FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20459 Quarterly Report under Section 13 or 15 (d) of the Securities Act of 1934 For Quarter Ended March 31, 1998 Commission File No. 0-3680 - -------------------------------- ------ Industrial Acoustics Company, Inc. - ------------------------------------------------------------------------------- New York 13-1713318 - ------------------------------------------------------------------------------- (State or other jurisdiction of (IRS employer Incorporation or organization) Identification #) 1160 Commerce Avenue, Bronx, New York 10462 - ------------------------------------------------------------------------------- (Address of Principal Executive Offices) (Zip Code) (718) 931-8000 - ------------------------------------------------------------------------------- (Registrant's Telephone Number, including Area Code) - ------------------------------------------------------------------------------- (Former Name, Former Address and Former Fiscal Year, if changed from last report) 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 the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date. 2,978,961 PART 1 - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS INDUSTRIAL ACOUSTICS COMPANY, INC. & SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME FOR THE QUARTERS ENDED MARCH 31, 1998 AND 1997 Unaudited March 31 1998 1997 ---- ---- (In thousands, except per share data) REVENUES Net Sales $ 15,373 $ 15,361 Interest Income 427 386 Other (Net) 46 126 -------- -------- 15,846 15,873 -------- -------- COST AND EXPENSES Cost of Products Sold 14,908 14,130 Selling General and Administrative Expenses 3,279 3,055 Interest 216 217 -------- -------- 18,403 17,402 -------- -------- (Loss) before income taxes (2,557) (1,529) Benefit from income taxes 823 117 -------- -------- Net Loss ($ 1,734) ($ 1,412) ======== ======== Basic and Diluted Net Loss per Common Share ($ 0.58) ($ 0.47) ======== ======== Dividends per Common Share $ 0.10 Weighted Average Number of Common Shares Outstanding Basic 2,979 2,979 Diluted 2,979 2,979 See notes to the condensed consolidated financial statements INDUSTRIAL ACOUSTICS COMPANY, INC. & SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS Unaudited March 31, 1998 December 31, 1997 -------------- ----------------- (in thousands, except per share data) ASSETS CURRENT ASSETS Cash and Cash Equivalents $ 1,755 $ 3,032 Short-term Investments, available for sale 647 457 Receivables 16,393 17,843 Costs and Estimated Earnings in Excess Of Billings on Uncompleted Contracts 7,194 6,774 Inventories 5,697 5,856 Deferred Income Taxes 220 215 Prepaid Expenses 1,550 1,609 ------- ------- TOTAL CURRENT ASSETS 33,456 35,786 MARKETABLE SECURITIES, available for sale 19,753 22,328 PROPERTY, PLANT AND EQUIPMENT - Net 13,793 12,540 DEFERRED INCOME TAXES 1,710 975 OTHER ASSETS 2,646 2,633 ------- ------- TOTAL ASSETS $71,358 $74,262 ======= ======= See notes to the condensed consolidated financial statements INDUSTRIAL ACOUSTICS COMPANY, INC. & SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS March 31, 1998 December 31, 1997 -------------- ----------------- (in thousands, except per share data) LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Loans Payable $ 10,234 $ 9,656 Accounts Payable and Accrued Expenses 13,627 16,167 Income Taxes 193 Customer Deposits 574 730 Current Portion of Long-term Debt and Capital Lease Obligations 280 78 Billings in Excess of Costs on Uncompleted Contracts 1,611 1,491 -------- -------- TOTAL CURRENT LIABILITIES $ 26,326 $ 28,315 LONG TERM DEBT AND CAPITAL LEASE OBLIGATIONS 3,795 3,055 DEFERRED INCOME TAXES 685 687 DEFERRED COMPENSATION 1,331 1,339 -------- -------- TOTAL LIABILITIES $ 32,137 $ 33,396 ======== ======== COMMITMENTS SHAREHOLDERS' EQUITY Common Stock, par value $0.10 a share; authorized 5,000 shares; issued and outstanding 2,979 in 1998 and 1997 excluding 87 shares in treasury at par value 298 298 Additional Paid-in Capital 2,223 2,223 Accumulated other comprehensive income(loss): Cumulative Currency Translation Adjustments (25) (117) Net unrealized gain on marketable securities 104 107 Retained Earnings 36,621 38,355 -------- -------- TOTAL SHAREHOLDERS' EQUITY $ 39,221 $ 40,866 -------- -------- TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $ 71,358 $ 74,262 ======== ======== See notes to the condensed consolidated financial statements INDUSTRIAL ACOUSTICS COMPANY, INC. & SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE QUARTERS ENDED MARCH 31, 1998 and 1997 Unaudited March 31, 1998 March 31, 1997 -------------- -------------- Net cash used in operating