-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OezoqCiIk4SA0Ud7KFFt+i+0d78cpeItvYmamFckjjh8gReBWNp9o1hYMO5kR4Ix CMqMrsfB7onv5wjL8kLvJw== 0000350750-99-000005.txt : 19990325 0000350750-99-000005.hdr.sgml : 19990325 ACCESSION NUMBER: 0000350750-99-000005 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990323 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BAIRNCO CORP /DE/ CENTRAL INDEX KEY: 0000350750 STANDARD INDUSTRIAL CLASSIFICATION: PLASTICS, MATERIALS, SYNTH RESINS & NONVULCAN ELASTOMERS [2821] IRS NUMBER: 133057520 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-08120 FILM NUMBER: 99570339 BUSINESS ADDRESS: STREET 1: 2251 LUCIEN WAY SUITE 300 CITY: MAITLAND STATE: FL ZIP: 32751 BUSINESS PHONE: 4078752222 MAIL ADDRESS: STREET 1: 2251 LUCIEN WAY, SUITE 300 CITY: MAITLAND STATE: FL ZIP: 32751-7037 10-K 1 FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1998 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number: 1-8120 BAIRNCO CORPORATION (Exact name of Registrant as specified in its charter) Delaware 13-3057520 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 2251 Lucien Way, Maitland, Florida 32751 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (407) 875-2222 Securities registered pursuant to Section 12(b) of the Act: Name of each Exchange on Title of each class which registered Common Stock, par value $.01 per share New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No On March 8, 1999, the aggregate market value of the Registrant's voting stock held by non-affiliates was $38,993,888. On March 8, 1999, there were 8,209,659 shares of Common Stock outstanding, exclusive of treasury shares or shares held by subsidiaries of the Registrant. Parts I, II and IV incorporate information by reference from the Annual Report to Stockholders for the fiscal year ended December 31, 1998. Part III incorporates information by reference from the Proxy Statement dated March 17, 1999 in connection with the Registrant's Annual Meeting of Stockholders to be held on April 22, 1999. PART I Item 1. BUSINESS a. Recent Developments and Description Bairnco Corporation was incorporated under the laws of the State of New York on April 9, 1981. Effective September 24, 1991, Bairnco Corporation changed its state of incorporation from New York to Delaware. Unless otherwise indicated herein, the terms "Bairnco" and the "Corporation" refer to Bairnco Corporation and its subsidiaries. Bairnco's two core businesses are Arlon's Engineered Materials and Components, and Kasco's Replacement Products and Services. At December 31, 1998, Bairnco employed 816 persons including 13 Headquarters personnel. Bairnco's operations occupy approximately 634,700 square feet of factory and office space at its principal locations. There is an additional 54,000 square feet of leased space used as field warehouses throughout North America. b. & c. Financial Information About Industry Segments and Narrative Description of Business Bairnco Corporation is a diversified multinational company that operates two business sectors. Engineered materials and components are designed, manufactured and sold under the Arlon brand identity to electronic, industrial and commercial markets. These products are based on common technologies in coating, laminating, polymers and dispersion chemistry. Replacement products and services are manufactured and distributed under the Kasco brand identity principally to supermarkets, meat and deli operations, and meat, poultry and fish processing plants throughout the United States, Canada and Europe. Kasco also manufactures small band saw blades for cutting metal and wood, and large band saw blades for use at lumber mills. In Canada and France, in addition to providing its replacement products, Kasco also distributes equipment to the supermarket and food processing industries. Financial data and other information about the Corporation's segments is set forth in Note 10 to the Consolidated Financial Statements on pages 29 through 31 and on pages 4 through 7 of Bairnco's 1998 Annual Report to Stockholders which is incorporated herein by reference. This information should be read in conjunction with the "Financial History" set forth on page 9 of Bairnco's 1998 Annual Report to Stockholders, and "Management's Discussion and Analysis" set forth on pages 10 and 13 of Bairnco's 1998 Annual Report to Stockholders, which is incorporated herein by reference. The principal facilities utilized by each segment are detailed on page 10 under "Item 2. PROPERTIES" of this filing. ENGINEERED MATERIALS AND COMPONENTS (ARLON) Description of Business Engineered materials and components are designed, manufactured and sold under the Arlon brand identity to electronic, industrial and commercial markets. These products are based on common technologies in coating, laminating, polymers and dispersion chemistry. Arlon's principal products include high technology materials for the printed circuit board industry, pressure sensitive and adhesive coated cast and calendered vinyl films, custom-engineered laminates and coated products, and special silicone rubber compounds and components. Arlon Materials for Electronics has an international reputation as the premier supplier of high technology materials for the printed circuit board industry. These products are marketed principally to printed circuit board manufacturers and OEM's by a direct sales force in concert with strong technical support teams in the US and through distributors and manufacturers representatives in Europe, the Far East, and South America. Our Electronic Substrates product line includes high temperature, high performance thermoset laminates and prepreg bonding plies used in circuit boards for sophisticated commercial applications and military electronics. These applications require materials that withstand continuous high or widely varying operating temperatures, provide ease of field reparability, are highly reliable, and improve board fabrication yields. Intermediate temperature laminates, which provide improved product reliability and ease of manufacture at a lower cost, are also key to the line. The Microwave Materials product line offers application matched, reinforced PTFE and other resin based laminates providing high yields and high performance for low signal-loss and frequency-dependent microwave applications. The applications for this product line include digital cordless telephones, cellular phone systems, direct broadcast satellite TV systems, personal communications networks, global positioning satellites, local area networks, collision avoidance systems, and radar detection systems. Arlon specialty graphic films are marketed under the Calon brand name and include cast and calendered vinyl films that are manufactured in a wide variety of colors, face stocks and adhesive systems. These vinyl films are used in commercial and electrical signage, point of purchase displays, highway signage, fleet markings, and other commercial advertising applications. In November of 1998, Bairnco announced the purchase of MII International, Inc., a manufacturer of adhesive coated films for use in the graphics and industrial markets. MII's product lines complement Arlon's current vinyl product lines, and will provide product line extensions, additional brand recognition, product development synergies, and penetration into new customer segments and markets. The acquisition also expanded Arlon's coating and converting capacity. Custom engineered laminates and coated products are also manufactured and marketed under the Arlon brand identity. Typical applications include insulating foam tapes for thermopane windows, specialty flexible circuit materials, electrical insulation materials for motors and transformers, thermal insulation panels for appliances and cars, identification cards and labels, durable printing stock, and other custom engineered laminates for specific industrial applications. A line of silicone rubber materials, used in a broad range of consumer, industrial and commercial products, is also manufactured and marketed under the Arlon brand identity. Typical applications and products include silicone rubber for molding composites, silicone rubber insulating tapes for traction motor coil windings, insulation for industrial flexible heaters, silicone materials for high temperature hose and duct markets, insulating tapes for electrical splices, as well as compliant thermally and electrically conductive silicone sheet adhesives known as ThermabondT. Competition Arlon has numerous competitors ranging in size from small, sole proprietorships to units of very large, multinational corporations that in certain instances have far greater market positions and financial resources than the Corporation's. The principal method of competition for Arlon's products varies by product line and type of customer. While competition for established lines is usually based on one or more of lead time, price, product performance, technical support and customer service, it may also be based on the ability to service emerging technologies through the custom design of new products, or redesign of existing products, and materials for the new applications. For high performance materials sold to the printed circuit board industry, the consistent technical performance of the materials supplied in excess of minimum specified standards can be the critical competitive element. In addition, Arlon sells a significant portion of its circuit board materials into the Japanese and European markets where local producers of similar materials have a competitive advantage related to their geographic location. Distribution Arlon products are marketed by company sales personnel, outside sales representatives and distributors in the North and South America, Europe, the Far East and several other international markets. Raw Materials and Purchased Parts The essential raw materials used in Arlon engineered materials and components are silicone rubber, fiberglass cloth, pigments, steel and aluminum parts, copper foil, aluminum foil, polyethylene foam and various plastic films, special papers and release liners, vinyl resins, various adhesives and solvents, TeflonT or polytetrafluoroethylene (PTFE) resin, polyimide resin, epoxy resins, and various chemicals. Generally, these materials are each available from several qualified suppliers. There are, however, several raw materials used in Arlon's products that are purchased from chemical companies and are proprietary in nature. Other raw materials are purchased from a single approved vendor on a "sole source" basis although alternative sources could be developed in the future if necessary. However, the qualification procedure can take up to several months and could therefore interrupt production if the primary raw material source was lost unexpectedly. Due to the number and diversity of Arlon's products it is unlikely that availability problems with any one raw material would have a material adverse effect on Arlon. The Corporation is aware that a raw material supplier will discontinue the sale of a resin system currently used in certain Arlon products. An alternative resin system has been qualified and is expected to completely replace the existing resin system during 1999. There are no other known limitations to the continued availability of Arlon's raw materials. Current suppliers are located in the United States, Japan, Europe and Brazil. Employees As of December 31, 1998, approximately 486 employees were employed by the operations, which constitute Arlon's engineered materials and components. Patents and Trademarks The Corporation owns several registered trademarks under which certain Arlon products are sold. The Corporation does not believe that the loss of any or all of these trademarks would have a material adverse effect on this segment. REPLACEMENT PRODUCTS AND SERVICES (KASCO) Description of Business Replacement products and services are manufactured and distributed under the Kasco brand identity principally to supermarkets, meat and deli operations, and meat, poultry and fish processing plants throughout the United States, Canada and Europe. These products and services include band saw blades for cutting meat and fish, chopper plates and knives for grinding meat, seasoning products, preventive maintenance for equipment in meat and deli operations, and other related butcher supply products. Kasco also manufactures small band saw blades for cutting metal and wood, and large band saw blades for use at lumber mills. Kasco's Canadian and French operations also distribute equipment to the supermarket and food processing industries. Replacement products and services are sold under a number of brand names including Kasco in the United States and Canada, Atlantic Service in the United Kingdom, and Bertram & Graf and Biro in Continental Europe. Competition and Marketing Kasco competes with several large and medium-sized national and regional companies, as well as numerous small local companies. The principal methods of competition are service, price and product performance. The performance of meat band saw blades used in cutting meat or other food items is balanced between minimizing waste and maximizing the efficiency and productivity of the band saw machine and operator or other cutting/processing equipment being used. During 1998, Kasco made several product design improvements to its band saw blades and its chopper plates and knives. Kasco has introduced a line of premium wood cutting band saw blades for use by professional cabinetry and furniture makers and serious hobbyists. The Mealtime Solutions seasoning program continues to be a success as sales for home meal replacement items within supermarkets increase. Mealtime Solutions offers a package of seasoning blends, recipes and instructions which allows a supermarket to present value-added products in their meat and deli departments. During 1998, Kasco developed several new product lines which expand their Mealtime Solutions program into deli and seafood departments. In North America, Kasco supplies its products and services directly to the supermarket and meat cutting industries through a continent-wide network of service professionals and exclusive distributors. During 1998, Kasco increased its emphasis on preventive maintenance, increasing the value-added service its network of professionals provides to customers. Raw Materials and Purchased Supplies High quality carbon steel is the principal raw material used in the manufacture of band saw blades and is purchased from multiple domestic and international suppliers. Tool steel is utilized in manufacturing meat grinder plates and knives and is purchased from qualified suppliers located in the United States, Europe and Japan. Equipment, replacement parts and supplies are purchased from a number of manufacturers and distributors, mostly in the United States and Europe. In France, certain specialty equipment and other items used in the supermarket industry and in the food processing industry are purchased and resold under exclusive distributorship agreements with the equipment manufacturers. All of the raw materials and purchased products utilized by this segment have been readily available throughout this last year and, despite some tightness in several seasoning raw materials forecasted for 1999, Kasco's long-term supply contracts assume adequate availability of raw materials to sustain the current growth rate in this segment. Employees As of December 31, 1998, approximately 317 persons were employed in the replacement products and services segment. Patents and Trademarks The Corporation has a number of United States and foreign mechanical patents related to several of the products manufactured and sold by Kasco, as well as a number of design patents and registered trademarks. The Corporation does not believe, however, that the loss of any or all of those patents would have a material adverse effect on this segment. d. Foreign Operations The Corporation has foreign operations located in Canada, the United Kingdom, France, and Germany. Information on the Corporation's operations by geographical area for the last three fiscal years is set forth in Note 10 to the Consolidated Financial Statements on pages 29 through 31 of Bairnco's 1998 Annual Report to Stockholders which is incorporated herein by reference. In addition, export sales from the Corporation's US based operations for the years ended December 31, 1998, 1997 and 1996 were $30,554,000, $28,770,000 and $28,692,000, respectively. Export sales to any particular country or geographic area did not exceed 10% of consolidated sales during any of these years. Item 2. PROPERTIES The following chart lists for the Corporation as a whole, and by each of its segments, the principal locations of the Corporation's facilities and indicates whether the property is owned or leased and if leased, the lease expiration date. LEASED OR OWNED LOCATION SQUARE FEET (LEASE EXPIRATION) CORPORATION TOTAL 688,700 Headquarters Maitland, FL 7,700 Leased (Expires 2000) Engineered Materials and Components (Arlon) Bear, DE 135,000 Owned East Providence, RI 60,000 Owned Northbrook, IL 30,000 Owned Rancho Cucamonga, CA 80,000 Owned Santa Ana, CA 124,000 Leased (Expires 2003) Replacement Products and Services (Kasco) Gwent, Wales, UK 25,000 Owned Pansdorf, Germany 22,000 Owned Paris, France 20,000 Leased (Expires 2000) St. Louis, MO 78,000 Owned St. Louis, MO 20,000 Leased (Expires 2000) Toronto, Ontario, Canada 33,000 Owned Field Warehouses (Approximately 70 locations in North America) 54,000 Leased Item 3. LEGAL PROCEEDINGS Bairnco and its subsidiaries are among the defendants in a lawsuit pending in the U.S. District Court for the Southern District of New York (the "Transactions Lawsuit") in which it is alleged that Bairnco and others are derivatively liable for the asbestos-related claims against its former subsidiary, Keene Corporation ("Keene"). The plaintiffs in the Transactions Lawsuit are the trustees of Keene Creditors Trust ("KCT"), a successor in interest to Keene. In the Transactions Lawsuit complaint, the KCT alleges that certain sales of assets by Keene to other subsidiaries of Bairnco were fraudulent conveyances and otherwise violative of state law, as well as being violative of the civil RICO statute, 18 U.S.C. Section 1964. The complaint seeks compensatory damages of $700 million, interest, punitive damages, and trebling of the compensatory damages pursuant to civil RICO. In a series of decisions that remain subject to appeal, the court has dismissed plaintiff's civil RICO claims; dismissed 14 of the 21 defendants named in the complaint; and partially granted defendants' motions for summary judgment on statute of limitations grounds. Discovery is now underway as to the remaining claims and defendants. Keene was spun off in 1990, filed for relief under Chapter 11 of the Bankruptcy Code in 1993, and emerged from Chapter 11 pursuant to a plan of reorganization approved in 1996 (the "Keene Plan"). The Keene Plan provided for the creation of the KCT, and transferred the authority to prosecute the Transactions Lawsuit from the Official Committee of Unsecured Creditors of Keene (which initiated the lawsuit in the Bankruptcy Court in 1995) to the KCT. The Keene Plan further provided that only the KCT, and no other entity, can sue Bairnco in connection with the claims in the Transactions Lawsuit complaint. Therefore, although a number of other asbestos-related personal injury and property damage cases against Bairnco nominally remain pending in courts around the country, it is expected that the resolution of the Transactions Lawsuit in substance will resolve all such claims. Bairnco also is the defendant in a separate action by the KCT (the "NOL Lawsuit"), also pending in the United States District Court for the Southern District of New York, in which the KCT seeks the exclusive benefit of tax refunds attributable to the carryback by Keene of certain net operating losses ("NOL Refunds"), notwithstanding certain provisions of applicable tax sharing agreements between Keene and Bairnco. (As with the Transactions Lawsuit, the NOL Lawsuit was commenced during Keene's Chapter 11 case and, pursuant to the Keene Plan, the KCT became the plaintiff in the lawsuit and the lawsuit was moved from the bankruptcy Court to the District Court.) Pending resolution of the NOL Lawsuit, any refunds actually received are to be placed