<PAGE>   1
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION

                              WASHINGTON D.C. 20549

                                    FORM 10-Q

[X]      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE   SECURITIES
         EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001

                                       OR

[   ]    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE  SECURITIES
         EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM  ________________ TO ___________________________

COMMISSION FILE NUMBER  1-12607

                            KRUG INTERNATIONAL CORP.
                            ------------------------
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

                    Ohio                                  31-0621189
                  ---------                         -------------------
(STATE OR OTHER JURISDICTION OF INCORPORATION        (I.R.S. EMPLOYER
                OR ORGANIZATION)                    IDENTIFICATION NO.)

--------------------------------------------------------------------------------
            900 Circle 75 Parkway, Suite 1300, Atlanta, Georgia 30339
                    (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
                                   (ZIP CODE)

                                 (770) 933-7000
              (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)


         Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filings requirements for the past 90 days.


Yes    [X]         No  [  ]


         The number of Common Shares, without par value, outstanding as of
August 10, 2001 was 4,976,342.



<PAGE>   2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

                    KRUG INTERNATIONAL CORP. AND SUBSIDIARIES
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                                 (IN THOUSANDS)
                                   (UNAUDITED)
                               JUNE 30, MARCH 31,

<TABLE>
<CAPTION>

                                                                                  2001                    2001
                                                                                --------                --------
<S>                                                                             <C>                     <C>
                                   ASSETS
Current Assets:
     Cash and cash equivalents                                                  $  3,397                $  3,186
     Receivables - net                                                             9,730                  10,878
     Inventories                                                                   1,798                   1,759
     Prepaid expenses and other                                                    1,396                   1,670
                                                                                --------                --------
         Total Current Assets                                                     16,321                  17,493

Property, Plant and Equipment, At Cost                                            27,635                  26,917
     Less accumulated depreciation                                                   503                     202
                                                                                --------                --------
         Property, Plant and Equipment - Net                                      27,132                  26,715

Net Noncurrent Assets of Discontinued Operations                                      --                   3,263
Other Assets                                                                         246                     240
                                                                                --------                --------

             Total Assets                                                       $ 43,699                $ 47,711
                                                                                ========                ========

                    LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
     Accounts payable                                                           $  3,046                $  3,947
     Third-party payor settlements                                                 6,149                   6,041
     Current maturities of long-term debt                                          4,000                   4,000
     Accrued expenses                                                              5,848                   5,584
     Income taxes                                                                     55                      56
     Net current liabilities of discontinued operations                            1,549                   1,109
                                                                                --------                --------
         Total Current Liabilities                                                20,647                  20,737

Long-term debt                                                                    16,406                  15,913
Noncurrent liability for general and professional liability risks                    475                     531
Noncurrent reserve for Industrial Segment                                            864                     899
                                                                                --------                --------
         Total Long-term Liabilities                                              17,745                  17,343

Shareholders' Equity:
     Common shares, no par value:
         Issued and outstanding, 4,976 at June 30, 2001
             and March 31, 2001                                                    2,488                   2,488
     Additional paid-in capital                                                    3,604                   3,604
     Retained earnings (deficit)                                                    (666)                  3,650
     Accumulated other comprehensive loss                                           (119)                   (111)
                                                                                --------                --------
                Total Shareholders' Equity                                         5,307                   9,631
                                                                                --------                --------

                    Total Liabilities and Shareholders' Equity                  $ 43,699                $ 47,711
                                                                                ========                ========
</TABLE>

See notes to condensed consolidated financial statements

                                       2
<PAGE>   3
                    KRUG INTERNATIONAL CORP. AND SUBSIDIARIES
                  CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
                                   (UNAUDITED)

<TABLE>
<CAPTION>


                                                                                     THREE MONTHS ENDED
                                                                                           JUNE 30,
                                                                                --------------------------------
                                                                                   2001                  2000
                                                                                --------                --------
<S>                                                                             <C>                     <C>
Net Revenues                                                                    $ 20,527                $     --

Operating Expenses:
     Salaries, wages and benefits                                                  9,928                     154
     Provision for bad debts                                                       2,627                      --
     Supplies                                                                      2,320                       2
     Purchased services                                                            1,855                      --
     Other operating expenses                                                      2,656                     126
     Rents and leases                                                                518                      15
     Depreciation                                                                    300                       2
                                                                                --------                --------

Operating Profit (Loss)                                                              323                    (299)

