Exhibit 99.1
AUDITED CONSOLIDATED FINANCIAL STATEMENTS OF BAIRNCO CORPORATION
AS OF DECEMBER 31, 2006
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Bairnco Corporation and
Subsidiaries:
We have audited the accompanying consolidated balance sheets of Bairnco
Corporation and subsidiaries (collectively, the "Company") (a Delaware
Corporation) as of December 31, 2006 and 2005 and the related consolidated
statements of income, comprehensive income, stockholders' equity, and cash flows
for each of the three years in the period ended December 31, 2006. 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 the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Bairnco Corporation
and subsidiaries as of December 31, 2006 and 2005, and the results of their
operations and their cash flows for each of the three years ended December 31,
2006, in conformity with accounting principles generally accepted in the United
States of America.
As discussed in Note 1 to the consolidated financial statements, the Company
adopted Statement No. 158, EMPLOYERS' ACCOUNTING FOR DEFINED BENEFIT PENSION AND
OTHER POSTRETIREMENT PLANS - AN AMENDMENT OF FASB STATEMENTS NO. 87, 88, 106,
AND 132R, effective for fiscal years ending after December 15, 2006, and
Statement No. 123 (revised 2004), SHARE-BASED PAYMENT, effective for interim or
annual reporting periods beginning after December 15, 2005. In addition, the
Company recorded a cumulative effect adjustment as of January 1, 2006, in
connection with the adoption of Staff Accounting Bulletin No. 108, CONSIDERING
THE EFFECTS OF PRIOR YEAR MISSTATEMENTS WHEN QUANTIFYING MISSTATEMENTS IN
CURRENT YEAR FINANCIAL STATEMENTS.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of Bairnco
Corporation and subsidiary's internal control over financial reporting as of
December 31, 2006, based on criteria established in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) and our report dated March 15, 2007, stated that
management did not support its evaluation of controls with sufficient evidence,
including documentation, and we were unable to apply other procedures to satisfy
ourselves as to the effectiveness of the company's internal control over
financial reporting. As a result, the scope of our work was not sufficient to
enable us to express, and we did not express, an opinion either on management's
assessment or on the effectiveness of Bairnco Corporation and subsidiaries'
internal control over financial reporting.
As discussed in Note 1, the Company restated its consolidated statement of
comprehensive income for the year ended December 31, 2006.
/s/ Grant Thornton LLP
- ----------------------
Orlando, Florida
March 15, 2007
1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Bairnco Corporation and Subsidiaries:
We were engaged to audit management's assessment, included in the accompanying
Management's Report on Internal Control Over Financial Reporting appearing under
Item 9A, that Bairnco Corporation (a Delaware corporation) maintained effective
internal control over financial reporting as of December 31, 2006, based on
criteria established in Internal Control--Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). Bairnco
Corporation's management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting.
An audit of management's assessment that the Company maintained effective
internal control over financial reporting includes obtaining an understanding
of, and evaluating, management's process for assessing the effectiveness of the
Company's internal control over financial reporting. In obtaining an
understanding of management's process, we determined that management did not
support its evaluation with sufficient evidence, including documentation, as a
result of not extending its testing into the three months ended December 31,
2006. Because management's process did not include sufficient evidence,
including documentation, we were unable to apply the procedures required to
express an opinion on management's assessment and on the effectiveness of
internal control over financial reporting.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatement. Also, projections of any evaluation of
effectiveness to future periods are subject to risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Since management did not support its evaluation of controls with sufficient
evidence that management had adequately completed its assessment, we were unable
to apply the procedures required to satisfy ourselves as to the effectiveness of
the company's internal control over financial reporting. As a result, the scope
of our work was not sufficient to enable us to express, and we do not express,
an opinion either on management's assessment or on the effectiveness of Bairnco
Corporation's internal control over financial reporting.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
Bairnco Corporation as of December 31, 2006 and 2005, and the related statements
of income, comprehensive income, stockholders' investment and cash flows for
each of the three years in the period ended December 31, 2006 and our report
dated March 15, 2007 expressed on unqualified opinion (and contained an
explanatory paragraph on the Company's adoption of Statement No. 158, Statement
No. 123 (revised 2004) and Staff Accounting Bulletin No. 108) on those financial
statements.