in escrow. Through December 31, 1998, approximately $28.5 million of NOL Refunds had been received and placed in escrow. There can be no assurance whatsoever that resolution of the NOL Lawsuit will result in the release of any portion of the NOL Refunds to Bairnco. Bairnco and its Arlon subsidiary also are among the defendants in a third action by the KCT (the "Properties Lawsuit"), commenced December 8, 1998 and pending in the United States District Court for the Southern District of New York. In the Properties Lawsuit complaint, the KCT seeks a declaratory judgment that it owns certain patents and real property purchased by Arlon from Keene in 1989, based on the allegations that technical title to these assets was not conveyed at the time of the sale and that no proof of claim specifically referencing these assets was filed during Keene's Chapter 11 case. Management believes that Bairnco has meritorious defenses to all claims or liability purportedly derived from Keene and that it is not liable, as an alter ego, successor, fraudulent transferee or otherwise, for the asbestos-related claims against Keene or with respect to Keene products. Bairnco Corporation and its subsidiaries are defendants in a number of other actions. Management of Bairnco believes that the disposition of these other actions, as well as the actions and proceedings described above, will not have a material adverse effect on the consolidated results of operations or the financial position of Bairnco Corporation and its subsidiaries as of December 31, 1998. Item 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS No matter was submitted to a vote of security holders during the fourth quarter of 1998. EXECUTIVE OFFICERS OF THE REGISTRANT The information required with respect to executive officers of the Corporation is as follows: Name and Age of Data Pertaining to Executive Officers Executive Officers Luke E. Fichthorn III (57) Mr. Fichthorn has served as Chairman of Bairnco since May 23, 1990, and on December 18, 1991, became Chief Executive Officer of Bairnco. For over twenty-five years, Mr. Fichthorn has been a private investment banker and partner of Twain Associates, a private investment banking and consulting firm. Mr. Fichthorn served as a director of Keene Corporation, a former subsidiary of Bairnco Corporation from August, 1969 until May, 1981, and became a director of Bairnco in January, 1981. Mr. Fichthorn is also a director of Florida Rock Industries, Inc. and FRP Properties, Inc., neither of which is affiliated with Bairnco. J. Robert Wilkinson (64) Mr. Wilkinson was elected Vice President - Finance and Treasurer in March 1990. From September 1986 to September 1989, Mr. Wilkinson was Bairnco's Vice President - Controller. From October 1989 to March 1990 he was Executive Vice President of Shielding Systems Corporation, a wholly owned subsidiary of Bairnco. James W. Lambert (45) Mr. Lambert was appointed Corporate Controller of Bairnco on August 11, 1997. Prior to joining Bairnco, Mr. Lambert was employed for over 15 years by Air Products and Chemicals Inc., in a variety of financial, marketing and product management capacities. PART II Item 5. MARKET FOR THE REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS a. & c. Data regarding market prices of Bairnco's common stock is included in the "Quarterly Results of Operations" on page 14 of Bairnco's 1998 Annual Report to Stockholders which is incorporated herein by reference. Bairnco's common stock is traded on the New York Stock Exchange under the symbol BZ. Data on dividends paid is included in the Consolidated Statements of Income on page 16 of Bairnco's 1998 Annual Report to Stockholders, which is incorporated herein by reference. The quarterly cash dividend remained constant at $0.05 per share during 1998. The Board continues to review the dividend on a quarterly basis. b. The approximate number of holders of record of Bairnco common stock (par value $.01 per share) as of December 31, 1998 was 1,436. Item 6. SELECTED FINANCIAL DATA Reference is made to "Financial History" on page 9 of Bairnco's 1998 Annual Report to Stockholders, which is incorporated herein by reference. Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Reference is made to the "Management's Discussion and Analysis" on pages 10 through 13 of Bairnco's 1998 Annual Report to Stockholders which is incorporated herein by reference. Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The interest on the Corporation's bank debt is floating and based on prevailing market interest rates. For market rate based debt, interest rate changes generally do not affect the market value of the debt but do impact future interest expense and hence earnings and cash flows, assuming other factors remain unchanged. A theoretical one percentage point change in market rates in effect on December 31, 1998 would increase interest expense and hence reduce the net income of the Corporation by approximately $250,000 per year. The Corporation's fiscal 1998 sales denominated in a currency other than U.S. dollars were less than 15% of total sales and net assets maintained in a functional currency other than U.S. dollars at December 31, 1998 were less than 15% of total net assets. The effects of changes in foreign currency exchange rates has not historically been significant to the Corporation's operations or net assets. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Reference is made to the Consolidated Financial Statements and accompanying Notes included on pages 16 through 32 and the "Quarterly Results of Operations" on page 14 of Bairnco's 1998 Annual Report to Stockholders which is incorporated herein by reference. Financial Statement Schedules are included in Part IV of this filing. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required with respect to directors of Bairnco is included in the Proxy Statement for the 1999 Annual Meeting of Stockholders of Bairnco, which will be filed with the Securities and Exchange Commission and is incorporated herein by reference. See the information regarding executive officers of the Corporation on page 13 of this Annual Report on Form 10-K. Item 11. EXECUTIVE COMPENSATION The information required by Item 11 is included in the Proxy Statement for the 1999 Annual Meeting of Stockholders of Bairnco, which will be filed with the Securities and Exchange Commission and is incorporated herein by reference. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by Item 12 is included in the Proxy Statement for the 1999 Annual Meeting of Stockholders of Bairnco, which will be filed with the Securities and Exchange Commission and is incorporated herein by reference. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by Item 13 is included in the Proxy Statement for the 1999 Annual Meeting of Stockholders of Bairnco, which will be filed with the Securities and Exchange Commission and is incorporated herein by reference. PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K a) 1. Financial Statements Included in the 1998 Annual Report to Stockholders which is included as Exhibit 13 to this Annual Report on Form 10-K: - Report of Independent Certified Public Accountants; - Consolidated Statements of Income for the years ended December 31, 1998, 1997 and 1996; - Consolidated Statements of Comprehensive Income for the years ended December 31, 1998, 1997 and 1996; - Consolidated Balance Sheets as of December 31, 1998 and 1997; - Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996; - Consolidated Statements of Stockholders' Investment for the years ended December 31, 1998, 1997 and 1996; - Notes to Consolidated Financial Statements. 2. Financial Statement Schedules Included in Part IV of this Annual Report on Form 10-K: - Report of Independent Certified Public Accountants on Financial Statement Schedules on page 20 of this Annual Report on Form 10-K; - Financial Statement Schedules for the years ended December 31, 1998, 1997 and 1996: Schedule II - Valuation and Qualifying Accounts on page 21 of this Annual Report on Form 10-K; All other schedules and notes are omitted because they are either not applicable, not required or the information called for therein appears in the Consolidated Financial Statements or Notes thereto. 3. See Index to Exhibits on pages 23 through 25 of this Annual Report on Form 10-K. b) Reports on Form 8-K - None in fiscal year 1998. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. BAIRNCO CORPORATION (Registrant) Date: March 19, 1999 By: /s/ J. Robert Wilkinson J. Robert Wilkinson Vice President-Finance and Treasurer (Principal Financial Officer) SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been executed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated above. /s/ Luke E. Fichthorn III Luke E. Fichthorn III - Chairman and CEO /s/ Richard A. Shantz Richard A. Shantz - Director /s/ Charles T. Foley Charles T. Foley - Director /s/ William F. Yelverton William F. Yelverton - Director /s/ J. Robert Wilkinson J. Robert Wilkinson - Vice President-Finance and Treasurer (Principal Financial Officer) /s/ James W. Lambert James W. Lambert - Controller (Principal Accounting Officer) REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULES TO BAIRNCO CORPORATION: We have audited in accordance with generally accepted auditing standards, the consolidated financial statements included in Bairnco Corporation's Annual Report to Stockholders incorporated by reference in this Form 10-K, and have issued our report thereon dated January 21, 1999. Our audits were made for the purpose of forming an opinion on those statements taken as a whole. The schedule listed in Item 14(a) 2 is the responsibility of the company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic consolidated financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic consolidated financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole. Orlando, Florida January 21, 1999 Arthur Andersen LLP BAIRNCO CORPORATION AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
Balance Balance Year Ended Beginning Deductions End December 31, of Year Expenses (a) Other (b) of Year 1998 - Reserve for Doubtful Accounts $943,000 $372,000 $(241,000) $150,000 $1,224,000 1997 - Reserve for Doubtful Accounts $822,000 $365,000 $(244,000) $ -- $ 943,000 1996 - Reserve for Doubtful Accounts $763,000 $300,000 $(241,000) $ -- $ 822,000 (a) Actual charges incurred in connection with the purpose for which the reserves were established. (b) Additions to the reserve from acquisition.
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 EXHIBITS TO FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998 Commission File No.: 1-8120 BAIRNCO CORPORATION (Exact name of registrant as specified in the charter) INDEX TO EXHIBITS Description Incorporated Herein By Reference To Certificate of Incorporation, as Exhibit 3 to Bairnco's Annual amended through September 24, 1991. Report on Form 10-K for fiscal year ended December 31, 1991. By Laws, as amended through December Exhibit 3 to Bairnco's Annual 18, 1991. Report on Form 10-K for fiscal year ended December 31, 1991. Amended and Restated Credit Exhibit 3.1 to Bairnco's Annual Agreement, dated as of December 17, Report on Form 10-K for fiscal 1992, among Bairnco Corporation and year ended December 31, 1992. certain of its subsidiaries, as guarantors, and certain Commercial Lending Institutions and Continental Bank NA (now Bank of America, Illinois), as the Agent for Lenders. Amendment dated as of March 16, 1994 Exhibit 3 to Bairnco's Annual to Amended and Restated Credit Report on Form 10-K for fiscal Agreement dated as of December 17, year ended December 31, 1993. 1992, by and among Bairnco Corporation and certain of its subsidiaries and certain Commercial Lending Institutions and Continental Bank NA (now Bank of America, Illinois), as the Agent for Lenders. Promissory note dated as of Exhibit 4 to Bairnco's Annual September 1, 1989, between Arlon, Report on Form 10-K for fiscal Inc. And the Delaware Economic year ended December 31, 1989. Development Authority. Indenture of Trust, series 1989, Exhibit 4 to Bairnco's Annual dated as of September 1, 1989, Report on Form 10-K for fiscal between the Delaware Economic year ended December 31, 1989. Development Authority and Manufacturers and Traders Trust Company, securing variable rate demand Industrial Development Refunding Revenue Bonds (Arlon, Inc. Project), series 1989 of the Delaware Economic Development Authority. Loan Agreement, dated as of Exhibit 4 to Bairnco's Annual September 1, 1989, between the Report on Form 10-K for fiscal Delaware Economic Development year ended December 31, 1989. Authority and Arlon, Inc. Reimbursement Agreement dated as of Exhibit 4 to Bairnco's Annual September 1, 1989 by and among Report on Form 10-K for fiscal Arlon, Inc., Bairnco Corporation and year ended December 31, 1989. Continental Bank NA (now Bank of America, Illinois). Agreement of the Company, dated Exhibit 4(e) to Bairnco's March 30, 1987, to furnish a copy of Annual Report on Form 10-K for any instrument with respect to fiscal year ended December 31, certain other long-term debt to the 1986. Securities and Exchange Commission upon its request. Lease dated December 10, 1991 Exhibit 10 to Bairnco's Annual between Mattei Corporation and Report on Form 10-K for fiscal Bairnco Corporation. year ended December 31, 1991. Lease, dated May 1, 1985, between Exhibit 10 to Bairnco's John B. Merrill, Joseph S. Weedon Annual Report on Form 10-K and Richard A. Westberg and KASCO for fiscal year ended Corporation as successor to Atlantic December 31, 1986. Service, Inc. Standard Industrial Lease dated June Exhibit 10 to Bairnco's 30, 1983 between James E. and Nancy Annual Report on Form 10-K S. Welsh, trustees under Welsh for fiscal year ended Family Trust, dated April 20, 1979 December 31, 1983. and Arlon, Inc. as successor to Keene Corporation. Bairnco Corporation 401(k) Savings Exhibit 4.3 to Bairnco's Plan and Trust. Registration Statement on Form S-8, No. 33-41313. Bairnco Corporation 1990 Stock Exhibit 4.3 to Bairnco's Incentive Plan. Registration Statement on Form S-8, No. 33-36330. Bairnco Corporation Management Exhibit 10 to Bairnco's Incentive Compensation Plan. Annual Report on Form 10-K for fiscal year ended December 31, 1981. Employment Agreement dated January Exhibit 10 to Bairnco's 22, 1990, between Bairnco Annual Report on Form 10-K Corporation and Luke E. Fichthorn for fiscal year ended III. December 31, 1989. Amendment dated as of April 18, Exhibit 4 to Bairnco's 1995, to Amended and Restated Credit Quarterly Report on Form 10-Q Agreement dated as of December 17, for the quarterly period 1992, by and among Bairnco ended April 1, 1995. Corporation and certain of its subsidiaries and certain Commercial Lending Institutions and Continental Bank NA (now Bank of America, Illinois), as the Agent for Lenders. Amendment dated as of February 14, Exhibit 4 to Bairnco's 1997, to Amended and Restated Credit Annual Report on Form 10-K Agreement dated as of December 17, for fiscal year ended 1992, by and among Bairnco December 31, 1996. Corporation and certain of its subsidiaries and certain Commercial Lending Institutions and Bank of America, Illinois, as the Agent for Lenders. Promissory Note dated January 31, Exhibit 4 to Bairnco's 1998, between Bairnco Corporation Annual Report on Form 10-K and Bank of America NT&SA. for fiscal year ended December 31, 1997. Amendment dated as of October 13, Exhibit 4 to Bairnco's 1998, to Amended and Restated Credit Quarterly Report on Form 10- Agreement dated as of December 17, Q for the quarterly period 1992, by and among Bairnco ended October 3, 1998. Corporation and certain of its subsidiaries and certain Commercial Lending Institutions and Bank of America, Illinois, as the Agent for Lenders. Amendment dated as of December 31, Exhibit 4 filed herewith. 1998, to Amended and Restated Credit Agreement dated as of December 17, 1992, by and among Bairnco Corporation and certain of its subsidiaries and certain Commercial Lending Institutions and Bank of America, Illinois, as the Agent for Lenders. Calculation of Basic and Diluted Exhibit 11 filed herewith. Earnings per Share for the years ended December 31, 1998, 1997 and 1996. 1998 Annual Report to Stockholders. Exhibit 13 filed herewith. Subsidiaries of the Registrant. Exhibit 21 filed herewith. Consent of Independent Certified Exhibit 23 filed herewith. Public Accountants. Financial Data Schedules. Exhibit 27 filed herewith (electronic filing only). Form 11-K Re: Bairnco Corporation Exhibit 99 filed herewith. 401(k) Savings Plan and Trust for the fiscal year ended December 31, 1998. EX-4 2 CREDIT AGREEMENT AMENDMENT DATED 12-31-98 SIXTH AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT This Agreement, dated as of December 31, 1998 (this "Amendment") is entered into by and among BAIRNCO CORPORATION, a Delaware corporation ("Bairnco"), certain of its Subsidiaries party to the Credit Agreement referred to below (together with Bairnco, hereinafter referred to collectively as the "Borrowers" and individually as a "Borrower"), the several financial institutions parties to this Amendment (collectively, the "Lenders"; individually, a "Lender"), and BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as agent for the Lenders (in such capacity, the "Agent"). RECITALS The Borrowers, the Lenders and the Agent are parties to an Amended and Restated Credit Agreement dated as of December 17, 1992 (as heretofore amended, supplemented or otherwise modified, the "Credit Agreement"). Capitalized terms used and not otherwise defined or amended in this Amendment shall have the meanings respectively assigned to them in the Credit Agreement. The Borrowers have requested that the Lenders and the Agent amend the Credit Agreement in certain respects, and the Lenders and the Agent have agreed to do so, all upon the terms and provisions and subject to the conditions hereinafter set forth, including, without limitation, payment of the amendment fee referred to in Section III below. AGREEMENT In consideration of the foregoing and the mutual covenants and agreement hereinafter set forth, the parties hereto mutually agree as follows: I. AMENDMENTS A. Amendments of Section 1.1 (Defined Terms). Section 1.1 of the Credit Agreement is hereby amended by: 1. Deleting therefrom the definition of "Applicable Euro Rate Margin" in its entirety and substituting therefor the following: "'Applicable Euro Rate Margin' shall mean: (a) 0.750% for each period (i) commencing on the fifth day following delivery by Bairnco to the Agent of the Compliance Certificate for any Fiscal Quarter required under Section 7.1.1(c) showing that the Debt to Capital Ratio for such Fiscal Quarter was less than 35%, and (ii) ending on the earlier of (A) the fifth day following delivery by Bairnco to the Agent of the Compliance Certificate for the next Fiscal Quarter, or (B) the date on which Bairnco fails to deliver to the Agent such Compliance Certificate for the next Fiscal Quarter as required under Section 7.1.1(c); (b) .875% for each period (i) commencing on the fifth day following delivery by Bairnco to the Agent of the Compliance Certificate for any Fiscal Quarter required under Section 7.1.1(c) showing that the Debt to Capital Ratio for such Fiscal Quarter was 35% or greater but less than 45%, and (ii) ending on the earlier of (A) the fifth day following delivery by Bairnco to the Agent of the Compliance Certificate for the next Fiscal Quarter, or (B) the date on which Bairnco fails to deliver to the Agent such Compliance Certificate for the next Fiscal Quarter as required under Section 7.1.1(c); (c) 1.125% for each period (i) commencing on the fifth day following delivery by Bairnco to the Agent of the Compliance Certificate for any Fiscal Quarter required under Section 7.1.1(c) showing that the Debt to Capital Ratio for such Fiscal Quarter was 45% or greater but less than 55%, and (ii) ending on the earlier of (A) the fifth day following delivery by Bairnco to the Agent of the Compliance Certificate for the next Fiscal Quarter, or (B) the date on which Bairnco fails to deliver to the Agent such Compliance Certificate for the next Fiscal Quarter as required under Section 7.1.1(c); and (d) 1.250% for each period (i) commencing on the fifth day following delivery by Bairnco to the Agent of the Compliance Certificate for any Fiscal Quarter required under Section 7.1.1(c) showing that the Debt to Capital Ratio for such Fiscal Quarter was 55% or greater, and (ii) ending on the earlier of (A) the fifth day following delivery by Bairnco to the Agent of the Compliance Certificate for the next Fiscal Quarter, or (B) the date on which Bairnco fails to deliver to the Agent such Compliance Certificate for the next Fiscal Quarter as required under Section 7.1.1(c). 