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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended March 31, 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 No. 1-12607
KRUG INTERNATIONAL CORP.
(Exact name of registrant as specified in its charter)
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Ohio 31-0621189
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
900 Circle 75 Parkway, Suite 1300, Atlanta, Georgia 30339
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(Address of principal executive offices)
Registrant's telephone number, including area code: (770) 933-7000
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each Class Name of each Exchange on which registered
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Common Shares without par value American Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act:
Warrants to purchase Common Shares
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (ss. 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of the registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. [X]
At the close of business on June 23, 2000:
Number of Common Shares without par value
outstanding 4,976,340
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Aggregate market value of Common
Shares without par value held by
non-affiliates of the Corporation $ 4,970,445
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CERTAIN CAUTIONARY STATEMENTS
In addition to historical information, 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
hospital 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.
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PART I
ITEM 1. BUSINESS
KRUG International Corp., an Ohio Corporation organized in June 1959, and
its subsidiaries (sometimes collectively called the "Corporation") currently
manufacture and distribute, through its subsidiaries, housewares and child
safety products, primarily in the United Kingdom ("U.K."), with operations in
several western European countries.
Information concerning revenues, operating profit and identifiable assets
of the business segments for the fiscal years ended March 31, 2000, 1999 and
1998 is set forth at Note 11 of the Notes to Consolidated Financial Statements
of the Corporation, which can be found at Item 8 of this report.
CORPORATE BUSINESS STRATEGY
The Corporation is currently redirecting its strategy toward the
acquisition of interests in the healthcare industry in the United States
("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 ("Klippan"), in light of its 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, and to devote any proceeds received therefrom
to its U.S. operations. Klippan is reported as a discontinued segment in the
accompanying financial statements. Currently, however, no sales agreement has
been reached and there can be no assurance any sales agreement will be reached
or that the net proceeds of any agreement will be sufficient (when added to the
Corporation's other liquid assets) to allow the Corporation to acquire any U.S.
healthcare business.
SIGNIFICANT TRANSACTIONS
On November 30, 1999, the Corporation sold its Wyle Laboratories, Inc.
("Wyle") Series A Preferred Stock for $4,125,000 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 $954,000 plus accrued and unpaid dividends at
8% per annum. On April 16, 1998, the Corporation sold its Leisure Marine
subsidiary to a company formed by the management of the subsidiary. The selling
price was approximately $15,000,000, comprised of approximately $8,900,000 in
cash and the assumption of approximately $6,100,000 in debt.
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HOUSEWARES SEGMENT
Bradley International Holdings Limited, a subsidiary of KRUG International
(UK) Ltd., operates the Corporation's housewares segment (collectively
"Bradley"). The housewares segment is composed of the Beldray Limited
("Beldray") and Hago Products Limited ("Hago") subsidiaries which manufacture
and sell consumer durable products, including ironing tables, household ladders,
rotary dryers, indoor airers, garden equipment and child safety gates and
accessories under the "Beldray", "Hago" and "Dennison" names as well as private
labels. Beldray is a long established name in household laundry products which
management believes has significant recognition among the buying public
throughout the U.K. and, together with Hago, which was acquired in October 1996,
manufactures and sells child safety gates and accessories under the
KiddiProof(R) trademark. Customers include do-it-yourself retailers,
supermarkets, mail order catalogs, wholesalers and department stores primarily
in the U.K. and Ireland.
The housewares segment order backlog is typically less than one month's
sales. The primary competitors of the segment are manufacturing companies, some
of which are larger and have more resources than Bradley, and compete with
Bradley on the basis of product quality, speed and reliability of delivery, and
price.
Over the past four years, Bradley has expanded its product offerings to
include safety gates through its acquisition of Hago. During fiscal 1998,
Bradley reorganized its manufacturing capability by moving the Hago
manufacturing operations into Beldray's manufacturing facility. Beldray has
upgraded its information technology, added important management personnel and
reduced costs during the past two years. These improvements were designed to
maintain and enhance its competitive position.
GENERAL INFORMATION
The Corporation owns a number of patents and patent applications but the
Corporation derives no revenue from this intellectual property, and it is not
possible to estimate their value. The Corporation does not believe its present
business is materially dependent on any patents or patent applications.
During the fiscal year ended March 31, 2000, the European housewares
segment had revenues of $11,031,000 (34.5% of consolidated revenues) from Argos
Distribution Ltd. ("Argos"), a U.K. company. Substantially all of the product
lines of the segment are sold to Argos. The loss of Argos as a customer would
have a material adverse effect on the Corporation if comparable replacement
business were not secured. The housewares segment had revenues of $4,593,000
(14.4% of consolidated revenues) from one other customer.
As of March 31, 2000, the Corporation employed four full-time and one
part-time persons in the U.S., none of whom are represented by a union, and
approximately 476 persons in Europe, approximately 290 of whom are represented
by a union. The Corporation believes its labor relations are generally
satisfactory.
Compliance with federal, state and local laws regulating the discharge of
material into the environment or otherwise relating to the protection of the
environment has had no material effect upon the capital expenditures, earnings
and competitive position of the Corporation. To the best of management's
knowledge, the Corporation is in substantial compliance with applicable federal,
state and local environmental regulations.
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ITEM 2. PROPERTIES
The principal properties of the Corporation as of June 23, 2000 are listed
below:
<TABLE>
<CAPTION>
LEASE
OWNED OR EXPIRATION SQUARE
LOCATION LEASED DATE FOOTAGE USE
-------- ------ ---- ------- ---
<S> <C> <C> <C> <C>
A. UNITED STATES
Atlanta, Georgia Leased Mar 2001 1,448 Office
B. EUROPE
BELDRAY LIMITED & SUBSIDIARIES
Bilston, West Midlands, U.K. Leased June 2019 105,000 Plant
Bilston, West Midlands, U.K. Owned 85,000 Plant
KLIPPAN LIMITED & SUBSIDIARIES (1)
Helsinki, Finland Leased Dec 2001 31,104 Office & Plant
Landskrona, Sweden Leased Dec 2003 8,554 Office & Warehouse
Carlisle, United Kingdom Leased Jan 2011 62,424 Office & Plant
Carlisle, United Kingdom Leased Jan 2011 6,372 Warehouse
</TABLE>
(1) Klippan Limited is currently for sale.
In management's opinion, the various facilities used by the Corporation
are adequate for the needs of the businesses conducted therein and the
Corporation maintains its plants, warehouses and offices in good condition.
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ITEM 3. 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 is scheduled to hear the appeal on
July 11, 2000. The Corporation intends to vigorously pursue its appeal and to
defend its position in any trial of the matter.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
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EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Corporation, as of June 23, 2000, their
positions with the Corporation and their ages are as follows:
<TABLE>
<CAPTION>
NAME OFFICES AGE
---- ------- ---
<S> <C> <C>
Robert M. Thornton, Jr. Director, Chairman of the Board of Directors, President, 51
Chief Executive Officer and Chief Financial Officer
James J. Mulligan Director and Secretary 78
Mark J. Stockslager Corporate Controller and Principal Accounting Officer 40
Marshall Cooper (1) Managing Director of Beldray Ltd. 55
David Wright (1) Group Managing Director of Klippan Ltd. 53
</TABLE>
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(1) Messrs. Cooper and Wright are executives of the Corporation's subsidiaries,
but per applicable Securities and Exchange Commission Rules must be
reported as executive officers of the Corporation. They are elected to
their offices by the directors of Beldray and Klippan, respectively.
All officers of the Corporation are elected annually by the Board of
Directors.
Robert M. Thornton, Jr., has been Chairman and Chief Executive Officer of
the Corporation since September 10, 1998, President since July 16, 1996 and
Chief Financial Officer since July 18, 1997. From October 1994 to the present,
Mr. Thornton has been a private investor and, since March 1995, Chairman and
Chief Executive Officer of CareVest Capital, LLC, a private investment and
management services firm. Mr. Thornton was President, Chief Operating Officer,
Chief Financial Officer and a director of Hallmark Healthcare Corporation
("Hallmark") from November 1993 until Hallmark's merger with Community Health
Systems, Inc. in October 1994. From October 1987 until November 1993, Mr.
Thornton was Executive Vice President, Chief Financial Officer, Secretary,
Treasurer and a director of Hallmark.
James J. Mulligan, became Secretary of the Corporation in 1966. Mr.
Mulligan has been a member of the law firm of Mulligan & Mulligan since January
1993. He was a member of the law firm of Smith & Schnacke from 1953 to 1989 and
a member of the law firm of Thompson Hine & Flory LLP from 1989 until his
retirement in 1991. Mulligan & Mulligan is general counsel to the Corporation
and received $78,681 for legal services rendered during the Corporation's fiscal
year ended March 31, 2000.
Mark J. Stockslager, has been Corporate Controller since November 6, 1996
and Principal Accounting Officer since March 11, 1998. He has been continuously
associated with the Corporation's accounting and finance operations since June
1988 and held various positions, including Manager of U.S. Accounting from June
1993 until November 1996. From June 1982 through May 1988, Mr. Stockslager was
employed by Price Waterhouse & Co.
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Marshall Cooper, has been Managing Director of Beldray since November 1998
and was Sales Director from December 1990 until November 1998. Prior to December
1990, he held senior management positions with three major housewares companies
for more than 10 years.
David Wright, has been Group Managing Director of Klippan since November
1998 and was Managing Director of Klippan's England operations from 1991 to
1998. He has been employed by Klippan and its predecessors since 1970, and has
held various managerial positions, including General Manager, Production Manager
and Quality Manager.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
KRUG International Corp.'s Common Shares are traded on the American Stock
Exchange under the symbol KRG and trading in its warrants is reported to and
compiled by the National Quotation Bureau under the symbol KRUGW. The table
below sets forth the high and low sales prices for the Common Shares for fiscal
2000 and 1999. The number of shareholders of record was 867 as of March 31,
2000. No cash dividends were paid in fiscal 2000 or 1999. Prior to December 30,
1996, the Common Shares were traded on the NASDAQ National Market System.
<TABLE>
<CAPTION>
Quarter 4th 3rd 2nd 1st
------- --- --- --- ---
<S> <C> <C> <C> <C> <C>
2000 High $2.06 $2.38 $1.88 $1.88
Low 1.25 1.31 1.13 1.25
1999 High 1.94 2.94 5.44 6.50
Low 1.19 1.56 2.88 5.25
</TABLE>
Effective May 15, 2000, the Corporation appointed First Union National Bank
as the Transfer Agent and Registrar for its Common Stock and Warrants. For all
shareholder inquiries, call First Union's Shareholder Customer Service Center at
1-800-829-8432.
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ITEM 6. SELECTED FINANCIAL DATA
The following table summarizes certain selected financial data which should
be read in conjunction with the Corporation's Consolidated Financial Statements
and related Notes at Item 8 of this report and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" at Item 7 of this
report.
<TABLE>
<CAPTION>
Years Ending March 31, 2000 1999 1998 1997 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
(All amounts in thousands,
except per share amounts)
Revenues $ 32,011 $ 34,832 $ 41,152 $ 33,540 $ 26,585
Loss from Continuing Operations (871) (6,065) (2,925) (35) (924)
Net Earnings (Loss) 1,583 (8,633) 256 2,096 1,171
Loss per Share from
Continuing Operations:
Basic (0.17) (1.20) (0.57) (0.01) (0.18)
Diluted (0.17) (1.20) (0.57) (0.01) (0.18)
Net Earnings (Loss) Per Share:
Basic 0.32 (1.71) 0.05 0.41 0.23
Diluted 0.32 (1.71) 0.05 0.40 0.23
Total Assets 23,128 26,121 37,546 37,841 36,124
Long-term Debt 2,027 5,910 6,703 8,331 9,225
Shareholders' Equity $ 9,513 $ 7,480 $ 18,099 $ 17,960 $ 14,530
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CERTAIN CAUTIONARY STATEMENTS
In addition to historical information, Item 7 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
hospital 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 United States
("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.
DISPOSAL OF BUSINESS SEGMENTS
In November 1999, the Corporation sold its Wyle Laboratories, Inc. ("Wyle")
Series A Preferred Stock for $4.1 million 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
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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 $0.95 million plus accrued and unpaid dividends
at 8% per annum. In April 1998, the Corporation sold its Leisure Marine
subsidiary to a company formed by the management of the subsidiary. The selling
price was approximately $15.0 million comprised of approximately $8.9 million in
cash and the assumption of approximately $6.1 million of debt.
RESULTS OF OPERATIONS - CONTINUING OPERATIONS
The Corporation's fiscal 2000 revenues of $32.0 million declined $2.8
million from $34.8 million in fiscal 1999. Fiscal 1999 revenues decreased $6.3
million from fiscal 1998. All of the Corporation's revenues relate to the U.K.
housewares segment.
The decreased revenues resulted from lower sales volume, primarily in
ladders, child safety gates and fireguards ($2.0 million), and the unfavorable
effect of currency translation ($0.8 million). Fiscal 1999 revenues of the
housewares segment decreased by $6.3 million to $34.8 million from $41.1 million
for 1998. The decreased revenues in fiscal 1999 resulted from the discontinuance
of the manufacture and sale of certain industrial and office products in March
1998 ($2.5 million), lower sales volume, primarily in laundry products and
ladders ($3.1 million), and the unfavorable effect of currency translation ($0.7
million).