activities $(3,708) $(1,479) Investing Activities Purchase of property, plant and equipment, net (491) (425) Sale of investments and marketable securities 3,053 393 Purchase of investments and marketable securities (674) (819) ------- ------- Net cash provided by (used in) investing activities 1,888 (851) ------- ------- Financing Activities Dividends paid 0 (298) Short-term Loans payable, net 500 2,000 Payments on long term debt and capital less obligations 0 (19) ------- ------- Net cash provided by financing activities 500 1,683 ------- ------- Effect of exchange rate on changes on cash 43 (33) ------- ------- Decrease in Cash and Cash Equivalents (1,277) (680) Cash and cash equivalents at beginning of period 3,032 1,254 ------- ------- Cash and cash equivalents at end of period $ 1,755 $ 574 ======= ======= Supplemental disclosure of cash flow information: Non cash investing and financing activities: Assets acquired by incurring long term debt 4,028 0 Capitalized lease obligations terminated (3,086) 0 See notes to the condensed consolidated financial statements INDUSTRIAL ACOUSTICS COMPANY, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q of Regulation S-X. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. All such adjustment are of a normal recurring nature including changes in contract estimates, which, for the current quarter, resulted in Revenue and Profit decreases of $1,109,000. Operating results for the three month period ended March 31, 1998 are not necessarily indicative of the results that may be expected for the year ending December 31, 1998. The Company adopted Statement of Financial Accounting Standard ("SFAS") No. 130, "Reporting Comprehensive Income", effective January 1, 1998. The year end consolidated balance sheet was derived from audited financial statements, but, as presented here, does not include all disclosures required by generally accepted accounting principles. The interim consolidated statements should be read in conjunction with financial statements and footnotes included in the Company's annual report on Form 10-K for the year ended December 31, 1997. 2. INVENTORIES Inventories are comprised of the following: March 31, 1998 December 31, 1997 -------------- ----------------- Materials and Supplies 2,270 2,246 Work in Process 3,427 3,610 ----- ----- Total 5,697 5,856 3. LONG TERM DEBT On March 27, 1998, the Company purchased, for $4,027,850, the 72,500 square feet of manufacturing space which it previously leased from PDJ Simone Realty Company, L.P. The purchase price was funded by a loan from Chase Manhattan Bank. The loan was collateralized by a mortgage on the Company's real property in the Bronx, New York. Interest is charged at the floating 30 day LIBOR rate (initial rate 7.4375%) with monthly interest payments and quarterly payments of principal are payable (in the amount of $67,130) for ten years. At the end of the ten year period, the remaining principal is due. 4. RECENTLY ISSUED ACCOUNTING STANDARDS In June 1997, the Financial Accounting Standards Board ("FASB") SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information". SFAS No. 131 establishes accounting standards for the way that public business enterprises report selected information about operating segments and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. SFAS No. 131 is required to be adopted for the year ended December 31, 1998. The Company is currently evaluating the impact, if any, of SFAS No. 131. ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Although consolidated revenues for the quarter ended March 31, 1998 are approximately the same as the first quarter of 1997, revenues at IAC Ltd. increased $754,000 (19%) over comparable revenues in the prior year (Standard and Special Products revenues increased 18% and 16%, respectively). However, the increased revenues, at IAC Ltd., are offset by a decrease in domestic revenues. This decrease is attributable to changes in cost estimates to complete certain major contract in the Architectural and Special Products Departments (such changes adversely impacted domestic revenues and profits by $1,109,000) and a lack of volume in the Special Products Department. The Company has filed claims and anticipates that it will recover a portion of the additional costs incurred. However, the future impact of any recoveries cannot be determined and, therefore, has not been included in the results for the period. As a result, Architectural and Special Products revenues decreased by 11% and 26%, respectively and revenues in the Air Conditioning and Industrial Departments were approximately the same as the first quarter of 