Back to GetFilings.com
1
UNITED STATES
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, 1997
Commission File No. 0-2901
KRUG INTERNATIONAL CORP.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Ohio 31-0621189
- ------------------------------ -------------------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification No.)
organization)
1290 Hercules Drive, Suite 120, Houston, Texas 77058
- -------------------------------------------------------------------------------
(Address of principal executive office)
Registrant's telephone number, including area code: (281) 212-1233
Securities Registered Pursuant to Section 12(b) of the Act:
COMMON SHARES WITHOUT PAR VALUE
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 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. [ ]
At the close of business on June 13, 1997:
Number of Common Shares without par value
outstanding 5,151,206
-------------
Aggregate market value of Common
Shares without par value held by
non-affiliates of the Corporation $ 19,171,752
-------------
2
DOCUMENTS INCORPORATED BY REFERENCE
1. KRUG International Corp. Proxy Statement for its Annual Meeting of
Shareholders on July 18, 1997, definitive copies of which were filed with
the Commission within 120 days after the end of the Corporation's last
fiscal year. Only such portions of the Proxy Statement as are specifically
incorporated by reference under Part III of this Report shall be deemed
filed as part of this Report.
3
PART I
ITEM 1. BUSINESS
KRUG International Corp., an Ohio corporation organized in June 1959, and
its subsidiaries (sometimes collectively called the "Corporation") operate
primarily in three business segments: Life Sciences and Engineering, Leisure
Marine and Housewares. Information concerning the revenues, operating profit
and identifiable assets of the three business segments for the fiscal years
ended March 31, 1997, 1996 and 1995 is set forth at Note M of the Notes to
Consolidated Financial Statements of the Corporation, which is incorporated
herein by this reference.
The Corporation's objective is to increase shareholder value by the
investment in and management of businesses which offer growth opportunities.
The Corporation evaluates each of its operating companies for growth potential
and seeks opportunities, including acquisitions and divestitures, for the
profitable employment and realization of capital.
CERTAIN CAUTIONARY STATEMENTS
This document 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 contracts and
backlog, its objectives and the outlook for its business segments. See Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations for certain risks, uncertainties and other factors which could cause
actual results to differ materially from those anticipated.
LIFE SCIENCES AND ENGINEERING
The Life Sciences and Engineering business ("LS&E") is comprised of the
Corporation's KRUG Life Sciences Inc. subsidiary, with operations in Houston
and San Antonio, Texas and the Technology/Scientific Services, Inc. subsidiary
in Dayton, Ohio.
KRUG LIFE SCIENCES INC. -- HOUSTON OPERATIONS
KRUG Life Sciences has been conducting, pursuant to contracts with the
National Aeronautics and Space Administration ("NASA"), biomedical research,
technology development, and flight crew operations support at NASA's Lyndon B.
Johnson Space Center continuously since 1967. From the original work of
developing specialized cardiovascular monitoring instrumentation, the research
and development activities have expanded to encompass certain additional
scientific activities relating to man's capability and capacity to explore and
exploit the frontiers of space. Such activities include the conceptualization
and implementation of groundbased and in-flight medical experiments to develop
the health care and physiological deconditioning countermeasures required to
offset the microgravity of space and ensure the well-being and productivity of
the flight crews.
Performance under such contracts includes the areas of neurosensory
physiology, cardiovascular physiology, musculoskeletal physiology, regulatory
systems physiology, electrophysiology, cell biology, biochemistry,
pharmacodynamics, remote health care, bioengineering, applications of knowledge
based systems and clinical laboratory operations. KRUG's work for the Johnson
Space Center is spread over a wide variety of agency programs, none of which
comprise more than 20% of the aggregate contracts. Some of the major areas of
work include support of shuttle flights and the joint Russian MIR space
ventures, shuttle extended duration mission research, manned flight research
and development, space station research and biotechnology research.
1
4
In March 1991, KRUG Life Sciences began work on a $136 million, five year
contract with NASA, replacing the one which previously started in January 1987.
This contract expanded the support services provided to the Medical Sciences
Division at the Johnson Space Center. In April 1993, NASA modified the contract
and increased its value to $165 million. This modification covered the cost of
additional test equipment, supplies and services for the remaining three years
of the contract. In February 1996, this contract was extended for a nine-month
period to November 30, 1996 and has been further extended in connection with
the rebid and sole source awards of various portions of the contract work.
On January 15, 1997, KRUG Life Sciences won the rebid of the medical
support and integration portion of its work for NASA and signed a new contract
with an expected value of approximately $82.1 million over five years,
including $33.8 million for years four and five, which may be awarded at the
option of NASA. On January 30, 1997, KRUG Life Sciences was awarded by NASA, on
a sole source basis, a $21.6 million contract for the continuation of the
design, development, test and evaluation of flight hardware for the shuttle and
space station through December 31, 1998. In June 1997, KRUG Life Sciences
submitted its bid for a five year biotechnology processing contract covering
certain work it presently performs. NASA has indicated that it will award a
contract for such work to KRUG Life Sciences on a sole source basis effective
July 1, 1997; however, until a contract is executed, there can be no assurance
that such award will be forthcoming or as to the scope, term or amount of such
work.
KRUG LIFE SCIENCES INC. -- SAN ANTONIO OPERATIONS
KRUG Life Sciences also provides professional research support services to
the United States Air Force ("USAF") under a contract which expires in November
1997 and is presently being rebid. Such services include research into human
tolerance to gravitational forces generated by rapid onset and increasing
acceleration. As advances in aircraft development lead to increases in speed
and mobility, this research becomes increasingly more important. Engineering
programs include the design and production of variable profile breathing
simulators, therapeutic oxygen manifold systems and other similar devices. KRUG
Life Sciences also does repair, maintenance and calibration of sophisticated
ground and airborne electronics equipment, and has provided such services on a
limited basis to commercial customers in the San Antonio area. The backlog
remaining on the USAF contract at March 31, 1997 was approximately $2.4
million.
TECHNOLOGY/SCIENTIFIC SERVICES, INC.
Technology/Scientific Services provides a wide variety of engineering and
technical support services in various on-site governmental research and
experimental programs under contracts with the U.S. Air Force which expire from
September 1997 through September 2001. Current activities are principally in
support of laboratories at Wright-Patterson Air Force Base and involve computer
networking using fiber optics, satellite communications, aircraft structural
and environmental testing, microelectronics, fabrication techniques for
composite materials and aircraft vulnerability investigations. In August 1996,
Technology/Scientific Services was awarded a new contract for equipment
calibration at the Wright Laboratory, Wright-Patterson Air Force Base. The
contract consists of a base period beginning August 1, 1996 plus four one year
options through September 30, 2000. The contract value with the options is
approximately $5 million.
GENERAL AND OUTLOOK
In its Life Sciences and Engineering Segment, the Corporation competes
with practically all the large and small aerospace companies, including small
local companies competing for services contracts. The areas of competition vary
from contract to contract but most contracts are price sensitive. Some business
has been obtained on a sole source basis, such as follow-on business, where a
unique capability or product has been developed and the limited market
precludes the development of a second source by the government.
2
5
The majority of the Corporation's Life Sciences and Engineering business
is with agencies of the U.S. Government and prime government contractors and,
as a result, is subject to possible termination for the convenience of the
government.
The order backlog of the Life Sciences and Engineering Segment was $106.9
million at March 31, 1997 and $60.4 million at March 31, 1996. Approximately
35% of the backlog at March 31, 1997 is expected to result in revenue during
fiscal 1998. Further information relating to the Corporation's LS&E Segment
contracts is included in Item 7, Management's Discussion and Analysis of
Financial Condition and Results of Operations.
Management believes that the current economic forces at work in the
government services market, including government budgetary limitations and
increased competition for government contracts, have caused a number of
companies to enter into business combinations and activities designed to make
them larger, stronger and more competitive, and that to maintain its
competitiveness in the areas in which it holds contracts, KRUG Life Sciences
needs to be part of such a larger organization. In April, 1997, the Corporation
engaged Quarterdeck Investment Partners, Inc., an investment bank which
provides advisory services to aerospace, defense and information technology
companies, to assist in evaluating strategic alternatives concerning the LS&E
Segment.
LEISURE MARINE
Sowester Limited ("Sowester"), a subsidiary of KRUG International (U.K.)
Ltd., is engaged in the Leisure Marine business. Sowester, located in the port
of Poole, Dorset, England, distributes sail and power boat equipment and
personal watercraft to the leisure marine market. Sowester's principal product
lines include: marine chandlery, boat fittings, equipment and clothing; Mercury
outboard engines; Mercury MerCruiser sterndrive and inboard engines; Sea Doo
personal watercraft; Morse controls, steering systems and controls for power
and sail boats; and diesel engines which provide auxiliary power for sailing
yachts. Sowester is the exclusive distributor of certain Mercury engineering
products in the United Kingdom and the Republic of Ireland under distribution
agreements effective through July 1, 1998.
Sowester sells its products in two principal markets -- boat manufacturers
and marine retailers -- through a network of over 100 sales and service
dealers. The marine products business is seasonal, with the highest sales
occurring in spring and summer. Order backlog is not a factor in the Leisure
Marine Segment since virtually all orders are shipped within days of receipt.
OUTLOOK
The leisure marine business conducted by Sowester is specialized and
requires substantial industry-specific knowledge and skills. Management
believes the leisure marine business in the U.K. and Europe is moving toward a
consolidation phase likely to be dominated by and rewarding larger companies.
Such changes would likely affect the structural nature of marine distribution
as conducted by Sowester. Accordingly, management has taken steps to refocus
Sowester on growth opportunities and management objectives which it believes
will be important in the future and, under appropriate circumstances, the
Corporation will consider a merger or other transaction if satisfied that the
opportunity would enhance Sowester's ability to adapt to future changes in the
market.
3
6
HOUSEWARES
Beldray Limited ("Beldray"), a subsidiary of KRUG International (U.K.)
Ltd., operates the Corporation's Housewares business. Beldray manufactures
consumer durable products sold under the "Beldray" name and, through its Hago
Products Ltd. subsidiary, which was acquired October 31, 1996, manufactures
child safety gates under the KiddiProofAE tradename. Beldray's products include
ironing tables and accessories, domestic aluminum ladders and work platforms,
garden equipment, shower screens, indoor and outdoor racks for drying clothes,
child safety gates, fire guards and industrial wire products such as fan blade
covers. These products are marketed through major retailers, wholesalers and
mail order companies to the housewares, do-it-yourself and garden markets.
