Back to GetFilings.com
1
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, 1999
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)
- --------------------------------------------------------------------------------
Ohio 31-0621189
- ---------------------------------- --------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
900 Circle 75 Parkway, Suite 1300, Atlanta, Georgia 30339
- --------------------------------------------------------------------------------
(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
------------------- -----------------------------------------
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 7, 1999:
Number of Common Shares without par value
outstanding 4,977,530
---------------
Aggregate market value of Common
Shares without par value held by
non-affiliates of the Corporation $5,859,588
---------------
2
CERTAIN CAUTIONARY STATEMENTS
In addition to historical information, this document contains certain
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995 including, without limitation, statements
regarding management's outlook for each of its businesses, the sufficiency of
the Corporation's liquidity and sources of capital and the impact of Year 2000
issues. These forward-looking statements are subject to certain risks,
uncertainties and other factors which could cause actual results, performance
and achievements to differ materially from those anticipated, including, without
limitation, general economic and business conditions in the U.S. and abroad,
restrictions imposed by debt agreements, competition in the housewares and child
safety businesses, governmental budgetary constraints, the regulatory
environment for the Corporation's businesses, consolidation and acquisition
trends in the Corporation's businesses, competition in the acquisition market,
changes in exchange rates, 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, claims for product liability from continuing and
discontinued operations, and operating performance of minority-owned affiliates.
2
3
PART I
ITEM 1. BUSINESS
KRUG International Corp., an Ohio Corporation organized in June 1959, and
its subsidiaries (sometimes collectively called the "Corporation") currently
manufacture and distribute, through its subsidiaries, housewares and child
safety products, primarily in the United Kingdom, with operations in several
western European countries.
In addition, the Corporation owns approximately 38% of the equity of Wyle
Laboratories, Inc. ("Wyle"), a company which merged in March 1998 with the
Corporation's two subsidiaries which previously comprised its life sciences and
engineering ("LS&E") segment. Wyle operates testing facilities and provides
engineering and life sciences support services to commercial and government
customers, primarily in the United States.
Information concerning the revenues, operating profit and identifiable
assets of the business segments for the fiscal years ended March 31, 1999, 1998,
and 1997 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 document.
The Corporation's objective is to increase shareholder value by the
investment in and management of businesses which offer growth opportunities. The
Corporation evaluates its operating subsidiaries for growth potential and seeks
acquisition opportunities for the profitable employment of capital. The
Corporation's goal for acquisitions is to acquire new businesses which it
believes present an opportunity for increased value without regard to industry
or current profitability. The Corporation considers from, time to time, the
disposition of any subsidiary or affiliate when it believes the subsidiary or
affiliate no longer offers suitable opportunities for growth or profitability,
or when the Corporation believes better opportunities exist for utilization of
the Corporation's capital which would be provided by the disposition of such
subsidiary or affiliate.
SIGNIFICANT TRANSACTIONS
On March 16, 1998, the Corporation merged its life sciences and engineering
subsidiaries into Wyle for approximately 38% of Wyle's equity, a cash payment of
$3,052,000 and the assumption of approximately $3,300,000 of working capital
debt of such subsidiaries. On April 16, 1998, the Corporation sold its leisure
marine subsidiary to a company formed by the subsidiary's management for
approximately $8,900,000 in cash and the assumption of approximately $6,100,000
of the subsidiary's debt.
HOUSEWARES AND CHILD SAFETY SEGMENTS
Bradley International Holdings Limited, a subsidiary of KRUG International
(UK) Ltd., operates the Corporation's housewares and child safety segments
(collectively "Bradley"). The housewares segment is comprised of the Beldray
Limited ("Beldray") and Hago Products Limited ("Hago"), subsidiaries which
manufacture and sell consumer durable products, including ironing tables,
household ladders, rotary dryers, indoor airers, garden equipment and child
safety gates and accessories under the "Beldray", "Hago" and "Dennison" names as
well as private labels. Beldray is a long established name in household laundry
products which management believes has significant recognition among the buying
public throughout the U.K. and, together with Hago, which was acquired in
October 1996, manufactures and sells child safety gates and accessories under
the KiddiProof(R) tradename. Customers include do-it-yourself retailers,
supermarkets, mail order
3
4
catalogs, wholesalers and department stores, primarily in the U.K. and Ireland.
The child safety segment is comprised of Klippan Limited ("Klippan"), which was
acquired by Bradley on October 2, 1997. Klippan manufactures children's
automobile safety seats in the U.K. and Finland which are sold under various
proprietary brand names and private labels with sales operations in the U.K.,
France, Germany and Sweden. Management believes Klippan is a significant brand
in the United Kingdom and Scandinavia.
The housewares and child safety segments order backlogs are typically less
than one month's sales. The segments' primary competitors 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.
OUTLOOK
Over the past three years, Bradley has expanded its product offerings to
include child safety gates and children's automobile safety seats through its
acquisitions of Hago and Klippan. During fiscal 1998, Bradley reorganized its
manufacturing capability by moving the Hago manufacturing operations into
Beldray's manufacturing facility. In addition, Klippan, concurrent with its
acquisition by Bradley, initiated a comprehensive product redevelopment program
for its children's automobile safety seats which resulted in the offering of new
and redesigned models in the third quarter of fiscal 1999. The Bradley
subsidiaries have also upgraded their information technology, reorganized their
European sales offices and added management in connection with and in
anticipation of expanded operations in Western Europe and possible future
acquisitions. Management's strategy for Bradley is to continue to improve its
manufacturing operations, reduce its costs, strengthen its management team and
broaden its customer base and geographic distribution, particularly in Europe,
and believes such improvements offer Bradley an opportunity to maintain and
enhance its competitive position.
INVESTMENT IN WYLE LABORATORIES, INC.
Wyle is a U.S. company headquartered in El Segundo, California, with other
major facilities located in Alabama, Florida, Ohio, Texas and Virginia. Wyle is
a scientific, engineering and management concern that primarily supports the
following industries: aerospace and defense, electronics, energy,
telecommunications and transportation. Wyle's range of products and services
spans eight major areas of expertise: acoustic research and consulting,
environmental remediation, life sciences, nuclear services, special test
systems, specialty manufacturing, support services and testing services. Wyle
employs approximately 1,300 people at eleven U.S. facilities.
Wyle is highly leveraged and its operations in recent periods have been
unprofitable. The Corporation's objective is to sell its investment in Wyle when
a satisfactory price can be obtained. Such a sale could require the concurrence
of Wyle's other shareholders. However, if Wyle's operations continue to be
unprofitable, and Wyle is unable to reduce its debt, including by assets sales,
or refinance its debt to provide lower debt service requirements and achievable
financial covenants, the Corporation believes there exists a risk that the
Corporation would be unable to sell its interest in, and could realize no value
from its approximately 38% equity interest in Wyle. The book value of the
Corporation's investment in Wyle at March 31, 1999 is zero.
SALE OF LEISURE MARINE SEGMENT
Sowester Limited ("Sowester"), a subsidiary of KRUG International (U.K.)
Ltd. until its sale to a group headed by its managing director and finance
director on April 16, 1998, is located in the port of Poole, Dorset, England,
and distributes sail and power boat equipment and personal watercraft to the
4
5
leisure marine market. During fiscal 1998, the Corporation concluded that
Sowester's dependence on a limited number of suppliers and the local nature of
the leisure marine business in Europe would limit Sowester's ability to achieve
the Corporation's growth and profit objectives and decided to sell Sowester to
the management group.
GENERAL INFORMATION
The Corporation owns a number of patents and patent applications but the
Corporation derives no revenue from this intellectual property, and it is not
possible to estimate their value. The Corporation does not believe its present
business is materially dependent on any patents or patent applications.
During the fiscal year ended March 31, 1999, the European housewares and
child safety segments had revenues of $14,477,000 (29% of consolidated revenues)
from Argos Distribution Ltd. ("Argos"), a U.K. company. Substantially all of the
segments' product lines are sold to Argos. The loss of Argos as a customer would
have a material adverse effect on the Corporation if comparable replacement
business were not secured as sales to Argos totaled 37% of housewares and 11% of
child safety revenues, respectively, for fiscal 1999. The European housewares
segment had revenues of $5,251,000 (representing 10% of consolidated revenues
and 15% of housewares revenues) from one other customer. Of the Corporation's
consolidated revenues of $50,295,000 for the year ended March 31, 1999,
$43,868,000 were from sales in the U.K.
As of May 31, 1999, the Corporation employed seven persons in the United
States, none of whom are represented by a union, and approximately 584 in
Europe, approximately 284 of whom are represented by a union. The Corporation
believes its labor relations are generally satisfactory.
Compliance with federal, state and local laws regulating the discharge of
materials into the environment or otherwise relating to the protection of the
environment has had no material effect upon the capital expenditures, earnings
and competitive position of the Corporation. To the best of management's
knowledge, the Corporation is in substantial compliance with applicable federal,
state and local environmental regulations.
5
6
ITEM 2. PROPERTIES
The principal properties of the Corporation as of June 9, 1999 are listed
below:
LEASE
OWNED OR EXPIRATION SQUARE
LOCATION LEASED DATE FOOTAGE USE
- -------- -------- ---------- ------- ----------------
A. UNITED STATES
Dayton, Ohio Leased June 1999 11,500 Office-Subleased(1)
Atlanta, Georgia Leased Mar 2001 1,448 Office
B. EUROPE
BELDRAY LIMITED & SUBSIDIARIES
Bilston, West Midlands, U.K. Leased June 2014 105,000 Plant
Bilston, West Midlands, U.K. Owned 85,000 Plant
KLIPPAN LTD. & SUBSIDIARIES
Helsinki, Finland Leased Dec 2001 31,104 Office & Plant
Freilassing, Germany Leased July 1999 1,559 Office
Landskrona, Sweden Leased Dec 2000 8,554 Office & Warehouse
Carlisle, United Kingdom Leased Jan 2011 62,424 Office & Plant
Carlisle, United Kingdom Leased Jan 2011 6,372 Warehouse
- ----------------------
(1) This property is no longer used by the Corporation and is subleased for the
remaining term of the Corporation's lease.
In management's opinion, the various facilities used by the Corporation
are adequate for the needs of the businesses conducted therein and the
Corporation maintains its plants and offices in good condition.
6
7
ITEM 3. LEGAL PROCEEDINGS
On December 31, 1998, Springdale Partners, Ltd., an Ohio Limited Liability
Company, and Mada Corporation ("Mada") filed a Complaint in the Chancery Court
of Knox County, Tennessee, naming KRUG International Corp. and KRUG Properties,
Inc. ("KRUG Properties") as defendants. The suit relates to industrial property
in Knoxville, Tennessee, that the Corporation sold to Springdale Partners, an
Ohio General Partnership, in December 1983. As part of the transaction, KRUG
Properties leased back a portion of the property from Springdale Partners and
the Corporation and KRUG Properties guaranteed the obligations of Mada, the
lessee of the other portion of the property. Mada was required to use all
reasonable efforts to sublease its portion of the property on terms and
conditions approved by the Corporation. As part of the purchase price,
Springdale Partners executed a $200,000 promissory note payable to the
Corporation due on December 31, 1998, which Springdale Partners has failed to
pay. As part of its obligations, the Corporation was required to maintain the
portion of the property that it leased and return it on December 31, 1998 in as
good condition as it was in at the beginning of the lease, excluding ordinary
wear and tear and obsolescence. The plaintiffs have requested a declaration from
the Court concerning the maintenance obligations of the Corporation and KRUG
Properties and the status of the $200,000 promissory note. The Corporation and
KRUG Properties have filed a Motion to Dismiss this action. On January 25, 1999,
the Corporation and KRUG Properties filed a Complaint in the Common Pleas Court
of Montgomery County, Ohio, relating to this action and naming Springdale
Partners, its general partners and Mada as defendants. This case involves
substantially the same factual situation as the Knox County, Tennessee, case.
The Corporation's claim is for the following relief: (1) judgement on the
$200,000 promissory note; (2) the award of damages due to breach of contract and
unjust enrichment; and (3) a declaration that a payment of $98,545 relating to a
sublease belongs to the Corporation and KRUG Properties. The parties have agreed
to stay the court proceedings and submit the matter to voluntary mediation. On
June 9, 1999, the parties executed a memorandum of understanding for the purpose
of settling the litigation. It is anticipated that the settlement details will
not be completed until mid-July, 1999. No gain or loss is expected to be
recognized as a result of this settlement.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
7
8
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
KRUG International Corp's Common Shares are traded on the American Stock
Exchange under the symbol KRG and trading in its warrants is reported to and
compiled by the National Quotation Bureau under the symbol KRUGW. The table
below sets forth the high and low sales prices for the Common Shares for fiscal
1999 and 1998. The number of shareholders of record was 923 as of March 31,
1999. No cash dividends were paid in fiscal 1999 or 1998. Prior to December 30,
1996, the Common Shares were traded on the NASDAQ National Market System.
QUARTER 4TH 3RD 2ND 1ST
------- ----- ----- ----- -----
1999................... HIGH $1.94 $2.94 $5.44 $6.50
LOW 1.19 1.56 2.88 5.25
1998................... HIGH 6.13 7.63 6.25 6.13
LOW 5.00 5.50 5.00 4.63
8
9
ITEM 6. SELECTED FINANCIAL DATA
The following table summarizes certain selected financial data which should
be read in conjunction with the Corporation's Consolidated Financial Statements
and related Notes at Item 8 of this report and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" at Item 7 of this
report.
YEARS ENDING MARCH 31, 1999 1998 1997 1996 1995
- ---------------------- ---- ---- ---- ---- ----
(All amounts in thousands,
except for per share amounts)
Revenues.................................. $50,295 $93,694 $83,081 $70,787 $70,842
Earnings (Loss) from
Continuing Operations.................. (9,000) (705) 1,062 188 1,457
Net Earnings (Loss)....................... (8,633) 256 2,096 1,171 2,012
Earnings (Loss) per Share from
Continuing Operations:
Basic.................................. (1.78) (0.14) 0.21 0.04 0.29
Diluted................................ (1.78) (0.14) 0.20 0.04 0.29
Earnings (Loss) Per Share:
Basic.................................. (1.71) 0.05 0.41 0.23 0.40
Diluted................................ (1.71) 0.05 0.40 0.23 0.40
Total Assets.............................. 29,742 39,579 41,085 34,664 35,824
Long-term Debt............................ 6,278 6,703 8,331 9,225 10,223
Shareholders' Equity...................... $7,480 $18,099 $17,960 $14,530 $14,068
Weighted Average Common
Shares Outstanding
Basic.................................. 5,049 5,168 5,135 5,044 5,000
Diluted................................ 5,049 5,199 5,193 5,067 5,047
9
10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CERTAIN CAUTIONARY STATEMENTS
In addition to historical information, Item 7 of this report contains
certain forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995 including, without limitation, statements
regarding management's outlook for each of its businesses, the sufficiency of
the Corporation's liquidity and sources of capital and the impact of Year 2000
issues. These forward-looking statements are subject to certain risks,
uncertainties and other factors which could cause actual results, performance
and achievements to differ materially from those anticipated, including, without
limitation, general economic and business conditions in the U.S. and abroad,
restrictions imposed by debt agreements, competition in the housewares and child
safety businesses, governmental budgetary constraints, the regulatory
environment for the Corporation's businesses, consolidation and acquisition
trends in the Corporation's businesses, competition in the acquisition market,
changes in exchange rates, 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, claims for product liability from continuing and
discontinued operations, and operating performance of minority-owned affiliates.
GENERAL
During March 1998, the Corporation merged KRUG Life Sciences Inc. and
Technology/Scientific Services, Inc., its two subsidiaries which comprised the
LS&E segment, with Wyle in exchange for a 38% equity interest in Wyle. The LS&E
segment is accounted for as continuing operations in fiscal years 1998 and 1997.
In fiscal 1999, the LS&E segment is included in Wyle's losses which are reported
on the equity method of accounting as a single line item in the Corporation's
consolidated statement of earnings.
In April 1998, the Corporation sold its leisure marine subsidiary.
Accordingly, the results of operations of the leisure marine segment are
included in discontinued operations for fiscal years 1999, 1998 and 1997.
RESULTS OF OPERATIONS - CONTINUING OPERATIONS
The Corporation's fiscal 1999 revenues of $50.3 million declined $43.4
million from $93.7 million in fiscal 1998. Fiscal 1998 revenues included the
revenues of the LS&E segment which was merged with Wyle in March 1998.