Order backlog is not meaningful for the housewares segment due to the short
time between order placement and shipment.
Gross profit margins (revenue less cost of goods sold) were 8.4%, 2.1% and
5.0% in fiscal 2000, 1999 and 1998, respectively. The increase in gross profit
margin in fiscal 2000 was the result of increased operational efficiencies,
primarily lower raw material costs and manufacturing labor overhead at the
housewares segment's manufacturing facility. Changes made to improve
manufacturing operations by new Beldray management since their appointment in
November 1998 has improved the gross profit margin in fiscal 2000. The decrease
in margin in fiscal 1999 was primarily due to operating inefficiencies and
missed customer delivery schedules resulting from the consolidation of the
manufacturing operations of Hago into Beldray's manufacturing facility. Beldray
also experienced lower than anticipated sales due to disruptions from the plant
consolidation.
Selling and administrative expenses were $3.9 million, $4.8 million and
$3.7 million in fiscal 2000, 1999 and 1998, respectively. The decreased expense
in fiscal 2000 resulted from overhead reductions of the housewares segment over
the past year to reduce its cost levels in response to lower than anticipated
sales levels. Corporate overhead expense also declined due to reduced labor
costs. The increased corporate overhead expenses in fiscal 1999 compared to 1998
resulted from corporate overhead allocable to the Life Sciences and Engineering
("LS&E") segment that was reimbursable under certain U.S. government contracts
in fiscal 1998 which was not allocable to the LS&E segment in fiscal 1999.
The Corporation recorded restructuring charges of $0.4 million and $1.5
million in fiscal 1999 and 1998, respectively. The fiscal 1999 charge was for
additional expenses related to final settlement with the landlord of the vacated
Hago facility in Bognor Regis, England. In fiscal 1998, the Corporation closed
the Hago facility and moved the operations to Beldray's facility in Bilston,
England. Charges were provided for relocation ($0.3 million), employee severance
($0.4 million for 100 employees) and rent and related costs of the vacated
facility ($0.8 million).
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Interest expense decreased $0.2 million in fiscal 2000 as a result of lower
U.K. debt. The U.K. Variable Rate Loan of approximately $2.9 million was repaid
in September 1999. Interest expense decreased $0.3 million in fiscal 1999 as a
result of lower U.S. debt. In connection with the Wyle merger in March 1998,
Wyle assumed debt of $3.3 million. Interest income decreased in fiscal 2000 due
to lower levels of invested cash resulting from the use of cash to repay the
U.K. Variable Rate Loan and to provide working capital for the European
operations.
Gain on sale of assets of $0.2 million in fiscal 1999 and $0.9 million in
fiscal 1998 resulted from the sale of excess land and building in Dayton, Ohio.
The Corporation recorded an income tax benefit of $0.3 million in fiscal
2000, income tax expense of $1.8 million in fiscal 1999 and an income tax
benefit of $0.03 million in fiscal 1998. The tax benefit in fiscal 2000 resulted
primarily because U.S. tax losses generated from continuing operations were used
to reduce the taxable income generated from the sale of the Wyle Series A
Preferred Stock, offset partially by a $0.1 million increase in foreign
valuation allowances. In fiscal 1999, the Corporation provided current domestic
taxes of $0.3 million (primarily U.S. alternative minimum tax) and $1.4 million
for deferred tax expense related to increased valuation allowances. Such
valuation allowances adjusted the net domestic tax assets to zero based upon
management's assessment that it is more likely than not that none of the
domestic tax assets will be realized through future taxable earnings or
implementation of tax planning strategies currently available. Foreign tax
expense of $0.1 million was provided in fiscal 1999. Foreign taxes included an
additional valuation allowance of $0.5 million for U.K. tax prepayments and an
additional allowance of $0.5 million for foreign net operating loss
carryforwards. These valuation allowance increases were offset by a $0.3 million
reduction in the valuation allowance for net deferred tax items, $0.6 million
from the sale of prepaid taxes and net operating loss carryforwards to Sowester
Limited after its sale in April 1998 by the Corporation.
The fiscal 1998 tax benefit was comprised of $2.6 million of U.S. deemed
dividends which are related to intercompany loans from the U.K. subsidiary to
the U.S. parent and $0.4 million of permanent foreign tax differences, offset by
a reduction in tax valuation allowances of $2.2 million and $0.8 million of tax
benefit in the U.S. due to tax losses generated from continuing operations which
were used to offset taxable income of the discontinued LS&E segment.
The loss from continuing operations was $1.1 million ($0.17 per share) in
fiscal 2000, $4.2 million ($1.20 per share) in fiscal 1999 and $2.95 million
($0.57 per share) in fiscal 1998. The decreased loss in fiscal 2000 was due to
improved results of the housewares segment. The increased gross profit margin
and decreased overhead expenses increased the housewares segment's operating
profit by $2.7 million. Corporate expense also decreased $0.5 million. The
fiscal 1999 loss from continuing operations increased from the prior year due to
increased housewares operating losses of $0.4 million, increased corporate
expense of $0.9 million and increased income tax expense due to the increased
tax valuation allowance provided in fiscal 1999.
RESULTS OF OPERATIONS - DISCONTINUED OPERATIONS
Earnings from discontinued operations in fiscal 2000 of $2.5 million
resulted from $2.7 million of earnings from the LS&E segment, partially offset
by a $0.2 million operating loss from the child safety segment. LS&E segment
earnings were composed of the pre-tax gain on the sale of Wyle Series A
Preferred Stock of $4.2 million offset by $0.7 million of domestic pension and
pension curtailment expenses and $0.8 million of domestic income tax expense.
The fiscal 1999 loss from discontinued operations of $2.6 million resulted from
an after-tax loss of $2.8 million from the child safety segment (which included
a $1.3 million asset impairment charge to reduce to $0 the goodwill
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recorded in connection with the purchase of the segment), $0.2 million loss from
the LS&E segment, $0.2 million additional provision for loss for the industrial
segment, and a $0.6 million after-tax gain on the sale of the leisure marine
segment. Fiscal 1998 earnings from discontinued operations of $3.2 million
resulted from earnings of $3.1 million from the LS&E segment (which was composed
of a $1.0 million pre-tax income from operations, a $2.9 million pre-tax gain on
the merger of the LS&E segment with Wyle and $0.8 million of domestic income tax
expense) and earnings of $1.8 million from leisure marine segment operations,
offset by a $0.9 million loss from the child safety segment and an after-tax
charge of $0.8 million for the industrial segment (for additions to the reserve
for estimated additional product liability expenses, such as increased legal,
professional and insurance costs).
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2000, the Corporation had outstanding term debt of $2.0
million, a decrease of $3.9 million from the prior year-end. The term debt is
composed of $1.3 million outstanding under the U.K. Term Loan relating to the
Beldray manufacturing facility, which has quarterly principal payments and
matures in fiscal 2005, and $0.7 million of debt under capital leases at
Beldray. The Corporation had no U.S. debt at March 31, 2000. In September 1999,
the Corporation refinanced its U.K. debt. A working capital line was established
with a U.K. bank. The availability under the line fluctuates with increases or
decreases of eligible accounts receivable. Borrowings under the line were $2.1
million at March 31, 2000. In conjunction with the refinancing, the U.K.
Variable Rate Loan, which had an outstanding balance of $2.9 million was repaid
and restrictions on approximately $4.1 million of the Corporation's U.K. cash
were removed. At March 31, 2000, the Corporation had a cash balance of $7.65
million, substantially all of which is in the U.S. The Corporation believes it
has adequate financing in both the U.S. and Europe to support its current level
of operations during fiscal 2001.
The Corporation used cash of approximately $3.8 million and $0.6 million in
operating activities in fiscal 2000 and 1999, respectively, and generated
approximately $7.8 million from operating activities in fiscal 1998. The use of
cash in fiscal 2000 resulted from cash used to provide working capital for the
European operations (primarily to reduce accounts payable balances and pay
restructuring expenses), fund corporate expenses and to pay U.S. income taxes.
In fiscal 1999, the use of cash resulted from the fiscal 1999 net loss, net of
non-cash depreciation of $0.9 million and deferred income taxes of $1.7 million,
offset partially by cash generated from reduced working capital in the
housewares segment. The cash generated in fiscal 1998 was due to cash generated
by the discontinued LS&E segment receivables as a result of the merger with Wyle
and increased cash generated from the discontinued leisure marine segment.
The Corporation expended $0.2 million, $0.1 million and $1.3 million for
property, plant and equipment in fiscal 2000, 1999 and 1998, respectively,
primarily for new equipment for the housewares segment. The Corporation
repurchased a total of 278,700 shares for cash of $1.4 million in fiscal 1999
and repurchased 1,245 shares for cash of $0.002 million in fiscal 2000. All
repurchased shares were retired by the Corporation.
INFLATION
During periods of inflation and labor shortages, employee wages increase
and suppliers pass along rising costs to the Corporation in the form of higher
prices for their raw materials and services. The Corporation has not always been
able to offset increases in operating costs by increasing prices for its
products, increasing its manufacturing efficiency or implementing cost control
measures. The
14
<PAGE> 15
Corporation is unable to predict its ability to offset or control future cost
increases or offset future cost increases by passing along the increased cost to
customers.
RECENT ACCOUNTING PRONOUNCEMENTS
Recent Accounting Pronouncements and their expected impact are discussed at
Note 1 of the Notes to Consolidated Financial Statements at Item 8 of this
Annual Report on Form 10-K.
IMPACT OF YEAR 2000 COMPUTER ISSUES
The Corporation experienced no material adverse effect on its results of
operations, financial condition or ability to deliver product to customers as a
result of the Year 2000 date conversion in its computer systems and programs.
While the Corporation still may experience certain Year 2000 problems with its
computer systems or programs, the Corporation does not believe that any such
potential problems will materially adversely affect its operations. However, the
contingency plans previously formulated are still in place should any Year 2000
problems arise. The total cost of Year 2000 related expenditures was
approximately $0.3 million, including the cost of capital expenditures. These
costs included $0.1 million of normal system software and equipment upgrades and
replacements which the Corporation anticipated incurring in the ordinary course
of business without regard to the Year 2000 issues.
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 between their existing local currencies and the Euro, the EU's single
currency. The Euro was adopted by the participating countries as their common
legal currency on that date. The Corporation currently operates in three
countries which adopted the Euro (Finland, France and Germany) and sells from
the U.K to certain additional countries which adopted the Euro. The Corporation
believes that the adoption of the Euro has not had a material effect on the
operations of its European businesses.
15
<PAGE> 16
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements and Supplementary Data
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report 17
Consolidated Balance Sheets -- March 31, 2000 and 1999 18-19
Consolidated Statements of Earnings --
for the years ended March 31, 2000, 1999 and 1998 20
Consolidated Statements of Shareholders' Equity --
for the years ended March 31, 2000, 1999 and 1998 21
Consolidated Statements of Cash Flows --
for the years ended March 31, 2000, 1999 and 1998 22
Notes to Consolidated Financial Statements --
for the years ended March 31, 2000, 1999 and 1998 23-41
</TABLE>
16
<PAGE> 17
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders of KRUG International Corp.:
We have audited the accompanying consolidated balance sheets of KRUG
International Corp. and subsidiaries (the "Corporation") as of March 31, 2000
and 1999 and the related consolidated statements of earnings, shareholders'
equity, and cash flows for each of the three years in the period ended March 31,
2000. These consolidated financial statements are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of KRUG International Corp. and
subsidiaries at March 31, 2000 and 1999 and the results of their operations and
their cash flows for each of the three years in the period ended March 31, 2000
in conformity with accounting principles generally accepted in the United States
of America.
Deloitte & Touche LLP
Atlanta, Georgia
May 19, 2000
17
<PAGE> 18
KRUG INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2000 AND 1999
(ALL AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------
ASSETS 2000 1999
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 7,651 $ 2,712
Restricted cash (Note 5) 6,641
Receivables - net 5,118 5,276
Inventories 3,611 3,626
Prepaid expenses and other 506 578
-------- -------
Total current assets 16,886 18,833
PROPERTY, PLANT, AND EQUIPMENT - At cost
Land 127 134
Buildings and improvements 1,377 1,395
Equipment 8,815 8,731
-------- -------
10,319 10,260
Less accumulated depreciation 6,069 5,391
-------- -------
4,250 4,869
OTHER NONCURRENT ASSETS:
Pension assets 1,129 1,469
Net noncurrent assets of discounted operations 855 941
Other 8 9
-------- -------
6,242 7,288
-------- -------
TOTAL ASSETS $ 23,128 $26,121
======== =======
</TABLE>
See notes to consolidated financial statements.