Beldray is a long established name with significant recognition among the
buying public throughout the United Kingdom. The Housewares Segment's firm
order backlog is typically less than one month's sales.
OUTLOOK
Over the last eighteen months, Beldray has expanded its product offerings
to include child safety gates and completed the acquisition of Hago Products
Ltd. Beldray has also taken steps to reorganize its manufacturing processes,
upgrade its information technology and strengthen its management team.
Management believes Beldray should further expand its product lines, continue
improving its manufacturing efficiencies and broaden its customer base and
geographic distribution with the objectives of maintaining and, possibly,
enhancing its competitive position. Management expects to continue its efforts
to grow Beldray through complementary or synergistic acquisitions.
4
7
GENERAL INFORMATION
The Corporation owns a number of patents and patent applications but it is
not possible to estimate their value. None of the Corporation's present
business is materially dependent on any patents or patent applications.
During the fiscal year ended March 31, 1997, revenues from agencies of the
U.S. Government were $49,808,000 or 45% of consolidated revenues. The
Housewares business had revenues from one customer of $11,913,000 or 10% of
consolidated revenues.
As of June 13, 1997, the Corporation employed 449 persons in the United
States and 605 in the United Kingdom. The Corporation's Life Sciences and
Engineering Segment employs highly trained persons holding bachelors degrees,
advanced degrees and professional designations in one or more of the following
disciplines -- engineering, medicine, mathematics, physics and biology. None of
the Corporation's United States employees are represented by a union.
Compliance with federal, state, and local laws regulating the discharge of
materials 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 compliance with federal, state and local
environmental regulations.
5
8
ITEM 2. PROPERTIES
The principal properties of the Corporation as of June 13, 1997 are listed
below:
OWNED OR SQUARE
LOCATION LEASED FOOTAGE USE AND SEGMENT
-------- ------ ------- ---------------
A. UNITED STATES
Knoxville, Tennessee Leased 387,000 Plant-Subleased (1)
Houston, Texas Leased 58,800 Offices & Laboratories -- LS&E
San Antonio, Texas Leased 2,000 Offices -- LS&E
Dayton, Ohio Owned 67,600 Offices -- LS&E (2)
Dayton, Ohio Leased 11,500 Offices -- Subleased (3)
B. ENGLAND
Bilston, West Midlands Leased 105,000 Plant -- Housewares
Owned 85,000 Plant -- Housewares
Bognor Regis, West Sussex Leased 59,000 Plant -- Housewares
Poole, Dorset Owned 71,000 Distribution - Leisure Marine
C. CANADA
Toronto, Ontario Leased 62,900 Plant-Subleased (4)
- ----------
(1) This property is no longer used by the Corporation; a portion is subleased
and the remainder is available for sublease.
(2) This property is subject to a $1.7 million mortgage given as security
under the Corporation's Credit Agreement with its U.S. Banks dated
November 14, 1991, as amended. This property is excess to the
Corporation's space needs and is listed for sale.
(3) This property is no longer used by the Corporation and is subleased for
the remaining term of the Corporation's lease.
(4) This facility is no longer used by the Corporation and the Corporation has
subleased this property.
The Corporation maintains its plants and offices in good repair. In the
opinion of management, the various facilities used by the Corporation are
adequate for the needs of the businesses conducted therein.
ITEM 3. LEGAL PROCEEDINGS
Neither the Corporation nor any of its subsidiaries is a party to any
material legal proceedings.
6
9
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
Executive Officers of the Registrant
The executive officers of the Corporation, as of June 13, 1997, their
positions with the Corporation and their ages are as follows:
NAME OFFICES AGE
---- ------- ---
Charles Linn Haslam Chairman of the Board of Directors and Chief Executive Officer 53
Robert M. Thornton, Jr. Director, President and Chief Financial Officer 48
W. Edward Greenhalgh Director, KRUG International (UK) Ltd. Director and Chairman of its 66
subsidiaries
James J. Mulligan Director and Secretary 75
Joseph P. Kerwin, M.D. KRUG Life Sciences Inc. President 65
Robert M. Ellis Principal Accounting Officer and KRUG Life Sciences Inc. Vice President, 54
Contracts, Procurement and Finance
All officers of the Corporation are elected annually by the Board of
Directors.
Charles Linn Haslam, 53, has been Chairman of the Board since July 16,
1996, Chief Executive Officer since May 17, 1996 and was President of the
Corporation from May 17, 1996 until July 16, 1996. Mr. Haslam practiced law in
Washington, D.C. from January 1980 to May 1996. He was General Counsel, United
States Department of Commerce during the Carter Administration (January 1977 to
December 1979) and University Counsel and Adjunct Professor of Law at Duke
University from 1974 to 1977.
Robert M. Thornton, Jr., 48, has been President of the Corporation since
July 16, 1996. From October 1994 to the present, he has been a private investor
and, since March 1995, Chairman and Chief Executive Officer of CareVest
Capital, LLC, a private investment and management services firm. Mr. Thornton
was President, Chief Operating Officer, Chief Financial Officer and a Director
of Hallmark Healthcare Corporation from November 1993 until Hallmark's merger
with Community Health Systems, Inc. in October 1994. From October 1987 until
November 1993, Mr. Thornton was Executive Vice President, Chief Financial
Officer, Secretary and Treasurer and a Director of Hallmark.
W. E. Greenhalgh, 66, has been associated continuously with KRUG
International (UK) Ltd. (formerly Butterfield Harvey PLC) from 1960 to the
present. He has served in a variety of capacities, including Chief Executive
Officer from 1983 until his retirement in 1989, and as a non-executive director
and consultant from 1989 to the present. He has also served as the
non-executive Chairman of Beldray Ltd. and Sowester Ltd. from 1989 to the
present.
James J. Mulligan, 75, has been a member of the law firm of Mulligan &
Mulligan since January 1993. He was a member of the law firm of Smith &
Schnacke from 1953 to 1989 and a member of the law firm of Thompson Hine &
Flory LLP from 1989 until his retirement in 1991. He became Secretary of the
Corporation in 1966.
7
10
Joseph P. Kerwin, M.D., 65, became President of KRUG Life Sciences Inc. on
April 1, 1997. From June 1996 until March 1997, Dr. Kerwin was the Manager,
Clear Lake Operations, of System Research Laboratories where his
responsibilities included medical support and biomedical research bids with
Baylor College of Medicine, Boeing, Lockheed Martin, Merck, and others. From
1987 until June 1996, Dr. Kerwin held various management positions with
Lockheed Martin Missiles and Space Company where he was responsible for
operations and programs including Houston activities of space station redesign
programs, the NASA human transportation study, the Assured Crew Return Vehicle
program, the Extravehicular Activity Systems for the space station, and the
Russian Mir procurement program for the Russian Tug -- the first vehicle in
launch sequence for the International Space Station. Dr. Kerwin served as an
astronaut from 1965 to 1987. In addition to flight duties, he held various
administrative positions, including Director of the NASA Space and Life
Sciences Division from 1983 to 1987. Dr. Kerwin flew as Science Pilot on Skylab
2 in 1973.
Robert M. Ellis, 54, has been Vice President, Contracts, Procurement and
Finance of KRUG Life Sciences Inc. since June 6, 1997 and was named Principal
Accounting Officer of KRUG International Corp. on November 8, 1996. He has been
continuously associated with the Corporation's life sciences, aerospace and
engineering operations since 1967, and has held a number of positions,
including Vice President, Procurement Operations and Finance of KRUG Life
Sciences Inc. from November 1996 to June 6, 1997 and Manager of Procurement
Operations and Finance from June 1991 until November 1996.
8
11
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
KRUG International'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
1997 and 1996. The number of shareholders of record was 946 as of March 31,
1997. No cash dividends were paid in fiscal 1997 or 1996. Prior to December 30,
1996, the Common Shares were traded on the NASDAQ National Market System.
QUARTER 4TH 3RD 2ND 1ST
------- --- --- --- ---
1997................... HIGH $6.88 $4.88 $5.25 $5.75
LOW 4.75 4.13 4.50 3.25
1996................... HIGH $4.87 $3.37 $3.75 $4.00
LOW 2.78 2.63 2.87 2.63
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 and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere herein.
FISCAL YEARS 1997 1996 1995 1994 1993
- ------------ ---- ---- ---- ---- ----
(All dollar amounts in thousands, except for per share amounts)
Revenues.................................. $111,739 $95,821 $91,766 $90,188 $97,155
Earnings from
Continuing Operations.................. 2,552 1,171 2,012 2,870 2,608
Net Earnings.............................. 2,096 1,171 2,012 1,418 2,608
Earnings Per Share from
Continuing Operations.................. 0.49 0.23 0.40 0.57 0.52
Net Earnings Per Share.................... 0.40 0.23 0.40 0.28 0.52
Total Assets.............................. 49,967 42,371 44,169 43,225 46,034
Long-Term Debt............................ 9,173 11,982 13,162 12,932 15,212
Shareholders' Equity...................... 17,960 14,530 14,068 10,616 9,908
9
12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The Corporation's fiscal 1997 revenues of $111.7 million increased by 17%
from fiscal 1996. Fiscal 1996 revenues increased by 4% from fiscal 1995. In
fiscal 1997, revenues in the U.S. were $50.0 million, and revenues in the U.K.
were $61.7 million.
Fiscal 1997 U.K. revenues of $61.7 million, which comprise the Housewares
Segment and Leisure Marine Segment, increased by $10.2 million or 20%. The
Housewares Segment revenue increased by $6.6 million or 25%. Hago Products
Limited (Hago), which was purchased on October 31, 1996, added $4.4 million of
revenue to the Housewares Segment during the year and revenue of Beldray Ltd.
increased by $2.2 million. The favorable effect of currency translation
contributed $0.4 million of revenue to the Housewares Segment. All Houseware
Segment product groups had increased sales from last year, with laundry
products, child safety gates and wire airer sales having the largest increases.
The Corporation believes the sales increases were the result of increased
market share and, with respect to child safety gates, the introduction of new
products and acquisition of Hago. Fiscal 1997 revenues of the Leisure Marine
Segment increased by $3.6 million, or 14% over last year. Of this increase,
$0.4 million was due to the favorable effect of currency translation. Increased
sales of chandlery products, outboard and inboard engines, engine parts and Sea
Doo personal watercraft also contributed to the increase. The increase in
chandlery revenue was due to the introduction of new chandlery products and
increases in other products resulted from higher demand for leisure marine
products in the UK.