/s/ GRANT THORNTON LLP
Orlando, Florida
March 15, 2007
2
CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31, 2006, 2005 and 2004
Bairnco Corporation and Subsidiaries
2006 2005 2004
- -----------------------------------------------------------------------------------------------------------------
Net Sales $178,828,000 $165,900,000 $165,496,000
Cost of sales 125,278,000 118,431,000 117,612,000
------------ ------------ ------------
Gross Profit 53,550,000 47,469,000 47,884,000
Selling and administrative expenses 47,484,000 41,878,000 39,827,000
------------ ------------ ------------
Operating Profit 6,066,000 5,591,000 8,057,000
Interest expense, net 712,000 54,000 566,000
------------ ------------ ------------
Income before Income Taxes 5,354,000 5,537,000 7,491,000
Provision for income taxes 392,000 1,937,000 2,372,000
------------ ------------ ------------
Income from continuing operations 4,962,000 3,600,000 5,119,000
Income from spun off subsidiary -- -- 25,710,000
------------ ------------ ------------
Net Income $ 4,962,000 $ 3,600,000 $ 30,829,000
============ ============ ============
Basic Earnings per share from continuing operations $ 0.69 $ 0.49 $ 0.70
Basic Earnings per share from spun off subsidiary -- -- 3.49
------------ ------------ ------------
Basic Earnings per share of Common Stock $ 0.69 $ 0.49 $ 4.19
============ ============ ============
Diluted Earnings per share from continuing operations $ 0.67 $ 0.47 $ 0.68
Diluted Earnings per share from spun off subsidiary -- -- 3.40
------------ ------------ ------------
Diluted Earnings per share of Common Stock $ 0.67 $ 0.47 $ 4.07
============ ============ ============
Dividends per Share of Common Stock $ 0.26 $ 0.24 $ 0.21
The accompanying notes are an integral part of these consolidated financial statements.
3
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the years ended December 31, 2006, 2005 and 2004
Bairnco Corporation and Subsidiaries
2006 2005 2004
- -----------------------------------------------------------------------------------------------------------------------
Net Income $ 4,962,000 $ 3,600,000 $ 30,829,000
Other comprehensive income (loss):
Currency translation adjustment 904,000 (1,078,000) 775,000
Minimum pension liability adjustment,
net of $6,000 tax in 2005
and $3,500 tax in 2004 -- (12,000) (6,000)
============ ============ ============
Comprehensive Income $ 5,866,000 $ 2,510,000 $ 31,598,000
============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements.
4
CONSOLIDATED BALANCE SHEETS
December 31, 2006 and 2005
Bairnco Corporation and Subsidiaries
2006 2005
- ----------------------------------------------------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents $ 1,869,000 $ 5,313,000
Accounts receivable, less allowances of $1,350,000 and $1,014,000, respectively 30,631,000 25,713,000
Inventories:
Raw materials and supplies 8,549,000 7,178,000
Work in process 9,325,000 8,939,000
Finished goods 15,734,000 11,114,000
------------- -------------
33,608,000 27,231,000
------------- -------------
Deferred income taxes 3,500,000 3,305,000
Other current assets 3,881,000 4,082,000
Assets held for sale 525,000 --
------------- -------------
Total current assets 74,014,000 65,644,000
------------- -------------
Plant and Equipment, at cost:
Land 3,076,000 1,928,000
Buildings and leasehold interests and improvements 23,164,000 18,666,000
Machinery and equipment 105,471,000 99,275,000
------------- -------------
131,711,000 119,869,000
Less - Accumulated depreciation and amortization (91,057,000) (85,496,000)
------------- -------------
40,654,000 34,373,000
------------- -------------
Cost in Excess of Net Assets of Purchased Businesses 17,057,000 14,439,000
Other Intangible Assets, net of amortization of $241,000 and $159,000, respectively 3,808,000 120,000
Other Assets 3,095,000 11,192,000
------------- -------------
$ 138,628,000 $ 125,768,000
============= =============