2. Deleting therefrom the definition of "Applicable Reference Rate Margin" in its entirety and substituting therefor the following: "'Applicable Reference Rate Margin' shall mean: (a) 0.000% for each period (i) commencing on the fifth day following delivery by Bairnco to the Agent of the Compliance Certificate for any Fiscal Quarter required under Section 7.1.1(c) showing that the Debt to Capital Ratio for such Fiscal Quarter was less than 35%, and (ii) ending on the earlier of (A) the fifth day following delivery by Bairnco to the Agent of the Compliance Certificate for the next Fiscal Quarter, or (B) the date on which Bairnco fails to deliver to the Agent such Compliance Certificate for the next Fiscal Quarter as required under Section 7.1.1(c); (b) .125% for each period (i) commencing on the fifth day following delivery by Bairnco to the Agent of the Compliance Certificate for any Fiscal Quarter required under Section 7.1.1(c) showing that the Debt to Capital Ratio for such Fiscal Quarter was 35% or greater but less than 45%, and (ii) ending on the earlier of (A) the fifth day following delivery by Bairnco to the Agent of the Compliance Certificate for the next Fiscal Quarter, or (B) the date on which Bairnco fails to deliver to the Agent such Compliance Certificate for the next Fiscal Quarter as required under Section 7.1.1(c); (c) .375% for each period (i) commencing on the fifth day following delivery by Bairnco to the Agent of the Compliance Certificate for any Fiscal Quarter required under Section 7.1.1(c) showing that the Debt to Capital Ratio for such Fiscal Quarter was 45% or greater but less than 55%, and (ii) ending on the earlier of (A) the fifth day following delivery by Bairnco to the Agent of the Compliance Certificate for the next Fiscal Quarter, or (B) the date on which Bairnco fails to deliver to the Agent such Compliance Certificate for the next Fiscal Quarter as required under Section 7.1.1(c); (c) 0.50% for each period (i) commencing on the fifth day following delivery by Bairnco to the Agent of the Compliance Certificate for any Fiscal Quarter required under Section 7.1.1(c) showing that the Debt to Capital Ratio for such Fiscal Quarter was 55% or greater, and (ii) ending on the earlier of (A) the fifth day following delivery by Bairnco to the Agent of the Compliance Certificate for the next Fiscal Quarter, or (B) the date on which Bairnco fails to deliver to the Agent such Compliance Certificate for the next Fiscal Quarter as required under Section 7.1.1(c); 3. Deleting therefrom the definition of "Arlon Loan Commitment Amount" in its entirety and substituting therefor the following: "'Arlon Loan Commitment Amount' shall mean, at any date $24,000,000 as such amount may be reduced from time to time pursuant to Section 2.2."; 4. Deleting therefrom the definition of "Bairnco LC Commitment Amount" in its entirety and substituting therefor the following: "'Bairnco LC Commitment Amount' shall mean, at any date $7,000,000 as such amount may be reduced from time to time pursuant to Section 2.2."; 5. Deleting therefrom the definition of "Bairnco Loan Commitment Amount" in its entirety and substituting therefor the following: "' Bairnco Loan Commitment Amount' shall mean, at any date $13,000,000 as such amount may be reduced from time to time pursuant to Section 2.2."; 4. Deleting from the definition of "Commitment Termination Date" the date "December 31, 2001" and substituting therefor the date "December 31, 2003"; B. Amendment of Section 2.2.2 (Reduction of Commitment Amounts; Mandatory--All Loans and Specific Loans). Section 2.2.2 of the Credit Agreement is hereby amended by deleting such Section in its entirety and substituting therefor the following: "SECTION 2.2.2 Mandatory--All Loans and Specific Loans. (a) As of the end of business on each date set forth below, the Maximum Loan Commitment Amount shall, without any further action, automatically and permanently be reduced by the amount set forth opposite such date: Date Amount December 31, 2000 $ 5,000,000 December 31, 2001 $ 5,000,000 December 31, 2002 $ 5,000,000 provided, however, that on the Commitment Termination Date, the Maximum Loan Commitment Amount shall be zero. (b) In order to implement the reductions in the Maximum Loan Commitment Amount contemplated by (a) above, automatic and permanent reductions shall, without any further action, be made to the Bairnco Loan Commitment Amount, the Arlon Loan Commitment Amount and the Kasco Dollar Loan Commitment Amount, as follows: (i) As of the end of business on each date set forth below, the Bairnco Loan Commitment Amount shall, without any further action, automatically and permanently be reduced by the amount set forth opposite such date: Date Amount December 31, 2001 $2,000,000 December 31, 2002 $2,000,000 (ii) As of the end of business on each date set forth below, the Arlon Loan Commitment Amount shall, without any further action, automatically and permanently be reduced by the amount set forth opposite such date: Date Amount December 31, 2000 $5,000,000 December 31, 2001 $2,000,000 December 31, 2002 $2,000,000 (iii) As of the end of business on each date set forth below, the Kasco Dollar Loan Commitment Amount shall, without any further action, automatically and permanently be reduced by the amount set forth opposite such date: Date Amount December 31, 2001 $1,000,000 December 31, 2002 $1,000,000 C. Amendment of Section 2.2.4 (Transfer of Commitment Amounts). Section 2.2.4(b) is hereby amended by deleting the amount "$10,000,000" and substituting the amount "$7,000,000" therefor. D. Amendment of Section 3.3.1 (Commitment Fee). Section 3.3.1 of the Credit Agreement is hereby amended by deleting such Section in its entirety and substituting therefor the following: The Borrowers jointly and severally agree to pay to the Agent for the account of the Lenders for the period (including any portion thereof when any of its Commitments are suspended by reason of the Borrowers' inability to satisfy any condition of Article V) commencing on the Effective Date and continuing through the final Commitment Termination Date, a commitment fee on each Lender's share of the sum of the average daily unused portion of (x) the Maximum Loan Commitment Amount and (y) the Bairnco LC Commitment Amount at a rate equal to: (a) 0.200% for each period (i) commencing on the fifth day following delivery by Bairnco to the Agent of the Compliance Certificate for any Fiscal Quarter required under Section 7.1.1(c) showing that the Debt to Capital Ratio for such Fiscal Quarter was less than 35%, and (ii) ending on the earlier of (A) the fifth day following delivery by Bairnco to the Agent of the Compliance Certificate for the next Fiscal Quarter, or (B) the date on which Bairnco fails to deliver to the Agent such Compliance Certificate for the next Fiscal Quarter as required under Section 7.1.1(c); (b) .225% for each period (i) commencing on the fifth day following delivery by Bairnco to the Agent of the Compliance Certificate for any Fiscal Quarter required under Section 7.1.1(c) showing that the Debt to Capital Ratio for such Fiscal Quarter was 35% or greater but less than 45%, and (ii) ending on the earlier of (A) the fifth day following delivery by Bairnco to the Agent of the Compliance Certificate for the next Fiscal Quarter, or (B) the date on which Bairnco fails to deliver to the Agent such Compliance Certificate for the next Fiscal Quarter as required under Section 7.1.1(c); (c) .250% for each period (i) commencing on the fifth day following delivery by Bairnco to the Agent of the Compliance Certificate for any Fiscal Quarter required under Section 7.1.1(c) showing that the Debt to Capital Ratio for such Fiscal Quarter was 45% or greater but less than 55%, and (ii) ending on the earlier of (A) the fifth day following delivery by Bairnco to the Agent of the Compliance Certificate for the next Fiscal Quarter, or (B) the date on which Bairnco fails to deliver to the Agent such Compliance Certificate for the next Fiscal Quarter as required under Section 7.1.1(c); and (d) .325% for each period (i) commencing on the fifth day following delivery by Bairnco to the Agent of the Compliance Certificate for any Fiscal Quarter required under Section 7.1.1(c) showing that the Debt to Capital Ratio for such Fiscal Quarter was 55% or greater, and (ii) ending on the earlier of (A) the fifth day following delivery by Bairnco to the Agent of the Compliance Certificate for the next Fiscal Quarter, or (B) the date on which Bairnco fails to deliver to the Agent such Compliance Certificate for the next Fiscal Quarter as required under Section 7.1.1(c). Such commitment fees shall be payable by such Borrowers in arrears on each Quarterly Payment Date, commencing with the first such day following the Effective Date, and on each Commitment Termination Date. As among the Lenders, the allocable amount of the commitment fee payable to each Lender shall be computed giving effect to the fact that only Bank of America (and no other Lender) is obligated to provide Loans in respect of the Foreign Loan Commitment and the Foreign Dollar Loan Commitment. E. Amendment of Section 3.3.2 (Letter of Credit Fees). Section 3.3.2 is hereby amended by deleting therefrom clauses (a) through (d) of the second sentence thereof and substituting therefor the following: (a) 0.750% for each period (i) commencing on the fifth day following delivery by Bairnco to the Agent of the Compliance Certificate for any Fiscal Quarter required under Section 7.1.1(c) showing that the Debt to Capital Ratio for such Fiscal Quarter was less than 35%, and (ii) ending on the earlier of (A) the fifth day following delivery by Bairnco to the Agent of the Compliance Certificate for the next Fiscal Quarter, or (B) the date on which Bairnco fails to deliver to the Agent such Compliance Certificate for the next Fiscal Quarter as required under Section 7.1.1(c); (b) .875% for each period (i) commencing on the fifth day following delivery by Bairnco to the Agent of the Compliance Certificate for any Fiscal Quarter required under Section 7.1.1(c) showing that the Debt to Capital Ratio for such Fiscal Quarter was 35% or greater but less than 45%, and (ii) ending on the earlier of (A) the fifth day following delivery by Bairnco to the Agent of the Compliance Certificate for the next Fiscal Quarter, or (B) the date on which Bairnco fails to deliver to the Agent such Compliance Certificate for the next Fiscal Quarter as required under Section 7.1.1(c); (c) 1.125% for each period (i) commencing on the fifth day following delivery by Bairnco to the Agent of the Compliance Certificate for any Fiscal Quarter required under Section 7.1.1(c) showing that the Debt to Capital Ratio for such Fiscal Quarter was 45% or greater but less than 55%, and (ii) ending on the earlier of (A) the fifth day following delivery by Bairnco to the Agent of the Compliance Certificate for the next Fiscal Quarter, or (B) the date on which Bairnco fails to deliver to the Agent such Compliance Certificate for the next Fiscal Quarter as required under Section 7.1.1(c); and (d) 1.250% for each period (i) commencing on the fifth day following delivery by Bairnco to the Agent of the Compliance Certificate for any Fiscal Quarter required under Section 7.1.1(c) showing that the Debt to Capital Ratio for such Fiscal Quarter was 55% or greater, and (ii) ending on the earlier of (A) the fifth day following delivery by Bairnco to the Agent of the Compliance Certificate for the next Fiscal Quarter, or (B) the date on which Bairnco fails to deliver to the Agent such Compliance Certificate for the next Fiscal Quarter as required under Section 7.1.1(c). F. Amendment of Section 7.2.3 (Financial Condition). Section 7.2.3 of the Credit Agreement is hereby amended by deleting such Section in its entirety and substituting therefor the following: "SECTION 7.2.3 Financial Condition. The Borrowers will not permit: (a) Net Worth. Their Net Worth to be less than the sum of (i) $40,000,000, plus (ii) 60% of Cumulative Net Income after December 31, 1998 plus (iii) 60% of the net cash proceeds of stock sold by Bairnco after December 31, 1998. (b) Debt/Capital Test. The ratio for Bairnco and its Subsidiaries of (i) all Consolidated Funded Debt to (ii) the sum of (A) Consolidated Funded Debt, plus (B) Stockholders' Investment (the 'Debt to Capital Ratio') to exceed 65% for any fiscal quarter ending prior to and including December 31, 2000 and 60% thereafter. (c) Interest Coverage Ratio. The ratio for Bairnco and its Subsidiaries of (i) consolidated earnings before deducting interest and taxes (excluding non-recurring gains and charges) to (ii) consolidated interest expense for Indebtedness (including, without limitation, Subordinated Debt and Capitalized Lease Liabilities) (the 'Interest Coverage Ratio') to be less than 2.00:1 for any Fiscal Quarter." II. REPRESENTATIONS AND WARRANTIES The Borrowers hereby represent and warrant to the Agent and the Lenders that: 1. No Default has occurred and is continuing; and 2. The representations and warranties of the Borrowers contained in Article VI of the Credit Agreement are true on and as of the date hereof as if made on and as of said date; provided, however, that each reference to "this Agreement" contained in such Article VI shall be deemed to be a reference to the Credit Agreement as amended hereby. III. CONDITIONS PRECEDENT This Amendment will become effective as of the date first written above upon receipt by the Agent of counterparts hereof duly executed by each Borrower, each of the Lenders party to the Credit Agreement and the Agent, provided that contemporaneously with such execution and delivery, the Agent shall have received for the account of the Lenders, an amendment fee in an amount equal to $50,000 to be distributed to the Lenders as set forth below: Lender Amount Bank of America NT&SA $23,222.00 First Union National Bank, N.A. $ 7,966.00 First National Bank of Maryland $ 7,966.00 Suntrust Bank, Central Florida, $10,846.00 National Association IV. MISCELLANEOUS A. This Amendment may be signed in any number of counterparts, each of which shall be an original, with same effect as if the signatures thereto and hereto were upon the same instrument. B. Except as herein specifically amended, all terms, covenants and provisions of the Credit Agreement shall remain in full force and effect and shall be performed by the parties hereto in accordance therewith. All references to the "Agreement" or the "Credit Agreement" contained in the Credit Agreement or in the Schedules or Exhibits shall henceforth refer to the Credit Agreement as amended by this Amendment. C. THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF ILLINOIS, WITHOUT REGARD TO CONFLICT OF LAWS PRINCIPLES. IN WITNESS WHEREOF, the parties hereto have executed and delivered this Amendment as of the date first written. BAIRNCO CORPORATION By: /s/ J. Robert Wilkinson Name: J. Robert Wilkinson Title: Vice President Finance ARLON, INC. By: /s/ J. Robert Wilkinson Name: J. Robert Wilkinson Title: Vice President KASCO CORPORATION By: /s/ J. Robert Wilkinson Name: J. Robert Wilkinson Title: Vice President ATLANTIC SERVICE CO. (UK), LTD. By: /s/ J. Robert Wilkinson Name: J. Robert Wilkinson Title: Director BERTRAM & GRAF GMBH By: /s/ J. Robert Wilkinson Name: J. Robert Wilkinson Title: Director EUROKASCO S.A. By: /s/ J. Robert Wilkinson Name: J. Robert Wilkinson Title: Director BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as Agent By: /s/ Steve A. Aronowitz Name: Steve A. Aronowitz Title: Managing Director BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as a Lender By: /s/ Steve A. Aronowitz Name: Steve A. Aronowitz Title: Managing Director FIRST UNION NATIONAL BANK, N.A. By: /s/ Mary H. Doonan Name: Mary H. Doonan Title: Vice President FIRST NATIONAL BANK OF MARYLAND By: /s/ Robert M. Beaver Name: Robert M. Beaver Title: Vice President SUNTRUST BANK, CENTRAL FLORIDA, NATIONAL ASSOCIATION By: /s/ William C. Barr III Name: William C. Barr III Title: First Vice President EX-11 3 BASIC AND DILUTED EPS EXHIBIT 11 BAIRNCO CORPORATION AND SUBSIDIARIES CALCULATION OF BASIC AND DILUTED EARNINGS PER SHARE FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996 BASIC EARNINGS PER COMMON SHARE: Net Income $1,594,000 $8,771,000 $8,335,000 Average common shares outstanding 8,655,000 9,151,000 9,753,000 Basic Earnings Per Common Share $ 0.18 $ 0.96 $ 0.85 DILUTED EARNINGS PER COMMON SHARE: Net Income $1,594,000 $8,771,000 $8,335,000 Average common shares outstanding 8,655,000 9,151,000 9,753,000 Common shares issuable in respect to options issued to employees with a dilutive effect 163,000 199,000 98,000 Total common shares assuming full dilution 8,818,000 9,350,000 9,851,000 Diluted Earnings Per Common Share $ 0.18 $ 0.94 $ 0.85 Basic earnings per common share were computed by dividing net income by the weighted average number of shares of common stock outstanding during each year. Diluted earnings per common share include the effect of all dilutive stock options.
EX-13 4 ANNUAL REPORT FOR YEAR ENDED DECEMBER 31, 1998 Our mission Bairnco is an organization of people committed to providing value-added industrial and commercial products and services to niche markets which meet or exceed our customers' requirements leading to the creation of stockholder and employee value. Our strategy Bairnco strives to develop true partnership relationships with its customers in selected markets through close cooperation in developing value- added solutions to their needs. Bairnco seeks to identify and participate in those markets that will provide growth opportunities due to either technical developments or the changing needs of customers. Bairnco implements this mission and strategy through two business segments: Engineered materials and components are designed, manufactured and sold under the Arlon brand identity. Replacement products and services are manufactured and distributed under the Kasco brand identity. Our objectives Bairnco believes that concentrating its resources in selected market niches can provide the basis to achieve both superior profitability and growth. Management's long term objectives are to achieve: 15% compound rate of earnings growth 20% return on stockholders' investment 15% return on total capital employed. Our values Values are the core of Bairnco's corporate culture. They are the basis for the decisions made regarding the development and deployment of people, the improvement and investment in processes, and the manufacture and distribution of products. Bairnco's values are: Personal and corporate integrity The inevitability and opportunity of change Continuous improvement and development Total customer satisfaction Decentralized organization and empowered employees Superior rewards for superior performance Have fun - enjoy your work and your life. CONTENTS Financial Highlights 1 Letter to Our Stockholders 2 Engineered Materials & Components (Arlon) 4 Replacement Products & Services (Kasco) 7 Directors and Management 8 Financial History 9 Management's Discussion and Analysis 10 Quarterly Results of Operations 14 Report of Independent Certified Public Accountants 15 Consolidated Financial Statements 16 Notes to Consolidated Financial Statements 20 FINANCIAL HIGHLIGHTS (In thousands except per share data)
Percent Change 1998 1997 1996 98/97 97/96 Net Sales $156,456 $158,708 $150,234 (1%) 6% Earnings before Interest, Provision for Litigation Costs and Taxes (a) $ 12,029 $ 15,592 $ 14,956 (23%) 4% Operating Profit $ 4,529 $ 15,592 $ 14,956 (71%) 4% Net Income $ 1,594 $ 8,771 $ 8,335 (82%) 5% Diluted Earnings per Share $ 0.18 $ 0.94 $ 0.85 (81%) 11% Cash Dividends per Share $ 0.20 $ 0.20 $ 0.20 0% 0% Stockholders' Investment per Average Diluted Common Share Outstanding $ 5.27 $ 5.61 $ 5.02 (6%) 12% Total Assets $118,555 $109,286 $102,600 8% 7% Stockholders' Investment $ 46,438 $ 52,469 $ 49,464 (11%) 6% Average Diluted Common Shares Outstanding 8,818 9,350 9,851 (6%) (5%) (a) Excludes impact of provision for litigation costs of $7.5 million (pre- tax) in 1998.
