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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for use of the Commission only (as permitted by Rule
14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section240.14a-11(c) or
Section240.14a-12
INDUSTRIAL ACOUSTICS COMPANY, INC.
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(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/ / No fee required.
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1)
and 0-11.
1) Title of each class of securities to which transaction applies:
Common Stock, par value $.10
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2) Aggregate number of securities to which transaction applies:
627,307
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3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
$11.00
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4) Proposed maximum aggregate value of transaction:
$6,900,377
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5) Total fee paid:
$1,380
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/X/ Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
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2) Form, Schedule or Registration Statement No.:
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3) Filing Party:
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4) Date Filed:
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INDUSTRUAL ACOUSTICS COMPANY, INC.
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
OCTOBER 29, 1998
NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders of INDUSTRIAL
ACOUSTICS COMPANY, INC. will be held at the offices of the Company, 1160
Commerce Avenue, Bronx, New York on October 29, 1998 at 10:00 a.m., New York
time, for the following purposes:
(1) to consider and vote upon a proposal to adopt an Agreement and Plan of
Merger pursuant to which (a) IAC Holdings Corp. ("Holdings"), a Delaware
corporation, will be merged with and into Industrial Acoustics Company,
Inc. (the "Company"), a New York corporation, and (b) each outstanding
share of common stock of the Company ("Common Stock") owned by Holdings
will be cancelled and each outstanding share of Common Stock owned by
shareholders other than Holdings will be converted into the right to
receive $11.00 per share in cash and the outstanding Shares of Holdings
will be converted into new shares of the Common Stock; and
(2) to transact such other business as may properly come before the meeting
and at any postponements or adjournments thereof.
Pursuant to the By-Laws of the Company, the Board of Directors has fixed the
close of business on September 30, 1998 as the record date for the determination
of shareholders entitled to notice of and to vote at the meeting and at any
postponements or adjournments thereof.
If you cannot be present in person please complete, date, sign, and return
the accompanying Proxy without delay. A business reply envelope which does not
require any postage, if mailed in the United States, is enclosed for your
convenience.
Dated: September 30, 1998
By order of the Board of Directors
INDUSTRIAL ACOUSTICS COMPANY, INC.
Robert N. Bertrand
Secretary
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INDUSTRIAL ACOUSTICS COMPANY, INC.
1160 COMMERCE AVENUE
BRONX, NEW YORK 10462
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PROXY STATEMENT
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SPECIAL MEETING OF SHAREHOLDERS
OCTOBER 29, 1998
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THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE FAIRNESS OR MERITS OF
SUCH TRANSACTION NOR UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION CONTAINED
IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
INTRODUCTION AND SUMMARY
PLACE; RECORD DATE; QUORUM; SOLICITATION. This Proxy Statement is furnished
in connection with the solicitation by Industrial Acoustics Company, Inc., a New
York corporation (the "Company" or "IAC") for use at a special meeting (the
"Meeting") of the Company's shareholders (the "Shareholders") to be held on
October 29, 1998 at 10:00 a.m. at the Company's principal executive offices
located at 1160 Commerce Avenue, Bronx, New York, 10462, and at any
postponements or adjournments thereof. The approximate date on which this
definitive Proxy Statement and the accompanying proxy are first being mailed to
shareholders is September 30, 1998.
Only Shareholders of record at the close of business on September 30, 1998
(the "Record Date"), will be entitled to vote at the Meeting. On that date,
there were 2,981,211 shares of the Common Stock of the Company, par value $.10
(the "Common Stock") outstanding and entitled to vote at the Meeting held by
approximately 600 shareholders of record. Based on a statement filed by IAC
Holdings Corp. ("Holdings") (a holding company whose principal assets consist of
Common Stock of the Company and whose principal executive offices are located at
100 First Stamford Place, Stamford, Connecticut 06902), on Schedule 13D, the
Company believes that Holdings owns 2,353,904 shares of Common Stock,
representing approximately 79% of the outstanding shares of Common Stock. The
sole shareholder of Holdings is International Mezzanine Investment, N.V.
("IMI"), a Netherlands Antilles corporation whose principal executive offices
are located at John B. Gorsiraweg 14 Curacao, Netherlands Antilles. The presence
at the Meeting, in person or by proxy, of a majority of the outstanding shares
of Common Stock entitled to vote shall constitute a quorum for the meeting.
Common Stock represented by properly executed proxies, unless previously
revoked, will be voted at the Meeting in accordance with the instructions
thereon. Each proxy granted may be revoked by a Shareholder giving such proxy at
any time before it is exercised by filing with the Secretary of the Company a
revoking instrument or a duly executed proxy bearing a later date. The powers of
any proxy holder will be suspended if the person who executed the proxy held by
such proxy holder attends the Meeting in person and so requests. Attendance at
the Meeting will not in itself constitute revocation of the proxy.
The Company will bear the cost of soliciting proxies in the form enclosed.
In addition to solicitation by mail, proxies may be solicited personally, or by
telephone, or by employees of the Company, without additional compensation for
such services. The Company may reimburse brokers holding Common Stock
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in their names or in the names of their nominees for their expenses in sending
proxy material to the beneficial owners of such Common Stock.
NO PERSONS HAVE BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED OR INCORPORATED BY REFERENCE IN THIS
PROXY STATEMENT IN CONNECTION WITH THE SOLICITATION OF PROXIES AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED.
PURPOSE; MERGER AGREEMENT. At the Meeting, Shareholders will consider and
vote upon a proposal to adopt an Agreement and Plan of Merger dated as of May
20, 1998 (the "Merger Agreement") between the Company and Holdings. The Merger
Agreement provides, subject to the approval of Shareholders at the Meeting, for
the merger of Holdings with and into the Company, with the Company being the
surviving corporation (the "Merger"). Approval of the Merger Agreement requires
the affirmative vote of the holders of two-thirds of the outstanding shares of
Common Stock. Since Holdings owns approximately 79% of the Common Stock,
adoption of the Merger Agreement is assured if Holdings votes in its favor.
Holdings has indicated its intention to vote in favor of the Merger. Pursuant to
the Merger Agreement, each outstanding share of Common Stock (other than Common
Stock held by the Company as treasury stock and Common Stock held by Holdings),
will be converted into the right to receive $11.00 per share in cash (the
"Merger Consideration"). Outstanding shares of common stock of Holdings will be
converted into the right to receive newly issued shares of common stock of the
Company. See "The Merger Agreement." A copy of the Merger Agreement is attached
to this Proxy Statement as Exhibit A.
Since the Common Stock is designated as a national market system security on
the Nasdaq National Market, pursuant to Section 910 of the New York Business
Corporation Law (the "BCL"), appraisal rights will not be available to
shareholders of the Company. Accordingly, although a Shareholder who objects to
the Merger may vote against its adoption, since Holdings has indicated that it
will vote in favor of the Merger, the approval by Shareholders is assured and an
objecting Shareholder's available alternative may be limited to selling the
Shareholder's Common Stock before the Merger takes place.
The Merger Agreement provides that as a condition to consummation of the
Merger, Holdings obtain the funds necessary to enable the Company to pay the
Merger Consideration. The Company has been informed by Holdings that Holdings
will amend its existing loan agreement with International Mezzanine Capital,
B.V. ("IMC"), an affiliate of Holdings dated as of March 19, 1998 to permit
Holdings to borrow funds sufficient to pay all or a portion of the Merger
Consideration and that the balance of the Merger Consideration (if any) will be
made available to Holdings by way of a capital contribution by Holdings' sole
shareholder, IMI. The aggregate amount of the Merger Consideration to be paid to
the Company's Shareholders is expected to be $6,900,377.
RECENT STOCK PRICES. On September 24, 1998, the high and low bid prices for
the Common Stock as reported on the Nasdaq National Market were both $9 7/8,
respectively, and the last reported sale price was $9 7/8 per share. The last
reported trade of the Common Stock prior to the announcement of the Merger took
place on May 13, 1998 at a price of $9 1/4. The closing bid price of the
Company's Common Stock on May 19, 1998, the day before the Merger was announced
to the public was $9 1/4. See "Stock Prices and Suspension of Dividends."
RECOMMENDATION OF THE BOARD OF DIRECTORS. The Board of Directors of the
Company has determined that the Merger Agreement is fair to, and in the best
interests of, the Company and its Shareholders and has unanimously approved and
adopted the Merger Agreement. Certain members of the Board of Directors have
conflicts of interest. See "Interests of Certain Persons in the Merger;
Conflicts of Interest." See "Special Factors -- Acquisition; Purpose of the
Merger; Fairness Factors."
Subsequent to its initial determination, the Board of Directors received the
opinion of Laidlaw & Co. as to the fairness of the Merger Consideration and
thereafter the Board unanimously confirmed its
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conclusion that the Merger Agreement is fair to, and in the best interests of
the Company and its Shareholders. See "Special Factors--Laidlaw Review."
CERTAIN RESULTS OF THE MERGER. As a result of the Merger, Shareholders of
the Company will no longer have any continuing interest in the Company, the
Company's Common Stock will no longer be traded on the Nasdaq National Market
and the registration of the Company's Common Stock under the Securities Exchange
Act of 1934, as amended (the "Exchange Act") and the Company's reporting
obligations thereunder will be terminated. After giving effect to the Merger,
IMI, the sole shareholder of Holdings, will be the sole shareholder of the
Company.
INTERESTS OF CERTAIN PERSONS IN THE MERGER. Messrs. Maarten D. Hemsley,
Robert M. Davies and Robert N. Haidinger (Directors of the Company) are
directors of Holdings. Messrs. James A. Read and Martin P. Dineen (Directors of
the Company) are officers and directors of Holdings. Mr. Haidinger is the
president of a company in which IMI, the sole shareholder of Holdings, has a
substantial interest. Menai Group, LLC and Bryanston Management Ltd (companies
which are wholly owned by Messrs. Davies and Hemsley, respectively) are partners
in IAC Acquisition Partners ("IAC Partners"), a partnership which provides
advisory and consulting services to Holdings. See "Interests of Certain Persons
in the Merger; Conflicts of Interest."
EXCHANGE OF CERTIFICATES. If the Merger is consummated, the Company will
send instructions to Shareholders regarding the surrender of stock certificates.
SHAREHOLDERS SHOULD NOT SUBMIT ANY STOCK CERTIFICATES AT THE PRESENT TIME.
EFFECTIVE TIME OF THE MERGER. The Merger will become effective upon the
filing of a certificate of merger with the Secretary of State of New York (the
"Effective Time"). The filing will occur after all conditions to the Merger
contained in the Merger Agreement have been satisfied or waived. The Company and
Holdings anticipate that the Merger will be consummated as promptly as
practicable following the Meeting.
CONDITIONS TO CONSUMMATION OF THE MERGER. The respective obligations of the
Company and Holdings to consummate the Merger are subject to the satisfaction or
waiver at or prior to the Effective Time of the following conditions, among
others: (i) adoption of the Merger Agreement by the holders of the Company's
Common Stock; (ii) the absence of any statute, rule, injunction or order that
would prevent consummation of the Merger; (iii) the receipt of all required
authorizations, consents and approvals; (iv) Holdings having obtained funds or
arranged financing sufficient to enable the Company to pay the Merger
Consideration and (v) the performance of and compliance with all agreements and
obligations of the parties under the Merger Agreement.
TERMINATION OF THE MERGER AGREEMENT. The Merger Agreement may be terminated
and the Merger abandoned at any time prior to the Effective Time by the Board of
Directors of the Company or by Holdings. See "The Merger Agreement --
Termination."
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SPECIAL FACTORS
ACQUISITION; PURPOSE OF THE MERGER; FAIRNESS FACTORS. On March 19, 1998,
Holdings became the owner of 2,353,904 shares of the Common Stock, or
approximately 79% of the issued and outstanding shares of the Common Stock of
the Company. Holdings acquired 1,914,429 of such shares from Martin Hirschorn,
the Company's founder and, until May 1998, its Chief Executive Officer, and
439,475 of such shares from certain other management and institutional
shareholders, in each case for $11.00 per share. On March 19, 1998, Messrs. John
M. Handley, Michael W. Hirschorn, Arnold W. Kanarek and Jorgen Svendsen resigned
from the Board of Directors of the Company and on March 20, 1998 the remaining
Directors appointed Messrs. Robert M. Davies, Martin P. Dineen, Robert N.
Haidinger, Maarten D. Hemsley and James A. Read as Directors of the Company. See
"--Background of Change of Control."
The Board of Directors, after Holdings' acquisition of 79% of the Common
Stock, considered the position, prospects and future of the Company generally
and as a company with public shareholders specifically and discussed such
matters with representatives of Holdings. For the reasons discussed below, the
Board of Directors determined in May of 1998 that it was not in the best
interests of the Company or its Shareholders for IAC to remain a company with
public shareholders and therefore the Board considered the proposed merger of
Holdings with and into the Company, and concluded that such Merger would be both
fair and in the best interests of the Company, its employees and both its
affiliated and unaffiliated Shareholders. Certain members of the Board of
Directors have conflicts of interests. See "Interests of Certain Persons in the
Merger; Conflicts of Interest." The same conclusion was reached by Holdings, and
by those members of the Board of Directors affiliated with Holdings, IMI, IMC
and IAC Partners. However, although none of IMI, IMC or IAC Partners or their
respective executive officers, directors or partners made any recommendation in
support of or opposed to the Merger (other than the recommendation of the Merger
as directors by those persons who are also directors of the Company), based on
the same factors considered by the Board discussed below, each of IMI, IMC and
IAC Partners believes that the Merger is fair to and in the best interests of
the Company, its employees and both its affiliated and unaffiliated
shareholders.
The Board did consider the fact that the unaffiliated shareholders would be
receiving less than book value for their shares and that if the Company's recent
trend of losses was reversed such shareholders would not be participating in the
Company's growth. However, for the reasons discussed below, the Board felt that
despite these negative or countervailing factors, the Merger was in the best
interests of, and fair to, unaffiliated shareholders. Certain members of the
Board of Directors have conflicts of interest. See "Interests of Certain Persons
in the Merger; Conflicts of Interest."