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current Liabilities:
Short-term debt $ 6,119,000 $ 2,233,000
Current maturities of long-term debt 1,219,000 134,000
Accounts payable 13,584,000 12,051,000
Accrued expenses 12,153,000 9,406,000
------------- -------------
Total current liabilities 33,075,000 23,824,000
------------- -------------
Long-Term Debt 18,490,000 7,069,000
Deferred Income Taxes 4,259,000 9,788,000
Other Liabilities 1,634,000 1,629,000
Commitments and Contingencies (Notes 6, 8 and 10)
STOCKHOLDERS' INVESTMENT:
Preferred stock, par value $.01, 5,000,000 shares authorized, none issued -- --
Common stock, par value $.01; authorized 30,000,000 shares; 11,724,590
and 11,612,307 shares issued, respectively; 7,291,853
and 7,342,570 shares outstanding, respectively 117,000 116,000
Paid-in capital 51,916,000 51,611,000
Retained earnings 69,535,000 66,787,000
Unamortized cost of restricted stock awards -- (504,000)
Accumulated Other Comprehensive Income (Loss):
Currency translation adjustment 3,519,000 2,615,000
Pension liability adjustment, net of $3,201,000 and $41,000 income tax, respectively (5,219,000) (73,000)
Treasury stock, at cost, 4,432,737 and 4,269,737 shares, respectively (38,698,000) (37,094,000)
------------- -------------
Total stockholders' investment 81,170,000 83,458,000
------------- -------------
$ 138,628,000 $ 125,768,000
============= =============
The accompanying notes are an integral part of these consolidated financial statements.
5
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 2006, 2005 and 2004
Bairnco Corporation and Subsidiaries
2006 2005 2004
- -------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,962,000 $ 3,600,000 $ 30,829,000
Adjustments to reconcile to net cash provided by operating activities:
Depreciation and amortization 7,411,000 7,456,000 7,668,000
(Gain) loss on disposal of plant and equipment 23,000 72,000 (1,094,000)
Deferred income taxes (2,831,000) 236,000 779,000
Change in current operating assets and liabilities:
Accounts receivable, net (1,992,000) (1,297,000) (1,044,000)
Inventories (3,606,000) (2,847,000) 921,000
Other current assets 263,000 85,000 (888,000)
Accounts payable 273,000 1,679,000 372,000
Accrued expenses 499,000 (926,000) (684,000)
Increase (decrease) in non-current prepaid pension asset (144,000) (2,811,000) 734,000
Other 551,000 284,000 370,000
------------ ------------ ------------
Net cash provided by operating activities 5,409,000 5,531,000 37,963,000
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (8,676,000) (7,304,000) (5,996,000)
Payment for purchased businesses, net of cash acquired (13,922,000) (6,000) (67,000)
Proceeds from sale of plant and equipment 39,000 52,000 1,715,000
------------ ------------ ------------
Net cash (used in) investing activities (22,559,000) (7,258,000) (4,348,000)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in short-term debt 3,790,000 1,472,000 (901,000)
Proceeds from long-term debt 14,206,000 9,790,000 4,500,000
Long-term debt repayments (1,712,000) (3,579,000) (33,598,000)
Payment of dividends (1,822,000) (1,812,000) (1,489,000)
Purchase of treasury stock (1,604,000) (2,349,000) --
Exercise of stock options 577,000 193,000 311,000
------------ ------------ ------------
Net cash provided by (used in) financing activities 13,435,000 3,715,000 (31,177,000)
------------ ------------ ------------
Effect of foreign currency exchange rate changes on cash and cash
equivalents 271,000 (126,000) 217,000
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (3,444,000) 1,862,000 2,655,000
Cash and cash equivalents, beginning of year 5,313,000 3,451,000 796,000
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 1,869,000 $ 5,313,000 $ 3,451,000
============ ============ ============
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
Interest $ 632,000 $ 107,000 $ 662,000
Income taxes $ 3,674,000 $ 2,792,000 $ 1,730,000
The accompanying notes are an integral part of these consolidated financial statements.