Graphic - Bar Chart depicting Sales (y-axis) for five years - 1994 to 1998 (x-axis): Year Sales (in thousands) 1994 $145,522 1995 $150,507 1996 $150,234 1997 $158,708 1998 $156,456 Graphic - Bar Chart depicting Operating Profit (y-axis) for five years - 1994 to 1998 (x-axis): Year Operating Profit (in thousands) 1994 $13,654 1995 $14,633 1996 $14,956 1997 $15,592 1998 $ 4,529 1998(b) $12,029 (b) Excludes impact on operating profit of $7.5 million (pre-tax) provision for litigation costs in the fourth quarter of 1998. Graphic - Bar Chart depicting Net Income (y-axis) for five years - 1994 to 1998 (x-axis): Year Net Income (in thousands) 1994 $7,255 1995 $7,781 1996 $8,335 1997 $8,771 1998 $1,594 1998(b) $6,320 (b) Excludes impact on net income of $7.5 million (pre-tax) provision for litigation costs in the fourth quarter of 1998. Graphic - Bar Chart depicting Diluted Earnings per Share (y-axis) for five years - 1994 to 1998 (x-axis): Year Diluted Earnings per Share (in thousands) 1994 $0.69 1995 $0.75 1996 $0.85 1997 $0.94 1998 $0.18 1998(b) $0.72 (b) Excludes impact on diluted earnings per share of $7.5 million (pre-tax) provision for litigation costs in the fourth quarter of 1998. LETTER TO OUR STOCKHOLDERS 1998 was a challenging year for Bairnco. Weak markets and price pressures resulted in lower sales and earnings. While costs were reduced, the decision was made, based on the future outlook, to both preserve and continue to improve the core management competencies. We continue to repurchase our stock. An acquisition that fits Arlon was completed. Bairnco's financial condition remains strong. In 1998 the court in the Transactions Lawsuit issued a series of opinions that eliminated certain claims and parties from the case and set the stage for discovery and trial as to the claims and parties that remain. In particular, the court dismissed the RICO claims; all claims against third- party professionals, including lawyers, accountants and investment bankers; and all claims against individuals with the exception of Bairnco's former chairman and president. The court also narrowed the scope of certain claims against Bairnco and the other corporate defendants. With the initial motions phase of the case now complete, Bairnco is prepared to mount a vigorous defense on the merits. Toward that end, a $7,500,000 provision for litigation costs was taken in the fourth quarter. FINANCIAL RESULTS 1998 consolidated sales of $156,456,000 decreased 1.4% from $158,708,000 in 1997. Arlon's sales decreased 3.8%. All markets served declined during the year after a strong first quarter. The electrical and electronic markets were the most depressed. The drop in the electronic market due to the Asian crisis adversely affected many of the end users of our products. Others of our OEM final customers were hurt by low priced competition from Asian competitors. Further penetration in new market segments offset some of the decline. Kasco's sales increased 4.4% through growth in the U.S. base business, seasoning programs for in-store meal preparation, and in the European operations. In 1998, gross profit decreased 6.3% to $50,583,000 from $53,996,000 in the prior year with gross profit margins declining to 32.3% from 34% last year. Gross profit decreased at Arlon as the combined result of lower sales, lower prices, and a continuing change in mix to lower margin commercial products to serve the electronics and communications markets. Kasco's gross profit decreased slightly due to the costs from discontinued products and services. Selling and administrative expenses, excluding the provision for litigation costs, increased 0.4% to $38,554,000 from $38,404,000 in 1997. As a percent of sales, these expenses increased to 24.6% in 1998 from 24.2% in 1997. Research and development expenses increased 4.8% as Bairnco continued to invest in the development of new products and improved quality. The average number of employees was reduced by 3.3% from last year. Productivity as measured by sales per employee increased 1.9%. Earnings before interest, the provision for litigation costs and taxes were $12,029,000 down 22.9% from $15,592,000 in 1997. The decline is primarily attributable to reduced gross profit. In the fourth quarter of 1998 Bairnco recorded the $7,500,000 pre tax provision for anticipated litigation costs. Net interest expense increased from $1,834,000 to $1,998,000. The increase was due to increased average debt outstanding primarily resulting from the acquisition in the fourth quarter. Income before income taxes decreased to $2,531,000 in 1998 as compared to $13,758,000 in 1997. The effective tax rate was 37% as compared to 36.2% in 1997. Net income decreased to $1,594,000 from $8,771,000. Diluted earnings per common share fell to $.18 from $.94 in 1997 as a result of the decreased operating income and the provision for litigation costs. The provision for litigation costs reduced net income in 1998 by $4,726,000 or $.54 per share. During 1998, Bairnco repurchased 737,400 shares of its common stock. The diluted average number of shares outstanding in 1998 was 8,818,000 a 5.7% decrease from the 9,350,000 diluted average shares outstanding in 1997. MII ACQUISITION Effective October 31,1998 Bairnco purchased MII International, Inc. ("MII" - - formerly the Marking Films and Engineered Coated Products unit of The Meyercord Co.) for approximately $8.3 million including the repayment of its debt. Sales of MII for the six months ended September 30, 1998 were approximately $6 million. MII's adhesive coated graphic films are used in a variety of fleet, rail car, and shipping container marking applications; OEM and screen print applications; and other corporate specified programs. MII's engineered- coated products include transfer adhesives, single and double-faced tapes, specialty-coated foils, and other custom coated products. MII has a strong presence in international markets. The acquisition complemented Arlon's graphic films and industrial products with product line extensions, additional brand recognition, product development synergies, and penetration into new customer segments and markets. The acquisition also expanded Arlon's coating and converting capacity. FINANCIAL MANAGEMENT Excluding the provision for litigation costs, return on capital employed decreased to 8.9% from 12.2% last year and return on stockholders' investment in 1998 decreased to 12.2% compared to 17.4% last year. In 1998, Bairnco's Board of Directors authorized the repurchase of up to $5,000,000 of its common stock. This authorization was in addition to the $3.7 million still unused from the prior year authorization. During the year the company repurchased 737,400 shares for $6.2 million. The Board has authorized management to continue its stock repurchase program in 1999 subject to market conditions and capital requirements of the business. At year-end $2.5 million was available for additional stock repurchases. The Board may consider additional authorizations if appropriate during the year. In the fourth quarter Bairnco amended its $50,000,000 reducing revolving credit agreement to extend the first commitment reduction date to December 31, 2000 and the final maturity to December 31, 2003. At year-end 1998 Bairnco had $10.5 million available under its revolving credit agreement, and $4.3 million available under short-term lines of credit. Working capital as a percent of sales decreased from 22.5% to 21.3%. Accounts receivable increased due to higher foreign sales. However higher current liabilities as a result of the provision for litigation costs resulted in lower working capital. Net cash flows provided by operating activities were $14,116,000. These cash flows were more than sufficient to cover operating requirements, fund Bairnco's capital expenditure program, pay dividends, purchase treasury stock and generate some excess cash. However, the acquisition required $8.3 million in additional funds. Consequently 1998 total debt increased to $37,844,000 from $30,318,000 at the end of 1997. Debt as a percent of equity increased to 81.5% from 57.8% in 1997. 1998 capital expenditures were $5,976,000 as compared to a plan of $12,000,000. Depreciation and amortization was $6,688,000. Capital expenditures were cut back in light of changing market conditions. Expenditures were focused on cost reduction projects, replacements and new MIS systems and hardware that were installed during the year. The capital expenditure plan for 1999 is approximately $8.2 million. Depreciation and amortization is estimated to be approximately $7.0 million. The planned capital expenditures include cost reduction projects, replacements, quality improvements, new product developments, new processing equipment, MIS hardware and software, and limited capacity additions. DIVIDEND The quarterly $.05 per share cash dividend was maintained during the year. MANAGEMENT During 1998 the management development program, which is one of the keys to our future success, continued to make progress in all operations. Significant additions and changes were made to strengthen operations management which has lead to lower scrap and started to improve efficiencies. Also we have further strengthened our sales organizations to further penetrate certain market segments. During 1998, a Six-Sigma program was initiated in two of our operations as part of our continuous improvement program. For 1999, additional projects have been selected and training will be expanded to include representatives for all our domestic operations. We expect this program to accelerate the yields from our continuous improvement program. The ongoing improvement and development of all our employees remains a critical and never-ending element for Bairnco's success. OUTLOOK Our management team has action plans in place designed to recover most of the ground lost in 1998. In general we expect little improvement in demand from our industrial markets served. Although most markets stabilized after the sharp drop in the second quarter of 1998, the recovery from those low levels has been and is expected to be modest. Arlon's management team continues to improve efficiencies and quality to more effectively compete in the electronic, electric, graphic, custom and industrial markets. Although there is no meaningful recovery expected in the markets served, the combined effect of the acquisition, improved efficiencies, product developments and penetration of new market segments should return Arlon to growing sales and earnings. Kasco North America's programs to become the preeminent supplier of cutting products and routine in-store equipment services are continuing. Kasco's seasoning program for in-store meal preparation continued to grow. Kasco North American operations earnings are expected to resume their improving trend based on some increased market share but primarily from cost reductions and efficiency improvements that were made in 1998 and which are continuing in 1999. Kasco's management expects 1999 to see Kasco back on its plan for continued improvements. The outlook for 1999 is for improved sales and earnings. The US industrial economy is expected to experience very slow growth during 1999 with inflation remaining under control and the Federal Reserve Board maintaining low interest rates. Asia is expected to slowly recover but represent continued strong competition to industrial America. We expect the combination of growth from new products, higher growth in certain niche markets, and a full year of the results of the acquisition will result in increased sales. Improved earnings are expected both from the increased sales and from continuing efficiency and yield improvement programs. The continuing dedication and excellent performance of our teammates remains the key to our past and future success. We are all dedicated to making 1999 a year of continuing improvement. Respectfully yours, /s/ Luke E. Fichthorn III Luke E. Fichthorn III Chairman and CEO Arlon Engineered Materials and Components Bairnco designs, manufactures, and sells engineered materials and components for the electronic, industrial and commercial markets under the Arlon brand identity. These products are based on common technologies in coating, laminating, polymers, and dispersion chemistry. Arlon Materials for Electronics has an international reputation as the premier supplier of high technology materials for the printed circuit board industry. These products are marketed principally to printed circuit board manufacturers and OEM's by a direct sales force in concert with strong technical support teams in the U.S. and through distributors and manufacturers representatives in Europe, the Far East, and South America. Our Electronic Substrates product line includes high temperature, high performance thermoset laminates and prepreg bonding plies used in circuit boards for sophisticated commercial applications and military electronics. These applications require materials that withstand high continuous or widely varying operating temperatures, provide ease of field repairability, are highly reliable, and improve board fabrication yields. Intermediate temperature laminates, which provide improved product reliability and ease of manufacture at a lower cost, are also key to the line. The Microwave Materials product line offers application matched, reinforced PTFE and other resin based laminates providing high yields and high performance for low signal-loss and frequency-dependent microwave applications. The applications for this product line include microwave antennas, digital cordless telephones, cellular phone systems, direct broadcast satellite TV systems, personal communications networks, global positioning satellites, local area networks, collision avoidance systems, and radar detection systems. Recently developed products which made commercial inroads in 1998 include: . Arlon's 25N series, a laminate system based on aromatic polyolefin resin that offers many of the performance advantages of PTFE materials with the cost and processing advantages of traditional thermoset materials, targeted for commercial electronics. . Arlon's Thermount nonwoven, aramid reinforced materials that offer many advantages for specialty applications at a more attractive cost- performance ratio than woven aramids. . Arlon's AD Series substrate materials: a specialized PTFE based laminate system that offers all the performance characteristics of PTFE with lower cost targeted for commercial applications. . Arlon's 33N and 35N polyimide laminate systems provide high temperature capability while reducing production time for board fabricators. PHOTO - Coater operators inspect Thermount 85NT being produced at Arlon's Rancho Cucamonga, CA facility. Thermount 85NT is a new product being widely used for surface mount applications in sophisticated commercial and military aircraft avionics circuit boards. PHOTO - Lay up operators at the Bear, DE facility assemble Arlon's AD Series laminates in a new clean room. AD Series substrate materials designate a cost competitive PTFE based system that offers the performance characteristics of traditional PTFE at a lower cost. Bairnco manufactures and markets, under the Calon brand name, cast and calendered vinyl films in a wide variety of colors, face stocks and adhesive systems. These vinyl films are used in commercial and electrical signage, point of purchase displays, highway signage, fleet markings, and other commercial advertising applications. We have continued to invest in new product development and to improve the quality of our current product line. During 1998 we introduced ProFleet, a pressure sensitive vinyl product specifically designed for fleet and vehicle graphics. ProFleet features an ultra-durable 2mil high performance cast vinyl and an adhesive formulated to reduce installation time and labor costs. We also introduced a product line of electrostatic media in September 1998. The Imageburst electrostatic media line includes StatPrint HP, StatPrint Intermediate, StatPrint Promotional and overlaminates. In November of 1998 we announced the purchase of MII International, Inc., a manufacturer of adhesive coated films for use in the graphics and industrial markets. MII's product lines complement Arlon's current vinyl product lines, and will provide product line extensions, additional brand recognition, product development synergies, and penetration into new customer segments and markets. The acquisition has also expanded Arlon's coating and converting capacity. PHOTO - Arlon's Imageburst StatPrint Intermediate - Series 4000 vinyl, in conjunction with the appropriate overlaminate, was used for the floor graphics created for collegiate basketball's 1998 Western Athletic Conference (WAC) games. StatPrint 4000 is a 3-mil, calendered vinyl with permanent, clean-removing adhesive (up to 2 years). PHOTO - Arlon's ProFleet vinyl, used for fleet markings and large format graphics, is specially designed for flat, riveted and corrugated surfaces. PHOTO - Arlon has improved their line of translucent vinyl films. The product has been modified for improved compatibility with thermoforming and improved flexibility. This product improvement supports Arlon's sales in the electrical and commercial signage markets. Arlon also manufactures and markets custom-engineered laminates and coated products. Typical applications include insulating foam tapes for thermopane windows, specialty flexible circuit materials, electrical insulation materials for motors and transformers, thermal insulation panels for appliances and cars, identification cards and labels, durable printing stock, and other custom engineered laminates for specific industrial applications. The keys to Arlon's success in custom-engineered laminates and coated products are our knowledge base of materials and adhesives technology and our understanding of customer applications. Our sales engineers and product managers are dedicated to understanding customer requirements and developing product specifications that meet those customer needs. PHOTO - Arlon glazing tapes consist of a closed-cell copolymer foam coated on both sides with an aggressive acrylic adhesive system. This adhesive system provides optimum compatibility with a variety of sash materials. Bairnco manufactures a line of silicone rubber materials used in a broad range of consumer, industrial and commercial products. Typical applications and products include: . Silicone rubber for molding composites . Silicone rubber insulating tape for electric traction motor coil windings . Insulation for industrial flexible heaters . Silicone products for high temperature hose and duct markets . Insulating tape for electrical splices . Compliant, thermally or electrically conductive silicone sheet adhesive known as ThermabondTM In 1999 we will continue to focus application development efforts on thermally and electrically conductive sheet adhesives for electrical and electronic markets, as well as broaden our hose and duct material product line. PHOTO - An Arlon operator uses a micrometer to measure thickness of flexible heater material. This production line performs precision calendering and fabric coating to produce a family of silicone products for industrial markets. Kasco Replacement Products and Services Kasco is the leading manufacturer and supplier of replacement products and services principally to supermarkets; meat and deli operations; and meat, poultry and fish processing plants throughout the United States, Canada and Europe. These products and services include: . Band saw blades for cutting meat and fish . Chopper plates and knives for grinding meat . Seasoning products . Preventive maintenance for equipment in meat and deli operations . Other related butcher supply products. Kasco also manufactures small band saw blades for cutting metal and wood, and large band saw blades for use at lumber mills. Kasco has manufacturing operations in St. Louis, Missouri; Gwent, Wales, United Kingdom; and Pansdorf, Germany. In Canada and France, in addition to providing its replacement products, Kasco distributes equipment used in the supermarket industry and in the food processing industry. During 1998, Kasco made several product design improvements to its band saw blades and its chopper plates and knives. Kasco has introduced a line of premium wood cutting band saw blades for use by professional cabinetry and furniture makers and serious hobbyists. The Mealtime Solutions seasoning program continues to be a success as sales for home meal replacement items within supermarkets increase. Mealtime Solutions offers a package of seasoning blends, recipes and instructions which allows a supermarket to present value-added products in their meat and deli departments. During 1998 Kasco developed several new product lines which expand their Mealtime Solutions program into deli and seafood departments. In North America, Kasco supplies its products and services directly to the supermarket and meat cutting industries through a continent-wide network of service professionals and exclusive distributors. During 1998, Kasco increased its emphasis on preventive maintenance, increasing the value- added service its network of professionals provides to customers. PHOTO - Kasco's Mealtime Solutions seasoning program offers a package of seasoning blends, recipes, and instructions which allows a supermarket to present an attractive, ready-to-cook home meal to their customers. PHOTO - The Predator Series of splitter blades from Kasco features a Gold Tooth Hardening process which offers high speed, high volume cutting and less waste, straighter cuts, less workplace noise, and less operator fatigue. Directors 1.Luke E. Fichthorn III Chairman and CEO Bairnco Corporation 2.Charles T. Foley President Estabrook Capital Management, Inc. 3.Richard A. Shantz Private Investor 4.William F. Yelverton Independent Business Consultant Management: 1.Jeffrey M. Berresford President Kasco Corporation 2.Robert M. Carini Vice President Arlon, Inc. 3.James W. Lambert Controller Bairnco Corporation 4.Elmer G. Pruim Vice President Arlon, Inc. 5.J. Robert Wilkinson Vice President Finance & Treasurer Bairnco Corporation FINANCIAL HISTORY
1998 1997 1996 1995 1994 Summary of Operations ($ in thousands) Net sales $156,456 158,708 150,234 150,507 145,522 Gross profit $ 50,583 53,996 52,536 53,317 53,177 Earnings before interest, provision for litigation costs & taxes (a) $ 12,029 15,592 14,956 14,633 13,654 Operating profit $ 4,529 15,592 14,956 14,633 13,654 Interest expense, net $ 1,998 1,834 1,725 2,026 2,144 Income before income taxes $ 2,531 13,758 13,231 12,607 11,510 Provision for income taxes $ 937 4,987 4,896 4,826 4,255 Net income $ 1,594 8,771 8,335 7,781 7,255 Return from operations on: Net sales % 1.0 5.5 5.5 5.2 5.0 Stockholders' investment % 3.1 17.4 17.2 16.7 17.4 Capital employed % 3.3 12.2 12.3 11.9 10.6 Year-End Position ($ in thousands) Working capital $ 33,259 35,712 30,341 28,350 26,277 Plant and equipment, net $ 41,402 39,913 38,276 34,449 36,289 Total assets excluding discontinued operations $118,555 109,286 102,600 98,196 99,243 Net assets of discontinued operations $ -- -- -- -- 3,529 Total assets $118,555 109,286 102,600 98,196 102,772 Total debt $ 37,844 30,318 28,179 24,578 31,775 Stockholders' investment $ 46,438 52,469 49,464 48,024 43,997 Capital employed $ 84,282 82,787 77,643 72,602 75,772 Per Common Share Data Income from continuing operations: - Basic $ 0.18 0.96 0.85 0.75 0.69 - Diluted $ 0.18 0.94 0.85 0.75 0.69 Cash dividend $ 0.20 0.20 0.20 0.20 0.20 Stockholders' investment $ 5.27 5.61 5.02 4.60 4.19 Market price: High $ 11-3/8 11-1/4 8-1/2 6 5-1/2 Low $ 5-9/16 6-3/8 5-1/2 3-7/8 3 Other Data (in thousands) Depreciation and amortization $ 6,688 6,516 6,305 6,314 6,502 Capital expenditures $ 5,976 8,789 10,131 4,831 5,176 Average common shares outstanding 8,655 9,151 9,753 10,433 10,500 Diluted common shares outstanding 8,818 9,350 9,851 10,440 10,500 Current ratio 2.2 2.6 2.4 2.2 2.0 Number of common stockholders 1,436 1,574 1,773 1,967 2,198 Average number of employees 822 850 825 874 915 Sales per employee $190,340 186,710 182,100 172,200 159,040 (a) Excludes impact of provision for litigation costs of $7.5 million (pre-tax) in 1998.
