<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, 2000
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 1-12607
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.)
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)
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 August 1,
2000 was 4,976,340.
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
KRUG INTERNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(ALL AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
2000 2000
---------- ----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 6,737 $ 7,651
Receivables - net 4,348 5,118
Inventories 3,299 3,611
Prepaid expenses and other 744 506
---------- ----------
Total Current Assets 15,128 16,886
Property, Plant and Equipment, At Cost 9,940 10,319
Less accumulated depreciation 5,958 6,069
---------- ----------
Property, Plant and Equipment - Net 3,982 4,250
Pension Asset 1,073 1,129
Net noncurrent assets of discontinued operations 858 855
Other Assets 62 8
---------- ----------
Total Assets $ 21,103 $ 23,128
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Bank borrowings $ 2,409 $ 2,064
Accounts payable 4,458 5,562
Accrued expenses 2,069 2,378
Income taxes 38 348
Net current liabilities of discontinued operations 242 198
Current maturities of long-term debt 514 589
---------- ----------
Total Current Liabilities 9,730 11,139
Long-term debt 1,267 1,438
Noncurrent reserve for Industrial Segment 1,017 1,038
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Total Long-term Liabilities 2,284 2,476
Shareholders' Equity:
Common shares, no par value:
Issued and outstanding, 4,976 at June 30, 2000
and March 31, 2000 2,488 2,488
Additional paid-in capital 3,604 3,604
Retained earnings 2,954 3,172
Accumulated other comprehensive income 43 249
---------- ----------
Total Shareholders' Equity 9,089 9,513
---------- ----------
Total Liabilities and Shareholders' Equity $ 21,103 $ 23,128
========== ==========
</TABLE>
See notes to condensed consolidated financial statements
2
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KRUG INTERNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
----------------------------
2000 1999
----------------------------
<S> <C> <C>
Revenues $ 6,932 $ 7,681
Cost of Goods Sold 6,341 7,009
Selling and Administrative Expenses 745 1,008
----------------------------
Operating Loss (154) (336)
Other Income (Expense):
Interest expense (51) (78)
Interest income 105 83
Other income - net -- 1
----------------------------
Loss From Continuing Operations
Before Income Taxes (100) (330)
Income Tax Expense (63) --
----------------------------
Loss From Continuing Operations (163) (330)
Loss From Discontinued Operations
(net of tax benefit of $18 and tax
expense of $48, respectively) (55) (263)
----------------------------
Net Loss $ (218) $ (593)
============================
Loss Per Share:
Continuing Operations:
Basic $ (0.03) $ (0.07)
============================
Diluted $ (0.03) $ (0.07)
============================
Net Loss:
Basic $ (0.04) $ (0.12)
============================
Diluted $ (0.04) $ (0.12)
============================
Average Common Shares Outstanding:
Basic 4,976 4,978
============================
Diluted 4,976 4,978
============================
</TABLE>
See notes to condensed consolidated financial statements
3
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KRUG INTERNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
----------------------------
2000 1999
----------------------------
<S> <C> <C>
Net Cash Used in Operating Activities $ (1,114) $ (2,483)
Cash Flows From Investing Activities:
Expenditures for property, plant and equipment (92) (31)
----------------------------
Net Cash Used In Investing Activities (92) (31)
Cash Flows From Financing Activities:
Bank borrowings - net 446 --
Payments on long-term debt (153) (360)
Change in restricted cash -- 1,650
----------------------------
Net Cash Provided by Financing Activities 293 1,290
Effect of Exchange Rate Changes on Cash (1) (70)
----------------------------
Net Decrease in Cash and Cash Equivalents (914) (1,294)
Cash and Cash Equivalents at Beginning of Period 7,651 2,712
----------------------------
Cash and Cash Equivalents at End of Period $ 6,737 $ 1,418
============================
Cash Paid For:
Income Taxes $ 500 $ 170
============================
Interest $ 51 $ 82
============================
Non-Cash Investing and Financing Activities:
Capital leases $ -- $ 40
============================
</TABLE>
See notes to condensed consolidated financial statements
4
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KRUG INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED JUNE 30, 2000
(DOLLARS IN THOUSANDS)
NOTE 1. -- BASIS OF PRESENTATION
The unaudited Condensed Consolidated Financial Statements for the three
months ended June 30, 2000 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 26, 2000. 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 months ended June 30, 2000
are not necessarily indicative of the results that may be expected for the
entire fiscal year or any other interim period.
NOTE 2. -- BUSINESS OPERATIONS AND CORPORATE STRATEGY
KRUG International Corp. manufactures and distributes housewares and child
safety products through its manufacturing and distribution operations in Europe.