The Board of Directors, which includes Martin Hirschorn and Frederic M. Oran
(the Company's Chief Executive Officer since May 1998), both of whom sold all
the shares in the Company that they owned to Holdings in March 1998 at a price
of $11.00 per share, unanimously approved the Merger Agreement on May 20, 1998.
Certain members of the Board of Directors have conflicts of interests. See
"Interests of Certain Persons in the Merger; Conflicts of Interest." The Company
and Holdings entered into the Merger Agreement on May 20, 1998. In approving the
Merger Agreement and reaching its conclusions as to the fairness of the Merger
to unaffiliated Shareholders, the Board of Directors considered the following
factors in particular: (a) providing minority Shareholders with the same
opportunity to dispose of their shares at the price obtained from Holdings by
the Company's founder, management and certain institutional holders, which was
at a premium to the recent market price and reflected a "control premium"; (b)
the limited market for the Company's Common Stock as has existed in recent years
and the resulting limited ability of minority Shareholders to realize on their
investment in the Company; and (c) the urgent need for the Company's management
to take actions to reverse operating losses, which may, in the short term,
adversely affect the Company's operating results.
EQUIVALENT PRICE; PREMIUM OVER MARKET PRICE. In transactions with Holdings,
the founder and former Chief Executive Officer of the Company, Martin Hirschorn,
Frederic M. Oran, and other members of management and certain institutional
holders were able to receive $11.00 per share on their investment.
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This price was negotiated on an arms-length basis between these unaffiliated
parties after giving effect to the recent trading range for the Common Stock and
the Company's financial position and prospects and recognizing a "control
premium". See "-- Background of Change of Control." In considering the fairness
of the Merger, the Board of Directors gave particular weight to this factor.
The average market price of the Common Stock for the period from March 19,
1998 (the date Holdings acquired its interest in the Company) to May 20, 1998
(the date the Merger Agreement was executed) was $9.71. The closing bid price
for the Common Stock on May 19, 1998, the day before the Merger was announced to
the public, was $9 1/4. The last reported trade of the Common Stock during that
period took place on May 13, 1998 at a price of $9 1/4. The Merger Consideration
of $11.00 per share represents a premium of 19% to such last reported trade. See
"Stock Prices and Suspension of Dividends." In considering the fairness of the
Merger to minority shareholders, the Board of Directors also gave significant
weight to this factor.
LIMITED TRADING MARKET. For several years there has been a limited market
for the Company's Common Stock on the NASDAQ system. There are currently only
two market makers for the Common Stock. Additional purchases of some, but not
all of the outstanding shares of Common Stock by Holdings would only serve to
further contract the market for the Common Stock, thus resulting in an
increasingly illiquid minority.
At September 24, 1998, the Company had approximately 600 holders of 627,307
shares of Common Stock, excluding shares held by Holdings. The Company
understands that during the twelve months ended September 24, 1998, there were
only 143 trades of the Common Stock involving an aggregate of 132,190 shares of
its Common Stock.
Other factors considered by the Board of Directors in determining that the
Company and its employees would be better served by private ownership included:
1. the ongoing cost to the Company of regulatory compliance as a public company
without the benefit of having a ready market for its securities; 2. greater
operating flexibility in the management of the business to remedy recent adverse
operating results; and 3. disappointing results of operations which, as a result
of the Company's public status, become available to its competitors. However,
these considerations will not provide any benefit to the unaffiliated
shareholders of the Company.
COST OF REGULATORY COMPLIANCE. The Company estimates that it spends
approximately $160,000 on an annual basis on costs solely related to being a
publicly-held entity, including legal, accounting, insurance, printing and
mailing costs. The Board considered the ongoing costs of remaining a public
company without the benefit of having a ready market for its securities in its
determination to approve the Merger.
OPERATING FLEXIBILITY. The Board is of the opinion that the Merger would
enable management to concentrate their efforts on reversing the Company's
operating losses and improving long-term growth of its businesses and to make
business decisions and acquisitions free from the constraints of public
ownership, which the Board of Directors believes often places undue emphasis on
short-term considerations. The Board of Directors also believes that the
short-term effect of such restructuring efforts on the future market value of
Common Stock may be negative. The Board therefore believes that prospects for
achieving the necessary business turnaround would improve if it were no longer a
public company.
COMPETITIVE DISADVANTAGES. As a consequence of its publicly-held status,
the Company is required to file and make public detailed and periodic reports
about its operations and its financial status. The Company's detailed financial
reports disclose to the public (including the Company's competitors, customers,
suppliers and employee labor unions) operating losses which may be used to the
detriment of the Company by its competitors and in negotiations and dealings
with others. Certain of the Company's competitors are privately-owned companies,
not required to disclose publicly such sensitive financial details of their
operations. At the same time, competitors have the advantage of examining the
Company's financial statements. Those of the Company's competitors which are
publicly-held are either significantly
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larger, and engaged in a broader spectrum of activities, or are subsidiaries of
larger, diversified public companies whose financial information is disclosed on
a consolidated basis with other lines of business. As to such competitors,
required financial disclosures do not reveal detailed information regarding the
operations of those components directly competitive with the Company. The Board
of Directors believes that private ownership of the Company would not only
eliminate the requirement to disclose results of operations but, as discussed
above, would also provide management of the Company with the operating
flexibility to focus on and improve the Company's results of operations on a
long-term basis. The value of such flexibility cannot be quantified.
CERTAIN RESULTS OF MERGER. As a result of the Merger, IMI will own all of
the outstanding equity interests of the Company (subject to agreements to grant
options in Common Stock to IAC Partners), so that IMI's interest in the Company,
including its future net earnings, will increase from approximately 79% to 100%
in return for the aggregate Merger Consideration of $6,900,377. According to the
terms of the Merger Agreement, each share of Common Stock (except treasury
shares and shares owned by Holdings) will be converted into the right to receive
the Merger Consideration of $11.00 per share. As a result, the Common Stock held
by existing Shareholders will no longer represent an equity interest in the
Company and will no longer share in future earnings or losses of the Company,
the risks associated with such earnings and losses, or the potential to realize
greater value in the event that strategic acquisitions, divestitures or other
extraordinary corporate transactions are pursued by the Company in the future.
Neither the Company nor, to the knowledge of the Company, Holdings now has any
such transactions under consideration. At September 30, 1997, the last quarterly
reporting date prior to the execution of a letter of intent between IAC Partners
and Martin Hirschorn for the sale of his shares, net book value of the Company
was approximately $41,009,000 or $13.77 per share. At March 31, 1998, the net
book value of the Company had declined to approximately $39,221,000, or $13.17
per share of Common Stock and at June 30, 1998 had further declined to
approximately $36,784,000 or $12.34 per share. Before giving effect to the
Merger, Holdings' 79% interest had a net book value to Holdings (that is, its
investment including the principal amount of the Loan but excluding
transactional expenses) of approximately $25,893,000, or $11.00 per share of
Common Stock. After giving effect to the Merger, Holdings will own all of the
outstanding shares of Common Stock of the Company and will have made an
investment, on a comparable basis, of approximately $32,793,000 or $11.00 per
share of pre-Merger Common Stock. The Company has reported net losses of $.78,
$.58 and $.41 per share for the quarters ended June 30 and March 31, 1998 and
the year ended December 31, 1997, respectively, and net income of $.12 per share
for the year ended December 31, 1996. The Company cannot predict when its recent
operating losses may be reversed.
Following the Merger, it is anticipated that the registration of the Common
Stock under the Exchange Act will be terminated and that the Company will no
longer file reports under the Exchange Act. In addition, upon consummation of
the Merger, Holdings' obligation under an uncollateralized loan of approximately
$17 million from IMC, a subsidiary of IMI (the "Loan"), will become an
obligation of the Company's and the option held by IAC Partners to acquire 12%
of the common stock of Holdings will become an option to acquire 12% of the
Common Stock of the Company. See "-- Background of Change of Control."
FEDERAL INCOME TAX CONSIDERATIONS. The receipt of cash for Common Stock
pursuant to the Merger will be a taxable transaction for federal income tax
purposes under the Code, and also may be a taxable transaction under applicable
state, local and other tax laws. In general, a Shareholder will recognize gain
or loss equal to the difference between the tax basis for the Common Stock held
by such Shareholder and the amount of cash received in exchange therefor. See
"Certain Federal Income Tax Consequences of the Merger."
BOARD AND SHAREHOLDER APPROVAL; INDEPENDENT OPINION. On May 20, 1998, the
Board of Directors of the Company approved the Merger unanimously. Certain
members of the Board of Directors have conflicts of interest. See "Interests of
Certain Persons in the Merger; Conflicts of Interest." No unaffiliated advisor
to the Board, any group of Directors or the Shareholders was retained prior to
May 20, 1998 for
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purposes of negotiating or reporting on the fairness of the Merger.
Subsequently, the Board engaged Laidlaw & Co. ("Laidlaw"), an investment bank,
to perform a financial analysis and to consider the fairness of the Merger
Consideration. See--"Laidlaw Review." In approving the Merger, the Board
considered the recent completion of Holdings' acquisition and its willingness to
effect the Merger at the same price per share being paid to minority
shareholders, which price Holdings and Mr. Hirschorn had negotiated at
arms-length. Holdings, IMI and IAC Partners considered the historic financial
results and position of the Company generally when the price between Holdings
and Mr. Hirschorn was agreed, made numerous inquiries to confirm the nature and
extent of the Company's assets and liabilities, and performed extensive
financial analyses. However, prior to approval of the Merger by the Board on May
20, 1998, no going concern or liquidation valuations were performed for the
Board. In considering the Merger, the Board of Directors did not undertake any
additional financial analyses to determine whether the Merger Consideration was
fair to unaffiliated shareholders. Based primarily on the fact that the Merger
Consideration of $11.00 per share represents a premium over the recent market
price of the Common Stock and that the price was agreed as a result of
arms-length negotiations between Holdings and Mr. Hirschorn, the Board of
Directors determined that additional financial analysis was not necessary to
reach a fairness determination. The Board of Directors also concluded that as a
result of the arms-length nature of the negotiations between Holdings and Mr.
Hirschorn and the fact that the price per share reflected a premium over the
market value of the Company, the process used in arriving at the Merger
Consideration was procedurally fair to all shareholders, including those not
affiliated with Holdings, IMI, IMC or IAC Partners. Certain members of the Board
of Directors have conflicts of interest. See "Interests of Certain Persons in
the Merger; Conflicts of Interest."
Adoption of the Merger Agreement requires that it be approved by the holders
of two-thirds of the shares of Common Stock. Given the approximately 79%
interest of Holdings, the favorable vote of Holdings would assure such approval.
The Merger has not been structured to require the approval of a majority of
unaffiliated Shareholders.
Although the net book value per share of Common Stock was $13.71 at March
31, 1998, the Board of Directors, Holdings, IMI, IMC and IAC Partners concluded
that recent net losses incurred by the Company of $.78, $.58 and $.41 per share
for the quarters ended June 30 and March 31, 1998 and the year ended December
31, 1997, respectively, and the lack of certainty as to when these losses may be
reversed, did not make book value a reliable indicator as to the going-concern
value of the Company. At June 30, 1998 the net book value per share of Common
Stock was $12.34.
Although it is impracticable to assign a specific weight given to each of
the factors considered by the Board, the most heavily weighted factors in the
Board's decision were the premium being paid over the market price of the Common
Stock and the arm's length negotiation of the $11.00 price per share paid by
Holdings to Mr. Hirschorn. See "-- Acquisition; Purpose of the Merger; Fairness
Factors."
LAIDLAW REVIEW. On July 22, 1998, the Company retained Laidlaw to perform a
financial analysis of the Merger and to consider the fairness of the Merger
Consideration previously approved by the Board of Directors, from the
perspective of shareholders not affiliated with Holdings, IMI, IMC or IAC
Partners. Laidlaw was engaged to provide an additional level of procedural
fairness to such unaffiliated holders. After determining that the Merger
Consideration was fair to, and in the best interests of the unaffiliated
shareholders, the Board retained an independent financial advisor to provide
support for its decision. Based on a review of similar transactions, the Board
felt that its shareholders could make a more informed decision regarding the
Merger if presented with a fairness opinion from an independent financial
advisor. The Company's selection of Laidlaw as financial advisor was based,
among other things, on Laidlaw's experience in providing fairness opinions for
small and medium-sized companies and its ability to issue the opinion in a
timely fashion without delaying the Merger. Laidlaw has no other relationship to
the Company, Holdings, IMI, IMC or IAC Partners.
Laidlaw, founded in 1842, is a privately held, full service, international
investment bank which serves domestic and international corporations and
investors. Laidlaw's capabilities include asset management,
7
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institutional and retail sales, trading, research and investment banking. As
part of its investment banking services, Laidlaw is engaged in public offerings
and private placements of both debt and equity securities. Additionally, Laidlaw
offers its clients a wide array of advisory services including merger and
acquisitions, divestitures, recapitalizations and fairness opinions.
On July 31, 1998, Laidlaw delivered its conclusions (the "Laidlaw Review")
with respect to the Merger and the fairness of the Merger Consideration to the
Board of Directors of the Company. Laidlaw made no presentation to the Board of
its analysis, nor did the Board undertake to inquire as to the financial
analysis done by Laidlaw or the reasons supporting its opinion. Laidlaw did make
itself available to the Board to answer any questions via conference call, but
the Board did not ask any questions. The Board did not request Laidlaw to
provide it with a presentation nor did it ask any questions because the Board
consisted either of persons somehow involved with the purchase of 79% of the
Common Stock by Holdings, (See "Interests of Certain Persons in the Merger;
Conflicts of Interest") or persons who sold their stock in the same transaction.