18
<PAGE> 19
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY 2000 1999
<S> <C> <C>
CURRENT LIABILITIES:
Bank borrowings $ 2,064
Accounts payable 5,562 $ 6,906
Accrued payroll and related taxes 1,159 874
Pension liability 602 560
Net current liabilities of discontinued operations 198 927
Other accrued expenses 617 2,108
Income taxes 348 199
589 5,230
-------- -------
Total current liabilities 11,139 16,804
LONG-TERM LIABILITIES:
Long-term debt 1,438 680
Noncurrent reserve for Industrial Segment 1,038 1,157
-------- -------
Total long-term liabilities 2,476 1,837
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred Shares, authorized and unissued, 2,000 shares
Common Shares, no par
value; authorized, 12,000 shares;
issued and outstanding, 4,976 and 5,256 at March 31,
2000 and 1999, respectively 2,488 2,628
Additional paid-in capital 3,604 4,829
Retained earnings 3,172 1,589
Treasury shares at cost, 279 shares (1,363)
Accumulated other comprehensive income (loss) 249 (203)
-------- -------
Total shareholders' equity 9,513 7,480
-------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 23,128 $26,121
======== =======
</TABLE>
19
<PAGE> 20
KRUG INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE YEARS ENDED MARCH 31, 2000, 1999, AND 1998
(All amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
2000 1999 1998
<S> <C> <C> <C>
REVENUES $ 32,011 $ 34,832 $ 41,152
COST OF GOODS SOLD 29,327 34,107 39,112
SELLING AND ADMINISTRATIVE EXPENSES 3,949 4,816 3,658
RESTRUCTURING CHARGES 412 1,545
-------- -------- --------
OPERATING LOSS (1,265) (4,503) (3,163)
OTHER INCOME (EXPENSE):
Interest income 328 532 7
Interest expense (208) (424) (751)
Gain on sale of assets 175 939
Other income - net 22 18
-------- -------- --------
LOSS FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES (1,123) (4,220) (2,950)
INCOME TAX EXPENSE (BENEFIT) (252) 1,845 (25)
-------- -------- --------
LOSS FROM CONTINUING OPERATIONS (871) (6,065) (2,925)
EARNINGS (LOSS) FROM DISCONTINUED OPERATIONS, net
of income taxes 2,454 (2,568) 3,181
-------- -------- --------
NET EARNINGS (LOSS) $ 1,583 $ (8,633) $ 256
======== ======== ========
EARNINGS (LOSS) PER SHARE:
Continuing operations:
Basic $ (0.17) $ (1.20) $ (0.57)
======== ======== ========
Diluted (0.17) (1.20) (0.57)
======== ======== ========
Discontinued operations:
Basic $ 0.49 $ (0.51) $ 0.62
======== ======== ========
Diluted 0.49 (0.51) 0.61
======== ======== ========
Net earnings:
Basic $ 0.32 $ (1.71) $ 0.05
======== ======== ========
Diluted 0.32 (1.71) 0.05
======== ======== ========
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING:
Continuing operations:
Basic 4,977 5,049 5,168
======== ======== ========
Diluted 4,977 5,049 5,168
======== ======== ========
Discontinued operations:
Basic 4,977 5,049 5,168
======== ======== ========
Diluted 4,977 5,049 5,199
======== ======== ========
Net earnings:
Basic 4,977 5,049 5,168
======== ======== ========
Diluted 4,977 5,049 5,199
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
20
<PAGE> 21
KRUG INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 2000, 1999, AND 1998
(All amounts in thousands)
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
Accumulated
Common Shares Additional Treasury Shares Other Total
----------------- Paid-in Retained --------------- Comprehensive Shareholders'
Shares Amount Capital Earnings Shares Amount Income (Loss) Equity
<S> <C> <C> <C> <C> <C> <C> <C> <C>
MARCH 31, 1997 5,151 $ 2,576 $ 4,399 $ 9,966 -- $ -- 1,019 17,960
Net earnings 256 256
Foreign currency translation adjustment 286 286
Minimum pension liability adjustment,
net of tax of $318 (617) (617)
-------
Total comprehensive loss (75)
-------
Common shares issued 48 23 191 214
------ ------- -------- ------- ----- ------ ------ -------
MARCH 31, 1998 5,199 2,599 4,590 10,222 -- -- 688 18,099
Net loss (8,633) (8,633)
Foreign currency translation adjustment (925) (925)
Minimum pension liability adjustment,
net of tax of $19 34 34
-------
Total comprehensive loss (9,524)
-------
Common shares issued 57 29 239 268
Treasury shares purchased 279 (1,363) (1,363)
------ ------- -------- ------- ----- ------ ------ -------
MARCH 31, 1999 5,256 2,628 4,829 1,589 279 (1,363) (203) 7,480
Net earnings 1,583 1,583
Foreign currency translation adjustment 30 30
Minimum pension liability adjustment,
net of tax of $218 422 422
-------
Total comprehensive income 2,035
-------
Treasury shares purchased 1 (2) (2)
Treasury shares retired (280) (140) (1,225) (280) 1,365 --
------ ------- -------- ------- ----- ------ ------ -------
MARCH 31, 2000 4,976 $ 2,488 $ 3,604 $ 3,172 -- $ -- $ 249 9,513
====== ======= ======== ======= ===== ====== ====== =======
</TABLE>
See notes to consolidated financial statements.
21
<PAGE> 22
KRUG INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 2000, 1999, AND 1998
(All amounts in thousands)
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------------
2000 1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net earnings (loss) $ 1,583 $ (8,633) $ 256
Adjustments to reconcile net earnings (loss) to net cash provided by operating activities:
Depreciation and amortization 813 881 968
Deferred income taxes 1,722 (349)
Provision for loss from discontinued operations 220 1,257
Gain on sale of Wyle Laboratories, Inc. Series A Preferred Stock (4,153)
Gain on merger of Life Sciences and Engineering subsidiaries (2,850)
Gain on sale of Leisure Marine subsidiary (622)
Gain on sale of assets (2) (175) (939)
Change in assets and liabilities:
Receivables 92 2,804 (199)
Inventories (31) (144) 554
Prepaid expenses and other assets 320 309 38
Accounts payable and accrued expenses (1,956) (1,976) 1,379
Income taxes 235 2,390 163
Net cash provided by (used in) discontinued operations (652) 2,644 7,503
-------- --------- --------
Net cash provided by (used in) operating activities (3,751) (580) 7,781
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of Wyle Laboratories, Inc. Series A Preferred Stock 4,125
Purchase of subsidiaries (3,882)
Proceeds from merger of Life Sciences and Engineering subsidiaries 3,052
Proceeds from sale of Leisure Marine subsidiary 8,178
Proceeds from sales of assets 7 220 1,808
Expenditures for property, plant, and equipment (215) (120) (1,301)
-------- --------- --------
Net cash provided by (used in) investing activities 3,917 8,278 (323)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 268 214
Purchase of treasury stock (2) (1,363)
Bank borrowings - net 2,090 (1,164)
Additions to long-term debt 3,882
Payment of long-term debt (3,955) (1,432) (6,018)
Change in restricted cash 6,641 (6,641)
-------- --------- --------
Net cash used in financing activities 4,774 (9,168) (3,086)
EFFECT OF EXCHANGE RATE CHANGES ON CASH (1) (249) 20
-------- --------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 4,939 (1,719) 4,392
CASH AND CASH EQUIVALENTS:
Beginning of year 2,712 4,431 39
-------- --------- --------
End of year $ 7,651 $ 2,712 $ 4,431
======== ========= ========
CASH PAID FOR:
Income taxes $ 447 $ 265 $ 306
======== ========= ========
Interest $ 258 $ 466 $ 1,167
======== ========= ========
NONCASH INVESTING AND FINANCING ACTIVITIES:
Capital leases $ 40 $ 863 $ 391
======== ========= ========
Merger of Life Sciences and Engineering Subsidiaries $ -- $ -- $ 177
======== ========= ========
</TABLE>
See notes to consolidated financial statements.
22
<PAGE> 23
KRUG INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2000, 1999, AND 1998
(ALL AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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. 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.
Principles of Consolidation - The consolidated financial statements
include the accounts of the Corporation and its domestic and foreign
subsidiaries. All significant intercompany transactions and balances
have been eliminated.
Revenue Recognition - Revenues from the housewares products and child
safety products segments are recorded at the time the products are
shipped to the customer and ownership has been transferred. Product
returns are accepted from the customers if the product has been
damaged, soiled, or if the customer has been unable to resell the
product. The amount of the allowance for product returns is based upon
the historical volume of returns incurred by the businesses.
Use of Estimates - The preparation of financial statements in
conformity with accounting principles generally accepted in the United
States of America requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ materially
from those estimates.
Cash and Cash Equivalents - Cash and cash equivalents consist of
highly liquid financial instruments which have original maturities of
three months or less.
Inventories - Inventories are valued at the lower of cost or market
using the first-in, first-out method.
Property, Plant, and Equipment - Property, plant, and equipment,
including capital leases, are recorded at cost. Depreciation is
provided over the estimated useful lives of the assets, which range
from 5 to 45 years, on a straight-line basis. Generally, furniture and
fixtures are depreciated over 5 to 10 years, machinery and equipment
over 10 years, and buildings over 45 years. Leasehold improvements and
leased machinery and equipment are depreciated over the lease term or
estimated useful life of the asset, whichever is shorter, and range
from 5 to 15 years. Expenditures for major renewals and replacements
are capitalized. Expenditures for maintenance and repairs are charged
to income as incurred. When property items are retired or otherwise
disposed of, amounts applicable to such items are removed from the
related asset and accumulated depreciation amounts and any resulting
gain or loss is credited or charged to income.
23
<PAGE> 24
Long-Lived Assets - The Corporation periodically assesses the
recoverability of assets based on its expectations of future
profitability and undiscounted cash flow of the related operations
and, when circumstances dictate, adjusts the carrying value of the
asset to estimated fair value. These factors, along with management's
plans with respect to the operations, are considered in assessing the
recoverability of goodwill, other purchased intangibles, and property
and equipment.
Income Taxes - The Corporation accounts for income taxes in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 109,
Accounting for Income Taxes. SFAS No. 109 is an asset and liability
approach that requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences. SFAS No. 109
generally considers all expected future events other than proposed
enactments of changes in the tax law or rates.
Stock-Based Compensation - The Corporation measures compensation cost
for stock options issued to employees using the intrinsic value-based
method of accounting.
Foreign Currency Translation - The assets and liabilities of the
Corporation's wholly owned European subsidiaries are translated using
exchange rates in effect at the balance sheet date, and amounts for
the consolidated statements of earnings are translated using average
exchange rates for the period. Translation gains and losses are
recorded in shareholders' equity, and transaction gains and losses are
included in the consolidated statement of earnings for the period.
Fair Value of Financial Instruments - The recorded values of cash and
trade receivables and payables approximate their fair values because
of the relatively short maturity of these instruments. Similarly, the
fair value of the Corporation's long-term debt is estimated to
approximate its recorded value due to its relatively short maturity
and its interest rate characteristics.
Earnings (Loss) per Share - Earnings (loss) per common share ("EPS")
is based on the weighted-average number of common shares and common
stock equivalents outstanding each fiscal year presented, including
vested and unvested shares issued under the Corporation's Incentive
Stock Option Plan and outstanding stock purchase warrants issued by
the Corporation. Common stock equivalents represent the dilutive
effect of the assumed exercise of the outstanding stock options and
warrants.
Recent Accounting Standards - SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, requires that an entity recognize
all derivatives as either assets or liabilities in the balance sheet
and measure those instruments at fair value. If certain conditions are
met, a derivative may be specifically designated as (a) a hedge of the
exposure to changes in the fair value of a recognized asset or
liability or an unrecognized firm commitment, (b) a hedge of the
exposure to variable cash flows of a forecasted transaction, or (c) a
hedge of the foreign currency exposure of a net investment in a
foreign operation, an unrecognized firm commitment, an
available-for-sale security, or a foreign-currency-denominated
forecasted transaction. The accounting for changes in the fair value
of a derivative (that is, gains and losses) depends on the intended
use of the derivative and the resulting designation. This statement is
effective for the fiscal quarter beginning April 1, 2001. Management
believes that adoption of this pronouncement is not expected to have a
material effect on the Corporation's consolidated financial
statements.
Reclassifications - Certain amounts in prior years' consolidated
financial statements have been reclassified to conform to the 2000
presentation.
24
<PAGE> 25
2. DISCONTINUED OPERATIONS
Child Safety Segment - Subsequent to March 31, 2000, the Corporation
has decided to dispose of the European Child Safety Segment, Klippan
Ltd. ("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 U.K. manufacturer of
children's automobile safety seats and accessories having
manufacturing facilities and sales offices in the United Kingdom
("U.K.") and Europe. Goodwill totaling $1,892 was recorded on the
purchase and was being amortized over five years. In fiscal 1999, the
Corporation determined that Klippan's unamortized value of goodwill
allocated in the purchase was impaired. Accordingly, the Corporation
adjusted the goodwill allocated in the purchase to $0 by recording a
noncash impairment loss of $1,315, which is included in the loss from
discontinued operations for fiscal 1999.
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 nondividend-paying and nonvoting 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 March 31, 2000.