6
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT
For the years ended December 31, 2006, 2005 and 2004
Bairnco Corporation and Subsidiaries
Accumulated Other
Unamortized Comprehensive Income
Cost of ------------------------
Restricted Pension Currency
Common Paid-in Retained Stock Liability Translation Treasury
Stock Capital Earnings Awards Adjustment Adjustment Stock
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2003 $ 115,000 $50,912,000 $35,729,000 $(576,000) $ (55,000) $2,918,000 $(34,745,000)
Net income 30,829,000
Cash dividends ($.21 per share) (1,574,000)
Issuance of 50,208 shares pursuant
to exercise of stock options 1,000 310,000
Earned compensation 134,000
Currency translation adjustment 775,000
Pension liability adjustment, net
of $4,000 tax (6,000)
--------- ----------- ----------- --------- ----------- ---------- ------------
BALANCE, DECEMBER 31, 2004 $ 116,000 $51,222,000 $64,984,000 $(442,000) $ (61,000) $3,693,000 $(34,745,000)
Net income 3,600,000
Cash dividends ($.24 per share) (1,797,000)
Issuance of 29,625 shares pursuant
to exercise of stock options 172,000
Issuance of restricted stock (20,000
shares) 217,000 (217,000)
Earned compensation 155,000
Acquisition of treasury stock
(231,868 shares at cost) (2,349,000)
Currency translation adjustment (1,078,000)
Pension liability adjustment, net of
$6,000 tax (12,000)
--------- ----------- ----------- --------- ----------- ---------- ------------
BALANCE, DECEMBER 31, 2005 $ 116,000 $51,611,000 $66,787,000 $(504,000) $ (73,000) $2,615,000 $(37,094,000)
Accumulated effect of implementing
SAB 108, net of $194,000 tax (315,000)
--------- ----------- ----------- --------- ----------- ---------- ------------
7
BALANCE, JANUARY 1, 2006 $ 116,000 $51,611,000 $66,472,000 $(504,000) $ (73,000) $2,615,000 $(37,094,000)
Net income 4,962,000
Cash dividends ($.26 per share) (1,899,000)
Issuance of 96,283 shares pursuant
to exercise of stock options 1,000 611,000
Issuance of restricted stock
(16,000 shares) --
Reclassification of unamortized
cost of restricted stock
awards to paid-in capital (504,000) 504,000
Earned compensation 198,000
Acquisition of treasury stock
(163,000 shares at cost) (1,604,000)
Currency translation adjustment 904,000
Pension liability adjustment, net
of $3,160,000 tax (5,146,000)
--------- ----------- ----------- --------- ----------- ---------- ------------
BALANCE, DECEMBER 31, 2006 $ 117,000 $51,916,000 $69,535,000 $ -- $(5,219,000) $3,519,000 $(38,698,000)
========= =========== =========== ========= =========== ========== ============
The accompanying notes are an integral part of these consolidated financial statements.
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS:
Bairnco Corporation, a Delaware Corporation, is a diversified
multinational company that operates three business segments: Arlon's ELECTRONIC
MATERIALS and COATED MATERIALS segments which design, manufacture, market and
sell products to electronic, industrial and commercial markets worldwide; and,
Kasco's REPLACEMENT PRODUCTS AND Services segment which manufactures and
distributes products and services 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 Electronic Materials' principal products include
high performance materials for the printed circuit board industry and silicone
rubber-based insulation materials used in a broad range of industrial,
military/aerospace, consumer and commercial markets. Arlon Coated Materials'
principal products include adhesive coated cast and calendered vinyl films, cast
vinyl fabric, custom-engineered laminates, and coated and laminated films,
foils, foams and papers 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 inter-company accounts and transactions.
USE OF ESTIMATES:
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
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. Changes in estimates are made when
circumstances warrant and are reflected in reported results of operations; if
material, the effects of the changes in estimates are disclosed in the notes to
the consolidated financial statements.
NEW ACCOUNTING PRONOUNCEMENTS:
In November 2004, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 151,
INVENTORY COSTS - AN AMENDMENT OF ARB NO. 43, CHAPTER 4 ("SFAS 151") .