Thus, the members of the Board had conducted substantial diligence prior to
retaining Laidlaw and the Laidlaw opinion served to confirm a conclusion that
had already been reached by the Board.
In summary, among other things, Laidlaw (i) reviewed certain publicly
available business and financial information, (ii) reviewed certain other
information, including financial forecasts provided by the Company, and (iii)
met with the Company's and Holdings' management to discuss the business and
prospects of the Company.
No instructions were given by the Company to Laidlaw and there were no
limitations placed on Laidlaw in rendering its fairness opinion. The following
is a summary of the material analyses performed by Laidlaw in issuing its
opinion.
Previous Arms-Length Negotiation for Sale of Control of the Company.
Laidlaw's opinion was based, in part, on the fact that an arm's length
negotiation resulted in the sale of a controlling interest in the Company at a
price of $11.00 per share. Laidlaw considered the fact that the minority
shareholders were receiving the same price as paid for the controlling interest,
with no discount for their status as minority shareholders, even though control
had already been obtained.
Premium Over Market Price. Laidlaw considered the fact that the price of
$11.00 per share represented a premium of 19% over the market price at the time
of sale of the controlling interest in the Company. Although this amount
represents a discount to the stock's 52-week high, Laidlaw did not consider this
to be a relevant factor. Significant losses had been incurred by the Company
from the time the stock achieved its 52-week high and the price of the stock had
dropped significantly in the wake of such losses.
FINANCIAL ANALYSIS. Laidlaw reviewed the Company's historical results and
inquired as to the reasons for the lack of revenue growth and the accumulated
losses before interest, taxes, depreciation and amortization ("LBITDA") for the
four years ended December 31, 1997 of $5.8 million. Laidlaw reviewed the
financial results for the year through June 30, 1998 and inquired as to the
reasons for the continuation of the significant LBITDA, amounting to $5.3
million. Laidlaw discussed the 1998 financial projections with management and
inquired as the assumptions supporting the forecasted full year's LBITDA of $6
million. Based upon its discussions with management regarding among other
things, the failure of the Company to estimate the cost to completion on its
contracts, Laidlaw considered the possibility that the actual 1998 operating
loss could be significantly greater than forecast. Having reviewed the Company's
financial predicament and the lack of certainty with regard to returning to
profitability, Laidlaw reviewed the possible effects of a discontinuation of the
business and concluded that in an orderly winding-up of the business, the
liquidation value was approximately $8 per share. Laidlaw also considered the
continuation of operating cash losses, the significant restructuring required to
stabilize the operations and the shrinking backlog. Laidlaw did not perform a
comparable company analysis because no companies were comparable enough to the
business of the Company to make such an analysis meaningful. In addition,
Laidlaw did not
8
<PAGE>
perform a discounted cash flow analysis because the Company had no cash flow.
The Company suffered continuous losses, thus rendering such an analysis moot.
REMAINING PUBLIC. In addition to the financial factors listed above,
Laidlaw also considered some "non-financial" factors to support its conclusion.
Based on a thin trading market and low volume for the Common Stock, Laidlaw
reached the conclusion that the Common Stock would not garner much support from
traditional sources of support for equity securities (such as research services
of stock analysts) and that there would not be any significant market making in
the future. In addition, the costs to the Company of complying with the
reporting requirements of the Securities and Exchange Commission would
constitute an additional burden to the Company on a going-forward basis. Based
on these factors, among others, Laidlaw determined that remaining public
appeared to be more of a burden on the remaining shareholders than an
opportunity for capital appreciation.
Laidlaw also considered the opportunity for the minority shareholders to
redeploy funds from the sale of their Common Stock of the Company at $11.00 per
share as a means of determining fairness. Laidlaw concluded that opportunities
for reinvestment which were more attractive were readily available and that the
minority shareholders might incur considerable risk by maintaining their
investments in the Company.
Based on the above procedures Laidlaw concluded that the consideration of
$11.00 per share to be paid to the Company's shareholders was fair from a
financial point of view. The amount of the Merger Consideration was negotiated
between the Company and Holdings prior to engaging Laidlaw.
On July 31, 1998 the Board of Directors met to consider the Laidlaw Review.
Based on the Laidlaw Review, as well as the various factors relating to the
Merger which it had previously considered, and further operating losses incurred
since the May 20, 1998 approval of the Merger, the Board of Directors
unanimously reapproved the Merger.
A copy of the opinion of Laidlaw is available for inspection and copying at
the principal executive offices of the Company located at 1160 Commerce Avenue,
Bronx, New York during regular business hours (9:00 a.m. to 5:00 p.m.) by any
interested Shareholder or representative of a Shareholder who has been so
designated in writing. The opinion has also been filed as an exhibit to a
Schedule 13E-3 filed by the Company and may be obtained from the SEC's web site
at http://www.sec.gov.
BACKGROUND OF CHANGE OF CONTROL. In November 1997, IAC Partners approached
Mr. Hirschorn with a view toward arranging a purchase of Mr. Hirschorn's stock
in the Company. After a lengthy due diligence investigation, IAC Partners
negotiated a preliminary agreement with Mr. Hirschorn and IAC Partners
approached IMI, a Netherlands Antilles company engaged in the business of
investing in companies in the United States and Europe, about investing in the
Company.
IMI decided to pursue an acquisition of the Common Stock of the Company held
by Mr. Hirschorn and certain other management and institutional shareholders of
the Company.
IMI organized Holdings as a wholly-owned subsidiary of IMI to effect the
stock acquisition. In January 1998, Holdings entered into separate stock
purchase agreements with Mr. Hirschorn and the other selling Shareholders. On
March 19, 1998, Holdings and Mr. Hirschorn signed an amendment to the stock
purchase agreement between them waiving certain financial conditions to closing
and effecting a minor change in the number of shares being purchased. On that
date, Holdings acquired 2,353,904 shares of the Common Stock of the Company, or
approximately 79% of the issued and outstanding shares of the Common Stock of
the Company, 1,914,429 of which were purchased from Mr. Hirschorn and 439,475 of
which were purchased from the other selling Shareholders, all at a price of
$11.00 per share.
In order to effect the acquisition, Holdings received an equity contribution
of approximately $10 million from IMI and an uncollaterized loan of
approximately $17 million from IMC, a subsidiary of IMI. Interest on the unpaid
principal amount of the Loan accrues at a rate per annum equal to LIBOR (as
defined in the IMC-Holdings loan agreement) plus 3.50 percent. The Loan matures
on March 19, 2000. The Company has been informed by Holdings that Holdings will
amend the IMC-Holdings loan agreement
9
<PAGE>
to allow for additional borrowings by Holdings in order to enable the Company to
pay all or a portion of the Merger Consideration. If the Merger is consummated,
the Loan, including any additional borrowings, will become an obligation of the
Company and its maturity could be accelerated. No arrangements have been made to
repay or refinance the Loan. IMI will make a capital contribution to Holdings in
an amount sufficient to pay the balance, if any, of the Merger Consideration.
Holdings and IAC Partners have agreed that IAC Partners would receive a due
diligence and consulting fee equal to 1.5% of the total consideration paid by
Holdings in the acquisition and would be granted an option to acquire 12% of the
common stock of Holdings on a fully diluted basis, exercisable upon the sale by
Holdings of all or a majority of its interest in the Company, at an exercise
price equal to the net cost of IMI's equity investment in Holdings on a per
share basis. Upon consummation of the Merger, such option would become an option
to acquire 12% of the Common Stock of the Company on a fully diluted basis,
exercisable upon the sale by IMI of all or a majority of its interest in the
Company. Holdings and Messrs. Hemsley and Davies also expect to enter into a
management agreement pursuant to which Messrs. Hemsley and Davies will agree to
provide certain management services to Holdings relating to its investment in
the Company, including providing the services of Messrs. Hemsley and Davies as
officers or directors of the Company, if so requested.
Immediately after the closing of the acquisition by Holdings, Messrs.
Handley, Michael Hirschorn, Kanarek and Svendsen resigned from the Board of
Directors of the Company and, on March 20, 1998, the remaining Directors
appointed Messrs. Davies, Dineen, Haidinger, Hemsley and Read to join Mr.
Hirschorn and Frederic Oran as members of the Board of Directors. On April 28,
1998, the Board of Directors accepted the resignations of Arnold Kanarek and
John Handley as senior officers of the Company, which resignations became
effective on May 1, 1998. Mr. Hirschorn also resigned as an executive officer of
the Company but remains the Chairman of the Board of Directors. On April 28,
1998, the Board of Directors elected Frederic Oran as President and Chief
Executive Officer of the Company, Robert N. Bertrand as Senior Vice President of
Finance and Administration and Secretary, and Robert A. Schmidt as Senior Vice
President of Marketing and Sales, all as of May 1, 1998.
INTERESTS OF CERTAIN PERSONS IN THE MERGER; CONFLICTS OF INTEREST
Messrs. Maarten D. Hemsley, Robert M. Davies and Robert N. Haidinger
(Directors of the Company) are directors of Holdings. Messrs. James A. Read and
Martin Dineen (Directors of the Company) are officers and directors of Holdings.
Messrs. Read and Dineen are affiliated with a private management group which is
the sole investment advisor to IMI, which owns 100% of the capital stock of
Holdings. Mezzanine Management Ltd., an investment advisor to IMI, receives fees
from IMI in connection with the provision of services. Messrs. Dineen and Read
are salaried employees of Mezzanine Management Ltd. Through companies owned by
them, Messrs. Davies and Hemsley control IAC Partners which, if requested, has
agreed to provide advisory and consulting services to Holdings. In addition, IAC
Partners holds an option to acquire 12% of the common stock of Holdings on a
fully diluted basis. Upon consummation of the Merger, such option would become
an option to acquire 12% of the Common Stock of the Company on a fully diluted
basis. Through IAC Partners, Mr. Davies and Mr. Hemsley have an indirect
interest in 80% of such option and 80% to 100% of fees for such advisory and
consulting services depending on the type of services provided. Mr. Haidinger is
president of a company in which IMI has a substantial interest. Although Mr.
Haidinger may not have a conflict of interest that is financial in nature, his
relationship with IMI may be such that scenarios may arise where the interests
of the Company differ from those of IMI. The nature of these conflicts is such
that the Directors indicated may have an interest in the Company beyond their
status as directors. Any increase in the value of the Company may benefit not
only Holdings and persons affiliated or associated with Holdings (including its
directors), but also management and employees of the Company.
10
<PAGE>
REGULATORY APPROVALS
The Company does not believe that any federal or state requirements must be
complied with or that approval must be obtained in connection with the Merger,
other than filings required pursuant to federal securities laws and the filing
of the Certificate of Merger with the Secretary of State of New York and the
Secretary of State of Delaware.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
The receipt of cash for Common Stock pursuant to the Merger will be a
taxable transaction for federal income tax purposes under the Code, and also may
be a taxable transaction under applicable state, local and other tax laws.
In general, a Shareholder will recognize gain or loss equal to the
difference between the tax basis for the Common Stock held by such stockholder
and the amount of cash received in exchange therefor. Such gain or loss will be
capital gain or loss if the Common Stock in the hands of the Shareholder is a
capital asset and, in the case of non-corporate Shareholders, generally will be
long-term gain or loss if the holding period for the Common Stock is more than
eighteen months prior to the Effective Date and mid-term gain or loss if the
holding period is more than one year but not more than eighteen months prior
thereto. In certain circumstances, Shareholders who are individuals may be
entitled to preferential treatment for long-term and mid-term capital gains;
however, the ability to offset capital losses against ordinary income is
limited. If the holding period is less than one year then the gain or loss will
be short term gain or loss.
Long-term capital gains recognized by Shareholders who are individuals are
taxable at a maximum rate of 20% and mid-term capital gains are taxable at a
maximum rate of 28% (as compared with a maximum rate of 39.6% on ordinary
income). Corporations generally are subject to tax at a maximum rate of 35% on
both capital gains and ordinary income. The distinction between capital gain and
ordinary income may be relevant for certain other purposes, including the
taxpayer's ability to utilize capital loss carryovers to offset any gain
recognized.
If a Shareholder has long-term, mid-term and short-term capital transactions
during the year, a multi-step netting process occurs. First, gains and losses
within each group are netted separately. The long-term capital gains, if any,
are offset by net short-term capital losses, if any. Short-term capital losses
are then applied to reduce any mid-term capital gain from the 28% group. A net
loss from the 20% group is used first to reduce net gain from the 28% group. A
net loss in the 28% group may be used to offset gain from the 20% group.
If the result of combining all of the Shareholder's capital gains and losses
during the taxable year is a net capital gain, the full amount of such gain will
be included in the Shareholder's gross income. Any net capital gain that is
attributable to a particular rate group is taxed at that group's marginal tax
rate. In general, if the result of combining all such capital gains and losses
recognized during the taxable year is a net capital loss, a Shareholder that is
a corporation may not deduct any portion of such loss, and a Shareholder that is
not a corporation (such as an individual) may deduct such loss only to the
extent that it does not exceed $3,000 ($1,500 in the case of a married
individual filing a separate return), with the remainder available for carryover
into future taxable years.
The foregoing discussion may not be applicable to Shareholders who acquired
their Common Stock pursuant to the exercise of options or other compensation
arrangements or who are not citizens or residents of the United States or who
are otherwise subject to special tax treatment under the Code.
THE FOREGOING DISCUSSION IS THE COMPANY'S INTERPRETATION OF THE TAX
CONSEQUENCES OF THE MERGER AND IS BASED ON THE PROVISIONS OF THE CODE, TREASURY
REGULATIONS, RULINGS AND JUDICIAL DECISIONS NOW IN EFFECT, ALL OF WHICH ARE
SUBJECT TO CHANGE. ANY SUCH CHANGES MAY BE APPLIED RETROACTIVELY IN A MANNER
THAT COULD ADVERSELY AFFECT SHAREHOLDERS. EACH
11
<PAGE>
SHAREHOLDER SHOULD CONSULT ITS OWN TAX ADVISOR WITH RESPECT TO THE TAX
CONSEQUENCES TO IT, INCLUDING THE TAX CONSEQUENCES UNDER STATE, LOCAL, FOREIGN
AND OTHER TAX LAWS OF THE RECEIPT OF CASH FOR COMMON STOCK PURSUANT TO THE
MERGER.