MANAGEMENT'S DISCUSSION AND ANALYSIS The following discussion should be read in conjunction with the Consolidated Financial Statements and related notes which begin on page 18. Results of Operations: 1998 Compared to 1997 1998 consolidated sales of $156,456,000 decreased 1.4% from $158,708,000 in 1997. Arlon's sales decreased 3.8%. All markets served declined during the year after a strong first quarter. The electrical and electronic markets were the most depressed. The drop in the electronic market due to the Asian crisis adversely affected many of the end users of Arlon's products. Others of Arlon's OEM final customers were hurt by low priced competition from Asian competitors. Further penetration in new market segments offset some of the decline. Kasco's sales increased 4.4% through growth in the U.S. base business, seasoning programs for in-store meal preparation, and in the European operations. In 1998, gross profit decreased 6.3% to $50,583,000 from $53,996,000 in the prior year with gross profit margins declining to 32.3% from 34% last year. Gross profit decreased at Arlon as the combined result of lower sales, lower prices, and a continuing change in mix to lower margin commercial products to serve the electronic/communication markets. Kasco's gross profit decreased slightly due to the costs from discontinued products and services. In 1998 the court in the Transactions Lawsuit (refer to Note 11 to the Consolidated Financial Statements) issued a series of opinions that eliminated certain claims and parties from the case and set the stage for discovery and trial as to the claims and parties that remain. In particular, the court dismissed the RICO claims; all claims against third- party professionals, including lawyers, accountants and investment bankers; and all claims against individuals with the exception of Bairnco's former chairman and president. The court also narrowed the scope of certain claims against Bairnco and the other corporate defendants. With the initial motions phase of the case now complete, Bairnco is prepared to mount a vigorous defense on the merits. Toward that end, a $7,500,000 provision for litigation costs was taken in the fourth quarter of 1998 (refer to Note 2 to the Consolidated Financial Statements). Selling and administrative expenses, excluding the provision for litigation costs, increased 0.4% to $38,554,000 from $38,404,000 in 1997. As a percent of sales, these expenses increased to 24.6% in 1998 from 24.2% in 1997. Research and development expenses increased 4.8% as Bairnco continued to invest in the development of new products and improved quality. Based on sharp swings in order input throughout the year and management's continuing belief in the future of the Corporation's key markets, the decision was made to cut costs but not to impair the core management competencies that have been developed. The average number of employees was reduced by 3.3% from last year. Productivity as measured by sales per employee increased 1.9%. Earnings before interest, the provision for litigation costs and taxes were $12,029,000 down 22.9% from $15,592,000 in 1997. The decline is primarily attributable to reduced gross profit. In the fourth quarter of 1998 Bairnco recorded the $7,500,000 pre-tax provision for anticipated litigation costs. Net interest expense increased from $1,834,000 to $1,998,000. The increase was due to increased average debt outstanding primarily resulting form the acquisition in the fourth quarter. Income before income taxes decreased to $2,531,000 in 1998 as compared to $13,758,000 in 1997. The effective tax rate was 37% as compared to 36.2% in 1997. The provision for income taxes in both years includes all applicable federal, state, local and foreign income taxes. Audits of the Corporation's consolidated US federal income tax returns have been completed for all years through 1992. Net income decreased to $1,594,000 from $8,771,000. Diluted earnings per common share fell to $.18 from $.94 in 1997 as a result of the decreased operating income and the provision for litigation costs. The provision for litigation costs reduced net income in 1998 by $4,726,000 or $.54 per share. Results of Operations: 1997 Compared to 1996 Net sales for the year ended December 31, 1997 increased 5.6% to $158,708,000 from $150,234,000 in 1996. Arlon's sales increased 8.3% as all markets served experienced growth although there was substantial volatility within the electronics market. Kasco's sales declined 0.2% as growth in the US markets, especially in the seasonings for ready-to-cook foods for supermarkets and special products areas, was offset by the planned discontinuation of equipment sales in certain Canadian markets and the negative impact of currency translation rates on sales of Kasco's European operations. In 1997, gross profit increased 2.8% to $53,996,000 from $52,536,000 in the prior year. Gross profit increased 2.6% at Arlon and 1.0% at Kasco with increased sales. However, the strong US dollar also negatively impacted the translation of foreign gross profit. Gross profit margins declined to 34.0% from 35.0% in 1996. Profit margins were lower primarily due to plant and labor inefficiencies caused by swings in demand during the year, new equipment start-ups at three plants, and the two week strike at the Bear, Delaware facility Selling and administrative expenses increased 2.2% to $38,404,000 from $37,580,000 in 1996. As a percent of sales, these expenses decreased to 24.2% in 1997 from 25.0% in 1996. Selling expenses were relatively unchanged. General and administrative expenses increased $543,000 or 4.4% reflecting the Company's on-going investment in recruiting, management development and incentive compensation programs. Research and development expenses increased 17.2% as Bairnco continued to invest in the development of new products and improved quality. Operating profit in 1997 was $15,592,000, or 9.8% of net sales, compared to operating profit in 1996 of $14,956,000, or 10.0% of net sales. Net interest expense increased $109,000 or 6.3% from $1,725,000 to $1,834,000. The increase was due to increased average debt outstanding. Income before income taxes increased 4.0% to $13,758,000 in 1997 as compared to $13,231,000 in 1996. The effective tax rate decreased to 36.2% from 37.0% in 1996 due primarily to the tax benefits attendant with Bairnco's foreign sales corporation. Net income increased 5.2% to $8,771,000 in 1997 as compared to $8,335,000 in 1996. Diluted earnings per share increased 10.6% to $.94 from $.85 in 1996. As a result of the stock repurchase program, the average number of diluted shares outstanding in 1997 was 9,350,000, a 5.1% decrease from the 9,851,000 average outstanding in 1996. Liquidity and Capital Resources At December 31, 1998, Bairnco had working capital of $33.3 million compared to $35.7 million at December 31, 1997. The increase in accounts receivable relates primarily to the growth in export sales which have longer payment terms. Current deferred tax assets increased with the increase in accrued expenses primarily resulting from the $7.5 million provision for litigation costs. Other current assets decreased primarily as a result of the settlement of certain non-trade related receivables in the first quarter 1998. The increase in accrued expenses results primarily from provision for litigation costs. As of December 31, 1998, the reducing revolving credit agreement was amended to extend the first commitment reduction date to December 31, 2000 and the final maturity to December 31, 2003. At December 31, 1998, $37.8 million of total debt was outstanding compared to $30.3 million at the end of 1997. As of December 31, 1998, approximately $10.5 million was available for borrowing under the Corporation's secured reducing revolving credit agreement, as amended. In addition, approximately $4.3 million was available under various short-term domestic and foreign uncommitted credit facilities. Debt as a percent of equity increased to 81.5% at the end of 1998 from 57.8% at the end of 1997. The increase was due to the $7.5 million provision for litigation costs which reduced equity by $4,726,000 and the increased debt resulting from the MII acquisition and stock repurchase program. Bairnco made $5,976,000 of capital expenditures in 1998 as compared to its plan of approximately $12.0 million. Capital expenditures were significantly reduced in light of changing market conditions and were focused on cost reduction projects, replacements and new MIS systems and hardware that were installed during the year. Total capital expenditures in 1999 are expected to be approximately $8.2 million. Depreciation and amortization is estimated to be approximately $7.0 million. The planned capital expenditures include cost reduction projects, replacements, quality improvements, new product developments, new processing equipment, MIS hardware and software, and limited capacity additions. In 1998, Bairnco's Board of Directors authorized an additional $5,000,000 to be available for the ongoing repurchase of its common stock. The authorization was in addition to the $3.7 million still unused from the prior year $5,000,000 authorization. During 1998, Bairnco repurchased 737,400 shares of its common stock for $6.2 million. The diluted average number of shares outstanding in 1998 was 8,818,000 a 5.7% decrease from the 9,350,000 diluted average shares outstanding in 1997. The Board has authorized management to continue its stock repurchase program in 1999 subject to market conditions and the capital requirements of the business. Cash provided by operating activities plus the amounts available under the existing credit facilities are expected to be sufficient to fulfill Bairnco's anticipated cash requirements in 1999. Year 2000 Date Conversion As previously stated in Bairnco's 1997 Annual Report on Form 10-K, the Corporation has evaluated and identified its internal risks of software failure due to processing errors arising from calculations using the Year 2000 date. The plan that was established to maintain the integrity of its financial systems and ensure the reliability of its operating systems is proceeding on schedule. The total estimated cost of achieving Year 2000 compliance remains at approximately $250,000 and includes software and installation costs. Of this amount, approximately $175,000 had been incurred through December 31, 1998 with the remainder expected to be incurred during 1999. In January of 1998 Bairnco adopted a formal plan to address the Year 2000 issue. This plan has defined roles, identified staff members to execute the plan, set target dates, and provided a detailed budget. The plan also incorporates the use of outside consultants. The plan is periodically updated and modified, and progress is monitored against it to ensure that target dates are being met and that the Corporation designates whatever resources are necessary to meet the plan's requirements. Bairnco has compiled a checklist for all areas that may be affected by this issue. The Corporation has formed task forces at each of its operating divisions and charged them with doing thorough and complete audits of their facilities using the checklist as a guide. The Corporation is aware of some hardware issues and has assembled a plan to have the outmoded equipment replaced during 1999. Bairnco has assessed the software in use at all of its operations and identified applications that do not currently process using a four-digit field to record the date. The Corporation is in the process of adapting or replacing any such programs and expects to have the work completed on schedule. Through December 31, 1998, four of the seven North American locations' operating information technology ("IT") systems plus all of the European locations' IT systems had been upgraded to be Year 2000 compliant with the remaining four US locations expected to be completed by the end of the second quarter of 1999. These four divisions were in various stages of validation and implementation of the upgraded systems. Bairnco has contacted the majority of its suppliers and customers with whom the Corporation has a material business relationship regarding their Year 2000 state of readiness. The responses to date have indicated they are, or expect to be, Year 2000 compliant. Based on the results of our efforts to date as discussed above, the Corporation believes it will not experience any material disruption in its operations due to Year 2000 issues with its computer software programs and operating systems or its interface with key suppliers and vendors. However, the implementation and validation of Bairnco's IT and non-IT systems, and the evaluation of the state of readiness of Bairnco's material business partners are ongoing. The disruption in service of any critical suppliers or the failure of the Corporation's operating systems to comply, could result in a shutdown of the operations affected for the duration of the disruption. The Corporation has not analyzed the risks of a "most reasonably likely worst case scenario" nor has it developed a contingency plan to address this uncertainty. The Corporation's efforts to date have been focused on ensuring the impact of Year 2000 issues is minimized. It is management's intention to analyze the risks of this uncertainty and determine whether to develop such a plan. This process is scheduled for completion during the first half of 1999. Other Matters Bairnco Corporation and its subsidiaries are defendants in a number of legal actions and proceedings that are discussed in more detail in Note 10 to the Consolidated Financial Statements. Management of Bairnco believes that the disposition of these actions and proceedings will not have a material adverse effect on the consolidated results of operations or the financial position of Bairnco Corporation and its subsidiaries as of December 31, 1998. Outlook Management is not aware of any adverse trends that would materially affect the Company's strong financial position. The outlook for 1999 is for improved sales and earnings. It is expected that the combination of growth from new products, higher growth in certain niche markets and a full year of the results of the acquisition will result in increased sales. Improved earnings are expected both from increased sales and from continuing efficiency and yield improvement programs. Quarterly Results of Operations (Unaudited) (In thousands except per share data)
1st 2nd 3rd 4th Total 1998 1997 1998 1997 1998 1997 1998 1997 1998 1997 Net Sales $ 42,125 $ 37,445 $ 37,651 $ 41,128 $ 37,747 $ 39,814 $ 38,933 $ 40,321 $156,456 $158,708 Cost of sales 28,442 24,465 24,905 27,020 25,922 26,228 26,604 26,999 105,873 104,712 Gross Profit 13,683 12,980 12,746 14,108 11,825 13,586 12,329 13,322 50,583 53,996 Selling and administrative expenses 9,716 9,116 9,717 9,981 9,461 9,717 9,660 9,590 38,554 38,404 Provision for litigation costs -- -- -- -- -- -- 7,500 -- 7,500 -- Operating Profit 3,967 3,864 3,029 4,127 2,364 3,869 (4,831) 3,732 4,529 15,592 Interest expense, net 481 415 508 460 502 486 507 473 1,998 1,834 Income before income taxes 3,486 3,449 2,521 3,667 1,862 3,383 (5,338) 3,259 2,531 13,758 Provision for income taxes 1,290 1,276 933 1,320 689 1,218 (1,975) 1,173 937 4,987 Net Income $ 2,196 $ 2,173 $ 1,588 $ 2,347 $ 1,173 $ 2,165 $ (3,363)$ 2,086 $ 1,594 $ 8,771 Basic Earnings per Share $ 0.25 $ 0.23 $ 0.18 $ 0.26 $ 0.14 $ 0.24 $ (0.40)$ 0.23 $ 0.18 $ 0.96 Diluted Earnings per Share $ 0.24 $ 0.23 $ 0.18 $ 0.25 $ 0.14 $ 0.23 $ (0.40)$ 0.23 $ 0.18 $ 0.94 Market Price: High $ 11-3/8 $ 7-5/8 $ 11-3/8 $ 8-3/8 $ 9-1/8 $ 11 $ 7-1/8 $ 11-1/4 $ 11-3/8 $ 11-1/4 Low 9-13/16 6-3/8 8-7/8 6-7/8 5-9/16 8 5-3/4 6-11/16 5-9/16 6-3/8
"Safe Harbor" Statement under the Private Securities Reform Act of 1995 Certain of the statements contained in this annual report (other than the financial statements and statements of historical fact), including, without limitation, statements as to management expectations and belief presented under the captions "Letter to Our Stockholders" and "Management's Discussion and Analysis", are forward-looking statements. Forward-looking statements are made based upon management's expectations and belief concerning future developments and their potential effect upon the Corporation. There can be no assurance that future developments will be in accordance with management's expectations or that the effect of future developments on the Corporation will be those anticipated by management. The Corporation wishes to caution readers that the assumptions which form the basis for forward-looking statements with respect to or that may impact earnings for the year ended December 31, 1999 and thereafter include many factors that are beyond the Corporation's ability to control or estimate precisely. These risks and uncertainties include, but are not limited to, the market demand and acceptance of the Corporation's existing and new products; the impact of competitive products; changes in the market for raw or packaging materials which could impact the Corporation's manufacturing costs; changes in product mix; changes in the pricing of the products of the Corporation or its competitors; the loss of a significant customer or supplier; production delays or inefficiencies; disruptions in operations due to labor disputes; the unanticipated costs and disruption in operations due to Year 2000 non-compliance; the costs and other effects of complying with environmental regulatory requirements; losses due to natural disasters where the Corporation is self-insured, the costs and other effects of legal and administrative cases and proceedings, settlements and investigations; and changes in US or international economic or political conditions, such as inflation or deflation, or fluctuations in interest or foreign exchange rates. While the Corporation periodically reassesses material trends and uncertainties affecting the Corporation's results of operations and financial condition in connection with its preparation of the stockholders' letter and management's discussion and analysis contained in its annual reports, the Corporation does not intend to review or revise any particular forward-looking statement referenced herein in light of future events. REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Stockholders of Bairnco Corporation: We have audited the accompanying consolidated balance sheets of Bairnco Corporation (a Delaware corporation) and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of income, comprehensive income, stockholders' investment and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Bairnco Corporation and subsidiaries as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. Orlando, Florida January 21, 1999 Arthur Andersen LLP CONSOLIDATED STATEMENTS OF INCOME For the years ended December 31, 1998, 1997 and 1996 Bairnco Corporation and Subsidiaries
1998 1997 1996 Net Sales $156,456,000 $158,708,000 $150,234,000 Cost of sales 105,873,000 104,712,000 97,698,000 Gross Profit 50,583,000 53,996,000 52,536,000 Selling and administrative expenses 38,554,000 38,404,000 37,580,000 Provision for litigation costs (Note 2) 7,500,000 -- -- Operating Profit 4,529,000 15,592,000 14,956,000 Interest expense, net 1,998,000 1,834,000 1,725,000 Income before Income Taxes 2,531,000 13,758,000 13,231,000 Provision for income taxes (Note 5) 937,000 4,987,000 4,896,000 Net Income $ 1,594,000 $ 8,771,000 $ 8,335,000 Basic Earnings per Share of Common Stock (Note 4) $ 0.18 $ 0.96 $ 0.85 Diluted Earnings per Share of Common Stock (Note 4) $ 0.18 $ 0.94 $ 0.85 Dividends per Share of Common Stock $ 0.20 $ 0.20 $ 0.20 The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME For the years ended December 31, 1998, 1997 and 1996 Bairnco Corporation and Subsidiaries
1998 1997 1996 Net Income $ 1,594,000 $ 8,771,000 $ 8,335,000 Other comprehensive income, net of tax: Foreign currency translation adjustment (Note 1) 173,000 (710,000) (18,000) Comprehensive Income $ 1,767,000 $ 8,061,000 $ 8,317,000 The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED BALANCE SHEETS December 31, 1998 and 1997 Bairnco Corporation and Subsidiaries