The Corporation is currently redirecting its business strategy toward the
acquisition of interests in the healthcare industry in the United States
("U.S."). The Corporation has not confined its strategy to any one sector of the
healthcare industry, but its initial focus has been directed at evaluating
acquisition opportunities for community hospitals.
NOTE 3. -- DISCONTINUED OPERATIONS
Child Safety Segment - During the quarter ended June 30, 2000, the
Corporation decided to dispose of the European Child Safety segment, Klippan
Limited ("Klippan"), and it is being marketed for sale. The Corporation
currently anticipates that the sale will occur in fiscal 2001, which ends March
31, 2001. Klippan is a leading United Kingdom ("U.K.") manufacturer of
children's automobile safety seats and accessories having manufacturing
facilities and sales offices in the U.K. and Europe.
Life Sciences and Engineering Segment - On November 30, 1999, the
Corporation sold its Wyle Laboratories, Inc. ("Wyle") Series A Preferred Stock
and stock option for $4,125 in cash. The Series A Preferred Stock had voting
rights and was convertible into approximately 38% of Wyle's common shares. In
connection with the sale, which was a part of a leveraged management buy-out of
Wyle, the Corporation also exchanged its non-dividend paying and non-voting
Series B Preferred Stock in Wyle for Senior Preferred Stock of LTS Holdings,
Inc., Wyle's new parent company, and canceled its existing option to acquire
Wyle shares. The New Senior Preferred Stock is redeemable on March 31, 2003 for
$954 plus accrued and unpaid dividends at 8% per annum. No gain was reported on
the exchange of the Series B Preferred Stock of Wyle for Senior Preferred Stock
of LTS Holdings, Inc. due to the highly leveraged nature of Wyle's management
buy-out. The recorded investment in the Senior Preferred Stock of LTS Holdings,
Inc. is $0 at June 30, 2000.
Industrial Segment - In fiscal year 1989, the Corporation discontinued the
operations of its Industrial segment and subsequently disposed of substantially
all related net assets. However, obligations remain relating to product
liability claims for products sold prior to the disposal.
5
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4. - BANK BORROWINGS AND LONG-TERM DEBT
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
2000 2000
---------- ----------
<S> <C> <C>
U.K. Term Loan $ 1,196 $ 1,313
Capital leases 585 714
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Total 1,781 2,027
Less current maturities (514) (589)
---------- ----------
Long-term portion $ 1,267 $ 1,438
========== ==========
</TABLE>
The Corporation has established a working capital line with a U.K. bank.
The availability under the line is based upon the current levels of U.K.
accounts receivable and will fluctuate with increases or decreases in eligible
accounts receivable.
Borrowings under this line were $2,409 at June 30, 2000.
NOTE 5. -- INVENTORIES
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
2000 2000
---------- ----------
<S> <C> <C>
Finished goods $ 886 $ 1,245
Work-in-process 1,053 748
Raw materials and supplies 1,360 1,618
---------- ----------
$ 3,299 $ 3,611
========== ==========
</TABLE>
NOTE 6. -- INCOME TAXES
Income tax expense for the three months ended June 30, 2000 represents
foreign taxes of $63.
6
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7. -- RESTRUCTURING CHARGES
Accrued expenses at June 30 and March 31, 2000, included $45 for estimated
final expenses of a vacated leased office. The lease ended June 25, 1999, but
certain costs related to the removal of furniture and fixtures have not been
settled.
NOTE 8. -- COMPREHENSIVE INCOME
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
----------------------------
JUNE 30, JUNE 30,
2000 1999
---------- ----------
<S> <C> <C>
Net loss: $ (218) $ (593)
Other comprehensive
income net of tax:
Change in equity due to
foreign currency
translation adjustments (206) (426)
---------- ----------
Comprehensive loss $ (424) $ (1,019)
========== ==========
</TABLE>
7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
CERTAIN CAUTIONARY STATEMENTS
In addition to historical information, Items 1 and 2 of this report
contains certain forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995 including, without limitation,
statements regarding the Corporation's business strategy and management's
outlook for each of its businesses, the sufficiency of the Corporation's
liquidity and sources of capital and the impact of Year 2000 issues. These
forward-looking statements are subject to certain risks, uncertainties and other
factors which could cause actual results, performance and achievements to differ
materially from those anticipated, including, without limitation, general
economic and business conditions in the U.S. and abroad, restrictions imposed by
debt agreements, competition in the housewares and child safety businesses,
governmental budgetary constraints, the regulatory environment for the
Corporation's businesses, consolidation and acquisition trends in the
Corporation's businesses, economic conditions influencing the Corporation's
ability to sell its Child Safety business and influencing the price of the Child
Safety business, competition in the acquisition market including for the
acquisition of hospitals and healthcare facilities, changes in exchange rates
including in Europe the effects of the European currency, the Euro, increases in
prices of raw materials and services, the purchasing practices of significant
customers, the availability of qualified management and staff personnel in each
subsidiary, the functionality of the Corporation's computer systems and claims
for product liability from continuing and discontinued operations.