Fiscal 1998 revenues increased $10.6 million, or 13%, over fiscal 1997.
Fiscal 1999 revenues of the housewares segment, which operates in the
United Kingdom, decreased by $6.3 million to $34.8 million from $41.1 million
for 1998. The decreased sales resulted from the discontinuance of the
manufacture and sale of certain industrial and office products in March 1998
($2.5 million), lower sales volume, primarily in laundry products and ladders
($3.1 million) and the unfavorable effects of currency translation ($0.7
million). During fiscal 1999, Beldray experienced significant operating
inefficiencies at its Bilston facility as a result of the consolidation of the
manufacturing operations of Hago which led to missed customer delivery schedules
and the lower sales volumes. Fiscal 1998 housewares' revenues increased by $8.1
million from fiscal 1997, an increase of 24%. Hago, acquired in October 1996,
was included in fiscal 1997 for five months and added $5.8 million in revenues
in fiscal 1998, and Beldray's revenues increased by $2.3 million, including
increases in sales of child safety gates, garden products and indoor drying
products, while
10
11
sales of ladders and outdoor drying products decreased. Of the $8.1 million
increase, the favorable effect of foreign currency translation contributed $1.5
million.
Fiscal 1999 revenues of the child safety segment, which operates in Europe,
increased by $7.6 million to $15.5 million. The child safety segment commenced
operation with the acquisition of Klippan Limited and its four European
subsidiaries on October 2, 1997. The fiscal 1999 sales included a full year's
revenues versus six months for fiscal 1998.
The U.S. LS&E segment was merged into Wyle on March 16, 1998; therefore, no
fiscal 1999 revenues are reported for the LS&E segment. Revenues for the LS&E
segment were $44.7 million in fiscal 1998 and $50.0 million in fiscal 1997. The
lower fiscal 1998 revenues resulted from decreased material purchases and labor
services provided under contracts with the National Aeronautics and Space
Administration ("NASA") and the U.S. Air Force and, as a result of the merger,
the Corporation reported only eleven and one-half months of revenues in fiscal
1998. Subsequent to the merger, the results of operations of the LS&E segment
are reported as part of Wyle's results on the equity method of accounting as a
single line item in the Corporation's Consolidated Statement of Operations.
Order backlog is not meaningful for the housewares and child safety
segments due to the short time between order placement and shipment. As a result
of the merger of the LS&E segment with Wyle, the Corporation had no order
backlog at March 31, 1999.
Gross profit margins (revenues less cost of goods sold) were 5.9%, 8.4% and
10.1% in fiscal 1999, 1998 and 1997, respectively. The decrease in gross profit
margin in fiscal 1999 was due primarily to operating inefficiencies and missed
customer delivery schedules of the housewares segment in connection with the
consolidation of the manufacturing operations of Hago into Beldray's
manufacturing facility. Beldray experienced lower than anticipated sales due to
the disruptions from the plant consolidation as well as lower demand for its
products. During the third and fourth quarters of fiscal 1999 and continuing
into the first quarter of fiscal 2000, the Corporation made significant
operational and organizational changes at the facility to address these
operational conditions. The Corporation believes the positive effect of these
changes was primarily responsible for achieving the small operating profit for
housewares in the fourth quarter of fiscal 1999.
The gross profit margin of the child safety segment decreased slightly from
15.2% in 1998 to 14.9% in fiscal 1999. This decrease was due primarily to the
costs of a comprehensive product redevelopment program undertaken during the
year for the child safety seats.
The decrease in the gross profit margin in fiscal 1998 as compared to
fiscal 1997 was due primarily to the operating losses incurred by the housewares
and child safety segments. During the third quarter of fiscal 1998, the
housewares segment commenced the consolidation of the Hago operations into the
Beldray facility. This consolidation caused higher manufacturing costs
(including labor, material and overhead) due to inefficiencies existing prior to
and during the factory move, as well as disruption of the Beldray operations
resulting from the move. The gross profit margin of the LS&E segment decreased
slightly in fiscal 1998 as compared to fiscal 1997 as a result of lower fees
received for labor services and lower material purchases under contracts with
NASA and the U.S. Air Force.
Selling and administrative expenses were $8.5 million, $8.8 million and
$5.5 million in fiscal 1999, 1998 and 1997, respectively. The slight decrease in
fiscal 1999 was due to the absence of LS&E expenses of $1.0 million and
decreased housewares expenses of $0.9 million offset by increased expenses of
$1.6 million in the child safety segment as a result of including twelve months
of its operations in
11
12
fiscal 1999 versus six months in fiscal 1998. The increase in fiscal 1998 was
due primarily to additional costs as a result of the purchase of Klippan in
October 1997, which added $2.1 million of expense, the inclusion of Hago's
operations for a full year, which added $0.5 million of expense, $0.3 million of
expense related to an abandoned U.K. acquisition and $0.2 million of unfavorable
foreign currency translation effect.
The Corporation recorded restructuring and impairment charges of $1.7
million, $1.6 million and $0.5 million in fiscal 1999, 1998 and 1997,
respectively. In fiscal 1999, charges of $1.3 million were recorded relative to
the impairment of goodwill recorded in connection with the fiscal 1998 purchase
of Klippan and for additional expenses of $0.4 million related to the vacated
Hago facility in Bognor Regis, England. The Corporation's evaluation of the
recoverability of the goodwill allocated in the purchase of Klippan was pursuant
to the provisions of Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to
be Disposed Of." Market conditions and the competitive environment in which
Klippan operates has, to date, prevented the Corporation from increasing
Klippan's sales and operating profits to levels anticipated at the time of the
acquisition. As a result of this evaluation, in the fourth quarter of fiscal
1999, the Corporation determined that Klippan's unamortized goodwill was
impaired and recorded a non-cash impairment loss of $1.3 million to adjust the
unamortized goodwill balance to zero. A final settlement with its landlord in
May 1999 for the vacated Hago facility was reached and the additional $0.4
million restructuring charge reflects such cost of the settlement. At March 31,
1999, $0.6 million was recorded in accrued expenses, including the amount paid
in May 1999 for the final settlement of the Hago facility.
In fiscal 1998, the Corporation recorded restructuring charges of $1.6
million related to the housewares and child safety businesses. The Corporation
closed the Hago facility in Bognor Regis, England, and moved the operations to
Beldray's facility in Bilston, England. Charges were provided for relocation
($0.3 million), employee severance ($0.4 million for 105 employees) and rent and
related costs of the vacated facility ($0.8 million). Also in fiscal 1998, the
Corporation relocated its German sales office and provided $0.1 million for the
severance for five employees and rent and other costs of its vacated office in
Germany.
The Corporation closed its executive offices in Dayton, Ohio, and
consolidated its headquarters in Houston, Texas in October 1996. During the year
ended March 31, 1997, the Corporation recorded restructuring charges of $0.5
million related to severance for six employees, rent and other costs related to
the vacated offices in Dayton, Ohio. At March 31, 1999, $0.1 million was
included in accrued expenses for rent and other expenses payable through June
1999, the lease termination date of the Dayton, Ohio office.
The Corporation has recognized a portion of Wyle's losses under the equity
method of accounting. The Corporation recognized $0.1 million and $0.1 million
of Wyle's losses in fiscal 1999 and 1998, respectively. At March 31, 1999, the
book value of the Corporation's investment in Wyle was zero as a result of
recording a portion of Wyle's losses against the carrying value of the
investment. The Corporation's proportional share of losses incurred by Wyle
subsequent to the carrying value of the investment being reduced to zero are not
recorded by the Corporation but must be offset by an equal amount of earnings
before future income, if any, from the investment can be recognized. At March
31, 1999, the Corporation's proportional share of unrecognized losses was $0.4
million based upon Wyle's unaudited results of operations as reported to the
Corporation.
Interest expense decreased $0.7 million in fiscal 1999 as a result of lower
U.S. debt. In connection with the Wyle merger, debt of $3.3 million was assumed
by Wyle in March 1998. The Corporation currently has no indebtedness for money
borrowed in the U.S. Interest expense increased
12
13
$0.2 million in fiscal 1998 as compared to fiscal 1997, primarily as a result of
$3.9 million debt financing for the purchase of Klippan in October 1997.
Interest income was $0.5 million in fiscal 1999, primarily from investment
income on the short-term investment of cash balances in the U.K. which resulted
from the cash received from the sale of Sowester in April 1998.
Other income for fiscal 1999 resulted from a pre-tax gain of $0.2 million
on the sale of excess land in Dayton, Ohio. Other income for fiscal 1998 of $3.8
million included a $2.9 million gain resulting from the merger of the life
sciences and engineering subsidiaries with Wyle and a $0.9 million gain from the
sale of assets, primarily excess land and a building in Dayton, Ohio. Other
income was not significant in fiscal 1997.
The Corporation recorded an income tax provision of $1.9 million in fiscal
1999, $0.8 million in fiscal 1998 and $0.5 million in fiscal 1997. In fiscal
1999, the Corporation provided current domestic taxes of $0.3 million (primarily
U.S. alternative minimum tax) and $1.4 million for deferred tax expense related
to increased valuation allowances. Such valuation allowances adjusted the net
domestic tax asset to zero based upon management's assessment that 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
currently available. A substantial portion of the long-term domestic tax asset
relates to foreign tax credit carryforwards which can only be used to offset
future foreign source income, and future foreign source income would likely
generate additional foreign tax credits to offset such income. As a result, the
Corporation believes the use of the foreign tax credit carryforwards is not
considered likely. An effective tax planning strategy for the use of the
alternative minimum tax credit carryforwards and other net domestic tax assets
could not be formulated at this time, therefore, management considered the
realization of these items less likely than not. As a result, a valuation
allowance for the full amount of these deferred tax assets has been provided.
The Corporation provided foreign taxes of $0.2 million for fiscal 1999.
Foreign taxes included an additional valuation allowance of $0.7 million for
foreign net operating loss carryforwards and $0.5 million for U.K. tax
prepayments. These valuation allowance increases were offset by a $0.3 million
reduction in the valuation allowance for net deferred tax items, $0.6 million
from the sale of prepaid taxes and net operating loss carryforwards to Sowester
after its sale by the Corporation and $0.1 million of favorable effects of
foreign currency translation. The Corporation recorded amounts to increase its
foreign tax valuation allowance which adjusted the foreign deferred tax asset to
zero at March 31, 1999. 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 currently
available. Due to a change in the U.K. tax law effective in April 1999 and net
operating loss carryforwards available to offset future taxable income in the
U.K., the use of tax prepayments currently available in the U.K. is not
considered likely.
The fiscal 1998 tax expense of $0.8 million was comprised of $2.6 million
of U.S. deemed dividends which are related to intercompany loans from the U.K.
subsidiary to the U.S. parent and $0.4 million of permanent foreign tax
differences, offset by a reduction in tax valuation allowances of $2.2 million.
The Corporation reversed $3.2 million of its domestic valuation allowance for
deferred taxes in 1998 as a result of management's assessment that it was more
likely than not that the domestic tax asset of $1.6 million at March 31, 1998
could be realized through implementation of tax planning strategies then
available to the Corporation. A valuation allowance for foreign net operating
loss carryforwards of $1.0 million was established during fiscal 1998 because
future use of the carryforwards was considered not likely. The fiscal 1997
effective tax rate of 29.8% was lower than the U.S. statutory tax rate primarily
due to deductible U.K. pension amounts which were higher than recorded pension
expense.
13
14
The loss from continuing operations was $9.0 million ($1.78 per share) in
fiscal 1999 compared to a loss from continuing operations of $0.7 million ($0.14
per share) in fiscal 1998 and earnings from continuing operations of $1.1
million ($0.21 per share) in fiscal 1997. The loss from continuing operations in
fiscal 1999 was due to operating losses of the housewares and child safety
segments, the restructuring and impairment charges of $1.7 million, and $1.9
million of tax expense resulting from increases in tax valuation allowances,
somewhat offset by the tax benefits of the operating losses. The fiscal 1998
loss from continuing operations was due to operating losses of the housewares
and child safety segments, restructuring charges of the housewares segment and
$0.8 million tax expense caused primarily by the tax effect of the U.S. deemed
dividend, offset by the decreases in the U.S. tax valuation allowance. The
fiscal 1998 loss from continuing operations was in part offset by other income
generated by the gains from the Wyle merger and sales of assets.
RESULTS OF OPERATIONS - DISCONTINUED OPERATIONS
On April 16, 1998, the Corporation sold its leisure marine subsidiary to a
company formed by the subsidiary's management. The purchase price of
approximately $15.0 million was comprised of approximately $8.4 million in cash,
deferred payments of approximately $0.4 million which were paid during fiscal
1999 and the assumption of approximately $6.2 million of debt. As a result of
the disposal, the Corporation reported a gain of $0.6 million under discontinued
operations in fiscal 1999.
In fiscal 1989, the Corporation discontinued the operations of its
industrial segment and subsequently disposed of substantially all related net
assets. However, obligations remained relating to leases in Knoxville, Tennessee
(which expired December 31, 1998) and product liability claims for products
manufactured and sold prior to the disposal of the segment. In connection with
the alleged final obligations under leases in Knoxville, Tennessee, the landlord
filed a lawsuit in December 1998 claiming damages for certain alleged
maintenance obligations on the property and requesting relief from payment of a
$0.2 million promissory note due to the Corporation by the landlord. In January
1999, the Corporation filed suit against the landlord to collect on the
promissory note, for other damages due to breach of contract and unjust
enrichment and for a declaration regarding a payment from a former sub-tenant
due to the Corporation. See Item 3. Legal Proceedings of this Annual Report on
Form 10-K for more information regarding these lawsuits. The Corporation
believes the landlord's claims are without substantial merit and intends to
aggressively defend such claims and pursue collection of the note receivable. On
June 9, 1999, the parties executed a memorandum of understanding for the purpose
of settling the litigation. It is anticipated that the settlement details will
not be completed until mid-July, 1999. No gain or loss is expected to be
recognized as a result of this settlement. Based upon an evaluation of
information currently available and consultation with legal counsel, the
Corporation recorded a charge of $0.2 million in the fourth quarter of fiscal
1999 related to the discontinued operations.
During the year ended March 31, 1998, the Corporation recorded an after-tax
charge of $0.8 million to provide for estimated additional product liability
expenses and increased legal, professional and insurance costs related to
product liability losses relative to the discontinued operations. During the
year ended March 31, 1997, the Corporation recorded an after-tax charge of $0.5
million to provide for estimated additional repair and maintenance costs
related to the Knoxville location, increased insurance costs related to product
liability claims and loss of future sublease income caused by the bankruptcy
filing of a tenant in the Toronto facility. The accrual for losses from
discontinued operations was $1.5 million at March 31, 1999. See Note 4 of the
Notes to the Consolidated Financial Statements at Item 8 of this Annual Report
on Form 10-K for further analysis of the provision for losses from discontinued
operations.
14
15
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1999, the Corporation had outstanding debt of $3.2 million
under a variable rate loan with a U.K. bank, the proceeds of which were used to
purchase Klippan in October 1997. The debt is payable in equal quarterly
installments of $0.2 million and matures in fiscal 2003. The Corporation also
has an outstanding term loan with a U.K. bank relating to the Beldray
manufacturing facility totaling $1.6 million which requires quarterly principal
payments of $0.1 million and matures in fiscal 2005. The U.K. loan agreements
are collateralized by substantially all of the Corporation's U.K. assets, except
for shares of the U.K. subsidiaries, and these loans include certain tangible
net worth and cash flow covenants relating to the U.K. subsidiaries. The
Corporation currently is not in compliance with certain covenants of the U.K.
loan agreements, but has received from the bank waivers of such covenants at
March 31, 1999. In conjunction with these loans, the Corporation has agreed to
maintain cash of $6.6 million on deposit at the bank (net of $1.4 million which
was offset at March 31, 1999 against outstanding bank overdraft balances) until
the U.K. debt can be renegotiated with new covenants more appropriate for the
current operating levels. The Corporation is seeking to renegotiate its U.K.
bank debt but believes such renegotiated bank debt, if achieved, will result in
the paydown of a substantial amount of such debt and may not result in the
elimination of the requirement to keep certain amounts of cash on deposit. In
addition, at March 31, 1999, the Corporation had $0.3 million of loans
outstanding from Finnish banks relating to the Klippan Finland operations of
Klippan. Such loans are payable in semi-annual installments over four years
beginning in August 1999.