1998 1997 Assets Current Assets: Cash and cash equivalents $ 822,000 $ 1,217,000 Accounts receivable, less allowances of $1,224,000 and $943,000, respectively 27,999,000 24,939,000 Inventories: Raw materials and supplies 5,701,000 5,646,000 Work in process 6,604,000 6,402,000 Finished goods 13,874,000 14,350,000 26,179,000 26,398,000 Deferred income taxes (Note 5) 4,137,000 2,641,000 Other current assets 1,709,000 2,748,000 Total current assets 60,846,000 57,943,000 Plant and Equipment, at cost: Land 1,846,000 1,541,000 Buildings and leasehold interests and improvements 18,115,000 16,659,000 Machinery and equipment 77,330,000 71,670,000 97,291,000 89,870,000 Less - Accumulated depreciation and amortization (55,889,000) (49,957,000) 41,402,000 39,913,000 Cost in Excess of Net Assets of Purchased Businesses (Note 1) 11,840,000 7,607,000 Other Assets (Note 1) 4,467,000 3,823,000 $118,555,000 $109,286,000 Liabilities and Stockholders' Investment Current Liabilities: Short-term debt (Note 7) $ 4,373,000 $ 3,018,000 Current maturities of long-term debt (Note 7) -- 9,000 Accounts payable 9,022,000 8,661,000 Accrued expenses (Note 6) 14,192,000 10,543,000 Total current liabilities 27,587,000 22,231,000 Long-Term Debt (Note 7) 33,471,000 27,291,000 Deferred Income Taxes (Note 5) 2,912,000 4,098,000 Other Liabilities 8,147,000 3,197,000 Stockholders' Investment (Notes 4, 7 and 8): Preferred stock, par value $.01, 5,000,000 shares authorized, none issued -- -- Common stock, par value $.01, 30,000,000 shares authorized, 11,187,224 and 11,160,774 issued, respectively 112,000 112,000 Paid-in capital 49,165,000 49,030,000 Retained earnings 22,670,000 22,802,000 Currency translation adjustment (Note 1) 1,745,000 1,572,000 Treasury stock, at cost, 2,904,165 and 2,166,765 shares, respectively (27,254,000) (21,047,000) Total stockholders' investment 46,438,000 52,469,000 $118,555,000 $109,286,000 The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended December 31, 1998, 1997 and 1996 Bairnco Corporation and Subsidiaries
1998 1997 1996 Cash Flows from Operating Activities: Net income $ 1,594,000 $ 8,771,000 $ 8,335,000 Adjustments to reconcile to net cash provided by operating activities: Depreciation and amortization 6,688,000 6,516,000 6,305,000 (Gain) loss on disposal of plant and equipment (13,000) 34,000 203,000 Deferred income taxes (2,751,000) 1,265,000 373,000 Change in operating assets and liabilities: (Increase) in accounts receivable, net (1,033,000) (3,874,000) (147,000) Decrease (increase) in inventories 2,117,000 (3,406,000) (442,000) Decrease (increase) in other current assets 1,125,000 956,000 (1,628,000) (Decrease) increase in accounts payable (38,000) 1,510,000 (460,000) Increase (decrease) in accrued expenses 2,204,000 (480,000) (426,000) Other 4,223,000 472,000 734,000 Net cash provided by operating activities 14,116,000 11,764,000 12,847,000 Cash Flows from Investing Activities: Capital expenditures (5,976,000) (8,789,000) (10,131,000) Payment for purchased businesses, net of cash acquired (8,423,000) -- -- Proceeds from sale of plant and equipment 123,000 219,000 138,000 Net cash (used in) investing activities (14,276,000) (8,570,000) (9,993,000) Cash Flows from Financing Activities: Net borrowings of external debt 7,746,000 2,434,000 3,968,000 Payment of dividends (1,726,000) (1,827,000) (1,937,000) Purchase of treasury stock (6,207,000) (3,255,000) (5,412,000) Exercise of stock options 135,000 26,000 472,000 Net cash (used in) financing activities (52,000) (2,622,000) (2,909,000) Effect of foreign currency exchange rate changes on cash and cash equivalents (183,000) (210,000) 302,000 Net (decrease) increase in cash and cash equivalents (395,000) 362,000 247,000 Cash and cash equivalents, beginning of year 1,217,000 855,000 608,000 Cash and cash equivalents, end of year $ 822,000 $ 1,217,000 $ 855,000 Supplemental Disclosures of Cash Flow Information: Cash paid during the year for: Interest $ 2,008,000 $ 1,824,000 $ 1,696,000 Income taxes $ 2,402,000 2,805,000 5,378,000 The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT For the years ended December 31, 1998, 1997 and 1996 Bairnco Corporation and Subsidiaries
Currency Common Paid-in Retained Translation Treasury Stock Capital Earnings Adjustment Stock Balance, December 31, 1995 $111,000 $48,533,000 $ 9,460,000 $2,300,000 $(12,380,000) Net income -- -- 8,335,000 -- -- Cash dividends ($.20 per share) -- -- (1,937,000) -- -- Issuance of 93,000 shares pursuant to exercise of stock options 1,000 471,000 -- -- -- Acquisition of treasury stock (803,900 shares at cost) -- -- -- -- (5,412,000) Currency translation adjustment (Note 1) -- -- -- (18,000) -- Balance, December 31, 1996 112,000 49,004,000 15,858,000 2,282,000 (17,792,000) Net income -- -- 8,771,000 -- -- Cash dividends ($.20 per share) -- -- (1,827,000) -- -- Issuance of 5,275 shares pursuant to exercise of stock options -- 26,000 -- -- -- Acquisition of treasury stock (424,800 shares at cost) -- -- -- -- (3,255,000) Currency translation adjustment (Note 1) -- -- -- (710,000) -- Balance, December 31, 1997 112,000 49,030,000 22,802,000 1,572,000 (21,047,000) Net income -- -- 1,594,000 -- -- Cash dividends ($.20 per share) -- -- (1,726,000) -- -- Issuance of 26,450 shares pursuant to exercise of stock options -- 135,000 -- -- -- Acquisition of treasury stock (737,400 shares at cost) -- -- -- -- (6,207,000) Currency translation adjustment (Note 1) -- -- -- 173,000 -- Balance, December 31, 1998 $112,000 $49,165,000 $22,670,000 $1,745,000 $(27,254,000) The accompanying notes are an integral part of these consolidated financial statements.
(1) Nature of Operations and Summary of Significant Accounting Policies Nature of operations: Bairnco Corporation is a diversified multinational company that operates two business sectors: Engineered Materials and Components which are designed, manufactured and sold under the Arlon brand identity to electronic, industrial and commercial markets worldwide; and, Replacement Products and Services which are manufactured and distributed under the Kasco brand identity principally to retail food stores and meat, poultry and fish processing plants throughout the United States, Canada and Europe. Arlon's products are based on a common technology in coating, laminating and dispersion chemistry. Arlon's principal products include high performance materials for the printed circuit board industry, cast and calendered vinyl film systems, custom engineered laminates and pressure sensitive adhesive systems, and calendered and extruded silicone rubber insulation products used in a broad range of industrial, consumer and commercial products. Kasco's principal products include replacement band saw blades for cutting meat, fish, wood and metal, on-site maintenance services and seasonings for ready-to-cook foods for the retail food industry primarily in the meat and deli departments. Kasco also distributes equipment to the food industry in Canada and France. Principles of consolidation: The accompanying consolidated financial statements include the accounts of Bairnco Corporation and its subsidiaries (Bairnco or the Corporation) after the elimination of all material inter-company accounts and transactions. The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Consolidated statements of cash flows: The Corporation considers cash in banks, commercial paper, demand notes and similar investments with a maturity of less than three months as cash and cash equivalents for the purposes of the consolidated statements of cash flows. Certain reclassifications were made to prior year balances in order to conform to the current year presentation. Inventories: Inventories are stated at cost, which is not in excess of market. Inventory costs include material, labor and overhead. Inventories are stated principally on a first-in, first-out (FIFO) basis. Plant and equipment: The Corporation provides for depreciation of plant and equipment principally on a straight-line basis by charges to income in amounts estimated to allocate the cost of these assets over their useful lives. Rates of depreciation vary among the several classifications as well as among the constituent items in each classification, but generally fall within the following ranges: Years Buildings and leasehold interests and improvements 5 - 40 Machinery and equipment 3 - 20 When property is sold or otherwise disposed of, the asset cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is included in the statement of income. Leasehold interests and improvements are amortized over the terms of the respective leases, or over their estimated useful lives, whichever is shorter. Maintenance and repairs are charged to operations. Renewals and betterments are capitalized. Accelerated methods of depreciation are used for income tax purposes, and appropriate provisions are made for the related deferred income taxes. Depreciation expense of $6,509,000, $6,333,000 and $6,123,000 was recognized during 1998, 1997 and 1996, respectively. Cost in excess of net assets of purchased businesses: Cost in excess of net assets of purchased businesses acquired prior to 1971 of approximately $3.5 million is not being amortized since, in the opinion of management, there has been no diminution in value. For businesses acquired subsequent to 1970, the cost in excess of net assets of purchased businesses, aggregating $10,020,000 and $5,625,000 at December 31, 1998 and 1997, respectively, is being amortized over 40 years. The increase is due to the acquisition of MII (refer to Note 3 to the Consolidated Financial Statements). Accumulated amortization at December 31, 1998 and 1997, was $1,665,000 and $1,504,000, respectively. Amortization expense of $147,000, $146,000 and $149,000 was recognized during 1998, 1997 and 1996, respectively. At each balance sheet date, the Corporation evaluates the realizability of its cost in excess of net assets of purchased businesses based upon expectations of non-discounted cash flows and operating income for each division having a material cost in excess of net assets of purchased businesses balance. Based upon its most recent analysis, the Corporation believes that no material impairment of its cost in excess of net assets of purchased businesses exists at December 31, 1998. Intangibles: Intangible assets of purchased businesses, net of amortization, are included in other assets and totaled $123,000 and $99,000 at December 31, 1998 and 1997, respectively. These items are amortized over their estimated lives, which generally range from three to twenty years. Amortization expense recognized was $32,000 during 1998, $37,000 during 1997 and $33,000 during 1996. Revenue recognition: Revenues are recognized when products are shipped or when services are rendered. Income taxes: The Corporation accounts for income taxes using an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Corporation's financial statements or tax returns. In estimating future tax consequences, the Corporation generally considers all expected future events other than enactment of changes in the tax law or changes in tax rates. Changes in tax laws or rates will be recognized in the future years in which they occur. Temporary differences between income for financial reporting and income tax purposes arise primarily from the timing of the deduction of certain accruals and from the use of accelerated methods of depreciation for income tax reporting purposes compared to the method of depreciation used for financial reporting purposes. Accrued expenses-insurance: Accrued expenses-insurance represents the estimated costs of known and anticipated claims under the Corporation's general liability, automobile liability, property and workers compensation insurance policies for all of its US operations. The Corporation provides reserves on reported claims and claims incurred but not reported at each balance sheet date based upon the estimated amount of the probable claim or the amount of the deductible, whichever is lower. Such estimates are reviewed and evaluated in light of emerging claim experience and existing circumstances. Any changes in estimates from this review process are reflected in operations currently. Stock options: The Corporation accounts for stock options under Accounting Principles Board Opinion No. 25 ("APB 25"), under which no compensation expense has been recognized. In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), which is effective for years beginning after December 15, 1995. SFAS 123 established financial accounting and reporting standards for stock-based employee compensation plans. The statement defines a fair value based method of accounting for an employee stock option or similar equity instrument and encourages all entities to adopt that method of accounting for all of their stock compensation plans. However, it also allows an entity to continue to measure compensation costs for those plans using the intrinsic value based method of accounting prescribed by APB 25, but requires pro-forma disclosure of net income and earnings per share for the effects on compensation expense had the accounting guidance for SFAS 123 been adopted. Compensation costs determined consistent with SFAS 123 did not have a material impact on the accompanying consolidated net earnings and earnings per share. Translation of foreign currencies: Balance sheet accounts of foreign subsidiaries are translated at the rates of exchange in effect at the balance sheet date while income and expenses are translated at the monthly average rates of exchange in effect during the year. Fair value of financial instruments: The carrying values of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, approximate fair value due to the short-term maturities of these assets and liabilities. The carrying amount of the Corporation's short-term and long-term debt approximates fair value, since the debt is at floating rates or rates approximating rates currently offered to the Corporation for debt of the same remaining maturities. Comprehensive income: In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"), which is effective for years beginning after December 15, 1997. SFAS 130 established standards for reporting and displaying comprehensive income and its components in a full set of general-purpose financial statements. This statement requires that all items of comprehensive income are classified by their nature in a financial statement and that the accumulated balance of other comprehensive income be displayed separately from retained earnings and additional paid-in capital in the equity section of a statement of financial position. Bairnco adopted SFAS 130 effective January 1, 1998. The comparative prior period financial statements have been reclassified to conform to the current period presentation. Comprehensive income includes net income as well as certain other transactions shown as changes in stockholders' investment. For Bairnco, comprehensive income includes net income plus the change in net asset values of foreign divisions as a result of translating the local currency values of net assets to US dollars at varying exchange rates. Accumulated other comprehensive income consists solely of foreign currency translation adjustments. There are currently no tax expenses or benefits associated with the foreign currency translation adjustments. Reportable segments: In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"), which is effective for fiscal years beginning after December 15, 1997. SFAS 131 introduces a new model for segment reporting called the management approach. The management approach is based on the way the chief operating decision-maker organizes segments within a company for making operating decisions and assessing performance. SFAS 131 requires disclosures for each segment that are similar to those required under previous standards with the addition of quarterly disclosure requirements and a finer partitioning of geographic disclosures. It requires limited segment data on a quarterly basis. It also requires geographic data by country, as opposed to broader geographic regions permitted under previous standards. Bairnco adopted SFAS 131 effective January 1, 1998 and prior year segment information and disclosures have been restated, where applicable, to conform to the current year presentation. Pension Accounting: In February 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 132, "Employers' Disclosures about Pensions and other Postretirement Benefits" ("SFAS 132"), which is effective for fiscal years beginning after December 15, 1997. SFAS 132 standardizes the disclosure requirements for pensions and other postretirement benefits and requires additional information on changes in the benefit obligations and fair value of plan assets while eliminating certain prior disclosures that are no longer considered useful. Bairnco adopted SFAS 132 effective January 1, 1998 and prior year pension disclosures have been restated, where applicable, to conform to the current year presentation. (2) Provision for Litigation Costs In the fourth quarter of 1998, Bairnco recorded a $7,500,000 pre-tax provision for litigation costs. The litigation provision added to the existing reserves for asbestos-related litigation expenditures due to a change in the estimate to defend the Transaction Lawsuit (refer to Management's Discussion and Analysis and Note 11 to Consolidated Financial Statements). $2.5 million of this provision for litigation costs is included in accrued expenses with the remaining $5.0 million included in other liabilities in the Corporation's consolidated balance sheet for the year ended December 31, 1998. After recognition of related tax benefits, the litigation provision reduced net income in 1998 by $4.7 million or approximately $.54 diluted earnings per common share. (3) Acquisition On October 31, 1998, Bairnco purchased MII International, Inc. ("MII") for approximately $8.3 million including the repayment of its debt. MII manufactures adhesive coated films for use in the graphics and industrial markets. The transaction was accounted for as a purchase and was financed with long-term debt. The purchase price exceeded the fair value of net assets acquired by approximately $4.0 million which is being amortized on a straight-line basis over 40 years. The results of operations of MII are included in the accompanying consolidated financial statements from the date of acquisition. The following summarized unaudited pro forma financial information assumes the acquisition had occurred on January 1 of each year: Pro Forma Information (in thousands, except per share data) 1998 1997 Net sales $167,865 $174,184 Net income $ 1,782 $ 9,053 Basic earnings per share $ 0.21 $ 0.99 Diluted earnings per share $ 0.20 $ 0.97 These amounts include MII's actual results in 1997 and for the first ten months of 1998 prior to acquisition and actual results for the two months in 1998 after acquisition. The amounts are based upon certain assumptions and estimates, and do not reflect any benefit from economies which might be achieved from combined operations. The pro forma results do not necessarily represent results which would have occurred if the acquisition had taken place on the basis assumed above, nor are they indicative of the results of future combined operations. (4)Earnings per Share The Corporation accounts for earnings per share ("EPS") under Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"). The following disclosures comply with the requirements of SFAS 128.
1998 1997 1996 Basic Earnings per Common Share: Net Income $ 1,594,000 $ 8,771,000 $ 8,335,000 Average common shares outstanding 8,655,000 9,151,000 9,753,000 Basic Earnings Per Common Share $ 0.18 $ 0.96 $ 0.85 Diluted Earnings per Common Share: Net Income $ 1,594,000 $ 8,771,000 $ 8,335,000 Average common shares outstanding 8,655,000 9,151,000 9,753,000 Common shares issuable in respect to options issued to employees, with a dilutive effect 163,000 199,000 98,000 Total diluted common shares outstanding 8,818,000 9,350,000 9,851,000 Diluted Earnings Per Common Share $ 0.18 $ 0.94 $ 0.85 Basic earnings per common share were computed by dividing net income by the weighted average number of shares of common stock outstanding during the year. Diluted earnings per common share includes the effect of all dilutive stock options.
