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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended March 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ____________
Commission File No. 1-12607
KRUG INTERNATIONAL CORP.
(Exact name of registrant as specified in its charter)
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Ohio 31-0621189
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
900 Circle 75 Parkway, Suite 1300, Atlanta, Georgia 30339
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(Address of principal executive offices)
Registrant's telephone number, including area code: (770) 933-7000
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each Class Name of each Exchange on which registered
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Common Shares without par value American Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act:
Warrants to Purchase Common Shares
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (ss. 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of the registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. []
At the close of business on June 27, 2001 there were 4,976,342 Common
Shares without par value outstanding. The aggregate market value of the Common
Shares held by non-affiliates of the Corporation was $9,086,047. Market value is
determined by reference to the closing price on June 27, 2001 of the
Corporation's Common Shares as reported by the American Stock Exchange.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Corporation's definitive Proxy Statement to be filed
under Regulation 14A in connection with the Annual Meeting of Stockholders of
the Corporation scheduled to be held on August 20, 2001 have been incorporated
by reference into Part I and Part III of this Report. The Proxy Statement will
be filed with the Securities and Exchange within 120 days after March 31, 2001.
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CERTAIN CAUTIONARY STATEMENTS
In addition to historical information, this report contains certain
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995 including, without limitation, statements
regarding the Corporation's business strategy, management's outlook for each of
its businesses, and the sufficiency of the Corporation's liquidity and sources
of capital. These forward-looking statements are subject to certain risks,
uncertainties and other factors which could cause actual results, performance
and achievements to differ materially from those anticipated, including, without
limitation:
- - general economic and business conditions in the U.S. both nationwide
and in the states in which the Corporation operate hospitals;
- - general economic and business conditions in the U.K. and Europe where
the Corporation operate the housewares business;
- - restrictions imposed by debt agreements;
- - the highly competitive nature of the U.S. community hospital business;
- - the highly competitive nature of the U.K. housewares business;
- - Management's ability to integrate acquired hospitals and implement its
business strategy;
- - existing and proposed governmental budgetary constraints and the
regulatory environment for the Corporation's businesses;
- - consolidation and acquisition trends in the Corporation's businesses;
- - competition in the acquisition market including the acquisition of
hospitals and healthcare facilities;
- - the availability of capital to fund working capital, renovations and
capital improvements at existing hospital facilities and for
acquisitions and replacement hospital facilities and at our U.K.
manufacturing facilities;
- - possible changes in the levels and terms of government (including
Medicare, Medicaid and other programs) and private reimbursement for
the Corporation's healthcare services including the payment
arrangements and terms of managed care agreements;
- - changes in or failure to comply with Federal, state or local laws and
regulations affecting the healthcare industry; - professional, general,
and other liabilities claims asserted against the Corporation; - the
efforts of insurers, healthcare providers and others to contain
healthcare costs; - the impact on hospital services of the treatment of
patients in lower acuity healthcare settings, with drug therapy or via
alternative healthcare services;
- - the possible enactment of Federal or state healthcare reform;
- - changes in medical and other technology;
- - changes in exchange rates (including in Europe the effects of the
European currency, the Euro);
- - increases in prices of raw materials and services utilized in the
Corporation's hospital operations in the U.S. and manufacturing
operations in the U.K.;
- - the purchasing practices of significant customers in the U.K.;
- - the availability of and the Corporation's ability to attract and retain
(i) qualified management and staff personnel and physicians for the
Corporation's hospital operations in the U.S. and (ii) qualified
management and staff personnel for the Corporation's manufacturing
operations in the U.K.;
- - the functionality of the Corporation's computer systems;
- - changes in accounting principles generally accepted in the U.S.; and
- - claims for product and environmental liabilities from continuing and
discontinued operations.
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Except as required by law, Management undertakes no obligation to publicly
update these forward-looking statements, whether as a result of new information,
future events or otherwise. However, any additional relevant disclosures will be
made by the Corporation in any of its subsequent filings of its reports on Form
10-Q, 8-K and 10-K with the Securities and Exchange Commission. The foregoing
are factors Management thinks could cause actual results to differ materially
from expected results. However, there could be other additional factors besides
those listed herein that also could affect the Corporation in an adverse manner.
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PART I
ITEM 1. BUSINESS
KRUG International Corp., an Ohio corporation organized in June 1959,
and its subsidiaries collectively the "Corporation", unless otherwise stated or
indicated by the context, currently operates two business segments, the United
States ("U.S."). community hospital segment and the United Kingdom ("U.K.")
housewares segment. The U.S. community hospital segment is comprised of six
community hospitals and related businesses in the U.S., which are operated
through its subsidiary, SunLink Healthcare Corp. ("SunLink"). The U.K.
housewares segment manufactures and distributes, through its Beldray Limited
("Beldray") subsidiary, housewares products in the U.K.. The discussion of the
U.K. housewares segment begins on page 18.
Information concerning revenue, operating profit and identifiable assets of
the business segments for the fiscal years ended March 31, 2001, 2000, and 1999
is set forth at Note 13 of the Notes to Consolidated Financial Statements of the
Corporation, which can be found at Item 8 of this report.
CORPORATE BUSINESS STRATEGY
The Corporation has recently redirected its business strategy toward
acquisitions of community hospitals in the U.S. SunLink completed the purchase
of six community hospitals and related businesses for approximately $26.5
million on February 1, 2001. The Corporation disposed of its European child
safety subsidiary, Klippan Limited ("Klippan") on January 29, 2001 for net
proceeds of approximately $3 million after repayment of Klippan's debt. During
fiscal 1999 the Corporation disposed of subsidiaries in the Life Sciences and
Engineering ("LS&E") and Leisure Marine businesses.
U.S. COMMUNITY HOSPITAL SEGMENT
OVERVIEW
SunLink operates the Corporation's U.S. community hospital segment. SunLink
was formed as a wholly-owned subsidiary of the Corporation in February 2000 to
own and operate community hospitals. SunLink, through its subsidiaries,
currently owns or leases six general acute care hospitals with a total of 333
licensed beds in four states.
Management of SunLink believes healthcare delivery is a local business
requiring autonomous local management supported by effective corporate
resources. SunLink supports the efforts of its community hospitals to link their
patients' needs with the professional expertise of quality medical practitioners
and the dedication and compassion of skilled employees. SunLink hospitals earn
the support of local communities by meeting their healthcare needs in a
professional, caring and efficient manner. Linked together with their
constituents, management believes SunLink's hospitals are positioned to prosper
in today's healthcare markets.
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BUSINESS STRATEGY
SunLink's objective is to be a quality provider of healthcare services and
the primary provider of such services in the communities it serves. SunLink's
primary operational priority is to improve the profitability of its hospitals by
reducing out-migration of patients, recruiting physicians, expanding services
and maintaining effective cost controls. Management of SunLink intends to focus
its efforts on internal growth. However, Sunlink plans to supplement internal
growth through acquisitions. SunLink plans to selectively acquire community
hospitals with net revenue of approximately $10 million or more which are (i)
the sole or primary hospital in market areas with a population of greater than
15,000 or (ii) a principal healthcare provider with substantial market share in
communities with a population of 50,000 to 150,000.
Management of SunLink believes the community hospital market provides the
most attractive sector for hospital investment because rural hospitals generally
experience (1) less competition, (2) lower managed care penetration, (3) lower
inflationary pressure with respect to salaries and benefits, (4) higher staff
and community loyalty, and (5) in certain cases, opportunity for future growth.
In evaluating potential hospital acquisitions in rural markets, SunLink seeks
markets which have growth potential. Management believes that the majority of
SunLink's community hospitals are generally positioned in areas which will
experience substantial growth.
OWNED AND LEASED HOSPITALS
On February 1, 2001, SunLink completed the purchase of six community
hospitals and related businesses for approximately $26.5 million. The purchase
price was funded with approximately $3.6 million cash from internally available
funds, $4 million of short-term debt, $15.6 million seller financing and the
assumption of certain liabilities and costs transactions of $3.3 million. The
purchase price of the hospitals is subject to adjustment for, among other
things, certain changes in the amount of working capital at closing. All
hospitals are owned except Dexter Memorial Hospital, which is a leased hospital.
The following sets forth certain information with respect to each of the six
community hospitals:
- - Chestatee Regional Hospital ("Chestatee"), located in Dahlonega, Georgia,
Lumpkin County, Georgia, is a 49-bed acute-care hospital accredited by
the Joint Commission on Accreditation of Healthcare Organization
("JCAHO"), including a 12-bed obstetric department, a 4-bed intensive
care unit ("ICU") and a 33-bed medical/surgical/pediatrics unit.
Chestatee is the only hospital in its primary service area of Lumpkin and
Dawson counties.
- - Mountainside Medical Center and Nursing Center ("Mountainside"), located
in Jasper, Pickens County, Georgia, consists of a JCAHO accredited
40-licensed-bed, acute-care hospital (including four ICU beds) and a
60-bed nursing home. Mountainside is the only hospital in Pickens County,
which is included in the Atlanta Metropolitan Statistical Area ("MSA").
The Corporation has a Certificate of Need to build a 35-bed replacement
hospital in Jasper.
- - North Georgia Medical Center ("North Georgia"), located in Ellijay,
Gilmer County Georgia, consists of a JCAHO accredited 50-licensed-bed
acute-care hospital and Gilmer Nursing Home, a 100-bed skilled nursing
facility. North Georgia is the only hospital in Gilmer County.
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- - Trace Regional Hospital ("Trace") consists of a JCAHO accredited 84
licensed-bed acute care hospital and Floy Dyer Manor Nursing Home, a 66
bed nursing home, located in Houston, Mississippi. Trace is the only
hospital in Houston, Mississippi, and the primary hospital in its market
area.
- - Chilton Medical Center ("Chilton") is a 60 licensed-bed JCAHO accredited,
acute care hospital located in Clanton, Alabama. Chilton is the only
hospital in Chilton County.
- - Dexter Memorial Hospital ("Dexter") is a leased 50 licensed-bed acute
care hospital located in Dexter, Missouri, and includes a 4-bed ICU. It
is the only hospital in its community. The lease expires in 2004.
HOSPITAL OPERATIONS
Management of SunLink believes that the long-term growth potential of a
hospital is dependent on that hospital's ability to offer appropriate healthcare
services and effectively recruit and retain physicians. Each SunLink hospital
has developed and is implementing an operating plan designed to improve
operating efficiency and increase revenue through the expansion of services
offered by the hospital and the recruitment of physicians to the community.
Each hospital management team is comprised of a chief executive officer,
chief financial officer and chief nursing officer. SunLink's management believes
that the quality of the on-site hospital management team is critical to the
hospital's success. The on-site management team is responsible for implementing
the operating plan which it has developed in conjunction with SunLink's senior
management team. The local management team participates in a performance-based
compensation program based upon the achievement of goals set forth in the
operating plan.
The local management team is responsible for the day-to-day operations of
the hospital. SunLink's corporate staff provides support services, assistance or
advice to each hospital in certain areas, including physician recruiting,
corporate compliance, reimbursement, information systems, human resources,
accounting, cash management, finance, tax and insurance. Financial controls are
maintained through the utilization of standardized policies and procedures.
SunLink's hospitals have contracted with the HealthTrust Group Purchasing
Organization, a purchasing group used by a large number of community hospitals,
for certain supplies and equipment. SunLink promotes communication among its
hospitals so that local expertise and improvements can be shared throughout the
SunLink system of facilities.
EXPANSION OF SERVICES
SunLink seeks to add services at its hospitals on an as-needed basis in
order to improve access to quality healthcare services in the community with the
ultimate goal of reducing outmigration. Additional and expanded services and
programs, which may include specialty inpatient and outpatient services, are
often dependent on recruiting physicians; therefore, physician recruiting goals
are important to SunLink's ability to expand services. SunLink's management
believes each hospital's emergency room is its "window to the community" and a
critical component of its local service offering. Therefore, SunLink seeks to
maintain in each hospital a quality, patient-friendly emergency department.
Capital investments in technology and facilities are often necessary to increase
the quality and scope of services provided to the communities. Management of
SunLink believes additional and expanded services and improvements and each
hospital's quality of care and reputation in the community may reduce
outmigration and increase patient census and revenue.
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PHYSICIAN RECRUITING
Each SunLink hospital management team is responsible for assessing the need
for additional physicians, including the number and specialty of additional
physicians needed by their community. The local management team, with the
assistance of outside recruiting firms, identifies and seeks to attract specific
physicians to the hospital's medical staff. The hospital generally guarantees a
newly recruited physician a minimum level of cash collections during an initial
period, generally one year, and assists the physician's transition into the
community. The physician will be required to repay some or all of the amounts
paid under such a guarantee if the physician leaves the community within a
specified period. SunLink hospitals generally do not employ physicians.
OPERATING STATISTICS
The following table sets forth certain operating statistics for SunLink's
owned or leased hospitals for the two-month period subsequent to their
acquisition by SunLink:
TWO MONTHS ENDED
MARCH 31, 2001
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Hospitals owned or leased at end of period .............. 6
Licensed beds (at end of period) ........................ 333
Beds in service (at end of period) ...................... 275
Admissions .............................................. 1,161
Average length of stay (days) (1) ....................... 3.99
Patient days ............................................ 4,633
Adjusted patient days (2) ............................... 10,598
Occupancy rate (% of licensed beds) (3) ................. 23.58%
Occupancy rate (% of beds in service) (4) ............... 28.55%
Net patient service revenue (in thousands) .............. $13,128
Net outpatient service revenue (in thousands) ........... $ 6,226
Net outpatient service revenue (as a % of gross
patient service revenue) ....................... 47.43%
(1) Average length of stay is calculated based on the number of patient
days divided by the number of admissions.
(2) Adjusted patient days have been calculated based on a revenue-based
formula of multiplying actual patient days by the sum of gross inpatient
revenue and gross outpatient revenue and dividing the result by gross
inpatient revenue for each hospital. Adjusted patient days is a statistic
(which is used generally in the industry) designed to communicate an
approximate volume of service provided to inpatients and outpatients by
converting total patient revenue to a number representing adjusted patient
days.
(3) Percentages are calculated by dividing average daily census by average
licensed beds.
(4) Percentages are calculated by dividing average daily census by average
beds in service.
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SOURCES OF REVENUE
Each SunLink hospital receives payments for patient care from Federal
Medicare programs for elderly and disabled patients, state Medicaid programs,
private insurance carriers, health maintenance organizations, preferred provider
organizations, TriCare (formerly known as the Civilian Health and Medical
Program of the Uniformed Services, or CHAMPUS), and from employers and patients
directly. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations."
The following table sets forth the percentage of the patient days from
various payors in SunLink's owned or leased hospitals for the period indicated.
See "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations."
TWO MONTHS ENDED
MARCH 31, 2001
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Source
Medicare 57.50%
Medicaid 25.43%
Private and other sources 17.07%
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Total 100.00%
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Medicare is a Federal program that provides certain hospital and medical
insurance benefits to persons age 65 and over, some disabled persons and persons
with end-stage renal disease. Medicaid is a Federal-state program, administered
by the states, which provides hospital and nursing home benefits to qualifying
individuals who are unable to afford care. All of SunLink's hospitals are
certified as healthcare services providers for persons covered under Medicare
and Medicaid programs. Amounts received under the Medicare and Medicaid programs
generally are significantly less than the hospitals' established charges for the
services provided. Patients are generally not responsible for any difference
between established hospital charges and amounts reimbursed for such services
under Medicare, Medicaid, some private insurer plans, HMOs or PPOs, but are
responsible to the extent of any exclusions, deductibles or co-insurance
features of their coverage. The amount of such exclusions, deductibles and
co-insurance has been increasing in recent years. Collection of amounts due from
individuals is typically more difficult than from governmental or third-party
payors.
MANAGEMENT INFORMATION SYSTEMS
SunLink utilizes commercially available management information systems at
its hospitals, four of which utilize a comprehensive system designed for larger
hospitals and two of which utilize a system designed for smaller hospitals. Each
system includes features such as a general ledger, patient accounting, billing,
accounts receivable, payroll, accounts payable and pharmacy. SunLink maintains a
small staff and limited equipment to complement the hospital systems and to
report combined and individual data for corporate management, monitoring and
compliance purposes. SunLink's goal is to convert all of its hospitals to a
single management information system upon expiration of its existing systems
agreements, which range from three to five years.
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QUALITY ASSURANCE
Each SunLink hospital implements quality assurance procedures to monitor
the level and quality of care provided to its patients. Each hospital has a
medical director who supervises and is responsible for the quality of medical
care provided and a medical advisory committee comprised of physicians who
review the professional credentials of physicians applying for medical staff
privileges at the hospital. The medical advisory committees also review and
monitor surgical outcomes along with procedures performed and the quality of the
logistical, medical and technological support provided to the physician. Each
hospital periodically conducts surveys of its patients either during their stay
at the hospital or subsequently by mail, to identify potential areas of
improvement. Each SunLink hospital, other than the leased hospital in Dexter,
Missouri, is accredited by the JCAHO Healthcare.