Other Income (Expense):
     Interest expense                                                               (667)                     --
     Interest income                                                                  25                     142
                                                                                --------                --------

Loss From Continuing Operations
     Before Income Taxes                                                            (319)                   (157)

Income Tax Expense                                                                    --                      62
                                                                                --------                --------

Loss From Continuing Operations                                                     (319)                   (219)

Discontinued Operations:
     Loss from operations of Housewares
         Segment                                                                  (2,433)
     Loss on disposal of Housewares Segment,
         including $687 for operating losses through
          the estimated disposal date                                             (1,556)
     Loss from operations of Industrial Segment                                       (8)
     Earnings from operations of Child Safety
         Segment (net of tax benefit of $18)                                                                   1
                                                                                --------                --------
Net Loss                                                                        $ (4,316)               $   (218)
                                                                                ========                ========

Loss Per Share:
     Continuing Operations:
         Basic                                                                  $  (0.06)               $  (0.04)
                                                                                ========                ========
         Diluted                                                                $  (0.06)               $  (0.04)
                                                                                ========                ========

     Net Loss:
         Basic                                                                  $  (0.87)               $  (0.04)
                                                                                ========                ========
         Diluted                                                                $  (0.87)               $  (0.04)
                                                                                ========                ========

Weighted-Average Common Shares Outstanding:
         Basic                                                                     4,976                   4,976
                                                                                ========                ========
         Diluted                                                                   4,976                   4,976
                                                                                ========                ========

</TABLE>
See notes to condensed consolidated financial statements

                                       3
<PAGE>   4
                    KRUG INTERNATIONAL CORP. AND SUBSIDIARIES
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)
                                   (UNAUDITED)

<TABLE>
<CAPTION>

                                                                                       THREE MONTHS ENDED
                                                                                             JUNE 30,
                                                                                ---------------------------------
                                                                                  2001                    2000
                                                                                --------                --------
<S>                                                                             <C>                     <C>
Net Cash Provided by (Used in) Operating Activities                             $    929                $   (910)

Cash Flows From Investing Activities:
     Expenditures for property, plant and equipment                                 (718)                     --
                                                                                --------                --------

         Net Cash Used In Investing Activities                                      (718)                     --


     Effect of Exchange Rate Changes on Cash                                          --                      (1)
                                                                                --------                --------

Net Increase (Decrease) in Cash and Cash Equivalents                                 211                    (911)

Cash and Cash Equivalents at Beginning of Period                                   3,186                   7,645
                                                                                --------                --------

Cash and Cash Equivalents at End of Period                                      $  3,397                $  6,734
                                                                                ========                ========

Supplemental Disclosure of Cash Flow Information:

Cash Paid For:
     Income Taxes                                                               $     --                $    500
                                                                                ========                ========
     Interest                                                                   $    136                $     --
                                                                                ========                ========

Noncash Investing and Financing Activities:
     Long-term debt issued as payment-in-kind for interest payable              $    482
                                                                                ========
</TABLE>

See notes to condensed consolidated financial statements.


                                       4
<PAGE>   5

                    KRUG INTERNATIONAL CORP. AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                        THREE MONTHS ENDED JUNE 30, 2001
                             (DOLLARS IN THOUSANDS)

NOTE 1. -- BASIS OF PRESENTATION

         The unaudited Condensed Consolidated Financial Statements for the three
months ended June 30, 2001 have been prepared in accordance with Rule 10-01 of
Regulation S-X of the Securities and Exchange Commission and, as such, do not
include all information required by accounting principles generally accepted in
the United State of America. These Condensed Consolidated Financial Statements
should be read in conjunction with the consolidated financial statements
included in KRUG International Corp.'s (the "Corporation") Annual Report on Form
10-K for the fiscal year ended March 31, 2001 filed on June 29, 2001. In the
opinion of management, the Condensed Consolidated Financial Statements, which
are unaudited, include all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly the financial position and results of
operations for the periods indicated. The results of operations for the three
months ended June 30, 2001 are not necessarily indicative of the results that
may be expected for the entire fiscal year or any other interim period.