At March 31, 1999, the Corporation had a cash balance of $9.3 million,
including $6.6 million which was restricted in connection with the U.K. loan
agreements. Approximately $8.2 million of the March 31, 1999 cash balance
represents proceeds received from the sale of Sowester in April 1998. The
Corporation believes it has adequate financing in both the U.S. and Europe to
support its current level of operations during fiscal 2000.
The Corporation generated cash of approximately $0.1 million, $7.8 million
and $2.0 million from operating activities for fiscal 1999, 1998 and 1997,
respectively. The lower amount of cash generated in 1999 resulted from the cash
used to fund the fiscal 1999 net loss, net of non-cash items of depreciation and
amortization expense ($1.6 million), the gain on the sale of Sowester ($0.6
million), charges for impairment of intangible assets ($1.3 million) and income
taxes ($4.1 million), together with cash generated from reduced working capital
in the housewares segment. The increase in cash generated in fiscal 1998
compared to fiscal 1997 was due to increased cash generated from the liquidation
of the LS&E segment's receivables as a result of the merger with Wyle, increased
cash generated from the leisure marine segment and decreased cash usage by the
discontinued industrial segment.
In fiscal 1999, the Corporation expended $0.9 million for property, plant
and equipment, primarily for new tooling and equipment for new and redesigned
products of the child safety segment. During fiscal 1998, $3.9 million was
expended for the purchase of Klippan and $1.3 million for property, plant and
equipment for the housewares segment. Capital expenditures of $0.3 million for
1997 were primarily for new equipment for the housewares segment.
In April 1998, the Corporation announced that it would repurchase for cash
in the open market up to 200,000 of its common shares, and in August 1998, the
Corporation's Board of Directors authorized the repurchase of an additional
100,000 shares. During fiscal 1999, the Corporation repurchased a total of
278,700 shares for cash of $1.4 million. The repurchased shares were retired by
the Corporation on April 9, 1999.
15
16
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 and employee wage increases. The
Corporation has not always been able to offset increases in operating costs by
increasing prices for its products, increasing its manufacturing efficiency or
implementing cost control measures. The Corporation is unable to predict its
ability to offset or control future cost increases or its ability to pass along
the increased costs 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 10K.
IMPACT OF YEAR 2000
Some older computer programs and systems were written using two digits
rather than four to define the applicable year (for example, 98 to denote 1998).
As a result, those computer programs have software which may recognize a date
using "00" as the year 1900 rather than the year 2000. This may result in
computer system failures or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices, engage in manufacturing processes, or continue similar normal
business activities.
State of Readiness - The Corporation recognizes the importance of the Year
2000 issues and has given high priority to the planning and implementation of
Year 2000 solutions, including contingency planning. The Corporation has
underway a Year 2000 project to identify the programs and infrastructure that
could be affected by the Year 2000 issues and is implementing a plan to resolve
on a timely basis the problems identified. The Corporation's Year 2000 plan
generally may be broken into five interrelated phases: (i) evaluating existing
information technology ("IT") and non-IT systems of the Corporation, (ii)
implementing corrective actions to such systems (including testing), where
appropriate, (iii) evaluating the Corporation's exposure to third parties'
failures to adequately address Year 2000 issues, (iv) developing contingency
plans with respect to such exposure, and (v) on-going vigilance with respect to
Year 2000 developments. As mentioned, the scope of the Year 2000 project
includes (i) IT systems such as software and hardware; (ii) non-IT systems or
embedded technology such as micro-controllers contained in various manufacturing
systems; and (iii) the readiness of key third parties, including suppliers and
customers, and electronic data interchange with those key third parties. The
evaluation phase of the Year 2000 project includes identifying IT and non-IT
systems or components that might malfunction or fail as a result of the Year
2000 issues.
The Corporation currently has three primary operating locations (Bilston,
England, Carlisle, England and Helsinki, Finland) and each location has a
designated person responsible for coordinating Year 2000 issues for that
location. At the largest location, Bilston, England, the IT system is less
than two years old and the information technology system, when purchased, was
reviewed for Year 2000 compliance. The other two locations are smaller and will
require new IT systems (primarily local area networks) for approximately 25
users at each location. Such new IT systems will be installed by the end of
1999. The non-IT systems identified are primarily manufacturing and assembly
systems which will require testing for Year 2000 compliance. Key third parties
are being contacted to minimize the disruptions in the relationship between the
Corporation and such third parties because of the Year 2000 issues. While the
Corporation cannot guarantee compliance of third parties, the Corporation will
consider alternate sources of supply in the event a key supplier cannot
demonstrate its systems or products are Year 2000 compliant.
16
17
The Year 2000 project requires the Corporation to devote considerable
internal resources and hire consultants to assist with the implementation and
monitoring of the plan, and will require the replacement of certain equipment
and replacement or modification of certain software. The Corporation will also
be working with its customers and suppliers to ensure business continuity during
the potential problem period. In order to validate systems for Year 2000
readiness (both IT and non-IT systems), the Corporation has performed a number
of procedures, each as appropriate for the system being verified. For IT
systems, the Corporation has, where it is able, simulated the date change to
year 2000 issues by resetting the system date to December 31, 1999 and then
monitoring the effects of the date changes. For non-IT systems, the Corporation
has been in correspondence with the vendor or manufacturer and sought
verification from them that the system has been tested and not failed under Year
2000 conditions. Where the Corporation has any doubt about the system's ability
to deal correctly with Year 2000 issues, contingency planning has been performed
to evaluate the impact on the business, alternatives to the system in question
have been discussed and the need for replacement considered. In addition, the
manufacturers of all equipment containing embedded circuitry purchased since
November 1998 have confirmed to the Corporation that such equipment was Year
2000 compliant before the equipment was accepted. The Corporation has tested all
IT systems and all of the non-IT systems that can be tested, but the non-IT
systems tested account for only approximately 20% of all non-IT systems that may
be affected by Year 2000 issues.
The state of completion of each of the five phases and the Corporation's action
plan is as follows:
- - Evaluating existing IT and non-IT systems of the Corporation - This has
been completed.
- - Implementing corrective actions to such systems (including testing) - The
Corporation is currently testing the systems and the testing is expected
to be substantially completed by July 1, 1999.
- - Evaluating the Corporation's exposure to third parties' failures to
adequately address Year 2000 issues. The Corporation is currently
inquiring of significant third parties as to their Year 2000 preparedness.
Significant suppliers, customers and service providers will be initially
contacted and evaluated by July 1, 1999, and will continue to be evaluated
as to their Year 2000 preparedness.
- - Developing contingency plans with respect to such exposure - Contingency
plans are being formulated currently and should be completed by July 31,
1999.
- - On-going vigilance with respect to Year 2000 developments - This on-going
process will not be fully completed until after the significant Year 2000
dates, both prior to January 1, 2000 and after, have passed.
Costs to Address the Year 2000 Issues - The Corporation currently estimates
that the total cost of its Year 2000 project will be approximately $0.2 million,
which has been or will be expensed as incurred, and will also require
approximately $0.4 million of capital expenditures. These costs include
approximately $0.2 million of normal system software and equipment upgrades and
replacements, which the Corporation anticipated incurring in the ordinary course
of business without regard to the Year 2000 issues. The majority of these costs
will be incurred during fiscal 2000.
Risks to the Corporation of the Year 2000 Issues - If the Corporation's
plan to address the Year 2000 issues is not successful or is not timely
implemented, the Corporation may need to devote more resources to the process
and additional costs may be incurred which could have a material adverse effect
on the Corporation's financial condition and results of operations. Problems
with the Year 2000
17
18
issues encountered by the Corporation's vendors and customers may also have a
material adverse effect of an uncertain magnitude on the Corporation's financial
condition and results of operations.
The Corporation's Contingency Plans - At present, the Corporation is not
able to describe its most reasonably likely worst case Year 2000 scenarios
because it does not presently have adequate information from its suppliers and
customers and has not completed evaluating its non-IT systems. The Corporation
has devoted, and will continue to devote, resources to address this
uncertainty. As a component of its Year 2000 project, the Corporation is
developing contingency plans to mitigate the effects of problems experienced by
it, key vendors and service providers and customers in the timely
implementation of solutions to Year 2000 problems. At present, however, the
Corporation has not completed contingency plans, but plans to do so by July 31,
1999.
The estimated costs of the Corporation's Year 2000 project and the dates by
which the Corporation expects to complete portions of its Year 2000 compliance
program are based on management's best estimates and reflect assumptions
regarding the availability and cost of personnel trained in this area, the
compliance plans of third parties, and similar uncertainties. However, due to
the complexity and pervasiveness of the Year 2000 issues and, in particular, the
uncertainty regarding the compliance programs of third parties, no assurance can
be given that these estimates can be achieved and actual results could differ
materially from those anticipated.
THE EURO CONVERSION
On January 1, 1999, eleven of the fifteen member countries of the European
Union ("EU") established fixed conversion rates through the European Central
Bank ("ECB") between their existing local currencies and the Euro, the EU's
future single currency. The participating countries adopted the Euro as their
common legal currency on that date. The Euro currently trades on currency
exchanges and is available for non-cash transactions. The Corporation currently
operates in three countries which adopted the Euro (Finland, France and Germany)
and sells from the United Kingdom to certain countries which adopted the Euro.
The Corporation's exchange rate risk has been changed only in so far as
currently it sells into Germany and France from the U.K. and into Sweden from
Finland; thus the Corporation now has the risk of the Euro as well as of the
former German, Finnish and French currencies. The British pound strengthened in
anticipation of the Euro adoption and has continued strong compared to other
European currencies. The Corporation believes the strength of the pound has
adversely affected the Corporation's sales from the U.K. to certain European
countries. The Corporation does not have any derivatives exposures nor any
material contracts which would be affected by the Euro conversion, and is not
aware of any material potential tax consequences to its operations as a result
of the Euro conversion. The Corporation is not aware of any significant
information technology systems modification that will be required as a result of
the Euro conversion.
18
19
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements and Supplementary Data
PAGES
-----
Independent Auditors' Report................................................................ 20
Consolidated Balance Sheets -- March 31, 1999 and 1998...................................... 21-22
Consolidated Statements of Earnings --
for the years ended March 31, 1999, 1998 and 1997....................................... 23
Consolidated Statements of Shareholders' Equity --
for the years ended March 31, 1999, 1998 and 1997....................................... 24
Consolidated Statements of Cash Flows --
for the years ended March 31, 1999, 1998 and 1997....................................... 25
Notes to Consolidated Financial Statements --
for the years ended March 31, 1999, 1998 and 1997....................................... 26-48
19
20
INDEPENDENT AUDITORS' REPORT
To the 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, 1999
and 1998 and the related consolidated statements of earnings, shareholders'
equity and cash flows for each of the three years in the period ended March 31,
1999. These consolidated financial statements are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of KRUG International Corp. and
Subsidiaries at March 31, 1999 and 1998, and the results of their operations and
their cash flows for each of the three years in the period ended March 31, 1999
in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Atlanta, Georgia
May 20, 1999
20
21
KRUG INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1999 AND 1998
(ALL AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- -------------------------------------------------------------------------------
ASSETS 1999 1998
------- -------
CURRENT ASSETS:
Cash and cash equivalents $ 2,680 $ 4,205
Restricted cash (Note 7) 6,641
Receivables - net 7,174 10,314
Inventories 4,959 5,000
Prepaid expenses and other 778 664
Net current assets of discontinued operations 4,527
------- -------
Total current assets 22,232 24,710
PROPERTY, PLANT, AND EQUIPMENT - At cost
Land 334 358
Buildings and improvements 1,395 1,445
Equipment 9,995 8,658
------- -------
11,724 10,461
Less accumulated depreciation 5,796 4,863
------- -------
5,928 5,598
OTHER NONCURRENT ASSETS:
Goodwill 1,714
Deferred tax assets 2,529
Pension assets 1,567 1,557
Net noncurrent assets of discontinued operations 2,740
Other 15 731
------- -------
1,582 9,271
------- -------
TOTAL ASSETS $29,742 $39,579
======= =======
See notes to consolidated financial statements.
21
22
LIABILITIES AND SHAREHOLDERS' EQUITY 1999 1998
-------- -------
CURRENT LIABILITIES:
Accounts payable $ 10,129 $ 9,482
Accrued payroll and related taxes 1,225 1,012
Pension liability 560 542
Net current liabilities of discontinued operations 400
Other accrued expenses 2,560 3,418
Income taxes 199 323
Current maturities of long-term debt 5,347 1,238
-------- -------
Total current liabilities 20,420 16,015
LONG-TERM LIABILITIES:
Long-term debt 931 5,465
Net noncurrent liabilities of discontinued operations 911
Total liabilities 22,262 21,480
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred Shares, authorized and unissued, 2,000,000 shares
Common Shares, no par value; authorized, 12,000,000 shares;
issued and outstanding, 5,256,230 and 5,198,730 at March 31,
1999 and 1998, respectively 2,628 2,599
Additional paid-in capital 4,829 4,590
Retained earnings 1,589 10,222
Treasury shares at cost, 278,700 shares at March 31, 1999 (1,363)
Accumulated other comprehensive income (loss) (203) 688
-------- -------
Total shareholders' equity 7,480 18,099
-------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 29,742 $39,579
======== =======
22
23
KRUG INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE YEARS ENDED MARCH 31, 1999, 1998,
AND 1997 (ALL AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
1999 1998 1997
REVENUES $ 50,295 $ 93,694 $ 83,081
COST OF GOODS SOLD 47,322 85,835 74,673
SELLING AND ADMINISTRATIVE EXPENSES 8,487 8,758 5,505
RESTRUCTURING AND IMPAIRMENT CHARGES 1,727 1,630 530
-------- -------- --------
OPERATING PROFIT (LOSS) (7,241) (2,529) 2,373
OTHER INCOME (EXPENSE):
Interest income 532 7
Interest expense (447) (1,118) (936)
Gain on sale of assets 175 939 10
Gain on merger of Life Sciences and Engineering
Subsidiaries with Wyle Laboratories Inc. 2,850
Equity in loss of Wyle Laboratories Inc. (123) (55)
Other income-net 19 65
-------- -------- --------
EARNINGS (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES (7,104) 113 1,512
INCOME TAXES 1,896 818 450
-------- -------- --------
EARNINGS (LOSS) FROM CONTINUING OPERATIONS (9,000) (705) 1,062
EARNINGS FROM DISCONTINUED OPERATIONS 367 961 1,034
-------- -------- --------
NET EARNINGS (LOSS) $ (8,633) $ 256 $ 2,096
======== ======== ========
EARNINGS (LOSS) PER SHARE :
Continuing operations:
Basic $ (1.78) $ (0.14) $ 0.21
======== ======== ========
Diluted (1.78) (0.14) 0.20
======== ======== ========
Discontinued operations:
Basic $ 0.07 $ 0.19 $ 0.20
======== ======== ========
Diluted 0.07 0.19 0.20
======== ======== ========
Net earnings:
Basic $ (1.71) $ 0.05 $ 0.41
======== ======== ========
Diluted (1.71) 0.05 0.40
======== ======== ========
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING:
Continuing operations:
Basic 5,049 5,168 5,135
======== ======== ========
Diluted 5,049 5,168 5,193
======== ======== ========
Discontinued operations:
Basic 5,049 5,168 5,135
======== ======== ========
Diluted 5,055 5,199 5,193
======== ======== ========
Net earnings:
Basic 5,049 5,168 5,135
======== ======== ========
Diluted 5,049 5,199 5,193
======== ======== ========
See notes to consolidated financial statements.
23
24
KRUG INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 1999, 1998, AND 1997
(ALL AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
ACCUMULATED
COMMON SHARES ADDITIONAL TREASURY SHARES OTHER TOTAL
------------------- PAID-IN RETAINED -------------- COMPREHENSIVE STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS SHARES AMOUNT INCOME (LOSS) EQUITY
MARCH 31, 1996 5,077 $ 2,538 $ 4,224 $ 7,870 -- $ -- $ (102) $ 14,530
Net earnings 2,096 2,096
Foreign currency translation adjustment 1,121 1,121
--------
Total comprehensive income 3,217
--------
Common shares issued 74 38 175 213
------ ------- ------- ------- ------ -------- ------- --------
MARCH 31, 1997 5,151 2,576 4,399 9,966 -- -- 1,019 17,960
Net earnings 256 256
Foreign currency translation adjustment 286 286
Minimum pension liability adjustment (617) (617)
------- --------
Total comprehensive loss (75)
--------
Common shares issued 48 23 191 214
------ ------- ------- ------- ------ -------- ------- --------
MARCH 31, 1998 5,199 2,599 4,590 10,222 -- -- 688 18,099
Net earnings (8,633) (8,633)
Foreign currency translation adjustment (925) (925)
Minimum pension liability adjustment 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
====== ======= ======= ======= ====== ======== ======= ========
See notes to consolidated financial statements.