1997. However, revenues in the Medical and Door Departments increased 10% and 138%, respectively. Interest income, at $427,000, was 11% higher than 1997 and other income decreased $80,000 primarily due to gains on the sale of investments, recorded in 1997, which did not recur in 1998. IAC Ltd.'s Cost of products sold, as a percentage of net sales, was 79% compared to 87% for the same period last year. Domestically, Cost of products sold was 105% compared to 90% for the same period last year as a result of the estimate changes noted above. Selling, general and administrative expenses (excluding interest expense) increased $224,000 (7%). A provision of $681,000 has been made for Domestic severance costs. However, the quarter benefited from a $42,000 gain on exchange rates (compared to a $190,000 loss in 1997) and IAC Ltd. was adversely affected, in 1997, by approximately $150,000 in costs associated with overhead reductions which did not recur in 1998. Interest expense was approximately the same as the first quarter of 1997. ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - contd. Net cash used in operating activities was $3,708,000 due primarily to the losses incurred and the large reduction in accounts payable and accrued expenses. Operating activities were financed by the sale of investments and an increase in short terms loans. The Company's funds, which consist of cash and cash equivalents, short term investments and marketable securities decreased 14% from $25,817,000 to $22,155,000 and loans payable and capital lease obligations (both long and short term) increased $1,520,000. Shareholders' equity decreased by $1,734,000 as a result of the first quarter loss which was partially offset by unrealized gains on currency translation of $92,000. Order intake for the quarter ended March 31, 1998 was $13,096,000 compared to $16,436,000 for the same period last year and revenue backlog at March 31, 1998 was $44,859,000 compared to $46,673,000 at March 31, 1997. "SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995: This report contains forward-looking statements. For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words "believes," "anticipates," "plans,""expects" and similar expressions are intended to identify forward looking statements. There are a number of factors that could cause the Company's actual results to differ materially from those indicated by such forward looking statements. These factors include, without limitation, general economic conditions in the Company's markets, including inflation, recession, interest rates and other economic factors, especially in the United States and the United Kingdom but also including other areas of the world where the Company markets its products, any loss of the services of the Company's key management personnel, changes in the cost and availability of raw materials, fluctuations in exchange rates relative to the US dollar for currencies of the United Kingdom and other nations where the Company does business, casualty to or disruption of the Company's production facilities and equipment, delays and disruptions in the shipment of the Company's products and raw materials, and other factors that generally affect the business of manufacturing companies with international operations. YEAR 2000 COMPLIANCE The Company has assessed the potential issues associated with programming codes in its existing computer systems with respect to a two-digits year value for 2000 and believes that addressing such issues is not a material event or uncertainty that would cause reported financial information not to be indicative of future operating results or financial condition. The Company is currently upgrading its accounting software and expects this to be completed by the third quarter of 1999. PART II- OTHER INFORMATION ITEM 1 - LEGAL PROCEEDINGS The Company is not involved in any material legal proceedings. ITEM 5 - OTHER MATERIALLY IMPORTANT FACTS None. ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K (a) All required exhibits are incorporated by reference from the Form 10-K filed for the year ended December 31, 1997. (b) On April 1, 1998, a Form 8-K was filed in connection with the change of control of the Company and the change of Directors. (c) On May 4, 1998, a Form 10-K/A was filed. SIGNATURE Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. INDUSTRIAL ACOUSTICS COMPANY, INC. Date: May 15,1997 By: /s/ Robert N. Bertrand --------------------------------- Robert N. Bertrand Senior Vice President, Secretary Date: May 15, 1997 By: /s/ T. Joseph Looney --------------------------------- T. Joseph Looney Vice President - Finance, Treasurer