The Corporation acquired the Wyle Series A Preferred Stock, Series B
Preferred Stock, and stock option in March 1998 when it merged its
domestic subsidiaries, KRUG Life Sciences, Inc. and Technology
Scientific Services, Inc., into Wyle. In the merger, the Corporation
exchanged its ownership of the subsidiaries for (i) 3.8 million shares
of Series A-1 Preferred Stock; (ii) cash of $3,052 received by the
Corporation; (iii) shares of Series B Senior Preferred Stock of Wyle;
and (iv) a stock option that entitled the Corporation to purchase
approximately 38% of the shares issuable under existing employee stock
options of Wyle. In addition, Wyle assumed approximately $3,300 of
KRUG Life Sciences, Inc. and Technology Scientific Services, Inc.
working capital debt. In 1998, the Corporation recognized a gain
totaling $2,850 as a result of the transaction. Recognition of
additional gain was precluded because of the significance of the
nonmonetary assets received by the Corporation.
Leisure Marine Segment - On April 16, 1998, the Corporation sold its
Leisure Marine Segment to a company formed by the Segment's
management. The sales price of approximately $15,000 was comprised of
approximately $8,100 in cash, deferred payments of $800 due within one
year, and the assumption of approximately $6,100 of debt.
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.
25
<PAGE> 26
Estimated Losses - Discontinued Operations:
During the year ended March 31, 1999, the Corporation recorded a
charge of $220 for settlement of obligations under leases of property
in Knoxville, Tennessee (which expired December 31, 1998) related to
the Industrial Segment. A settlement with the landlord was reached in
August 1999 with no additional loss.
During the year ended March 31, 1998, the Corporation recorded a
charge of $830 (net of a tax benefit of $427) to provide for estimated
additional product liability losses and increased legal and
professional and insurance costs for the discontinued operations of
the Industrial Segment.
The following is a summary of the loss reserves for discontinued
operations:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------------
2000 1999 1998
<S> <C> <C> <C>
Beginning balance $ 1,459 $ 1,575 $ 918
Provision for losses 220 1,257
Usage - net (271) (336) (600)
------- ------- -------
Ending balance $ 1,188 $ 1,459 $ 1,575
======= ======= =======
</TABLE>
The reserve for losses from discontinued operations represents
management's best estimate of the Corporation's liability with regard
to resolution of all property and product liability claims for which
it may incur liability. These estimates are based on the Corporation's
judgments using currently available information as well as
consultation with its insurance carriers and legal counsel. The
Corporation historically has purchased insurance policies to reduce
its exposure to product liability claims and anticipates it will
continue to purchase such insurance policies if available at
commercially reasonable rates.
While the Corporation has based its estimates on its evaluation of
available information to date, it is not possible to predict with
certainty the ultimate outcome of these contingencies. The Corporation
will adjust its estimates of the reserve as additional information is
developed and evaluated. However, management believes that the final
resolution of these contingencies will not have a material adverse
impact on the financial position, cash flows, or results of operations
of the Corporation.
DISCONTINUED OPERATIONS - SUMMARY BALANCE SHEET INFORMATION
<TABLE>
<CAPTION>
MARCH 31,
--------------------
2000 1999
<S> <C> <C>
Current assets $4,143 $3,808
Property, plant, and equipment, net 818 1,060
Other assets 223 137
------ ------
Total assets 5,184 5,005
Current liabilities 4,341 4,735
Long-term debt 186 256
------ ------
Total liabilities 4,527 4,991
------ ------
Net assets $ 657 $ 14
====== ======
</TABLE>
26
<PAGE> 27
Results of discontinued operations were as follows:
DISCONTINUED OPERATIONS - SUMMARY STATEMENT OF EARNINGS
INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------------------
2000 1999 1998
<S> <C> <C> <C>
Revenue:
Child Safety Segment $ 15,707 $ 15,463 $ 7,856
Leisure Marine Segment 32,197
Life Sciences and Engineering Segment 44,686
--------- --------- ---------
$ 15,707 $ 15,4637 $ 84,739
========= ========= =========
Earnings (Loss) from Discontinued Operations:
Child Safety Segment
Loss from operations before income taxes $ (171) $ (2,691) $ (848)
Income taxes 24 50 78
--------- --------- ---------
Loss from operations after income taxes (195) (2,741) (926)
--------- --------- ---------
Life Sciences and Engineering Segment
Income (loss) from operations before income taxes (680) (194) 1,061
Pretax gain on merger of LS&E subsidiaries 2,850
Pretax gain on sale of Wyle shares 4,153
Income taxes 824 765
--------- --------- ---------
Earnings (loss) from operations after income taxes 2,649 (194) 3,146
--------- --------- ---------
Leisure Marine Segment:
Earnings from operations before income taxes 2,667
Income taxes 876
---------
Earnings from operations after income taxes 1,791
Gain on sale of segment, net of tax of $35 587
--------- --------- ---------
Earnings from Leisure Marine Segment -- 587 1,791
--------- --------- ---------
Industrial Segment:
Provision for additional estimated costs, net of
taxes of $427 in 1998 (220) (830)
--------- --------- ---------
Earnings (Loss) from Discontinued Operations $ 2,454 $ (2,568) $ 3,181
========= ========= =========
</TABLE>
27
<PAGE> 28
3. RECEIVABLES
<TABLE>
<CAPTION>
MARCH 31,
---------------------
2000 1999
<S> <C> <C>
Trade accounts receivable $5,198 $4,503
Other 870
------ ------
5,198 5,373
Less allowance for doubtful accounts (80) (97)
------ ------
Total $5,118 $5,276
====== ======
</TABLE>
4. INVENTORIES
<TABLE>
<CAPTION>
MARCH 31,
---------------------
2000 1999
<S> <C> <C>
Finished goods $1,245 $1,238
Work-in-process 748 873
Raw materials 1,618 1,515
------ ------
Total $3,611 $3,626
====== ======
</TABLE>
5. LONG-TERM DEBT
<TABLE>
<CAPTION>
MARCH 31,
---------------------
2000 1999
<S> <C> <C>
U.K. Term Loan $ 1,313 $ 1,571
U.K. Variable Rate Loan 3,236
Capital leases 714 1,103
------- -------
Total 2,027 5,910
Less contractual current maturities (589) (1,425)
U.K. Loans - reclassified (3,805)
------- -------
Long-term portion $ 1,438 $ 680
======= =======
</TABLE>
The U.K. Term Loan is a 10-year term loan which commenced in July 1995
with a U.K. bank. The loan has quarterly principal payments of $60,
plus interest, at the bank's base rate plus 1.5% (7.5% at March 31,
2000 and 7% at March 31, 1999).
The U.K. Variable Rate Loan commenced October 1997 with a U.K. bank.
The loan was repaid in September 1999. The loan bore interest at the
bank's base rate plus 1.25% (6.75% at March 31, 1999).
Substantially all foreign assets (except shares of the foreign
subsidiaries) are pledged as collateral for the U.K. Term Loan. This
loan includes certain tangible net worth and cash flow covenants
relating to the foreign subsidiaries. The Corporation was not in
compliance
28
<PAGE> 29
with certain covenants of the Term Loan and Variable Rate Loan at
March 31, 1999, but had received waivers of the covenants for that
date. At March 31, 1999 in conjunction with these loans, the
Corporation agreed to maintain $8,082 of cash on deposit at the bank
(of which $1,391 was offset at March 31, 1999 against outstanding bank
overdraft balances) until these loans could be renegotiated with new
covenants. Due to the cash on deposit requirement, the U.K. loans were
reclassified as current debt at March 31, 1999. In September 1999, the
Corporation repaid the Variable Rate Loan and renegotiated the
covenants of the Term Loan. At March 31, 2000, the Corporation was in
compliance with the covenants.
In September 1999, a working capital line of credit was established
with a U.K. bank. The availability under the line is based upon the
current levels of U.K. accounts receivables and fluctuates with
increases or decreases in eligible accounts receivables. Borrowings
under the line were $2,064 at March 31, 2000. The line of credit has
monthly interest payments at the bank's base rate plus 1.5% (7.5% at
March 31, 2000).
Annual required payments of debt, including capital leases, for the
next five years and thereafter are as follows:
<TABLE>
<S> <C>
2001 $ 589
2002 446
2003 396
2004 239
2005 239
Thereafter 118
------
Total $2,027
======
</TABLE>
29
<PAGE> 30
6. SHAREHOLDERS' EQUITY
Stock Option Plans - The Corporation's 1995 Incentive Stock Option
Plan permits the grant of options to officers and key employees for
purchase of up to 250,000 common shares through May 2005, of which
55,000 options are available for grant at March 31, 2000. Vesting and
option expiration periods are determined by the Board of Directors but
may not exceed 10 years.
<TABLE>
<CAPTION>
RANGE
NUMBER WEIGHTED- OF
OF AVERAGE EXERCISE
SHARES EXERCISE PRICE PRICES
<S> <C> <C> <C>
Options outstanding, March 31, 1997 121,320 $ 3.96 $3.00 - $4.50
Granted 15,000 5.13 5.13
Exercised (32,820) 3.24 3.14 - 4.50
Forfeited (13,000) 4.50 4.50
-------- ------ -------------
Options outstanding, March 31, 1998 90,500 4.34 3.00 - 5.13
Granted 79,000 1.69 1.69
Exercised (57,500) 4.66 4.50 - 5.13
Forfeited (15,000) 4.50 4.50
-------- ------ -------------
Options outstanding, March 31, 1999 97,000 1.96 1.69 - 4.50
Forfeited (12,000) 3.25 3.00 - 4.50
-------- ------ -------------
Options outstanding, March 31, 2000 85,000 $ 1.78 $1.69 - $3.00
======== ====== =============
Options exercisable, March 31, 1998 84,500 $ 4.33 $3.00 - $5.13
======== ====== =============
Options exercisable, March 31, 1999 18,000 $ 3.17 $3.00 - $4.50
======== ====== =============
Options exercisable, March 31, 2000 25,750 $ 1.99 $1.69 - $3.00
======== ====== =============
</TABLE>
No stock options were granted during the year ended March 31, 2000.
The weighted-average fair value of the options granted during the
years ended March 31, 1999 and 1998 was $0.75 and $2.11, respectively.
The fair value of each stock option grant was estimated using the
Black-Scholes option pricing model with the following weighted-average
assumptions used for grants during the years ended March 31, 1999 and
1998, respectively: estimated volatility of 55% and 60%; risk-free
interest rate of 4.8% and 6.0%; dividend yield of 0% for both years;
and an expected life of 3.5 years and 2.5 years.
30
<PAGE> 31
Information with respect to stock options outstanding and exercisable
at March 31, 2000 is as follows:
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
REMAINING
EXERCISE NUMBER CONTRACTUAL LIFE NUMBER
PRICES OUTSTANDING (IN YEARS) EXERCISABLE
<S> <C> <C> <C>
$ 1.69 79,000 3.73 19,750
3.00 6,000 5.60 6,000
------ ---- ------
85,000 3.86 25,750
====== ==== ======
</TABLE>
Using the intrinsic value method, no compensation costs have been
recognized for the stock option plans since the exercise price of the
options is not less than the fair value of the Corporation's common
stock at the grant date.
Pro forma net earnings and net earnings per share had compensation
costs been determined using the fair value-based method follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------------------------
2000 1999 1998
<S> <C> <C> <C>
Net earnings (loss) $ 1,583 $ (8,692) $ 224
Net earnings (loss) per share:
Basic 0.32 (1.72) 0.04
Diluted 0.32 (1.72) 0.04
</TABLE>
Warrants - The Corporation issued warrants to shareholders of record
on December 23, 1995. For each five common shares held, the
Corporation distributed one warrant for the purchase of one common
share. The warrants entitled the holders to purchase, in the
aggregate, 999,487 common shares for $8.625 per share through their
expiration on January 31, 1998. The Corporation may reduce the
purchase price at any time. In January 2000, the Corporation extended
the expiration date of the warrants to January 31, 2001.
In March 1998, the Corporation issued warrants, which expire in March
2001, to purchase 25,000 shares of its common stock for $5.75 per
share to investment advisors assisting the Corporation in the merger
of its Life Sciences and Engineering subsidiaries (see Note 2). The
weighted-average fair value of these warrants was calculated at $1.37
per share and the Corporation recorded $34 as an expense of the merger
for these warrants.
Treasury Shares - On April 9, 1999, the directors of the Corporation
voted to retire the 278,700 common shares held as treasury shares by
the Corporation. On September 30, 1999 the directors of the
Corporation voted to retire 1,245 common shares purchased by the
Corporation in September 1999.
