of such
confidential information for any purpose until such information ceases to be
confidential or becomes part of the public domain through no fault of Mr.
Thornton.
Section 9. Non-Competition. So long as Mr. Thornton shall be receiving
payments pursuant to this Agreement, he shall not, directly or indirectly, as a
principal or solely or jointly with others as a director, officer, agent,
employee, consultant, or partner, stockholder or limited partner owning more
than four percent (4%) of the stock of or equity interest in, or securities
exercisable for or convertible into more than four percent (4%) of the stock of,
or equity interest in, any corporation, limited partnership or other entity,
without the Corporation's prior written consent (i) carry on or engage in any
Competitive Operation; (ii) give advice to, or otherwise act on behalf of, a
Competitive Operation; (iii) lend or allow his name or reputation to be used in
or by a Competitive Operation; or (iv) carry on in any other manner a
Competitive Operation. This covenant shall extend to each and every county in
any state in the United States in which the business of the Corporation has been
carried on, as well as to those other areas of the world
<PAGE> 7
where the Corporation's business has been conducted. For purposes of this
Agreement "Competitive Operation" shall mean any business operation or
enterprise that engages in substantial and direct competition with any business
operation actively conducted by the Corporation or any of its subsidiaries or
affiliates (including Wyle Laboratories, Inc.).
Section 10. Arbitration. Any dispute which arises out of, in relation
to or in connection with this Agreement, or any breach hereof, shall be finally
settled by arbitration. The arbitration shall be conducted in Atlanta, Georgia
in accordance with the rules of the American Arbitration Association upon
written notice from the claimant to the other party of such claimant's intention
to arbitrate. The arbitrator shall be selected according to the rules of the
American Arbitration Association and the decision of the arbitrator shall be
final and incontestably binding upon the parties. Each of the parties shall pay
one-half of the fees and expenses of the arbitrator. Judgment upon any award
rendered in any arbitration under this Agreement may be entered in any court
having jurisdiction.
Section 11. Waiver. The failure of either party to insist, in any one
or more instances, upon the performance of any of the terms, covenants or
conditions of this Agreement by the other party hereto, shall not be construed
as a waiver or as a relinquishment of any right granted hereunder to the party
failing to insist on such performance, or as a waiver of the future performance
of any such term, covenant or condition, but the obligations hereunder of both
parties hereto shall remain unimpaired and shall continue in full force and
effect.
Section 12. Successor; Binding Agreement. The Corporation shall require
any successor (whether direct or indirect, by purchase, merger, consolidation or
otherwise) to all or substantially all of the business or assets of the
Corporation, by agreement in form and substance reasonably satisfactory to Mr.
Thornton, to expressly assume and agree to perform this
<PAGE> 8
Agreement in the same manner and to the same extent that the Corporation would
be required to perform it if no such succession had taken place. As used herein,
"Corporation" shall mean KRUG International Corp. and any successor to its
business and/or its assets as aforesaid which executes and delivers the
agreement provided for in this Section 12 or which otherwise becomes bound by
the terms and provisions of this Agreement by operation of law.
Section 13. Notices. All notices required or permitted to be given
under this Agreement shall be in writing and shall be mailed (postage prepaid
via either registered or certified mail) or delivered, if to the Corporation
addressed to:
KRUG International Corp.
900 Circle 75 Parkway, Suite 1300
Atlanta, Georgia 30339
with an additional copy to:
Karen Brenner
1300 Bristol Street North, Suite 100
Newport Beach, California 92660
and if to Mr. Thornton, addressed to:
Robert M. Thornton, Jr.
900 Circle 75 Parkway, Suite 1300
Atlanta, Georgia 30339
with an additional copy to:
Robert M. Thornton, Jr.
2014 Walthall Drive
Atlanta, Georgia 30318
Either party may change the address to which notices to it are to be directed by
giving written notice of such change to the other party in the manner specified
in this Section 13.
Section 14. Complete 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.
<PAGE> 9
Section 15. Validity. 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.
IN WITNESS WHEREOF, the parties have hereunto set their hands as of the
9th day of November, 1998.
KRUG INTERNATIONAL CORP.
/s/ Robert M. Thornton, Jr. By /s/ James J. Mulligan
- ---------------------------------- ---------------------------------
ROBERT M. THORNTON, JR.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF KRUG INTERNATIONAL CORPORATION FOR THE NINE MONTH PERIOD
ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
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<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> DEC-31-1998
<CASH> 10,454
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<RECEIVABLES> 8,454
<ALLOWANCES> 169
<INVENTORY> 4,608
<CURRENT-ASSETS> 24,125
<PP&E> 11,596
<DEPRECIATION> 5,802
<TOTAL-ASSETS> 35,038
<CURRENT-LIABILITIES> 17,273
<BONDS> 5,877
2,628
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<COMMON> 0
<OTHER-SE> 9,260
<TOTAL-LIABILITY-AND-EQUITY> 35,038
<SALES> 37,088
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<CGS> 35,269
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<OTHER-EXPENSES> (123)
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<INCOME-PRETAX> (5,228)
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