REGULATORY COMPLIANCE PROGRAM
SunLink maintains a company-wide compliance program under the direction of
Jerome Orth, Vice President, Technical and Compliance Services. Mr. Orth has
over twenty-five years experience in reimbursement in multi-hospital
corporations, at both the facility and corporate level. SunLink's compliance
program is directed at all areas of regulatory compliance, including physician
recruitment, reimbursement and cost reporting practices, and laboratory and home
healthcare operations. Each hospital designates a compliance officer and
develops plans to correct problems should they arise. In addition, all employees
are provided with a copy of and given an introduction to SunLink's Code of
Conduct, which includes ethical and compliance guidelines and instructions about
the proper resources to utilize in order to address any concerns that may arise.
Each hospital conducts annual training to re-emphasize SunLink's Code of Conduct
and SunLink monitors its corporate compliance program to respond to developments
in healthcare regulation and in the industry. SunLink also maintains a toll-free
hotline to permit employees to report compliance concerns on an anonymous basis.
COMPETITION
SunLink's management believes the factors influencing patient selection
among hospitals in non-urban markets include the appearance and functionality of
the healthcare facilities, the quality and demeanor of professional staff and
physicians and the participation of the hospital in plans which pay a portion of
the patient's bill. The factors are influenced heavily by the quality and scope
of medical services, strength of referral networks, hospital location and the
price of hospital services. Although SunLink's hospitals may face less
competition in their immediate patient service areas than would be expected in
larger communities since they are the primary provider of healthcare services in
their respective communities, SunLink hospitals nevertheless face competition
from larger tertiary care centers and, in some cases, other non-urban hospitals.
The competing hospitals may be owned by governmental agencies or not-for-profit
entities supported by endowments and charitable contributions, and may be able
to finance capital expenditures on a tax-exempt basis. Such governmental and
not-for-profit hospitals, as well as for-profit hospitals operating in the
service area, likely have greater access to financial resources than SunLink
hospitals.
MEDICAL STAFF
The number and quality of physicians affiliated with the hospital directly
affects the quality of patient care and the reputation of the hospital.
Physicians may terminate their affiliation with a hospital at any time. SunLink
hospitals seek to retain physicians of varied specialties on the hospitals'
medical staffs and to attract other qualified physicians. SunLink believes
physicians refer patients to a hospital primarily on the basis of the quality of
services the hospital renders to patients and physicians, the quality of other
physicians on the medical staff, the location of the hospital and the quality of
the
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hospital's facilities, equipment and employees. Accordingly, SunLink strives to
provide quality facilities, equipment, employees and services for physicians and
their patients.
MANAGED CARE AND EFFORTS TO CONTROL HEALTHCARE COSTS
Each SunLink hospital is dependent, to an increasing degree, on
management's ability to negotiate service contracts with purchasers of group
healthcare services. Health maintenance organizations and preferred provider
organizations attempt to direct and control the use of hospital services through
managed care programs and to obtain discounts from hospitals' established
charges. In addition, employers and traditional health insurers increasingly are
seeking to contain costs through negotiations with hospitals for managed care
programs and discounts from established charges. Generally, hospitals compete on
the basis of market reputation, geographic location, quality and range of
services, quality of the medical staff, convenience and price for service
contracts with group healthcare service purchasers. The importance of obtaining
contracts with managed care organizations varies from market to market,
depending on the market strength of such organizations. Managed care contracts
generally are less important in the non-urban markets than in urban and suburban
markets where there is typically a higher level of managed care penetration.
The healthcare industry, as a whole, faces the challenge of continuing to
provide quality patient care while managing rising costs, facing strong
competition for patients and adjusting to a general reduction of reimbursement
rates by both private and government payors. Both private and government payors
continually seek to reduce the nature and scope of services which may be
reimbursed. Healthcare reform at both the Federal and state level generally are
designed to reduce reimbursement rates. Changes in medical technology, existing
and future legislation, regulations and interpretations and competitive
contracting for provider services by private and government payors may require
changes in facilities, equipment, personnel, rates and/or services in the
future.
The hospital industry and all of SunLink's hospitals continue to have
significant unused capacity. Inpatient utilization, average lengths of stay and
average inpatient occupancy rates continue to be affected negatively by
payor-required pre-admission authorization, utilization review, and payment
mechanisms designed to maximize outpatient and alternative healthcare delivery
services for less acutely ill patients and to limit the cost of treating
inpatients. Admissions constraints, payor pressures and increased competition
are likely to continue and SunLink hospitals expect to respond to such trends by
adding and expanding outpatient services, upgrading facilities and equipment,
offering new programs and adding or expanding certain inpatient and ancillary
services.
ACQUISITIONS
Although SunLink's priority is to improve the profitability of its existing
hospitals, management continues to monitor the market for community hospitals
which are or may be available for purchase. SunLink's hospital acquisition
initiatives face competition for acquisitions primarily from for-profit hospital
management companies and not-for-profit entities who may have greater financial
and other resources than SunLink. Increased competition for the acquisition of
non-urban acute-care hospitals could have an adverse impact on SunLink's ability
to acquire such hospitals on favorable terms.
In recent years, the legislatures and attorney general of several states,
including states where SunLink is monitoring potential acquisitions, have shown
a heightened level of interest in transactions involving the sale of
not-for-profit hospitals. Although the level of interest varies from state to
state, the trend is to require increased governmental review, and, in some
cases, approval of transactions whereby a not-for-profit corporation sells a
healthcare facility.
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MEDICARE/MEDICAID REIMBURSEMENT
A significant portion of SunLink's revenue is dependent upon reimbursement
from the Federal Government's Medicare and various states' Medicaid programs.
The Medicare program pays hospitals under the provisions of a prospective
payment system for inpatient services. Under the prospective payment system, a
hospital receives a fixed amount for inpatient hospital services based on the
established fixed payment amount per discharge for categories of hospital
treatment, known as diagnosis related group payments. Diagnosis related group
payments do not consider a specific hospital's costs, but are national rates
adjusted for area wage differentials and case-mix index. Long-term care
psychiatric units within hospitals (along with certain other services generally
not provided in SunLink's facilities) currently are exempt from the prospective
payment system and are reimbursed under the provisions of a cost-based system,
subject to specific reimbursement caps.
Although the Federal government reviews payment rates annually, the
percentage increases for the last several years to the diagnosis related group
payments rates have been lower than the percentage increases in the related cost
of goods and services purchased by general hospitals. The index used to adjust
the diagnosis related group payments rates is based on a price statistic, known
as the Healthcare Finance Administration ("HCFA") market basket index, reduced
by Congressionally-mandated reduction factors. Diagnosis related group rate
increases were 1.5%, 2%, 0%, 0.7% and 1.1% for Federal fiscal years 1996, 1997,
1998, 1999 and 2000, respectively. The Balanced Budget Act of 1997 set the
diagnosis related group payment rates of increase for future Federal fiscal
years at rates that are based on the market basket rates less reduction factors
of 1.8% in 2000, and 1.1% in 2001 and 2002. The Medicare, Medicaid, and Health
Benefits Improvement and Protection Act of 2000 ("BIPA") amended the Balanced
Budget Act of 1997 by giving hospitals a full market basket increase in fiscal
2001 and market basket increases minus 0.55% in fiscal years 2002 and 2003. In
addition, BIPA contains provisions delaying scheduled reductions in payment for
home health agencies and other provisions designed to lessen the impact on
providers of spending reductions contained in the Balanced Budget Act of 1997.
The Medicare program historically has set aside 5.1% of Medicare inpatient
payments to pay for outlier cases. During Federal fiscal year 2000, Medicare
projected that payments for cost outlier cases have exceeded the 5.1% and,
therefore, has increased the cost threshold for federal fiscal year 2001, which
will reduce total payments for outlier cases.
Most outpatient services provided by general hospitals are reimbursed by
Medicare under the outpatient prospective payment system. The Balanced Budget
Act of 1997 mandated the implementation of the prospective payment system for
Medicare outpatient services. This outpatient prospective payment system is
based on a system of Ambulatory Payment Classifications ("APC"). Each APC is
designed to represent a "bundle" of outpatient services, and each APC is
assigned a fully prospective reimbursement rate. BIPA also improves the updates
for outpatient services. Prior to BIPA, the update for calendar years 2000
through 2002 was to be limited to the market basket minus 1%. BIPA modifies the
updated provisions for the period April 1, 2001 through December 31, 2001. As a
result, hospital outpatient payments will be updated by the amount established
by BIPA, effective January 1, 2001, plus 0.32%. The update scheduled for 2002,
as provided under BIPA, is market basket minus 1%.
Medicare has special payment provisions for "Sole Community Hospitals." A
Sole Community Hospital is generally the only hospital in at least a 35-mile
radius or a 45-minute driving time radius. None of the SunLink hospitals
currently are qualified as Sole Community Hospitals under Medicare regulations.
Special payment provisions related to Sole Community Hospitals include a higher
diagnostic related group payment rate, which is based on a blend of
hospital-specific costs and the
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national diagnosis related group payment rate, and a 90% payment "floor" for
capital cost. In addition, the TriCare program has special payment provisions
for hospitals recognized as Sole Community Hospitals for Medicare purposes. The
Balanced Budget Refinement Act of 1999 also provides a payment increase for Sole
Community Hospitals for fiscal year 2001. For fiscal year 2001, the prospective
payment system rate increase for Sole Community Hospitals is 3.4%.
Each state has its own Medicaid program funded jointly by the state and the
Federal government. Federal law governs how each state manages its Medicaid
program, but there is wide latitude for states to customize Medicaid programs to
fit local needs and resources. As a result, each state Medicaid plan has its own
payment formula and recipient eligibility criteria.
The Balanced Budget Act of 1997 also repealed the Boren Amendment. The
Boren Amendment was enacted in 1980 and imposed several requirements on states
regarding their calculations of Medicaid rates. For example, the Boren Amendment
required states to pay providers rates that are "reasonable and adequate" to
meet the necessary costs of an economically and efficiently operated facility.
Although the full effect of the repeal of the Boren Amendment is not yet known,
the likely result will be that states will begin setting lower Medicaid
reimbursement rates than they would have under the provisions of the Boren
Amendments.
GOVERNMENT REIMBURSEMENT PROGRAM ADJUSTMENTS
The Medicare, Medicaid and TriCare programs are subject to statutory and
regulatory changes, administrative rulings, interpretations and determinations,
requirements for utilization review and new governmental funding restrictions,
all of which may materially increase or decrease program payments as well as
affect the cost of providing services and the timing of payments to facilities.
ANNUAL COST REPORTS
All hospitals participating in the Medicare and Medicaid programs, whether
paid on a reasonable cost basis or under a prospective payment system, are
required to meet certain financial reporting requirements. Federal and, where
applicable, state regulations require the submission of annual cost reports
covering the revenue, costs and expenses associated with the services provided
by each hospital to Medicare beneficiaries and Medicaid recipients.
Annual cost reports required under the Medicare and Medicaid programs are
subject to routine audits which may result in adjustments to the amounts
ultimately determined to be due to SunLink under these reimbursement programs.
These audits often require several years to reach the final determination of
amounts due. Providers also have rights of appeal, and it is common to contest
issues raised in audits of prior years' cost reports. Although the final outcome
of these audits and the nature and amounts of any adjustments are difficult to
predict, management believes that adequate provisions have been made in the
Corporation's financial statements for adjustments that may result from these
audits and that final resolution of any contested issues should not have a
material adverse effect upon its consolidated results of operations or financial
position. Until final adjustment, however, significant issues remain unresolved
and previously determined allowances could become either inadequate or greater
than ultimately required.
If SunLink or any of its facilities were found to be in violation of
Federal or state laws relating to Medicare, Medicaid or similar programs,
SunLink could be subject to substantial monetary fines, civil penalties and
exclusion from future participation in the Medicare and Medicaid programs. Any
such sanctions could have a material adverse effect on the financial position
and results of operations of SunLink. See Item 3 -- "Legal Proceedings."
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HEALTHCARE REGULATION AND LICENSING
Because it is one of the largest industries in the U.S., the healthcare
industry, continues to attract much legislative interest and public attention.
There are many factors that are highly significant to the healthcare industry
including Medicare, Medicaid and other public and private hospital
cost-containment programs, proposals to limit healthcare spending and proposals
to limit prices and industry competition factors. The healthcare industry is
governed by an extremely complex framework of Federal and state laws, rules and
regulations.
There continues to be Federal and state proposals that would, and actions
that do, impose more stringent limitations on government and private payments to
providers including community hospitals such as SunLink's. In addition, there
are proposals to increase co-payments and deductibles from program and private
patients. Hospital facilities also are affected by controls imposed by
government and private payors designed to reduce admissions and lengths of stay.
Such controls, including what is commonly referred to as "utilization review,"
have resulted in a decrease in certain treatments and procedures being
performed. Utilization review entails the review of a patient's admission and
course of treatment by a third party. Utilization review by third-party peer
review organizations is required in connection with the provision of care to
be funded by Medicare and Medicaid. Utilization review by third parties also is
required under many managed care arrangements.
Many states have enacted, or are considering enacting, measures that are
designed to reduce their Medicaid expenditures and to make changes to private
healthcare insurance. Various states have applied, or are considering applying,
for a Federal waiver from current Medicaid regulations in order to allow them to
serve some of their Medicaid participants through managed care providers. These
proposals also may attempt to include coverage for some people who presently are
uninsured, and generally could have the effect of reducing payments to
hospitals, physicians and other providers for the same level of service provided
under Medicaid.
CERTIFICATE OF NEED REQUIREMENTS
A number of states require approval for the purchase, construction and
expansion of healthcare facilities, including findings of need for additional or
expanded healthcare facilities or services. Certificates of need, which are
issued by governmental agencies with jurisdiction over healthcare facilities,
are at times required for capital expenditures exceeding a prescribed amount,
changes in bed capacity or services and certain other matters. All four states
in which SunLink currently operates hospitals (Alabama, Georgia, Mississippi and
Missouri) have certificate of need laws. In addition, future hospital
acquisitions may occur in states that require certificates of need. SunLink is
unable to predict whether its hospitals will be able to obtain any certificates
of need that may be necessary to accomplish their business objectives in any
jurisdiction where such certificates of need are required.
ANTI-KICKBACK AND SELF-REFERRAL REGULATIONS
Sections of the Anti-Fraud and Abuse Amendments to the Social Security Act,
commonly known as the "anti-kickback" statute, prohibit certain business
practices and relationships that might influence the provision and cost of
healthcare services reimbursable under Medicaid or Medicare or other Federal
healthcare programs, including the payment or receipt of remuneration for the
referral of patients whose care will be funded by Medicare or other government
programs. Sanctions for violating the anti-kickback statute include criminal
penalties and civil sanctions, including fines and possible exclusion from
future participation in government programs, such as Medicare and Medicaid.
Pursuant to the Medicare and Medicaid Patient and Program Protection Act of
1987, the U.S.
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Department of Health and Human Services ("HHS") issued regulations that create
safe harbors under the anti-kickback statute. A given business arrangement that
does not fall within an enumerated safe harbor is not per se illegal; however,
business arrangements that fail to satisfy the applicable safe harbor criteria
are subject to increased scrutiny by enforcement authorities. The Health
Insurance Portability and Accountability Act of 1996 ("HIPPA"), which became
effective January 1, 1997, added several new fraud and abuse laws. These new
laws cover all health insurance programs -- private as well as governmental. In
addition, the HIPPA broadened the scope of certain fraud and abuse laws, such as
the anti-kickback statute, to include not just Medicare and Medicaid services,
but all healthcare services reimbursed under a Federal or state healthcare
program.
There is increasing scrutiny by law enforcement authorities, the Office of
Inspector General of the HHS, the courts and the U.S. Congress of arrangements
between healthcare providers and potential referral sources to ensure that the
arrangements are not designed as mechanisms to exchange remuneration for
patient-care referrals and opportunities. Investigators also have demonstrated a
willingness to look behind the formalities of a business transaction to
determine the underlying purpose of payments between healthcare providers and
potential referral sources. Enforcement actions have increased, as is evidenced
by recent highly publicized enforcement investigations of certain hospital
activities.
In addition, provisions of the Social Security Act prohibit physicians from
referring Medicare and Medicaid patients to providers of a broad range of
designated health services with which the physicians or their immediate family
members have ownership or certain other financial arrangements. Certain
exceptions are available for employment agreements, leases, physician
recruitment and certain other physician arrangements. These provisions are known
as the Stark Law and were named for their legislative sponsor, Rep. Pete Stark
(R-CA). A person making a referral, or seeking payment for services referred, in
violation of the Stark Law would be subject to civil monetary penalties of up to
$15,000 for each service; restitution of any amounts received for illegally
billed claims; and/or exclusion from future participation in the Medicare
program, which can subject the person or entity to exclusion from future
participation in state healthcare programs.
Further, if any physician or entity enters into an arrangement or scheme
that the physician or entity knows or should have known has the principal
purpose of assuring referrals by the physician to a particular entity, and the
physician directly makes referrals to such entity, then such physician or entity
could be subject to a civil monetary penalty of up to $100,000. Many states have
adopted or are considering similar legislative proposals, some of which extend
beyond the Medicaid program, to prohibit the payment or receipt of remuneration
for the referral of patients and physician self-referrals regardless of the
source of the payment for the care.