31
<PAGE> 32
Accumulated Other Comprehensive Income (Loss) - Information with
respect to the balances of each classification within accumulated
other comprehensive income (loss) is as follows:
<TABLE>
<CAPTION>
FOREIGN MINIMUM ACCUMULATED
CURRENCY PENSION OTHER
TRANSLATION LIABILITY COMPREHENSIVE
ADJUSTMENT ADJUSTMENT INCOME (LOSS)
<S> <C> <C> <C>
March 31, 1999 $380 $(583) $(203)
Current period change 30 422 452
---- ----- -----
March 31, 2000 $410 $(161) $ 249
==== ===== =====
</TABLE>
7. INCOME TAXES
The provisions (benefits) for income taxes on continuing operations
include the following:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------------
2000 1999 1998
<S> <C> <C> <C>
Domestic:
Current $ (382) $ 268 $ 244
Deferred 1,445 (333)
------- ------- -----
Total domestic tax expense (benefit) (382) 1,713 (89)
Foreign:
Current 130 (145) 108
Deferred 277 (44)
------- ------- -----
Total foreign tax expense 130 132 64
------- ------- -----
Total income tax expense (benefit) $ (252) $ 1,845 $ (25)
======= ======= =====
</TABLE>
32
<PAGE> 33
Deferred tax assets recorded in the balance sheets include the
following:
<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
--------- ---------
2000 1999
<S> <C> <C>
Domestic:
Alternative minimum tax credit carryforward $ 43 $ 320
Foreign tax credit carryforwards 904 1,071
Investment basis in LTS Holdings, Inc. 363 --
Provision for loss on discontinued operations 404 496
Other 268 205
------- -------
1,982 2,092
Less valuation allowance (1,982) (2,092)
------- -------
Total domestic deferred tax assets -- --
Foreign:
Net operating loss carryforwards 1,186 921
Tax prepayments not currently utilized 873 830
Depreciation expense (567) (672)
Other 31 328
------- -------
1,523 1,407
Less valuation allowance (1,523) (1,407)
------- -------
Total foreign deferred tax assets -- --
------- -------
Net deferred tax assets $ -- $ --
======= =======
Valuation allowance:
Continuing operations $ 1,172 $ 1,344
Discontinued operations 2,333 2,155
------- -------
$ 3,505 $ 3,499
======= =======
</TABLE>
The differences between income taxes at the federal statutory rate and
the effective tax rate were as follows:
<TABLE>
<CAPTION>
Year Ended March 31,
-----------------------------
2000 1999 1998
<S> <C> <C> <C>
Income taxes at federal statutory rate $(382) $(1,435) $(1,003)
Foreign tax rate differential (28) 61 81
Changes in valuation allowance - continuing
operations (172) 2,955 (1,583)
United States ("U.S.") deemed dividend 300 268 2,550
U.K. pension 54 16 15
Other (24) (20) (85)
----- ------- -------
Total income tax expense (benefit) -
continuing operations $(252) $ 1,845 $ (25)
===== ======= =======
</TABLE>
33
<PAGE> 34
The Corporation provided a deferred tax valuation allowance for the
domestic tax assets in fiscal 2000 so that the net domestic tax assets
is unchanged from the prior year-end balance of $0. Based upon
management's assessment, it is more likely than not that none of the
domestic deferred tax assets will be realized through future taxable
earnings or implementation of tax planning strategies. The foreign tax
credit carryforwards can only be used to offset future foreign source
income, and any future foreign source income would likely generate
additional foreign tax credits which would offset this income. As a
result, the usage of the carryforward foreign tax credits is not
likely. A tax planning strategy for usage of the other net domestic tax
assets is considered not likely as well. As a result, a valuation
allowance has also been provided for these assets.
The Corporation provided a deferred tax valuation allowance for foreign
tax assets in fiscal 2000 so that the net foreign tax assets are
unchanged from the prior year-end balance of $0. Based upon
management's assessment, it is more likely than not that none of the
foreign deferred tax assets will be realized through future taxable
earnings or implementation of tax planning strategies. Usage of the tax
prepayments in the future are considered less likely than not, due to
the net operating loss carryforwards and a change in the U.K. tax law
effective April 1999. The usage of the net operating loss carryforwards
are also considered less likely than not, as the subsidiaries which
generated them have been unprofitable or only marginally profitable in
the past three years, and these carryforwards can only be used in the
future by the subsidiaries which originally generated the tax losses.
In fiscal 1999, the Corporation provided additional deferred tax
valuation allowances for domestic and foreign tax assets to adjust the
consolidated net assets to $0 at March 31, 1999. Similar to the
explanations listed for fiscal 2000, usage of the domestic foreign tax
credit carryforward, alternative minimum tax carryforward, and other
net domestic tax assets was considered less likely than not as was
usage of the foreign net operating loss carryforwards, tax prepayments,
and other net foreign tax assets.
Earnings (loss) from continuing operations before income taxes include
foreign earnings (losses) of $691, $(2,249), and $(2,689) in 2000,
1999, and 1998, respectively. Undistributed earnings of the foreign
subsidiaries aggregated $16,104 at March 31, 2000. To date, the
Corporation has included in its U.S. taxable income deemed dividends
from its foreign subsidiaries of approximately $18,400. The foreign net
operating losses of continuing operations at March 31, 2000 were $3,954
for the U.K., without an expiration date.
8. EMPLOYEE BENEFITS
Defined Benefit Plans - The Corporation has historically maintained
defined benefit retirement plans covering substantially all of its
employees. Benefits are principally based on years of service and level
of earnings. The Corporation funds the domestic plan, which is
noncontributory, at a rate that meets or exceeds the minimum amounts
required by ERISA. The Corporation funds monthly contributions to the
foreign plans, which are contributory, based on actuarially determined
rates.
The vested obligation of the foreign plans is calculated as the actual
present value to which the employee is entitled to immediately if the
employee were to separate.
Effective February 28, 1997, the Corporation amended its domestic
retirement plan to freeze participant benefits and close the plan to
new participants. The Corporation approved a plan amendment as of March
31, 1998 to terminate the plan. However, on July 1, 1999, the directors
of the Corporation rescinded the termination of the plan. With the sale
of the Corporation's investment in Wyle (see Note 2), net domestic
pension expense is now classified as an expense of discontinued
operations. During the years ended March 31, 2000
34
<PAGE> 35
and 1998, the Corporation recognized curtailment losses of $649 and
$190, respectively, for partial plan settlement of pension obligations
to vested former employees.
The components of net pension expense for all plans, excluding the
curtailment losses above, were as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------------------------------------------------
2000 1999 1998
----------------- ------------------ ------------------
DOMESTIC FOREIGN DOMESTIC FOREIGN DOMESTIC FOREIGN
<S> <C> <C> <C> <C> <C> <C>
Service cost $ 425 $ 385 $ 409
Interest cost $ 347 525 $ 362 559 $ 422 603
Expected return on assets (351) (612) (341) (658) (411) (634)
Amortization of prior service cost 35 155 49 63 27 (15)
----- ----- ----- ----- ----- -----
Net pension expense $ 31 $ 493 $ 70 $ 349 $ 38 $ 363
===== ===== ===== ===== ===== =====
Weighted-average assumptions:
Discount rate 5.80% 5.50% 5.99% 5.50% 6.17% 6.50%
Expected return on plan assets 6.50% 6.50% 6.50% 7.50% 6.50% 7.50%
Rate of compensation increase 0.00% 3.75% 0.00% 3.75% 0.00% 4.50%
</TABLE>
35
<PAGE> 36
Summary information for the plans is as follows:
<TABLE>
<CAPTION>
MARCH 31,
--------------------------------------------------
2000 1999
---------------------- ----------------------
DOMESTIC FOREIGN DOMESTIC FOREIGN
<S> <C> <C> <C> <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at the beginning of year $ 6,026 $ 9,586 $ 6,166 $ 8,656
Service cost 425 385
Interest cost 347 525 362 559
Actuarial (gain) loss (487) (487) (69) 432
Benefits paid (1,334) (284) (433) (104)
Exchange differences (123) (342)
------- -------- ------- -------
Benefit obligation at end of year $ 4,552 $ 9,642 $ 6,026 $ 9,586
======= ======== ======= =======
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year $ 5,466 $ 9,327 $ 5,624 $ 8,724
Actual return (loss) on plan assets (182) 1,070 275 794
Company contributions 314 248
Benefits paid (1,334) (284) (433) (104)
Exchange differences (131) (335)
------- -------- ------- -------
Fair value of plan assets at end of year $ 3,950 $ 10,296 $ 5,466 $ 9,327
======= ======== ======= =======
Funded (unfunded) status of the plans $ (602) $ 654 $ (560) $ (259)
Unrecognized actuarial loss (gain) 243 (158) 883 1,017
Unrecognized prior service cost 633 711
------- -------- ------- -------
Accrued cost $ (359) $ 1,129 $ 323 $ 1,469
======= ======== ======= =======
AMOUNTS RECOGNIZED IN CONSOLIDATED BALANCE SHEETS
Prepaid benefit cost $ 1,129 $ 1,469
Accrued benefit liability $ (602) $ (560)
Accumulated other comprehensive income 243 883
------- -------- ------- -------
Net amount recognized $ (359) $ 1,129 $ 323 $ 1,469
======= ======== ======= =======
</TABLE>
Accumulated other comprehensive income represents pretax minimum pension
liability adjustments.
Defined Contribution Plan - The Corporation had a defined contribution plan
pursuant to IRS Section 401(k) covering substantially all domestic employees
until March 16, 1998. This plan was transferred to Wyle in connection with the
merger (see Note 2). The Corporation matched a specific percentage of the
employee's contribution as determined periodically by its Board of Directors.
Plan expense was $415 in 1998, which is included in discontinued operations
expense.
36
<PAGE> 37
9. COMMITMENTS AND CONTINGENCIES
Leases - The Corporation leases various land, buildings, and equipment
(principally for its European operations) under capital and operating lease
obligations having noncancelable terms ranging from one to 17 years. Minimum
lease commitments as of March 31, 2000 follow:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
<S> <C> <C>
2001 $ 388 $ 820
2002 231 600
2003 175 535
2004 533
2005 533
Thereafter 7,331
----- -------
Total minimum lease payments 794 $10,352
=======
Amount representing interest (80)
-----
Present value of minimum lease payments 714
Less current maturities of capital leases 350
-----
Long-term portion of capital leases $ 364
=====
</TABLE>
At March 31, 2000 and 1999, buildings and equipment under capital
leases of $2,704 and $2,757 (less accumulated depreciation of $1,189
and $926), respectively, are included in property, plant, and
equipment. Rent expense under operating leases was $890, $1,253, and
$1,407 for the years ended March 31, 2000, 1999, and 1998,
respectively.
Litigation - The Corporation is a party to claims and litigation
incidental to its business, as to which it is not currently possible to
determine the ultimate liability, if any. Based on an evaluation of
information currently available and consultation with legal counsel,
management believes that resolution of such claims and litigation is
not likely to have a material effect on the financial position, cash
flows, or results of operations of the Corporation.
Consulting Agreements - The Corporation entered into a consulting
agreement with its former chairman in April 1996 and terminated its
obligation to him under a previous founder's agreement. The remaining
obligation under the consulting agreement of $79 and $117 at March 31,
2000 and 1999, respectively, is included in other accrued expenses in
the consolidated balance sheets.
10. RESTRUCTURING CHARGES
During the year ended March 31, 1998, the Corporation recorded
restructuring and relocation charges of $1,546 related to its European
Housewares businesses. In the restructuring, the Corporation closed its
manufacturing facility in Bognor Regis, England, and moved the
operations to its facility in Bilston, England. This move was completed
in April 1998. Charges were provided for manufacturing plant relocation
of $337, employee severance for 100 employees of $352, and rent and
other costs related to the vacated facility of $857.
37
<PAGE> 38
During the year ended March 31, 1999, an additional $412 of expense was
recorded for additional costs related to the vacated facility.
At March 31, 2000, accrued expenses 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 paid.
The following is a summary of the provision for restructuring charges:
<TABLE>
<CAPTION>
MARCH 31,
--------------------------------
2000 1999 1998
<S> <C> <C> <C>
Beginning balance $ 680 $ 572 $ 340
Provision for U.K. manufacturing facility relocation 412 1,546
Charges (635) (304) (1,314)
----- ------- -------
Ending balance $ 45 $ 680 $ 572
===== ======= =======
</TABLE>
11. BUSINESS SEGMENTS AND RELATED INFORMATION
The Corporation adopted SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information, in fiscal 1999. The Corporation's
continuing operations consist of its Housewares segment located in
Europe.
The Housewares segment is composed of Beldray Ltd. and Hago Products
Ltd., subsidiaries that manufacture and sell, under various proprietary
brand names and private labels, ironing tables, household ladders,
rotary dryers, indoor airers, children's safety gates and accessories,
and garden equipment. Customers include do-it-yourself retailers,
supermarkets, mail-order catalogs, wholesalers, and department stores,
primarily in the U.K. and Ireland.
38
<PAGE> 39
Information concerning the Corporation's continuing operations by
segment is presented in the following table:
<TABLE>
<CAPTION>
REVENUES
YEAR ENDED MARCH 31,
--------------------------------------
2000 1999 1998
<S> <C> <C> <C>
Housewares $ 32,011 $ 34,832 $ 41,152
======== ======== ========
OPERATING PROFIT (LOSS)
YEAR ENDED MARCH 31,
--------------------------------------
2000 1999 1998
Housewares $ 590 $ (2,144) $ (1,735)
Corporate expense (U.S. and U.K.) (1,855) (2,359) (1,428)
-------- -------- --------
(1,265) (4,503) (3,163)
Interest expense (208) (424) (751)
Interest income 328 532 7
Other income - net 22 175 957
-------- -------- --------
Loss from continuing operations before income taxes $ (1,123) $ (4,220) $ (2,950)
======== ======== ========
CAPITAL EXPENDITURES
YEAR ENDED MARCH 31,
--------------------------------------
2000 1999 1998
Housewares $ 213 $ 104 $ 1,287
Corporate 2 16 14
-------- -------- --------
$ 215 $ 120 $ 1,301
======== ======== ========
IDENTIFIABLE ASSETS
YEAR ENDED MARCH 31,
--------------------------------------
2000 1999 1998
Housewares $ 14,391 $ 13,971 $ 17,629
Discontinued operations 855 941 11,008
Corporate 7,882 11,209 8,909
-------- -------- --------
$ 23,128 $ 26,121 $ 37,546
======== ======== ========
DEPRECIATION AND AMORTIZATION
YEAR ENDED MARCH 31,
--------------------------------------
2000 1999 1998
Housewares $ 807 $ 877 $ 930
Corporate 6 4 38
-------- -------- --------
$ 813 $ 881 $ 968
======== ======== ========
</TABLE>
The revenues of the Housewares segment were from sales to customers in
Europe in fiscal 2000, 1999, and 1998, respectively. All revenue
relates to tangible products and includes revenues from one customer of
$11,031, $12,773, and $14,550 in fiscal 2000, 1999, and 1998,
respectively. Revenues from another customer were $4,593 and $5,251 in
fiscal 2000 and 1999, respectively.