Fiscal 1996 U. K. revenues of $51.5 million increased by $3.7 million for
an 8% increase from fiscal 1995. Of this increase, $3.3 million was due to
increased sales volume with the remainder due to favorable currency
translation. Fiscal 1996 Leisure Marine Segment revenues increased by $4.1
million to $25.0 million, of which $3.9 million was due to increased sales
volume. All Leisure Marine Segment product groups had increased revenues except
for inboard engines. Chandlery and Sea Doo personal watercraft sales increased
significantly due to new products and increased demand. Fiscal 1996 Housewares
Segment revenues decreased by $0.4 million to $26.5 million, of which $0.6
million was due to decreased volume partially offset by $0.2 million of
favorable foreign currency translation. Sales of laundry products, rotary
dryers and wire airers decreased during the year. Laundry sales decreased 3% in
fiscal 1996 due to consumers buying ironing tables with lower prices. Rotary
dryers and wire airer sales decreased as a result of losing a significant
customer. The decreases were partially offset by the introduction of child
safety gates during the year.
Revenues for the U.S. Life Sciences and Engineering Segment (LS&E) were
$50.0 million in fiscal 1997, $44.3 million in fiscal 1996 and $44.0 million in
fiscal 1995. Increased labor services, material purchases and subcontract
effort provided under contracts to the National Aeronautics and Space
Administration's (NASA) Johnson Space Center and the U.S. Air Force resulted in
the increased revenues in fiscal 1997. In fiscal 1996, increased labor services
and subcontract support provided to NASA resulted in the increased revenues
from fiscal 1995.
The LS&E Segment order backlog at March 31, 1997 was $106.9 million
compared to $60.4 million at March 31, 1996 and $89.1 million at March 31,
1995. In January 1997, KRUG Life Sciences Inc. (KLSI) was awarded a new
five-year contract by NASA's Johnson Space Center Medical Services Division
(JSCMD) with a contract value over five years of approximately $82.1 million,
including $33.8 million for option years four and five. Effective January 30,
1997, KLSI signed a new $21.6 million contract with NASA's JSCMD for the
continuation of the design, development, test and evaluation of flight hardware
for the shuttle and space station through December 31, 1998. In addition, KLSI
has submitted a bid and is negotiating another five year NASA contract on a
sole source basis for biotechnology processing services. In August 1996, the
LS&E Segment was awarded a new contract for equipment calibration at the Wright
Laboratory, Wright-Patterson Air Force Base. The contract consists of a base
period beginning August 1, 1996 plus four one-year options through September
30,
10
13
2000. The contract value with the options is approximately $5.0 million.
Backlog is not meaningful in the Leisure Marine and Housewares Segments due to
the short time between order placement and shipment.
Gross profit (revenues less cost of goods sold) margins were 13.3%, 12.6%
and 13.7% in fiscal 1997, 1996 and 1995, respectively. The increase in gross
profit margin in fiscal 1997 was due to increased margins in the Housewares
Segment which increased to 10.8% from 7.1% in fiscal 1996, due primarily to
increased selling prices and lower raw materials costs. Gross profit margin of
the Leisure Marine Segment increased slightly in fiscal 1997 primarily as a
result of increased sales of higher margin products. The gross profit margin of
the LS&E Segment decreased during fiscal 1997 due to increased material
purchases and subcontract support services provided under contracts to NASA and
the U.S. Air Force on which margins were lower than on other LS&E Segment
revenues. The decrease in gross profit margin in fiscal 1996 was due to
decreased margins in the Housewares Segment. Depressed selling prices caused by
competitive market conditions and increased raw material costs for aluminum and
steel which were not fully recovered through higher selling prices were the
primary causes of the Housewares Segment margin decrease. The Leisure Marine
Segment gross profit margin increased slightly in fiscal 1996 as compared to
fiscal 1995 as a result of selling more higher margin products. The gross
margin of the LS&E Segment decreased slightly during fiscal 1996 because of
increased subcontract service on U.S. government contracts for which no
additional profit was received.
Selling and administrative expenses were $9.4 million, $9.2 million and
$8.8 million in fiscal 1997, 1996 and 1995, respectively. The increase in
fiscal 1997 is attributable primarily to the acquisition of Hago on October 31,
1996 and increased Leisure Marine Segment sales volume, which increased selling
expenses. Such increases were partially offset by decreased U.K. pension
expense and lower U.S. Corporate expense. The increase in selling and
administrative expenses in fiscal 1996 as compared to fiscal 1995 was due to
increased expenses of the Leisure Marine Segment caused by increased sales
volume, increased U.K. pension expense and U.S. Corporate expense for the
retiring Chairman's new consulting agreement which replaced his prior pension
agreement.
In September 1996, the Corporation closed its executive offices in Dayton,
Ohio and consolidated its headquarters activities with its primary operations
facility adjacent to the NASA Johnson Space Center in Houston, Texas. A
restructuring charge of $0.8 million was recorded for such office consolidation
during the quarter ended September 30, 1996. The charge consisted primarily of
estimated costs relating to severance for six employees and rent and other
costs related to the vacated offices in Dayton, Ohio. In the fourth quarter of
fiscal 1997, the Corporation sublet the vacated offices and, as a result,
recorded a credit to the restructuring charge of $0.27 million.
Interest expense decreased by $0.1 million in fiscal 1997 due to lower
average debt levels in both the U.S. and U.K. as compared to fiscal 1996.
Interest expense decreased by $0.2 million in fiscal 1996 compared to fiscal
1995 due to decreased levels of debt in both the U.K. and U.S. and slightly
decreased U.K. and U.S. interest rates.
The effective income tax rate was 34.7% for fiscal 1997, 38.2% for fiscal
1996 and 31.0% for fiscal 1995. The effective tax rate for fiscal 1997 was
slightly higher than the statutory U.S. tax rate due to certain non-deductible
U.K. expenses partially offset by deductible U.K. pension amounts higher than
pension expense. The effective tax rate for fiscal 1996 was higher than the
statutory U.S. tax rate due to U.K. pension expense in excess of deductible
amounts, amortization of intangibles and other non-deductible expenses in the
U.K.
11
14
Earnings from continuing operations were $2.6 million in fiscal 1997, an
increase of $1.4 million from fiscal 1996. The increase was due to profits
earned in the Housewares Segment for fiscal 1997 (versus losses in fiscal
1996), and increased sales and gross profit by the Leisure Marine Segment.
Earnings from continuing operations were $1.2 million in fiscal 1996, a
decrease of $0.8 million from fiscal 1995. The decrease was due to losses
incurred by the Housewares Segment in fiscal 1996 which were greater than the
increase in Leisure Marine Segment profits, and the absence of significant
other income items which were $0.5 million in fiscal 1995.
DISCONTINUED OPERATIONS
In fiscal 1989, the Corporation discontinued the operations of its
Industrial Segment and subsequently disposed of substantially all related net
assets. However, obligations remain relating to leased property in Knoxville,
Tennessee, leased property in Toronto, Canada, and product liability claims for
products sold prior to the disposal. During the year ended March 31, 1997, the
Corporation recorded a charge of $0.5 million (net of a tax benefit of $0.2
million) to increase the provision for losses from such discontinued
operations. The increase was due to additional repair and maintenance costs
relating to the Knoxville property, decreased sublease income from the
Knoxville property, increased insurance costs related to product liability
claims and the loss of future sublease income caused by the bankruptcy filing
of a tenant in the Toronto facility.
LIQUIDITY AND CAPITAL RESOURCES
Under the Corporation's revolving credit facility with a U.S. business
credit corporation, the Corporation had a loan outstanding of $ 3.8 million at
March 31, 1997. Availability under the revolving credit facility is based upon
the amount of billed and unbilled U.S. accounts receivable and is limited to a
maximum of $10.0 million. The credit facility expires March 15, 2000. Under the
agreement, the Corporation had additional borrowing capacity of $1.6 million
available at March 31, 1997. At March 31, 1997, the Corporation also had a $1.7
million mortgage loan outstanding on its Dayton, Ohio real property. The
mortgage loan was provided by five U.S. banks and matures on March 31, 1998.
The Corporation's U.K. subsidiaries had two term loans outstanding totaling
$5.6 million at March 31, 1997. The loans require quarterly principal payments
and mature in fiscal 2005. In addition, the Corporation has a U.K. line of
credit with $4.1 million available of which $1.2 million was used at March 31,
1997. The Corporation's various debt agreements contain affirmative and
negative covenants, including financial covenants relating to cash flow,
operating profit and limitations on cash dividends, additional debt and capital
expenditures. The Corporation believes it has adequate financing in both the
U.S. and U.K. to support its current level of operations.
The Corporation generated $3.0 million, $2.5 million and $1.2 million from
operating activities for fiscal 1997, 1996 and 1995, respectively. The $0.5
million increase in cash generated from operating activities in fiscal 1997
compared to fiscal 1996 was due primarily to increased profit in the United
Kingdom and utilization of tax prepayments in the U.K., offset somewhat by
increased U.K. inventory levels, increased prepaid expenses and other assets
and increased net cash used in U.S. discontinued operations. The $1.3 million
increase in cash generated from operating activities in fiscal 1996 compared to
fiscal 1995 was due primarily to cash generated from decreased inventory levels
in the U.K. and decreased cash used by discontinued operations.
During fiscal 1997 the Corporation's U.K. Housewares subsidiary expended
approximately $1.8 million for the purchase of Hago Products Ltd. Expenditures
for property, plant and equipment in fiscal 1997, 1996 and 1995 were $0.6
million, $0.3 million and $0.4 million, respectively. The capital expenditures
for fiscal 1997 include $0.3 million of new equipment for Leisure Marine
distribution activities while other capital expenditures for fiscal 1997 and
for fiscal 1996 and 1995 represent normal replacement expenditures. At March
31, 1997, there were no significant capital commitments.
12
15
The Corporation monitors the effect of inflation on its businesses.
Inflation did not have a significant impact on operations during the past three
years and is not expected to have a significant impact in the foreseeable
future.
CERTAIN CAUTIONARY STATEMENTS
In addition to historical information, Items 1 and 7 of this document
contain certain forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995 including, without limitation,
statements regarding managements' outlook for each of its businesses and the
sufficiency of the Corporation's liquidity and sources of capital. These
forward-looking statements are subject to certain risks, uncertainties and
other factors which could cause actual results to differ materially from those
anticipated, including, without limitation, restrictions imposed by debt
agreements, competition in the Housewares and Leisure Marine business and for
government services provided by the Life Sciences and Engineering Segment,
governmental budgetary constraints, the regulatory environment for the
Corporation's businesses, consolidation trends in the Corporation's businesses,
competition in the acquisition market, changes in exchange rates, increases in
raw material prices, the purchasing practices of significant customers, the
availability of qualified management and staff personnel in each business
segment and claims for product liability from continuing and discontinued
operations.