SFAS 151 amends the guidance in ARB No. 43, Chapter 4, "Inventory Pricing," to
clarify the accounting for abnormal amounts of idle facility expense, freight,
handling costs, and wasted material (spoilage). The statement was adopted
effective January 1, 2005 and its provisions applied prospectively. The adoption
of this statement had no impact on the Corporation's financial position or
results of operations.
In December 2004, the FASB issued SFAS 123 (revised 2004), SHARE-BASED
PAYMENT ("SFAS 123R") . This statement establishes standards for the accounting
for transactions in which an entity exchanges its equity instruments for goods
and services but focuses primarily on accounting for transactions in which an
entity obtains employee services in share-based payment transactions. The
statement, as issued, is effective as of the beginning of the first interim or
annual reporting period that begins after June 15, 2005, although earlier
adoption is encouraged. The SEC announced on April 14, 2005 that it would
provide for a phased-in implementation process for SFAS 123R, allowing issuers
to adopt the fair value provisions no later than the beginning of the first
fiscal year beginning after June 15, 2005. The Corporation adopted SFAS 123R
effective January 1, 2006 and is using the modified-prospective method whereby
compensation cost for the portion of awards for which the requisite service has
not yet been rendered that are outstanding as of the adoption date is recognized
over the remaining service period. The compensation cost for that portion of
awards is based on the grant-date fair value of those awards as calculated for
pro forma disclosures under Statement 123, as originally issued. All new awards
and awards that are modified, repurchased, or cancelled after the adoption date
will be accounted for under the provisions of Statement 123R. The adoption of
SFAS 123R had an immaterial impact on the Corporation's financial position,
results of operations and cash flows.
9
In May 2005, the FASB issued SFAS No. 154, ACCOUNTING CHANGES AND ERROR
CORRECTIONS - A REPLACEMENT OF APB OPINION NO. 20 AND FASB STATEMENT NO. 3
("SFAS 154"). SFAS 154 changes the requirements for the accounting for and
reporting of a change in accounting principle. SFAS 154 applies to all voluntary
changes in accounting principles, and applies to changes required by an
accounting pronouncement in the unusual instance that the pronouncement does not
include specific transition provisions. SFAS 154 requires retrospective
application to prior period financial statements for a change in accounting
principle. Previously, a change in accounting principle was recognized by
including the change in net income in the period of the change. SFAS 154 is
effective for fiscal years beginning after December 15, 2005. The adoption of
SFAS 154 effective January 1, 2006, had no impact on the Corporation's financial
position, results of operations or cash flows.
In June 2006, the FASB issued FASB Interpretation No. 48, ACCOUNTING FOR
UNCERTAINTY IN INCOME TAXES - AN INTERPRETATION OF FASB STATEMENT NO. 109 ("FIN
48"). FIN 48 clarifies the accounting for uncertainty in income taxes in an
enterprise's financial statements in accordance with SFAS 109. FIN 48 provides a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return. The interpretation also provides guidance on de-recognition,
classification, interest and penalties, accounting in interim periods,
disclosure, and transition. FIN 48 is effective for fiscal years beginning after
December 15, 2006, although earlier application of the provisions of the
interpretation is encouraged. The Corporation has completed its initial
assessment of the impact of FIN 48 and does not believe its adoption in the
first quarter of 2007 will have a material impact on the Corporation's
consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157, FAIR VALUE Measurements
("SFAS 157"). SFAS 157 defines fair value, establishes a framework for measuring
fair value in generally accepted accounting principles, and expands disclosure
about fair value measurements. SFAS 157 is effective for financial statements
issued for fiscal years beginning after November 15, 2007, although earlier
application is encouraged. The Corporation has not yet determined what the
implications of its adoption, if any, will be on the consolidated financial
position or results of operations.