39
<PAGE> 40
12. RELATED PARTIES
From April 1998 to November 1999, a director of the Corporation had a
consulting agreement with the Corporation. The director was paid $40
and $60 under this agreement in fiscal 2000 and 1999, respectively.
Also, from April 1998 to November 1999, the Corporation had an
identical consulting agreement with Fortuna Advisors, Inc.
("Fortuna"). A director of the Corporation was the sole shareholder
and President of Fortuna, which was paid $40 and $60 under this
agreement in fiscal 2000 and 1999, respectively. Both of these
consulting agreements were terminated by mutual consent effective
November 30, 1999.
Two directors of the Corporation are members of two different law
firms. The Corporation paid $375, $145, and $125 for legal services to
these law firms in fiscal 2000, 1999, and 1998, respectively.
13. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
FISCAL
Year
Ended Fourth Third Second First
March 31, Quarter Quarter Quarter Quarter
<S> <C> <C> <C> <C> <C>
REVENUES 2000 $ 8,046 $ 8,291 $ 7,993 $ 7,681
1999 9,032 8,063 9,482 8,255
GROSS PROFIT (Revenues less cost of goods sold) 2000 530 755 727 672
1999 263 (5) (29) 496
EARNINGS (LOSS) FROM CONTINUING
OPERATIONS 2000 (355) 19 (205) (330)
1999 (2,194) (1,773) (1,477) (621)
NET EARNINGS (LOSS) 2000 (491) 2,832 (165) (593)
1999 (3,725) (2,060) (1,962) (886)
EPS:
Continuing operations
Basic 2000 (0.07) 0.01 (0.04) (0.07)
1999 (0.44) (0.36) (0.29) (0.12)
Diluted 2000 (0.07) 0.01 (0.04) (0.07)
1999 (0.44) (0.36) (0.29) (0.12)
Net earnings (loss)
Basic 2000 (0.10) 0.57 (0.03) (0.12)
1999 (0.75) (0.41) (0.39) (0.17)
Diluted 2000 (0.10) 0.57 (0.03) (0.12)
1999 (0.75) (0.41) (0.39) (0.17)
WEIGHTED-AVERAGE COMMON SHARES
OUTSTANDING:
Basic 2000 4,976 4,976 4,977 4,978
1999 4,978 4,978 5,028 5,215
Diluted 2000 4,976 4,976 4,977 4,978
1999 4,978 4,978 5,028 5,215
</TABLE>
40
<PAGE> 41
14. EARNINGS PER SHARE
<TABLE>
<CAPTION>
2000 1999 1998
---------------------- ---------------------- -----------------------
PER SHARE PER SHARE PER SHARE
AMOUNT AMOUNT AMOUNT AMOUNT AMOUNT AMOUNT
<S> <C> <C> <C>
Loss from continuing operations $ (871) $(6,065) $(2,925)
Basic:
Weighted-average shares outstanding 4,977 $ (0.17) 5,049 $ (1.20) 5,168 $ (0.57)
======= ======= ======= ======= ======= =======
Diluted:
Weighted-average shares outstanding 4,977 $ (0.17) 5,049 $ (1.20) 5,168 $ (0.57)
======= ======= ======= ======= ======= =======
</TABLE>
The dilutive securities from options were 6 and 31 in 1999 and 1998,
respectively, and are not used because they would be antidilutive.
41
<PAGE> 42
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
42
<PAGE> 43
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Corporation's Board of Directors is presently comprised of seven
persons and is divided into two classes, with one class having four members and
the other class three members. One class of directors is elected at each Annual
Meeting of Shareholders for a term of two years.
DIRECTORS OF THE REGISTRANT
The following table sets forth certain information about the directors
of the Corporation:
<TABLE>
<CAPTION>
COMMON SHARES
NAME AND OFFICES DIRECTOR BENEFICIALLY OWNED
PRESENTLY HELD WITH CORPORATION SINCE AS OF 6/23/00 (3)
---------------------------------------------------------- -------- --------------------------
NUMBER % OF CLASS
DIRECTORS WHOSE TERM OF OFFICE EXPIRED IN 1999 (1) : ------------ ----------
<S> <C> <C> <C> <C>
T. Wayne Holt (2) ....................................... 1993 21,883 (4) (11)
Director
James J. Mulligan ........................................ 1966 32,085 (5) (11)
Director and Secretary
Ronald J. Vannuki ........................................ 1998 190,875 (6) 3.7
Director
DIRECTORS WHOSE TERM OF OFFICE EXPIRES IN 2000:
Robert M. Thornton, Jr ................................... 1996 215,024 (7) 4.3
Director, Chairman, President, Chief
Executive Officer and Chief Financial Officer
Karen B. Brenner ......................................... 1996 827,348 (8) 16.3
Director
C. Michael Ford .......................................... 1999 3,000 (11)
Director
Howard E. Turner ......................................... 1998 119,537 (9) 2.4
Director
DIRECTOR NOMINEE:
Steven Baileys, D.D.S. (2) ............................... N/A 715,198 (10) 14.1
Nominee
</TABLE>
(1) These directors continue to hold office because no successors were
elected. The Corporation was enjoined from holding its 1999 Annual
Shareholders Meeting. See Item 3. Legal Proceedings.
(2) On August 9, 1999, Mr. Holt announced that he would not stand for
election at the 1999 Annual Meeting. Dr. Baileys was nominated by the
Board of Directors to replace Mr. Holt. The 1999 Annual Shareholders
Meeting was not held due to an injunction. Dr. Baileys continues to be
a nominee for Director. See Item 3. Legal Proceedings.
43
<PAGE> 44
(3) These columns show the number of Common Shares beneficially owned as of
June 23, 2000, as confirmed by each beneficial owner, and the
percentage of class represented thereby, and includes, where
applicable, shares owned by members of the individual's household.
Unless otherwise indicated, each individual has voting power and
investment power which are exercisable solely by such individual or are
shared by such individual with members of his or her household.
(4) Includes 5,952 shares that may be acquired upon exercise of warrants.
(5) Includes 5,380 shares that may be acquired upon exercise of warrants.
(6) These shares (which include 151,557 shares which may be acquired upon
the exercise of warrants) are beneficially owned by Fortuna Investment
Partners, L.P. Mr. Vannuki is the president of its general partner,
Fortuna Capital Management, Inc.
(7) Includes 37,540 shares that may be acquired upon exercise of warrants
and 5,000 shares that may be acquired upon the exercise of options
within 60 days of June 23, 2000.
(8) Includes 815,228 shares (which include 110,882 shares which may be
acquired upon the exercise of warrants) over which Ms. Brenner, as a
registered investment advisor and sole shareholder of Fortuna Asset
Management, LLC, has shared investment power. Ms. Brenner shares
investment power over 715,198 shares (which include 102,982 shares
which may be acquired upon the exercise of warrants) with Dr. Baileys.
(9) Includes 12,685 shares that may be acquired upon the exercise of
warrants.
(10) Dr. Baileys shares investment power over all of these shares (which
include 102,982 shares which may be acquired upon the exercise of
warrants) with Ms. Brenner.
(11) Less than 1%.
Certain information concerning each person listed in the above table,
including his or her principal occupation for at least the last five years, is
set forth below.
T. Wayne Holt, 73, was involved continuously with the Corporation's
life sciences, aerospace and engineering operations for twenty-two years
commencing with his initial employment in 1971 until his initial retirement in
1993. Mr. Holt came out of retirement and was elected President of KRUG Life
Sciences Inc., a position he previously held, from April 15, 1995 until his
second retirement on April 15, 1997. Mr. Holt held a number of positions,
including Vice President-Aerospace Group from 1981 to 1988, Assistant to the
Chairman, Aerospace Group, from 1988 to 1990, Vice President from May 1990 to
February 1991, Executive Vice President from February 1991 to December 31, 1992,
and Advisor to the Chairman, Life Sciences and Engineering, from January 1, 1993
to May 1, 1993.
James J. Mulligan, 78, became Secretary of the Corporation in 1966. Mr.
Mulligan has been a member of the law firm of Mulligan & Mulligan since January
1993. He was a member of the law firm of Smith & Schnacke from 1953 to 1989 and
a member of the law firm of Thompson Hine & Flory LLP from 1989 until his
retirement in 1991. Mulligan & Mulligan is general counsel to the Corporation
and received $78,681 for legal services rendered during the Corporation's fiscal
year ended March 31, 2000.
Ronald J. Vannuki, 59, has been a registered investment adviser with
Strome Securities, L.P., a broker and investment adviser, since 1995. From 1988
to 1995, Mr. Vannuki was Managing Director of Drake Capital Securities, Inc., a
registered broker-dealer, and from 1990 to 1995 was a Director and Portfolio
Manager of Drake Capital Advisers, Inc., a registered investment adviser.
Robert M. Thornton, Jr., 51, has been Chairman and Chief Executive
Officer of the Corporation since September 10, 1998, President since July 16,
1996 and Chief Financial Officer since July 18, 1997. From October 1994 to the
present, Mr. Thornton has been a private investor and, since March 1995,
Chairman and Chief Executive Officer of CareVest Capital, LLC, a private
investment and
44
<PAGE> 45
management services firm. Mr. Thornton was President, Chief Operating Officer,
Chief Financial Officer and a director of Hallmark Healthcare Corporation
("Hallmark") from November 1993 until Hallmark's merger with Community Health
Systems, Inc. in October 1994. From October 1987 until November 1993, Mr.
Thornton was Executive Vice President, Chief Financial Officer, Secretary,
Treasurer and a director of Hallmark.
Karen B. Brenner, 47, has been President of Fortuna Asset Management,
LLC, an investment advisory firm located in Newport Beach, California, since
2000. Fortuna Asset Management, LLC succeeded the business of Fortuna Advisors,
Inc., which Ms. Brenner formed and operated from 1993 to 2000. Ms. Brenner is
also a director of Creative Bakeries, Inc.
C. Michael Ford, 61, has been the owner and Chairman of the Board of
Montpelier Corporation, a venture capital and real estate holding company, since
October 1990. Mr. Ford served as Vice President of Development of Columbia/HCA
Healthcare Corporation from September 1994 to September 1997, and was Vice
President of Marketing of Meditrust from October 1993 to September 1994. Mr.
Ford was employed by Charter Medical Corporation from 1976 to 1990 in a variety
of positions, which included Secretary and Treasurer, Chief Financial Officer
and a member of the Board of Directors. Mr. Ford has been the Interim Chief
Executive Officer and Chairman of the Board of In Home Health, Inc., since
February 2000.
Howard E. Turner, 58, has been a partner in the law firm of Smith,
Gambrell & Russell, LLP, since 1971, where he heads one of the firm's corporate
sections. Mr. Turner has been involved in numerous corporate mergers,
acquisitions and dispositions; in structuring public and private equity and debt
financing; and has represented special committees and boards of directors of
large public companies. Mr. Turner has served as a director of Avlease, Ltd., a
lessor of large commercial aircraft, and currently serves as an officer and
director of HSR, Ltd. Mr. Turner provides legal services to the Corporation
through the law firm, Smith, Gambrell & Russell, LLP, as requested by the
Corporation.
Dr. Steven Baileys, 46, has been Chairman of the Board of Directors of
SafeGuard Health Enterprises, Inc., a public dental care benefits company, since
1995, Chief Executive Officer from 1995 to February 2000, President from 1981
until 1997 and Chief Operating Officer from 1981 until 1995. Dr. Baileys is
licensed to practice dentistry in the State of California.
EXECUTIVE OFFICERS OF THE REGISTRANT
See Information concerning the executive officers of the Corporation
set forth in Part I of this report.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires directors
and certain officers of the Corporation and owners of more than 10% of the
Corporation's Common Shares to file an initial ownership report with the
Securities and Exchange Commission and a monthly or annual report listing any
subsequent change in their ownership of any of the Corporation's equity
securities. The Corporation believes, based on information provided to the
Corporation by the persons required to file such reports, that all filing
requirements applicable to such persons during the period from April 1, 1999
through March 31, 2000 have been met.
45
<PAGE> 46
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table presents, for the three fiscal years ended March
31, 2000, the compensation of the Chief Executive Officer during the year ended
March 31, 2000 and the other executive officers at March 31, 2000 whose salary
and bonus during fiscal 2000 exceeded $100,000.