NOTE 2. - BUSINESS OPERATIONS AND CORPORATE STRATEGY

         The Corporation has redirected its business strategy toward the
operation of community hospitals in the United States. KRUG International Corp.
operates six community hospitals and related businesses which it acquired for
approximately $26,500 on February 1, 2001 (the "SunLink Acquisition"). The
community hospitals are operated by the Corporation's wholly-owned subsidiary,
SunLink Healthcare Corp. ("SunLink"). The Corporation has announced that the
operations of Beldray Limited ("Beldray"), which manufactures and distributes
housewares in the U.K., will be disposed of and Beldray has been reported as a
discontinued operation in the fiscal quarter ended June 30, 2001. The
Corporation has proposed to change its name to SunLink Health Systems, Inc. at
its annual meeting of shareholders on August 20, 2001.

NOTE 3. - DISCONTINUED OPERATIONS

         Housewares Segment - The Corporation has announced that it will dispose
of its U.K. housewares segment, Beldray, to focus management's resources on its
U.S. community hospital business. The Corporation does not currently expect to
receive any net proceeds from the disposal. During the quarter ended June 30,
2001, the Corporation reported a charge for discontinued operations relating to
Beldray of $3,988. The charge was composed of losses from operations of $2,433
(including an asset impairment provision of $2,088 to reduce the carrying value
of Beldray's net assets to net realizable value of $0) and a loss on disposal of
Beldray of $1,556, including $687 for operating losses through the disposal
date. The net current liabilities of discontinued operations of $1,549 at June
30, 2001 represent the reserve for operating losses through sale date and
estimated costs and expenses related to disposal. Revenues of Beldray were
$6,263 and $6,932 for the three months ended June 30, 2001 and 2000,
respectively.


                                       5
<PAGE>   6


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

         Industrial Segment - In fiscal 1989, the Corporation discontinued the
operations of its industrial segment and subsequently disposed of substantially
all related net assets. However, obligations remain relating to product
liability claims for products sold prior to the disposal. A charge of $8 was
recorded in loss from discontinued operations for the quarter ended June 30,
2001 for pension expense related to this discontinued segment.

         The Corporation has over the past twelve years discontinued operations
relating to its former industrial, U.K. leisure marine, life sciences and
engineering and U.K. child safety segments as well as its current U.K.
housewares segment. Reserves relating to discontinued operations represent
management's best estimate of the Corporation's liability with regard to the
resolution of all property, product liability and other claims for which the
Corporation believes it may incur liability. These estimates are based on
management's judgments using currently available information as well as in
certain instances consultation with its insurance carriers and legal counsel.
The Corporation historically has purchased insurance policies to reduce certain
of it product liability exposure and anticipates it will continue to purchase
such insurance if available at commercially reasonable rates. While the
Corporation has based its estimates on its evaluation of available information,
it is not possible to predict with certainty the ultimate outcome of many
contingencies relating to discontinued operations. The Corporation intend to
adjust its estimates of the reserves as additional information is developed and
evaluated. However, management believes that the final resolution of these
contingencies will not have a material adverse impact on the financial position,
cash flows, or results of operations of the Corporation.

NOTE 4. - RECENT ACCOUNTING PRONOUNCEMENT

         In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141 ("SFAS 141"), "Business
Combinations". SFAS 141 requires the purchase method of accounting for business
combinations initiated after June 30, 2001 and eliminates the
pooling-of-interests method. The Corporation does not believe the adoption of
SFAS 141 will have a material impact on its consolidated financial statements.
In July, 2001, the FASB issued Statement of Financial Accounting Standards No.
142 ("SFAS 142"), "Goodwill and Other Intangible Assets", which the Corporation
will adopt July 1, 2002. SFAS 142 requires, among other things, the
discontinuance of goodwill amortization. In addition, the standard includes
provisions for the reclassification of certain existing recognized intangibles,
reassessment of the useful lives of existing recognized intangibles,
reclassifications of certain intangibles out of previously reported goodwill and
the identification of reporting units for purposes of assessing potential future
impairment of goodwill. SFAS 142 also requires the Corporation to complete a
transitional goodwill impairment test six months from the date of adoption. The
Corporation does not believe the adoption of SFAS 142 will have a material
impact on its consolidated financial statements.