THE MERGER AGREEMENT
The following is a summary of the material terms of the Merger Agreement, a
copy of which is attached as Exhibit A to this Proxy Statement. Such summary is
qualified in its entirety by reference to the Merger Agreement.
The Merger Agreement provides that, upon the terms and subject to the
conditions thereof, and in accordance with the BCL, at the Effective Time of the
Merger, Holdings shall be merged with and into the Company, with the Company
being the surviving corporation.
The Merger Agreement provides that at the Effective Time, by virtue of the
Merger and without any action on the part of Holdings, the Company or the
holders of Common Stock:
(a) Each share of Common Stock issued and outstanding immediately prior
to the Effective Time (other than Common Stock owned by Holdings and Common
Stock held by the Company as treasury stock) will be cancelled and will be
converted automatically into the right to receive, in cash, from the Company
an amount equal to $11.00 per share payable, without interest, to the holder
of each such share, upon surrender of the certificate that formerly
evidenced such share;
(b) Each share of common stock of Holdings issued and outstanding
immediately prior to the Effective Time will be cancelled and converted into
a new share of common stock of the Company issued and outstanding, and no
payment or distribution will be made with respect thereto; and
(c) Each share of Common Stock held by Holdings or in the Company's
treasury will be cancelled.
Employees holding options under the Company's 1995 Stock Option Plan, as
amended, will be entitled, under the terms of the plan, to receive the
difference between the exercise price of each such option per share and $11.00
multiplied by the number of shares of Common Stock subject to such options.
Under the Merger Agreement, the respective obligations of each party to
effect the Merger are subject to the satisfaction at or prior to the Effective
Time of the following conditions: (a) the Merger Agreement and the transactions
contemplated thereby have been approved and adopted by the affirmative vote of
the holders of a two-thirds of the Company's Common Stock; (b) there is no
statute, rule, injunction or order that would prevent consummation of the
Merger; (c) all required authorizations, consents and approvals have been
obtained; (d) Holdings having obtained funds or arranged financing sufficient to
pay the Merger Consideration; and (e) all agreements and obligations of the
parties under the Merger Agreement have been performed and complied with.
TERMINATION. The Merger Agreement may be terminated and the Merger and the
other transactions contemplated by the Merger Agreement may be abandoned at any
time prior to the Effective Time, notwithstanding any requisite approval and
adoption of the Merger Agreement and the transactions contemplated thereby by
the shareholders of the Company or by Holdings.
AMENDMENT AND WAIVER. The Merger Agreement may be amended in writing by the
parties thereto or by their respective Boards of Directors at any time prior to
the Effective Time. Except as otherwise provided by the Merger Agreement, any
party thereto may (i) extend the time for the performance of any obligation or
other act of any other party thereto, (ii) waive any inaccuracy in the
representations and warranties contained therein and (iii) waive compliance with
any agreement or condition contained therein.
12
<PAGE>
ACCOUNTING TREATMENT
The Merger wll be treated as a pooling of interests for accounting purposes.
STOCK PRICES AND SUSPENSION OF DIVIDENDS
The Company's Common Stock is traded over the counter on the Nasdaq National
Market under the symbol IACI. As of August 3, 1998, there were approximately 600
shareholders of record. Market price ranges (high and low bid quotations)
obtained from the Nasdaq Stock Market's Summary of Activity for the Common Stock
for the third calendar quarter through August 3, 1998 and the first and second
calendar quarters of 1998 and for each quarter of the fiscal years ended
December 31, 1995, 1996 and 1997 were as follows:
<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
1995
First Quarter..................................................................... 16 1/4 15
Second Quarter.................................................................... 16 14 1/2
Third Quarter..................................................................... 16 9 3/4
Fourth Quarter.................................................................... 11 1/2 10
1996
First Quarter..................................................................... 11 9 3/4
Second Quarter.................................................................... 11 1/2 10
Third Quarter..................................................................... 11 9 1/2
Fourth Quarter.................................................................... 11 1/4 8 1/2
1997
First Quarter..................................................................... 16 8 3/4
Second Quarter.................................................................... 11 1/4 8
Third Quarter..................................................................... 9 1/2 8 1/4
Fourth Quarter.................................................................... 11 1/4 8 1/2
1998
First Quarter..................................................................... 11 9 7/8
Second Quarter.................................................................... 10 7/8 9 1/16
Third Quarter (through September 24, 1998)........................................ 11 1/2 9 7/8
</TABLE>
The closing bid price of the Company's Common Stock on May 19, 1998, the day
before the Merger was announced to the public, was $9.25.
The Board of Directors did not declare a dividend for the year ended
December 31, 1997. A dividend of $.10 per share was paid on March 21, 1997 to
shareholders of record on March 14, 1997 for the year ended December 31, 1996. A
dividend of $.10 per share was paid on March 22, 1996 to shareholders of record
on March 15, 1996 for the year ended December 31, 1995.
13
<PAGE>
INFORMATION WITH RESPECT TO HOLDINGS, IMI, IMC AND IAC PARTNERS
The sole stockholder of Holdings is IMI. The address of the principal
executive offices of IMI is John B. Gorsiraweg 14, P.O. Box 3889, Curacao,
Netherlands Antilles. IMI is a private company which invests in the debt and
equity securities of corporations in Europe and the United States. IMC is a
wholly owned subsidiary of IMI. Its principal executive offices are located at
Herengracht 424, 1017BZ, Amsterdam, The Netherlands and its principal business
is investing in the debt and equity securities of corporations in Europe and the
United States. IAC Partners is a partnership whose principal executive offices
are located at 82 Powder Point Avenue, Duxbury, Massachusetts 02332. IAC
Partners was formed in connection with the Acquisition and its only continuing
business is providing advisory and consulting services to Holdings. Set forth
below is certain information concerning the Directors and Executive Officers of
Holdings, IMI, IMC and IAC Partners.
DIRECTORS AND EXECUTIVE OFFICERS OF HOLDINGS
<TABLE>
<CAPTION>
NAME AND BUSINESS ADDRESS PRINCIPAL OCCUPATION CITIZENSHIP
- --------------------------------------------- --------------------------------------------- -------------------
<S> <C> <C>
James A. Read Managing Director USA
c/o Mezzanine Management Ltd. Mezzanine Management Ltd.
Mansfield House (an investment advisor to IMI)
One Southampton Street
London WC2/ROLR England
Robert M. Davies Merchant Banking United Kingdom
c/o The Menai Group LLC Managing Director
100 First Stamford Place Menai Capital LLC
6th Floor
Stamford, Connecticut 06902
Maarten D. Hemsley Merchant Banking United Kingdom
c/o Bryanston Management Ltd. Managing Director
82 Powder Point Avenue Menai Capital LLC
Duxbury, Massachusetts 02332
Martin P. Dineen Vice President USA
c/o Mezzanine Management LLC Mezzanine Management LLC
100 First Stamford Place--6th Floor
Stamford, Connecticut 06902
Robert M. Haidinger President, CEO USA
c/o JJI Lighting Group JJI Lighting Group
67 Holly Hill Lane
Greenwich, Connecticut 06830
</TABLE>
Messrs. Read and Haidinger have been at their respective present positions
for more than the last 5 years. Prior to his current employment, Mr. Davies was
Vice President of Wexford Capital Corporation from 1994 to March 1997. From
September 1993 to May 1994, he was Managing Director of Steinhardt Enterprises,
Inc. and from 1987 to August 1993, he was Executive Vice President of the
Hallwood Group Incorporated. Mr. Dineen was involved in banking with Chase
Manhattan Bank from 1989 to 1995 and with Bank of Boston from 1995 to 1997. In
addition to his position with Menai Capital LLC, Mr. Hemsley has been President
of Bryanston Management Ltd. since 1993.
14
<PAGE>
DIRECTORS OF IMI AND IMC
Each of the persons named below is a director of both IMI and IMC other than
MeesPierson Trust (Curacao) N.V. which is a director of IMI but not IMC and Mr.
Schouten who is a director of IMC but not IMI. Other than Mr. Schouten, whose
principal occupation is to act as a director of IMC (and First Britannia
Mezzanine Capital B.V., an unrelated investing corporation advised by Mezzanine
Management Ltd.), IMI and IMC have no executive officers.
<TABLE>
<CAPTION>
NAME AND BUSINESS ADDRESS PRINCIPAL OCCUPATION CITIZENSHIP
- --------------------------------------------- --------------------------------------------- --------------------
<S> <C> <C>
D. Thomas Abbott Chairman USA
c/o Mees Pierson Holdings, Inc. Mees Pierson Holdings, Inc.
31 Stamford Plaza
310 Tresser Boulevard
Stamford, CT 06901-3239
Ian Cotterill Director, United Kingdom
c/o HSBC Investment Bank plc Hongkong Shanghai Bank
Vintner's Place
68 Upper Thames Street
London EC4V 3BJ, England
Franz Horhager Director, Austria
c/o Bank Austria AG Bank Austria AG
Am Hof 2
A-1010 Vienna, Austria
A. Kipp Koester Managing Director, USA
c/o The Northwestern Mutual Life The Northwestern Mutual Life Insurance
Insurance Company Company
720 East Wisconsin Avenue
Milwaukee, Wisconsin 53202-4797
Hamish Mair Associate Director, United Kingdom
c/o Scottish Eastern Investment Martin Currie Investment
Trust plc Management Ltd.
Saltire Court
20 Castle Terrace
Edinburgh EH1 2ES Scotland
MeesPierson Trust (Curacao) N.V. Trust company Netherlands Antilles
John B. Gorsiraweg 14
P.O. Box 3889
Curacao
Netherlands Antilles
Muneef Othman Executive Director United Arab Emirates
Abu Dhabi Investment Authority Abu Dhabi Investment Authority
P.O. Box 3600
Abu Dhabi, United Arab Emirates
Jacobus Schouten Director, IMC The Netherlands
c/o International Mezzanine and First Britannia Mezzanine
Capital B.V. Capital B.V.
Herengracht 424
1017 BZ Amsterdam
The Netherlands
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
NAME AND BUSINESS ADDRESS PRINCIPAL OCCUPATION CITIZENSHIP
- --------------------------------------------- --------------------------------------------- --------------------
<S> <C> <C>
Charles E. Symington Vice President, USA
c/o Metropolitan Life Investment Company Metropolitan Life Investment Company
43 Pippins Way
Morristown, N.J. 07960
Stephen Weber Director Equities United Kingdom
c/o Norwich Union Life & Pensions Limited Norwich Union Life & Insurance Society
P.O. Box 150
37 Surrey Street
Norwich NR1 3UZ England
</TABLE>
From December 1993 to May 1995, Mr. Abbot was Chairman and Chief Executive
Officer of Savin Corp. Prior to December 1993, he was President of Harvest
Group, Inc. Messrs. Horhager, Cotterill, Symington, Weber, Mair, Othman and
Schouten have been at their respective present positions for more than the last
five years. From 1993 to 1997, Mr. Koester was Vice President of Northwestern
Mutual Life Insurance Company.
PARTNERS OF IAC PARTNERS
<TABLE>
<CAPTION>
NAME AND BUSINESS ADDRESS PRINCIPAL OCCUPATION CITIZENSHIP
- --------------------------------------------- --------------------------------------------- -------------------
<S> <C> <C>
Robert M. Davies(1) Merchant Banking United Kingdom
c/o The Menai Group LLC Managing Director
100 First Stamford Place Menai Capital LLC
6th Floor
Stamford, Connecticut 06902
Maarten D. Hemsley(1) Merchant Banking United Kingdom
c/o Bryanston Management Ltd. Managing Director
82 Powder Point Avenue Menai Capital LLC
Duxbury, Massachusetts 02332
Robert P. Schreimer Attorney USA
c/o StoneRidge Partners, Inc.
650 Third Avenue--3rd Floor
New York, New York 10016
David Stoller Attorney USA
c/o Millbank, Tweed, Hadley & McCloy
1 Chase Manhattan Plaza
New York, New York 10005
</TABLE>
- ------------------------
(1) The interests of Messrs. Davies and Hemsley in IAC Partners are held by the
Menai Group LLC, which is wholly owned by Mr. Davies, and Bryanston
Management Ltd., which is wholly owned by Mr. Hemsley.
16
<PAGE>
EXPENSES
It is estimated that the following expenses will be incurred in connection
with the Merger, all of which have been or will be paid by the Company:
<TABLE>
<S> <C>
SEC Filing Fee.................................................... $ 1,380
Laidlaw & Co opinion fee.......................................... 50,000
Legal Fees and Expenses........................................... 100,000
Accounting Fees and Expenses...................................... 10,000
Printing Expenses................................................. 5,000
Miscellaneous..................................................... 3,620
---------
Total....................................................... $ 170,000
---------
---------
</TABLE>
In connection with the Merger, neither the Company nor Holdings anticipate
incurring any appraisal or solicitation fees or expenses. Proxies may be
solicited by employees of the Company without additional compensation.
INDEPENDENT AUDITORS
PricewaterhouseCoopers LLP are the Company's independent auditors.
Representatives of PricewaterhouseCoopers LLP are expected to be present at the
Meeting. They will have the opportunity to make a statement if they so desire
and are expected to be available to respond to appropriate questions.
OTHER MATTERS
The Board of Directors knows of no other matters which will be presented for
consideration at the Meeting. However, if any other matter is properly brought
before the Meeting, it is the intention of the persons named in the proxy forms
to vote the Proxies in accordance with their best judgment.