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
---------------------------------
AWARDS PAYOUTS
---------------------- ---------
ANNUAL COMPENSATION
------------------------------------- LONG-TERM
OTHER RESTRICTED SECURITIES INCENTIVE
ANNUAL STOCK UNDERLYING PLAN ALL OTHER
NAME AND SALARY BONUS COMPENSATION AWARDS OPTIONS PAYOUTS COMPENSATION
PRINCIPAL POSITIONS YEAR ($) ($) ($) ($) (#) ($) ($)
------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ROBERT M. THORNTON, JR., 2000 $210,000 $49,544 $0 $0 0 $0 $ 0
Chairman, President, 1999 196,700 0 0 0 20,000 0 0
Chief Executive Officer 1998 159,500 35,000(2) 0 0 0 0 4,785(3)
and Chief Financial
Officer (1)
MARSHALL COOPER 2000 $104,754 $ 0 $0 $0 0 $0 $ 0
Managing Director 1999 83,642 0 0 0 0 0 0
Beldray Ltd. (4) 1998 77,994 4,310 0 0 0 0 0
</TABLE>
---------------
(1) Mr. Thornton was elected Chairman and Chief Executive Officer on
September 10, 1998.
(2) This bonus was for services performed in fiscal 1997 and fiscal 1998.
(3) This amount was contributed by the Corporation under the 401(k) plan
for the benefit of the named executive.
(4) Mr. Cooper was appointed Managing Director of Beldray Limited in
November 1998 and was Sales Director of Beldray Limited from December
1990 until November 1998.
OPTION GRANTS IN LAST FISCAL YEAR
The following table shows, for the named executive officers, additional
information about option grants for the fiscal year ended March 31, 2000.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE VALUE
----------------------------------------------- AT ASSUMED ANNUAL RATES
NUMBER OF % OF TOTAL OF STOCK PRICE
SHARES OPTIONS APPRECIATION FOR OPTION
UNDERLYING GRANTED TO ------------------------------
OPTIONS EMPLOYEES EXERCISE OR TERM
GRANTED IN FISCAL BASE PRICE EXPIRATION --------------------------------
NAME (#) YEAR ($/SHARE) DATE 0%($) 5%($) 10%($)
---------------------- ---------- ---------- ----------- ---------- ----- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Robert M. Thornton, Jr 0 N/A N/A N/A N/A N/A N/A
Marshall Cooper 0 N/A N/A N/A N/A N/A N/A
</TABLE>
46
<PAGE> 47
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
The following table shows information about stock option exercises
during fiscal 2000 and unexercised stock options at March 31, 2000 for the named
executive officers.
<TABLE>
<CAPTION>
NUMBER OF SHARES
UNDERLYING
UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT FISCAL IN-THE-MONEY OPTIONS
SHARES YEAR-END AT FISCAL YEAR-END
ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISE (#) REALIZED ($) UNEXERCISABLE (#) UNEXERCISABLE ($)
---------------------- ------------ ------------ ----------------- ---------------------
<S> <C> <C> <C> <C>
Robert M. Thornton, Jr 0 $0 5,000/20,000 $0/$0
Marshall Cooper 0 N/A N/A N/A
</TABLE>
OTHER
Mr. Thornton, Chairman, President, Chief Executive Officer and Chief
Financial Officer, is currently employed by the Corporation under the terms of
an Employment Agreement effective August 1, 1998. The initial term of the
Agreement expired July 31, 1999, but the Agreement continues in force until
either Mr. Thornton or the Corporation provides four months written notice
terminating the Agreement. The Agreement provides for an annual base salary of
$210,000, plus any increases that may be granted from time to time by the
Corporation. Mr. Thornton is also eligible to receive a bonus equal to
twenty-five percent of his annual base salary if certain goals, agreed to by the
parties to the Agreement, for the current and future fiscal years are met.
During the term of his employment, Mr. Thornton is also eligible to participate
in any stock option or compensation plan adopted for officers and shall receive
the fringe benefits extended by the Corporation to its most highly compensated
executives.
The Agreement also provides for severance payments in the event Mr.
Thornton ceases to be employed by the Corporation (whether voluntarily by Mr.
Thornton or otherwise) within one year after a change in control of the
Corporation (as defined in the Agreement). In such event, the Corporation is
required to pay Mr. Thornton an amount equal to one year's base salary. In
addition, any stock options held by Mr. Thornton on the date the Agreement is
terminated become immediately exercisable and may be exercised by Mr. Thornton
within ninety days of the termination of the Agreement, but only if Mr. Thornton
terminates the Agreement. While Mr. Thornton is receiving payments pursuant to
the Agreement, he is prohibited from competing with the Corporation.
47
<PAGE> 48
PERFORMANCE GRAPH
The following graph compares the cumulative total shareholder return on
the Corporation's Common Shares for its last five fiscal years with the
cumulative total return of the American Stock Exchange Market Index, an American
Stock Exchange listed peer group index over the same period with market
capitalization between $20 million and $40 million ("AMEX I"), and an American
Stock Exchange listed peer group index over the same period with market
capitalization between $0 and $20 million ("AMEX II") assuming investments of
$100 in each vehicle on March 31, 1995 and reinvestment of all dividends. The
AMEX I peer group index is comprised of 621 companies and includes all
non-financial American Stock Exchange companies with a market capitalization of
between $20 and $40 million, which were publicly traded throughout the five-year
period. The AMEX II peer group index is comprised of 658 companies and includes
all non-financial American Stock Exchange companies with a market capitalization
between $0 and $20 million which were publicly trading throughout the five-year
period. Due to the fact that the Corporation's shares have been traded at lower
levels, the Corporation believes it is appropriate to compare its return with
companies with the lower market capitalization of the AMEX II peer group. The
peer group indexes were developed by an independent agency. The Corporation is
not aware of any appropriate industry or line-of-business index with which to
compare itself because of the diversity of the Corporation's businesses and,
therefore, it believes a market capitalization index is appropriate.
48
<PAGE> 49
PERFORMANCE DATA
<TABLE>
<CAPTION>
1995 1996 1997 1998 1999 2000
---- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
KRUG International Corp. 100 93.3 136.7 150.0 40.0 36.7
$20M - $40M Capitalization Group 100 116.5 106.2 108.3 60.6 55.0
$0M - $20M Capitalization Group 100 103.5 80.5 83.9 41.0 33.1
Broad AMEX Market Index 100 120.9 122.1 159.5 150.9 213.4
</TABLE>
The companies which comprise the AMEX I and AMEX II peer groups are
listed on Exhibits 99.1 and 99.2 of this report.
EXECUTIVE COMPENSATION COMMITTEE REPORT
ON EXECUTIVE COMPENSATION
The Executive Compensation Committee of the Board of Directors
currently is comprised of two directors who are not employees or former
employees of the Corporation. The Committee's stated function is to act in an
advisory capacity to the Board with respect to compensation of executives of the
Corporation. Except as specifically authorized by the Board, the Committee does
not have the authority to fix the compensation of any employee, officer or
director of the Corporation. However, since the Committee's creation in 1977,
the Board has only on rare occasions not completely adopted the recommendations
of the Committee and on those occasions only minor changes were made.
The goal of the Committee has been to adopt a compensation approach
that is basically simple, internally equitable and externally competitive, and
that attracts, motivates and retains qualified people capable of contributing to
the growth, success and profitability of the Corporation, thereby contributing
to long-term shareholder value. Given the size of the Corporation and the
limited number of its executive officers, the Committee has traditionally chosen
to evaluate each executive individually and on a subjective basis, without
resort to mathematical performance formulas. The principle followed is to
provide what the Committee believes is suitable compensation based on its
subjective evaluation of the executive's contribution to the profitability of
the Corporation.
The three key elements of executive compensation are base salary,
short-term incentives and long-term incentives.
The Corporation's base salaries are intended to be consistent with its
understanding of competitive practices, levels of responsibility, qualifications
necessary for the particular position, and experience. Salary increases reflect
the Committee's belief as to competitive trends, the performance of the
individual and the overall financial performance of the Corporation.
The short-term incentive for an executive is the opportunity to earn an
annual cash bonus. In line with the Corporation's normally discretionary
approach, the Committee considers all relevant facts and circumstances in
evaluating an executive. The Committee considers performance over a period of
time, not merely performance in the most recent year. However, in general, the
most important consideration is how well the executive has met his individual
goals as set forth in the most recent operating plan. Generally, the second most
important consideration is the Corporation's overall financial performance in
the most recent year. The Committee also considers factors beyond the
executive's control, such as general economic conditions, industry trends,
inflation, changes in government policies, etc., which may have had a material
effect (positive or negative) on an
49
<PAGE> 50
individual's overall performance. After considering all of these factors, the
Committee recommends whether or not a particular executive should be awarded a
bonus and, if so, the amount.
While salary and short-term incentives are primarily designed to
compensate current and past performance, the main purpose of the long-term
incentive compensation program is to directly link management compensation with
the long-term interests of shareholders. The Corporation currently is using, as
it has for many years, stock options to provide that link. Options are intended
to provide strong incentives for superior long-term future performance.
In November 1998, the Directors adopted the recommendation of the
Committee and authorized the execution of an Employment Agreement with Mr.
Thornton, which is described under the heading "Other". Under the Agreement, Mr.
Thornton received an annual base salary of $210,000 during the 1999 fiscal year
and also during the 2000 fiscal year. The Committee believes that this base
salary is at the low end for positions requiring similar competence, dedication,
creativity, experience and leadership qualities. The Agreement also provides
that Mr. Thornton will receive a bonus equal to 25% of his annual base salary if
goals agreed to by the Corporation and Mr. Thornton are met. No bonus was
payable for fiscal 1999 because the agreed goals were not met. For fiscal 2000
it was agreed that Mr. Thornton would be paid a bonus equal to 0.6% of the
amount or value received, or paid out, by the Corporation in connection with
"significant transactions" (i.e., those determined to be significant by the
Committee, including the disposition or acquisition of significant amounts of
assets or the repatriation of cash from the U.K.) consummated during fiscal
2000. The reason for choosing these goals was to encourage and reward the
accomplishment of actions which would help position the Corporation to enter the
healthcare industry its primary strategic objective. During fiscal 2000, the
Corporation consummated two transactions which the Committee deemed significant
and upon which Mr. Thornton received the bonus amount (which is reflected in the
"Summary Compensation Table"): the sale of the Corporation's equity interest in
Wyle Laboratories, Inc. for $4,125,000 in cash and the repatriation of
$4,132,000 in cash from the U.K.
This report has been submitted by the Executive Compensation Committee:
Karen B. Brenner James J. Mulligan
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Executive Compensation Committee are Ms. Brenner
(Chairperson) and Mr. Mulligan. Ms. Brenner was the sole shareholder and
President of Fortuna Advisors, Inc. From April 1, 1998 until its termination on
November 30, 1999, Fortuna Advisors, Inc. had a Consulting Agreement with the
Corporation (see Item 13. Certain Relationships and Related Transactions in this
Annual Report on Form 10K). Mr. Mulligan is Secretary of the Corporation and a
member of the law firm of Mulligan & Mulligan, general counsel for the
Corporation. Mulligan & Mulligan received $78,681 for legal services rendered
during the Corporation's fiscal year 2000.
50
<PAGE> 51
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
PRINCIPAL HOLDERS OF COMMON SHARES
Set forth below is certain information concerning the entities known by the
Board of Directors of the Corporation to be the beneficial owners of more than
5% of the outstanding Common Shares of the Corporation as of June 23, 2000.
<TABLE>
<CAPTION>
COMMON SHARES BENEFICIALLY OWNED
AS OF 6/23/00 (1)
--------------------------------
NAME AND ADDRESS SHARES % OF CLASS
---------------- ---------- -----------
<S> <C> <C>
FORTUNA ASSET MANAGEMENT, LLC (2) 815,228(4) 16.0
1300 Bristol Street North
Suite 100
Newport Beach, CA 92660
KAREN B. BRENNER (2) 827,348(5) 16.2
1300 Bristol Street North
Suite 100
Newport Beach, CA 92660
BAILEYS FAMILY TRUST (3) 378,649(2)(6) 7.5
C/O Karen Brenner
P.O. Box 9109
Newport Beach, CA 92658-9109
STEVEN BAILEYS (3) 715,198(2)(7) 14.1
C/O Karen Brenner
P.O. Box 9109
Newport Beach, CA 92658-9109
DIMENSIONAL FUND ADVISORS 268,129 5.4
1299 Ocean Avenue
Eleventh Floor
Santa Monica, CA 90401
WESTSIDE CAPITAL PARTNERS, L.P. 275,700 5.5
575 Lexington Avenue
Seventh Floor
New York, NY 10022
</TABLE>
(1) Under applicable Securities and Exchange Commission regulations, shares
are treated as "beneficially owned" if a person has or shares voting or
investment power with respect to the shares or has a right to acquire
the shares within 60 days of June 23, 2000. Unless otherwise indicated,
sole voting power and sole investment power are exercised by the named
entity. In calculating "% of Class" for an entity, shares which may be
acquired by the entity within such 60-day period are treated as owned
by the entity and as outstanding shares.
(2) The business of Fortuna Asset Management, LLC is to provide
discretionary investment management services to clients and Karen B.