CORPORATE BUSINESS STRATEGY
The Corporation is currently redirecting its strategy toward the
acquisition of interests in the healthcare industry in the U.S. The Corporation
intends to seek acquisitions in sectors which it believes have an opportunity
for future growth. The Corporation has not confined its strategy to any one
sector of the healthcare industry, but its initial focus has been directed at
evaluating acquisition opportunities for community hospitals. The Corporation is
evaluating acquisitions without regard to their current profitability if it
believes an acquisition provides an opportunity to achieve future cashflow and
profitability.
DISCONTINUED SEGMENT
The Corporation has evaluated the disposition of its European Child Safety
subsidiary, Klippan Limited, in light of its performance and the Corporation's
objective of acquiring a U.S. healthcare business. As a result of such
evaluation and to better position itself to acquire a U.S. healthcare business,
the Corporation has decided to offer Klippan for sale. Klippan is reported as a
discontinued segment in the accompanying financial statements. However, no sales
agreement has yet been reached and there can be no assurance any sales agreement
will be reached or that the net proceeds of any agreement which is reached will
be sufficient (when added to the Corporation's other liquid assets) to allow the
Corporation to acquire any U.S. healthcare business.
8
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DISPOSAL OF BUSINESS SEGMENTS
In November 1999, the Corporation sold its Wyle Laboratories, Inc. ("Wyle")
Series A Preferred Stock for $4,125 in cash. The Series A Preferred Stock had
voting rights and was convertible into approximately 38% of Wyle's common
shares. In connection with the sale, which was part of a leveraged management
buy-out of Wyle, the Corporation also exchanged its non-dividend paying and
non-voting Series B Preferred Stock in Wyle for Senior Preferred Stock of LTS
Holdings, Inc., Wyle's new parent company, and canceled its existing options to
acquire Wyle shares. The new Senior Preferred Stock is redeemable on March 31,
2003 for $954 plus accrued and unpaid dividends at 8% per annum.
FINANCIAL SUMMARY
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
----------------------------
2000 1999
---------- ----------
<S> <C> <C>
REVENUES:
Housewares segment $ 6,932 $ 7,681
========== ==========
LOSS FROM CONTINUING
OPERATIONS BEFORE
INCOME TAXES:
Housewares segment $ 208 $ 73
Corporate expenses (U.S. and U.K.) (362) (409)
---------- ----------
(154) (336)
Interest expense (51) (78)
Interest income 105 83
Other income - net -- 1
---------- ----------
Loss from Continuing Operations
before Income Taxes $ (100) $ (330)
========== ==========
</TABLE>
RESULTS OF OPERATIONS
Revenues for the first quarter of fiscal 2001 of $6,932 declined from
$7,681 for the first quarter of fiscal 2000. All of the Corporation's revenues
relate to the U.K. housewares segment. Decreased sales of child safety gates and
rotary laundry dryers and the unfavorable effect of foreign currency translation
of $333 were the causes of the revenue decline. Sales volume increased in the
current year in the laundry care and ladder product groups.
Gross profit margin (revenue less cost of goods sold) decreased to 8.5% for
the quarter ended June 30, 2000 from 8.8% for the same quarter of the previous
fiscal year. The decrease in the current year was the result of increased
distribution costs and lower manufacturing volume due to the decreased sales
volume.
Selling and administrative expense decreased by $263 in the quarter ended
June 30, 2000 from the same quarter of the previous fiscal year. The decreased
expense resulted from overhead reductions of the housewares segment, which were
made to reduce cost levels in response to lower than anticipated sales levels.
9
<PAGE> 10
Interest expense decreased $27 in the quarter ended June 30, 2000 from the
same quarter of the previous fiscal year as a result of reduced U.K. debt
levels. Interest income increased $22 in the quarter ended June 30, 2000 from
the same quarter of the prior year due to increased levels of cash invested and
higher interest rates earned in the U.S.