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
PAGE
----
Independent Auditors' Report................................................................ 14
Consolidated Balance Sheets -- March 31, 1997 and 1996...................................... 15 - 16
Consolidated Statements of Earnings --
for the fiscal years ended March 31, 1997, 1996 and 1995................................ 17
Consolidated Statements of Shareholders' Equity --
for the fiscal years ended March 31, 1997, 1996 and 1995................................ 18
Consolidated Statements of Cash Flows --
for the fiscal years ended March 31, 1997, 1996 and 1995................................ 19
Notes to Consolidated Financial Statements --
for the fiscal years ended March 31, 1997, 1996 and 1995................................ 20 - 31
Selected Quarterly Financial Data --
for the fiscal years ended March 31, 1997 and 1996...................................... 32
13
16
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
KRUG International Corp.
Houston, Texas
We have audited the accompanying consolidated balance sheets of KRUG
International Corp. and Subsidiaries (the "Corporation") as of March 31, 1997
and 1996 and the related consolidated statements of earnings, shareholders'
equity and cash flows for each of the three years in the period ended March 31,
1997. These financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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, 1997 and 1996, and the results of their operations
and their cash flows for each of the three years in the period ended March 31,
1997 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Dayton, Ohio
May 16, 1997
14
17
KRUG INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS,
MARCH 31, 1997 AND 1996
(All dollar amounts in thousands)
- -------------------------------------------------------------------------------
ASSETS (Note E) 1997 1996
CURRENT ASSETS:
Cash $ 105 $ 439
Receivables - net (Note C) 21,631 18,309
Inventories (Note D) 11,103 8,635
Prepaid expenses 1,058 627
------- -------
TOTAL CURRENT ASSETS 33,897 28,010
PROPERTY, PLANT AND EQUIPMENT - At cost (Note J):
Land 2,226 2,079
Buildings and improvements 6,652 6,291
Equipment 9,610 7,331
------- -------
18,488 15,701
Less accumulated depreciation 7,650 6,444
------- -------
10,838 9,257
OTHER NONCURRENT ASSETS:
Deferred tax assets (Note H) 2,041 2,508
Pension asset (Note I) 2,966 2,316
Other 225 280
------- -------
5,232 5,104
------- -------
TOTAL ASSETS $49,967 $42,371
======= =======
See notes to consolidated financial statements.
15
18
KRUG INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, - Continued
MARCH 31, 1997 AND 1996
(All dollar amounts in thousands)
- -------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY 1997 1996
CURRENT LIABILITIES:
Bank borrowings (Note E) $ 1,161 $ 31
Accounts payable 11,650 8,205
Accrued payroll and related taxes 2,594 2,347
Other accrued expenses 3,582 3,187
Income taxes 451 218
Net current liabilities of discontinued operations (Note L) 450 500
Current maturities of long-term debt (Note E) 2,922 1,166
-------- --------
TOTAL CURRENT LIABILITIES 22,810 15,654
LONG-TERM DEBT (Note E) 9,173 11,982
NET LONG-TERM LIABILITIES OF DISCONTINUED
OPERATIONS (Note L) 24 205
COMMITMENTS AND CONTINGENCIES (Note J)
-------- --------
TOTAL LIABILITIES 32,007 27,841
SHAREHOLDERS' EQUITY (Notes E and F):
Preferred Shares, authorized and unissued, 2,000,000 shares
Common Shares, no par value; authorized, 12,000,000 shares;
issued and outstanding, 5,151,206 and 5,076,950 at March 31,
1997 and 1996, respectively 2,576 2,538
Additional paid-in capital 4,399 4,224
Retained earnings 9,966 7,870
Foreign currency translation adjustment 1,019 (102)
-------- --------
TOTAL SHAREHOLDERS' EQUITY 17,960 14,530
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 49,967 $ 42,371
======== ========
16
19
KRUG INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE YEARS ENDED MARCH 31, 1997, 1996 AND 1995
(All amounts in thousands, except per share amounts)
- -------------------------------------------------------------------------------
1997 1996 1995
REVENUES (Note M) $ 111,739 $ 95,821 $ 91,766
COSTS AND EXPENSES:
Cost of goods sold (Note M) 96,930 83,701 79,214
Selling and administrative 9,448 9,151 8,816
Restructuring charge (Note K) 530
Interest 995 1,126 1,307
Other income - net (Note G) (75) (51) (485)
--------- --------- ---------
EARNINGS FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 3,911 1,894 2,914
INCOME TAXES (Note H) 1,359 723 902
--------- --------- ---------
EARNINGS FROM CONTINUING OPERATIONS 2,552 1,171 2,012
LOSS FROM DISCONTINUED OPERATIONS (Note L) (456)
--------- --------- ---------
NET EARNINGS $ 2,096 $ 1,171 $ 2,012
========= ========= =========
PER COMMON AND COMMON EQUIVALENT SHARE:
Earnings from continuing operations $ 0.49 $ 0.23 $ 0.40
Loss from discontinued operations (0.09)
--------- --------- ---------
NET EARNINGS PER SHARE $ 0.40 $ 0.23 $ 0.40
========= ========= =========
AVERAGE COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING (Note F) 5,192 5,067 5,047
========= ========= =========
See notes to consolidated financial statements.
17
20
KRUG INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 1997, 1996 AND 1995
(All amounts in thousands)
- -------------------------------------------------------------------------------
COMMON SHARES FOREIGN
------------------ ADDITIONAL CURRENCY
PAID-IN RETAINED TRANSLATION
SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENT
APRIL 1, 1994 4,999 $ 2,500 $ 4,065 $ 4,690 $ (639)
Net earnings 2,012
Cash in lieu of fractional shares (Note F) (3)
Common Shares issued 12 6 25
Foreign currency translation adjustment 1,412
------- ------- ------- ------- -------
MARCH 31, 1995 5,011 2,506 4,090 6,699 773
Net earnings 1,171
Common Shares issued 66 32 134
Foreign currency translation adjustment (875)
------- ------- ------- ------- -------
MARCH 31, 1996 5,077 2,538 4,224 7,870 (102)
Net earnings 2,096
Common Shares issued 74 38 175
Foreign currency translation adjustment 1,121
------- ------- ------- ------- -------
MARCH 31, 1997 5,151 $ 2,576 $ 4,399 $ 9,966 $ 1,019
======= ======= ======= ======= =======
See notes to consolidated financial statements.
18
21
KRUG INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 1997, 1996 AND 1995
(All dollar amounts in thousands)
- -------------------------------------------------------------------------------
1997 1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 2,096 $ 1,171 $ 2,012
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation 1,153 1,117 1,060
Amortization of intangibles 54 60 (26)
Deferred income taxes (68) 164 219
Loss from discontinued operations 691
Gain on sale of assets (10) (31) (360)
Change in assets and liabilities:
Receivables (198) (1,589) 320
Inventories (700) 804 (288)
Prepaid expenses and other assets (863) 154 (22)
Accounts payable and accrued expenses 612 985 24
Income taxes 1,168 13 (757)
Net cash used in discontinued operations (921) (377) (935)
------- ------- -------
Net cash provided by operating activities 3,014 2,471 1,247
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Hago Products Ltd. (Note B) (1,783)
Proceeds from sales of assets 37 108 448
Expenditures for property, plant and equipment (624) (250) (425)
------- ------- -------
Net cash provided by (used in) investing activities (2,370) (142) 23
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 213 166 31
Bank borrowings - net 1,093 (1,037) (229)
Additions to long-term debt 7,243
Payments on long-term debt (2,287) (1,381) (9,140)
------- ------- -------
Net cash used in financing activities (981) (2,252) (2,095)
EFFECT OF EXCHANGE RATE CHANGES ON CASH 3 (1) 2
------- ------- -------
NET INCREASE (DECREASE) IN CASH (334) 76 (823)
CASH AT BEGINNING OF YEAR 439 363 1,186
------- ------- -------
CASH AT END OF YEAR $ 105 $ 439 $ 363
======= ======= =======
CASH PAID FOR:
Income taxes $ 237 $ 575 $ 1,328
======= ======= =======
Interest $ 1,136 $ 1,095 $ 1,362
======= ======= =======
NONCASH INVESTING AND FINANCING ACTIVITY - Capital leases $ 772 $ 414 $ 139
======= ======= =======
See notes to consolidated financial statements.
19
22
KRUG INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1997, 1996 AND 1995
(ALL DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- -------------------------------------------------------------------------------
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 cost reimbursement and time and
material government contracts are recorded as costs are incurred and
include estimated earned fees. Earned fees on contracts with fixed- fee
provisions are based on the proportion that costs incurred to date bear
to total estimated costs at completion. For contracts with award fee
provisions, fees are based on semiannual performance evaluations.
Revenues from fixed-price contracts are generally recognized using the
percentage-of-completion method for financial accounting purposes. Claims
for recovery of additional contract costs are recognized only to the
extent that the recoverable amounts can be determined with reasonable
certainty. Costs not recoverable upon completion of contracts are
immediately charged against earnings.
USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles 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 from
those estimates.
INVENTORIES - Inventories are valued at the lower of cost or market using
the first-in first-out method.
LONG-LIVED ASSETS - The Corporation adopted Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" effective
April 1, 1996. Implementation of SFAS No. 121 had no impact on the
consolidated financial statements.
DEPRECIATION - Property, plant and equipment, including capital leases,
is depreciated over its estimated useful life principally using the
straight-line method.
STOCK-BASED COMPENSATION - The Corporation measures compensation cost for
stock options issued to employees using the intrinsic value based method
of accounting prescribed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees."
NET EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE - Net earnings per
share is computed by dividing net earnings by the weighted average number
of Common Shares outstanding during each period, adjusted for the
dilutive effect, if any, of stock options and stock warrants.
FOREIGN CURRENCY TRANSLATION - The assets and liabilities of the
Corporation's wholly owned U.K. 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.
20
23
FINANCIAL INSTRUMENTS - The recorded values of cash and trade receivables
and payables approximate fair values because of the relatively short
maturity of these instruments. Similarly, the fair values of the
Corporation's notes payable are estimated to approximate current values
due to their relatively short maturity and interest rate characteristics.