Brenner is President of Fortuna Asset Management,
51
<PAGE> 52
LLC. Ms. Brenner also serves as a director of the Corporation. Ms.
Brenner has shared investment power over all shares reported by the
Baileys Family Trust and Steven Baileys.
(3) Baileys Family Trust is a private investor, and Steven Baileys is a
private investor, the Trustee of Baileys Family Trust, and a nominee
for election as a director.
(4) Includes 110,662 shares that may be acquired upon exercise of warrants.
(5) Includes 110,882 shares that may be acquired upon exercise of warrants.
(6) Includes 52,041 shares that may be acquired upon exercise of warrants.
(7) Includes 102,982 shares that may be acquired upon exercise of warrants.
The parties listed above in this section (excluding Dimensional Fund
Advisors and Westside Capital Partners, L.P.), together with Ronald J. Vannuki,
have filed with the Securities and Exchange Commission, as a group, a Schedule
13D and amendments thereto under the Securities and Exchange Act of 1934
relating to their beneficial ownership of shares of the Corporation. The
information set forth herein with respect to beneficial ownership of shares of
the Corporation was obtained from Amendment No. 6 to Schedule 13D dated October
22, 1998 and filed April 1, 1999, as supplemented by members of the group. The
parties listed above, except Dimensional Fund Advisors and Westside Capital
Partners, L.P., are sometimes referred to as the Fortuna Group. As a group, the
Fortuna Group beneficially owns 1,018,223 shares (including warrants to purchase
262,439 shares) or 19.4% of the outstanding shares of the Corporation.
COMMON SHARES OWNED BY MANAGEMENT
The following table sets forth the number of Common Shares of the
Corporation beneficially owned as of June 23, 2000 by each named executive
listed in the Summary Compensation Table and by all directors, nominees and
executive officers of the Corporation as a group.
<TABLE>
<CAPTION>
NAME COMMON SHARES BENEFICIALLY
OWNED AS OF 6/23/00
------------------------------ -----------------------------
NUMBER % OF CLASS
------------ ----------
<S> <C> <C>
Robert M. Thornton, Jr. 215,024 (1) 3.5
Marshall Cooper 0 0
Directors, Nominees and Executive Officers 1,463,270 (2) 27.5
as a Group (10 persons)
</TABLE>
(1) Includes 37,540 shares that may be acquired upon the exercise of
warrants and 5,000 shares that may be acquired upon the exercise of
options within 60 days of June 23, 2000.
(2) Includes 325,889 shares that may be acquired upon the exercise of
warrants and 18,500 shares that may be acquired upon the exercise of
options within 60 days of June 23, 2000.
52
<PAGE> 53
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Effective April 1, 1998, Ronald J. Vannuki, a director of the
Corporation, entered into a Consulting Agreement with the Corporation. The
Agreement was terminated by mutual agreement effective November 30, 1999. Mr.
Vannuki's duties under the Agreement were to prepare short-term and
intermediate-term acquisition plans and investigate and evaluate potential
acquisitions for the Corporation. The amount of time to be devoted by him to his
duties was agreed to by the parties but it was anticipated that Mr. Vannuki on
average would perform approximately twenty hours of service per month. The
Agreement provided for a fee to Mr. Vannuki of $5,000 per month. The Agreement
also provided that, during its term, Mr. Vannuki would not provide similar
services to anyone else.
Also effective April 1, 1998, the Corporation entered into an identical
Consulting Agreement with Fortuna Advisors, Inc. Karen Brenner, a director of
the Corporation, was the sole shareholder and President of Fortuna Advisors,
Inc. The Agreement was terminated by mutual agreement effective November 30,
1999.
James J. Mulligan, secretary and a director of the Corporation, is a
member of the law firm of Mulligan & Mulligan. Mulligan & Mulligan is general
counsel to the Corporation and received $78,681 for legal services rendered
during the Corporation's fiscal year 2000.
Howard E. Turner, a director of the Corporation, is a partner in the
law firm of Smith, Gambrell & Russell, LLP, which provides legal services to the
Corporation.
53
<PAGE> 54
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) Financial Statements
The following consolidated financial statements of the Corporation and
its subsidiaries are set forth in Item 8 of this Annual Report on Form
10-K.
Independent Auditors' Report.
Consolidated Balance Sheets - March 31, 2000 and 1999.
Consolidated Statements of Earnings - for the years ended March 31,
2000, 1999 and 1998.
Consolidated Statements of Shareholders' Equity - for the years ended
March 31, 2000, 1999 and 1998.
Consolidated Statements of Cash Flows - for the years ended March 31,
2000, 1999 and 1998.
Notes to Consolidated Financial Statements - for the years ended March
31, 2000, 1999 and 1998.
(a)(2) Financial Statement Schedules
<TABLE>
<S> <C>
Independent Auditors' Report................ At page 56 of this Report.
Schedule II Valuation and qualifying
accounts.................................... At page 57 of this Report
</TABLE>
The information required to be submitted in Schedules I, III, IV and V
for KRUG International Corp. and its consolidated subsidiaries has either been
shown in the financial statements or notes, or is not applicable or required
under Regulation S-X and, therefore, have been omitted.
(b) Reports on Form 8-K
During the quarter ended March 31, 2000, the Corporation filed no
reports on Form 8-K.
(c) Exhibits
The "Index to Exhibits" to this Annual Report on Form 10-K is
incorporated by reference.
54
<PAGE> 55
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, KRUG International Corp. has duly caused this Report to be
signed on its behalf by the undersigned, thereunto duly authorized, on this 26th
day of June, 2000.
KRUG INTERNATIONAL CORP.
By: /s/ ROBERT M. THORNTON, JR.
-----------------------------------
Robert M. Thornton, Jr.
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of KRUG
International Corp. and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Name Title Date
---------------------------------- ---------------------------------------------- -------------------
<S> <C> <C>
Director, Chairman, President, Chief Executive
/s/ ROBERT M. THORNTON, JR. Officer and Chief Financial Officer June 26, 2000
---------------------------------- (principal executive and financial officer) -------------------
Robert M. Thornton, Jr.
/s/ MARK J. STOCKSLAGER Principal Accounting Officer June 26, 2000
---------------------------------- (principal accounting officer) -------------------
Mark J. Stockslager
/s/ KAREN B. BRENNER Director June 26, 2000
---------------------------------- -------------------
Karen B. Brenner
/s/ C. MICHAEL FORD Director June 26, 2000
---------------------------------- -------------------
C. Michael Ford
/s/ T. WAYNE HOLT Director June 26, 2000
---------------------------------- -------------------
T. Wayne Holt
/s/ JAMES J. MULLIGAN Director June 26, 2000
---------------------------------- -------------------
James J. Mulligan
/s/ HOWARD E. TURNER Director June 26, 2000
---------------------------------- -------------------
Howard E. Turner
/s/ RONALD J. VANNUKI Director June 26, 2000
---------------------------------- -------------------
Ronald J. Vannuki
</TABLE>
55
<PAGE> 56
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
KRUG International Corp.
Atlanta, Georgia
We have audited the consolidated financial statements of KRUG International
Corp. and Subsidiaries as of March 31, 2000 and 1999 and for each of the three
years in the period ended March 31, 2000 and have issued our report thereon
dated May 19, 2000 (included elsewhere in this Form 10-K). Our audits also
included the consolidated financial statement schedule of KRUG International
Corp. and Subsidiaries, listed in Item 14. This consolidated financial statement
schedule is the responsibility of the Corporation's management. Our
responsibility is to express an opinion based on our audits. In our opinion,
such consolidated financial statement schedule, when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
Deloitte & Touche LLP
Atlanta, Georgia
May 19, 2000
56
<PAGE> 57
KRUG INTERNATIONAL CORP. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
AMOUNTS IN THOUSANDS
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- -------- -------- -------- --------
CURRENCY
ALLOWANCE FOR BALANCE AT CHARGED TO TRANSLATION/ DEDUCTIONS BALANCE AT
DOUBTFUL BEGINNING COST AND ACQUISITION/ FROM END
ACCOUNTS OF YEAR EXPENSES (DISPOSITION) RESERVES OF YEAR
-------- ------- -------- ------------- -------- -------
<S> <C> <C> <C> <C> <C>
YEAR ENDED
MARCH 31, 2000 $ 134 $ - $ (38) $ 16 $ 80
YEAR ENDED
MARCH 31, 1999 $ 174 $ 18 $ (7) $ 51 $ 134
YEAR ENDED
MARCH 31, 1998 $ 856 $ 21 $ (645) $ 58 $ 174
</TABLE>
<TABLE>
<CAPTION>
DEFERRED INCOME CURRENCY
TAX ASSET BALANCE AT CHARGED TO TRANSLATION/ DEDUCTIONS BALANCE AT
VALUATION BEGINNING COST AND ACQUISITION/ FROM END
ALLOWANCE OF YEAR EXPENSES (DISPOSITION) RESERVES OF YEAR
-------- ------- -------- ------------- -------- -------
<S> <C> <C> <C> <C> <C>
YEAR ENDED
MARCH 31, 2000 $ 4,228 $ 116 $ (729) $ 110 $ 3,505
YEAR ENDED
MARCH 31, 1999 $ 3,411 $ 3,279 $ (35) $ 2,427 $ 4,228
YEAR ENDED
MARCH 31, 1998 $ 5,536 $ 984 $ 47 $ 3,156 $ 3,411
</TABLE>
57
<PAGE> 58
INDEX TO EXHIBITS
(3) ARTICLES OF INCORPORATION AND BY-LAWS:
3.1 Amended Articles of Incorporation of KRUG International Corp.
(incorporated by reference from Exhibit 3.1 of the
Corporation's Report on Form 10-K for the year ended March 31,
1998).
3.2 Code of Regulations of KRUG International Corp., as amended
(incorporated by reference from Exhibit 3.1 of the
Corporation's Report on Form 10-Q for the quarter ended June
30, 1996).
(4) INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING
INDENTURES:
4.1 Loan Facility dated December 8, 1994 among KRUG International
(UK) Limited, Beldray Limited and National Westminster Bank
(incorporated by reference from Exhibit 4.9 of the
Corporation's Report on Form 10-K for the year ended March 31,
1996).
4.2 Facility Letter dated November 18, 1999 from KRUG
International (UK) Limited, Beldray Limited and Westminster
Bank PLC.
4.3 Invoice Discounting Agreement (recourse) between Lombard
NatWest Discounting Limited and Beldray Limited, dated
September 27, 1999 (incorporated by reference from Exhibit
10.1 of the Corporation's Report on Form 10-Q for the quarter
ended September 30, 1999).
4.4 Invoice Discounting Agreement (recourse) between Lombard
NatWest Discounting Limited and Klippan Limited, dated
September 27, 1999 (incorporated by reference from Exhibit
10.2 of the Corporation's Report on Form 10-Q for the quarter
ended September 30, 1999).
(10) MATERIAL CONTRACTS:
10.1 1995 Incentive Stock Option Plan (incorporated by reference
from Exhibit 10.3 of the Corporation's Report on Form 10-K for
the year ended March 31, 1996).
10.2 Consulting Agreement between KRUG International Corp. and
Maurice F. Krug dated April 30, 1996 (incorporated by
reference from Exhibit 10.4 of the Corporation's Report on
Form 10-K for the year ended March 31, 1996).
10.3 Employment Agreement between KRUG International Corp. and
Robert M. Thornton, Jr. dated November 9, 1998 (incorporated
by reference from Exhibit 10.1 of the Corporation's Report on
Form 10-Q for the quarter ended December 31, 1998).
10.4 Stock Purchase Agreement between KRUG International Corp. and
Wyle Laboratories, Inc. dated September 24, 1999 (incorporated
by reference from Exhibit 10.3 of the Corporation's Report on
Form 10-Q for the quarter ended September 30, 1999).
10.5 Exchange Agreement between KRUG International Corp. and LTS
Holdings, Inc. dated September 24, 1999 (incorporated by
reference from Exhibit 10.4 of the Corporation's Report on
Form 10-Q for the quarter ended September 30, 1999).
58
<PAGE> 59
10.6 Extension of Closing Date of Stock Purchase Agreement and
Exchange Agreement between KRUG International Corp., Wyle
Laboratories, Inc. and LTS Holdings, Inc. dated October 29,
1999 (incorporated by reference from Exhibit 10.5 of the
Corporation's Report on Form 10-Q for the quarter ended
September 30, 1999).
(21) SUBSIDIARIES:
21.1 List of Subsidiaries.
(23) CONSENTS OF EXPERTS AND COUNSEL:
23.1 Consent of Deloitte & Touche LLP dated June 23, 2000 with
respect to material incorporated by reference into the KRUG
International Corp. Registration Statement on Form S-8 (No.
333-06129) relating to the Corporation's 1995 Incentive Stock
Option Plan and the Registration Statement on Form S-3 (No.
33-88190) relating to the Corporation's Warrants to purchase
Common Shares.
(27) FINANCIAL DATA SCHEDULES:
27.1 Financial Data Schedules for the fiscal year ended March 31,
2000.
(99) ADDITIONAL EXHIBITS
99.1 Companies comprising AMEX I peer group
99.2 Companies comprising AMEX II peer group
59