THE FEDERAL FALSE CLAIMS ACT AND SIMILAR STATE LAWS
A factor affecting the healthcare industry today is the use of the Federal
False Claims Act and, in particular, actions brought by individuals on the
government's behalf under the Federal False Claims Act's "qui tam" or
whistleblower provisions. Whistleblower provisions allow private individuals to
bring actions on behalf of the government alleging that the defendant has
defrauded the Federal government.
If a defendant is determined by a court of law to be liable under the
Federal False Claims Act, the defendant may be required to pay three times the
actual damages sustained by the government, plus mandatory civil penalties of
between $5,500 and $11,000 for each separate false claim. Settlements entered
prior to litigation usually involve a less severe damages methodology. There are
many potential bases for liability under the Federal False Claims Act. Liability
often arises when an entity
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knowingly submits a false claim for reimbursement to the Federal government. The
Federal False Claims Act defines the term "knowingly" broadly. Thus, although
simple negligence will not give rise to liability under the Federal False Claims
Act, submitting a claim with reckless disregard to its truth or falsity
constitutes "knowing" submission under the Federal False Claims Act and,
therefore, will qualify for liability. In some cases, whistleblowers or the
Federal government have taken the position that providers who allegedly have
violated other statutes, such as the anti-kickback statute and the Stark Law,
have thereby submitted false claims under the False Claims Act. A number of
states have adopted their own false claims provisions as well as their own
whistleblower provisions whereby a private party may file a civil lawsuit in
state court.
ENVIRONMENTAL REGULATIONS
The healthcare operations of SunLink generate medical waste that must be
disposed of in compliance with Federal, state and local environmental laws,
rules and regulations. SunLink's operations also are subject to various other
environmental laws, rules and regulations.
HEALTHCARE FACILITY LICENSING REQUIREMENTS
SunLink's healthcare facilities are subject to extensive Federal, state and
local legislation and regulation. In order to maintain their operating licenses,
healthcare facilities must comply with strict standards concerning medical care,
equipment and hygiene. Various licenses and permits also are required in order
to dispense narcotics, operate pharmacies, handle radioactive materials and
operate certain equipment. All licenses, provider numbers and other permits or
approvals required to perform hospital business operations are held by the
hospital subsidiaries. All SunLink's hospitals, except the leased hospital in
Dexter, Missouri, are fully accredited by JCAHO.
UTILIZATION REVIEW COMPLIANCE AND HOSPITAL GOVERNANCE
SunLink's healthcare facilities are subject to and comply with various
forms of utilization review. In addition, under the Medicare prospective payment
system, each state must have a peer review organization to carry out a Federally
mandated system of review of Medicare patient admissions, treatments and
discharges in hospitals. Medical and surgical services and practices are
supervised extensively by committees of staff doctors at each healthcare
facility, are overseen by each healthcare facility's local governing board, the
primary voting members of which are physicians and community members, and are
reviewed by SunLink's quality assurance personnel. The local governing boards
also help maintain standards for quality care; develop long-range plans;
establish, review and enforce practices and procedures; and approve the
credentials; and disciplining of medical staff members.
PROPOSED MEDICAL RECORDS PRIVACY
The Health Insurance Portability and Accountability Act of 1996 ("HIPPA")
directed Congress to pass comprehensive health privacy legislation no later than
August 21, 1999. In the event Congress failed to pass such legislation, HIPPA
required the Secretary of ("HHS") HHS to issue regulations designed to protect
the privacy of individually identifiable health information no later than
February 21, 2000. Neither Congress nor the Secretary of HHS met these
deadlines, although HHS eventually did publish final privacy regulations on
December 28, 2000. The final regulations became effective in April 2001, and
compliance is required by April 2003. The standards incorporated in the
regulations apply to medical records created by healthcare providers, hospitals,
health plans and healthcare clearinghouses that are either transmitted or
maintained electronically and the paper printouts created from these records.
The standards increase consumer control over their medical records; mandate
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substantial financial penalties for violation of a patient's right to privacy;
and with a few exceptions, require that an individual's health information only
be used for health purposes.
The standards also require healthcare providers to implement and enforce
privacy policies to ensure compliance with the standards. The standards may be
modified further prior to final implementation. Until the standards are
implemented in final form, it is not possible to know the cost for implementing
the requirements imposed by the regulations. SunLink has delegated the task of
studying the proposed regulations' potential effects on its business to its Vice
President, Technical and Compliance Services.
The Administrative Simplification Provisions of HIPPA requires the use of
uniform electronic data transmission standards for healthcare claims and payment
transactions submitted or received electronically. These provisions are intended
to encourage electronic commerce in the healthcare industry. On August 17, 2000,
HHS published final regulations establishing electronic data transmission
standards that all healthcare providers must use when submitting or receiving
certain healthcare transactions electronically. Compliance with these
regulations is required by October 16, 2002. SunLink cannot predict the impact
that these regulations, when fully implemented, will have on its operations.
PROFESSIONAL LIABILITY
As part of its business, SunLink is subject to claims of liability for
events occurring as part of the ordinary course of hospital operations. To cover
these claims, SunLink maintains professional malpractice liability insurance and
general liability insurance in amounts that management believes to be sufficient
for SunLink's operations, although some claims may exceed the scope of the
coverage in effect. At January 31, 2001, SunLink purchased a "tail" policy for
claims occurring prior to its ownership of the hospitals. SunLink also provides
an accrual for incurred but not reported claims to cover the period subsequent
to its purchase of the healthcare facilities. At various times in the past, the
cost of malpractice and other liability insurance has risen significantly.
Therefore, adequate levels of insurance may not continue to be available at a
reasonable price.
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U.K. HOUSEWARES SEGMENT
Bradley International Holdings Limited, a subsidiary of KRUG
International (UK) Ltd., owns Beldray Limited which operates the Corporation's
U.K. housewares segment (collectively "Bradley"). The Corporation has announced
its intention to position the U.K. housewares segment for sale in order to
concentrate its strategic efforts on its U.S. community hospital segment. The
Corporation has established no timeframe in which to sell the U.K. housewares
segment, has not adopted a formal plan of disposal and is unable to estimate the
amount of gain or loss that may result from a sale. In June 2001, Bradley hired
a Managing Director in connection with its efforts to position its U.K.
housewares segment for sale.
The U.K. housewares segment is composed of the Beldray Limited ("Beldray")
and Hago Products Limited ("Hago") subsidiaries which manufacture and sell
consumer durable products, including ironing tables, household ladders, rotary
dryers, indoor airers, garden equipment and child safety gates and accessories
under the "Beldray", "Hago" and "Dennison" names, as well as private labels.
Beldray is a long-established name in household laundry products with proven
consumer appeal and significant recognition among the buying public throughout
the U.K. Hago manufactures and sells child safety gates and accessories under
the KiddiProof(R) trademark and, also, has significant brand recognition in the
U.K. Dennison is a long-standing brand of indoor airers with significant name
recognition in the U.K. Over the last two years, Beldray has focused on quality
and customer service standards in order to establish itself as a reliable,
quality supplier to do-it-yourself retailers, supermarkets, mail-order catalogs,
wholesalers and department stores primarily in the U.K. and Ireland.
The market for Beldray's products is highly competitive and the Corporation
believes customers select its products based primarily on quality, delivery
reliability and price. Beldray manufactures substantially all of its products in
its manufacturing facility in Bilston, England. Certain Kiddiproof(R) child
safety products, garden products and accessories are purchased from outside
suppliers. Beldray is currently evaluating additional products which may be
purchased from outside suppliers to complement its existing product lines.
Beldray periodically reviews its manufacturing processes and maintains an
engineering staff to evaluate new product ideas and to undertake specific
product initiatives to reduce manufacturing costs, increase consumer appeal and
enhance product quality. Beldray has increased its capital expenditures in each
of the last two years. During fiscal year 2001, Beldray redesigned its range of
child safety gates to enhance consumer appeal and to create a product with
increased export opportunities.
The U.K. housewares segment order backlog is typically less than one
month's sales. The primary competitors of the segment are manufacturing
companies, some of which are larger and have more resources than Bradley, and
compete with Bradley on the basis of product quality, speed and reliability of
delivery and price.
During the fiscal year ended March 31, 2001, the U.K. housewares segment
had revenue of $9.2 million (22.1% of consolidated revenue) from Argos
Distribution Ltd. ("Argos"), a U.K. company. Substantially all of the product
lines of the housewares segment are sold to Argos. The loss of Argos as a
customer would have a material adverse effect on Beldray if a comparable
replacement business were not secured.
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GENERAL INFORMATION
The Corporation owns a number of patents and patent applications, but the
Corporation derives no revenue from this intellectual property, and it is not
possible to estimate their value. The Corporation does not believe its present
business is materially dependent on any patents or patent applications.
As of March 31, 2001, the Corporation employed 916 full-time and 235
part-time persons in the U.S., none of whom are represented by a union, and
approximately 417 persons in Europe, approximately 241 of whom are represented
by a union. Management believes its labor relations are generally satisfactory.
Management believes compliance with Federal, state and local laws
regulating the discharge of material into the environment or otherwise relating
to the protection of the environment has had no material effect upon the capital
expenditures, earnings and competitive position of the Corporation. To the best
of management's knowledge, the Corporation is in substantial compliance with
applicable Federal, state and local environmental regulations.
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ITEM 2. PROPERTIES
The principal properties of the Corporation as of June 22, 2001 are listed
below:
A. UNITED STATES DATE OF
------------- LICENSED ACQUISITION/LEASE OWNERSHIP
CITY AND STATE BEDS INCEPTION TYPE
-------------- ---- --------- ----
SUNLINK HEALTHCARE CORP. HOSPITALS
Chilton Medical Center Clanton, AL 60 February 1, 2001 Owned
Chestatee Regional Hospital Dahlonega, GA 49 February 1, 2001 Owned
North Georgia Medical Center
& Gilmer Nursing Home Ellijay, GA 50 February 1, 2001 Owned
Trace Regional Hospital & Floy
Dyer Manor Nursing Home Houston, MS 84 February 1, 2001 Owned
Mountainside Medical Center Jasper, GA 40 February 1, 2001 Owned
& Nursing Home
Dexter Memorial Hospital (2) Dexter, MO 50 February 1, 2001 Leased
SunLink Healthcare Corp. (1) Atlanta, GA -- February 1, 2001 Leased
B. EUROPE
OWNED LEASE
OR EXPIRATION
LEASED DATE SQUARE FOOTAGE USE
------ ---- -------------- ---
BELDRAY LIMITED & SUBSIDIARIES
Bilston, West Midlands, U.K. Leased June 2019 105,000 Plant
Bilston, West Midlands, U.K. Owned 85,000 Plant
(1) Lease of 2,612 square feet of office space for KRUG and SunLink
corporate staff. The lease expires in February 2005.
(2) The lease expires in March 2004.
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ITEM 3. LEGAL PROCEEDINGS
The Federal government (the "Government") reviewed certain medical records
of two of the SunLink hospitals, Chestatee and Mountainside (collectively, the
"Hospitals"), prior to their purchase by SunLink, as a part of a nationwide
Medicare audit project regarding hospital (inpatient) billing practices with
respect to the diagnosis of pneumonia. The review sought to determine whether
claims were improperly coded for Medicare purposes and whether the Hospitals'
submission of those claims violated applicable law including the Federal False
Claims Act. 31 U.S.C. ss.ss. 3729 et. seq. Based upon its review, the Government
has projected that 103 Medicare claims were coded improperly by Chestatee and 91
Medicare claims were coded improperly by Mountainside. SunLink believes review
and analysis of all medical records identified by the Government has been
substantially completed, and interviews have been conducted by both the U.S.
Attorney's Office for the Northern District of Georgia and the U.S. HHS, Office
of the Inspector General. Based upon the Government's projections and the
application of the multiple damage provisions of the Federal False Claims Act,
the Corporation estimates that, if the Government's projections were
substantiated, the total potential aggregate liability of the Hospitals in this
matter could be as high as $1.5 million. The Corporation disputes and intends to
vigorously resist all claims based upon any such improper coding and believes
the Government's projections do not accurately represent the facts. Settlement
discussions are underway between SunLink and the Government. Government
representatives informally have indicated that the Government most likely would
not pursue a false claims charge, require either of the Hospitals to enter into
a corporate integrity agreement, or seek double or treble damages providing a
settlement is reached between the parties. To management's knowledge, no audit
has been conducted by the Government of any other SunLink facility in connection
with pneumonia coding investigations. Under the terms of the Stock Purchase
Agreement between SunLink and NetCare Health Systems, Inc. ("Seller") for
SunLink's purchase of the six community hospitals, SunLink would be responsible
for any settlement relating to the Hospitals' claims arising prior to their
purchase by SunLink, but has limited right of indemnification from the Seller
for any future claims which were not disclosed at the date of purchase.
The Corporation is also subject to various claims and suits arising in the
ordinary course of business, including claims for personal injuries and other
matters. Such pending claims and suits are either insured or, in the opinion of
management, the ultimate resolution of such claims and suits should not have a
material adverse effect on the Corporation's results of operations or financial
condition.
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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 22, 2001, their
positions with the Corporation and their ages are as follows:
NAME OFFICES AGE
---- ------- ---
Robert M. Thornton, Jr. Director, Chairman of the Board of Directors, President, 52
Chief Executive Officer and Chief Financial Officer
James J. Mulligan Director and Secretary 79
Mark J. Stockslager Corporate Controller and Principal Accounting Officer 41
Joseph T. Morris (1) President and Chief Financial Officer of SunLink Healthcare Corp. 53
Geoff Hopwood (2) Managing Director of Bradley International Holdings Ltd. 55
Marshall Cooper (3) Managing Director of Beldray Limited 56
(1) Mr. Morris is an executive of SunLink, but per applicable Securities
and Exchange Commission Rules must be reported as an executive officer
of the Corporation. He is elected to his office by the directors of the
Corporation.
(2) Mr. Hopwood is an executive of Bradley, but per applicable Securities
and Exchange Commission Rules must be reported as an executive officer
of the Corporation. He is elected to his office by the directors of
Bradley.
(3) Mr. Cooper is an executive of Beldray, but per applicable Securities
and Exchange Commission Rules must be reported as an executive officer
of the Corporation. He is elected to his office by the directors of
Beldray.
All officers of the Corporation are elected annually by the Board of
Directors.
Robert M. Thornton, Jr. has been Chairman and Chief Executive Officer of
the Corporation since September 10, 1998, President since July 16, 1996 and
Chief Financial Officer since July 18, 1997. From October 1994 to the present,
Mr. Thornton has been a private investor and, since March 1995, Chairman and
Chief Executive Officer of CareVest Capital, LLC, a private investment and
management services firm. Mr. Thornton was President, Chief Operating Officer,
Chief Financial Officer and a director of Hallmark Healthcare Corporation
("Hallmark") from November 1993 until Hallmark's merger with Community Health
Systems, Inc. in October 1994. From October 1987 until November 1993, Mr.
Thornton was Executive Vice President, Chief Financial Officer, Secretary,
Treasurer and a director of Hallmark.
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James J. Mulligan became Secretary of the Corporation in 1966. Mr. Mulligan
has been a member of the law firm of Mulligan & Mulligan since January 1993. He
was a member of the law firm of Smith & Schnacke from 1953 to 1989 and a member
of the law firm of Thompson Hine & Flory LLP from 1989 until his retirement in
1991. Mulligan & Mulligan is general counsel to the Corporation and received
$32,159 for legal services rendered during the Corporation's fiscal year ended
March 31, 2001.
Mark J. Stockslager has been Corporate Controller since November 6, 1996
and Principal Accounting Officer since March 11, 1998. He continuously has been
associated with the Corporation's accounting and finance operations since June
1988 and has held various positions, including Manager of U.S. Accounting from
June 1993 until November 1996. From June 1982 through May 1988, Mr. Stockslager
was employed by Price Waterhouse & Co.
Joseph T. Morris has been President and Chief Financial Officer of
SunLink Healthcare Corp. since February 1, 2001. Mr. Morris provided turn-around
operational and financial consulting services for several healthcare companies
including Cambio Health Solutions and New American Healthcare Corporation from
June 1999 through January 2001. From January 1997 until May 1999, Mr. Morris was
Executive Vice President and Chief Financial Officer of ValueMark HealthCare
Systems, Inc., which was formed after the successful turn-around and subsequent
merger of Hallmark Healthcare Corporation with Community Health Systems, Inc. in
October, 1994. From August, 1993 to December 1996, Mr. Morris was President of
Affiliated Health Management, Inc., and from February, 1990 to July, 1993, was
Senior Vice President, Hospital Financial Operations for Hallmark Healthcare
Corporation.
Geoff Hopwood was elected as Managing Director of Beldray effective June 4,
2001. Prior to joining Beldray, Mr. Hopwood served as a senior management
executive for more than twenty years, and has a technical, marketing and general
background in multi-site manufacturing and distribution operations in the U.K.
and Europe.