(5) Income Taxes The components of income before income taxes and the provisions for domestic and foreign income taxes are as follows:
1998 1997 1996 Income before Income Taxes: Domestic $ 1,187,000 $12,765,000 $13,176,000 Foreign 1,344,000 993,000 55,000 Total Income before Income Taxes $ 2,531,000 $13,758,000 $13,231,000 Provision for Income Taxes: Domestic: Currently payable $ 3,266,000 $ 3,616,000 $ 4,096,000 Deferred (2,688,000) 1,102,000 594,000 Foreign: Currently payable 422,000 106,000 452,000 Deferred (63,000) 163,000 (246,000) Total Provision for Income Taxes $ 937,000 $ 4,987,000 $ 4,896,000
Bairnco's net current and non-current deferred tax assets (liabilities) include the following at December 31:
1998 1997 1996 Current Deferred Tax Items: Accrued Expenses $ 2,840,000 $ 1,584,000 $ 1,887,000 Inventories 977,000 847,000 872,000 Other 320,000 210,000 163,000 Net Current Deferred Tax Asset 4,137,000 2,641,000 2,922,000 Non-Current Deferred Tax Items: Fixed Assets (3,539,000) (3,291,000) (2,889,000) Pensions (1,273,000) (1,051,000) (1,149,000) Intangible Assets (13,000) 21,000 15,000 Provision for Litigation Costs 1,700,000 -- -- Other 213,000 223,000 909,000 Net Non-Current Deferred Tax Liability (2,912,000) (4,098,000) (3,114,000) Net Deferred Tax Asset (Liability) $ 1,225,000 $(1,457,000) $ (192,000)
Management expects that future operations will generate sufficient taxable income to realize the existing net temporary differences. As a result, the Corporation has not recorded any valuation allowances against its deferred tax assets. In 1998, 1997 and 1996 the Corporation's effective tax rates were 37.0%, 36.2% and 37.0%, respectively, of income before income taxes. An analysis of the differences between these rates and the US federal statutory income tax rate is as follows:
1998 1997 1996 Computed income taxes at statutory rate $ 861,000 $ 4,678,000 $4,499,000 State and local taxes, net of federal tax benefit 64,000 368,000 321,000 Dividend income -- 1,303,000 198,000 Amortization of goodwill 9,000 9,000 9,000 Foreign income taxed at different rates (98,000) (69,000) 187,000 Tax credits (31,000) (1,182,000) (271,000) Benefit of Foreign Sales Corporation (270,000) (289,000) (413,000) Other, net 402,000 169,000 366,000 Provision for income taxes $ 937,000 $ 4,987,000 $4,896,000
Audits of the federal income tax returns of the Corporation and its subsidiaries have been completed through 1992. Provision has not been made for US income taxes on approximately $3.1 million of undistributed earnings of international subsidiaries. These earnings could become subject to additional tax if they were remitted as dividends or if the Corporation should sell its stock in the subsidiaries. It is not practicable to estimate the amount of additional tax that might be payable on the foreign earnings; however, the Corporation believes that US foreign tax credits would largely eliminate any US income tax incurred. (6) Accrued Expenses Accrued expenses consisted of the following as of December 31, 1998 and 1997, respectively: 1998 1997 Salaries and wages $ 2,669,000 $ 2,353,000 Income taxes 633,000 139,000 Insurance 2,462,000 2,216,000 Litigation 3,580,000 1,461,000 Other accrued expenses 4,848,000 4,374,000 Total accrued expenses $14,192,000 $10,543,000 (7) Debt Long-term debt consisted of the following as of December 31, 1998 and 1997, respectively: 1998 1997 Revolving Credit Notes $30,471,000 $24,291,000 Industrial Revenue Bonds 3,000,000 3,000,000 Other -- 9,000 33,471,000 27,300,000 Less Current Maturities -- 9,000 Total $33,471,000 $27,291,000 On December 31, 1998, the Corporation's secured, reducing revolving credit agreement (the "Credit Agreement") with a consortium of four banks led by Bank of America, Illinois, and including SunTrust Bank, First Union Bank of Florida and First National Bank of Maryland, was amended. The amendment effectively extended the first commitment reduction date to December 31, 2000 and the expiration date of the Credit Agreement from December 31, 2001 to December 31, 2003. The Credit Agreement also includes a letter of credit facility of $7 million, although the letter of credit facility may be increased up to $20 million with a corresponding decrease in the revolving credit facility. Effective December 31, 1998, the letter of credit facility was increased by $2.0 million to $9.0 million with a corresponding decrease in the revolving credit facility. At December 31, 1998, $30.5 million of revolving credit was outstanding and payable from 2001 through 2003. In addition, approximately $8.2 million of irrevocable standby letters of credit were outstanding under the Credit Agreement, which are not reflected in the accompanying consolidated financial statements. $5.2 million of the letters of credit guarantee various trade and insurance activities. An outstanding $3.0 million letter of credit supports the Industrial Revenue Bonds. Interest rates vary on the revolving credit and are set at the time of borrowing in relationship to one of several reference rates, as selected by the Corporation at the time of the borrowing. Interest rates on the revolving credit outstanding at December 31, 1998, were approximately 6.1% on US borrowings and ranged from approximately 3.9% to 7.1% on European borrowings. A commitment fee is paid on the unused portion of the total credit. The interest rate on the Industrial Revenue Bonds was approximately 3.9% at December 31, 1998. Substantially all of the assets of the Corporation and its US subsidiaries are pledged as collateral under the Credit Agreement, which expires on December 31, 2003. The Credit Agreement contains covenants, which require the Corporation to meet minimum interest coverage ratios, and which limit the ratio of total debt to capital employed as defined in the Credit Agreement. In addition, minimum levels of stockholders' investment must be maintained. At December 31, 1998 the Corporation was in compliance with all covenants contained in the Credit Agreement. The Corporation has other short-term debt outstanding at rates of 5.9% to 6.5% due in 1999. The annual maturity requirements for long-term debt due after December 31, 1998, are summarized as follows: Year Ended December 31, 1999 $ -- 2000 -- 2001 3,000,000 2002 3,000,000 2003 27,471,000 Total Long-term Debt $33,471,000 (8) Stock Options The Corporation has a stock incentive plan which was established in 1990 ("1990 Plan"). The 1990 Plan permits the grant of options to purchase not more than 2,500,000 shares of common stock. The 1990 Plan provides for the grant of non-qualified options and options qualifying as incentive stock options under the Internal Revenue Code to key employees and each outside Director of the Corporation at an option price equal to the fair market value on the date of grant. Non-qualified stock options may also be granted at book value. The term of each option may not exceed 10 years from the date the option becomes exercisable (or, in the case of an incentive stock option, 10 years from the date of grant). A senior executive of the Corporation presently holds performance based, non-qualified stock options granted under the 1990 Plan to purchase a total of 250,000 shares of common stock at option prices equal to the fair market value on the date of grant. Two-thirds of these performance options became exercisable as a result of the Corporation's earnings performance in 1992 and 1995 with the remaining one-third becoming fully exercisable on the tenth anniversary of the date of grant if the executive is still employed by the Corporation. These options remain exercisable for ten years from the date they first become exercisable. Changes in the stock options granted under the 1990 Plan during 1998, 1997 and 1996 were as follows:
1998 1997 1996 Wtd Avg Wtd Avg Wtd Avg 1998 Exercise 1997 Exercise 1996 Exercise Options Price Options Price Options Price Outstanding at beginning of year 633,750 $5.89 684,225 $5.71 716,950 $5.56 Granted 52,625 8.20 33,400 8.24 78,000 6.32 Exercised (26,450) 5.13 (5,275) 4.93 (93,000) 5.09 Canceled (12,975) 6.75 (78,600) 5.39 (17,725) 5.28 Outstanding at end of year 646,950 $6.09 633,750 $5.89 684,225 $5.71 Exercisable at end of year 461,813 $5.79 465,563 $5.70 501,513 $5.62
At December 31, 1998, 1997 and 1996, 1,450,825, 1,490,475 and 1,495,925 shares, respectively, were available for option grants under the 1990 Plan. The weighted average contractual life of the 646,950 options outstanding at December 31, 1998 was 3.17 years. There were no charges to income in connection with stock option grants or exercises during 1998, 1997 and 1996. (9) Pension Plans The Corporation has several pension plans which cover substantially all of its employees. The benefits paid under these plans generally are based on employees' years of service and compensation during the last years of employment. Annual contributions made to the US plans are determined in compliance with the minimum funding requirements of ERISA using a different actuarial cost method and actuarial assumptions than are used for determining pension expense for financial reporting purposes. Plan assets consist primarily of publicly traded equity and debt securities. The Corporation maintains unfunded supplemental plans in the United States to provide retirement benefits in excess of levels provided under the Corporation's other plans. The Corporation's foreign subsidiaries provide retirement benefits for employees consistent with local practices. The foreign plans are not significant in the aggregate and therefore are not included in the following disclosures. The following table describes the funded status of US pension plans:
1998 1997 Change in Benefit Obligation: Benefit obligation at September 30, 1997 and 1996, respectively $ 25,638,000 $ 24,241,000 Service cost 756,000 754,000 Interest cost 1,895,000 1,815,000 Actuarial loss 2,071,000 211,000 Benefits paid (1,457,000) (1,383,000) Benefit obligation at September 30, 1998 and 1997, respectively 28,903,000 25,638,000 Change in Plan Assets: Fair value of plan assets at September 30, 1997 and 1996, respectively 30,433,000 24,371,000 Actual return on plan assets 1,142,000 6,276,000 Employer contributions 667,000 1,148,000 Benefits paid (1,436,000) (1,362,000) Fair value of plan assets at September 30, 1998 and 1997, respectively 30,806,000 30,433,000 Funded status 1,903,000 4,796,000 Unrecognized net transition obligation 349,000 447,000 Unrecognized prior service cost 266,000 323,000 Unrecognized net actuarial loss (gain) 744,000 (2,839,000) Prepaid pension costs at September 30, 1998 and 1997, respectively 3,262,000 2,727,000 Fourth quarter accruals (26,000) (125,000) Fourth quarter contributions 52,000 55,000 Prepaid pension costs at yearend $ 3,288,000 $ 2,657,000
The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for the pension plan with plan assets in excess of accumulated benefit obligations were $25,448,000, $22,705,000 and $28,380,000, respectively, at September 30, 1998, and $22,534,000, $20,223,000 and $28,066,000, respectively, at September 30, 1997. The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for the pension plans with accumulated benefit obligations in excess of plan assets were $3,455,000, $3,396,000 and $2,426,000, respectively, at September 30, 1998, and $3,105,000, $3,036,000 and $2,368,000, respectively, at September 30, 1997. The discount rate used in determining the actuarial present value of the projected benefit obligations in the table above was 7.0% at September 30, 1998 and 7.5% at September 30, 1997. The rate of projected pay increases, where applicable, was 5% at both September 30, 1998 and 1997. The expected long-term rate of return on retirement plan assets was 9% at both September 30, 1998 and 1997. Amounts recognized in the consolidated balance sheets of the Corporation consist of the following:
1998 1997 Prepaid benefit cost $ 3,382,000 $ 2,845,000 Accrued benefit liability (969,000) (668,000) Intangible asset 849,000 550,000 Net amount recognized at September 30 3,262,000 2,727,000 Fourth quarter accruals (26,000) (125,000) Fourth quarter contributions 52,000 55,000 Net amount recognized at December 31 $ 3,288,000 $ 2,657,000
Net periodic pension cost for the US plans included the following:
1998 1997 1996 Service cost-benefits earned during the year $ 752,000 $ 771,000 $ 716,000 Interest cost on projected benefit obligation 1,918,000 1,823,000 1,695,000 Expected return on plan assets (2,722,000) (2,252,000) (2,018,000) Amortization of net obligation at date of transition 99,000 99,000 99,000 Amortization of prior service cost 56,000 61,000 26,000 Amortization of accumulated loss -- -- 7,000 Net periodic pension cost $ 103,000 $ 502,000 $ 525,000
(10) Reportable Segment Data Operating segments are components of an enterprise that: a.Engage in business activities from which they may earn revenues and incur expenses, b.Whose operating results are regularly reviewed by the company's chief operating decision-maker to make decisions about resources to be allocated to the segment and assess its performance, and c.For which discrete financial information is available. Operating segments with similar products and services, production processes, types of customers, and sales channels are combined into reportable segments for disclosure purposes. Bairnco has two reportable segments - the Arlon Engineered Materials and Components segment and the Kasco Replacement Products and Services segment. The Arlon Engineered Materials and Components segment designs, manufactures and sells laminated and coated materials to the electronic, industrial and commercial markets under the Arlon and Calon brand names. These products are based on common technologies in coating, laminating, polymers, and dispersion chemistry. Among the products included in this segment are high technology materials for the printed circuit board industry, vinyl films for graphics art applications, foam tapes used in window glazing, electrical and thermal insulation products, and silicone rubber products for insulating tapes and flexible heaters. The Kasco Replacement Products and Services segment manufactures, sells and services products and equipment used in supermarkets, meat and deli operations, and meat, poultry, and fish processing plants throughout the United States, Canada and Europe. It also manufactures and sells small band saw blades for cutting wood and metal, and large band saw blades for use at lumber mills. Bairnco evaluates segment performance based on income before interest and taxes and excluding allocation of headquarters expense. Segment income and assets are measured on a basis that is consistent with the methods described in the summary of significant accounting policies. Segment assets exclude US deferred income taxes and assets attributable to US employee benefit programs. Inter-segment transactions are not material. No customer accounts for 10% or more of consolidated revenue. Financial information about the Corporation's operating segments for the years ended December 31, 1998, 1997 and 1996 is as follows:
Operating Capital Depreciation/ Net Sales Profit (Loss) Assets Expenditures Amortization 1998 Arlon $107,736,000 $ 12,698,000 $ 72,880,000 $ 2,925,000 $3,952,000 Kasco 48,720,000 3,085,000 38,215,000 3,022,000 2,676,000 Headquarters -- (11,254,000)(a) 7,460,000 29,000 60,000 Total $156,456,000 $ 4,529,000 $118,555,000 $ 5,976,000 $6,688,000 1997 Arlon $112,036,000 $ 15,873,000 $ 64,530,000 $ 5,438,000 $3,665,000 Kasco 46,672,000 3,495,000 37,703,000 3,252,000 2,791,000 Headquarters -- (3,776,000) 7,053,000 99,000 60,000 Total $158,708,000 $ 15,592,000 $109,286,000 $ 8,789,000 $6,516,000 1996 Arlon $103,449,000 $ 16,159,000 $ 58,498,000 $ 7,255,000 $3,312,000 Kasco 46,785,000 2,649,000 35,328,000 2,830,000 2,933,000 Headquarters -- (3,852,000) 8,774,000 46,000 60,000 Total $150,234,000 $ 14,956,000 $102,600,000 $10,131,000 $6,305,000 (a) Includes impact of $7.5 million (pre-tax) provision for litigation costs.
The Corporation has operations in Canada and several European countries. Information about the Corporation's operations by geographical area for the years ended December 31, 1998, 1997 and 1996 is as follows: Sales to External Long-lived Segment Customers Assets 1998 United States $133,005,000 $48,109,000 France 12,821,000 218,000 Other Foreign 10,630,000 4,997,000 1997 United States $136,010,000 $42,478,000 France 12,238,000 209,000 Other Foreign 10,460,000 5,169,000 1996 United States $124,154,000 $40,272,000 France 12,179,000 267,000 Other Foreign 13,901,000 5,823,000 (11) Contingencies Bairnco and its subsidiaries are among the defendants in a lawsuit pending in the U.S. District Court for the Southern District of New York (the "Transactions Lawsuit") in which it is alleged that Bairnco and others are derivatively liable for the asbestos-related claims against its former subsidiary, Keene Corporation ("Keene"). The plaintiffs in the Transactions Lawsuit are the trustees of Keene Creditors Trust ("KCT"), a successor in interest to Keene. In the Transactions Lawsuit complaint, the KCT alleges that certain sales of assets by Keene to other subsidiaries of Bairnco were fraudulent conveyances and otherwise violative of state law, as well as being violative of the civil RICO statute, 18 U.S.C. Section 1964. The complaint seeks compensatory damages of $700 million, interest, punitive damages, and trebling of the compensatory damages pursuant to civil RICO. In a series of decisions that remain subject to appeal, the court has dismissed plaintiff's civil RICO claims; dismissed 14 of the 21 defendants named in the complaint; and partially granted defendants' motions for summary judgment on statute of limitations grounds. Discovery is now underway as to the remaining claims and defendants. Keene was spun off in 1990, filed for relief under Chapter 11 of the Bankruptcy Code in 1993, and emerged from Chapter 11 pursuant to a plan of reorganization approved in 1996 (the "Keene Plan"). The Keene Plan provided for the creation of the KCT, and transferred the authority to prosecute the Transactions Lawsuit from the Official Committee of Unsecured Creditors of Keene (which initiated the lawsuit in the Bankruptcy Court in 1995) to the KCT. The Keene Plan further provided that only the KCT, and no other entity, can sue Bairnco in connection with the claims in the Transactions Lawsuit complaint. Therefore, although a number of other asbestos-related personal injury and property damage cases against Bairnco nominally remain pending in courts around the country, it is expected that the resolution of the Transactions Lawsuit in substance will resolve all such claims. Bairnco also is the defendant in a separate action by the KCT (the "NOL Lawsuit"), also pending in the United States District Court for the Southern District of New York, in which the KCT seeks the exclusive benefit of tax refunds attributable to the carryback by Keene of certain net operating losses ("NOL Refunds"), notwithstanding certain provisions of applicable tax sharing agreements between Keene and Bairnco. (As with the Transactions Lawsuit, the NOL Lawsuit was commenced during Keene's Chapter 11 case and, pursuant to the Keene Plan, the KCT became the plaintiff in the lawsuit and the lawsuit was moved from the bankruptcy Court to the District Court.) Pending resolution of the NOL Lawsuit, any refunds actually received are to be placed in escrow. Through December 31, 1998, approximately $28.5 million of NOL Refunds had been received and placed in escrow. There can be no assurance whatsoever that resolution of the NOL Lawsuit will result in the release of any portion of the NOL Refunds to Bairnco.. Bairnco and its Arlon subsidiary also are among the defendants in a third action by the KCT (the "Properties Lawsuit"), commenced December 8, 1998 and pending in the United States District Court for the Southern District of New York. In the Properties Lawsuit complaint, the KCT seeks a declaratory judgment that it owns certain patents and real property purchased by Arlon from Keene in 1989, based on the allegations that technical title to these assets was not conveyed at the time of the sale and that no proof of claim specifically referencing these assets was filed during Keene's Chapter 11 case. Management believes that Bairnco has meritorious defenses to all claims or liability purportedly derived from Keene and that it is not liable, as an alter ego, successor, fraudulent transferee or otherwise, for the asbestos-related claims against Keene or with respect to Keene products. Bairnco Corporation and its subsidiaries are defendants in a number of other actions. Management of Bairnco believes that the disposition of these other actions, as well as the actions and proceedings described above, will not have a material adverse effect on the consolidated results of operations or the financial position of Bairnco Corporation and its subsidiaries as of December 31, 1998. CORPORATE INFORMATION Corporate Office Suite 300, 2251 Lucien Way Maitland, Florida 32751 (407) 875-2222 www.bairnco.com Principal Facilities Bear, Delaware East Providence, Rhode Island Northbrook, Illinois Rancho Cucamonga, California St. Louis, Missouri Santa Ana, California Toronto, Ontario, Canada Gwent, Wales, United Kingdom Paris, France Pansdorf, Germany Transfer Agent and Registrar Trust Company Bank P.O. Box 4625 Atlanta, Georgia 30302 (404) 588-7815 Independent Certified Public Accountants Arthur Andersen LLP 200 South Orange Avenue, Suite 2100 Orlando, Florida 32801 (407) 841-4601 Stock Listing Bairnco common stock is listed on the New York Stock Exchange. Symbol - BZ. Annual Meeting The annual stockholders meeting will be held at Bairnco's Corporate Office on April 22, 1999 at 9:00 a.m. Form 10-K Stockholders may obtain without charge a copy of Bairnco's Form 10-K filed with the Securities and Exchange Commission by writing to Investor Relations at the Corporate Office address. Investor Relations Information Contact J. Robert Wilkinson, Vice President Finance and Treasurer, Bairnco Corporation (407) 875-2222, extension 228. BAIRNCO CORPORATION Suite 300, 2251 Lucien Way Maitland, Florida 32751 407-875-2222 FAX 407-875-3398 www.bairnco.com EX-21 5 SUBSIDIARIES OF REGISTRANT EXHIBIT 21 BAIRNCO CORPORATION AND SUBSIDIARIES Subsidiaries of Registrant as of March 19, 1999 Percentage State/Country of Ownership Incorporation Arlon, Inc. 100% Delaware Kasco Corporation 100% Delaware Bairnco Foreign Sales Corporation 100% Barbados Bertram & Graf Gmbh (1) 100% Germany Invabond Ltd. (1) 100% Ireland Atlantic Service Co. Ltd. (1) 100% Canada Atlantic Service Co. (UK) Ltd. (1) 98.9% United Kingdom EuroKasco S.A. (1) 100% France (1) Indirect wholly-owned subsidiary of Bairnco Corporation. EX-23 6 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACOUNTANTS EXHIBIT 23 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS TO BAIRNCO CORPORATION: As independent certified public accountants, we hereby consent to the incorporation of our reports included and incorporated by reference in this Form 10-K, into the Company's previously filed Registration Statements on Form S-8 (Files 33-36330 and 33 41313). Orlando, Florida March 19, 1999 Arthur Andersen LLP EX-27 7 FINANCIAL DATA SCEDULES
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION FROM BAIRNCO'S ANNUAL REPORT TO SHAREHOLDERS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 3-MOS YEAR DEC-31-1998 DEC-31-1998 DEC-31-1998 DEC-31-1998 822,000 822,000 0 0 29,223,000 29,223,000 1,224,000 1,224,000 26,179,000 26,179,000 60,846,000 60,846,000 97,291,000 97,291,000 55,889,000 55,889,000 118,555,000 118,555,000 27,587,000 27,587,000 33,471,000 33,471,000 0 0 0 0 112,000 112,000 46,326,000 46,326,000 118,555,000 118,555,000 38,933,000 156,456,000 38,933,000 156,456,000 26,604,000 105,873,000 26,604,000 105,873,000 0 0 0 0 507,000 1,998,000 (5,338,000) 2,531,000 (1,975,000) 937,000 (3,363,000) 1,594,000 0 0 0 0 0 0 (3,363,000) 1,594,000 (0.40) 0.18 (0.40) 0.18
EX-99 8 FORM 11-K FOR YEAR ENDED DECEMBER 31, 1998 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 11-K FOR ANNUAL REPORT OF EMPLOYEE STOCK PURCHASE, SAVINGS AND SIMILAR PLANS PURSUANT TO SECTION 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [X] ANNUAL REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number: 33-41313 A. Full title of the plan and the address of the plan, if different from that of the issuer named below: Bairnco Corporation 401(k) Savings Plan and Trust B. Name of issuer of the securities held pursuant to the plan and the address of its principal executive office: Bairnco Corporation 2251 Lucien Way Maitland, Florida 32751 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Advisory Committee of Bairnco Corporation 401(k) Savings Plan and Trust: We have audited the accompanying statements of net assets available for benefits of Bairnco Corporation 401(k) Savings Plan and Trust (the Plan) as of December 31, 1998 and 1997, and the related statement of changes in net assets available for benefits for the year ended December 31, 1998. These financial statements and the supplemental schedules referred to below are the responsibility of the Plan's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the net assets available for benefits of the Plan as of December 31, 1998 and 1997, and the changes in its net assets available for benefits for the year ended December 31, 1998, in conformity with generally accepted accounting principles. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplemental schedules of reportable transactions, assets held for investment and transactions with parties in interest are presented for purposes of additional analysis and are not a required part of the basic financial statements but are supplementary information required by the Department of Labor's Rules and Regulations for Reporting and Disclosure under the Employee Retirement Income Security Act of 1974. The Fund Information in Note 6 is presented for purposes of additional analysis rather than to present the changes in net assets available for benefits of each fund. The supplemental schedules and Fund Information have been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, are fairly stated in all material respects, in relation to the basic financial statements taken as a whole. Orlando, Florida March 9, 1999 Arthur Andersen LLP BAIRNCO CORPORATION 401(k) SAVINGS PLAN AND TRUST STATEMENTS OF NET ASSETS AVAILABLE FOR BENEFITS AS OF DECEMBER 31, 1998 AND 1997
1998 1997 ASSETS INVESTMENTS, at fair market value (Notes 2 & 3) Bairnco common stock $ 194,962 $ 277,830 Mutual funds 5,131,997 3,873,674 Participant notes receivable 193,146 108,523 TOTAL INVESTMENTS 5,520,105 4,260,027 RECEIVABLES Participants' contributions 71,745 69,647 Investment income -- 1,396 TOTAL RECEIVABLES 71,745 71,043 TOTAL ASSETS 5,591,850 4,331,070 NET ASSETS AVAILABLE FOR BENEFITS $5,591,850 $4,331,070 The accompanying notes are an integral part of these financial statements.