                                       6
<PAGE>   7



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 5. -LONG-TERM DEBT

<TABLE>
<CAPTION>
                                                      JUNE 30,         MARCH 31,
                                                        2001             2001
                                                      --------         --------

         <S>                                          <C>              <C>
         Senior subordinated note, net of
              unamortized discount                    $ 14,929         $ 14,476
         Short-term bridge loan                          4,000            4,000
         Senior subordinated zero coupon note,
              net of unamortized discount                1,477            1,437
                                                      --------         --------
                                                      $ 20,406         $ 19,913
         Less contractual current maturities            (4,000)          (4,000)
                                                      --------         --------
                                                      $ 16,406         $ 15,913
                                                      ========         ========
</TABLE>

         In connection with the SunLink Acquisition, the Corporation entered
into an 8.5% senior subordinated note in the face amount of $17,000 and a senior
subordinated zero coupon note in the face amount of $2,000, both with the
seller. The senior subordinated note is due on January 31, 2006 with interest
payable semi-annually either in cash or additional promissory notes through
February 1, 2003 and in cash thereafter. An additional promissory note of $482
for interest from February 1, 2001 through May 31, 2001 was issued June 1, 2001
and the accrued interest payable at June 30, 2001 of $124 is included in the
senior subordinated note. Accrued interest of $237 as of March 31, 2001 was
included in the senior subordinated note at that date. The stated interest rate
of 8.5% on the senior subordinated note was considered a below-market interest
rate; therefore, the note was discounted to market value at an effective
interest rate of 12.3%. The original discount recorded on the senior
subordinated note was $2,809. The unamortized debt discount on the senior
subordinated note was $2,676 and $2,761 at June 30, 2001 and March 31, 2001,
respectively. The purchase agreement for the six hospitals includes a potential
adjustment to the senior subordinated note to the extent working capital at the
purchase date is finally determined to be greater or lesser than an agreed-upon
amount.

         The senior subordinated zero coupon note is due January 31, 2004. The
interest rate on the senior subordinated zero coupon note was considered less
than market value; therefore, the note was discounted to a market interest rate
of 11.3%. The original issue discount on the senior subordinated zero coupon
note was $594. The unamortized debt discount on the senior subordinated zero
coupon note was $523 and $563 at June 30, 2001 and March 31, 2001, respectively.

         The discounts on the long-term debt were independently determined by
the Corporation based on high-yield debt instruments of similar health care
providers and are being amortized over the term of the specific debt instrument
using the effective interest method. For the three months ended June 30, 2001,
the Corporation recognized amortization expense on the discounts of $125.

         The loan agreement pursuant to which the senior subordinated note and
the senior subordinated zero coupon note were issued requires that SunLink grant
to the lender a security interest in and mortgage on collateral consisting of
all SunLink's and its subsidiaries' real and personal property. However, the
loan agreement also requires that the lender release the collateral if SunLink
incurs senior indebtedness that meets certain conditions. The $4,000 short-term
bridge loan satisfied these conditions. Consequently, the senior subordinated
note and the


                                       7
<PAGE>   8

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

senior subordinated zero coupon note are not presently collateralized. Upon
repayment of the short-term loan, SunLink will be required to secure the senior
subordinated note and the senior subordinated zero coupon note unless SunLink
enters into a new loan for senior indebtedness meeting certain conditions. Also,
each of the individual hospital subsidiaries of SunLink is a guarantor of these
notes. Further, these notes are subordinate in payment and collateral to all
defined senior indebtedness of SunLink which in the aggregate does not exceed
$15,000, other than debt incurred in connection with future acquisitions.

         The Corporation also entered into a short-term bridge loan with three
separate private equity funds in the amount of $4,000, which is due February 1,
2002. The bridge loan has an interest rate of prime plus 5.5% (12.25% at June
30, 2001); however, the interest rate escalates, beginning August 2, 2001, to
prime plus 10.5%, and then increases monthly by 2% to a maximum rate of prime
plus 20.5% at January 2, 2002. The short-term bridge loan is secured by a pledge
of the real and personal property as well as the capital stock owned by SunLink
or its subsidiaries. Each of the hospital subsidiaries of SunLink is a guarantor
of the bridge loan.