RECENT ACCOUNTING STANDARDS - In February 1997 SFAS No. 128, "Earnings
per Share" was issued. The statement requires dual presentation of basic
and diluted earnings per share ("EPS") on the face of the statement of
earnings for entities with complex capital structures. SFAS No. 128 is
effective for financial statements for periods after December 15, 1997,
including interim periods. Implementation of this pronouncement is not
expected to have a material effect on reported EPS.
B. ACQUISITION OF HAGO PRODUCTS LTD.
Effective October 31, 1996, the Corporation's U.K. housewares subsidiary
purchased the outstanding common stock of Hago Products Ltd. ("Hago"), a
U.K. manufacturer of child safety gates and fireguards, for approximately
$1.8 million in cash. The acquisition was financed with internally
available funds including borrowings under the U.K. line of credit.
The acquisition was accounted for using the purchase method of
accounting. Accordingly, the consolidated statements of earnings include
the results of operations of Hago since the effective date of the
acquisition. The information below presents combined results of
operations on a pro-forma basis assuming the acquisition had occurred at
the beginning of the respective period:
YEAR ENDED MARCH 31,
------------------------
1997 1996
(Unaudited)
Revenues $ 117,787 $ 104,797
Earnings (loss) from continuing operations 2,316 (322)
Net earnings (loss) 1,860 (322)
Net earnings (loss) per share 0.36 (0.06)
The pro-forma amounts shown above include adjustments to reflect interest
expense for acquisition-related debt and are not necessarily indicative
of the consolidated results that would have occurred had the acquisition
taken place on April 1, 1995; nor are they necessarily indicative of
results that may occur in the future.
C. RECEIVABLES
MARCH 31
-------------------
1997 1996
Trade accounts receivable $ 13,157 $ 9,087
Contract receivables:
Amounts billed 6,986 8,019
Recoverable costs and accrued profit on work completed
but not yet billed 2,166 1,696
Other 178 165
-------- --------
22,487 18,967
Less allowance for doubtful accounts (856) (658)
-------- --------
$ 21,631 $ 18,309
======== ========
21
24
D. INVENTORIES
MARCH 31
--------------------------
1997 1996
Finished goods $ 8,171 $ 6,352
Work-in-process 1,291 1,101
Raw materials 1,641 1,182
-------- --------
$ 11,103 $ 8,635
======== ========
E. LONG-TERM DEBT
MARCH 31
--------------------------
1997 1996
U.S. Revolving Credit Line $ 3,793 $ 4,638
U.S. Mortgage 1,743 2,017
U.K. Term Loans 5,574 5,805
Capital leases 985 688
-------- --------
12,095 13,148
Less current maturities (2,922) (1,166)
-------- --------
$ 9,173 $ 11,982
======== ========
The U.S. Revolving Credit Line is a revolving credit facility with a U.S.
business credit corporation which provides up to $10 million. The credit
facility expires March 15, 2000. Interest is payable monthly at the
lender's base rate plus 2%, (10-1/2% at March 31, 1997). Availability
under the facility is based upon the billed and unbilled accounts
receivable of the Corporation's U.S. operations. At March 31, 1997,
additional availability under the revolving credit facility was
approximately $1.6 million. Under the terms of the credit facility, the
Corporation is restricted from declaring or paying cash dividends without
the consent of the lender and must comply with certain other restrictive
and financial covenants.
The U.S. Mortgage, which is due March 31, 1998, is collateralized by the
Corporation's Dayton, Ohio real property, which is held for sale.
Interest is payable monthly at the bank's base rate plus 2% (10 1/2% at
March 31, 1997).
Substantially all U.S. assets (except shares of foreign subsidiaries and
all related assets) are pledged as collateral for the U.S. Revolving
Credit Line and Mortgage.
The U.K. Term Loans are two, ten-year term loans which commenced in July
1995 with a U.K. bank. The loans have quarterly principal payments that
total $164, plus interest, at the bank's base rate plus 1 1/2% (8 1/4% at
March 31, 1997). Substantially all U.K. assets (except shares of the U.K.
subsidiaries) are pledged as collateral for the U.K. Term Loans. The Term
Loans include certain tangible net worth and cash flow requirements
relating to the U.K. subsidiaries. The Corporation's Bank Borrowing is
pursuant to a line of credit for the U.K. subsidiaries of which $2,938
was unused at March 31, 1997. Interest is payable quarterly on the line
of credit at the bank's base rate plus 1 1/2% (8 1/4% at March 31, 1997).
Annual payments of long-term debt, including capital leases, for the next
five years are as follows: 1998 - $2,922; 1999 - $961; 2000 - $4,558;
2001 - $685 and 2002 - $674.
22
25
F. SHAREHOLDERS' EQUITY
STOCK OPTION PLANS - The Corporation has three stock option plans
permitting the grant of options to purchase common shares to officers and
key employees; namely, the 1985 Incentive Stock Option Plan, the 1985
Incentive Stock Option Scheme for U.K. Employees and the 1995 Incentive
Stock Option Plan. The 1985 U.K. Scheme has been administered as part of
the 1985 Incentive Stock Option Plan. The authority to grant options
under the 1985 Plan has expired; however, 30,320 options previously
granted are still outstanding. Under the 1995 Plan, the grant of options
to purchase up to 250,000 Common Shares is authorized through May 2005,
and 91,000 options are outstanding. Option grants are made at the fair
market values on the date of grant and expire three to ten years later.
Vesting periods are determined by the Board of Directors but may not
exceed ten years. On April 30, 1996, the Board of Directors approved the
immediate vesting of all of the then outstanding stock options. Options
granted during the year ended March 31, 1997 vest ratably over two years
from November 1996.
NUMBER OF WEIGHTED-AVERAGE RANGE OF
SHARES EXERCISE PRICE EXERCISE PRICES
------------- ---------------- ----------------
Options outstanding, April 1, 1994 170,803 $ 2.81 $2.16-4.63
Exercised (12,128) 2.57 2.57
Expired (9,096) 4.63 4.63
Forfeited (6,064) 3.14 3.14
----------- ----------- ----------
Options outstanding, March 31, 1995 143,515 2.68 2.16-3.14
Granted 66,000 3.00 3.00
Exercised (40,427) 2.28 2.16-2.57
Forfeited (42,448) 2.87 2.57-3.14
----------- ----------- ----------
Options outstanding, March 31, 1996 126,640 2.93 2.57-3.14
Granted 75,000 4.50 4.50
Exercised (74,256) 2.86 2.57-3.00
Expired (6,064) 2.57 2.57
----------- ----------- ----------
Options outstanding, March 31, 1997 121,320 3.96 $3.00-4.50
=========== =========== ==========
Options exercisable, March 31, 1997 46,320 $ 3.09 $3.00-3.14
=========== =========== ==========
Weighted-average remaining contractual
life at March 31, 1997 3.07 years
===========
The weighted-average fair value at grant date for the options granted
during the years ended March 31, 1997 and 1996 was $1.65 and $1.15,
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, 1997 and 1996, respectively; estimated volatility of 51% and 55%;
risk-free interest rate of 6%; dividend yield of 0%; and an expected life
of 2.5 years.
No compensation costs have been recognized for the stock option plans
since the exercise price of the options is not less than the grant date
fair value. Had compensation costs been determined on the fair value
based method consistent with SFAS No. 123, the Corporation's net earnings
would have been $2,033 and $1,169 and net earnings per share would have
been $0.39 and $0.23 for the years ended March 31, 1997 and 1996,
respectively.
1997 EMPLOYEE STOCK PURCHASE PLAN - The 1997 Employee Stock Purchase Plan
was approved by the Board of Directors in November 1996. Each employee
continuously employed through December 31, 1997 by KRUG International
Corp. and KRUG Life Sciences Inc. is eligible to purchase up to 200
Common Shares for 85% of the fair market value as determined based on the
lower of the last sale price at January 2, 1997 or December 31, 1997.
Payments for stock subscribed under the plan are being made
23
26
by payroll deductions. An employee may voluntarily terminate
participation in the Plan at any time prior to December 31, 1997 and
receive a refund of payroll deductions plus interest thereon at 7% per
annum. At March 31, 1997, a total of 19,152 common shares have been
subscribed by participants under this plan.
WARRANTS - The Corporation issued warrants to shareholders of record on
December 23, 1995. For each five common shares held, the Corporation
distributed one warrant which may be used to purchase one common share.
The warrants entitle the holders to purchase, in the aggregate, 999,487
common shares. The purchase price was $7.125 per share through January
31, 1997, and is $8.625 from February 1, 1997 through their expiration on
January 31, 1998. The Corporation may reduce the purchase price at any
time.
In October 1995 the Corporation agreed to issue warrants to two outside
advisory firms to purchase a total of 125,000 common shares at $3.031 per
share. In December 1996 the Corporation terminated the advisory
agreements which included the cancellation of the warrant provisions.
STOCK DIVIDENDS - A 10% stock dividend distributed by the Corporation in
fiscal year 1995 has been reflected in the financial statements for all
periods presented.
G. OTHER INCOME - NET
YEAR ENDED MARCH 31
--------------------
1997 1996 1995
Gain on sale of assets $ 10 $ 31 $360
U.K. tax rebates related to intercompany dividends 110
Other 65 20 15
---- ---- ----
$ 75 $ 51 $485
==== ==== ====
H. INCOME TAXES
The provisions for income taxes include the following:
YEAR ENDED MARCH 31
---------------------------------
1997 1996 1995
Domestic - deferred $ 159 $ 198 $ 324
------ ------ ------
Foreign:
Current 1,110 573 683
Deferred 90 (48) (105)
------ ------ ------
Total foreign tax provision 1,200 525 578
------ ------ ------
$1,359 $ 723 $ 902
====== ====== ======
24
27
Deferred tax assets recorded in the balance sheets include the following
tax effects:
MARCH 31
--------------------
1997 1996
Domestic:
Contract accounting $ 121 $ 206
Net operating loss carryforwards 3,797 4,091
Provision for loss on discontinued operations 312 482
Other 149 155
------- -------
4,379 4,934
Less valuation allowance (3,156) (3,796)
------- -------
Total domestic deferred tax assets 1,223 1,138
Foreign:
Capital loss carryforward 2,380 2,223
Tax prepayments not currently utilized 1,385 1,842
Depreciation expense (648) (568)
Other 81 96
------- -------
3,198 3,593
Less valuation allowance (2,380) (2,223)
------- -------
Total foreign deferred tax assets 818 1,370
------- -------
$ 2,041 $ 2,508
======= =======
At March 31, 1997, the Corporation has accumulated domestic net operating
loss carryforwards (expiring in 2005 through 2009) of approximately
$11,000 available to offset future domestic taxable income.