SHAREHOLDER PROPOSALS
If the Merger is consummated, no public annual meetings of shareholders of
the Company will be held in the future. If the Merger is not consummated, and
because the date of any such meeting cannot currently be determined,
Shareholders will be informed (by press release or other means determined
reasonable by the Company) of the date of such meeting and the date that
Shareholder proposals for inclusion in the proxy material must be received by
the Company, which proposals must comply with the rules and regulations of the
Securities and Exchange Commission ("SEC") then in effect.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Exchange Act requires the Company's executive officers
and directors and persons who own more than 10 percent of the outstanding Common
Stock to file reports of ownership and changes in ownership with the SEC. Based
solely on reports and other information submitted by executive officers and
directors, the Company believes that during the year ended December 31, 1997,
and prior fiscal years, each of its executive officers, directors and persons
who owns more than 10 percent of the outstanding Common Stock filed all reports
required by Section 16(a).
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange Act
and, in accordance therewith, files reports, proxy statements and other
information with the SEC. Such reports and other information may be inspected
and copied or obtained by mail upon payment of the SEC's prescribed rates at the
public reference facilities maintained by the SEC at 450 Fifth Street, N.W.,
Room 1024, Washington, D.C. 20549 and at the New York Regional Office of the
SEC, 7 World Trade Center, New York, New York
17
<PAGE>
10048. The SEC also maintains a Web site that contains reports, proxy,
information statements and other information regarding registrants that file
electronically with the SEC. The address of such site is http:// www.sec.gov.
Accompanying and forming a part of this Proxy Statement is the Company's
Annual Report on Form 10-K (the "Annual Report") for the year ended December 31,
1997, as amended. In addition, the Company's Quarterly Reports on Form 10-Q for
the quarterly periods ended March 31 and June 30, 1998 accompany and form a part
of this Proxy Statement.
FINANCIAL INFORMATION
SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial data of the
Company for each of the last five years:
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net Sales.................................................. $ 72,911 $ 73,623 $ 70,633 $ 71,736 $ 86,571
Net (Loss) Income.......................................... $ (1,218) $ 364 $ (448) $ (1,701) $ 3,918
Basic and Diluted (Loss) Income per common share........... $ (0.41) $ 0.12 $ (0.15) $ (0.57) $ 1.32
--------- --------- --------- --------- ---------
Total Assets............................................... $ 74,262 $ 72,845 $ 75,716 $ 71,730 $ 73,124
Long Term Obligations...................................... $ 5,081 $ 4,499 $ 4,683 $ 2,431 $ 2,504
Cash Dividends per Common Share*........................... None $ 0.10 $ 0.10 $ 0.10 $ 0.30
</TABLE>
- ------------------------
* Declared and paid in March of subsequent year.
18
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
INDUSTRIAL ACOUSTICS COMPANY, INC.:
We have audited the consolidated financial statements and financial
statement schedule of INDUSTRIAL ACOUSTICS COMPANY, INC. and SUBSIDIARIES as
appearing in of this Proxy Statement. These financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. We did not audit the financial
statements and financial statement schedule of Industrial Acoustics Company
Limited and Subsidiaries, a wholly owned subsidiary, which statements reflect
total assets of $17,104,000 and $18,690,000 at December 31, 1997 and 1996,
respectively, and total revenues of $19,310,000, $22,126,000 and $23,731,000 for
the years ended December 31, 1997, 1996 and 1995, respectively. Those statements
and schedule were audited by other auditors whose report has been furnished to
us, and our opinion, insofar as it relates to the amounts included for
Industrial Acoustics Company Limited and Subsidiaries, is based solely on the
report of the other auditors.
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 and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of Industrial Acoustics Company, Inc. and
Subsidiaries as of December 3l, 1997 and 1996, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 3l, 1997 in conformity with generally accepted accounting
principles. In addition, in our opinion, based on our audits and the report of
other auditors, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
Coopers & Lybrand L. L. P.
New York, New York
March 11, 1998
19
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS OF
INDUSTRIAL ACOUSTICS COMPANY LIMITED
We have audited the consolidated balance sheets of Industrial Acoustics
Company Limited and subsidiaries (a wholly owned subsidiary of Industrial
Acoustics Company Inc.) as of 31st December 1997 and 1996 and the related
consolidated statements of income and retained earnings, and cash flows and the
financial statement schedule for each of the three years in the period ended
31st December 1997. These financial statements and financial statement schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Industrial
Acoustics Company Limited and subsidiaries as of 31st December 1997 and 1996 and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended 31st December 1997 in conformity with
accounting principles generally accepted in the United States. In addition, in
our opinion, the financial statement schedule referred to above, when considered
in relation to the basic financial statements taken as a whole, present fairly,
in all material respects, the information required to be included therein.
Kidsons Impey
Registered Auditors
Chartered Accountants
London
February 12, 1998
20
<PAGE>
INDUSTRIAL ACOUSTICS COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
ASSETS:
CURRENT ASSETS:
Cash and cash equivalents............................................................... $ 3,032 $ 1,254
Short-term investments, available for sale.............................................. 457 218
Receivables............................................................................. 17,843 22,713
Costs and estimated earnings in excess of billings on uncompleted contracts............. 6,774 5,108
Inventories............................................................................. 5,856 4,605
Income tax receivable................................................................... 685
Deferred income taxes................................................................... 215 130
Prepaid expenses........................................................................ 1,609 1,473
--------- ---------
TOTAL CURRENT ASSETS................................................................ 35,786 36,186
MARKETABLE SECURITIES, available for sale................................................... 22,328 20,584
PROPERTY, PLANT AND EQUIPMENT, net.......................................................... 12,540 13,028
DEFERRED INCOME TAXES....................................................................... 975 124
OTHER ASSETS................................................................................ 2,633 2,923
--------- ---------
Total Assets........................................................................ $ 74,262 $ 72,845
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY:
CURRENT LIABILITIES:
Loans payable........................................................................... $ 9,656 $ 8,775
Accounts payable and accrued expenses................................................... 16,167 15,606
Income taxes............................................................................ 193
Customer deposits....................................................................... 730 389
Current portion of long-term debt and capital lease obligations......................... 78 71
Billings In excess of costs and estimated earnings on uncompleted contracts............. 1,491 1,128
--------- ---------
TOTAL CURRENT LIABILITIES........................................................... 28,315 25,969
CAPITAL LEASE OBLIGATIONS................................................................... 3,055 3,132
DEFERRED INCOME TAXES....................................................................... 687
DEFERRED COMPENSATION....................................................................... 1,339 1,367
--------- ---------
TOTAL LIABILITIES................................................................... 33,396 30,468
--------- ---------
COMMITMENTS
SHAREHOLDERS' EQUITY:
Common Stock, par value $.1 0 per share; authorized 5,000 shares; issued and outstanding
2,979 shares, excluding 87 shares held in treasury at par value......................... 298 298
Additional paid-in capital................................................................ 2,223 2,223
Equity Adjustments:
Cumulative currency translation adjustment.............................................. (117) 152
Net unrealized gain (loss) on marketable securities..................................... 107 (167)
Retained earnings......................................................................... 38,355 39,871
--------- ---------
TOTAL SHAREHOLDERS' EQUITY.......................................................... 40,866 42,377
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.......................................... $ 74,262 $ 72,845
--------- ---------
--------- ---------
</TABLE>
See notes to consolidated financial statements.
21
<PAGE>
INDUSTRIAL ACOUSTICS COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997,1996 AND 1995
(IN THOUSANDS, EXCEPT PER SHARE DAFT)
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
REVENUES
Net sales...................................................................... $ 72,911 $ 73,623 $ 70,633
Interest....................................................................... 1,615 1,609 1,553
Other.......................................................................... 738 918 574
--------- --------- ---------
75,264 76,150 72,760
--------- --------- ---------
COST AND EXPENSES
Cost of products sold.......................................................... 61,934 62,105 59,657
Selling, administrative and general............................................ 13,474 12,680 13,068
Interest....................................................................... 939 1,078 586
--------- --------- ---------
76,347 75,863 73,311
--------- --------- ---------
(Loss) income before income taxes................................................ (1,083) 287 (551)
Provision (benefit) for income taxes............................................. 135 (77) (103)
--------- --------- ---------
Net (loss) income................................................................ ($ 1,218) $ 364 ($ 448)
--------- --------- ---------
--------- --------- ---------
Basic and diluted net (loss) income per common share............................. ($ 0.41) $ 0.12 ($ 0.15)
--------- --------- ---------
--------- --------- ---------
Weighted Average Number of Shares Outstanding:
Basic.......................................................................... 2,979 2,979 2,979
--------- --------- ---------
--------- --------- ---------
Diluted........................................................................ 2,979 2,990 2,979
--------- --------- ---------
--------- --------- ---------
</TABLE>
See notes to consolidated financial statements
22
<PAGE>
INDUSTRIAL ACOUSTICS COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK* EQUITY ADJUSTMENTS
------------------------ --------------------------
NET
UNREALIZED
GAIN (LOSS)
NUMBER ADDITIONAL CUMULATIVE ON
OF PAID-IN CURRENCY MARKETABLE RETAINED
SHARES AMOUNT CAPITAL TRANSLATION SECURITIES EARNINGS TOTAL
----------- ----------- ----------- ----------- ------------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 3l, 1994..... 2,979 $ 298 $ 2,223 ($ 325) ($ 580) $ 40,550 $ 42,166
Net loss for 1995.............. (448) (448)
Cash dividends paid--$.10 per
share........................ (298) (298)
Equity adjustments:
Currency translation......... (20) (20)
Net unrealized gain on
marketable securities, net
of income taxes of $306.... 1,034 1,034
----- ----- ----------- ----- ------ --------- ---------
Balance at December 31, 1995..... 2,979 298 2,223 (345) 454 39,804 42,434
Net income for 1996............ 364 364
Cash dividends paid--$.10 per
share........................ (297) (297)
Equity adjustments:
Currency translation......... 497 497
Not unrealized loss on
marketable securities, net
of income taxes of $111.... (621) (621)
----- ----- ----------- ----- ------ --------- ---------
Balance at December 31, 1996..... 2,979 298 2,223 152 (167) 39,871 $ 42,377
Net loss for 1997.............. (1,218) (1,218)
Cash dividends paid--$.10 per
share........................ (298) (298)
Equity adjustments:
Currency translation......... (269) (269)
Not unrealized gain on
marketable securities, net
of Income taxes of $182.... 274 274
----- ----- ----------- ----- ------ --------- ---------
Balance at December 31, 1997..... 2,979 $ 298 $ 2,223 ($ 117) $ 107 $ 38,355 $ 40,866
----- ----- ----------- ----- ------ --------- ---------
----- ----- ----------- ----- ------ --------- ---------
</TABLE>
- ------------------------
* Excluding common stock held in treasury of 87 shares for all years
presented.
See notes to consolidated financial statements
23
<PAGE>
INDUSTRIAL ACOUSTICS COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net (loss) income................................................................ $ (1,218) 364 $ (448)
Adjustments to reconcile net (loss) income to net cash provided by (used in)
operating activities:
Depreciation and amortization.................................................. 1,267 1,305 1,204
Deferred income taxes.......................................................... (431) (184) 102
Deferred compensation.......................................................... (28) 90 50
Changes in operating assets and liabilities:
Receivables.................................................................... 4,489 4,731 2,736
Costs and estimated earnings in excess of billings on uncompleted contracts.... (1,667) 2,230 (3,288)
Inventories and prepaid expenses............................................... (1,447) (834) 395
Income tax receivable.......................................................... 685 (685) --
Accounts payable and accrued expenses.......................................... 820 (776) 400
Income taxes................................................................... 193 (131) 1,329
Billings in excess of costs and estimated earnings on uncompleted contracts.... 364 103 (2,105)
Customer deposits.............................................................. 346 103 (444)
Other assets................................................................... 345 (2,537) (121)
--------- --------- ---------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES........................ 3,718 3,779 (190)
--------- --------- ---------
INVESTING ACTIVITIES
Purchase of property, plant and equipment........................................ (1,024) (1,956) (3,964)
Sales of short-term investments and marketable securities........................ 3,564 15,184 3,176
Purchases of short-term investments and marketable securities.................... (5,091) (14,103) (3,738)
--------- --------- ---------
NET CASH USED IN INVESTING ACTIVITIES...................................... (2,551) (875) (4,526)
--------- --------- ---------
FINANCING ACTIVITIES
Loans payable, net............................................................... 1,018 (2,720) 3,412
Payments on long-term debt and capital lease obligations......................... (72) (13) (194)
Dividends paid................................................................... (298) (297) (298)
--------- --------- ---------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES........................ 648 (3,030) 2,920
--------- --------- ---------
FOREIGN EXCHANGE
Effect of exchange rate changes on cash.......................................... (37) (126) 29
--------- --------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........................... 1,778 (252) (1,767)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR..................................... 1,254 1,506 3,273
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR................................... $ 3,032 $ 1,254 $ 1,506
--------- --------- ---------
--------- --------- ---------
</TABLE>
See notes to consolidated financial statements.
24
<PAGE>
INDUSTRIAL ACOUSTICS COMPANY, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS AND HARES IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of the Company
and its subsidiaries, all of which are wholly-owned. All significant
intercompany accounts and transactions have been eliminated.
MANAGEMENT'S USE OF ESTIMATES:
In conformity with generally accepted accounting principles, management must
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
CASH EQUIVALENTS:
The Company considers all highly liquid investments with an original
maturity of three months or less when purchased to be cash equivalents.
INVENTORIES:
Inventories are stated at the lower of cost (first-in, first-out method) or
market.
LONG-TERM CONSTRUCTION CONTRACTS:
Estimated earnings on long-term construction type contracts are recognized
on the percentage-of-completion method, measured by the percentage of costs
incurred to date to estimated total costs for each contract. Periodic reviews of
estimated final revenues and costs during the terms of such contracts may result
in revisions of contract estimates, the effects of which are recognized in the
periods in which the revisions are determined. Provision for estimated losses on
uncompleted contracts are made in the period in which such losses are
determined.