NOTE 6. -- COMPREHENSIVE LOSS

         Comprehensive loss for the Corporation includes foreign currency
translation and minimum pension liability adjustments. Total comprehensive loss
for the following periods was as follows:

<TABLE>
<CAPTION>
                                                       THREE MONTHS ENDED
                                                   ------------------------
                                                   JUNE 30,         JUNE 30,
                                                     2001            2000
                                                   -------          -------
         <S>                                       <C>              <C>
         Net loss:                                 $(4,316)          $(218)
         Other comprehensive
          Income net of tax:
            Change in equity due to
               Foreign currency
                  translation adjustments               (8)           (206)


                                                   -------           -----

         Comprehensive loss                        $(4,324)          $(424)
                                                   =======           =====
</TABLE>


                                       8
<PAGE>   9




ITEM 2.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

                       CONDITION AND RESULTS OF OPERATIONS
          (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND ADMISSIONS DATA)

CERTAIN CAUTIONARY STATEMENTS

         In addition to historical information, Items 1 and 2 of this report
contain certain forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995 including, without limitation,
statements regarding the Corporation's business strategy and management's
outlook for each of its businesses and the sufficiency of the Corporation's
liquidity and sources of capital. These forward-looking statements are subject
to certain risks, uncertainties and other factors which could cause actual
results, performance and achievements to differ materially from those
anticipated, including, without limitation, general economic and business
conditions in the U.S., restrictions imposed by debt agreements, competition in
the community hospital business, governmental budgetary constraints, the
regulatory environment for the Corporation's businesses, consolidation and
acquisition trends in the Corporation's businesses, competition in the
acquisition market including the acquisition of hospitals and healthcare
facilities, changes in exchange rates (including in Europe the effects of the
European currency, the Euro), changes in prices of raw materials and services,
the purchasing practices of significant customers, the availability of qualified
management and staff personnel in each subsidiary, the functionality of the
Corporation's computer systems and claims for product liability from continuing
and discontinued operations. See risks, uncertainties and other factors
disclosed in more detail in the Corporation's Annual Report on Form 10-K for the
year ended March 31, 2001.

CORPORATE BUSINESS STRATEGY

         The Corporation has redirected its strategy toward the operation and
acquisition of community hospitals in the United States. On February 1, 2001,
the Corporation's 100% owned subsidiary, SunLink Healthcare Corp., completed the
purchase of six community hospitals and related businesses for approximately
$26,500. The Corporation has announced its intention to dispose of the
operations of its U.K. subsidiary, Beldray, which manufactures and distributes
housewares in the U.K. The Corporation sold its European child safety
subsidiary, Klippan, on January 29, 2001 and redeployed substantially all of the
net proceeds of the sale to the acquisition of the six U.S. community hospitals.

FINANCIAL SUMMARY

<TABLE>
<CAPTION>
                                                          THREE MONTHS ENDED
                                                               JUNE 30,
                                                     ---------------------------
                                                        2001            2000
                                                     ---------------------------
         <S>                                        <C>                <C>
         NET REVENUES:
         Community hospital segment                  $ 20,527
                                                     ========

         LOSS FROM CONTINUING
         OPERATIONS BEFORE
         INCOME TAXES:

         Community hospital segment                  $    623           $  --
         Corporate expenses (U.S. and U.K.)              (300)           (299)
                                                     --------           -----
                                                         (323)           (299)
         Interest expense                                (667)             --
         Interest income                                   25             142
                                                     --------           -----
         Loss from Continuing Operations
            Before Income Taxes                      $   (319)          $(157)
                                                     ========           =====
</TABLE>


                                       9
<PAGE>   10

RESULTS OF OPERATIONS

         All of the Corporation's net revenues relate to the U.S. community
hospital segment which was acquired February 1, 2001. No net revenues from
continuing operations were reported for the quarter ended June 30, 2000 as the
operations of the Corporation's two business segments during that period, U.K.
housewares and child safety products, are reported in discontinued operations.

         The Corporation's community hospitals reported aggregate net revenues
of $20,527, a total of 3,882 adjusted admissions and revenues of $5,288 per
adjusted admission for the quarter ended June 30, 2001. The Corporation seeks to
increase adjusted admissions by attracting additional physicians to its
hospitals and upgrading the services offered by its hospitals.

         Operating expenses including depreciation were $20,204 and $299 for the
three months ended June 30, 2001 and 2000, respectively. The increase is due to
the inclusion of the community hospital segment in the current year. Salaries,
wages and benefits were 48% of net revenues for the quarter. The Corporation has
undertaken cost control initiatives in each facility to reduce labor cost.
However, the level of hospital and corporate labor cost is expected to remain
relatively high until such time as the Corporation increases net revenues,
whether by internal growth or acquisitions. Provision for bad debts was 13% of
net revenues in the quarter, reflecting the Corporation's high level of self-pay
patients. The Corporation is providing assistance to the hospitals in
implementing additional business office systems and procedures designed to
reduce bad debts. Supplies expense was 11% of net revenues for the quarter,
reflecting a lower level and volume of specialty services performed in the
Corporation's hospitals. The Corporation expects supplies expense to increase as
additional specialty services are provided by its hospitals.