BAIRNCO CORPORATION 401(k) SAVINGS PLAN AND TRUST STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS FOR THE YEAR ENDED DECEMBER 31, 1998 (Note 6) 1998 NET ASSETS AVAILABLE FOR BENEFITS, beginning of year $4,331,070 ADDITIONS: Participants' contributions 1,038,728 Interest and dividends 157,892 Net realized and unrealized appreciation on investments (Note 2) 654,560 1,851,180 DEDUCTIONS: Distributions 584,679 Administrative expenses 5,721 590,400 NET INCREASE 1,260,780 NET ASSETS AVAILABLE FOR BENEFITS, end of year $5,591,850 The accompanying notes are an integral part of these financial statements. BAIRNCO CORPORATION 401(k) SAVINGS PLAN AND TRUST NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1998 and 1997 1. PLAN DESCRIPTION: The following description of the Bairnco Corporation 401(k) Savings Plan and Trust (the "Plan") provides only general information. Participants of the Plan should refer to the Plan document for a complete description of the Plan's provisions. The Plan document is available from Bairnco Corporation ("Bairnco" or the "Corporation") at its offices in Maitland, Florida. General Bairnco established the Plan effective July 1, 1991. The Plan is a defined contribution plan under which all full-time employees become eligible for participation on the first day of the month following completion of thirty days of service. Once an employee becomes eligible for participation, salary deferrals (contributions) may commence on any subsequent date. The Plan excludes non-resident aliens, leased employees and independent contractors from participating in the Plan. Union employees of the Corporation are permitted to participate in the Plan. The Plan is subject to the Department of Labor's Rules and Regulations for Reporting and Disclosure under the Employee Retirement Income Security Act of 1974 ("ERISA"). Contributions Under the terms of the Plan, allowable contributions are outlined as follows: Participant Contributions - The participants may elect to defer a minimum of 1% and a maximum of 20% of compensation, as defined in the Plan, not to exceed $10,000 for 1998. The maximum dollar amount that may be deferred is adjusted annually by the Internal Revenue Service. The amount of the compensation which is deferred, plus any earnings or losses on that amount, is not subject to federal income tax until the funds are actually distributed to the participant by the Plan. However, contributions are subject to FICA (Social Security and Medicare Taxes). Employer Contributions - The Corporation does not match elective deferrals pursuant to the Plan. Participant Accounts Each participant's account is credited with the participant's contribution and allocations of Plan earnings or losses, and charged with an allocation of administrative expenses. Allocations are based on participant account balances, as defined in the Plan. The benefit to which a participant is entitled is the amount that can be provided from the participant's vested account. Vesting A participant shall at all times have a 100 percent nonforfeitable interest in the value of his/her account attributable to all contributions made plus or minus investment earnings and losses thereon and related administrative costs. Transfers From Other Qualified Plans Participants who have an interest in any other qualified employee benefit plan (as described in Section 401(a) of the Internal Revenue Code) may transfer the distributions from these plans directly into the Plan at the discretion of the Administrative Committee (see Note 4). Distributions A participant who has attained age 59-1/2 may elect, by filing a written application with the Administrative Committee, to withdraw any amount up to 100 percent of the vested portion of his/her account, for any reason. For participants who have not attained age 59-1/2, the reasons for such withdrawals are restricted to those defined in the Plan. Upon termination of employment, a participant can elect to have the balance in the participant's account distributed to the participant in a single lump sum cash distribution or a partial distribution, if requested in writing by the participant. As an alternative, the participant may also elect to leave the related funds in the Plan or transfer the related funds into another qualified plan. Participant Notes Receivable An active participant may borrow from his/her account a minimum of $1,000 up to a maximum equal to the lesser of (1) a total of $50,000 of borrowings within one year or (2) 50% of the participant's account balance. Loan transactions are treated as transfers between the investment fund and the participant notes receivable account. Loan terms range from 1-5 years or up to 15 years for the purchase of a primary residence. The loans are secured by the balance in the participant's account and bear interest at the prime rate at the time of borrowing plus 2%. During 1998, interest rates ranged from 9.75% to 10.5%. Principal and interest are paid quarterly through payroll deductions. As of December 31, 1998 and 1997, there were 61 and 43 loans outstanding. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Use of Estimates- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of additions and deductions from the net assets available for benefits during the reporting period. Actual results could differ from those estimates. Basis Of Accounting- For the year ended December 31, 1998, the accounting records of the Plan and the Plan's assets were maintained by Schwab Retirement Plan Services, Inc. ("Schwab") a subsidiary of the Charles Schwab Corporation. The participants' account balances are determined on the cash basis; however, the Plan's financial statements contained herein are presented on an accrual basis. Investment Valuation and Income Recognition- Investments are stated at fair market value. Securities which are traded on a national securities exchange are valued at the last reported sales price on the last business day of the year. Any unlisted securities are valued at the bid price next preceding the close of business on the valuation date. Participant notes receivable are valued at cost, which approximates fair market value. Any unrealized appreciation/depreciation on investments represents the difference between fair market value of investments at the beginning of the Plan year or when acquired, whichever is later, and the fair market value of investments at the end of the Plan year. Interest income is recognized on the accrual basis. Administrative Expenses- Certain administrative expenses of the Plan are paid directly by Bairnco on behalf of the Plan. During the year ended December 31, 1998, Bairnco paid administrative expenses of approximately $16,000. Benefit Payments- Benefits are recorded when paid. 3. INVESTMENTS: There are currently eight investment options into which participants may direct the investment of their accounts. These are Invesco Strategic Technology Fund, Founders Growth Fund, Schwab 1000 Equity Fund, Strong Government Securities Fund, Schwab Retirement Money Fund, Neuberger & Berman Partners Fund and Neuberger & Berman Guardian Fund (collectively the "mutual funds"), and Bairnco Corporation Common Stock Fund ("Bairnco common stock fund"). Participants invest in units of participation of the fund which represents an undivided interest in the underlying assets of the fund. Participants may separately direct the investment of future deferrals and existing account balances into these eight investment options in increments of 5%. Participants are permitted to modify their elections for future deferrals and existing account balances between investment funds on a daily basis. The investments that represent 5% or more of the net assets available for benefits are as follows at December 31, 1998 and 1997: 1998 1997 Invesco Strategic Technology Fund $ 476,615 $ 312,018 Founders Growth Fund 844,891 551,921 Schwab 1000 Equity Fund 2,379,812 1,907,170 Strong Government Securities Fund 758,197 565,494 Schwab Retirement Money Fund 637,965 537,071 Bairnco Common Stock Fund 194,962 277,830 $5,292,442 $4,151,504 4. TRUST AGREEMENT: Schwab is the Plan's Trustee pursuant to the Plan document which is signed by the Corporation and Plan Trustee. Schwab manages the Plan assets and makes distributions to participants as directed by the Plan Administrator. The Administrative Committee of the Corporation is the Plan Administrator. Expenses incurred by the Plan Trustee or the Plan Administrator in the performance of their duties may be paid by the Plan or the Corporation at the Corporation's discretion. During 1998, all investment managers' fees were paid directly by the Plan. 5. PLAN TERMINATION: Although it has not expressed any intent to do so, the Corporation reserves the right under the Plan to terminate the Plan, in whole or in part, at any time. In the event of the Plan's termination, the Plan assets will be distributed to the participants in lump sum distributions or transferred to another qualified plan at the direction of the participant. 6. CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS, WITH FUND INFORMATION: The following schedule presents changes in net assets available for benefits, by fund, for the year ended December 31, 1998:
Participant Directed Invesco Schwab Strong Schwab Neuberger Neuberger Bairnco Strategic Founders 1000 Government Retirement & Berman & Berman Common Participant Technology Growth Equity Securities Money Partners Guardian Stock Notes Other Fund Fund Fund Fund Fund Fund Fund Fund Receivable Receivable Total Net Assets Available for Benefits, beginning of year $312,018 $551,921 $1,907,170 $565,494 $537,071 $ -- $ -- $277,830 $108,523 $71,043 $4,331,070 Additions: Participant's contributions 157,803 287,199 321,615 151,154 64,831 7,179 3,164 43,685 -- 2,098 1,038,728 Interest and dividends (5) 47,062 17,830 52,496 31,558 2,448 946 6,953 -- (1,396) 157,892 Net realized and unrealized appreciation (depreciation) on investments 111,924 115,830 509,632 (617) 390 (3,128) (2,429) (77,042) -- -- 654,560 Total additions 269,722 450,091 849,077 203,033 96,779 6,499 1,681 (26,404) -- 702 1,851,180 Deductions: Distributions 64,038 86,971 319,600 55,558 37,899 1,728 -- 9,549 9,336 -- 584,679 Administrative expenses 740 1,145 2,210 759 455 5 6 401 -- -- 5,721 Total deductions 64,778 88,116 321,810 56,317 38,354 1,733 6 9,950 9,336 -- 590,400 Transfers to other funds (40,347) (69,005) (54,625) 45,987 42,469 23,626 4,450 (46,514) 93,959 -- -- Net increase (decrease) 164,597 292,970 472,642 192,703 100,894 28,392 6,125 (82,868) 84,623 702 1,260,780 Net Assets Available for Benefits, end of year $476,615 $844,891 $2,379,812 $758,197 $637,965 $28,392 $6,125 $194,962 $193,146 $71,745 $5,591,850 7. TRANSACTIONS WITH PARTIES IN INTEREST: Under ERISA, the Plan is required to report investment transactions with and compensation paid to a "party in interest". The term "party in interest" is broadly defined but includes Bairnco Corporation as the Plan's sponsor, Schwab, as Plan Trustee, and any person or corporation which renders services to the Plan. Certain fees for legal and accounting services provided in connection with the Plan were paid by the Plan sponsor on behalf of the Plan during these years and are not included in the accompanying financial statements. Additional fees paid by the Plan during 1998 for services rendered by parties in interest were based on rates which the Plan's Administrator believes were customary and reasonable. 8. INCOME TAX STATUS: The Plan obtained its latest determination letter on April 29, 1997, in which the Internal Revenue Service stated that the Plan, as then designed, was in compliance with the applicable requirements of the Internal Revenue Code. The plan administrator and legal counsel believe that the Plan is currently being operated in compliance with the applicable requirements of the Internal Revenue Code. 9. SUBSEQUENT EVENT Effective October 31, 1998, Bairnco purchased MII International, Inc. ("MII"). On December 11, 1998, Bairnco's Board of Directors elected to merge the MII 401(k) plan into the Plan effective January 1, 1999, at which time the employees of MII will begin participating in the Plan. 10. SUPPLEMENTAL SCHEDULES: Supplemental Schedule I lists the reportable transactions of the Plan for the year ended December 31, 1998. Purchases and sales are made at fair market value on the date of transaction. Supplemental Schedule II lists the Plan assets held for investment as of December 31, 1998. Supplemental Schedule III lists transactions with parties in interest of the Plan for the year ended December 31, 1998. SCHEDULE I BAIRNCO CORPORATION 401(k) SAVINGS PLAN AND TRUST SCHEDULE OF REPORTABLE TRANSACTIONS FOR THE YEAR ENDED DECEMBER 31, 1998 Sales Sales Sales Description of Transaction Purchases Cost Proceeds Net Gain Founders Growth Fund $433,631 $236,572 $256,491 $ 19,919 Schwab 1000 Equity Fund 512,349 390,721 549,339 158,618 Strong Government Securities Fund 317,252 117,020 123,932 6,912 Schwab Retirement Money Fund 229,053 127,794 128,549 755 The preceding notes are an integral part of this schedule. SCHEDULE II BAIRNCO CORPORATION 401(k) SAVINGS PLAN AND TRUST SCHEDULE OF ASSETS HELD FOR INVESTMENT AS OF DECEMBER 31, 1998 Fair Market Description Value (Note 2) Cost Cash Equivalents Schwab Money Market Fund $ 1,411 $ 1,411 Common Stocks Bairnco Corporation 193,551 174,600 Total Bairnco Common Stock Fund $ 194,962 $ 176,011 Mutual Funds Invesco Strategic Technology Fund $ 476,615 $ 419,042 Founders Growth Fund 844,891 760,963 Schwab 1000 Equity Fund 2,379,812 1,521,336 Strong Government Securities Fund 758,197 741,957 Schwab Retirement Money Fund 637,965 637,965 Neuberger & Berman Partners Fund 28,392 30,914 Neuberger & Berman Guardian Fund 6,125 7,492 Total Mutual Funds $5,131,997 $4,119,669 Other Investments Participant Notes Receivable $ 193,146 $ 193,146 Total $5,520,105 $4,488,826 The preceding notes are an integral part of this schedule. SCHEDULE III BAIRNCO CORPORATION 401(k) SAVINGS PLAN AND TRUST SCHEDULE OF TRANSACTIONS WITH PARTIES IN INTEREST FOR THE YEAR ENDED DECEMBER 31, 1998 Description Amount Sold 8,228.303 units of Bairnco Corporation Common Stock between $5.563 and $11.375 per unit $ 71,213 Purchased 7,469.303 units of Bairnco Corporation Common Stock between $5.563 and $12.023 per unit $ 64,311 The preceding notes are an integral part of this schedule. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Administrative Committee has duly caused this annual report to be signed on its behalf by the undersigned hereunto duly authorized. BAIRNCO CORPORATION 401(K) SAVINGS PLAN AND TRUST (Name of Plan) Date: March 9, 1999 By: /s/ J. ROBERT WILKINSON J. ROBERT WILKINSON Administrative Committee Member
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