Included in receivables are retainages of $1,054 and $844 at December 31,
1997 and 1996, respectively. The Company expects to collect the open retainage
in 1998.
Before tax operating results for 1997 and 1996 were decreased by $1,066 and
$2,250, net, due to changes in revenues and cost estimates on long-term
contracts.
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment are carried at cost. Depreciation and
amortization of property, plant and equipment, including leased property, are
provided principally by the straight-line method based over the estimated useful
lives of the depreciable assets or the term of the related leases, if less. The
cost and accumulated depreciation or amortization of assets refined or sold are
removed from the respective accounts and any gain or loss is recognized in
operations.
RESEARCH AND DEVELOPMENT:
Research and development expenditures, which are expensed as incurred,
amounted to $825, $944 and $872 in 1997, 1996 and 1995, respectively.
25
<PAGE>
INDUSTRIAL ACOUSTICS COMPANY, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS AND HARES IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SHORT-TERM INVESTMENTS AND MARKETABLE SECURITIES:
The Company primarily invests its available funds into U.S. federal, state
and local government and corporate debt securities. The Company considers such
investments to be "available-for-sale" as defined by Statement of Financial
Accounting Standards ("SFAS") No. 115, "Accounting for certain Investments in
Debt and Equity Securities". SFAS 115 requires that the difference between the
carrying value and market value, as of the balance sheet date, of available
for-sale-investments be recorded as an adjustment to shareholders' equity.
In the event of a decline in market value below carrying value ("Decline"),
which is other than temporary and resulting from factors other than changes in
interest rate, such Decline would be included in the operating results of the
Company in the period in which it occurs. In addition, if a Decline exists for
an investment which has been identified to be sold, such Decline would also be
included in operating results in the period in which it is identified to be
sold. During the year ended December 31, 1997, there were no Declines.
EARNINGS PER COMMON SHARE DATA:
The Company adopted SFAS No. 128, "Earnings per Share," in 1997. As required
by the statement, the Company restated all prior-period per share data
presented. SFAS No. 128 requires presentation of both basic and diluted earnings
per share. Basic earnings per share are calculated based on the weighted average
number of shares of common stock outstanding during the reporting period.
Diluted earnings per share are calculated giving effect to all potentially
dilutive common shares, assuming such shares were outstanding during the
reporting period.
As required by SFAS No. 128, the Company has provided a reconciliation of
basic weighted average shares to diluted weighted average shares within the
table outlined below. The conversion of diluted shares has no impact on the
Company's operating results. Options to purchase 200,000 shares of common stock
were also outstanding at December 31, 1997 and 1995 but were not included in the
computation of diluted earnings per share because they would have had an
anti-dilutive effect on the earnings per share.
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Weighted average number of shares--basic................................................. 2,979 2,979 2,979
Dilutive effect of shares issuable as of year end under the stock option plan............ -- 11 --
--------- --------- ---------
Weighted average number of shares--diluted............................................... 2,979 2,990 2,979
--------- --------- ---------
--------- --------- ---------
</TABLE>
CONCENTRATION OF CREDIT RISK:
Financial instruments which potentially subject the Company to
concentrations of credit risk include cash, cash equivalents, short-term
investments, marketable securities and accounts receivable. The Company holds no
collateral for these financial instruments. The Company places its available
funds into government and corporate debt securities as well as investments with
financial institutions and, by policy, limits the amount of credit exposure to
any one issuer. Except for contracts with the United States Government,
concentration of credit risk with respect to accounts receivables are limited
due to a large diversified customer bass which is not concentrated in any one
geographic area. Some of the Company's
26
<PAGE>
INDUSTRIAL ACOUSTICS COMPANY, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS AND HARES IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
contracts with the United States Government have delivery schedules extending
for more than one year. Under applicable United States Government procedures,
such contracts may be subject to annual funding. Accordingly, there is some
risk, even after a United States Government contract has been awarded to the
Company, that the necessary funding for purposes of the contract may not be made
available, in subsequent years, to the relevant United States Government agency.
United States Government contracts may also be subject to cancellation, in which
event, the Company would be entitled to recover incurred costs on completed
units, work in progress and profits associated with such costs.
RECENTLY ISSUED ACCOUNTING STANDARDS:
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income"
and SFAS No. 131, "Disclosure about Segments of an Enterprise and Related
Information." SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in full set general purpose financial statements. 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. 130 and SFAS No. 131 are
required to be adopted by 1998. The Company is currently evaluating the impact,
if any, of SFAS No. 130 and SFAS No. 131.
FOREIGN CURRENCY TRANSLATION:
All non-U.S. subsidiaries consider their local currencies to be their
functional currencies. Net assets of non-U.S. subsidiaries are translated into
U.S. dollars based on the current rates of exchange. Income and expense items
are translated at the average exchange rate for the year. The resulting
translation adjustments are recorded directly into a separate component of
shareholders' equity.
Foreign currency transaction gains and losses result from the periodic
fluctuation in exchange rates, as measured at the respective balance sheet
dates, for transactions denominated in currencies other than the respective
functional currencies used by the Company and its subsidiaries. Such gains and
losses are included in the Company's operating results in the period in which
the exchange rate changes. The net foreign currency transaction (losses) gains
included in (loss) income before taxes for 1997,1996 and 1995 were ($169), $211
and ($52), respectively. These net foreign currency translation (losses) gains
include ($149) and $366 in 1997and 1966, respectively, applicable to a U.S.
dollar demand loan payable to the Company by its subsidiary, Industrial
Acoustics Company Ltd (IAC Ltd).
RECLASSIFICATION:
Certain items in 1996 and 1995 have been reclassified to conform to the 1997
presentation.
NOTE B--SHORT-TERM INVESTMENTS AND MARKETABLE SECURITIES
The Company considers its marketable securities to be "available-for-sale",
as defined by SFAS 115, and, accordingly, unrealized holding gains and losses
are excluded from operations and reported as a net amount in a separate
component of shareholders' equity.
27
<PAGE>
INDUSTRIAL ACOUSTICS COMPANY, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS AND HARES IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE B--SHORT-TERM INVESTMENTS AND MARKETABLE SECURITIES (CONTINUED)
The following table summarizes the aggregate fair value of short-term
investments and marketable securities, gross unrealized holding gains and
losses, and the amortized cost basis of short term investments and marketable
securities at December 31, 1997:
<TABLE>
<CAPTION>
UNREALIZED HOLDING
AMORTIZED MARKET -----------------------------------
DESCRIPTION COST BASIS VALUE GAINS (LOSSES) NET
- ----------------------------------------------------------------- ----------- --------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Maturities within one year:
Corporate debt securities...................................... $ 452 $ 457 $ 5 $ 0 $ 5
----------- --------- ----- ----- ---------
452 457 5 0 5
----------- --------- ----- ----- ---------
Maturities between one and five years:
Corporate debt securities...................................... 3,616 3,698 116 (34) 82
U.S. Government securities..................................... 501 518 17 0 17
State and Local Government securities.......................... 186 191 5 0 5
----------- --------- ----- ----- ---------
4,303 4,407 138 (34) 104
----------- --------- ----- ----- ---------
Maturities between five and ten years:
Corporate debt securities...................................... 7,393 7,393 103 (103) (0)
U.S. Government securities..................................... 254 251 0 (3) (3)
State and local government securities.......................... 120 122 3 (1) 2
----------- --------- ----- ----- ---------
7,767 7,766 106 (107) (1)
----------- --------- ----- ----- ---------
Maturities after ten years
Corporate debt securities...................................... 9,495 9,572 165 (88) 77
State and local government securities.......................... 590 583 9 (16) (7)
----------- --------- ----- ----- ---------
10,085 10,155 174 (104) 70
----------- --------- ----- ----- ---------
$ 22,607 $ 22,785 $ 423 ($ 245) $ 178
----------- --------- ----- ----- ---------
----------- --------- ----- ----- ---------
</TABLE>
The aggregate net unrealized gain of $178, less applicable taxes of $71, has
been included as a $107 addition to shareholders' equity at December 31, 1997.
At December 31, 1996, the aggregate net unrealized loss of $278, less applicable
taxes of $111, was included as a $167 reduction in shareholders' equity.
Realized gains and losses are included as a component of other income. For
the year ended December 31, 1997, gross realized gains were $89 and gross
realized losses were $38 for a total not realized gain of $51. For the years
ended December 31, 1996 and 1995, net realized gains (losses) were $249 and
($120), respectively. In computing realized gains and losses, the Company
computes the cost of its investments on a specific identification basis. Such
cost includes the direct costs to acquire the securities, adjusted for the
amortization of any discount or premium. The fair value of investments has been
estimated based on quoted market prices.
28
<PAGE>
INDUSTRIAL ACOUSTICS COMPANY, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS AND HARES IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE C--SUPPLEMENTAL BALANCE SHEET INFORMATION
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1997 1998
--------- ---------
<S> <C> <C>
RECEIVABLES:
Completed orders, less allowances for doubtful accounts (1997 -- $534 1996 -- $913)....... $ 15,266 $ 18,082
Billings on uncompleted contracts......................................................... 1,560 3,648
Other..................................................................................... 1,017 983
--------- ---------
$ 17,843 $ 22,713
--------- ---------
--------- ---------
COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS:
Direct costs incurred on uncompleted contracts............................................ $ 32,983 $ 45,776
Estimated earnings........................................................................ 15,376 21,049
--------- ---------
48,359 66,825
Low billings to date...................................................................... (43,076) (62,845)
--------- ---------
$ 5,283 $ 3,980
--------- ---------
--------- ---------
The above balance is included in the accompanying balance sheets under the following
captions:
Costs and estimated eamings in excess of billings on uncompleted contracts................ $ 6,774 $ 5,108
Billings in excess of costs and estimated earnings on uncompleted contracts............... (1,491) (1,128)
--------- ---------
$ 5,283 $ 3,980
--------- ---------
--------- ---------
INVENTORIES:
Materials and supplies.................................................................... $ 2,246 $ 1,492
Work in process........................................................................... 3,610 3,113
--------- ---------
$ 5,856 $ 4,605
--------- ---------
--------- ---------
PROPERTY, PLANT AND EQUIPMENT:
Land...................................................................................... $ 203 $ 203
Buildings................................................................................. 12,252 12,537
Machinery, fixtures and equipment......................................................... 10,796 9,931
Leasehold improvements.................................................................... 565 539
Lab and wind tunnel....................................................................... 245 245
--------- ---------
24,061 23,455
--------- ---------
Less allowances for depreciation and amortization......................................... (11,521) (10,427)
--------- ---------
$ 12,540 $ 13,028
--------- ---------
--------- ---------
</TABLE>
In 1995, IAC Ltd. completed the acquisition of a 90,000 square foot factory
in Winchester, England for $3,146. This purchase price and costs related to
factory renovations were substantially financed with the proceeds of a
short-term loan from Midland Bank. IAC Ltd moved to the Winchester facilities
during the second quarter of 1996. For 1996, selling, administrative and general
expenses include $683 attributable to the relocation.
29
<PAGE>
INDUSTRIAL ACOUSTICS COMPANY, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS AND HARES IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE C--SUPPLEMENTAL BALANCE SHEET INFORMATION (CONTINUED)
Fully depreciated assets were $4,181 and $3,317 in 1997 and 1996,
respectively.
OTHER ASSETS:
In 1992, the Company entered into a Split-Dollar Life Insurance Agreement
with Michael Hirschorn, a director of the Company, wherein the Company agreed to
advance up to one-half of the amount of premiums on an insurance policy owned by
Michael Hirschorn on the life of Martin Hirschorn, his father and President of
the Company. The Company shall be reimbursed for such advances, which are non-
interest bearing, by Michael Hirschorn upon the earlier to occur of the
surrender of such policy or the payment of proceeds upon the death of Martin
Hirschorn. As of December 31, 1997 and 1996, advances totaling approximately
$391 and $344, respectively, are included in other assets.
ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
<TABLE>
<S> <C> <C>
Accounts payable.......................................................... $ 9,374 $ 9,764
Accrued commissions....................................................... 1,726 1,844
Salaries, wages and related items......................................... 2,267 1,752
Accrued expenses.......................................................... 2,800 2,246
--------- ---------
$ 16,167 $ 15,606
--------- ---------
--------- ---------
</TABLE>
NOTE D--BORROWINGS
LOANS PAYABLE--The Company, as of December 31, 1997 and 1996, had
outstanding $9,656 and $8,775 of short-term borrowings. At December 31, 1997,
the Company borrowed $6,250 ($5,150 at December 31, 1996) under a $10,000 line
of credit from a commercial bank. Such amount accrues interest, payable monthly,
at a variable rate of 7.31% (7.1% at December 31, 1996) and is collateralized by
marketable securities with a market value of $11,850. In addition, the Company
owes $3,406 in the United Kingdom ($3,625 at December, 31, 1996) in connection
with the purchase of property. The loan is payable on demand, is collateralized
by the purchased property, and accrues interest, payable monthly, at 8.75% per
annum at December 3l, 1997 (8% at December 3l, 1996). For the years ended
December 31, 1997 and 1996, the weighted average interest rate on all short-term
loans payable was 7.52% and 7.35% respectively. Interest paid amounted to $940,
$1,100 and $563 in 1997, 1996 and 1995, respectively.
30
<PAGE>
INDUSTRIAL ACOUSTICS COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
The carrying amount for the bank borrowings approximates fair value because
the loans are short term.