Marshall Cooper has been Managing Director of Beldray since November 1998
and was Sales Director from December 1990 until November 1998. Prior to December
1990, he held senior management positions with three major housewares companies
for more than ten years.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Corporation'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 2001 and 2000.
The number of shareholders of record was 789 as of March 31, 2001. No cash
dividends were paid in fiscal 2001 or 2000. Prior to December 30, 1996, the
Common Shares were traded on the NASDAQ National Market System.
QUARTER 4TH 3RD 2ND 1ST
------- --- --- --- ---
2001 High $1.88 $1.38 $1.09 $1.88
Low $1.30 $1.00 $1.00 $1.25
2000 High $2.06 $2.38 $1.88 $1.88
Low $1.25 $1.31 $1.13 $1.25
Effective May 15, 2000, the Corporation appointed First Union National Bank
as the Transfer Agent and Registrar for its Common Shares and warrants. For all
shareholder inquiries, call First Union's Shareholder Customer Service Center at
1-800-829-8432.
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ITEM 6. SELECTED FINANCIAL DATA
The following table summarizes certain selected financial data which should
be read in conjunction with the Corporation's Consolidated Financial Statements
and related Notes at "Item 8. Financial Statements and Supplementary Data" and
"Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations" of this Report.
Years Ending March 31, 2001 2000 1999 1998 1997
------------------------------- ------- -------- -------- -------- --------
(All amounts in thousands,
except per share amounts)
Revenue $ 41,674 $ 32,011 $ 34,832 $ 41,152 $ 33,540
Loss from Continuing Operations (1,366) (871) (6,065) (2,925) (35)
Net Earnings (Loss) 478 1,583 (8,633) 256 2,096
Loss per Share from
Continuing Operations:
Basic (0.27) (0.17) (1.20) (0.57) (0.01)
Diluted (0.27) (0.17) (1.20) (0.57) (0.01)
Net Earnings (Loss) Per Share:
Basic 0.10 0.32 (1.71) 0.05 0.41
Diluted 0.10 0.32 (1.71) 0.05 0.40
Total Assets 56,514 23,128 26,121 37,546 37,841
Long-term Debt 21,709 2,027 5,910 6,703 8,331
Shareholders' Equity $ 9,631 $ 9,513 $ 7,480 $ 18,099 $ 17,960
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (ALL AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
CERTAIN CAUTIONARY STATEMENTS
In addition to historical information, Item 7 of this Report contains
certain forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995 including, without limitation, statements
regarding the Corporation's business strategy and management's outlook for each
of its businesses 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, performance
and achievements to differ materially from those anticipated, including, without
limitation, general economic and business conditions in the U.S. and abroad,
restrictions imposed by debt agreements, competition in the community health and
child safety businesses, governmental budgetary constraints, the regulatory
environment for the Corporation's businesses, consolidation and acquisition
trends in the Corporation's businesses, competition in the acquisition market
including for the acquisition of hospital and healthcare facilities, changes in
exchange rates (including in Europe the effects of the European currency, the
Euro), increases in prices of raw materials and services, the purchasing
practices of significant customers, the availability of qualified management and
staff personnel in each subsidiary, the functionality of the Corporation's
computer systems and claims for product liability from continuing and
discontinued operations.
CORPORATE BUSINESS STRATEGY
The Corporation has redirected its business strategy toward acquisitions of
community hospitals in the U.S. and in February 2001, its subsidiary, SunLink,
completed the purchase of corporations owning six community hospitals and
related businesses for approximately $26,500. In addition, the Corporation
currently owns subsidiaries in the U.K. which manufacture and distribute
housewares products. The Corporation disposed of its European Child Safety
subsidiary, Klippan Limited ("Klippan") on January 29, 2001 for net proceeds of
approximately $3,000 after repayment of Klippan's debt. During fiscal 1999, the
Corporation disposed of subsidiaries in the LS&E and Leisure Marine business
segments.
DISPOSAL OF BUSINESS SEGMENTS
In November 1999, the Corporation sold its Wyle Laboratories, Inc. ("Wyle")
Series A Preferred Stock for $4,100 in cash. The Series A Preferred Stock had
voting rights and was convertible into approximately 38% of Wyle's common
shares. In connection with the sale, which was part of a leveraged management
buy-out of Wyle, the Corporation also exchanged its non-dividend paying and
non-voting Series B Preferred Stock in Wyle for Senior Preferred Stock of LTS
Holdings, Inc., Wyle's new parent company, and canceled its existing options to
acquire Wyle shares. The Corporation acquired the Wyle Series A and Series B
Preferred Stock and options in connection with the disposal of its LS&E business
segment. The new Senior Preferred Stock is redeemable on March 31, 2003 for $954
plus accrued and unpaid dividends at 8% per annum. In April 1998, the
Corporation sold its Leisure Marine subsidiary to a company formed by the
management of the subsidiary. The selling price was approximately $15,000
comprised of approximately $8,900 in cash and the assumption of approximately
$6,100 of debt.
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REVENUES
----------------------------------------
YEAR ENDED MARCH 31,
----------------------------------------
2001 2000 1999
-------- -------- --------
Community Hospital $ 13,639
Housewares 28,035 $ 32,011 $ 34,832
----------------------------------------
$ 41,674 $ 32,011 $ 34,832
========================================
GROSS PROFIT
----------------------------------------
YEAR ENDED MARCH 31,
----------------------------------------
2001 2000 1999
-------- -------- --------
Housewares $ 2,098 $ 3,497 $ 1,606
========================================
LOSS FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES
----------------------------------------
YEAR ENDED MARCH 31,
----------------------------------------
2001 2000 1999
-------- -------- --------
Community Hospital EBITDA (1) $ 912
Housewares EBITDA (1) 479 $ 1,397 $ (1,267)
Corporate (U.S. and U.K.) EBITDA (1) (1,547) (1,849) (2,355)
Depreciation expense (849) (813) (881)
----------------------------------------
Operating profit (1,005) (1,265) (4,503)
Interest expense (670) (208) (424)
Interest income 359 328 532
Other income - net 22 175
----------------------------------------
Loss from continuing operations before income taxes $ (1,316) $ (1,123) $ (4,220)
========================================
NET CASH PROVIDED BY (USED IN)
----------------------------------------
YEAR ENDED MARCH 31,
----------------------------------------
2001 2000 1999
-------- -------- --------
Operating activities $ (1,304) $ (3,751) $ (580)
========================================
Investing activities $ (3,034) $ 3,917 $ 8,278
========================================
Financing activities $ (15) $ 4,774 $ (9,168)
========================================
(1) EBITDA represents the sum of income before income taxes, interest,
depreciation and amortization. We understand that industry analysts
generally consider EBITDA to be one measure of the financial
performance of a corporation that is presented to assist investors in
analyzing the operating performance of a corporation and its ability to
service debt. We believe an increase in EBITDA level is an indicator of
improved ability to service existing debt, to sustain potential future
increases in debt and to satisfy capital requirements. EBITDA, however,
is not a measure of financial performance under accounting principles
generally accepted in the United States of America and should not be
considered an alternative to net income as a measure of operating
performance or to cash liquidity. Given that EBITDA is not a
measurement determined in accordance with accounting principles
generally accepted in the United States of America and is thus
susceptible to varying calculations, EBITDA, as presented, may not be
comparable to other similarly titled measures of other corporations.
27
28
RESULTS OF OPERATIONS - CONTINUING OPERATIONS
The Corporation's fiscal 2001 revenue of $41,674 increased $9,663 from
$32,011 in fiscal 2000 as a result of $13,639 of revenue from the six community
hospitals and related businesses of the U.S. community hospital segment acquired
February 1, 2001. Fiscal 2000 revenue decreased $2,821 from fiscal 1999 due to
lower sales of the U.K. housewares segment.
The fiscal 2001 revenue for the U.S. community hospital segment
consists of $13,639 net patient revenue. The occupancy rate of hospital beds in
service for the two months SunLink operated the six hospitals was 28.5% and net
outpatient revenue was 47.4% of net patient revenue.
The revenue of the U.K. housewares segment decreased $3,976 in fiscal
2001 from decreased sales volume, primarily in laundry products, child safety
gates and fireguards which was offset somewhat by increased ladder revenue
($1,460 in aggregate), and the unfavorable effect of currency translation
($2,516). Fiscal 2000 revenue of the housewares segment decreased by $2,821 to
$32,011 from $34,832 for 1999. The decreased revenue in fiscal 2000 resulted
primarily from lower sales volume, primarily in ladders, child safety gates and
fireguards ($831 in aggregate), and the unfavorable effect of currency
translation ($1,990). Order backlog is not meaningful for the housewares segment
due to the short time between order placement and shipment.
Gross profit margins (revenue less cost of goods sold) for the U.K.
housewares segment were 7.5%, 10.9% and 4.6% in fiscal 2001, 2000 and 1999,
respectively. The decrease in gross profit margin in fiscal 2001 was primarily
due to lower manufacturing volume as manufacturing overhead costs did not
decrease at the same percentage that sales decreased. The increased sales of
ladders in fiscal 2001 also decreased the gross profit margin due to the higher
material cost of ladders compared to other product lines. The increase in gross
profit margin in fiscal 2000 was the result of increased operational
efficiencies, primarily lower raw material costs and manufacturing labor
overhead.
The community hospital earnings before interest, taxes, depreciation
and amortization ("EBITDA") of $912 was 6.7% of net patient revenue. This EBITDA
to net patient revenue percentage is lower than most other publicly traded
community hospitals and has been targeted for improvement by SunLink management.
Other areas targeted for improvement by SunLink management are increased net
patient revenue, bad debts, and supplies cost. Operating costs and expenses of
the U.S. community hospital segment were $12,726 for the two months ended March
31, 2001. Salaries, wages and benefits comprised 49.0% of these expenses and bad
debt expense was $1,637 or 12.9% of net patient revenue.
Housewares EBITDA decreased $918 in fiscal 2001 to $479 from $1,397 in
fiscal 2000 due to decreased sales volume and lower gross profit margin
discussed earlier. Fiscal 2000 Housewares EBITDA of $1,397 compares to a loss of
$1,267 in fiscal 1999. The fiscal 2000 increase resulted from increased gross
profit margin and decreased selling and administrative expenses.
Selling and administrative expenses were $15,893, $3,949 and $4,816 in
fiscal 2001, 2000 and 1999, respectively. The 2001 amounts include $12,726 of
operating costs and expenses of the U.S. community hospital segment which was
purchased February 1, 2001. Excluding these expenses, selling and administrative
expenses decreased $782 in fiscal 2001 compared to the prior year. The decreased
expense in fiscal 2001 resulted from overhead reductions of the housewares
segment and lower corporate overhead expense. Overhead reductions of the
housewares segment were in response to the lower sales levels. Corporate
overhead expense declined due to lower legal expense. The decreased expense in
fiscal 2000 resulted from overhead reductions of the housewares segment and
lower corporate overhead expense, which declined due to reduced labor costs.
28
29
The Corporation recorded restructuring charges of $412 in fiscal 1999
for additional expenses related to the final settlement with the landlord of a
vacated manufacturing facility in Bognor Regis, England. In fiscal 1998, the
Corporation closed the manufacturing facility and moved the operations to its
facility in Bilston, England.
Interest expense increased $462 in fiscal 2001 as a result of $447 of
interest expense on the debt incurred in connection with the purchase of the six
hospitals and related businesses on February 1, 2001. Interest expense decreased
$216 in fiscal 2000 as a result of lower U.K. debt. The U.K. Variable Rate Loan
of approximately $2,900 was repaid in September 1999. Interest income increased
slightly in fiscal 2001 due to higher average cash balances during the year.
Interest income decreased in fiscal 2000 due to lower levels of invested cash
resulting from the use of cash to repay the U.K. Variable Rate Loan and to
provide working capital for the European operations.
Gain on sale of assets of $175 in fiscal 1999 resulted primarily from
the sale of excess land in Dayton, Ohio.
The Corporation recorded income tax expense of $50 in fiscal 2001,
income tax benefit of $252 in fiscal 2000 and income tax expense of $1,845
fiscal 1999. The income tax expense in fiscal 2001 results from state income
expense. No U.S. Federal nor foreign income taxes are payable for fiscal 2001
due to tax operating losses for the U.S. and U.K. No deferred income tax expense
was recorded because the Corporation provided 100% valuation allowances for U.S.
and foreign deferred tax assets. The Corporation decided to provide such
valuation allowances to adjust the net deferred tax assets to zero based upon
management's assessment that it is more likely than not that the net operating
loss carryforwards and other deferred tax assets items will not be realized
through future taxable earnings or implementation of tax planning strategies
considered likely to be available in the future. The income tax benefit in
fiscal 2000 resulted primarily because U.S. tax losses generated from continuing
operations were used to reduce the taxable income generated from the sale of the
Wyle Series A Preferred Stock, offset partially by a $116 increase in the
foreign tax valuation allowances. In fiscal 1999, the Corporation provided
current domestic tax expense of $268 (primarily U.S. alternative minimum tax)
and $1,445 for deferred tax expense related to increased valuation allowances.
Such valuation allowances adjusted the net domestic tax assets to zero based
upon management's assessment that it was more likely than not that none of the
domestic deferred tax assets would be realized through future taxable earnings
or implementation of tax planning strategies then available. Foreign tax expense
of $132 was provided in fiscal 1999.
The loss from continuing operations was $1,366 ($0.27 per share) in
fiscal 2001, $871 ($0.17 per share) in fiscal 2000 and $6,065 ($1.20 per
share) in fiscal 1999. The increased loss in fiscal 2001 was due to lower EBITDA
of the housewares segment as a result of their decreased revenue and lower gross
profit margin and increased interest expense which resulted from the debt
incurred in the acquisition of the six hospitals and related businesses on
February 1, 2001. The decreased loss in fiscal 2000 as compared to fiscal 1999
was due to improved results of the housewares segment which increased its gross
profit margin and decreased its overhead expenses resulting in an increase in
their EBITDA of $2,664. Corporate EBITDA also increased $506 as a result of
reduced payroll and travel costs.
RESULTS OF OPERATIONS - DISCONTINUED OPERATIONS
The fiscal 2001 earnings from discontinued operations of $1,844
resulted from the $2,457 pre-tax gain on the sale of the child safety segment,
partially offset by a $474 after tax loss from operations
29
30
(prior to the sale) of the child safety segment and a $139 after tax loss from
the LS&E segment which resulted from domestic pension curtailment expenses.
Earnings from discontinued operations in fiscal 2000 of $2,454 resulted from
$2,649 of earnings from the LS&E segment, partially offset by a $195 operating
loss from the child safety segment. The LS&E segment earnings were composed of
the pre-tax gain on the sale of Wyle Series A Preferred Stock of $4,153 offset
by $680 of domestic pension curtailment expenses and $824 of domestic income tax
expense. The fiscal 1999 loss from discontinued operations of $2,568 resulted
from an after-tax loss of $2,741 from the child safety segment (which included a
$1,315 asset impairment charge to reduce to zero the goodwill recorded in
connection with the purchase of the segment), a $194 loss from the LS&E segment,
an additional provision of $220 for losses of the industrial segment, and a $587
after-tax gain on the sale of the leisure marine segment.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2001, the Corporation had outstanding U.S. debt of
$19,913, all of which was incurred in connection with the February 1, 2001
purchase of the six community hospitals and related businesses.
The U.S. debt includes a short term loan of $4,000, a seller financed
balloon note of $14,476 and a seller financed zero coupon note of $1,437. The
short-term loan was made to SunLink by a group of three private equity funds and
matures February 1, 2002. The short-term loan initially bears interest at the
prime rate plus 5.5% (13.5% at March 31, 2001) and the rate escalates beginning
August 2, 2001 to prime plus 10.5% and monthly thereafter in increments to a
rate of prime plus 20.5% beginning January 2, 2002. It is management's intention
to refinance the bridge loan prior to maturity.
The balloon note, due January 31, 2006, has a face amount of $17,000
and a stated interest rate of 8.5% which, because it is considered a below
market interest rate, has been discounted for financial reporting purposes to a
market interest rate of 12.3%. The balloon note has a payment-in-kind (PIK)
feature for interest accrued through January 31, 2003. Interest due and payable
through that date can be paid in additional balloon notes due 2002 and the
Corporation presently intends to issue PIK notes for interest due through
January 31, 2003. The interest accrued through March 31 2001 of $237 has been
included in the principal amount of the balloon note at March 31, 2001. The
purchase agreement for the six hospitals provides for an adjustment to the
balloon note to the extent working capital at the purchase date was greater or
less than an agreed upon amount. The Corporation has submitted to the seller a
working capital adjustment to reduce the balloon note by $1,053. The seller has
objected to the adjustment and the Corporation and seller currently are seeking
to conclude the working capital adjustment settlement under the dispute
provisions of the sale agreement. No adjustment for any working capital
settlement has been made to the balloon note at March 31, 2001.