Income tax expense of $63 was recorded for the quarter ending June 30,
2000, compared to a zero tax expense for the same quarter of the previous year
as a result of taxable income in the U.K. In the prior year, no tax expense from
continuing operations was recorded due to taxable losses in the U.S. and the
U.K.
The loss from continuing operations was $163 ($0.03 per share) in the first
quarter of fiscal 2001 compared to a loss of $330 ($0.07 per share) in the first
quarter of fiscal 2000. The loss was less in the current year primarily due to
the increased operating profits of the European Housewares segment and slightly
reduced corporate overhead. The loss from continuing operations results
primarily from corporate expense, which exceeded the subsidiary's operating
profit.
LIQUIDITY AND CAPITAL RESOURCES
The Corporation used $1,114 of cash in operating activities during the
first three months of fiscal 2001. Cash was used to pay U.S. income taxes of
$500, to pay for costs related to probable hospital acquisitions of $127 (all of
which has been capitalized in prepaid expenses), to provide working capital for
the European operations (primarily to reduce accounts payable balances) and to
fund corporate expenses.
The Corporation has established a working capital line of approximately
$4,500 with a U.K. bank. The availability under the line is based upon the
current levels of U.K. accounts receivable and will fluctuate with increases or
decreases in eligible accounts receivable. Borrowings under this line were
$2,409 at June 30, 2000. At June 30, 2000, the Corporation had $1,196
outstanding under the U.K. Term Loan relating to the Beldray Ltd. manufacturing
facility which has quarterly principal payments and matures in fiscal 2005. At
June 30, 2000, the Corporation had no outstanding U.S. debt. The Corporation
believes it has adequate financing and liquidity in both the U.S. and U.K. to
support its current level of operations.
Obligations remain relating to product liability claims for products
manufactured and sold before the disposal of the Corporation's discontinued
industrial segment in fiscal 1989. The Corporation reviewed the provision for
losses from such discontinued operations during the quarter and no changes were
deemed necessary.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
10
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Joseph M. Girard ("Girard"), a shareholder of the Corporation, filed a
complaint on November 12, 1999 seeking to enjoin alleged violations of Section
14(A) of the Securities Exchange Act of 1934 and declaratory relief against the
Corporation (hereinafter "Complaint"). The Complaint sought to prohibit the
Corporation from further soliciting and using proxies for the annual
shareholders' meeting, which was scheduled for November 19, 1999, because the
proxy statement and form of proxy did not disclose Plaintiff's proposed, but
improperly nominated, slate of directors. At the time of the injunction, the
Corporation had received proxies totaling 4,052,837 shares (81.4%) in favor of
the management nominees.
On November 16, 1999, the Court issued a temporary restraining order and
order to show cause, scheduling the matter for a preliminary injunction hearing
on November 30, 1999. The temporary restraining order enjoined the Corporation
from conducting the annual shareholders' meeting on November 19, 1999. On
November 30, 1999, the Court issued a preliminary injunction providing that
during the pendency of the action, the Corporation is enjoined from: 1)
conducting the annual shareholders' meeting until such time as it has amended
its proxy statement and proxy to include the slate of nominees of Girard and
provide thirty (30) days notice to shareholders; and 2) using the proxies which
were solicited by means of the proxy statement and proxy in the form dated
October 21, 1999. The preliminary injunction order also required Girard to post
a security bond of $25,000.
In December 1999, Girard requested that the Court modify the preliminary
injunction to require that the Corporation reschedule the annual meeting, to
include Girard's alternate slate in the Corporation's proxy statement and proxy,
and certain other affirmative action. By order dated January 18, 2000, the Court
denied Girard's motion to modify the preliminary injunction.
The Corporation filed its Answer on December 20, 1999, and, on December 29,
1999, the Corporation filed its notice of appeal of the preliminary injunction.
In the Answer and its appeal, the Corporation set forth its beliefs that: 1) the
Corporation was not required to include Girard's proposal in its proxy statement
and proxy under SEC Rule 14a-8(i)(8), which provides that shareholder proposals
relating to an election for membership on a company's board of directors do not
have to be included in the company's proxy statement and proxy; and 2) Girard's
alternate slate was not properly nominated under the Corporation's Code of
Regulations and was not in compliance with Item 401(e) of Regulation S-K.
In April 2000, the Appeals Court issued an order, which referred the appeal
to a merits panel for disposition. The panel heard oral arguments on the appeal
on July 11, 2000, but has yet to render any opinion on the case. The Corporation
intends to vigorously pursue its appeal and to defend its position in any trial
on the matter.
11
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibit 27 - Financial Data Schedule.
(B) Reports on Form 8-K - None.
12
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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: August 7, 2000
13