The differences between income taxes at the federal statutory rate and
the effective tax rate are as follows:
YEAR ENDED MARCH 31
--------------------------
1997 1996 1995
Income taxes at federal statutory rate 34.0% 34.0% 34.0%
Foreign tax rate differential (0.9) (0.7) (0.7)
U.K. pension (2.0) 2.3 0.5
U.K. amortization of intangibles 0.9 (0.5)
Other 3.6 1.7 (2.3)
---- ---- ----
Effective tax rate 34.7% 38.2% 31.0%
==== ==== ====
Earnings from continuing operations before income taxes include $3,439,
$1,312 and $1,962 in 1997, 1996 and 1995, respectively, of foreign
earnings.
Domestic income taxes have not been provided on undistributed earnings of
the foreign subsidiaries aggregating $19,279 at March 31, 1997 because
such amounts are considered to be permanently invested abroad.
Determination of the amount of the unrecognized deferred tax liability
for these undistributed earnings is not practicable.
25
28
I. 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.
Effective February 28, 1997, the Corporation amended its domestic plan to
freeze participant benefits and close the plan to new participants. As a
result, the Corporation recognized a curtailment gain of $369 primarily
due to the reduction of the projected benefit obligation. The domestic
pension asset recorded on the balance sheet would be substantially
unrecoverable in the event of plan termination due to taxes, including
excise taxes, which would be payable upon reversion of any excess pension
assets to the Corporation.
The components of net pension expense for all plans, excluding the
curtailment gain, are as follows:
YEAR ENDED MARCH 31
--------------------------------------------------------------------------
1997 1996 1995
---------------------- ---------------------- ----------------------
DOMESTIC FOREIGN DOMESTIC FOREIGN DOMESTIC FOREIGN
Service cost $ 434 $ 391 $ 477 $ 425 $ 492 $ 383
Interest cost 449 709 446 663 429 563
Actual return on assets (825) (779) (732) (1,476) (438) (566)
Net amortization and deferral 317 83 324 1,035 33 134
--------- --------- --------- --------- --------- ---------
Net pension expense $ 375 $ 404 $ 515 $ 647 $ 516 $ 514
========= ========= ========= ========= ========= =========
26
29
Summary information for the funded plans is as follows:
MARCH 31
--------------------------------------------
1997 1996
-------------------- --------------------
DOMESTIC FOREIGN DOMESTIC FOREIGN
Vested benefit obligation $ 5,701 $ 8,692 $ 4,398 $ 5,732
======== ======== ======== ========
Accumulated benefit obligation $ 5,911 $ 8,748 $ 4,819 $ 5,732
======== ======== ======== ========
Projected benefit obligation $ 5,911 $ 9,445 $ 6,311 $ 7,640
Fair value of plan assets 6,343 10,020 6,112 8,243
-------- -------- -------- --------
Plan assets greater (less) than projected benefit
obligation 432 575 (199) 603
Reconciliation of financial status of plans to
amounts recorded in the balance sheets:
Unamortized plan assets in excess of plan liabilities
(overfunding) to be recognized as a reduction of
future years' pension expense (34) (707) (169) (726)
Unrecognized net loss from experience different
than plan assumptions 223 1,254 391 825
Unamortized prior service cost from change in
benefit formula 1,223 360 1,231
-------- -------- -------- --------
Pension asset included in the balance sheets $ 621 $ 2,345 $ 383 $ 1,933
======== ======== ======== ========
The weighted-average discount rate used for the domestic plan was 7.5% in
1997 through the curtailment date and 1996. The discount rate was changed
to 7.0% after the curtailment. Where appropriate, the projected rate of
compensation increases was 4.5% in 1997 and 1996 and the expected rate of
return on plan assets was 8% in 1997 and 1996. Domestic plan assets are
primarily invested in listed stocks and bonds and U.S. government
obligations. Approximately 12% of the fair value of the assets at March
31, 1997 comprised 146,000 Common Shares of the Corporation.
The weighted-average discount rate used for the foreign plans was 9% in
1997 and 1996. The projected rate of compensation increases was 7% in
1997 and 1996, and the expected rate of return on plan assets was 9% in
1997 and 1996. Foreign plan assets are invested in managed fund units in
the United Kingdom.
DEFINED CONTRIBUTION PLAN - The Corporation has a defined contribution
plan pursuant to IRS Section 401(k) covering substantially all domestic
employees. The Corporation's policy is to contribute a specified
percentage of the employees' contribution as determined periodically by
the Corporation. Plan expense was $200 in 1997, $169 in 1996 and $170 in
1995.
27
30
J. COMMITMENTS AND CONTINGENCIES
LEASES - The Corporation leases various land, buildings and equipment
(principally for the U.K. companies) under capital and operating lease
obligations with noncancelable terms ranging from 1 to 18 years. Minimum
lease commitments as of March 31, 1997 follow:
CAPITAL OPERATING
LEASES LEASES
------- -------
1998 $ 543 $ 1,400
1999 355 1,351
2000 121 923
2001 34 575
2002 20 563
Later years 6,353
------- -------
Total minimum lease payments 1,073 $11,165
=======
Amount representing interest (88)
-------
Present value of minimum lease payments 985
Less current maturities of capital leases 523
-------
Long-term portion of capital leases $ 462
=======
At March 31, 1997 and 1996, buildings and equipment under capital leases
of $2,481 and $2,750 (less accumulated depreciation of $1,109 and
$1,629), respectively, are included in property, plant and equipment.
Rent expense under operating leases was $1,171, $993 and $922 for the
years ended March 31, 1997, 1996 and 1995, 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 is of the opinion that such claims and litigation are not
likely to have a material effect on the financial position or results of
operations of the Corporation.
CONSULTING AGREEMENTS - The Corporation entered into a consulting
agreement with its former chairman in April 1997 and terminated its
obligation to him under a previous founders agreement. The remaining
obligation under the consulting agreement of $450 and $700 at March 31,
1997 and 1996, respectively, is included in other accrued expenses in the
consolidated balance sheets.
GOVERNMENT CONTRACTS - Overhead rates for cost reimbursement and time and
material billed to government contracts are subject to possible audit,
adjustment and/or renegotiation. Management does not believe such matters
will have a material effect on the consolidated financial statements.
28
31
K. RESTRUCTURING CHARGE
In September 1996 the Corporation closed its executive offices in Dayton,
Ohio and consolidated its headquarters activities with its primary
operations facility adjacent to the NASA Johnson Space Center in Houston,
Texas. A restructuring charge of $800 was recorded for such office
consolidation during the quarter ended September 30, 1996. The charge
consisted primarily of estimated costs relating to severance for six
employees and rent and other costs related to the vacated offices in
Dayton, Ohio. In the fourth quarter of fiscal year 1997, the Corporation
recorded a credit to the restructuring charge of $270 after successfully
subleasing the vacated offices. At March 31, 1997, the accrued
restructuring charge of $340 primarily relates to rent (net of expected
sublease rental income) and other expenses payable through June 1999, the
lease termination date.
L. DISCONTINUED OPERATIONS
In fiscal 1989, the Corporation discontinued the operations of its
Industrial Segment and subsequently disposed of substantially all related
net assets. However, obligations remain relating to a leased property in
Knoxville, Tennessee, a leased property in Toronto, Canada, and product
liability claims for products sold prior to the disposal.
During the year ended March 31, 1997, the Corporation recorded a charge
of $456 (net of a tax benefit of $235) to increase the provision for
losses for such discontinued operations. The increase was due to
additional repair and maintenance costs relating to the Knoxville
property, decreased sublease income from the Knoxville property,
increased insurance costs related to product liability claims and loss of
future sublease income caused by the bankruptcy filing of a tenant in the
Toronto facility.
During the year ended March 31, 1997, the reserve for losses from
discontinued operations increased by the $691 charge previously discussed
and decreased by $1,192 for charges to the reserve, leaving a balance of
$918 at March 31, 1997. During the year ended March 31, 1996, the reserve
for losses from discontinued operations increased by $140 from asset
sales and decreased by $781 for charges to the reserve, leaving a balance
of $1,419 at March 31, 1996. During the year ended March 31, 1995, the
reserve for losses from discontinued operations increased by $700 as a
result of a settlement with the bankruptcy court related to a major
tenant of the Knoxville leased property who filed bankruptcy in 1994 and
decreased by $1,212 for charges to the reserve.
The Corporation is directly or contingently liable for lease and other
commitments related to property formerly used by its discontinued
operations. Commitments, net of minimum sublease rentals expected to be
received, are $335 in 1998 and $196 in 1999.
29
32
M. INDUSTRY SEGMENTS
The Corporation's operations consist of three segments:
- Leisure Marine equipment distribution in the U.K.
- Housewares manufacturing and distribution in the U.K.
- Life Sciences and Engineering in the U.S.
The Leisure Marine distribution segment is comprised of Sowester Ltd. a
subsidiary, which sells to boat manufacturers and marine retailers more
than 4,000 items of marine equipment including hardware and electronics,
outboard, inboard and stern drive engines, personal watercraft, engine
controls, steering systems, and associated replacement parts. Sowester
Ltd. is the exclusive distributor in the U.K. and Ireland for many
well-known brand names such as Mercury, MerCruiser and Sea Doo.
The Housewares manufacturing segment is comprised of Beldray Ltd. and
Hago Products Ltd., subsidiaries which manufacture and sell under various
proprietary brand names and private labels ironing tables, household
ladders, rotary dryers, indoor airers, child safety gates, fireguards and
garden equipment. Customers include do-it-yourself retailers,
supermarkets, mail order catalogs, wholesalers and department stores,
primarily in the U.K. and Ireland.
The Life Sciences and Engineering segment is comprised of two
subsidiaries, KRUG Life Sciences Inc. and Technology/Scientific Services,
Inc., and is engaged in basic and applied biotechnological research,
support services and engineering pursuant to contracts primarily with
agencies of the U.S. government.