The zero coupon note is due January 31, 2004 has a face amount of
$2,000, and has been discounted to a market interest rate of 11.3%. The
principal amount of the zero coupon note is subject to reduction for certain
indemnified items pursuant to the purchase agreement. The Corporation has not
made any claims for reduction of the zero coupon note.
The Corporation had outstanding U.K. debt of $3,754 at March 31, 2001,
including a term loan of $1,345 relating to the Beldray manufacturing facility
which has monthly principal payments and matures in fiscal 2010, $451 of debt
under capital leases at Beldray and a working capital line with a U.K. bank of
$1,958. Availability under the working capital line fluctuates with increases or
decreases of eligible accounts receivable.
30
31
At March 31, 2001, the Corporation had a cash balance of $3,263 and
$581 in an escrow account relating to the sale of Klippan. The escrow is
scheduled to be paid at various dates between June 2001 and October 2002.
Substantially all cash is in the U.S. The Corporation believes it has adequate
financing in both the U.S. and U.K. to support its current level of operations
during fiscal 2002, but will require refinancing of the bridge loan during
fiscal 2002.
The Corporation used cash of approximately $1,304, $3,751 and $580 in
operating activities in fiscal 2001, 2000 and 1999, respectively. In fiscal
2001, the use of cash resulted from cash used to fund U.S. and U.K. corporate
overhead expenses and to pay U.S. income taxes of $356, offset somewhat by cash
generated from reduced working capital in the housewares segment. The use of
cash in fiscal 2000 resulted from cash used to provide working capital for the
European operations (primarily to reduce accounts payable balances and pay
restructuring expenses), fund corporate expenses and to pay U.S. income taxes.
In fiscal 1999, the use of cash resulted from the fiscal 1999 net loss, net of
non-cash depreciation of $881 and deferred income taxes of $1,722, offset
partially by cash generated from reduced working capital in the housewares
segment.
The Corporation used $3,034 in cash for investing activities in fiscal
2001 while generating $3,917 and $8,278 in cash from investing activities in
fiscal 2000 and 1999 respectively. Cash of $4,759 used for the SunLink
Acquisition and $994 for capital expenditures which were somewhat offset by cash
generated from the sale of Klippan of $2,487 in fiscal 2001. Fiscal 2001 capital
expenditures included $753 for the hospital segment and $239 for new equipment
for the housewares segment. Fiscal 2000 cash generated from investing activities
included $4,215 proceeds from the sale of the Wyle Series A Preferred Stock
offset by $215 used for capital expenditures, primarily for new equipment at the
housewares segment. Fiscal 1999 cash generated from investing activities
included $8,178 from the sale of the leisure marine business and $220 from the
sale of excess assets, offset by $120 used for capital expenditures, primarily
for new equipment at the housewares segment. The Corporation repurchased a total
of 278,700 shares for cash of $1,363 in fiscal 1999 and repurchased 1,245 shares
for cash of $2 in fiscal 2000. All repurchased shares were retired by the
Corporation. At March 31, 2001, there were no material commitments for capital
expenditures.
INFLATION
During periods of inflation and labor shortages, employee wages
increase and suppliers pass along rising costs to the Corporation in the form of
higher prices for their raw materials and services. The Corporation has not
always been able to offset increases in operating costs by increasing prices for
its services and products, increasing its manufacturing efficiency or
implementing cost control measures. The Corporation is unable to predict its
ability to control future cost increases or offset future cost increases by
passing along the increased cost to customers.
RECENT ACCOUNTING PRONOUNCEMENTS
Recent Accounting Pronouncements and their expected impact are
discussed at Note 1 of the Notes to Consolidated Financial Statements at Item 8
of this Annual Report on Form 10-K.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Corporation is exposed to interest rate changes, primarily as a
result of our U.S. bridge loan, U.K. term debt and U.K. working capital line
bearing interest based upon floating rates. No action has been taken to cover
interest rate market risk, and is not a party to any interest rate market risk
management activities.
31
32
The Corporation also is exposed to risk of changes in foreign currency
exchange rates as it translates the results of its U.K. operations from U.K.
pounds to U.S. dollars for the Corporation's consolidated financial statements.
Changes in the U.K.-pound-to-U.S. dollar exchange rate could significantly
impact the results of the Corporation's operations in future periods.
32
33
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements and Supplementary Data
Page
-----
Independent Auditors' Report 34
Consolidated Balance Sheets -- March 31, 2001 and 2000 35-36
Consolidated Statements of Earnings --
For the Years Ended March 31, 2001, 2000 and 1999 37-38
Consolidated Statements of Shareholders' Equity --
For the Years Ended March 31, 2001, 2000 and 1999 39
Consolidated Statements of Cash Flows --
For the Years Ended March 31, 2001, 2000 and 1999 40-41
Notes to Consolidated Financial Statements --
For the Years Ended March 31, 2001, 2000 and 1999 42-63
33
34
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders of KRUG International Corp.:
We have audited the accompanying consolidated balance sheets of KRUG
International Corp. and subsidiaries (the "Corporation") as of March 31, 2001
and 2000, and the related consolidated statements of earnings, shareholders'
equity, and cash flows for each of the three years in the period ended March 31,
2001. 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 auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of KRUG International Corp. and
subsidiaries as of March 31, 2001 and 2000, and the results of their operations
and their cash flows for each of the three years in the period ended March 31,
2001 in conformity with accounting principles generally accepted in the United
States of America.
/s/ Deloitte & Touche LLP
Atlanta, Georgia
June 1, 2001
34
35
KRUG INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2001 AND 2000
(ALL AMOUNTS IN THOUSANDS)
ASSETS 2001 2000
-------- --------
CURRENT ASSETS:
Cash and cash equivalents $ 3,263 $ 7,651
Receivables - net 15,191 5,118
Inventories 4,701 3,611
Prepaid expenses and other 1,707 506
-------- --------
Total current assets 24,862 16,886
PROPERTY, PLANT, AND EQUIPMENT - At cost
Land 3,423 127
Buildings and improvements 20,897 1,377
Equipment and fixtures 11,887 8,815
-------- --------
36,207 10,319
Less accumulated depreciation 6,018 6,069
-------- --------
Property, plant, and equipment - net 30,189 4,250
OTHER NONCURRENT ASSETS:
Pension asset 1,222 1,129
Net noncurrent assets of discontinued operations 855
Other 241 8
-------- --------
Total other noncurrent assets 1,463 1,992
-------- --------
TOTAL ASSETS $ 56,514 $ 23,128
======== ========
See notes to consolidated financial statements.
35
36
LIABILITIES AND SHAREHOLDERS' EQUITY 2001 2000
-------- --------
CURRENT LIABILITIES:
Bank borrowings $ 1,958 $ 2,064
Accounts payable 9,164 5,562
Third-party payor settlements 6,041
Current maturities of long-term debt 4,360 589
Accrued payroll and related taxes 3,387 882
Pension liability 787 602
Income taxes payable 56 348
Current portion of liability for general and professional liability risks 429
Other accrued expenses 2,009 1,092
-------- --------
Total current liabilities 28,191 11,139
LONG-TERM LIABILITIES:
Long-term debt 17,349 1,438
Noncurrent liability for general and professional liability risks 444
Noncurrent reserve for Industrial Segment 899 1,038
-------- --------
Total long-term liabilities 18,692 2,476
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred Shares, authorized and unissued, 2,000 shares
Common Shares, no par value; authorized, 12,000 shares;
issued and outstanding, 4,976 at March 31,
2001 and 2000 2,488 2,488
Additional paid-in capital 3,604 3,604
Retained earnings 3,650 3,172
Accumulated other comprehensive income (loss) (111) 249
-------- --------
Total shareholders' equity 9,631 9,513
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 56,514 $ 23,128
======== ========
36
37
KRUG INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE YEARS ENDED MARCH 31, 2001, 2000 AND 1999
(All amounts in thousands, except per share amounts)
2001 2000 1999
-------- -------- --------
COMMUNITY HOSPITAL REVENUE $ 13,639
HOUSEWARES REVENUE 28,035 $ 32,011 $ 34,832
-------- -------- --------
TOTAL REVENUE 41,674 32,011 34,832
-------- -------- --------
COSTS AND EXPENSES
Cost of goods sold 25,937 28,514 33,226
Selling and administrative expenses 15,893 3,949 4,816
Restructuring charges 412
Depreciation 849 813 881
-------- -------- --------
Total operating costs and expenses 42,679 33,276 39,335
-------- -------- --------
OPERATING LOSS (1,005) (1,265) (4,503)
OTHER INCOME (EXPENSE):
Interest income 359 328 532
Interest expense (670) (208) (424)
Other income - net 22 175
-------- -------- --------
LOSS FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES (1,316) (1,123) (4,220)
INCOME TAX EXPENSE (BENEFIT) 50 (252) 1,845
-------- -------- --------
LOSS FROM CONTINUING OPERATIONS (1,366) (871) (6,065)
EARNINGS (LOSS) FROM DISCONTINUED OPERATIONS,
net of income taxes 1,844 2,454 (2,568)
-------- -------- --------
NET EARNINGS (LOSS) $ 478 $ 1,583 $ (8,633)
======== ======== ========
EARNINGS (LOSS) PER SHARE:
Continuing operations:
Basic $ (0.27) $ (0.17) $ (1.20)
======== ======== ========
Diluted $ (0.27) $ (0.17) $ (1.20)
======== ======== ========
Discontinued operations:
Basic $ 0.37 $ 0.49 $ (0.51)
======== ======== ========
Diluted $ 0.37 $ 0.49 $ (0.51)
======== ======== ========
Net earnings (loss):
Basic $ 0.10 $ 0.32 $ (1.71)
======== ======== ========
Diluted $ 0.10 $ 0.32 $ (1.71)
======== ======== ========
(Continued)
37
38
KRUG INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE YEARS ENDED MARCH 31, 2001, 2000 AND 1999
(All amounts in thousands, except per share amounts)
2001 2000 1999
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING:
Continuing operations:
Basic 4,976 4,977 5,049
======== ======== ========
Diluted 4,976 4,977 5,049
======== ======== ========
Discontinued operations:
Basic 4,976 4,977 5,049
======== ======== ========
Diluted 4,976 4,977 5,049
======== ======== ========
Net earnings:
Basic 4,976 4,977 5,049
======== ======== ========
Diluted 4,976 4,977 5,049
======== ======== ========
(Concluded)
See notes to consolidated financial statements.
38
39
KRUG INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 2001, 2000 AND 1999
(ALL AMOUNTS IN THOUSANDS)
ACCUMULATED
OTHER
COMMON SHARES ADDITIONAL TREASURY SHARES COMPREHENSIVE TOTAL
---------------- PAID-IN RETAINED --------------- COMPREHENSIVE SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS SHARES AMOUNT INCOME (LOSS) EQUITY
MARCH 31, 1998 5,199 $2,599 $ 4,590 $ 10,222 $ 688 $ 18,099
Net loss (8,633) (8,633)
Foreign currency translation adjustment (925) (925)
Minimum pension liability adjustment,
net of tax of $19 34 34
---------
Total comprehensive loss (9,524)
---------
Common shares issued 57 29 239 268
Treasury shares purchased 279 $(1,363) (1,363)
------ ------ -------- --------- ---- ------- ------- ---------
MARCH 31, 1999 5,256 2,628 4,829 1,589 279 (1,363) (203) 7,480
Net earnings 1,583 1,583
Foreign currency translation adjustment 30 30
Minimum pension liability adjustment,
net of tax of $218 422 422
---------
Total comprehensive income 2,035
---------
Treasury shares purchased 1 (2) (2)
Treasury shares retired (280) (140) (1,225) (280) 1,365 --
------ ------ -------- --------- ---- ------- ------- ---------
MARCH 31, 2000 4,976 2,488 3,604 3,172 -- -- 249 9,513
Net earnings 478 478
Foreign currency translation adjustment (300) (300)
Minimum pension liability adjustment,
net of tax of $31 (60) (60)
---------
Total comprehensive income 118
------ ------ -------- --------- ---- ------- ------- ---------
MARCH 31, 2001 4,976 $2,488 $ 3,604 $ 3,650 -- $ -- $ (111) $ 9,631
====== ====== ======== ========= ==== ======= ======= =========
See notes to consolidated financial statements.
39
40
KRUG INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 2001, 2000 AND 1999
(ALL AMOUNTS IN THOUSANDS)
2001 2000 1999
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $ 478 $ 1,583 $ (8,633)
Adjustments to reconcile net earnings (loss) to net cash used in
operating activities:
Depreciation 849 813 881
Deferred income taxes 1,722
Provision for bad debts 1,637
Interest capitalized on long-term debt 317
Gain on sale of Klippan (2,457)
Gain on sale of Leisure Marine subsidiary (622)
Gain on sale of Wyle Laboratories, Inc. Series A Preferred Stock (4,153)
Gain on sale of assets (2) (175)
Provision for loss from discontinued operations 220
Change in assets and liabilities (excluding effect of acquisition):
Receivables (1,456) 92 2,804
Inventories 260 (31) (144)
Prepaid expenses and other assets (580) 320 309
Accounts payable and accrued expenses 506 (1,956) (1,976)
Income taxes (294) 235 2,390
Third-party payor settlements (389)
Net cash provided by (used in) discontinued operations (175) (652) 2,644
-------- -------- --------
Net cash used in operating activities (1,304) (3,751) (580)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of Klippan 2,487
Proceeds from sale of Wyle Laboratories, Inc. Series A Preferred Stock 4,125
Cash paid in SunLink Acquisition (4,759)
Cash acquired in SunLink Acquisition 232
Proceeds from sale of Leisure Marine subsidiary 8,178
Proceeds from sales of assets 7 220
Expenditures for property, plant, and equipment (994) (215) (120)
-------- -------- --------
Net cash provided by (used in) investing activities (3,034) 3,917 8,278
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common shares 268
Purchase of treasury shares (2) (1,363)
Bank borrowings - net 127 2,090
Additions to long-term debt 370
Payment of long-term debt (512) (3,955) (1,432)
Change in restricted cash 6,641 (6,641)
-------- -------- --------
Net cash provided by (used in) financing activities (15) 4,774 (9,168)
EFFECT OF EXCHANGE RATE CHANGES ON CASH (35) (1) (249)
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (4,388) 4,939 (1,719)
CASH AND CASH EQUIVALENTS:
Beginning of year 7,651 2,712 4,431
-------- -------- --------
End of year $ 3,263 $ 7,651 $ 2,712
======== ======== ========
(Continued)
40
41
KRUG INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 2001, 2000 AND 1999
(ALL AMOUNTS IN THOUSANDS)
2001 2000 1999
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Effect of acquisition by community hospital segment:
Fair value of assets acquired $ 39,356
Liabilities assumed and expenses paid (15,000)
-------
24,356
Less debt financing (19,597)
--------
Cash paid 4,759
Less cash acquired (232)
--------
Net cash paid for acquisition $ 4,527
========
Cash paid for:
Income taxes $ 356 $ 447 $ 265
======== ======== ========
(Concluded)
41
42
KRUG INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2001, 2000 AND 1999
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business Operations and Corporate Strategy - KRUG International Corp.
and Subsidiaries (the "Corporation") currently operates two business
segments, the U.S. community hospital segment and the U.K. housewares
segment. The U.S. community hospital segment is comprised of six
community hospitals and related businesses, which were acquired through
its SunLink Healthcare Corp. ("SunLink") subsidiary (the "SunLink
Acquisition"), in the United States on February 1, 2001. The U.K.
housewares segment manufactures and distributes through its Beldray
Limited subsidiary ("Beldray") housewares products in the United
Kingdom. On January 29, 2001, the Corporation disposed of its European
child safety subsidiary.
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.
Use of Estimates - The preparation of financial statements in
conformity with accounting principles generally accepted in the United
States of America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ materially
from those estimates.
Net Patient Service Revenue - U.S. Community Hospital Segment - The
U.S. community hospital segment of the Corporation has agreements with
third-party payors that provide for payments at amounts different from
its established rates. Payment arrangements include prospectively
determined rates per discharge, reimbursed costs, discounted charges
and per diem payments. Net patient service revenue is reported as
services are rendered at the estimated net realizable amounts from
patients, third-party payors, and others for services rendered,
including estimated retroactive adjustments under reimbursement
agreements with third-party payors. Retroactive adjustments are accrued
during the period the related services are rendered and adjusted in
future periods as final settlements are determined.
Concentrations of Credit Risk - The Corporation grants unsecured credit
to its patients, most of whom reside in the service area of the
Corporation's facilities and are insured under third-party agreements.
Because of the geographic diversity of the Corporation's facilities and
nongovernmental third-party payors, Medicare and Medicaid represent the
Corporation's only significant concentrations of credit risk.
Revenue Recognition - U.K. Housewares Segment - Revenue from the
housewares segment are recorded at the time the products are shipped to
the customer and ownership has been transferred. Product returns are
accepted from the customers if the product has been damaged, soiled, or
if the customer has been unable to resell the product. The amount of
the allowance for product returns is based upon the historical volume
of returns incurred by the businesses.