24
25
KRUG INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 1999, 1998, AND 1997
(ALL AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
1999 1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $(8,633) $ 256 $ 2,096
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization 1,183 1,152 769
Amortization of intangibles 381 206 54
Deferred income taxes 1,762 258 80
Provision for loss from discontinued operations 220 1,257 691
Gain on merger of Life Sciences and Engineering Subsidiaries (2,850)
Gain on sale of Leisure Marine Subsidiary (622)
Impairment of intangible asset 1,315
Gain on sale of assets (175) (939) (10)
Change in assets and liabilities:
Receivables 3,266 8,073 479
Inventories (140) 740 (29)
Prepaid expenses and other assets 34 1,805 (709)
Accounts payable and accrued expenses (787) (3,511) 2
Income taxes 2,300 (539) 854
Net cash provided by (used in) discontinued operations (67) 1,909 (2,241)
------- ------- -------
Net cash provided by operating activities 37 7,817 2,036
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of subsidiaries (3,882) (1,783)
Proceeds from merger of Life Sciences and Engineering Subsidiaries 3,052
Proceeds from sale of Leisure Marine Subsidiary 8,178
Proceeds from sales of assets 220 1,808 37
Expenditures for property, plant, and equipment (883) (1,400) (295)
------- ------- -------
Net cash provided by (used in) investing activities 7,515 (422) (2,041)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 268 214 213
Purchase of treasury stock (1,363)
Bank borrowings - net (1,164) 1,093
Additions to long-term debt 3,882
Payment of long-term debt (1,097) (6,191) (1,690)
------- ------- -------
Net cash used in financing activities (2,192) (3,259) (384)
EFFECT OF EXCHANGE RATES CHANGES ON CASH (244) 16 3
------- ------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 5,116 4,152 (386)
RESTRICTED CASH, CASH, AND CASH EQUIVALENTS:
Beginning of year 4,205 53 439
------- ------- -------
End of year $ 9,321 $ 4,205 $ 53
======= ======= =======
CASH PAID FOR:
Income taxes $ 265 $ 306 $ 237
------- ------- -------
Interest $ 466 $ 1,167 $ 1,136
======= ======= =======
NONCASH INVESTING AND FINANCING ACTIVITIES:
Capital leases $ 906 $ 941 $ 772
======= ======= =======
Merger of Life Sciences and Engineering Subsidiaries $ 177
=======
See notes to consolidated financial statements
25
26
KRUG INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1999, 1998, AND 1997
(ALL AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business Operations - KRUG International Corp. manufactures and
distributes housewares and child safety products through its manufacturing
and distributions operations in Europe, and owns a 38% equity interest in
Wyle Laboratories, Inc. ("Wyle") which provides high-technology testing
and technical services to commercial and government customers in the
United States.
Principles of Consolidation - The consolidated financial statements
include the accounts of the Corporation and its domestic and foreign
subsidiaries. All significant intercompany transactions and balances have
been eliminated.
Revenue Recognition - Revenues from the Housewares Products and Child
Safety Products segments are recorded at the time the products are shipped
to the customer and ownership has been transferred. Product returns are
accepted from the customers if the product has been damaged, soiled, or if
the customer has been unable to resell the product. The amount of the
allowance for product returns is based upon the historical volume of
returns incurred by the businesses. Revenues within the Life Sciences and
Engineering Segment from cost reimbursement and time and material
government contracts were recorded as costs were incurred and include
estimated earned fees. Claims for recovery of additional contract costs
were recognized only to the extent that the recoverable amounts could be
determined within reasonable certainty. Costs not recoverable upon
completion of contracts were immediately charged against earnings. See
Note 3 for a discussion of the merger of the Life Sciences and Engineering
subsidiaries in fiscal 1998.
Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ
materially from those estimates.
Cash and Cash Equivalents - Cash and cash equivalents consist of highly
liquid financial instruments which have original maturities of three
months or less.
Inventories - Inventories are valued at the lower of cost or market
using the first-in, first-out method.
Property, Plant, and Equipment - Property, plant, and equipment, including
capital leases, is recorded at cost. Depreciation is provided over the
estimated useful lives of the assets, which range from 5 to 30 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 30 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
26
27
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.
Long-Lived Assets - The Corporation periodically assesses the
recoverability of assets based on its expectations of future profitability
and undiscounted cash flow of the related operations and, when
circumstances dictate, adjusts the carrying value of the asset to
estimated fair value. These factors, along with management's plans with
respect to the operations, are considered in assessing the recoverability
of goodwill, other purchased intangibles, and property and equipment. As
discussed in Note 12, the Corporation recorded an impairment charge during
the year ended March 31, 1999 of $1,315 relating to goodwill of its Child
Safety segment. Goodwill was previously amortized using the straight-line
method over a period of five years.
Income Taxes - The Corporation accounts for income taxes in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 109,
Accounting for Income Taxes. SFAS No. 109 is an asset and liability
approach that requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences. SFAS No. 109
generally considers all expected future events other than proposed
enactments of changes in the tax law or rates.
Stock-based Compensation - The Corporation measures compensation cost for
stock options issued to employees using the intrinsic value-based method
of accounting.
Foreign Currency Translation - The assets and liabilities of the
Corporation's wholly owned European subsidiaries are translated using
exchange rates in effect at the balance sheet date, and amounts for the
consolidated statements of earnings are translated using average exchange
rates for the period. Translation gains and losses are recorded in
shareholders' equity, and transaction gains and losses are included in the
consolidated statement of earnings for the period.
Fair Value of Financial Instruments - The recorded values of cash and
trade receivables and payables approximate their fair values because of
the relatively short maturity of these instruments. Similarly, the fair
value of the Corporation's long-term debt is estimated to approximate its
recorded value due to its relatively short maturity and its interest rate
characteristics.
Earning (Loss) per Share - Earnings (loss) per common share ("EPS") are
based on the weighted-average number of common shares and common stock
equivalents outstanding each fiscal year presented, including vested and
unvested shares issued under the Corporation's Incentive Stock Option Plan
and outstanding stock purchase warrants issued by the Corporation. Common
stock equivalents represent the dilutive effect of the assumed exercise of
the outstanding stock options and warrants.
Recent Accounting Standards - SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, requires that an entity recognize all
derivatives as either assets or liabilities in the balance sheet and
measure those instruments at fair value. If certain conditions are met, a
derivative may be specifically designated as (a) a hedge of the exposure
to changes in the fair value of a recognized asset or liability or an
unrecognized firm commitment, (b) a hedge of the exposure to variable cash
flows of a forecasted transaction, or (c) a hedge of the foreign currency
exposure of a net investment in a foreign operation, an unrecognized firm
commitment, an available-for-sale security, or a
foreign-currency-denominated forecasted transaction. The accounting for
changes in the fair value of a derivative (that is, gains and losses)
depends on the intended use of the derivative and the resulting
designation. This statement is effective for all fiscal quarters of all
fiscal years beginning after June 15, 1999. Management believes that
adoption of this pronouncement is not expected to have a material effect
on the Corporation's consolidated financial statements.
27
28
Segment Information - Effective April 1, 1998, the Corporation adopted
SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information, which changes the method used by the Corporation to report
information about its operating segments. Information for 1998 and 1997
has been restated to conform to the 1999 presentation. SFAS No. 131
establishes standards to be used by enterprises to identify and report
information about operating segments and for related disclosures about
products and services, geographic areas, and major customers. The adoption
of SFAS No. 131 did not affect results of operations or financial
position, but did affect the disclosure of segment information contained
in Note 13.
Reclassifications - Amounts in prior years' consolidated financial
statements have been reclassified to conform to the 1999 presentation.
2. ACQUISITIONS
Klippan Limited - On October 2, 1997, the Corporation's United Kingdom
("U.K.") housewares and child safety subsidiary purchased the outstanding
common stock of Klippan Limited ("Klippan"), a manufacturer of children's
automobile safety seats and accessories having manufacturing facilities
and sales offices in the U.K. and Europe, for approximately $3,900 in
cash. The acquisition was financed under the Corporation's U.K. bank
credit facility. Goodwill totaling $1,892 was recorded on the transaction
and was being amortized over five years. The related accumulated
amortization was $210 at March 31, 1998. See Note 12 related to the
impairment of goodwill recorded in connection with the Klippan purchase.
Hago Products Ltd. - Effective October 31, 1996, the Corporation's U.K.
housewares and child safety subsidiary purchased the outstanding common
stock of Hago Products Ltd. ("Hago"), a U.K. manufacturer of child safety
gates and fireguards, for approximately $1,800 in cash. The acquisition
was financed with internally available funds and borrowings under the U.K.
line of credit.
Both acquisitions were accounted for using the purchase method of
accounting. Accordingly, the consolidated statements of earnings only
include the results of operations of the individual companies since the
effective date of each acquisition.
Pro Forma Disclosure - The information below presents combined results of
operations on a pro forma basis assuming the acquisitions of Klippan and
Hago and the merger of the Life Sciences and Engineering Subsidiaries (see
Note 3) occurred at the beginning of the fiscal years presented:
(UNAUDITED)
YEAR ENDED MARCH 31,
-----------------------
1998 1997
Revenues $ 57,167 $48,771
Earnings (loss) from continuing operations (1,617) 31
Net earnings (loss) (656) 1,065
Net earnings (loss) per share:
Basic (0.13) 0.21
Diluted (0.13) 0.21
The pro forma amounts include adjustments to reflect interest expense for
acquisition-related debt and amortization of goodwill related to the
Klippan and Hago acquisitions and adjustments to eliminate the revenues
and earnings of the Life Sciences and Engineering Subsidiaries and reflect
28
29
the Corporation's equity in earnings of Wyle (see Note 3). The pro forma
amounts are not necessarily indicative of the consolidated results that
would have occurred had the transactions taken place on April 1, 1996, nor
are they necessarily indicative of results that may occur in the future.
3. MERGER OF LIFE SCIENCES AND ENGINEERING SUBSIDIARIES
On March 16, 1998, the Corporation merged its domestic subsidiaries, KRUG
Life Sciences Inc. and Technology Scientific Services, Inc. (the
"Subsidiaries"), into Wyle. Wyle provides high-technology testing and
technical services to commercial and government customers in the U.S.
In the merger, the Corporation exchanged its ownership of the Subsidiaries
for (i) 3.8 million shares of Series A-1 Preferred Stock that have voting
rights and are convertible into approximately 38% of Wyle's common stock;
(ii) cash of $3,052 received by the Corporation; (iii) shares of Series B
Senior Preferred Stock of Wyle that are nonvoting and have a face amount
and an aggregate liquidation preference of $954 payable in even increments
on December 22, 2003, 2004, and 2005; and (iv) a stock option that
entitles the Corporation to purchase approximately 38% of the shares
issuable under existing employee stock options of Wyle, as and if such
shares are purchased by existing employees. The Series A-1 Preferred Stock
bears a cumulative annual dividend of $780. Payment of the dividend is
subject to the prior redemption of the Series B Senior Preferred Stock,
compliance by Wyle with any applicable loan covenants, and Wyle's
availability of funds. In connection with the merger, Wyle assumed
approximately $3,300 of the Subsidiaries' working capital debt.
The Corporation entered into a stockholders agreement with Wyle providing
that for so long as the Corporation owns 10% or more of the stock of Wyle,
that (i) the Corporation will appoint two of seven directors; (ii) the
vote of six of the seven directors or a class vote of each series of
preferred stock is necessary for certain significant corporate
transactions; and (iii) the Corporation will have demand registration
rights beginning nine months after the closing of the merger. The
Corporation issued warrants to purchase 25,000 shares of its common stock
to investment advisors assisting in the merger (see Note 8).
The Corporation recognized a partial gain totaling $2,850 as a result of
the transaction. Recognition of additional gain was precluded because of
the significance of the nonmonetary assets received by the Corporation.
29
30
Summarized financial information of Wyle is presented below:
(UNAUDITED) (UNAUDITED)
March 31, March 31,
1999 1998
Current assets $31,167 $26,774
Property, plant, and equipment, net 11,798 11,270
Goodwill 5,023 5,403
Other assets 3,350 3,723
------- -------
Total assets $51,338 $47,170
======= =======
Current liabilities $20,469 $17,754
Other liabilities 1,826 2,971
Long-term debt 24,625 20,501
Owners' equity 4,418 5,944
------- -------
Total liabilities and equity $51,338 $47,170
======= =======
Corporation's proportionate share of the underlying net assets of Wyle $ 1,679 $ 2,258
======= =======
Corporation's investment in Wyle, at equity, included in other
noncurrent assets at March 31 $ -- $ 122
======= =======
The Corporation accounts for its investment in Wyle using the equity
method of accounting. As a result of losses reported by Wyle, the
Corporation recorded losses in its equity investment of $123 and $55 for
the fiscal years ended March 31, 1999 and 1998, respectively. The book
value of the investment at March 31, 1999 is $0 as a result of recording
those losses against the carrying value of the investment. The
Corporation's proportional shares of the losses incurred by Wyle
subsequent to the adjustment of the carrying value of the investment to $0
must be offset by an equal amount of earnings before any income from the
investment can be recognized by the Corporation. The difference between
the Corporation's proportionate share of Wyle's net assets and its
recorded investment in Wyle is $1,679 at March 31, 1999. This noncash
amount will be recognized as income over a period of approximately 15
years once the Corporation's share of the Wyle losses subsequent to the
write-off of the Corporation's investment has been offset by future
earnings.
4. DISCONTINUED OPERATIONS
Leisure Marine Segment - On April 16, 1998, the Corporation sold its
Leisure Marine Segment to a company formed by the Segment's management.
The purchase 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 leased properties in Knoxville, Tennessee, and in Toronto, Canada, and
to product liability claims for products sold prior to the disposal.
In connection with alleged obligations under the leases in Knoxville,
Tennessee, the landlord filed a lawsuit in December 1998, seeking to
recover alleged maintenance costs from the Corporation and one of its
subsidiaries and requesting relief from payment of a $200 promissory note
due to the
30
31
Corporation. In January 1999, the Corporation filed suit against the
landlord demanding payment of the promissory note. Based upon an
evaluation of information currently available and consultation with legal
counsel, the Corporation has recorded a charge of $220 for discontinued
operations. Management believes the lawsuit claims are without merit and
intends to aggressively defend it and pursue payment of the note
receivable.
During the year ended March 31, 1998, the Corporation recorded a charge of
$830 (net of a tax benefit of $427) to provide for estimated additional
product liability losses and increased legal and professional and
insurance costs for such discontinued operations.
During the year ended March 31, 1997, the Corporation recorded a charge of
$456 (net of a tax benefit of $235) to provide for estimated additional
losses for such discontinued operations. The charge was due to additional
repair and maintenance costs relating to the Knoxville property, decreased
sublease income from the Knoxville property, increased insurance costs
related to product liability claims, and loss of future sublease income
caused by the bankruptcy filing of a tenant in the Toronto facility.
The following is a summary of the provision for losses for discontinued
operations:
YEAR ENDED MARCH 31,
-----------------------------------
1999 1998 1997
Beginning balance $ 1,575 $ 918 $ 1,419
Provision for losses 220 1,257 691
Asset sales 105
Usage (441) (600) (1,192)
------- ------- -------
Ending balance $ 1,459 $ 1,575 $ 918
======= ======= =======
The reserve for losses from discontinued operations represents
management's best estimate of the Corporation's liability with regard to
resolution of all property and product liability claims for which it may
incur liability. These estimates are based on the Corporation's judgments
using currently available information as well as consultation with its
insurance carriers and legal counsel. The Corporation historically has
purchased insurance policies to reduce its exposure to product liability
claims and anticipates it will continue to purchase such insurance
policies if available at commercially reasonable rates.
While the Corporation has based its estimates on its evaluation of
available information to date, it is impossible to predict with certainty
the ultimate outcome of these contingencies. The Corporation will adjust
its estimates of the reserve as additional information is developed and
evaluated. However, management believes that the final resolution of these
contingencies will not have a material adverse impact on the financial
position, cash flows, or results of operations of the Corporation.