         Interest expense of $667 in the quarter ended June 30, 2001 resulted
from the debt incurred in connection with the community hospitals acquired on
February 1, 2001. Cash paid for interest during the quarter ended June 30, 2001
of $136 was on the short-term loan only.

         No tax expense was recorded for the three months ended June 30, 2001
compared to income tax expense of $62 for the same period of the previous year.
The prior year tax expense was a result of taxable income in the U.K.

         The loss from continuing operations was $319 ($0.06 per share) in the
first quarter of fiscal 2002 compared to a loss from continuing operations of
$219 ($0.04 per share) in the first quarter of fiscal 2001. The operating profit
of $323 for fiscal 2002 resulted from operating profits achieved by the
community hospitals offset by corporate expenses of $300. The prior year
operating loss of $299 resulted from corporate expenses. The loss from
continuing operations increased in the current year primarily due to the net
interest expense of $642 for the current quarter compared to net interest income
of $142 last year. The current year interest expense resulted from debt incurred
in the February 1, 2001 purchase of community hospitals.

LIQUIDITY AND CAPITAL RESOURCES

         The Corporation generated an increase of $929 in cash from operating
activities during the first three months of fiscal 2002 compared to a use of
$910 during the comparable period of fiscal 2001. The cash generated in the
current year resulted primarily from a net decrease in outstanding receivables
of the community hospital segment and interest expense incurred but not


                                       10
<PAGE>   11

paid on long-term debt, offset somewhat by decreased accounts payable. The cash
use in the first quarter of fiscal 2001 resulted from a payment of $500 for U.S.
income taxes and corporate expenses.

         The Corporation expended $718 for capital improvements at its hospitals
during the quarter ended June 30, 2001. In addition to routine capital
expenditures of $439 during the quarter, primarily new and replacement
equipment, the Corporation expended $234 for renovation and upgrading of patient
service areas at Chestatee Regional Hospital in Dahlonega, Georgia and $46 for
upgrades to labor and delivery suites and equipment at Mountainside Medical
Center in Jasper, Georgia. Management believes an attractive physical facility
assists in recruiting quality staff and physicians as well as attracting
patients, and the Corporation expects to expend approximately $2,500 for capital
expenditures during the twelve months ended June 30, 2002.

         At June 30, 2001, the Corporation had outstanding U.S. debt of $20,406,
all of which was incurred in connection with the February 1, 2001 purchase of
the six community hospitals and related businesses.

         The U.S. debt includes a short- term bridge loan of $4,000, a seller
financed balloon note of $14,929 and a seller financed zero coupon note of
$1,477. The short-term bridge loan was made to SunLink by a group of three
private equity funds and matures February 1, 2002. The short-term loan initially
bears interest at the prime rate plus 5.5% (12.25% at June 30, 2001) and the
rate escalates beginning August 2, 2001 to prime plus 10.5% and monthly
thereafter in increments to a rate of prime plus 20.5% beginning January 2,
2002. It is management's intention to reduce and or refinance the bridge loan
prior to maturity and is currently evaluating refinancing options with several
potential lenders.

         The balloon note, due January 31, 2006, has a face amount of $17,000
and a stated interest rate of 8.5% which, because it was considered a below
market interest rate, has been discounted for financial reporting purposes to a
market interest rate of 12.3%. The balloon note has a payment-in-kind (PIK)
feature for interest accrued through January 31, 2003. Interest due and payable
through that date may be paid in additional balloon notes due in 2006 and the
Corporation presently intends to issue PIK notes for interest due through
January 31, 2003. An additional promissory note was issued June 1, 2001 for $482
for interest from February 1, 2001 to May 31, 2001 and the interest accrued
through June 30, 2001 of $124 has been included in the principal amount of the
balloon note at June 30, 2001. The purchase agreement for the six hospitals
provides for an adjustment to the balloon note to the extent working capital at
the purchase date was greater or lesser than an agreed upon amount. The
Corporation has submitted to the seller a working capital adjustment to reduce
the balloon note by $1,300. The seller has objected to the adjustment and the
Corporation and seller currently are seeking to conclude the working capital
settlement under the dispute provisions of the sale agreement. No adjustment for
any working capital settlement has been made to the balloon note at June 30,
2001.