42
43
Cash and Cash Equivalents - Cash and cash equivalents consist of highly
liquid financial instruments which have original maturities of three
months or less.
Inventories - Inventories are valued at the lower of cost or market,
using the first-in, first-out method.
Property, Plant, and Equipment - Property, plant, and equipment,
including capital leases, are recorded at cost. Depreciation is
provided over the estimated useful lives of the assets, which range
from 5 to 45 years, on a straight line basis. Generally, furniture and
fixtures are depreciated over 5 to 10 years, machinery and equipment
over 10 years, and buildings over 25 to 45 years. Leasehold
improvements and leased machinery and equipment are depreciated over
the lease term or estimated useful life of the asset, whichever is
shorter, and range from 5 to 15 years. Expenditures for major renewals
and replacements are capitalized. Expenditures for maintenance and
repairs are charged to income as incurred. When property items are
retired or otherwise disposed of, amounts applicable to such items are
removed from the related asset and accumulated depreciation amounts and
any resulting gain or loss is credited or charged to income.
Risk Management - The Corporation is exposed to various risks of loss
from torts; theft of, damage to, and destruction of assets; business
interruption; errors and omissions; employee injuries and illnesses;
natural disasters; and employee health, dental, and accident benefits.
Commercial insurance coverage is purchased for claims arising from such
matters.
In connection with the SunLink Acquisition, the Corporation assumed
responsibility for general and professional liability claims reported
after February 1, 2001 (date of acquisition), and the previous owner
retained responsibility for all known and filed claims. The Corporation
has purchased claims-made commercial insurance for coverage prior to
and after the acquisition date. The recorded liability for general and
professional liability risks includes an estimate of the liability for
claims incurred prior to February 1, 2001, but reported after February
1, 2001 and for claims incurred after February 1, 2001. As a component
of the related liability for general and professional liability risks,
the Corporation has included the premiums related to the cost of
insurance for claims prior to the acquisition date.
The Corporation's U.S. community hospital segment is self-insured for
workers' compensation and employee health risks. The estimated
liability for workers' compensation and employee health risks includes
estimates of the ultimate costs for both reported claims and claims
incurred but not reported, which was $463 at March 31, 2001. The
estimated liability is included in other accrued expenses.
The Corporation accrues an estimate of losses resulting from
professional liability, workers' compensation and employee health
claims to the extent they are not covered by insurance. These accruals
are estimated annually based upon historical loss patterns.
Long-Lived Assets - The Corporation periodically assesses the
recoverability of assets based on its expectations of future
profitability and the undiscounted cash flows of the related operations
and, when circumstances dictate, adjusts the carrying value of the
asset to estimated fair value. These factors, along with management's
plans with respect to the operations, are considered in assessing the
recoverability of goodwill, other purchased intangibles, and property,
plant, and equipment.
Income Taxes - The Corporation accounts for income taxes in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 109,
Accounting for Income Taxes. SFAS No. 109
43
44
is an asset and liability approach that requires the recognition of
deferred tax assets and liabilities for the expected future tax
consequences. SFAS No. 109 generally considers all expected future
events other than proposed enactments of changes in the tax law or
rates.
Stock-based Compensation - The Corporation measures compensation cost
for stock options issued to employees using the intrinsic value-based
method of accounting.
Foreign Currency Translation - The assets and liabilities of the
Corporation's wholly owned European subsidiaries are translated using
exchange rates in effect at the balance sheet date, and amounts for the
consolidated statements of earnings are translated using average
exchange rates for the period. Translation gains and losses are
recorded in shareholders' equity, and transaction gains and losses are
included in the consolidated statement of earnings for the period.
Fair Value of Financial Instruments - The recorded values of cash,
receivables and payables approximate their fair values because of the
relatively short maturity of these instruments. Similarly, the fair
value of the Corporation's discounted long-term debt is estimated to
approximate its recorded value due to its recent valuation and
relatively short maturity periods (three to five years).
Earnings (Loss) per Share - Earnings (loss) per common share ("EPS") is
based on the weighted-average number of common shares and dilutive
common share equivalents outstanding for each fiscal year presented,
including vested and unvested shares issued under the Corporation's
Incentive Stock Option Plan and outstanding stock purchase warrants
issued by the Corporation. Common share equivalents represent the
dilutive effect of the assumed exercise of the outstanding stock
options and warrants.
Recent Accounting Standards - SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, requires that an entity recognize
all derivatives as either assets or liabilities in the balance sheet
and measure those instruments at fair value. If certain conditions are
met, a derivative may be specifically designated as (a) a hedge of the
exposure to changes in the fair value of a recognized asset or
liability or an unrecognized firm commitment, (b) a hedge of the
exposure to variable cash flows of a forecasted transaction, or (c) a
hedge of the foreign currency exposure of a net investment in a foreign
operation, an unrecognized firm commitment, an available-for-sale
security, or a foreign-currency-denominated forecasted transaction. The
accounting for changes in the fair value of a derivative (that is,
gains and losses) depends on the intended use of the derivative and the
resulting designation. In June 2000, the Financial Accounting Standards
Board ("FASB") issued SFAS No. 138, which amends certain provisions of
SFAS No. 133 to clarify four areas causing difficulties in
implementation. The Corporation adopted SFAS No. 133 and the
corresponding amendments under SFAS No. 138 on April 1, 2001. The
Corporation's adoption of SFAS No. 133 had no material effect on the
Corporation's consolidated financial statements, as the Corporation has
no derivative instruments.
Reclassifications - Certain amounts in prior years' consolidated
financial statements have been reclassified to conform to the 2001
presentation.
2. ACQUISITION
On February 1, 2001, the Corporation, through SunLink, completed the
acquisition of six community hospitals and related businesses for a
purchase price of $26,444. The operating results of the six community
hospitals and related businesses are reported in Business Segment
Information
44
45
under the community hospital segment. The purchase price was funded
with $3,590 cash from internally available funds, $4,000 of short-term
debt, $15,597 of seller-financed debt, and the assumption of
liabilities and transaction costs of $3,257. The purchase agreement for
the SunLink Acquisition includes a provision for the settlement of the
working capital at the purchase date of the acquired hospitals and
related businesses. The adjustment will be accounted for as an
adjustment to the seller-financed debt. No settlement has been
finalized; however, management believes that the settlement should be
resolved during the next fiscal year.
The acquisition was accounted for by the purchase method of accounting
and, accordingly, the consolidated statement of earnings includes the
results of the six community hospitals and related businesses beginning
February 1, 2001. The purchase price has been allocated to the assets
acquired and liabilities assumed based on fair values at the date of
acquisition as determined by the Corporation's management based on
information currently available and independent appraisals of the
acquired property, plant, and equipment. The purchase price is subject
to adjustment for working capital at the purchase date greater or less
than an agreed-upon amount. The allocation of the purchase price is as
follows:
Estimated fair values
Assets acquired $ 39,356
Liabilities assumed 12,912
--------
$ 26,444
========
The following unaudited pro forma results of operations for the year
ended March 31, 2001 and 2000 give effect to the Corporation's
acquisition of the six community hospitals and related businesses as if
it had occurred as of April 1, 1999. The pro forma results include
estimates and assumptions which management believes are reasonable.
However, the pro forma results do not include any anticipated cost
savings or other effects of the planned integration of the six
community hospitals and related businesses, and are not necessarily
indicative of the results which would have occurred if the business
combination had been in effect on the dates indicated, or which may
result in the future.
PRO FORMA (UNAUDITED)
YEAR ENDED MARCH 31,
-----------------------------
2001 2000
Revenues $ 106,896 $ 117,483
Net loss (4,421) (4,434)
Net loss per common share - basic (0.89) (0.89)
Net loss per common share - assuming dilution (0.89) (0.89)
45
46
3. DISCONTINUED OPERATIONS
Child Safety Segment - On January 29, 2001, the Corporation sold its
European child safety subsidiary, Klippan Ltd. ("Klippan") for $3,082
resulting in a gain on sale of $2,457, net of a $14 reserve for the escrow
fund. The purchase price was comprised of $2,487 in cash and $595 which is
held in escrow. The escrow fund, net of a $14 reserve, is included in the
gain on sale, since the fund will be paid to the Corporation at various
dates between June 2001 and October 2002.
In fiscal year 1999, the Corporation determined that Klippan's unamortized
goodwill of $1,315 was impaired and recorded a noncash impairment loss of
$1,315, which is included in the loss from discontinued operations for
fiscal year 1999.
Life Sciences and Engineering Segment - On November 30, 1999, the
Corporation sold its Wyle Laboratories, Inc. ("Wyle") Series A Preferred
Stock and stock option for $4,125 in cash. The Series A Preferred Stock
had voting rights and was convertible into approximately 38% of Wyle's
common shares. In connection with the sale, which was a part of a
leveraged management buy-out of Wyle, the Corporation also exchanged its
nondividend-paying and nonvoting Series B Preferred Stock in Wyle for
Senior Preferred Stock of LTS Holdings, Inc., Wyle's new parent
Corporation, and canceled its existing option to acquire Wyle shares. The
New Senior Preferred Stock is redeemable on March 31, 2003 for $954 plus
accrued and unpaid dividends at 8% per annum. No gain was recorded on the
exchange of the Series B Preferred Stock of Wyle for Senior Preferred
Stock of LTS Holdings, Inc. due to the highly leveraged nature of Wyle's
management buy-out. The recorded investment in the Senior Preferred Stock
of LTS Holdings, Inc. is $0 at March 31, 2001.
Leisure Marine Segment - On April 16, 1998, the Corporation sold its
Leisure Marine Segment to a corporation formed by the Segment's
management. The sales price of approximately $15,000 was comprised of
approximately $8,100 in cash, deferred payments of $800 due within one
year, and the assumption of approximately $6,100 of debt.
Industrial Segment - In fiscal year 1989, the Corporation discontinued the
operations of its Industrial Segment and subsequently disposed of
substantially all related net assets. However, obligations remain relating
to product liability claims for products sold prior to the disposal.
Estimated Losses - Discontinued Operations:
The following is a summary of the loss reserves for discontinued
operations:
Year Ended March 31,
------------------------------------------
2001 2000 1999
Beginning balance $ 1,188 $ 1,459 $ 1,575
Provision for losses 220
Usage - net (139) (271) (336)
------- ------- -------
Ending balance $ 1,049 $ 1,188 $ 1,459
======= ======= =======
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47
The reserve for losses from discontinued operations represents
management's best estimate of the Corporation's liability with regard to
the resolution of all property and product liability claims for which it
may incur liability. These estimates are based on management's judgments
using currently available information as well as consultation with its
insurance carriers and legal counsel. The Corporation historically has
purchased insurance policies to reduce its exposure to product liability
claims and anticipates it will continue to purchase such insurance
policies if available at commercially reasonable rates.
While the Corporation has based its estimates on its evaluation of
available information to date, it is not possible to predict with
certainty the ultimate outcome of these contingencies. The Corporation
will adjust its estimates of the reserves as additional information is
developed and evaluated. However, management believes that the final
resolution of these contingencies will not have a material adverse impact
on the financial position, cash flows, or results of operations of the
Corporation.
Discontinued Operations - Summary Balance Sheet Information
March 31,
2000
Current assets $4,143
Property, plant, and equipment - net 818
Other noncurrent assets 223
------
Total assets 5,184
Current liabilities 4,341
Long-term debt 186
------
Total liabilities 4,527
------
Net assets $ 657
======
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48
Results of discontinued operations were as follows:
Discontinued Operations - Summary Statement of Earnings Information
Year Ended March 31,
--------------------------------------------
2001 2000 1999
Revenue - Child Safety Segment $ 10,622 $ 15,707 $ 15,463
======== ========= ========
Earnings (Loss) from Discontinued Operations:
Child Safety Segment
Pre-tax gain on sale of Klippan $ 2,457
Loss from operations before income taxes (390) $ (171) $ (2,691)
Income taxes 84 24 50
-------- --------- --------
Earning (loss) from operations after income taxes 1,983 (195) (2,741)
-------- --------- --------
Life Sciences and Engineering Segment:
Loss from operations before income taxes (95) (680) (194)
Pre-tax gain on sale of Wyle shares 4,153
Income taxes 44 824
-------- --------- --------
Earnings (loss) from operations after income taxes (139) 2,649 (194)
-------- --------- --------
Leisure Marine Segment:
Gain on sale of segment, net of tax of $35 587
Earnings from Leisure Marine Segment 587
Industrial Segment:
Provision for additional estimated costs (220)
-------- --------- --------
Earnings (Loss) from Discontinued Operations $ 1,844 $ 2,454 $ (2,568)
======== ========= ========
4. NET PATIENT SERVICE REVENUE
The U.S. community hospital segment of the Corporation has agreements with
third-party payors that provide for payments at amounts different from its
established rates. A summary of the payment arrangements with major
third-party payors follows:
Medicare - Inpatient acute care services rendered to Medicare program
beneficiaries are paid at prospectively determined rates per Diagnosis
Related Group ("DRG"). These rates vary according to a patient
classification system that is based on clinical, diagnostic, and other
factors. Inpatient nonacute services, certain outpatient services, and
defined capital and medical education costs related to Medicare
beneficiaries are paid based on a cost reimbursement methodology. Cost
reimbursable items are paid at a tentative rate, with final settlement
determined after submission of annual cost reports and audits thereof by
the Medicare fiscal intermediary.
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49
Medicaid - Inpatient and outpatient services rendered to Medicaid program
beneficiaries are reimbursed either under contracted rates or reimbursed
for cost reimbursable items at a tentative rate, with final settlement
determined after submission of annual cost reports and audits thereof by
the Medicaid fiscal intermediary.
The U.S. community hospital segment of the Corporation also has entered
into payment agreements with certain commercial insurance carriers, health
maintenance organizations, and preferred provider organizations. The basis
for payment under these agreements includes prospectively determined rates
per discharge, discounts from established charges, and prospectively
determined daily rates.
5. RECEIVABLES
March 31,
-------------------------
2001 2000
Patient accounts receivable (net of
contractual allowances) $ 12,515
Trade accounts receivable 4,384 $ 5,198
-------- --------
16,899 5,198
Less allowance for doubtful accounts (1,708) (80)
-------- --------
Total $ 15,191 $ 5,118
-------- --------
6. INVENTORIES
March 31,
-------------------------
2001 2000
Medical supplies $ 1,759
Finished goods 741 $ 1,245
Work-in-process 736 748
Raw materials 1,465 1,618
-------- --------
Total $ 4,701 $ 3,611
======== ========
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7. LONG-TERM DEBT
March 31,
-----------------------
2001 2000
Senior subordinated note, net of unamortized discount of $2,761 $ 14,476
Short-term loan 4,000
Senior subordinated zero coupon note, net of unamortized
discount of $563 1,437
U.K. term loan 1,345 $ 1,313
Capital leases 451 714
-------- -------
Total 21,709 2,027
Less contractual current maturities (4,360) (589)
-------- -------
$ 17,349 $ 1,438
======== =======
In connection with the SunLink Acquisition, the Corporation entered into a
8.5% senior subordinated note in the face amount of $17,000 and a senior
subordinated zero coupon note in the face amount of $2,000 with the
seller. The senior subordinate note is due on January 31, 2006 with
interest payable semiannually either in cash or through additional
promissory notes through February 1, 2003. The accrued interest as of
March 31, 2001 of $237 has been included as long-term debt. The stated
interest rate of 8.5% on the senior subordinate note is considered a
below-market interest rate; therefore, the note was discounted to market
value at an effective interest rate of 12.3%. The original discount
recorded on the senior subordinated note was $2,809. The purchase
agreement for the six hospitals includes a potential adjustment to the
senior subordinated note for working capital at the purchase date greater
or less than an agreed-upon amount.
The senior subordinated zero coupon note is due January 31, 2004. The
senior subordinated zero coupon note is considered to be at an interest
rate that is less than market value; therefore, the note has been
discounted to a market interest rate of 11.3%. The original issue discount
on the senior subordinated zero coupon note was $594.
The discounts on the long-term debt were independently determined based on
high-yield debt instruments of similar health care providers and are being
amortized over the term of the related debt using the effective interest
method. For the year ended March 31, 2001, the Corporation recognized
amortization expense on the discounts of $79.
The loan agreement pursuant to which the senior subordinated note and the
senior subordinated zero coupon note were issued requires that SunLink
grant to the lender a security interest in and mortgage on collateral
consisting of all SunLink's and its subsidiaries' real and personal
property. However, the loan agreement also requires that the lender
release the collateral if SunLink incurs senior indebtedness that meets
certain conditions. The short-term loan satisfied these conditions.
Consequently, the senior subordinated note and the senior subordinated
zero coupon note are not presently collateralized. Upon repayment of the
short-term loan, SunLink will be required to secure the senior
subordinated note and the senior subordinated zero coupon note unless
SunLink enters into a new loan for senior indebtedness meeting certain
conditions. Also, each of the individual hospital subsidiaries is a
guarantor of these notes. Further, these notes are subordinate in payment
50
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and collateral to all senior indebtedness of SunLink that in the aggregate
do not exceed $15,000, other than debt incurred in connection with future
acquisitions.