31
32
DISCONTINUED OPERATIONS - SUMMARY BALANCE SHEET INFORMATION
MARCH 31,
----------------------------------
1999 1998 1997
Current assets $ 246 $14,379 $12,829
Property, plant, and equipment, net 5,579 5,562
Other assets 1,123 1,372
------- ------- -------
Total assets 246 21,081 19,763
Current liabilities 646 9,852 5,924
Other liabilities 911 919 429
Long-term debt 3,043 3,187
------- ------- -------
Total liabilities 1,557 13,814 9,540
------- ------- -------
Net assets (liabilities) $(1,311) $ 7,267 $10,223
======= ======= =======
Results of discontinued operations were as follows:
DISCONTINUED OPERATIONS - SUMMARY STATEMENT OF EARNINGS INFORMATION
YEAR ENDED MARCH 31,
-------------------------------------
1999 1998 1997
Leisure Marine Segment:
Revenue $ 32,197 $28,658
======== =======
Earnings from operations before income taxes $ 2,667 $ 2,399
Income taxes 876 909
-------- -------
Earnings from operations after income taxes 1,791 1,490
Gain on sale of segment, net of tax of $35 $ 587
-------- -------- -------
587 1,791 1,490
Industrial Segment:
Provision for additional estimated costs, net
of tax for 1998 and 1997 (220) (830) (456)
-------- -------- -------
Earnings from Discontinued Operations $ 367 $ 961 $ 1,034
======== ======== =======
32
33
5. RECEIVABLES
MARCH 31,
-----------------------
1999 1998
Trade accounts receivable $ 6,653 $ 10,288
Other 655 200
-------- --------
7,308 10,488
Less allowance for doubtful accounts (134) (174)
-------- --------
Total $ 7,174 $ 10,314
======== ========
6. INVENTORIES
MARCH 31,
------------------
1999 1998
Finished goods $1,498 $1,599
Work-in-process 965 1,194
Raw materials 2,496 2,207
------ ------
Total $4,959 $5,000
====== ======
7. LONG-TERM DEBT
MARCH 31,
---------------------
1999 1998
U.K. Variable Rate Loan $ 3,236 $ 3,948
U.K. Term Loan 1,571 1,880
Capital leases 1,161 875
Finland Loan 256
Other 54
------- -------
Total 6,278 6,703
Less contractual current maturities (1,539) (1,238)
U.K. Loans - reclassified (3,808)
------- -------
Long-term portion $ 931 $ 5,465
======= =======
The U.K. Variable Rate Loan commenced October 2, 1997 with a U.K. bank.
The loan is due March 31, 2003 and is payable in equal quarterly
installments of $190 plus interest, at the bank's base rate plus 1.25%
(6.75% at March 31, 1999 and 8.25% at March 31, 1998).
33
34
The U.K. Term Loan is a ten-year term loan which commenced in July 1995
with a U.K. bank. The loan has quarterly principal payments of $60, plus
interest, at the bank's base rate plus 1.5% (7.0% at March 31, 1999 and
8.5% at March 31, 1998).
The Finland loan commenced February 5, 1999 with a Finish bank. The loan
is due February 5, 2002 and is payable in equal semiannual installments of
$43 plus interest at a fixed rate of 3.85% beginning August 2, 1999.
Substantially all foreign assets (except shares of the foreign
subsidiaries) are pledged as collateral for the U.K. Variable Rate and
Term Loans. These loans include certain tangible net worth and cash flow
covenants relating to the foreign subsidiaries. The Corporation is
currently not in compliance with certain covenants, but has received
waivers of the covenants at March 31, 1999 from the bank. In conjunction
with these loans, the Corporation has agreed to keep $8,032 of cash on
deposit at the bank (of which $1,391 has been offset at March 31, 1999
against outstanding bank overdraft balances) until these loans can be
renegotiated with new covenants more appropriate for the current operating
levels and to eliminate the cash deposit requirements. The net cash on
deposit of $6,641 was earning interest at an effective rate of 5.27% at
March 31, 1999. Due to the current cash on deposit requirements, the U.K.
loan amounts have been reclassified as current debt.
Annual required payments of debt, including capital leases, before
reclassification for the next five years and thereafter are as follows:
2000 $ 1,542
2001 1,477
2002 1,328
2003 1,133
2004 435
Thereafter 363
-------
Total $ 6,278
=======
34
35
8. SHAREHOLDERS' EQUITY
Stock Option Plans - The Corporation's 1995 Incentive Stock Option Plan
permits the grant of options to officers and key employees for purchase of
up to 250,000 common shares through May 2005, of which 43,000 options were
available for grant at March 31, 1999. Vesting and option expiration
periods are determined by the Board of Directors but may not exceed ten
years.
RANGE
NUMBER WEIGHTED- OF
OF AVERAGE EXERCISE
SHARES EXERCISE PRICE PRICES
Options outstanding, March 31, 1996 126,640 $2.93 $2.57 - $3.14
Granted 75,000 4.50 4.50
Exercised (74,256) 2.86 2.57 - 3.00
Expired (6,064) 2.57 2.57
---------- ----- -------------
Options outstanding, March 31, 1997 121,320 3.96 3.00 - 4.50
Granted 15,000 5.13 5.13
Exercised (32,820) 3.24 3.14 - 4.50
Forfeited (13,000) 4.50 4.50
---------- ----- -------------
Options outstanding, March 31, 1998 90,500 4.34 3.00 - 5.13
Granted 79,000 1.69 1.69
Exercised (57,500) 4.66 4.50 - 5.13
Forfeited (15,000) 4.50 4.50
---------- ----- -------------
Options outstanding, March 31, 1999 97,000 $1.96 $1.69 - $4.50
========== ===== =============
Options exercisable, March 31, 1997 46,320 $3.09 $3.00 - $3.14
========== ===== =============
Options exercisable, March 31, 1998 84,500 $4.33 $3.00 - $5.13
========== ===== =============
Options exercisable, March 31, 1999 18,000 $3.17 $3.00 - $4.50
========== ===== =============
Weighted-average remaining contractual
life at March 31, 1999 4.95 years
==========
The weighted-average fair value of the options granted during the years
ended March 31, 1999, 1998, and 1997 was $0.75, $2.11, and $1.65,
respectively. The fair value of each stock option grant was estimated
using the Black-Scholes option pricing model with the following
weighted-average assumptions used for grants during the years ended March
31, 1999, 1998, and 1997, respectively: estimated volatility of 55%, 60%,
and 51%; risk-free interest rate of 4.8%, 6.0%, and 6.0%; dividend yield
of 0% for all three years; and an expected life of 3.5 years, 2.5 years,
and 2.5 years.
35
36
Information with respect to stock options outstanding and exercisable at
March 31, 1999, is as follows:
WEIGHTED-AVERAGE
EXERCISE NUMBER REMAINING NUMBER
PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISABLE
$ 1.69 79,000 4.73
3.00 16,000 6.60 16,000
4.50 2,000 0.61 2,000
------ --------- ------
97,000 4.95 18,000
====== ========= ======
Using the intrinsic value method, no compensation costs have been
recognized for the stock option plans since the exercise price of the
options is not less than the fair value of the Corporation's common stock
at the grant date.
Pro forma net earnings and net earnings per share, had compensation costs
been determined using the fair value-based method, follows:
YEAR ENDED MARCH 31,
---------------------------------------
1999 1998 1997
Net earnings (loss) $ (8,692) $ 224 $ 2,033
Net earnings (loss) per share:
Basic (1.72) 0.04 0.40
Diluted (1.72) 0.04 0.39
1997 Employee Stock Purchase Plan - The 1997 Employee Stock Purchase Plan
was approved by the Board of Directors in November 1996. Each employee
continuously employed through December 31, 1997 by KRUG International
Corp. and KRUG Life Sciences Inc. was eligible to purchase up to 200
Common Shares for 85% of the fair market value as determined based on the
lower of the last sale price at January 2, 1997 or December 31, 1997.
Payments for stock subscribed under the plan were made by payroll
deductions. A total of 14,704 common shares were issued under this plan.
Warrants - The Corporation issued warrants to shareholders of record on
December 23, 1995. For each five common shares held, the Corporation
distributed one warrant for the purchase of one common share. The warrants
entitled the holders to purchase, in the aggregate, 999,487 common shares
for $8.625 per share through their expiration on January 31, 1998. The
Corporation may reduce the purchase price at any time. In January 1999,
the Corporation extended the expiration date of the warrants to January
31, 2000.
The Corporation issued warrants to purchase 25,000 shares of its common
stock for $5.75 per share to investment advisors assisting the Corporation
in the merger of its Life Sciences and Engineering Subsidiaries (see Note
3). The weighted-average fair value of these warrants was calculated at
$1.37 per share and the Corporation recorded $34 as an expense of the
merger for these warrants.
Treasury Shares - On April 9, 1999, the directors of the Corporation voted
to retire the 278,700 common shares held as treasury shares by the
Corporation.
36
37
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, 1998 $1,305 $(617) $ 688
Current period change (925) 34 (891)
------ ----- -----
March 31, 1999 $ 380 $(583) $(203)
====== ===== =====
9. INCOME TAXES
The provisions for income taxes on continuing operations include the
following:
YEAR ENDED MARCH 31,
--------------------------------
1999 1998 1997
Domestic:
Current $ 268 $ 332 $ 11
Deferred 1,445 343 148
------- ----- -----
Total domestic tax expense 1,713 675 159
Foreign:
Current (135) 228 359
Deferred 318 (85) (68)
------- ----- -----
Total foreign tax expense 183 143 291
------- ----- -----
Total income tax expense $ 1,896 $ 818 $ 450
======= ===== =====
37
38
Deferred tax assets recorded in the balance sheets include the following:
MARCH 31,
---------------------
1999 1998
Domestic:
Alternative minimum tax credit carryforward $ 320 $ 483
Foreign tax credit carryforwards 1,071
Net operating loss carryforwards 268
Provision for loss on discontinued operations 496 536
Other 205 339
------- -------
2,092 1,626
Less valuation allowance (2,092)
------- -------
Total domestic deferred tax assets -- 1,626
Foreign:
Net operating loss carryforwards 1,648 984
Tax prepayments not currently utilized 830 1,320
Depreciation expense (738) (848)
Other 396 431
------- -------
2,136 1,887
Less valuation allowance (2,136) (984)
------- -------
Total foreign deferred tax assets -- 903
------- -------
Net deferred tax assets $ -- $ 2,529
======= =======
The differences between income taxes at the federal statutory rate and the
effective tax rate were as follows:
YEAR ENDED MARCH 31,
---------------------------------
1999 1998 1997
Income taxes at federal statutory rate $(2,415) $ 38 $ 514
Foreign tax rate differential 148 106 (32)
Changes in valuation allowance 3,244 (2,125) (483)
United States deemed dividend 268 2,550 469
U.K. pension 22 18 (62)
U.K. amortization of intangibles 118 70
Impairment of intangible assets 447
Other 64 161 44
------- ------- -----
Total income tax expense - continuing operations $ 1,896 $ 818 $ 450
======= ======= =====
38
39
The Corporation provided a deferred tax valuation allowance for the
domestic tax assets of $2,092 in fiscal 1999, to adjust the net domestic
deferred tax asset to $0 at March 31, 1999. Based upon management's
assessment, it is more likely than not that none of the domestic deferred
tax assets will be realized through future taxable earnings or
implementation of tax planning strategies. The foreign tax credit
carryforwards can only be used to offset future foreign source income, and
any future foreign source income would likely generate additional foreign
tax credits which would offset this income. As a result, the usage of the
carryforward foreign tax credits is not likely. A tax planning strategy
for usage of the alternative minimum tax credit carryforwards and the
other net domestic tax assets is considered more likely than not as well.
As a result, a valuation allowance has also been provided for these
assets.
The Corporation provided additional deferred tax valuation allowance for
foreign tax assets of $1,152 in fiscal 1999 to adjust the foreign tax
deferred tax assets to $0 at March 31, 1999. 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. Due to a change in the U.K tax
laws effective April 1999, and the net operating loss carryforwards
available to offset future taxable income in the U.K., usage of the tax
prepayments in the future are considered less likely than not. The usage
of the net operating loss carryforwards are also considered less likely
than not, as the subsidiaries which generated them have not been
profitable for the past two years and these carryforwards can only be used
in the future by the subsidiaries which originally generated the tax
losses.
In fiscal 1998, the Corporation reversed the domestic valuation allowance
for deferred taxes by $3,156 as a result of management's assessment that
it was more likely than not that the domestic tax asset of $1,626 at March
31, 1998 could be realized through implementation of tax planning
strategies available to the Corporation at that time. A valuation
allowance for foreign net operating loss carryforwards of $984 was
established during fiscal 1998 as future use of these net operating loss
carryforwards were considered less likely than not.
In fiscal 1997, the Corporation decreased its domestic valuation allowance
for deferred taxes by $640 due to the usage of the domestic net operating
loss carryforward and the use of other deferred tax asset items during the
year.
Earnings (loss) from continuing operations before income taxes include
$(4,538), $(3,537), and $1,040 in 1999, 1998, and 1997, respectively, of
foreign earnings (losses). Undistributed earnings of the foreign
subsidiaries aggregated $15,738 at March 31, 1999. To date the Corporation
has paid taxes as United States deemed dividends on approximately $17,500.
The foreign net operating losses at March 31, 1999 were $3,488 for the
U.K., without an expiration date, $961 for Germany without an expiration
date, and $111 for France which expires on March 31, 2004.
39
40
10. EMPLOYEE BENEFITS
Defined Benefit Plans - The Corporation has historically maintained
defined benefit retirement plans covering substantially all of its
employees. Benefits are principally based on years of service and level of
earnings. The Corporation funds the domestic plan, which is
noncontributory, at a rate that meets or exceeds the minimum amounts
required by ERISA. The Corporation funds monthly contributions to the
foreign plans, which are contributory, based on actuarially determined
rates.
The vested obligation of the foreign plans is calculated as the actual
present value to which the employee is entitled to immediately if the
employee were to separate.
Effective February 28, 1997, the Corporation amended its domestic plan to
freeze participant benefits and close the plan to new participants. As a
result, the Corporation recognized a curtailment gain of $369 for the year
ended March 31, 1997 primarily due to the reduction of the projected
benefit obligation. During the year ended March 31, 1998, the Corporation
recognized a curtailment loss of $190 for a partial plan settlement of
pension obligations to vested former employees. The Corporation approved a
plan amendment as of March 31, 1998 to terminate its domestic plan.
Management expects that, subject to required regulatory approvals, final
payment of plan termination benefits will be made by August 31, 1999.
The components of net pension expense for all plans, excluding the
curtailment gain and loss above, were as follows:
YEAR ENDED MARCH 31,
-----------------------------------------------------------------------
1999 1998 1997
---------------------- --------------------- ---------------------
DOMESTIC FOREIGN DOMESTIC FOREIGN DOMESTIC FOREIGN
Service cost $ 513 $ 467 $ 434 $ 272
Interest cost $ 362 665 $ 422 653 449 493
Expected return on assets (341) (803) (411) (685) (825) (542)
Amortization of prior service cost 49 96 27 8 317 58
----- ----- ----- ----- -------- -----
Net pension expense $ 70 471 $ 38 $ 443 $ 375 $ 281
===== ===== ===== ===== ======== =====
Weighted-average assumptions:
Discount rate 5.99% 5.50% 6.17% 6.50% 7.46% 9.00%
Expected return on plan assets 6.50% 7.50% 6.50% 7.50% 8.00% 9.00%
Rate of compensation increase 0.00% 3.75% 0.00% 4.50% 4.50% 7.00%
40
41
Summary information for the plans is as follows:
MARCH 31,
-----------------------------------------------------
1999 1998
------------------------- --------------------------
DOMESTIC FOREIGN DOMESTIC FOREIGN
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at the beginning of year $ 6,166 $ 10,270 $ 5,911 $ 6,760
Service cost 513 467
Interest cost 362 665 422 653
Actuarial (gain) loss (69) 474 1,176 2,099
Benefits paid (433) (104) (1,343) (112)
Exchange differences (89) 403
------- -------- ------- --------
Benefit obligation at end of year $ 6,026 $ 11,729 $ 6,166 $ 10,270
======= ======== ======= ========
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year $ 5,624 $ 10,584 $ 6,343 $ 6,870
Actual return on plan assets 275 714 624 1,667
Company contributions 541 620
Benefits paid (433) (104) (1,343) (112)
Acquisitions 1,348
Exchange differences (399) 192
------- -------- ------- --------
Fair value of plan assets at end of year $ 5,466 $ 11,336 $ 5,624 $ 10,585
======= ======== ======= ========
Funded (unfunded) status of the plans $ (560) $ (393) $ (542) $ 314
Unrecognized actuarial loss 883 1,249 934 434
Unrecognized prior service cost 711 809
------- -------- ------- --------
Accrued cost $ 323 $ 1,567 $ 392 $ 1,557
======= ======== ======= ========
AMOUNTS RECOGNIZED IN CONSOLIDATED BALANCE SHEETS
Prepaid benefit cost $ 1,567 $ 1,557
Accrued benefit liability $ (560) $ (542)
Accumulated other comprehensive income 883 934
------- -------- ------- --------
Net amount recognized $ 323 $ 1,567 $ 392 $ 1,557
======= ======== ======= ========
41
42
Defined Contribution Plan - The Corporation had a defined contribution
plan pursuant to IRS Section 401(k) covering substantially all domestic
employees until March 16, 1998. This plan was transferred to Wyle in
connection with the merger (see Note 3). The Corporation matched a
specific percentage of the employee's contribution as determined
periodically by its Board of Directors. Plan expense was $415 in 1998 and
$200 in 1997. Effective September 1, 1998, the Corporation adopted a new
defined contribution plan pursuant to IRS Section 401(k) covering
substantially all domestic employees. The plan allows for the Corporation
to make discretionary contributions to employees as approved by the Board
of Directors. No contributions were made to this plan in 1999.