NOTE E--INCOME TAXES
The components of (loss) income before income taxes are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Domestic.......................................................... $ 703 ($ 28) $ 985
Foreign........................................................... (1,786) 315 (1,536)
--------- --------- ---------
($ 1,083) $ 287 ($ 551)
--------- --------- ---------
--------- --------- ---------
</TABLE>
Provision (benefit) for federal, foreign, state and local income taxes
consist of the following:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Current:
Federal........................................................ $ 352 ($ 72) $ 304
Foreign........................................................ (21) 32 (471)
State and local................................................ 235 95 60
--------- --------- ---------
566 55 (107)
--------- --------- ---------
Deferred:
Federal........................................................ (231) (212) (102)
Foreign........................................................ (259) 86 (22)
State and local................................................ 59 (6) 128-
--------- --------- ---------
(431) (132) 4
--------- --------- ---------
$ 135 ($ 77) ($ 103)
--------- --------- ---------
--------- --------- ---------
</TABLE>
31
<PAGE>
INDUSTRIAL ACOUSTICS COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE E--INCOME TAXES (CONTINUED)
Deferred taxes at December 31, 1997 and 1996 consist of the following:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Deferred tax assets:
Inventory and accounts receivable reserves............................... $ 135 $ 106
Accrued expenses......................................................... 80 115
Deferred compensation.................................................... 701 618
Marketable securities.................................................... --
Deferred gain in United Kingdom from intercompany sale of building....... 309 111
State and local net operating loss carry forwards........................ 274 120
--------- ---------
Total deferred tax assets.................................................. 1,499 1,070
--------- ---------
Deferred tax liabilities:
Property, plant and equipment............................................ 297 534
Marketable securities.................................................... 71 --
Pension liability........................................................ 319 282
--------- ---------
Total deferred tax liabilities............................................. 687 816
--------- ---------
Net deferred tax asset..................................................... $ 812 $ 254
Less: valuation allowance.................................................. (309) --
--------- ---------
$ 503 $ 254
--------- ---------
--------- ---------
</TABLE>
The valuation allowance was established for the amount by which deferred tax
assets exceed deferred tax liabilities in ther United Kingdom as a result of the
recent losses at IAC Ltd.
The following table accounts for the differences between the actual
provision and the amounts obtained by applying the statutory U.S. Federal Income
tax rate of 34% to the income before Income taxes:
<TABLE>
<CAPTION>
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Federal statutory tax rates............................................... (34)% 34% (34)%
State and local Income taxes, net of federal benefit...................... 18 (1) 29
Nontaxable interest....................................................... -- (69) (19)
Different effective tax rate in the United Kingdom........................ 30 4 6
Other..................................................................... (2) 5 (1)
-- -- --
12% (27)% (19)%
-- -- --
-- -- --
</TABLE>
Accumulated undistributed earnings of foreign subsidiaries at December 31,
1997 aggregated $2,229. No federal income taxes have been provided, since the
Company plans to reinvest undistributed earnings of the subsidiaries to finance
expansion and meet operating requirements. If such earnings were distributed,
foreign tax credits should become available under current law to reduce or
eliminate the resulting U.S. income tax liability.
32
<PAGE>
INDUSTRIAL ACOUSTICS COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE E--INCOME TAXES (CONTINUED)
Federal, foreign, state and local income taxes paid amounted to
approximately $118, $488 and $70 in 1997, 1996 and 1995, respectively.
NOTE F--EMPLOYEE BENEFIT PLANS
The Company has a Defined Contribution Tax Deferred Savings Plan covering
all U.S. employees not covered by collective bargaining agreements. The
Company's elective contribution is allocated to employees based on a five year
average salary basis and is integrated with Social Security. In 1997, the
Company expensed $300 in connection with this Plan.
The Company has a defined benefit pension plan in the United Kingdom
covering certain eligible employees. The Plan provides benefits based on years
of service and an employee's average compensation for the last three years of
employment before retirement. The Company's funding policy is to contribute
amounts sufficient to meet the minimum funding requirements. Assets of the plan
are comprised of a "with profits group" bond effected with an United Kingdom
assurance company.
Pension costs include the following components:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Service cost -- benefits earned during the period................... $ 312 $ 309 $ 450
Interest cost on projected benefit obligation....................... 465 389 1,137
Actual return on plan assets........................................ (373) (891) (2,125)
Net amortization and deferral....................................... (378) 275 1,026
--------- --------- ---------
Pension cost of the defined benefit plans........................... $ 26 $ 82 $ 488
--------- --------- ---------
--------- --------- ---------
</TABLE>
The funded status of the defined benefit plan and amounts recognized In the
consolidated balance sheets at December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Accumulated benefit obligation............................................. $ 5,535 $ 5,233
--------- ---------
--------- ---------
Projected benefit obligation............................................... $ 5,989 $ 5,696
Plan assets at fair value.................................................. 8,043 7,890
--------- ---------
Plan assets in excess of projected benefit obligation...................... 2,054 2,194
Unrecognized net gain...................................................... (1,924) (2,332)
Unrecognized prior service cost............................................ 1,053 1,195
Unrecognized not transition asset.......................................... (155) (202)
--------- ---------
Prepaid pension costs recognized in the balance sheet...................... $ 1,028 $ 855
--------- ---------
--------- ---------
</TABLE>
33
<PAGE>
INDUSTRIAL ACOUSTICS COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE F--EMPLOYEE BENEFIT PLANS (CONTINUED)
Assumptions used to calculate the actuarial present value of the projected
benefit obligation and the
expected long-term return on assets for the defined benefit plan are as follows:
<TABLE>
<CAPTION>
1997 1996
----- -----
<S> <C> <C>
Discount rate................................................................ 8.5% 8.5%
Rate of increase in future compensation levels............................... 6.5% 6.5%
Expected long term rate of return on plan assets............................. 8.5% 8.5%
</TABLE>
The Company contributes to multi-employer pension plans on behalf of
employees who are members of collective bargaining units. Benefit and asset
information comparable to that shown above for the Company's plans are not
determinable. Under the Employee Retirement Income Security Act of 1974, as
amended, an employer upon withdrawal from a multi-employer plan is required to
continue funding its proportionate share of the plan's unfunded vested benefits.
The plan administrator has not provided the Company with information regarding
its proportionate share of the plan's unfunded vested benefits (for withdrawal
liability purposes); however, the Company has no immediate intention of
withdrawing from the plan. Expenditures incurred amounted to $122, $145 and $119
In 1997, 1996 and 1995, respectively.
The Company has deferred compensation agreements with certain present and
past key officers, directors and employees ("participants"). The agreements
provide for the participants to receive defined amounts after reaching age 65.
The Company provides for the cost of the benefits payable under the agreements
over the participants' active employment. During the years ended December 31,
1997, 1996 and 1995, the Company incurred expenses related to these agreements
of $178, $202 and $164, respectively. As of December 31, 1997 and 1996, the
accrued liability totaled $1,339 and $1,367, respectively. The Company has
insured the lives of the participants to assist In the funding of this
liability.
NOTE G--LEASES
The Company conducts a large part of Its operations from leased facilities
which include manufacturing and office facilities. Certain leases include
options to renew for periods ranging from 5 to 67 years. Certain Company leases
also require it to pay all real estate taxes and operating costs and one lease
is subject to periodic rental escalations.
The following represents the amounts of assets under capital leases included
in property, plant and equipment:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
<S> <C> <C>
1997 1996
--------- ---------
Buildings and computer equipment........................................... $ 3,295 $ 3,295
Less accumulated amortization.............................................. (693) (554)
--------- ---------
$ 2,602 $ 2,741
--------- ---------
--------- ---------
</TABLE>
The building lease pertains to the New York manufacturing facility which
expires in 2019. However, the Company has entered into an agreement with the
landlord to purchase for $4,000 the approximately 72.500 square feet of
manufacturing space it now leases from the landlord.
34
<PAGE>
INDUSTRIAL ACOUSTICS COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE G--LEASES (CONTINUED)
Future minimum payments, by yearand in the aggregate, under capital leases
and noncancellable operating leases with initial or remaining terms of one year
or more consist of the following at December 31, 1997 (net of annual sub-lease
income of $98 through 2002):
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LOSSES
--------- -----------
<S> <C> <C>
Year ending December 31:
1998................................................................... $ 304 $ 409
1999................................................................... 304 383
2000................................................................... 304 110
2001................................................................... 304 59
2002................................................................... 291 19
Later years............................................................ 4,645 851
--------- -----------
Total minimum lease payments............................................. $ 6,152 $ 1,831
-----------
-----------
Less amounts representing Interest....................................... (3,019)
--------- -----------
Present value of minimum lease payments.................................. (3,133)
Less current portion..................................................... (78)
--------- -----------
$ 3,055
---------
---------
</TABLE>
The composition of rental expense is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------
<S> <C> <C> <C>
1997 1996 1995
--------- --------- ---------
Minimum rentals.................................................... $ 1,030 $ 908 $ 1,275
Sublease rental income............................................. (145) --
--------- --------- ---------
$ 885 $ 908 $ 1,275
--------- --------- ---------
--------- --------- ---------
</TABLE>
NOTE H--STOCK OPTION PLAN
On September 20, 1995, the Company adopted a stock option plan and granted
options to key employees to purchase 200,000 shares of common stock, the maximum
amount permitted under the plan, at $9.75 per share, the market value on the
date of grant. Options became exercisable after one year at the rate of 25% per
year for four consecutive years.
In January 1997. the options granted in 1995 were rescinded and new options
to purchase another 200,000 shares of common stock were granted at $8.00 per
share, the market value on the date of grant. The options will become
exercisable after one year at the rate of 25% per year for four consecutive
years.
Effective January 1, 1996, the Company adopted SFAS No. 123, "Accounting for
Stock-Based Compensation", which allows companies to measure compensation cost
in connection with employee stock compensation plans using a fair value based
method or to continue to use an intrinsic value based method. The Company will
continue to use the intrinsic value based method which generally does not result
in compensation cost. Had compensation cost been determined under the fair value
based method for the
35
<PAGE>
INDUSTRIAL ACOUSTICS COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE H--STOCK OPTION PLAN (CONTINUED)
stock options granted In 1995, the Company's 1997 and 1996 net (loss) income per
common share would have been changed to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
AS REPORTED PRO FORMA
----------- -----------
<S> <C> <C>
Net (loss) Income
1997.............................................................. ($ 1,218) ($ 1,366)
1996.............................................................. $ 364 $ 275
Net (loss) Income per common share
1997
Basic and diluted................................................... ($ 0.41) ($ 0.46)
1996
Basic and diluted................................................... $ 0.12 $ 0.09
</TABLE>
The fair value of each option is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions used for the options granted in l995: -- dividend yield 1.17%;
expected volatility 40%; risk free interest rate of 6.33%; and expected lives of
6 years.
NOTE I--GEOGRAPHIC INFORMATION
The Company and its subsidiaries operate within a single industry segment
which is the development, manufacturing, fabrication, and sale of products
designed for noise control and acoustically conditioned environments. The
Company's customers include governmental entities and companies in diversified
industries.
The Company primarily operates in two geographic areas: North America and
Europe. North America includes the United States and Canada. Europe includes the
United Kingdom and Germany. The following information sets forth the data by
geographic area.
During 1997, 1996 and 1995, revenues from the United States Government
amounted to approximately $l2,282, $15,510 and $13,169, respectively.
<TABLE>
<CAPTION>
NORTH
AMERICAN(1) EUROPEAN(2) ELIMINATION CONSOLIDATED
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997:
Net sales to unaffiliated customers...................... $ 53,645 $ 19,266 $ 72,911
Inter-area net sales..................................... 139 ($ 139)
----------- ----------- ----------- ------------
$ 53,784 $ 19,266 ($ 139) $ 72,911
----------- ----------- ----------- ------------
----------- ----------- ----------- ------------
Operating profit (loss)(3)............................... 1,322 (1,107) (359) (144)(4)
Identifiable assets(5)................................... 57,158 17,104 74,262
</TABLE>
36
<PAGE>
INDUSTRIAL ACOUSTICS COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE I--GEOGRAPHIC INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
NORTH
AMERICAN(1) EUROPEAN(2) ELIMINATION CONSOLIDATED
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1996:
Net sales to unaffiliated customers...................... $ 51,521 $ 22,102 $ 73,623
Inter-area net sales..................................... 226 1,864 ($ 2,090) --
----------- ----------- ----------- ------------
$ 51,747 $ 23,966 ($ 2,090) $ 73,623
----------- ----------- ----------- ------------
----------- ----------- ----------- ------------
Operating profit(3)...................................... 832 791 (258) 1,365(4)
Identifiable assets...................................... 54,155 18,690 72,845
YEAR ENDED DECEMBER 31, 1995:
Net sales to unaffiliated customers...................... $ 46,974 $ 23,659 $ 70,633
Inter-area net sales(3).................................. 336 1,368 ($ 1,704)
----------- ----------- ----------- ------------
$ 47,310 $ 25,027 ($ 1,704) $ 70,633
----------- ----------- ----------- ------------
----------- ----------- ----------- ------------
Operating profit (loss)(3)............................... 1,572 (1,537) 35(4)
Identifiable assets(s)(5)................................ 58,850 16,866 75,716
</TABLE>
- ------------------------
(1) Includes Canadian sales of $25, $114 and $448 in 1997, 1996 and 1995,
respectively.
(2) Includes German sales of $4,000, $3,891 and $4,691 in 1997, 1996 and 1995,
respectively.
(3) North American operating profit includes royalty income of $101 (1997), $74
(1996) and $419 (1995) charged against European operating profit and
Canadian operating profit of $1 (1997), $1 (1996), and $1 (1995). European
operating (loss) profit includes German operating profit (loss) of $61
(1997), ($152) (1996) and $124 (1995).
(4) Excludes interest expense of $940, $1,078 and $586 in 1997, 1996 and 1995,
respectively. The 1997 and 1996 elimination of $359 and $258, respectively,
relates to interest on an intercompany loan.
(5) North American includes Canadian assets of $202 (1997), $253 (1996) and $244
(1995). European includes German assets of $1,722 (1997), $2041 (1996) and
$1,862 (1995).
NOTE J--SUBSEQUENT EVENT
The principal stockholder of the Company entered into a stock-purchase
agreement, in January 1998, to sell his shareholdings, representing
approximately 64% of the outstanding common stock of the Company, to IAC Holding
Corp. whose principal investor is a European investment company.