The Corporation also entered into a short-term bridge loan with three
separate private equity funds in the amount of $4,000, which is due
February 1, 2002. The loan has an interest rate of prime plus 5.5% (13.5%
at March 31, 2001); however, the interest rate escalates, beginning August
2, 2001, to prime plus 10.5%, and then increases monthly by 2% to a
maximum rate of prime plus 20.5% at January 2, 2002. The short-term loan
is secured by a pledge of the real and personal property as well as the
capital stock owned by SunLink or its subsidiaries. Also, each of the
hospital subsidiaries is a guarantor of this loan.
The U.K. term loan was renegotiated in September 2000. The U.K. term
loan was extended to a new 10-year term commencing in September 2000,
in new principal amount of $1,415, and is with a U.K. bank. The loan
has monthly principal payments of $12, plus interest, at the bank's
base rate plus 1.25% (7.0% at March 31, 2001). Substantially all
foreign assets (except shares of the foreign subsidiaries) are pledged
as collateral for the U.K. term loan.
In September 1999, a working capital line of credit was established with a
U.K. bank. The availability under the line is based upon the current
levels of U.K. accounts receivable and fluctuates with increases or
decreases in eligible accounts receivable. Borrowings under the line were
$1,958 at March 31, 2001. The line of credit has monthly interest payments
at the bank's base rate plus 1.5% (7.25% at March 31, 2001).
Annual required payments of debt, including capital leases, for the next
five years and thereafter are as follows:
2002 $ 4,360
2003 314
2004 1,602
2005 160
2006 14,632
Thereafter 641
--------
Total $ 21,709
========
8. SHAREHOLDERS' EQUITY
Stock Option Plans - On February 28, 2001, the 2001 Long-Term Stock Option
Plan was approved by the Board of Directors of the Corporation. The 2001
Long-Term Stock Option Plan permits the grant of options to officers and
other key employees for the purchase of up to 810,000 common shares
through February 2006. Options for 540,000 shares were granted in March
2001; therefore, 270,000 shares are available for grant at March 31, 2001.
The Corporation's 1995 Incentive Stock Option Plan permits the grant of
options to officers and key employees for purchase of up to 250,000 common
shares through May 2005. Options for 55,000 shares were granted in August
2000, and no options are available for grant under the 1995 Plan at March
31, 2001. Vesting and option expiration periods for all option plans are
determined by the Board of Directors, but may not exceed 10 years.
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Range
Number Weighted- of
of Average Exercise
Shares Exercise Price Prices
Options outstanding, March 31, 1998 90,500 $ 4.34 $3.00 -$5.13
Granted 79,000 1.69 1.69
Exercised (57,500) 4.66 4.50 - 5.13
Forfeited (15,000) 4.50 4.50
-------- ------- ---------------
Options outstanding, March 31, 1999 97,000 1.96 1.69 - 4.50
Forfeited (12,000) 3.25 3.00 - 4.50
-------- ------- ---------------
Options outstanding, March 31, 2000 85,000 1.78 1.69 - 4.50
Granted 595,000 1.48 1.25 - 1.50
-------- ------- --------------
Options outstanding March 31, 2001 680,000 $ 1.51 $1.25 - $3.00
======= ------- --------------
Options exercisable, March 31, 1999 18,000 $ 3.17 $3.00 - $4.50
======= ------ --------------
Options exercisable, March 31, 2000 25,750 $ 1.99 $1.69 - $3.00
======= ------ --------------
Options exercisable, March 31, 2001 107,500 $ 1.65 $1.50 - $3.00
======= ------ --------------
The weighted-average fair value of the options granted during the years
ended March 31, 2001 and 1999 was $1.07 and $0.75, 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, 2001 and 1999, respectively:
estimated volatility of 64% and 55%; risk-free interest rate of 5.0% and
4.8%; dividend yield of 0% for both years; and, an expected life of 6.4
years and 3.5 years. No stock options were granted during the year ended
March 31, 2000.
Information with respect to stock options outstanding and exercisable at
March 31, 2001 is as follows:
Weighted-Average
Remaining
Exercise Number Contractual Life Number
Prices Outstanding (in years) Exercisable
$ 1.25 55,000 4.35 0
1.50 540,000 6.59 62,000
1.69 79,000 2.72 39,500
3.00 6,000 4.60 6,000
680,000 6.59 107,500
Using the intrinsic value method, no compensation costs have been
recognized for the stock option plans since the exercise price of the
options is not less than the fair value of the Corporation's common shares
at the grant date.
Pro forma net earnings (loss) and net earnings (loss) per share amounts
that would have resulted had compensation costs been determined using the
fair value-based method, are as follows:
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53
Year Ended March 31,
------------------------------------
2001 2000 1999
Net earnings (loss) $ 239 $ 1,583 $ (8,692)
Net earnings (loss) per share:
Basic 0.05 0.32 (1.72)
Diluted 0.05 0.32 (1.72)
Warrants - The Corporation issued warrants to shareholders of record on
December 23, 1995. For each five common shares held, the Corporation
distributed one warrant for the purchase of one common share. The warrants
entitled the holders to purchase, in the aggregate, 999,487 common shares
for $8.625 per share through their initial expiration on January 31, 1998.
In January 2001, the Corporation extended the expiration date through
January 31, 2002. The Corporation may reduce the purchase price at any
time. The Corporation's valuation of the warrants extended to 2002 reflect
no value.
Treasury Shares - On April 9, 1999, the directors of the Corporation voted
to retire the 278,700 common shares held as treasury shares by the
Corporation. On September 30, 1999, the directors of the Corporation voted
to retire 1,245 common shares purchased by the Corporation in September
1999.
Accumulated Other Comprehensive Income (Loss) - Information with respect
to the balances of each classification within accumulated other
comprehensive income (loss) is as follows:
Foreign Minimum Accumulated
Currency Pension Other
Translation Liability Comprehensive
Adjustment Adjustment Income (Loss)
March 31, 2000 $ 410 $ (161) $ 249
Current period change (300) (60) (360)
----- ----- -----
March 31, 2001 $ 110 $(221) $(111)
==== ==== =====
9. INCOME TAXES
The provisions (benefits) for income taxes on continuing operations
include the following:
Year Ended March 31,
---------------------------------
2001 2000 1999
Domestic:
Current $ 50 $ (382) $ 268
Deferred 1,445
------ ------ -----
Total domestic tax expense (benefit) 50 (382) 1,713
Foreign:
Current 130 (145)
Deferred 277
------ ------ -----
Total foreign tax expense 130 132
Total income tax expense (benefit) $ 50 $ (252) $1,845
====== ====== ======
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Deferred tax assets recorded in the balance sheets include the following:
March 31,
-------------------------
2001 2000
Domestic:
Alternative minimum tax credit carryforward $ 36 $ 43
Foreign tax credit carryforwards 904 904
Investment basis in LTS Holdings, Inc. 363 363
Provision for loss on discontinued operations 367 404
Net operating loss carryforward 1,549
Depreciation expense (3,728)
Allowances for receivables 3,757
Accrued expenses 506
Pension liabilities 299 223
Other 21 45
------- -------
4,074 1,982
Less valuation allowance (4,074) (1,982)
------- -------
Total domestic deferred tax assets -- --
Foreign:
Net operating loss carryforwards 1,254 1,186
Tax prepayments not currently utilized 776 873
Depreciation expense (243) (567)
Other 36 31
------- -------
1,823 1,523
Less valuation allowance (1,823) (1,523)
------- -------
Total foreign deferred tax assets -- --
------- -------
Net deferred tax assets $ -- $ --
======= =======
Valuation allowance:
Continuing operations $ 5,167 $ 2,738
Discontinued operations 730 767
------- -------
$ 5,897 $ 3,505
======= =======
The differences between income taxes at the federal statutory rate and the
effective tax rate were as follows:
Year Ended March 31,
------------------------------------
2001 2000 1999
Income taxes at federal statutory rate $ (448) $ (382) $ (1,435)
Foreign tax rate differential 2 (28) 61
Changes in valuation allowance - continuing operations 157 (172) 2,955
U.S. deemed dividend 248 300 268
U.K. pension 78 54 16
Other 13 (24) (20)
------ ------ --------
Total income tax expense (benefit) - continuing operations $ 50 $ (252) $ 1,845
====== ====== ========
The Corporation provided a deferred tax valuation allowance for the domestic tax
assets in fiscal years 2001 and 2000 so that the net domestic tax assets are $0.
Based upon management's
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assessment, it is more likely than not that none of the domestic deferred
tax assets will be realized through future taxable earnings or
implementation of tax planning strategies. The foreign tax credit
carryforwards can only be used to offset future foreign source income, and
any future foreign source income likely would generate additional foreign
tax credits which would offset this income. As a result, the usage of the
carryforward foreign tax credits is not likely. A tax planning strategy
for usage of the other net domestic tax assets is considered not likely as
well. As a result, a valuation allowance has also been provided for these
assets.
The Corporation provided a deferred tax valuation allowance for the
foreign tax assets in fiscal year 2001 and 2000 so that the net foreign
tax assets are $0. Based upon management's assessment, it is more likely
than not that none of the foreign deferred tax assets will be realized
through future taxable earnings or implementation of tax planning
strategies. Usage of the tax prepayments in the future are considered less
likely than not, due to the net operating loss carryforwards and a change
in the U.K. tax law effective April 2000. The usage of the net operating
loss carryforwards also are considered less likely than not, as the
subsidiaries which generated them have been unprofitable or only
marginally profitable in the past three years, and these carryforwards can
only be used in the future by the subsidiaries which originally generated
the tax losses.
Earnings (loss) from continuing operations before income taxes include
foreign earnings (losses) of $56, $691, and ($2,249) in 2001, 2000 and
1999, respectively. Undistributed earnings of the foreign subsidiaries
aggregated $18,145 at March 31, 2001. To date, the Corporation has
included in its U.S. taxable income deemed dividends from its foreign
subsidiaries of approximately $19,100. The foreign net operating losses of
continuing operations at March 31, 2001 were $4,179 for the U.K., without
an expiration date.
10. EMPLOYEE BENEFITS
Defined Benefit Plans - Prior to the SunLink Acquisition the Corporation
historically maintained defined benefit retirement plans covering
substantially all of its employees. No defined benefit plan is maintained
for the community hospital segment employees. Benefits are based on years
of service and level of earnings. The Corporation funds the domestic plan,
which is noncontributory, at a rate that meets or exceeds the minimum
amounts required by ERISA. The Corporation funds monthly contributions to
the foreign plans, which are contributory, based on actuarially determined
rates.
The vested obligation of the foreign plans is calculated as the actual
present value to which the employee is entitled immediately, if the
employee were to separate.
Effective February 28, 1997, the Corporation amended its domestic
retirement plan to freeze participant benefits and close the plan to new
participants. The Corporation approved a plan amendment as of March 31,
1998 to terminate the plan. However, on July 1, 1999, the directors of the
Corporation rescinded the termination of the plan. With the sale of the
Corporation's investment in Wyle (see Note 3), net domestic pension
expense is now classified as an expense of discontinued operations. During
the years ended March 31, 2001 and 2000, the Corporation recognized
curtailment losses of $46 and $649, respectively, for partial plan
settlement of pension obligations to vested former employees.
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The components of net pension expense for all plans, excluding the
curtailment losses above, were as follows:
Year Ended March 31,
-----------------------------------------------------------------------------
2001 2000 1999
---------------------- --------------------- ---------------------
Domestic Foreign Domestic Foreign Domestic Foreign
Service cost $ 413 $ 425 $ 385
Interest cost $ 101 488 $ 347 525 $ 362 559
Expected return on assets (61) (627) (351) (612) (341) (658)
Amortization of prior service cost 9 28 35 155 49 63
----- ----- ----- ----- ----- -----
Net pension expense $ 49 $ 302 $ 31 $ 493 $ 70 $ 349
===== ===== ===== ===== ===== =====
Weighted-average assumptions:
Discount rate 6.50% 5.50% 5.80% 5.50% 5.99% 5.50%
Expected return on plan assets 6.50 6.50 6.50 6.50 6.50 7.50
Rate of compensation increase 0.00 3.75 0.00 3.75 0.00 3.75
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Summary information for the plans is as follows:
MARCH 31,
-----------------------------------------------------
2001 2000
----------------------- -----------------------
DOMESTIC FOREIGN DOMESTIC FOREIGN
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at the beginning of year $ 4,552 $ 9,642 $ 6,026 $ 9,586
Service cost 413 425
Interest cost 101 488 347 525
Actuarial (gain) loss 54 1,584 (487) (487)
Benefits paid (3,232) (433) (1,334) (284)
Exchange differences (1,151) (123)
-------- -------- -------- --------
Benefit obligation at end of year $ 1,475 $ 10,543 $ 4,552 $ 9,642
======== ======== ======== ========
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year $ 3,950 $ 10,296 $ 5,466 $ 9,327
Actual return (loss) on plan assets (30) (688) (182) 1,070
Company contributions 361 314
Benefits paid (3,232) (433) (1,334) (284)
Exchange differences (1,103) (131)
-------- -------- -------- --------
Fair value of plan assets at end of year $ 688 $ 8,433 $ 3,950 $ 10,296
======== ======== ======== ========
Funded (unfunded) status of the plans $ (787) $ (2,110) $ (602) $ 654
Unrecognized actuarial loss (gain) 334 3,076 243 (158)
Unrecognized prior service cost 256 633
-------- -------- -------- --------
Accrued cost $ (453) $ 1,222 $ (359) $ 1,129
======== ======== ======== ========
AMOUNTS RECOGNIZED IN CONSOLIDATED BALANCE SHEETS
Prepaid benefit cost $ 1,222 $ 1,129
Accrued benefit liability $ (787) $ (602)
Accumulated other comprehensive income 334 243
-------- -------- -------- --------
Net amount recognized $ (453) $ 1,222 $ (359) $ 1,129
======== ======== ======== ========
Accumulated other comprehensive income represents pre-tax minimum pension
liability adjustments.
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11. COMMITMENTS AND CONTINGENCIES
Leases - The Corporation leases various land, buildings, and equipment
(principally for its European operations) under capital and operating
lease obligations having noncancelable terms ranging from one to 17
years. Minimum lease commitments as of March 31, 2001 follow:
CAPITAL OPERATING
LEASES LEASES
2002 $ 242 $ 1,677
2003 195 1,486
2004 25 1,380
2005 20 845
2006 17 707
Thereafter 5,911
----- -------
499
Total minimum lease payments $12,006
=======
Amount representing interest (48)
-----
Present value of minimum lease payments 451
Less current maturities of capital leases 218
-----
Long-term portion of capital leases $ 233
=====
At March 31, 2001 and 2000, buildings and equipment under capital
leases of $2,488 and $2,704 less accumulated depreciation of $1,278 and
$1,189, respectively, are included in property, plant, and equipment.
Rent expense under operating leases was $1,114, $890, and $1,253 for
the years ended March 31, 2001, 2000, and 1999, respectively.
Litigation - The Corporation is a party to claims and litigation
incidental to its business, as to which it is not currently possible to
determine the ultimate liability, if any. Based on an evaluation of
information currently available and consultation with legal counsel,
management believes that resolution of such claims and litigation is
not likely to have a material effect on the financial position, cash
flows, or results of operations of the Corporation.
As a part of a nationwide Medicare audit project regarding hospital
(inpatient) billing practices with respect to the diagnosis of
pneumonia, the federal government (the "Government") has reviewed
certain medical records of two of SunLink's hospitals: Chestatee
Regional Hospital and Mountainside Medical Center (collectively, the
"Hospitals"). The review sought to determine whether claims were
improperly coded for Medicare purposes and whether the Hospitals'
submission of those claims violated applicable law, including the False
Claims Act 31 U.S.C. ss.ss. 3729. Based upon its review, the Government
has projected that 103 Medicare claims were coded improperly by
Chestatee, and 91 Medicare claims by Mountainside. Review and analysis
of all medical records identified by the Government have been
substantially completed; interviews have been conducted by both the
U.S. Attorney's Office, Northern District, Georgia, and the U.S.
Department of Health and Human Services, Office of the Inspector
General. Based upon the Government's projections and the application of
the multiple damage provision of the False Claims Act, the Corporation
estimates that, if the Government's projections were substantiated, the
total potential aggregate liability to the Hospitals in this matter
could be as great as $1,500.
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The Corporation disputes and intends to vigorously resist all
Government claims of any such improper coding and believes the
Government's projections do not accurately represent the facts.
Settlement discussions are underway between SunLink and the Government.
Government representatives informally have indicated that the
Government most likely would not pursue a false claims charge, require
either of the Hospitals to enter into a corporate integrity agreement,
or seek double or triple damages providing a settlement is reached
between the parties. No audit has been conducted by the Government of
any other SunLink hospitals in connection with pneumonia coding
investigations. As of March 31, 2001, the Corporation accrued a
liability associated with this investigation. Management believes the
liability is a reasonable estimate of the future settlement of this
investigation with the Government.