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, 1999 follow:
CAPITAL OPERATING
LEASES LEASES
2000 $ 516 $1,397
2001 375 860
2002 226 670
2003 181 624
2004 4 624
Thereafter 25 5,736
------- ------
Total minimum lease payments 1,327 $9,911
======
Amount representing interest (166)
-------
Present value of minimum lease payments 1,161
Less current maturities of capital leases 422
-------
Long-term portion of capital leases $ 739
=======
At March 31, 1999 and 1998, buildings and equipment under capital leases
of $2,757 and $2,090 (less accumulated depreciation of $926 and $680),
respectively, are included in property, plant, and equipment. Rent expense
under operating leases was $1,536, $1,716, and $1,171 for the years ended
March 31, 1999, 1998, and 1997, 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 (see Note 4). 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.
42
43
Consulting Agreements - The Corporation entered into a consulting
agreement with its former chairman in April 1996 and terminated its
obligation to him under a previous founder's agreement. The remaining
obligation under the consulting agreement of $117 and $233 at March 31,
1999 and 1998, respectively, is included in other accrued expenses in the
consolidated balance sheets.
12. RESTRUCTURING AND IMPAIRMENT CHARGES
In October 1997, the Corporation purchased Klippan for approximately
$3,900 in cash, of which $1,892 was allocated to goodwill. This goodwill
was being amortized over a five-year life. During fiscal 1999, pursuant to
SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of, the Corporation evaluated the
recoverability of the long-lived assets, including intangibles, of
Klippan. Market conditions and the competitive environment in which
Klippan operates has, to date, prevented the Corporation from increasing
Klippan's sales and operating profit to levels anticipated at the time of
acquisition. In the fourth quarter of 1999, the Corporation determined
that Klippan's unamortized value of goodwill allocated in the purchase was
impaired. Accordingly, the Corporation adjusted the goodwill allocated in
the purchase to $0, by recording a noncash impairment loss of $1,315.
During the year ended March 31, 1998, the Corporation recorded
restructuring and relocation charges of $1,630 related to its European
Housewares businesses. In the restructuring, the Corporation closed it
manufacturing facility in Bognor Regis, England, and moved the operations
to its facility in Bilston, England. This move was completed in April
1998. Charges were provided for manufacturing plant relocation of $337,
employee severance for 105 employees of $436, and rent and other costs
related to the vacated facility of $857. Also in fiscal 1998, the
Corporation relocated its German sales office. The relocation cost
includes severance for five employees and rent and other costs related to
the vacated facility.
During the year ended March 31, 1999, an additional $412 of expense was
recorded for additional costs related to the vacated facility. At March
31, 1999, accrued expenses includes $599 for lease exit costs of the
Bognor Regis facility.
In September 1996, the Corporation closed its executive offices in Dayton,
Ohio and consolidated its headquarters in Houston, Texas. A restructuring
charge of $530 was recorded for such office consolidation during the year
ended March 31, 1997. The charge consisted primarily of estimated costs,
relating to severance for six employees of $150 and rent, net of sublease
income, and other costs related to the vacated office in Dayton, Ohio of
$380. At March 31, 1999, accrued expenses included $81 for rent and other
expenses payable though June 1999, the lease termination date of the
offices in Dayton, Ohio vacated by the Corporation.
43
44
The following is summary of the provision for restructuring and impairment
charges:
MARCH 31,
----------------------------------
1999 1998 1997
Beginning balance $ 572 $ 340
Provision for Dayton office closure $ 530
Provision for U.K 412 1,546
Impairment charge 1,315
Other 84
Usage (1,619) (1,398) (190)
------- ------- -----
Ending balance $ 680 $ 572 $ 340
======= ======= =====
13. BUSINESS SEGMENTS AND RELATED INFORMATION
The Corporation adopted SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information, in 1999 which changes the way the
Corporation reports information about its operating segments. The
information for 1998 and 1997 has been restated to conform to the 1999
presentation.
The Corporation's two remaining and one merged business units have
separate management teams and infrastructures that offer different
products and services. The business units are each considered a reportable
segment.
The Corporation's continuing operations consist of its Housewares and
Child Safety segments located in Europe and its equity in earnings of
Wyle.
The Housewares segment is composed of Beldray Ltd. and Hago Products Ltd.,
subsidiaries which manufacture and sell, under various proprietary brand
names and private labels, ironing tables, household ladders, rotary
dryers, indoor airers, 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.
The Child Safety segment is composed of the Klippan subsidiaries which
manufacture and sell, under various proprietary brand names and private
labels, children's automobile safety seats. Customers include various
retail outlets and wholesalers primarily in the U.K., Finland, Germany,
and Sweden.
The Life Sciences and Engineering segment was composed of two
subsidiaries, KRUG Life Sciences Inc. and Technology/Scientific Services,
Inc., engaged in basic and applied biotechnological research, support
services, and engineering pursuant to contracts primarily with agencies of
the U.S. government. The Corporation's ownership of these subsidiaries was
exchanged for an equity interest in Wyle on March 16, 1998 (see Note 3).
Activity associated with these subsidiaries prior to the exchange with
Wyle is reported below. Prior period segment information has not been
restated for the merger with Wyle.
44
45
Information concerning the Corporation's continuing operations by segment
is presented in the following table:
REVENUES
YEAR ENDED MARCH 31,
---------------------------------
1999 1998 1997
Housewares $34,832 $41,152 $33,071
Child Safety 15,463 7,856
Life Sciences and Engineering (3) 44,686 50,010
------- ------- -------
Total Revenues (1) $50,295 $93,694 $83,081
======= ======= =======
OPERATING PROFIT (LOSS)
YEAR ENDED MARCH 31,
-----------------------------------
1999 1998 1997
Housewares $(2,731) $(2,724) $ 729
Child Safety (2,923) (1,121)
Life Sciences and Engineering 2,883 3,592
Corporate Expense (1,587) (1,567) (1,948)
------- ------- -------
(7,241) (2,529) 2,373
Interest expense (447) (1,118) (936)
Interest income 532 7
Equity in loss of Wyle (123) (55)
Other income - net 175 3,808 75
------- ------- -------
Earnings (loss) from continuing operations before income taxes $(7,104) $ 113 $ 1,512
======= ======= =======
CAPITAL EXPENDITURES
YEAR ENDED MARCH 31,
---------------------------------
1999 1998 1997
Housewares $ 104 $ 1,132 $ 221
Child Safety 763 141
Life Sciences and Engineering 127 72
Corporate 16 2
------- ------- -------
$ 883 $ 1,400 $ 295
======= ======= =======
IDENTIFIABLE ASSETS
YEAR ENDED MARCH 31,
----------------------------------
1999 1998 1997
Housewares $13,758 $19,499 $16,041
Child Safety 4,656 5,501
Life Sciences and Engineering 9,976
Discontinued operations 7,267 10,223
Corporate 11,328 7,312 4,845
------- ------- -------
$29,742 $39,579 $41,085
======= ======= =======
DEPRECIATION AND AMORTIZATION
YEAR ENDED MARCH 31,
----------------------------
1999 1998 1997
Housewares $ 877 $ 959 $694
Child Safety 683 302
Life Sciences and Engineering 59 115
Corporate 4 38 14
------ ------ ----
$1,564 $1,358 $823
====== ====== ====
45
46
The following tables present revenue by geographic areas of the location
of the Corporation's customers:
YEAR ENDED MARCH 31,
---------------------------------
1999 1998 1997
Europe(2) $50,295 $49,008 $33,071
United States -- 44,686 50,010
------- ------- -------
Total $50,295 $93,694 $83,081
======= ======= =======
(1) Revenues from tangible products were $56,880 and $44,649, and revenues
from services were $36,814 and $38,432 in fiscal 1998 and 1997,
respectively. Related cost of goods sold for tangible products was
$57,361 and $40,118 and related cost of services was $28,474 and
$34,555 in fiscal 1998 and 1997, respectively. All revenue for fiscal
1999 related to tangible products.
(2) Includes revenues from one customer of $14,477 ($12,773 and $1,704
from the Housewares and Child Safety segments, respectively); $15,238
($14,550 and $688 from the Housewares and Child Safety segments,
respectively); and $11,913 (from the Housewares segment) in fiscal
1999, 1998, and 1997. Revenues from another customer were $5,251 (from
the Housewares segment) in fiscal 1999.
(3) Includes revenues from the U.S. government of $44,139 and $49,808 in
fiscal 1998 and 1997, respectively.
14. RELATED PARTIES
Effective April 1, 1998, a director of the Corporation entered into a
consulting agreement with the Corporation. The director's duties under the
agreement are to prepare short-term and intermediate-term acquisition
plans and investigate and evaluate potential acquisitions for the
Corporation. The amount of time to be devoted by him to his duties will be
agreed to by the parties but it is anticipated that, on average, the
director will perform approximately 20 hours of service per month. The
agreement provides for a fee to the director of $5 per month. The
agreement also provides that, during its term, the director will not
provide similar services to anyone else. The agreement may be terminated
by either party upon 30 days' written notice. The director was paid $60
under this agreement in 1999. Also effective April 1, 1998, the
Corporation entered into an identical consulting agreement with Fortuna
Advisors, Inc. ("Fortuna"). A director of the Corporation is the sole
shareholder and President of Fortuna, which was paid $60 under this
agreement in 1999.
Another director of the Corporation is a member of the law firm of
Mulligan & Mulligan. The Corporation paid Mulligan & Mulligan $105, $96,
and $99 for legal services in fiscal 1999, 1998, and 1997, respectively.
In addition, another director of the Corporation is a member of Smith,
Gambrell & Russell, LLP. The Corporation paid Smith, Gambrell & Russell,
LLP, $40 and $29 for legal services in fiscal 1999 and 1998, respectively.
46
47
15. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
FISCAL
Year
Ended Fourth Third Second First
March 31, Quarter Quarter Quarter Quarter
REVENUES 1999 $ 13,207 $ 11,976 $ 13,368 $ 11,744
1998 24,123 27,220 22,646 19,705
GROSS PROFIT (Revenues less cost of goods sold) 1999 854 629 675 815
1998 1,440 2,530 2,090 1,799
EARNINGS (LOSS) FROM CONTINUING
OPERATIONS 1999 (3,744) (2,060) (1,962) (1,234)
1998 (796) (321) 229 183
NET EARNINGS (LOSS) 1999 (3,725) (2,060) (1,962) (886)
1998 (1,204) (396) 771 1,085
EPS:
Continuing operations
Basic 1999 (0.75) (0.41) (0.39) (0.24)
1998 (0.15) (0.06) 0.04 0.04
Diluted 1999 (0.75) (0.41) (0.39) (0.24)
1998 (0.15) (0.06) 0.04 0.04
Net earnings (loss)
Basic 1999 (0.75) (0.41) (0.39) (0.17)
1998 (0.23) (0.08) 0.15 0.21
Diluted 1999 (0.75) (0.41) (0.39) (0.17)
1998 (0.23) (0.08) 0.15 0.21
WEIGHTED-AVERAGE COMMON SHARES
OUTSTANDING:
Basic 1999 4,978 4,978 5,028 5,215
1998 5,193 5,170 5,160 5,151
Diluted 1999 4,978 4,978 5,028 5,215
1998 5,193 5,170 5,196 5,183
Significant activity in the amount reported for the quarter ended March
31, 1999 include a charge for impairment of an intangible asset of $1,315,
provisions for losses related to the discontinued Industrial Segment
operations of $220, and tax expense of $1,868, primarily related to
providing valuation allowances for tax credits and tax loss carryforwards.
47
48
16. EARNINGS PER SHARE
1999 1998 1997
---------------------- -------------------- ---------------------
PER SHARE PER SHARE PER SHARE
AMOUNT AMOUNT AMOUNT AMOUNT AMOUNT AMOUNT
Earnings (loss) from continuing operations $(9,000) $ (705) $1,062
Basic -
Weighted-average shares outstanding 5,049 $ (1.78) 5,168 $ (0.14) 5,135 $ 0.21
======= ======== ====== ======== ====== =========
Diluted:
Weighted-average shares outstanding 5,049 5,168 5,135
Effect of dilutive securities - options 58
------- ----- -----
Total 5,049 $ (1.78) 5,168 $ (0.14) 5,193 $ 0.20
======= ======== ====== ======== ====== =========
The dilutive securities from options were 6 and 31 in 1999 and 1998,
respectively, and are not used because that would be antidilutive.
48
49
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
49
50
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Corporation's Board of Directors is presently comprised of seven
persons and is divided into two classes, with one class having four members and
the other class three members. One class of directors is elected at each Annual
Meeting of Shareholders for a term of two years.
DIRECTORS OF THE REGISTRANT
The following table sets forth certain information about the directors of
the Corporation:
NAME AND OFFICES DIRECTOR
PRESENTLY HELD WITH CORPORATION SINCE
------------------------------- -----
DIRECTORS WHOSE TERM OF OFFICE EXPIRES IN 1999:
----------------------------------------------
Robert M. Thornton, Jr...................................... 1996
Director, Chairman, President, Chief Executive
Officer and Chief Financial Officer
T. Wayne Holt............................................... 1993
Director
James J. Mulligan........................................... 1966
Director and Secretary
Ronald J. Vannuki........................................... 1998
Director
DIRECTORS WHOSE TERM OF OFFICE EXPIRES IN 2000:
----------------------------------------------
Karen B. Brenner............................................ 1996
Director
Bernee D.L. Strom........................................... 1996
Director
Howard E. Turner............................................ 1998
Director
Certain information concerning each person listed in the above table,
including his or her principal occupation for at least the last five years, is
set forth below.
Robert M. Thornton, Jr., 50, 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 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.
50
51
T. Wayne Holt, 72, was involved continuously with the Corporation's life
sciences, aerospace and engineering operations for twenty-two years commencing
with his initial employment in 1971 until his initial retirement in 1993. Mr.
Holt came out of retirement and was elected President of KRUG Life Sciences
Inc., a position he previously held from April 15, 1995 until his second
retirement on April 15, 1997. Mr. Holt held a number of positions, including
Vice President-Aerospace Group from 1981 to 1988, Assistant to the Chairman,
Aerospace Group, from 1988 to 1990, Vice President from May 1990 to February
1991, Executive Vice President from February 1991 to December 31, 1992, and
Advisor to the Chairman, Life Sciences and Engineering, from January 1, 1993 to
May 1, 1993.
James J. Mulligan, 77, 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 $105,063 for legal services rendered during the Corporation's
fiscal year ended March 31, 1999.
Ronald J. Vannuki, 58, has been a registered investment adviser with
Strome-Susskind Securities, L.P., a broker and investment adviser, since 1995.
From 1988 to 1995, Mr. Vannuki was Managing Director of Drake Capital
Securities, Inc., a registered broker-dealer, and from 1990 to 1995 was a
Director and Portfolio Manager of Drake Capital Advisers, Inc., a registered
investment adviser. From 1987 to 1988, he was President of Los Angeles
Securities, a broker-dealer and from 1984 to 1987, he was Vice President of
Kayne, Anderson & Co., Inc., a broker-dealer and money manager. Mr. Vannuki is a
director of Wyle Laboratories, Inc., a privately held corporation, of which 38%
of the equity is owned by the Corporation.