         The zero coupon note is due January 31, 2004, has a face amount of
$2,000, and has been discounted to a market interest rate of 11.3%. The
principal amount of the zero coupon note is subject to reduction for certain
indemnified items pursuant to the purchase agreement. The Corporation has not to
date made any claims for reduction of the zero coupon note.


         The Corporation believes it has adequate financing and liquidity in the
U.S. to support its current level of operations. The Corporation is, however, in
the process of evaluating the working capital and capital project needs of its
new healthcare subsidiary and seeking third-party


                                       11
<PAGE>   12


refinancing of the $4,000 short-term bridge loan. However, there can be no
assurance that the Corporation will be able to refinance this debt. The
Corporation has decided to dispose of its U.K. housewares business and it is
currently uncertain whether any additional financing from the U.S. will be
required prior to its disposal. The Corporation does not currently expect to
receive any net proceeds from the disposal.

         Contingent obligations remain relating to product liability claims for
products manufactured and sold before the disposal of the Corporation's
discontinued industrial segment in fiscal 1989. The Corporation reviewed the
provision for losses from such discontinued operations during the quarter and no
changes were deemed necessary.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK


         The Corporation is exposed to interest rate changes, primarily as a
result of our U.S. short-term bridge loan, U.K. term debt and U.K. working
capital line bearing interest based upon floating rates. No action has been
taken to cover interest rate market risk, and the Corporation is not a party to
any interest rate market risk management activities.

         The Corporation also is exposed to risk of changes in foreign currency
exchange rates as it translates the results of its U.K. operations from U.K.
pounds to U.S. dollars for the Corporation's consolidated financial statements.


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PART II.  OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

         The Federal government (the "Government") reviewed certain medical
records of two of the SunLink hospitals, Chestatee Regional Hospital
("Chestatee") and Mountainside Medical Center ("Mountainside") (collectively,
the "Hospitals"), prior to their purchase by SunLink, as a part of a nationwide
Medicare audit project regarding hospital (inpatient) billing practices with
respect to the diagnosis of pneumonia. The review sought to determine whether
claims were improperly coded for Medicare purposes and whether the Hospitals'
submission of those claims violated applicable law including the Federal False
Claims Act. 31 U.S.C. ss.ss. 3729 et. seq. Based upon its review, the Government
has projected that 103 Medicare claims were coded improperly by Chestatee and 91
Medicare claims were coded improperly by Mountainside. SunLink believes the
review and analysis of all medical records identified by the Government has been
substantially completed, and interviews have been conducted by both the U.S.
Attorney's Office for the Northern District of Georgia and the U.S. HHS, Office
of the Inspector General. Based upon the Government's projections and the
application of the multiple damage provisions of the Federal False Claims Act,
the Corporation estimates that, if the Government's projections were
substantiated, the total potential aggregate liability of the Hospitals in this
matter could be as high as $1.5 million. The Corporation disputes and intends to
vigorously resist all claims based upon any such allegedly improper coding and
believes the Government's projections do not accurately represent the facts.
Settlement discussions are underway between SunLink and the Government.
Government representatives informally have indicated that the Government most
likely would not pursue a false claims charge, require either of the Hospitals
to enter into a corporate integrity agreement, or seek double or treble damages
providing a settlement is reached between the parties. To management's
knowledge, no audit has been conducted by the Government of any other SunLink
facility in connection with pneumonia coding investigations. Under the terms of
the Stock Purchase Agreement between SunLink and NetCare Health Systems, Inc.
("Seller") for SunLink's purchase of the six community hospitals, SunLink would
be responsible for any settlement relating to the claims against the Hospitals
arising prior to their purchase by SunLink, but has limited right of
indemnification from the Seller for any future claims which were not disclosed
at the date of purchase.

         The Corporation is also subject to various claims and suits arising in
the ordinary course of business, including claims for personal injuries and
other matters. Such pending claims and suits are either insured or, in the
opinion of management, the ultimate resolution of such claims and suits should
not have a material adverse effect on the Corporation's results of operations or
financial condition.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

         None.


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<PAGE>   14


                                   SIGNATURES


         Pursuant to the requirements of the Securities Exchange Act of 1934,
KRUG International Corp. has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.

                                         KRUG International Corp.

                                         By: /s/ Mark J. Stockslager
                                             -------------------------
                                              Mark J. Stockslager
                                              Principal Accounting Officer





Dated:   August 14, 2001


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