30
33
Information concerning the Corporation's operations by industry segment
is presented in the following table:
YEAR ENDED MARCH 31
-----------------------------------
1997 1996 1995
REVENUES FROM UNAFFILIATED CUSTOMERS (1):
Leisure Marine $ 28,658 $ 25,034 $ 20,923
Housewares (2) 33,071 26,442 26,891
Life Sciences and Engineering (3) 50,010 44,345 43,952
--------- --------- ---------
$ 111,739 $ 95,821 $ 91,766
========= ========= =========
OPERATING PROFIT:
Leisure Marine $ 2,402 $ 1,932 $ 1,021
Housewares 729 (847) 599
Life Sciences and Engineering 3,592 3,786 3,894
--------- --------- ---------
6,723 4,871 5,514
Restructuring charge (530)
Other income - net 75 51 485
Interest expense (995) (1,126) (1,308)
Corporate expense (1,362) (1,902) (1,777)
--------- --------- ---------
Earnings from continuing operations before income taxes $ 3,911 $ 1,894 $ 2,914
========= ========= =========
IDENTIFIABLE ASSETS:
Leisure Marine $ 18,137 $ 15,900 $ 15,904
Housewares 16,041 10,167 11,583
Life Sciences and Engineering 9,976 10,723 10,331
Other 5,813 5,581 6,351
--------- --------- ---------
$ 49,967 $ 42,371 $ 44,169
========= ========= =========
DEPRECIATION:
Leisure Marine $ 384 $ 377 $ 363
Housewares 640 559 507
Life Sciences and Engineering 115 150 163
Other 14 31 27
--------- --------- ---------
$ 1,153 $ 1,117 $ 1,060
========= ========= =========
CAPITAL ADDITIONS:
Leisure Marine $ 329 $ 298 $ 87
Housewares 221 349 341
Life Sciences and Engineering 72 17 83
Other 2 53
--------- --------- ---------
$ 624 $ 664 $ 564
========= ========= =========
(1) Revenues from tangible products were $73,307, $59,384 and $57,747 and
revenues from services were $38,432, $36,437 and $34,019 for the years
ended March 31, 1997, 1996 and 1995, respectively. Related cost of goods
sold for tangible products was $62,375, $51,245 and $49,317 and related
cost of services was $34,555, $32,456 and $29,897, respectively.
(2) Includes revenues from one customer of $11,913 in 1997.
(3) Includes revenues from the U.S. government of $49,808 in 1997, $44,091 in
1995 and $43,637 in 1995.
31
34
N. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
FISCAL
YEAR
ENDED FOURTH THIRD SECOND FIRST
MARCH 31 QUARTER QUARTER QUARTER QUARTER
REVENUES 1997 $ 30,203 $ 28,360 $ 26,669 $ 26,507
1996 24,717 22,175 23,904 25,025
GROSS PROFIT (Revenues less cost 1997 4,287 3,038 3,419 4,065
of goods sold) 1996 3,127 2,640 3,114 3,239
EARNINGS FROM CONTINUING OPERATIONS 1997 1,161 258 84 1,049
1996 210 156 419 386
NET EARNINGS 1997 705 258 84 1,049
1996 210 156 419 386
EARNINGS PER SHARE FROM CONTINUING 1997 0.22 0.05 0.02 0.20
OPERATIONS 1996 0.04 0.03 0.08 0.08
NET EARNINGS PER SHARE 1997 0.13 0.05 0.02 0.20
1996 0.04 0.03 0.08 0.08
AVERAGE COMMON AND COMMON 1997 5,186 5,199 5,210 5,174
EQUIVALENT SHARES OUTSTANDING 1996 5,121 5,059 5,051 5,038
The Corporation files quarterly information on Form 10-Q with the
Securities and Exchange Commission. Significant activity in the amounts
reported for the quarter ended March 31, 1997 included the provision for
losses related to discontinued operations of $456, net of tax benefit of
$235 (see Note L); the pretax credit to the accrued restructuring charge
totaling $270 (see Note K); and pretax revenue from material fees upon
settlement of a government contract totaling $450.
******
32
35
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
33
36
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item 10 is incorporated herein by
reference from the Corporation's Proxy Statement for its Annual Meeting of
Shareholders on July 18, 1997, except for certain information concerning the
executive officers of the Corporation which is set forth in Part I of this
Report.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 is set forth in the Corporation's
Proxy Statement for its Annual Meeting of Shareholders on July 18, 1997, and is
incorporated herein by this reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item 12 is set forth in the Corporation's
Proxy Statement for its Annual Meeting of Shareholders on July 18, 1997, and is
incorporated herein by this reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item 13 is set forth in the Corporation's
Proxy Statement for its Annual Meeting of Shareholders on July 18, 1997, and is
incorporated herein by this reference.
34
37
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 incorporated by reference as part of this Report at Item 8
hereof.
Independent Auditors' Report.
Consolidated Balance Sheets -- March 31, 1997 and 1996.
Consolidated Statements of Earnings -- for the fiscal years ended March
31, 1997, 1996 and 1995.
Consolidated Statements of Shareholders' Equity -- for the fiscal years
ended March 31, 1997, 1996 and 1995.
Consolidated Statements of Cash Flows -- for the fiscal years ended March
31, 1997, 1996 and 1995.
Notes to Consolidated Financial Statements -- for the fiscal years ended
March 31, 1997, 1996 and 1995.
(a) (2) Financial Statement Schedules
Independent Auditors' Report -- .............. At page 37 of this Report.
Schedule I -- ................................. Condensed financial information of registrant
(at pages 38 - 40 of this Report)
Schedule II -- ................................ Valuation and qualifying accounts (at page 41
of this Report)
The information required to be submitted in Schedules III, IV and V for
KRUG International Corp. and consolidated subsidiaries has either been shown in
the financial statements or notes, or is not applicable or required under
Regulation S-X, and, therefore, those schedules have been omitted.
(b) Reports on Form 8-K
During the quarter ended March 31, 1997, the Corporation filed two
reports on Form 8-K. The first was dated January 14, 1997 reporting
Item 2 - Acquisition or Disposition of Assets. The second was dated
March 31, 1997 reporting Item 2 - Acquisition or Disposition of Assets.
Both Form 8-K's related to the acquisition of Hago Products Ltd. by
Beldray Ltd.
(c) Exhibits. See Index to Exhibits
35
38
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
13th day of June, 1997.
KRUG International Corp.
By: /s/ CHARLES LINN HASLAM
-------------------------------------
Charles Linn Haslam
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:
- ------------------------------------------------------------------------------------------------------------------------
Name Title Date
- ------------------------------------------------------------------------------------------------------------------------
/s/ CHARLES LINN HASLAM Chairman and Chief Executive Officer June 13, 1997
- ------------------------------------------- (Principal Executive Officer)
Charles Linn Haslam
/s/ ROBERT M. THORNTON, JR. Director, President and Chief Financial Officer June 13, 1997
- ------------------------------------------- (Principal Financial Officer)
Robert M. Thornton, Jr.
/s/ Robert M. Ellis Principal Accounting Officer June 13, 1997
- -------------------------------------------
Robert M. Ellis
/s/ JAMES J. MULLIGAN Director June 13, 1997
- -------------------------------------------
James J. Mulligan
/s/ BERNEE D. L. STROM Director June 13, 1997
- -------------------------------------------
Bernee D. L. Strom
/s/ W. EDWARD GREENHALGH Director June 13, 1997
- -------------------------------------------
W. Edward Greenhalgh
/s/ T. WAYNE HOLT Director June 13, 1997
- -------------------------------------------
T. Wayne Holt
/s/ KAREN B. BRENNER Director June 13, 1997
- -------------------------------------------
Karen B. Brenner
36
39
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
KRUG International Corp.
Houston, Texas
We have audited the consolidated financial statements of KRUG International
Corp. and subsidiaries as of March 31, 1997 and 1996, and for each of the three
years in the period ended March 31, 1997, and have issued our report thereon
dated May 16, 1997 (included elsewhere in this Form 10-K). Our audits also
included the consolidated financial statement schedules of KRUG International
Corp. and subsidiaries, listed in Item 14. These consolidated financial
statement schedules are 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 schedules, when considered in relation to
the basic financial statements taken as a whole, present fairly in all material
respects the information set forth therein.
DELOITTE & TOUCHE LLP
Dayton, Ohio
May 16, 1997
37
40
KRUG INTERNATIONAL CORP. AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION
OF REGISTRANT, KRUG INTERNATIONAL CORP.
BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
ASSETS
MARCH 31, MARCH 31,
1997 1996
--------- ---------
CURRENT ASSETS $ 250 $ 798
PROPERTY, PLANT & EQUIP. - NET 672 751
RECEIVABLE FROM SUBSIDIARIES 3,965 4,646
INVESTMENT IN SUBSIDIARIES
ON THE EQUITY METHOD 30,552 27,186
OTHER ASSETS 2,177 1,574
--------- ---------
$ 37,616 $ 34,955
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES $ 3,713 $ 1,892
PAYABLE TO SUBSIDIARIES 11,824 11,497
SUBSIDIARY LIABILITY GUARANTEED
BY REGISTRANT 327 564
LONG-TERM DEBT 3,792 6,472
--------- ---------
TOTAL LIABILITIES 19,656 20,425
--------- ---------
SHAREHOLDERS' EQUITY:
COMMON SHARES 2,576 2,538
ADDITIONAL PAID-IN CAPITAL 4,399 4,224
RETAINED EARNINGS 9,966 7,870
FOREIGN CURRENCY
TRANSLATION ADJUSTMENT 1,019 (102)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 17,960 14,530
--------- ---------
$ 37,616 $ 34,955
========= =========
38
41
KRUG INTERNATIONAL CORP. AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION
OF REGISTRANT, KRUG INTERNATIONAL CORP.
STATEMENTS OF EARNINGS AND RETAINED EARNINGS
(AMOUNTS IN THOUSANDS)
FISCAL YEAR ENDED MARCH 31,
1997 1996 1995
--------- --------- ---------
REVENUES:
NET SALES $ 78 $ 143 $ 187
DIVIDEND INCOME FROM KRUG
INTERNATIONAL (UK) LTD 1,595
DIVIDEND INCOME FROM KRUG
LIFE SCIENCES INC 1,111 1,099 4,614
--------- --------- ---------
TOTAL REVENUES 1,189 1,242 6,396
COSTS AND EXPENSES:
COSTS OF GOODS SOLD (13) (282) (201)
SELLING AND ADMINISTRATIVE 1,359 1,938 1,697
RESTRUCTURING CHARGE 530
INTEREST EXPENSE 916 938 1,284
OTHER (INCOME), NET (75) (20) (448)
--------- --------- ---------
EARNINGS BEFORE INCOME TAXES AND
EQUITY IN UNDISTRIBUTED NET
EARNINGS (LOSS) OF SUBSIDIARIES (1,528) (1,332) 4,064
INCOME TAXES - PROVIDED ON
SEPARATE RETURN BASIS (413) (374) 1,315
--------- --------- ---------
EARNINGS BEFORE EQUITY IN
UNDISTRIBUTED NET EARNINGS
(LOSS) OF SUBSIDIARIES (1,115) (958) 2,749
EQUITY IN UNDISTRIBUTED NET
EARNINGS (LOSS) OF
SUBSIDIARIES 3,211 2,129 (737)
--------- --------- ---------
NET EARNINGS 2,096 1,171 2,012
RETAINED EARNINGS, BEGINNING
OF YEAR 7,870 6,699 4,690
CASH PAID IN LIEU OF
FRACTIONAL SHARES (3)
--------- --------- ---------
RETAINED EARNINGS, END
OF YEAR $ 9,966 $ 7,870 $ 6,699
========= ========= =========
39
42
KRUG INTERNATIONAL CORP. AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION
OF REGISTRANT, KRUG INTERNATIONAL CORP.
STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
FISCAL YEAR ENDED MARCH 31,
1997 1996 1995
--------- --------- ---------
CASH FLOWS PROVIDED BY (USED IN)
OPERATING ACTIVITIES:
NET EARNINGS $ 2,096 $ 1,171 $ 2,012
ADJUSTMENTS TO RECONCILE
EARNINGS TO CASH PROVIDED
BY (USED IN) OPERATING
ACTIVIITES:
ACCOUNTS RECEIVABLE 70 40 424
OTHER (662) (675) (62)
--------- --------- ---------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 1,504 536 2,374
--------- --------- ---------
CASH FLOWS PROVIDED BY (USED IN)
FINANCING ACTIVITIES:
INCREASE (DECREASE) IN NET
PAYABLE TO SUBSIDIARIES (1,008) (39) (371)
BANK BORROWING - NET (1,000)
ADDITIONS TO LONG-TERM DEBT 4,879
PAYMENTS ON LONG-TERM DEBT (1,120) (573) (8,746)
SALE OF COMMON SHARES 213 166 31
--------- --------- ---------
NET CASH (USED IN)
FINANCING ACTIVITIES (1,915) (446) (5,207)
--------- --------- ---------
CASH FLOWS PROVIDED BY (USED IN)
INVESTING ACTIVITIES:
ADDITIONS TO PROPERTY, PLANT
AND EQUIPMENT (3) (5)
PROCEEDS FROM SALE OF ASSETS 422
CASH DIVIDENDS RECEIVED FROM
SUBSIDIARIES 1,595
--------- --------- ---------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES (3) (5) 2,017
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH (414) 85 (816)
CASH AT BEGINNING OF YEAR 430 345 1,161
--------- --------- ---------
CASH AT END OF YEAR $ 16 $ 430 $ 345
========= ========= =========
40
43
KRUG INTERNATIONAL CORP. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(AMOUNTS IN THOUSANDS)
Column A Column B Column C Column D Column E
- -------- -------- ------------------------- -------- --------
Additions
-------------------------
Currency
Allowance for Balance at Charged to Translation Deductions Balance
Doubtful Beginning Costs and /Foreign from at End
Accounts of Year Expenses Acquisition Reserves of Year
- -------------- ---------- ---------- ---------- ---------- ----------
YEAR ENDED
March 31,1997 $ 658 $ 184 $ 54 $ 40 $ 856
========== ========== ========== ========== ==========
YEAR ENDED
March 31,1996 $ 595 $ 144 $ (37) $ 44 $ 658
========== ========== ========== ========== ==========
YEAR ENDED
March 31,1995 $ 634 $ (7) $ 54 $ 86 $ 595
========== ========== ========== ========== ==========
Deferred Income Currency
Tax Asset Balance at Additions Translation Deductions Balance
Valuation Beginning to /Foreign from at End
Allowance of Year Reserves Acquisition Reserves of Year
- -------------- ---------- ---------- ---------- ---------- ----------
YEAR ENDED
March 31,1997 $ 6,019 $ 0 $ 157 $ 640 $ 5,536
========== ========== ========== ========== ==========
YEAR ENDED
March 31,1996 $ 6,280 $ 0 $ (136) $ 125 $ 6,019
========== ========== ========== ========== ==========
YEAR ENDED
March 31,1995 $ 6,800 $ 0 $ 198 $ 718 $ 6,280
========== ========== ========== ========== ==========
41
44
INDEX TO EXHIBITS
(3) ARTICLES OF INCORPORATION AND BY-LAWS:
*3.1 Articles of Incorporation of KRUG International Corp., as amended, was filed as Exhibit
3.1 to the Corporation's Report on Form 10-K for the year ended March 31, 1992
*3.2 Code of Regulations of KRUG International Corp., as amended, was filed as Exhibit 3.1 to
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 Credit Agreement among KRUG International Corp.,
Technology/Scientific Services, Inc., KRUG Life Sciences Inc. and Society Bank, N.A., The
Central Trust Company, N.A., Comerica Bank, CoreStates Bank, N.A. and Security Pacific
National Bank dated November 14, 1991, as well as the following related documents: (i)
Amendment No. 1 to the Credit Agreement, dated November 22, 1991; (ii) Form of Term Note,
dated November 14, 1991; (iii) Form of Revolving Credit Note, dated November 14, 1991;
(iv) Form of Security Agreement, dated November 14, 1991; (v) Amendment No. 1 to Security
Agreement; (vi) Open-End Mortgage, dated November 14, 1991 and Amendment No. 1 to Open-End
Mortgage, dated November 22, 1991 are filed as an Exhibit to this Report
*4.2 Amendment No. 2 to the Credit Agreement (listed at 4.1 immediately above) dated July 31,
1992 was filed as Exhibit 4.4 to the Corporation's Report on Form 10-K for the year ended
March 31, 1993
*4.3 Amendment to the Credit Agreement (listed at 4.1 above) dated May 25, 1993 was filed as
Exhibit 4.5 to the Corporation's Report on Form 10-K for the year ended March 31, 1993
*4.4 Amendment No. 2 to the Credit Agreement (listed at 4.1 above) dated June 10, 1994 was
filed as Exhibit 4.6 to the Corporation's Report on Form 8-K dated June 17, 1994
*4.5 Amendment No. 4 to the Credit Agreement (listed at 4.1 above) dated March 16, 1995 was
filed as Exhibit 4.7 to the Corporation's Report on Form 10-K for the year ended March 31,
1995
*4.6 Loan and Security Agreement dated March 16, 1995 among KRUG International Corp., KRUG Life
Sciences Inc., Technology/Scientific Services, Inc. and Transamerica Business Credit
Corporation was filed as Exhibit A on Form 8-K dated March 17, 1995
45
*4.7 Amendment No. 1 to the Loan and Security Agreement (listed at 4.6 above) dated September
26, 1995 was filed as Exhibit 4.7 to the Corporation's Report on Form 10-K for the year
ended March 31, 1996
*4.8 Loan Facility dated December 8, 1994 among KRUG International (UK) Limited, Sowester
Limited and National Westminster Bank was filed as Exhibit 4.8 to the Corporation's Report
on Form 10-K for the year ended March 31, 1996
*4.9 Loan Facility dated December 8, 1994 among KRUG International (UK) Limited, Beldray
Limited and National Westminster Bank was filed as Exhibit 4.9 to the Corporation's Report
on Form 10-K for the year ended March 31, 1996
(10) MATERIAL CONTRACTS:
*10.1 1981 Incentive Stock Option Plan, as amended, was filed as Exhibit 10.1 to the
Corporation's Report on Form 10-K for the year ended March 31, 1993
*10.2 1985 Incentive Stock Option Plan, as amended, was filed as Exhibit 10.2 to the
Corporation's Report on Form 10-K for the year ended March 31, 1993
*10.3 1995 Incentive Stock Option Plan was filed as Exhibit 10.3 to the Corporation's Report on
Form 10-K for the year ended March 31, 1996
*10.4 Consulting Agreement between KRUG International Corp. and Maurice F. Krug dated April 30,
1996 was filed as Exhibit 10.4 to the Corporation's Report on Form 10-K for the year ended
March 31, 1996
*10.5 Employment Agreement between KRUG International Corp. and Charles Linn Haslam dated May
17, 1996 was filed as Exhibit 10.1 to the Corporation's Report on Form 10-Q for the
quarter ended June 30, 1996
*10.6 Consulting and Employment Agreement between KRUG International Corp. and Robert M.
Thornton, Jr. dated May 17, 1996 was filed as Exhibit 10.2 to the Corporation's Report on
Form 10-Q for the quarter ended June 30, 1996
10.7 Employment Agreement between KRUG International Corp. and Thomas W. Kemp dated October 1,
1996 is filed as an Exhibit to this Report
10.8 1997 Employee Stock Purchase Plan is filed as an Exhibit to this Report
46
(21) SUBSIDIARIES:
The active subsidiaries of KRUG International Corp. are listed
below, do business under the name under which they are organized,
and are included in the consolidated financial statements of the
Corporation. The names, jurisdiction of incorporation of such
subsidiaries, and percentage of voting securities owned by the
Corporation are set forth below.
JURISDICTION IN PERCENTAGE
WHICH OF VOTING
NAME OF SUBSIDIARY INCORPORATED SECURITIES OWNED
------------------ ------------ ----------------
Technology/Scientific Services, Inc. Ohio 100%
KRUG Life Sciences Inc. Ohio 100%
KRUG Properties Inc. Ohio 100% (1)
KRUG Properties Ltd. Ontario, Canada 100% (1)
KRUG International (U.K.) Ltd. United Kingdom 100%
Beldray Limited United Kingdom 100% (2)
Sowester Limited United Kingdom 100% (2)
Hago Products Limited United Kingdom 100% (3)
----------
(1) Subsidiaries included within discontinued operations.
(2) Subsidiaries of KRUG International (U.K.) Ltd.
(3) Subsidiary of Beldray Limited
(23) CONSENTS OF EXPERTS AND COUNSEL:
23.1 Consent of Deloitte & Touche LLP dated June 13, 1997 with respect to material incorporated
by reference into the KRUG International Corp. Registration Statement on Form S-8 (No.
33-22847) relating to the Corporation's 1985 Incentive Stock Option Plan, the Registration
Statement on Form S-8 (No. 33-67920) relating to the Corporation's Incentive Share Option
Scheme 1985, and the 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)
(27) FINANCIAL DATA SCHEDULE:
Financial Data Schedule for the fiscal year ended March 31, 1997
- ---------
* Indicates that this Exhibit is incorporated by reference into this Annual
Report on Form 10-K from a previous filing with the Commission.