Karen B. Brenner, 46, has been President of Fortuna Advisors, Inc., an
investment advisory firm located in Newport Beach, California, since 1993.
Fortuna Advisors, Inc. succeeded to the business of Karen Brenner Registered
Investment Advisor which was formed by Ms. Brenner in 1984 and operated by her
from 1984 to 1993. Ms. Brenner is a director of Wyle Laboratories, Inc., a
privately held corporation, of which 38% of the equity is owned by
the Corporation. Ms. Brenner is also a director of Creative Bakeries, Inc.
Bernee D. L. Strom, 52, has been President, Chief Operating Officer and a
Director of Infospace.com, Inc., a leading provider of private label solutions
for content and commerce to web sites and internet appliances, since November
1998. Ms. Strom was President and Chief Executive Officer of The Strom Group, an
investment and business advisory firm that specializes in startups and
turnarounds of high technology companies, from 1990 until 1998. From July 1997
to December 1998, Ms. Strom was a director of Walker Digital, an intellectual
property studio, whose first spinout was Priceline.com, an internet commerce
company. From April 1995 to June 1997, Ms. Strom was President and Chief
Executive Officer of USA Digital Radio Partners, LP, a communications and
technology company and a partnership between Gannett Co., Inc., and Westinghouse
Electric Corporation. From 1990 to 1994, Ms. Strom was President and Chief
Executive Officer of MBS Technologies, Inc., a software publishing company. Ms.
Strom is also a director of Polaroid Corporation and a member of the Board of
Advisors of the J. L. Kellogg Graduate School of Management of Northwestern
University.
Howard E. Turner, 57, has been a partner in the law firm of Smith, Gambrell
& Russell, LLP, since 1971, where he heads one of the firm's corporate sections.
Mr. Turner has been involved in numerous corporate mergers, acquisitions and
dispositions; in structuring public and private equity and debt financing; and
has represented special committees and board of directors of large public
companies. Mr. Turner has served as a director of Avlease, Ltd., a lessor of
large commercial aircraft,
51
52
and currently serves as an officer and director of HSR, Ltd. Mr. Turner provides
legal services to the Corporation through the law firm, Smith, Gambrell &
Russell, LLP, as requested by the Corporation.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Corporation, as of June 9, 1999, their
positions with the Corporation and their ages are as follows:
NAME OFFICES AGE
---- ------- ---
Robert M. Thornton, Jr. Chairman of the Board of Directors, President, Chief Executive Officer 50
and Chief Financial Officer
James J. Mulligan Director and Secretary 77
Mark J. Stockslager Corporate Controller and Principal Accounting Officer 39
Marshall Cooper Managing Director of Beldray Ltd. 55
David Wright Group Managing Director of Klippan Ltd. 53
- ------------------------------
All officers of the Corporation are elected annually by the Board of
Directors.
With respect to Robert M. Thornton, Jr. and James J. Mulligan, see
information set forth above in the Directors Section.
Mark J. Stockslager has been Corporate Controller since November 6, 1996
and Principal Accounting Officer since March 11, 1998. He has been continuously
associated with the Corporation's accounting and finance operations since June
1988 and held various positions, including Manager of U.S. Accounting from June
1993 until November 1996. From June 1982 through May 1988, Mr. Stockslager was
employed by Price Waterhouse & Co.
Marshall Cooper has been Managing Director of Beldray Limited since
November 1998 and was Sales Director from December 1990 until November 1998.
Prior to December 1990, he held senior management positions with three major
housewares companies for more than 10 years.
David Wright has been Group Managing Director of Klippan since November
1998 and was Managing Director of Klippan's England operations from 1991 to
1998. He has been employed by Klippan and its predecessors since 1970, and has
held various managerial positions, including General Manager, Production
Manager and Quality Manager.
52
53
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires directors and
certain officers of the Corporation and owners of more than 10% of the
Corporation's Common Shares to file an initial ownership report with the
Securities and Exchange Commission and a monthly or annual report listing any
subsequent change in their ownership of Common Shares. The Corporation believes,
based on information provided to the Corporation by the persons required to file
such reports, that all filing requirements applicable to such persons during the
period from April 1, 1998 through March 31, 1999 have been met, except that
Karen B. Brenner belatedly filed three reports concerning seven transactions.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table presents for the three fiscal years ended March 31,
1999, the compensation of the Chief Executive Officers during the year ended
March 31, 1999 and the other executive officers at March 31, 1999, whose salary
and bonus during fiscal 1999 exceeded $100,000.
LONG-TERM COMPENSATION
-----------------------------------
AWARDS PAYOUTS
-------------------------------------
ANNUAL COMPENSATION
--------------------------------- LONG-TERM
OTHER RESTRICTED SECURITIES INCENTIVE
ANNUAL STOCK UNDERLYING PLAN ALL OTHER
NAME AND SALARY BONUS COMPENSATION AWARDS OPTIONS PAYOUTS COMPENSATION
PRINCIPAL POSITION YEAR ($) ($) ($) ($) (#) ($) ($)
- ------------------------ ------ ------- -------- ------------ ----------- ---------- --------- ----------
ROBERT M. THORNTON, JR., 1999 $196,700 $ 0 $0 $0 20,000 $0 $ 0
Chairman, President, 1998 159,500 35,000 (2) 0 0 0 0 4,785 (3)
Chief Executive Officer 1997 106,250 0 0 0 0 0 25,979 (4)
and Chief Financial
Officer (1)
C. L. HASLAM, 1999 $ 96,000 $0 $0 $0 0 $0 $96,528 (5)
Former Chairman 1998 189,500 0 0 0 0 0 5,685 (3)
and Chief Executive 1997 156,875 0 0 0 0 0 1,125 (3)
Officer (1)
- ----------------------------
(1) Mr. Thornton succeeded Mr. Haslam as Chairman and Chief Executive Officer
on September 10, 1998.
(2) This bonus was for services performed in fiscal 1997 and fiscal 1998.
(3) These amounts were contributed by the Corporation under the 401(k) plan
for the benefit of the named executives.
(4) This amount includes $24,479 paid to Mr. Thornton under a Consulting
Agreement from May 17, 1996 to July 16, 1996.
(5) This amount was paid to Mr. Haslam following his resignation as Chairman
and Chief Executive Officer.
53
54
OPTION GRANTS IN LAST FISCAL YEAR
The following table shows, for the named executive officers, additional
information about option grants for the fiscal year ended March 31, 1999.
INDIVIDUAL GRANTS POTENTIAL REALIZABLE VALUE
------------------------------------------ AT ASSUMED ANNUAL RATES OF
NUMBER OF % OF TOTAL STOCK PRICE APPRECIATION FOR
SHARES OPTIONS OPTION
UNDERLYING GRANTED TO ----------------------------
OPTIONS EMPLOYEES EXERCISE OR TERM
GRANTED IN FISCAL BASE PRICE EXPIRATION ----------------------------
NAME (#) YEAR ($/SHARE) DATE. 0%($) 5%($) 10%($)
- ------------------ ----------- ---------- ----------- ---------- ------ ------- -------
Robert M. Thornton, Jr. 20,000 25.3% $1.6875 12/21/2003 $0 $4,538 $14,565
C. L. Haslam 0 N/A N/A N/A N/A N/A N/A
- ----------------------------
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
The following table shows information about stock option exercises during
fiscal 1999 and unexercised stock options at March 31, 1999 for the named
executive officers.
NUMBER OF SHARES
UNDERLYING
UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT FISCAL IN-THE-MONEY OPTIONS
SHARES YEAR-END AT FISCAL YEAR-END
ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISE (#) REALIZED ($) UNEXERCISABLE (#) UNEXERCISABLE ($)
- --------------------------- ------------ ------------ ----------------- -----------------
Robert M. Thornton, Jr. 0 $0 0/20,000 $0/$3,750
C. L. Haslam 0 N/A N/A N/A
- ----------------------------
LONG-TERM INCENTIVE PLANS - AWARDS IN LAST FISCAL YEAR
The following table shows for the named executive officers, additional
information about awards during the fiscal year ended March 31, 1999 under
long-term incentive plans.
ESTIMATED FUTURE PAYOUTS UNDER
NUMBER OF PERFORMANCE OR NON-STOCK PRICE-BASED PLANS
SHARES, UNITS OTHER PERIOD -----------------------------------
OR OTHER UNTIL MATURATION THRESHOLD TARGET MAXIMUM
NAME RIGHTS (#) OR PAYOUT ($ OR #) ($ OR #) ($ OR #)
- --------------------------- ------------- ----------------- --------- -------- --------
Robert M. Thornton, Jr. 0 N/A N/A N/A N/A
C. L. Haslam 0 N/A N/A N/A N/A
- ---------------------------
54
55
OTHER
Mr. Thornton, Chairman, President, Chief Executive Officer and Chief
Financial Officer, is currently employed by the Corporation under the terms of
an Employment Agreement effective August 1, 1998. The initial period of the
Agreement expires July 31, 1999, but the Agreement continues in force thereafter
until either Mr. Thornton or the Corporation provides four months written notice
terminating the Agreement. The Agreement provides for an annual base salary of
$210,000, plus any increases that may be granted from time to time by the
Corporation. Mr. Thornton is also eligible to receive a bonus equal to
twenty-five percent of his annual base salary if certain goals, agreed to by the
parties to the Agreement, for the current and future fiscal years are met.
During the term of his employment, Mr. Thornton is also eligible to participate
in any stock option or compensation plan adopted for officers and shall receive
the fringe benefits extended by the Corporation to its most highly compensated
executives.
The Agreement also provides for severance payments in the event Mr.
Thornton ceases to be employed by the Corporation (whether voluntarily by Mr.
Thornton or otherwise) within one year after a change in control of the
Corporation (as defined in the Agreement). In such event, the Corporation is
required to pay Mr. Thornton an amount equal to one year's base salary. In
addition, any stock options held by Mr. Thornton on the date the Agreement is
terminated become immediately exercisable and may be exercised by Mr. Thornton
within ninety days of the termination of the Agreement, but only if Mr. Thornton
terminates the Agreement. While Mr. Thornton is receiving payments pursuant to
the Agreement, he is prohibited from competing with the Corporation.
Mr. Haslam resigned as Chairman and Chief Executive Officer of the
Corporation effective September 10, 1998. He was employed by the Corporation
under the terms of an Employment Agreement effective May 17, 1996. The Agreement
provided for a monthly salary of $15,000, which was increased to $16,000 per
month effective June 1, 1998.
55
56
PERFORMANCE GRAPH
The following graph compares the cumulative total shareholder return on the
Corporation's Common Shares for its last five fiscal years with the cumulative
total return of the American Stock Exchange Market Index and an American Stock
Exchange listed market capitalization based peer group index over the same
period (assuming investments of $100 in each vehicle on March 31, 1994 and
reinvestment of all dividends). The peer group index is comprised of 66
companies and includes all non-financial American Stock Exchange companies with
a market capitalization of between $20 and $40 million, which were publicly
traded throughout the five-year period. The peer group index was developed by an
independent agency. The Corporation is not aware of any appropriate industry or
line-of-business index with which to compare itself because of the diversity of
the Corporation's businesses and, therefore, it believes a market capitalization
index is appropriate.
[GRAPH]
PERFORMANCE DATA
1994 1995 1996 1997 1998 1999
---- ------ ------ ------- ------ ------
KRUG International Corp. 100 125.00 116.67 170.83 187.50 50.00
Peer Group Index 100 87.67 81.89 80.89 74.44 38.83
Broad AMEX Market Index 100 105.47 127.50 128.79 168.22 159.18
- ---------------------------------------
56
57
FISCAL 1999 AMEX PEER GROUP
The peer group is comprised of American Stock Exchange non-financial
companies with a market value between $20 and 40 million. The only companies
meeting this criteria for fiscal 1999 are the following:
Acme United Corp. Fortune Natural Resources Corp. MC Shipping Inc.
Advanced Photonix Cl A Goldfield Corp. McRae Industries Cl A
Autobond Acceptance Corp HMG/Courtland Prop. Inc. Multigraphics Inc.
Avenue Entertainment Group ILX Resorts Inc. Oriole Homes Cl B
B&H Ocean Carriers Ltd. Income Opportunity Realty Investment Plymouth Rubber Inc. Cl A
Beard Co. Integrated Orthopedics Plymouth Rubber Inc. Cl B
BFX Hospitality Corp. Integrated Tech USA Polyphase Corp.
Canyon Resources Corp. International Airline Supp. Group Professional Dental Tech
Cardiotech International Inc. International Remote Imaging Systems Provena Foods Inc.
CEC Resources Ltd. Intersystems Inc. Sentry Technology Corp.
CET Environmental Inc. Jaclyn Inc Soligen Technologies Inc.
Commodore Applied Tech. Jinpan International Ltd. Star Struck Ltd.
Computrac Inc. Joule Inc. Stevens International Cl A
Concord Fabrics Inc. A Killearn Properties Inc. Strategia Corp.
Concord Fabrics Inc. B Kit Manufacturing Co. Teletouch Commun.
Continucare Corp. Laser Technology Inc. Thermwood Corp.
CPS Systems Inc. Leather Factory Inc. Top Air Manufacturing
Creative Computer Applications Luxtec Corp. Trans Lux Corp.
Dairy Mart Convenience Cl B LXR Biotechnology Inc. Trio-Tech International
Etz Lavud Ltd. Ord. Matec Corp. Tuxis Corporation
EXX Inc. Cl A United Foods Inc. Cl A
Farmstead Telephone Gr. Unimar Co.
Flanigan's Enterprise Inc. Wendt Bristol Health Services
EXECUTIVE COMPENSATION COMMITTEE REPORT
ON EXECUTIVE COMPENSATION
The Executive Compensation Committee of the Board of Directors is comprised
of three directors who are not employees or former employees of the Corporation.
The Committee's stated function is to act in an advisory capacity to the Board
with respect to compensation of executives of the Corporation. Except as
specifically authorized by the Board, the Committee does not have the authority
to fix the compensation of any employee, officer or director of the Corporation.
However, since the Committee's creation in 1977, the Board has only on rare
occasions not completely adopted the recommendations of the Committee and on
those occasions only minor changes were made.
The goal of the Committee has been to adopt a compensation approach that is
basically simple, internally equitable and externally competitive, and that
attracts, motivates and retains qualified people capable of contributing to the
growth, success and profitability of the Corporation, thereby contributing to
long-term shareholder value. Given the size of the Corporation and the limited
number of its executive officers, the Committee has traditionally chosen to
evaluate each executive individually and on a subjective basis, without resort
to mathematical performance formulas. The
57
58
principle followed is to provide what the Committee believes is suitable
compensation based on its subjective evaluation of the executive's contribution
to the profitability of the Corporation.
The three key elements of executive compensation are base salary,
short-term incentives and long-term incentives.
The Corporation's base salaries are intended to be consistent with its
understanding of competitive practices, level of responsibility, qualifications
necessary for the particular position, and experience. Salary increases reflect
the Corporation's belief as to competitive trends, the performance of the
individual and the overall financial performance of the Corporation.
The short-term incentive for an executive is the opportunity to earn an
annual cash bonus. In line with the Corporation's normally discretionary
approach, the Committee considers all relevant facts and circumstances in
evaluating an executive. The Committee considers performance over a period of
time, not merely performance in the most recent year. However, in general, the
most important consideration is how well the executive has met his individual
goals as set forth in the most recent operating plan. Generally, the second most
important consideration is the Corporation's overall financial performance in
the most recent year. The Committee also considers factors beyond the
executive's control, such as general economic conditions, industry trends,
inflation, changes in government policies, etc., which may have had a material
effect (positive or negative) on an individual's overall performance. After
considering all of these factors, the Committee recommends whether or not a
particular executive should be awarded a bonus and, if so, the amount.
While salary and short-term incentives are primarily designed to compensate
current and past performance, the main purpose of the long-term incentive
compensation program is to directly link management compensation with the
long-term interests of shareholders. The Corporation is currently using, as it
has for many years, stock options to provide that link. Options are intended to
provide strong incentives for superior long-term future performance.
With respect to the Chairman, President, CEO and CFO (Mr. Thornton), the
Committee believes that his base salary is at the low end for positions
requiring similar competence, dedication, creativity, experience and leadership
qualities.
With respect to fiscal 1997, the Corporation's 1997 results exceeded the
Committee's expectations and the Committee considered recommending a bonus for
Mr. Thornton, but concluded to defer such action because, even though a number
of important initiatives had been commenced, none had been successfully
accomplished at that time.