12. RESTRUCTURING CHARGES
During the year ended March 31, 1998, the Corporation recorded
restructuring and relocation charges of $1,546 related to its European
housewares businesses. In the restructuring, the Corporation closed its
manufacturing facility in Bognor Regis, England, and moved the
operations to its facility in Bilston, England. This move was completed
in April 1998. During the year ended March 31, 1999, an additional $412
of expense was recorded for additional costs related to the vacated
facility.
The following is a summary of the provision for restructuring charges:
MARCH 31,
-----------------------------------------
2001 2000 1999
Beginning balance $ 45 $ 680 $ 572
Provision for U.K. manufacturing facility relocation 412
Charges (45) (635) (304)
------ ------ ------
Ending balance $ 0 $ 45 $ 680
====== ====== ======
13. BUSINESS SEGMENTS AND RELATED INFORMATION
The Corporation's continuing operations consist of its U.K. housewares
segment located in Europe and its U.S. community hospital segment
located in the U.S. The community hospital segment is composed of six
community hospitals and related businesses.
The housewares segment is composed of Beldray Ltd. and Hago Products
Ltd., subsidiaries that manufacture and sell, under various proprietary
brand names and private labels, ironing tables, household ladders,
rotary dryers, indoor airers, children's safety gates and accessories,
and garden equipment. Customers include do-it-yourself retailers,
supermarkets, mail-order catalogs, wholesalers, and department stores,
primarily in the U.K. and Ireland.
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Information concerning the Corporation's continuing operations by
segment is presented in the following table:
REVENUES
YEAR ENDED MARCH 31,
-----------------------------------------------
2001 2000 1999
Community Hospital $ 13,639
Housewares 28,035 $ 32,011 $ 34,832
--------- --------- ---------
$ 41,674 $ 32,011 $ 34,832
========= ========= =========
OPERATING PROFIT (LOSS)
YEAR ENDED MARCH 31,
-----------------------------------------------
2001 2000 1999
Community Hospital (1) $ 725
Housewares (179) $ 590 $ (2,144)
Corporate expense (U.S. and U.K.) (1,551) (1,855) (2,359)
--------- --------- ---------
(1,005) (1,265) (4,503)
Interest expense (670) (208) (424)
Interest income 359 328 532
Other income - net 22 175
--------- --------- ---------
Loss from continuing operations before income taxes $ (1,316) $ (1,123) $ (4,220)
========= ========= =========
CAPITAL EXPENDITURES
YEAR ENDED MARCH 31,
-----------------------------------------------
2001 2000 1999
Community Hospital $ 753
Housewares 239 $ 213 $ 104
Corporate 2 2 16
--------- --------- ---------
$ 994 $ 215 $ 120
========= ========= =========
IDENTIFIABLE ASSETS
YEAR ENDED MARCH 31,
-----------------------------------------------
2001 2000 1999
Community Hospital $ 40,544
Housewares 12,504 $ 14,391 $ 13,971
Discontinued operations -- 855 941
Corporate 3,466 7,882 11,209
--------- --------- ---------
$ 56,514 $ 23,128 $ 26,121
========= ========= =========
DEPRECIATION AND AMORTIZATION
YEAR ENDED MARCH 31,
-----------------------------------------------
2001 2000 1999
Community Hospital $ 187
Housewares 658 $ 807 $ 877
Corporate 4 6 4
--------- --------- ---------
$ 849 $ 813 $ 881
========= ========= =========
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The revenue of the housewares segment was from sales to customers in
Europe in fiscal 2001, 2000 and 1999, respectively. All revenue relates
to tangible products and includes revenues from one customer of $9,215,
$11,031, and $12,773 in fiscal 2001, 2000 and 1999, respectively.
Revenue from another customer was $4,593 in fiscal 2000.
(1) Operating expenses of the Community Hospital segment for the
year ended March 31, 2001 were comprised of the following:
Salaries, wages, and benefits $ 6,241
Provisions for bad debts 1,637
Supplies 1,580
Purchased services 1,191
Medical specialist fees 382
Other 1,695
-------
Community hospital expenses $12,726
=======
14. RELATED PARTIES
Two directors of the Corporation are members of two different law
firms. The Corporation paid $479, $375, and $145 for legal services to
these law firms in fiscal 2001, 2000 and 1999, respectively.
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15. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
FISCAL
YEAR
ENDED FOURTH THIRD SECOND FIRST
MARCH 31, QUARTER QUARTER QUARTER QUARTER
REVENUE 2001 $ 20,735 $ 7,026 $ 6,981 $ 6,932
2000 8,046 8,291 7,993 7,681
EARNINGS (LOSS) FROM CONTINUING 2001 (535) (338) (330) (163)
OPERATIONS 2000 (355) 19 (205) (330)
NET EARNINGS (LOSS) 2001 1,730 (449) (585) (218)
2000 (491) 2,832 (165) (593)
EARNINGS PER SHARE:
Continuing operations
Basic 2001 (0.10) (0.07) (0.07) (0.03)
2000 (0.07) 0.01 (0.04) (0.07)
Diluted 2001 (0.10) (0.07) (0.07) (0.03)
2000 (0.07) 0.01 (0.04) (0.07)
Net earnings (loss)
Basic 2001 0.35 (0.09) (0.12) (0.04)
2000 (0.10) 0.57 (0.03) (0.12)
Diluted 2001 0.35 (0.09) (0.12) (0.04)
2000 (0.10) 0.57 (0.03) (0.12)
WEIGHTED-AVERAGE COMMON SHARES
OUTSTANDING:
Basic 2001 4,976 4,976 4,976 4,976
2000 4,976 4,976 4,977 4,978
Diluted 2001 4,976 4,976 4,976 4,976
2000 4,976 4,976 4,977 4,978
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16. EARNINGS PER SHARE
2001 2000 1999
-------------------------- ---------------------- ----------------------
PER SHARE PER SHARE PER SHARE
AMOUNT AMOUNT AMOUNT AMOUNT AMOUNT AMOUNT
Loss from continuing operations $ (1,366) $ (871) $ (6,065)
Basic:
Weighted-average shares outstanding 4,976 $(0.27) 4,977 $(0.17) 5,049 $(1.20)
======== ====== ======== ====== ========= ======
Diluted:
Weighted-average shares outstanding 4,976 $(0.27) 4,977 $(0.17) 5,049 $(1.20)
======== ====== ======== ====== ========= ======
The dilutive securities from options were 3 and 6 in fiscal 2001 and
1999, respectively, and are not used because their effect would be
antidilutive.
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
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 August 20, 2001, 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 August
20, 2001, 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 August
20, 2001, and is incorporated herein by this reference.
ITEM 13. CERTAIN RELATIONSHIP 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 August
20, 2001, and is incorporated herein by this reference.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) Financial Statements
The following consolidated financial statements of the Corporation and
its subsidiaries are set forth in Item 8 of this Annual Report on Form
10-K.
Independent Auditors' Report.
Consolidated Balance Sheets - March 31, 2001 and 2000.
Consolidated Statements of Earnings - For the Years Ended
March 31, 2001, 2000 and 1999.
Consolidated Statements of Shareholders' Equity - For the
Years Ended March 31, 2001, 2000 and 1999.
Consolidated Statements of Cash Flows - For the Years Ended
March 31, 2001, 2000 and 1999.
Notes to Consolidated Financial Statements - For the Years
Ended March 31, 2001, 2000 and 1999.
(a) (2) Financial Statement Schedules
Independent Auditors' Report ................ At page 68 of this Report.
Schedule II Valuation and Qualifying accounts
At page 69 of this Report
The information required to be submitted in Schedules I, III, IV and V
for KRUG International Corp. and its consolidated subsidiaries has either been
shown in the financial statements or notes, or is not applicable or required
under Regulation S-X and, therefore, has been omitted.
(b) Reports on Form 8-K
During the quarter ended March 31, 2001, the Corporation filed two
reports on Form 8-K. The first report was dated February 13, 2001 reporting Item
2 - Acquisition or Disposition of Asset, related to the sale of Klippan on
January 29, 2001. The second report was dated February 16, 2001 reporting Item 2
- - Acquisition or Disposition of Asset, related to the purchase of six community
hospitals and related businesses on February 1, 2001.
In addition, on April 16, 2001, the Corporation filed a report on Form
8-K/A. This report was an amendment to the Form 8-K filed February 13, 2001
reporting the sale of Klippan and included the required unaudited condensed and
consolidated pro forma financial statements of KRUG International Corp. and
Subsidiaries, giving effect to the sale of Klippan and the purchase of the six
community hospitals as if the two transactions had occurred on December 31,
2000, as to the balance sheet, and on April 1, 1999, as to the statements of
earnings. On April 17, 2001 the Corporation filed another report on Form 8-K/A.
This report was an amendment to the Form 8-K filed February 16, 2001 reporting
the purchase of six community hospitals and related businesses and included the
required audit financial
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statements of the businesses acquired in the form of the combined financial
statements of the six acquired community hospitals and related businesses for
the years ended December 31, 2000, 1999 and 1998.
(c) Exhibits
The "Index to Exhibits" to this Annual Report on Form 10-K is
incorporated by reference.
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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 28th
day of June, 2001.
KRUG INTERNATIONAL CORP.
By: /s/ ROBERT M. THORNTON, JR.
----------------------------------------
Robert M. Thornton, Jr.
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of KRUG
International Corp. and in the capacities and on the dates indicated:
- -----------------------------------------------------------------------------------------------------------------
Name Title Date
- -----------------------------------------------------------------------------------------------------------------
/s/ ROBERT M. THORNTON, JR. Director, Chairman, President, Chief Executive June 28, 2001
- ---------------------------------------- Officer and Chief Financial Officer -------------
Robert M. Thornton, Jr. (principal executive and financial officer)
/s/ MARK J. STOCKSLAGER Principal Accounting Officer June 28, 2001
- ---------------------------------------- (principal accounting officer) -------------
Mark J. Stockslager
/s/ STEVEN J. BAILEYS, D.D.S. Director June 28, 2001
- ------------------------------------------ -------------
Steven J. Baileys, D.D.S.
/s/ KAREN B. BRENNER Director June 28, 2001
- ------------------------------------------ -------------
Karen B. Brenner
/s/ C. MICHAEL FORD Director June 28, 2001
- ------------------------------------------ -------------
C. Michael Ford
/s/ JAMES J. MULLIGAN Director June 28, 2001
- ------------------------------------------ -------------
James J. Mulligan
/s/ HOWARD E. TURNER Director June 28, 2001
- ------------------------------------------ -------------
Howard E. Turner
/s/ RONALD J. VANNUKI Director June 28, 2001
- ------------------------------------------ -------------
Ronald J. Vannuki
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INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
KRUG International Corp.
Atlanta, Georgia
We have audited the consolidated financial statements of KRUG International
Corp. and Subsidiaries (the "Corporation") as of March 31, 2001, 2000 and 1999,
and for each of the three years in the period ended March 31, 2001 and have
issued our report thereon dated June 1, 2001 (included elsewhere in this Form
10-K). Our audits also included the consolidated financial statement schedule of
KRUG International Corp. and Subsidiaries, listed in Item 14. This consolidated
financial statement schedule is the responsibility of the Corporation's
management. Our responsibility is to express an opinion based on our audits. In
our opinion, such consolidated financial statement schedule, when considered in
relation to the basic consolidated financial statements, presents fairly, in all
material respects the information set forth therein.
/s/ Deloitte & Touche LLP
Atlanta, Georgia,
June 1, 2001
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KRUG INTERNATIONAL CORP. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
AMOUNTS IN THOUSANDS
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ---------------- ---------- -------- ---------- ----------
CURRENCY
ALLOWANCE FOR BALANCE AT CHARGED TO TRANSLATION/ DEDUCTIONS BALANCE AT
DOUBTFUL BEGINNING COST AND ACQUISITION/ FROM END
ACCOUNTS OF YEAR EXPENSES (DISPOSITION) RESERVES OF YEAR
- ---------------- ---------- ---------- ------------- ---------- ----------
YEAR ENDED
MARCH 31, 2001 $ 80 $ 1,641 $ (9) $ 4 $ 1,708
YEAR ENDED
MARCH 31, 2000 $ 134 $ -- $ (38) $ 16 $ 80
YEAR ENDED
MARCH 31, 1999 $ 174 $ 18 $ (7) $ 51 $ 134
DEFERRED INCOME CURRENCY
TAX ASSET BALANCE AT CHARGED TO TRANSLATION/ DEDUCTIONS BALANCE AT
VALUATION BEGINNING COST AND ACQUISITION/ FROM END
ALLOWANCE OF YEAR EXPENSES (DISPOSITION) RESERVES OF YEAR
- ---------------- ---------- ---------- ------------- ---------- ----------
YEAR ENDED
MARCH 31, 2001 $3,505 $ 157 $2,235 $ -- $ 5,897
YEAR ENDED
MARCH 31, 2000 $4,228 $ 116 $(729) $ 110 $ 3,505
YEAR ENDED
MARCH 31, 1999 $3,411 $ 3,279 $ (35) $2,427 $ 4,228
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INDEX TO EXHIBITS
(3) ARTICLES OF INCORPORATION AND BY-LAWS:
3.1 Amended Articles of Incorporation of KRUG International Corp.
(incorporated by reference from Exhibit 3.1 of KRUG's Report
on Form 10-K for the year ended March 31, 1998).
3.2 Code of Regulations of KRUG International Corp., as amended
(incorporated by reference from Exhibit 3.1 of KRUG'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 Facility Letter dated November 18, 1999 from KRUG
International (UK) Limited, Beldray Limited and Westminster
Bank PLC (incorporated by reference from Exhibit 4.2 of KRUG's
Report on Form 10-K for the year ended March 31, 2000).
4.2 Invoice Discounting Agreement (recourse) between Lombard
NatWest Discounting Limited and Beldray Limited, dated
September 27, 1999 (incorporated by reference from Exhibit
10.1 of KRUG's Report on Form 10-Q for the quarter ended
September 30, 1999).
4.3 Advice of Borrowing Terms for KRUG International (UK) Ltd.
Group from National Westminster Bank PLC dated September 18,
2000 (incorporated by reference from Exhibit 10.1 of KRUG's
Report on Form 10-Q for the quarter ended September 30, 2001).
4.4 Loan Agreement between Sunlink Healthcare Corp., as Borrower,
Its Subsidiaries, as Guarantors and NHS, Inc., as Lender Dated
as of January 31, 2001 Relating to: $17,000,000 Aggregate
Principal Amount of 8.5% Senior Subordinated Notes due 2006
and $2,000,000 Senior Subordinated Zero Coupon Note due 2004.
4.5 Loan Agreement Dated as of February 1, 2001 among Sunlink
Healthcare Corp. as Borrower, Fulcrum Advisory, LLC, Geneva
Associates Merchant Banking Partners I, L.C.C., and Crumpler
Investment Management Co., L.L.C. as Lenders, and Fulcrum
Advisory, LLC as Agent for such Lenders.
(10) MATERIAL CONTRACTS:
10.1 1995 Incentive Stock Option Plan (incorporated by reference
from Exhibit 10.3 of KRUG's Report on Form 10-K for the year
ended March 31, 1996).
10.2 Employment Agreement between KRUG International Corp. and
Robert M. Thornton, Jr. effective January 1, 2001.
10.3 Stock Purchase Agreement between KRUG International Corp. and
Wyle Laboratories, Inc. dated September 24, 1999 (incorporated
by reference from Exhibit 10.3 of KRUG's Report on Form 10-Q
for the quarter ended September 30, 1999).
10.4 Exchange Agreement between KRUG International Corp. and LTS
Holdings, Inc. dated September 24, 1999 (incorporated by
reference from Exhibit 10.4 of KRUG's Report on Form 10-Q for
the quarter ended September 30, 1999).
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10.5 Extension of Closing Date of Stock Purchase Agreement and
Exchange Agreement between KRUG International Corp., Wyle
Laboratories, Inc. and LTS Holdings, Inc. dated October 29,
1999 (incorporated by reference from Exhibit 10.5 of KRUG's
Report on Form 10-Q for the quarter ended September 30, 1999).
10.6 Agreement for the sale and purchase of shares in Klippan
Limited between Bradley International Holdings Limited and
Newell Limited dated January 29, 2001 (incorporated by
reference from Exhibit 10.1 of KRUG's Report on Form 8-K/A
dated April 16, 2001).
10.7 The Stock Acquisition Agreement by and between NHS, Inc. and
SunLink HealthCare Corp. dated as of January 31, 2001
(incorporated by reference from Exhibit 10.1 of KRUG's Report
on Form 8-K dated February 16, 2001).
(21) SUBSIDIARIES:
21.1 List of Subsidiaries.
(23) CONSENTS OF EXPERTS AND COUNSEL:
23.1 Consent of Deloitte & Touche LLP dated June 27, 2001 with
respect to material incorporated by reference into the KRUG
International Corp. Registration Statement on Form S-8 (No.
333-06129) relating to KRUG's 1995 Incentive Stock Option Plan
and the Registration Statement on Form S-3 (No. 33-88190)
relating to KRUG's Warrants to purchase Common Shares.
71