37
<PAGE>
INDUSTRIAL ACOUSTICS COMPANY, INC. AND SUBSIDIARIES
SCHEDULE 11--VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
ADDITIONS (DEDUCTIONS)
BALANCE AT --------------------------
BEGINNING CHARGED TO OTHER BALANCE AT
OF COSTS AND ACCOUNTS- DEDUCTIONS- END OF
DESCRIPTION PERIOD EXPENSES DESCRIBE(1) DESCRIBE(2) PERIOD
- --------------------------------------- ----------- ----------- ------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1997
Allowances for doubtful accounts..... $ 913 ($ 391) ($ 8) $ 20 $ 534
Year ended December 31, 1996:
Allowances for doubtful accounts..... $ 613 302 20 (22) $ 913
Year ended December 31, 1995:
Allowances for doubtful accounts..... $ 1,090 (362) 1 (116) $ 613
</TABLE>
- ------------------------
(1) Represents the effect of exchange rate changes on translation of foreign
currencies into U.S. dollars.
(2) Represents write-offs (recoveries).
<PAGE>
INDUSTRIAL ACOUSTICS COMPANY, INC.
1160 COMMERCE AVENUE, BRONX, NEW YORK 10462
- --------------------------------------------------------------------------------
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF THE COMPANY
The undersigned hereby constitutes and appoints James A. Read and Robert M.
Davies, and each of them, as true and lawful agents and proxies with full power
of substitution in each, to represent the undersigned at the Special Meeting of
Shareholders of Industrial Acoustics Company, Inc. (the "Company") to be held at
1160 Commerce Avenue, Bronx, New York 10462, on October 29, 1998 at 10:00 a.m.
New York time and at any postponements and adjournments thereof, on all matters
coming before said meeting.
1. Approval of the Agreement and Plan of Merger between IAC Holdings Corp.
("Holdings") and the Company dated as of May 20, 1998, pursuant to which
Holdings will be merged with and into the Company and shareholders of the
Company (other than Holdings) will receive $11.00 in cash for each share of
Common Stock of the Company.
/ / FOR / / AGAINST
2. In their discretion, upon other matters as they may properly come before the
meeting.
(CONTINUED AND TO BE SIGNED ON THE OTHER SIDE.)
<PAGE>
(CONTINUED FROM OTHER SIDE.)
You are encouraged to specify your choices by marking the appropriate box,
see reverse side, but you need not mark any boxes if you wish to vote in
accordance with the Board of Directors' recommendations. The persons named on
the reverse side as agents and proxies cannot vote your share unless you sign
and return this card.
This proxy when properly executed will be voted in the manner directed
herein by the undersigned. If no direction is made, this proxy will be voted FOR
Proposal 1.
Dated 1998_______________________________
_________________________________________
_________________________________________
_________________________________________
Signature(s)
PLEASE MARK, SIGN AND RETURN PROMPTLY USING THE ENCLOSED ENVELOPE.
EXECUTORS, ADMINISTRATORS, TRUSTEES, ETC. SHOULD GIVE A TITLE AS SUCH. IF THE
SIGNER IS A CORPORATION, PLEASE SIGN FULL CORPORATE NAME BY DULY AUTHORIZED
OFFICER.
<PAGE>
AGREEMENT
AND PLAN OF MERGER
BETWEEN
IAC HOLDINGS CORP.
AND
INDUSTRIAL ACOUSTICS COMPANY, INC.
Agreement and Plan of Merger (the "Agreement"), dated as of
May 20, 1998, between IAC HOLDINGS CORP., a Delaware corporation ("Holdings")
and INDUSTRIAL ACOUSTICS COMPANY, INC., a New York corporation (the "Company").
WHEREAS, Holdings is a corporation duly organized and existing
under the laws of the State of Delaware and has an authorized capital of 1,000
shares of common stock, par value $.01. As of the date hereof, 1,000 shares of
Common Stock of Holdings are issued and outstanding and entitled to one vote per
share.
WHEREAS, the Company is a corporation duly organized and
existing under the laws of the State of New York and has an authorized capital
of 5,000,000 shares of common stock, $.10 par value (the "Common Stock"). As of
the date hereof, 2,981,211 shares of Common Stock are issued and outstanding and
entitled to one vote per share.
<PAGE>
2
WHEREAS, the Board of Directors of the Company has determined
that (i) a merger between Holdings and the Company is fair and in the best
interests of the Company and its shareholders and (ii) among other things, the
business purpose in effecting such a merger is to ultimately increase the value
of the Company and improve its management structure.
WHEREAS, notwithstanding anything contained herein to the
contrary, at any time prior to filing a certificate of merger with the Secretary
of State of New York, the plan of merger may be abandoned by the Board of
Directors of the Company or Holdings.
WHEREAS, the respective Boards of Directors of Holdings and
the Company and the stockholders of Holdings have approved this Agreement and
have directed that this Agreement be submitted to a vote of the shareholders of
the Company.
NOW THEREFORE, in consideration of the mutual agreements and
covenants set forth herein, Holdings and the Company hereby agree, subject to
the terms and conditions hereinafter set forth, as follows:
<PAGE>
3
ARTICLE I
MERGER
1.1 Merger. Subject to the terms and conditions of this
agreement, Holdings shall be merged with and into the Company in accordance with
the New York Business Corporation Law (the "NYBCL") and the General Corporation
Law of the State of Delaware (the "DGCL") (the "Merger").
The separate existence of Holdings shall cease, and the
Company shall be the surviving corporation and continue its corporate existence
under the laws of the State of New York. Thereafter, without further action, the
Company shall succeed, insofar as permitted by law, to all the rights, assets,
privileges, franchises, liabilities and obligations of Holdings.
1.2 Filing and Effectiveness. The Merger shall become
effective upon the completion of the following actions:
(a) This Agreement and the Merger shall have been approved
by the shareholders of the Company in accordance with the provisions of the
NYBCL;
(b) All of the conditions precedent to the consummation of
the Merger specified in this Agreement shall have been satisfied or duly waived
by the party entitled to satisfaction thereof;
<PAGE>
4
(c) An executed Certificate of Merger, in the form attached
hereto as Exhibit A, meeting the requirements of the DGCL or an executed
counterpart of this Agreement shall have been filed with the Secretary of State
of Delaware; and
(d) An executed Certificate of Merger, in the form attached
hereto as Exhibit B, meeting the requirements of the NYBCL shall have been filed
with the Secretary of State of New York.
(e) Holdings shall have the funds necessary, or shall have
arranged to borrow the funds on terms reasonably acceptable to its Board of
Directors, to pay the Merger Consideration (as defined herein).
The date and time when the Merger shall become effective, as
set forth above, is hereinafter referred to as the "Effective Date."
1.3 Certificate of Incorporation. The Certificate of
Incorporation of the Company, attached hereto as Exhibit C, in effect
immediately prior to the Effective Date shall continue in full force and effect
as the Certificate of Incorporation of the Company until duly amended in
accordance with the provisions thereof and applicable law, and the name of the
surviving Corporation shall be Industrial Acoustics Company, Inc.
<PAGE>
5
1.4 By-laws. The By-laws of the Company in effect immediately
prior to the Effective Date shall continue in full force and effect as the
By-laws of the Company until duly amended in accordance with the provisions
thereof and applicable law.
1.5 Directors and Officers. The directors and officers of the
Company immediately prior to the Effective Date shall continue as the directors
and officers of the Company until their successors shall have been elected or
until otherwise provided by law, the Certificate of Incorporation of the Company
or the By-laws of the Company.
1.6 Effect of Merger. Upon the Effective Date, the separate
existence of Holdings shall cease and the Company, (i) shall continue to possess
all of its assets, rights, powers and property as constituted immediately prior
to the Effective Date, shall be subject to all actions previously taken by its
Board of Directors and shall succeed, without other transfer, to all of the
assets, rights, powers and property of Holdings in the manner and as more fully
set forth in Section 259 of the DGCL, and (ii) shall continue to be subject to
all of its debts, liabilities and obligations as constituted immediately prior
to the Effective Date and succeed, without other transfer, to all of the debts,
liabilities and obligations of
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Holdings in the same manner as if the Company had incurred them, all as more
fully provided under the applicable provisions of the DGCL and the NYBCL.
ARTICLE II
MANNER OF CONVERSION OF STOCK
2.1 Outstanding stock of the Company. Upon the Effective Date,
by virtue of the Merger, each share of Common Stock outstanding immediately
prior thereto (other than Common Stock held by Holdings and Common Stock held by
the Company as treasury stock) shall be converted into the right to receive
$11.00 per share in cash (the "Merger Consideration"), upon surrender of the
stock certificates representing such Common Stock in accordance with Section 2.2
herein, with any fractional shares issuable to a registered owner of Common
Stock in the aggregate to be rounded up to the nearest whole share.
Each outstanding share of Common Stock owned by Holdings or
held by the Company as treasury stock will be cancelled.
2.2 Stock Certificates. (a) After the Effective Date, each
holder of a certificate(s) formerly evidencing Common Stock which has been
converted into the right to receive the Merger Consideration, upon surrender of
the same to an
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exchange agent appointed by the Company (the "Exchange Agent"), shall be
entitled to receive the Merger Consideration.
(b) Promptly after the Effective Date, the Exchange Agent
shall send a notice and a transmittal form (which shall specify that the
delivery shall be effected, and risk of loss and title shall pass, only upon
proper delivery of the certificates formerly representing Common Stock to the
Exchange Agent (subject to Section 2.2(d)) to each holder of certificates
formerly evidencing Common Stock advising such holder of the effectiveness of
the Merger and the procedure for surrendering to the Exchange Agent such
certificates for exchange into the Merger Consideration. The notice and
transmittal form provided for in this Section 2.2(b) shall be sent by the
Exchange Agent to the address for each holder of Common Stock contained in the
stock record books of the Company promptly after the Effective Date. Each holder
of certificates formerly evidencing Common Stock, upon proper surrender thereof
to the Exchange Agent together and in accordance with such transmittal form,
shall be entitled to receive in exchange therefor the Merger Consideration.
Notwithstanding the foregoing, neither the Exchange Agent nor any party shall be
liable to a holder of certificates formerly evidencing Common Stock for any
amount which may be required to be paid to a public official pursuant to any
applicable abandoned property, escheat or similar law.
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(c) If any portion of the Merger Consideration is to be
delivered to a Person other than the Person in whose name the certificates
surrendered in exchange therefor are registered, it shall be a condition to such
payment that the certificates so surrendered shall be properly endorsed or
accompanied by appropriate stock powers and otherwise in proper form for
transfer, that such transfer otherwise be proper and that the Person requesting
such transfer shall pay to the Exchange Agent any transfer or other taxes
payable by reason of the foregoing or establish to the satisfaction of the
Exchange Agent that such taxes have been paid or are not required to be paid.
For purposes of this Agreement, "Person" means an individual, a corporation, a
limited liability company, a partnership, an association, a trust or any other
entity or organization, including a government or political subdivision or any
agency or instrumentality thereof.
(d) In the event any certificate theretofore representing
Common Stock shall have been lost, stolen or destroyed, upon the making of an
appropriate affidavit of that fact by the shareholder claiming such certificate
to be lost, stolen or destroyed, such shareholder shall be paid the Merger
Consideration; provided that when the Merger Consideration is paid to such
shareholder, the Board of Directors of the Company may, in its discretion and as
a condition precedent to the issuance
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thereof, require the claiming Person to give the Company a bond or
indemnification in such form and sum as the Company may reasonably direct as
indemnity against any claim that may be made against the Company with respect to
the certificate alleged to have been lost, stolen or destroyed.
2.3 Outstanding Common Stock of Holdings. Upon the Effective
Date, by virtue of the merger, each issued and outstanding common stock of
Holdings shall be cancelled and converted into one share of Common Stock of the
Company.
ARTICLE III
GENERAL
3.1 Termination and Abandonment. At any time prior to the
Effective Date, this Agreement may be terminated and the Merger abandoned by the
Board of Directors of either Holdings or the Company if (a) approval by the
shareholders of the Company specified in Article I hereof shall not have been
obtained, or (b) the respective Board of Directors of either Holdings or the
Company determines that in its sole discretion the Merger does not appear to be
in the best interests of either of Holdings or the Company or their respective
shareholders or is otherwise not advisable.
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3.2 Amendment. This Agreement may be amended, modified,
supplemented or abandoned at any time (before or after shareholder approval)
prior to the Effective Date with the mutual consent of the Boards of Directors
of Holdings and the Company; provided, however, that this Agreement may not be
amended, modified or supplemented after it has been approved by the shareholders
of the Company in any manner which, in the judgment of the Board of Directors of
the Company, would have a material adverse effect on the rights of such
shareholders or in any manner not permitted under applicable law.
3.3 Headings. The headings set forth herein are inserted for
convenience or reference only and are not intended to be part of, or to affect
the meaning or interpretation of, this Agreement.
3.4 Counterparts. This Agreement may be executed in two or
more counterparts, each of which shall constitute an original, and all of which,
when taken together, shall constitute one and the same instrument.
3.5 Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York without regard to
principles of conflicts of law, except to the extent that the laws of the State
of Delaware require application herein.
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IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be executed on its behalf and attested by its officers hereunto
duly authorized, all as of the date and year first above written.
INDUSTRIAL ACOUSTICS COMPANY, INC.
By: /s/ Frederic M. Oran
-------------------------------
Name: Frederic M. Oran
Title: President
Attest:
By: /s/ Robert N. Bertrand
--------------------------------
Name: Robert N. Bertrand
Title: Secretary
IAC HOLDINGS CORP.
By: /s/ James A. Read
-------------------------------
Name: James A. Read
Title: President
Attest:
By: /s/ Martin P. Dineen
--------------------------------
Name: Martin P. Dineen
Title: Secretary