With respect to fiscal 1998, while the Committee was disappointed with the
Corporation's financial results for 1998, even though there were mitigating
circumstances, a number of important actions had been successfully completed:
the acquisitions of Hago Products Limited and Klippan Limited; the sale of
Sowester Limited; the merger of KRUG Life Sciences Inc. and
Technology/Scientific Services, Inc. into Wyle Laboratories, Inc. and the
restructuring of the manufacturing and sales functions of the housewares and
child safety segments. These actions produced the following important results
for the Corporation: the Corporation's presence in the child safety area was
rapidly and substantially enlarged; the Corporation's exposure to the risks
inherent in the government contracting business was significantly limited; the
Corporation's long-term debt was substantially reduced; the Corporation's cash
position was greatly improved; and, the Corporation's balance sheet was
materially strengthened. These steps rationalized the Corporation's activities
and put it in position to continue to pursue an acquisition program with the
ultimate goal of increasing shareholder value. Since some of these actions were
not completed until after the end of the 1998
58
59
fiscal year, the Committee decided to postpone consideration of a bonus for Mr.
Thornton until fiscal 1999.
In November, 1998, the Board of Directors, upon the recommendation of the
Committee, awarded Mr. Thornton a cash bonus of $35,000 in recognition of his
services in fiscal 1997 and 1998, which were, in considerable part, responsible
for the actions and results set forth above. In November 1998, the Directors
adopted the recommendation of the Committee and entered into an Employment
Agreement with Mr. Thornton, which is described under the heading "Other." The
Agreement provides, among other things, that Mr. Thornton can earn a bonus equal
to 25% of his annual base salary if goals agreed to by the Corporation and Mr.
Thornton are met. For fiscal 1999, it was agreed that Mr. Thornton would be
entitled to receive one-half of the bonus if certain specific operating results
were achieved during the third and fourth quarters of fiscal 1999 and that the
other one-half would be payable wholly at the discretion of the Directors
(although the Directors would give consideration to the accomplishment of major
tasks, such as the acquisition or divestiture of significant assets, the
refinancing of the European loans and the repatriation of U.K. funds). No bonus
was paid to Mr. Thornton because the operating results were not achieved and the
Corporation's financial results for fiscal 1999 were very disappointing.
Nonetheless, the Committee believes that Mr. Thornton has the ability,
determination, energy, experience, and leadership qualities, as well as a
substantial financial interest in the Corporation, to turn the Corporation
around and produce acceptable results for the shareholders. As an expression of
that confidence, in December 1998, the Corporation granted Mr. Thornton an
option to purchase 20,000 shares of the Corporation's common shares at the
market price on the date of the grant.
This report has been submitted by the Executive Compensation Committee:
Bernee D. L. Strom Karen B. Brenner James J. Mulligan
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Executive Compensation Committee are Mses. Strom
(Chairman) and Brenner and Mr. Mulligan. Ms. Brenner is the sole shareholder and
President of Fortuna Advisors, Inc. Effective April 1, 1998, Fortuna Advisors,
Inc. entered into a Consulting Agreement with the Corporation (see Item 13.
Certain Relationships and Related Transactions of this Annual Report on Form
10K). Mr. Mulligan is Secretary of the Corporation and a member of the law firm
of Mulligan & Mulligan, general counsel for the Corporation. Mulligan & Mulligan
received $105,063 for legal services rendered during the Corporation's 1999
fiscal year.
59
60
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
PRINCIPAL HOLDERS OF COMMON SHARES
Set forth below is certain information concerning the entities known by the
Board of Directors of the Corporation to be the beneficial owners of more than
5% of the outstanding Common Shares of the Corporation as of June 16, 1999.
COMMON SHARES AND WARRANTS TO PURCHASE
COMMON SHARES BENEFICIALLY OWNED
AS OF 6/16/99 (1)
---------------------------------------------------
NUMBER
----------------------------------
NAME AND ADDRESS SHARES WARRANTS % OF CLASS
---------------- ------ -------- ----------
FORTUNA ADVISORS, INC. (2) 704,566 110,662 16.4
1300 Bristol Street North
Suite 100
Newport Beach, CA 92660
KAREN B. BRENNER (2) 716,466 110,882 16.6
1300 Bristol Street North
Suite 100
Newport Beach, CA 92660
BAILEYS FAMILY TRUST (3) 326,608 52,041 7.6
C/O Karen Brenner
P.O. Box 9109
Newport Beach, CA 92658-9109
STEVEN BAILEYS (4) 612,216 102,982 14.4
C/O Karen Brenner
P.O. Box 9109
Newport Beach, CA 92658-9109
DIMENSIONAL FUND ADVISORS 272,949 _____ 5.5
1299 Ocean Avenue
Eleventh Floor
Santa Monica, CA 90401
(1) Under applicable Securities and Exchange Commission regulations, shares
are treated as "beneficially owned" if a person has or shares voting or
investment power with respect to the shares or has a right to acquire the
shares within 60 days of June 16, 1999. Unless otherwise indicated, sole
voting power and sole investment power are exercised by the named entity.
In calculating "% of Class" for an entity, shares which may be acquired by
the entity within such 60-day period are treated as owned by the entity
and as outstanding shares.
(2) Fortuna Advisors, Inc., 1300 Bristol Street North, Suite 230, Newport
Beach, CA 92660, a registered investment advisor, is the beneficial owner
of 815,228 shares (including warrants to purchase 110,662 shares) held in
clients' accounts. Karen Brenner is the sole shareholder and President of
Fortuna Advisors, Inc. and, as such, is also considered to be the
beneficial owner of the shares held in clients' accounts by Fortuna
Advisors, Inc. Fortuna Advisors, Inc. and Ms. Brenner have no voting power
and shared dispositive power with respect to all of these shares. This
number also includes the shares and warrants beneficially owned by the
Baileys Family Trust and Steven Baileys. Ms. Brenner also owns an
additional 12,120 shares (including
60
61
warrants to purchase 220 shares) of the Corporation.
(3) The Baileys Family Trust has sole voting power and shared dispositive
power with respect to all of the shares beneficially owned by it.
(4) Steven Baileys is the Trustee of the Baileys Family Trust and, as such, is
also considered to be the beneficial owner of the shares held by the
Baileys Family Trust. Steven Baileys has sole voting power and shared
dispositive power with respect to all of the shares beneficially owned by
him.
The parties listed above in this section, other than Dimensional Fund
Advisors, have filed with the Securities and Exchange Commission, as a group, a
Schedule 13D and amendments thereto under the Securities Exchange Act of 1934
relating to their beneficial ownership of shares of the Corporation. The
information set forth herein with respect to beneficial ownership of shares of
the Corporation was obtained from Amendment No. 6 to Schedule 13D dated October
22, 1998 and filed April 1, 1999, as supplemented by members of the group. The
parties listed above, other than Dimensional Fund Advisors, are sometimes
referred to as the Fortuna Group. As a group, the Fortuna Group beneficially
owns 1,018,223 shares (including warrants to purchase 365,201 shares) or 19.1%
of the outstanding shares of the Corporation.
COMMON SHARES OWNED BY MANAGEMENT
The following table sets forth the number of Common Shares of the
Corporation beneficially owned as of June 16, 1999 by each named executive
listed in the Summary Compensation Table and by all directors and executive
officers as a group.
COMMON SHARES BENEFICIALLY OWNED
AS OF JUNE 16, 1999
---------------------------------
NAME NUMBER % OF CLASS
---- -------------- ------------
Robert M. Thornton, Jr. ............................................... 176,024 (1) 3.5
C. L. Haslam (2) ...................................................... 0 0
Directors and Executive Officers as a group (10 persons) .............. 1,441,570 (3) 27.1
(1) Includes 37,540 shares that may be acquired upon the exercise of warrants.
(2) On September 10, 1998, C. L. Haslam resigned as Chairman and Chief
Executive Officer of the Corporation.
(3) Includes 325,889 shares that may be acquired upon the exercise of
warrants and 18,000 shares that may be acquired upon the exercise of
options within 60 days of June 16, 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Effective April 1, 1998, Ronald J. Vannuki, a director of the Corporation,
entered into a Consulting Agreement with the Corporation. Mr. Vannuki's duties
under the Agreement are to prepare short-term and intermediate-term acquisition
plans and investigate and evaluate potential acquisitions for the Corporation.
The amount of time to be devoted by him to his duties will be agreed to by the
parties but it is anticipated that Mr. Vannuki on average will perform
approximately twenty hours of service per month. The Agreement provides for a
fee to Mr. Vannuki of $5,000 per month. The Agreement also provides that, during
its term, Mr. Vannuki will not provide similar services to anyone else. The
Agreement may be terminated by either party upon thirty days written notice.
61
62
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 the Annual Report on Form 10-K
hereof.
Independent Auditors' Report.
Consolidated Balance Sheets -- March 31, 1999 and 1998.
Consolidated Statements of Earnings -- for the years ended March 31,
1999, 1998 and 1997.
Consolidated Statements of Shareholders' Equity -- for the years
ended March 31, 1999, 1998 and 1997.
Consolidated Statements of Cash Flows -- for the years ended March
31, 1999, 1998 and 1997.
Notes to Consolidated Financial Statements -- for the years ended
March 31, 1999, 1998 and 1997.
(a) (2) Financial Statement Schedules
Independent Auditors' Report -- .............. At page 64 of this Report.
Schedule II -- ................................ Valuation and qualifying accounts (at page
65 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, those schedules have been omitted.
(b) Reports on Form 8-K
During the quarter ended March 31, 1999, the Corporation filed no
reports on Form 8-K.
(c) Exhibits
The "Index to Exhibits" to this Annual Report on Form 10-K is
incorporated by reference.
62
63
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 18th
day of June, 1999.
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
- -------------------------------------------------------------------------------------------------------------------
Director, Chairman , Chief Executive Officer,
/s/ ROBERT M. THORNTON, JR. President and Chief Financial Officer June 18, 1999
- ------------------------------------------ (principal executive and financial officer) -----------------
Robert M. Thornton, Jr.
/s/ MARK J. STOCKSLAGER Principal Accounting Officer June 18, 1999
- ------------------------------------------ (principal accounting officer) ------------------
Mark J. Stockslager
/s/ KAREN B. BRENNER Director June 18, 1999
- ------------------------------------------ -----------------
Karen B. Brenner
/s/ T. WAYNE HOLT Director June 18, 1999
- ------------------------------------------ -----------------
T. Wayne Holt
/s/ JAMES J. MULLIGAN Director June 18, 1999
- ------------------------------------------ -----------------
James J. Mulligan
/s/ BERNEE D. L. STROM Director June 18, 1999
- ------------------------------------------ -----------------
Bernee D. L. Strom
/s/ HOWARD E. TURNER Director June 18, 1999
- ------------------------------------------ -----------------
Howard E. Turner
/s/ RONALD J. VANNUKI Director June 18, 1999
- ------------------------------------------ -----------------
Ronald J. Vannuki
63
64
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
KRUG International Corp.
Atlanta, Georgia
We have audited the consolidated financial statements of KRUG International
Corp. and Subsidiaries as of March 31, 1999 and 1998, and for each of the three
years in the period ended March 31, 1999, and have issued our report thereon
dated May 20, 1999 (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 financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Atlanta, Georgia
May 20, 1999
64
65
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 0 END
ACCOUNTS OF YEAR EXPENSES (DISPOSITION) RESERVES OF YEAR
------------- ---------- ---------- ------------- ---------- ----------
YEAR ENDED
MARCH 31, 1999 $ 174 $ 18 $ (7) $ 51 $ 134
YEAR ENDED
MARCH 31, 1998 $ 856 $ 21 $ (645) $ 58 $ 174
YEAR ENDED
MARCH 31, 1997 $ 658 $ 184 $ 54 $ 40 $ 856
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, 1999 $ 3,411 $ 3,279 $ (35) $ 2,427 $ 4,228
YEAR ENDED
MARCH 31, 1998 $ 5,536 $ 984 $ 47 $ 3,156 $ 3,411
YEAR ENDED
MARCH 31, 1997 $ 6,019 $ - $ 157 $ 640 $ 5,536
65
66
INDEX TO EXHIBITS
(3) ARTICLES OF INCORPORATION AND BY-LAWS:
3.1 Amended Articles of Incorporation of KRUG International Corp.
(incorporated by reference to Exhibit 3.1 of the Corporation's
Report on Form 10-K for the year ended March 31, 1998).
3.2 Code of Regulations of KRUG International Corp., as amended
(incorporated by reference to Exhibit 3.1 of the Corporation's
Report on Form 10-Q for the quarter ended June 30, 1996).
(4) INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING
INDENTURES:
4.1 Loan Facility dated December 8, 1994 among KRUG International
(UK) Limited, Beldray Limited and National Westminster Bank
(incorporated by reference to Exhibit 4.9 of the Corporation's
Report on Form 10-K for the year ended March 31, 1996).
4.2 Commercial Variable Rate Loan Agreement dated October 2, 1997
among KRUG International (UK) Limited, Bradley International
Holdings Limited and National Westminster Bank (incorporated
by reference to Exhibit 4.3 of the Corporation's Report on
Form 10-K for the year ended March 31, 1998).
4.3 Supplemental Agreement to the Loan Facility among KRUG
International (UK) Limited, Beldray Limited and National
Westminster Bank (listed as 4.2 above) dated October 2, 1997
(incorporated by reference to Exhibit 4.5 of the Corporation's
Report on Form 10-K for the year ended March 31, 1998).
(10) MATERIAL CONTRACTS:
10.1 1995 Incentive Stock Option Plan (incorporated by reference to
Exhibit 10.3 of the Corporation's Report on Form 10-K for the
year ended March 31, 1996).
10.2 Consulting Agreement between KRUG International Corp. and
Maurice F. Krug dated April 30, 1996 (incorporated by
reference to Exhibit 10.4 of the Corporation's Report on Form
10-K for the year ended March 31, 1996).
10.3 Employment Agreement between KRUG International Corp. and
Thomas W. Kemp dated October 1, 1996 (incorporated by
reference to Exhibit 10.7 of the Corporation's Report on Form
10-K for the year ended March 31, 1997).
10.4 1997 Employee Stock Purchase Plan (incorporated by reference
to Exhibit 10.8 of the Corporation's Report on Form 10-K for
the year ended March 31, 1997).
10.5 Amended and Restated Stockholder Agreement between Wyle
Laboratories, Inc., KRUG International Corp., Westminster
Partners L.P. and certain senior managers of Wyle
Laboratories, Inc. dated March 16, 1998 (incorporated by
reference to Exhibit 10.9 of the Corporation's Report on Form
10-K for the year ended March 31, 1998).
10.6 Agreement and Plan of Merger by and among KRUG Life Sciences,
Inc., Technology/Scientific Services, Inc. and Wyle
Laboratories, Inc. dated March 12, 1998 (incorporated by
reference to Exhibit 10.1 of the Corporation's Current Report
on Form 8-K filed March 31, 1998).
10.7 Share Sale and Purchase Agreement between KRUG International
(UK) Limited and Blakedew Ninety-Four Limited, dated April 16,
1998 (incorporated by
66
67
reference to Exhibit 10.1 of the Corporation's Current Report
on Form 8-K filed May 1, 1998).
10.8 Deed of Tax Covenant between KRUG International (UK) Limited
and Blakedew Ninety-Four Limited, dated April 16, 1998
(incorporated by reference to Exhibit 10.2 of the
Corporation's Current Report on Form 8-K filed May 1, 1998).
10.9 Employment Agreement between KRUG International Corp. and
Robert M. Thornton, Jr. dated November 9, 1998 (incorporated
by reference to Exhibit 10.1 of the Corporation's Report on
Form 10-Q for the quarter ended December 31, 1998).
(21) SUBSIDIARIES:
21.1 List of Subsidiaries.
(23) CONSENTS OF EXPERTS AND COUNSEL:
23.1 Consent of Deloitte & Touche LLP dated June 18, 1999 with
respect to material incorporated by reference into the KRUG
International Corp. Registration Statement on Form S-8 (No.
333-42217) relating to the Corporation's 1997 Employee Stock
Purchase Plan, the Registration Statement on Form S-8 (No.
333-06129) relating to the Corporation's 1995 Incentive Stock
Option Plan and the Registration Statement on Form S-3 (No.
33-88190) relating to the Corporation's Warrants to purchase
Common Shares.
(27) FINANCIAL DATA SCHEDULES:
27.1 Financial Data Schedules for the fiscal year ended March 31, 1999.
67