In September 2006, the FASB issued SFAS No. 158, EMPLOYERS' ACCOUNTING FOR
DEFINED BENEFIT PENSION AND OTHER POSTRETIREMENT PLANS - AN AMENDMENT OF FASB
STATEMENTS NO. 87, 88, 106, AND 132R ("SFAS 158") . SFAS 158 requires an
employer to recognize the over-funded or under-funded status of a defined
benefit postretirement plan as an asset or liability in its statement of
financial position and to recognize changes in that funded status in the year in
which the changes occur through comprehensive income. SFAS 158 also requires an
employer to measure the funded status of a plan as of the date of its year-end
statement of financial position. SFAS 158 is effective for financial statements
issued for fiscal years ending after December 15, 2006 for the recognition
provision and for fiscal years ending after December 15, 2008 for the
measurement date provision. Earlier application of the recognition or
measurement date provisions is encouraged. The Corporation expects to change its
measurement date in 2007.
At December 31, 2006, the Corporation's overfunded pension plans reflected
a fair value of plan assets in excess of the projected benefit obligations of
$2,885,000. Underfunded pension reflected projected benefit obligations in
excess of the fair value of plan assets of $685,000. The adoption of SFAS 158
had the following impact on the Corporation's consolidated statement of
financial position as of December 31, 2006:
As of December 31, 2006
Prior to the Adoption of Effect of Adopting
SFAS 158 SFAS 158 As Adjusted
------------------------ ------------------ -----------------
Other Assets $ 11,402,000 $ (8,307,000) $ 3,095,000
Current Liabilities - Accrued expenses (12,125,000) (28,000) (12,153,000)
Other Liabilities (1,663,000) 29,000 (1,634,000)
Deferred Income Taxes (7,419,000) 3,160,000 (4,259,000)
Accumulated Other Comprehensive (Income) Loss -
Pension liability adjustment 73,000 5,146,000 5,219,000
10
The adoption of SFAS 158 did not affect the Corporation's statement of
operations for the year ended December 31, 2006, or any prior periods, nor will
its adoption change the calculation of net income in future periods, but it will
affect the calculation of other comprehensive income. In the Corporation's
previously issued financial statements for the year ended December 31, 2006, the
effect of the Corporation's adoption of SFAS 158 of $5,146,000 was shown in the
Consolidated Statement of Comprehensive Income as a reduction of comprehensive
income for the year ended December 31, 2006, with such comprehensive income
being reported as $720,000. The accompanying restated Consolidated Statement of
Comprehensive Income reflects the correction of the impact of the adoption of
SFAS 158 and accordingly, comprehensive income has been reported as $5,866,000
for the year ended December 31, 2006.
The amounts recognized in the Corporation's consolidated statement of
financial position at December 31, 2006, consist of the following:
Non-current assets - Other Assets $ 2,885,000
Current liabilities - Accrued expenses (49,000)
Non-current liabilities - Other Liabilities (636,000)
-----------
$ 2,200,000
===========
The amounts recognized in accumulated other comprehensive income at December 31,
2006, consist of the following:
Actuarial losses $8,262,000
Prior service costs 158,000
The amounts included in accumulated other comprehensive income at December
31, 2006, and expected to be recognized in net periodic pension cost during the
year ended December 31, 2007, are as follows:
Actuarial losses $ 352,000
Prior service costs 22,000
In September 2006, the SEC staff issued Staff Accounting Bulletin No. 108,
CONSIDERING THE EFFECTS OF PRIOR YEAR MISSTATEMENTS WHEN QUANTIFYING
MISSTATEMENTS IN CURRENT YEAR FINANCIAL STATEMENTS ("SAB 108"). SAB 108 was
issued to provide consistency between how registrants quantify financial
statement misstatements. Historically, there have been two widely-used methods
for quantifying the effects of financial statement misstatements. These methods
are referred to as the "roll-over" and "iron curtain" method. The roll-over
method quantifies the amount by which the current year income statement is
misstated. Exclusive reliance on an income statement approach can result in the
accumulation of errors on the balance sheet that may not have been material to
any individual income statement, but which may misstate one or more balance
sheet accounts. The iron curtain method quantifies the error as the cumulative
amount by which the current year balance sheet is misstated. Exclusive reliance
on a balance sheet approach can result in disregarding the effects of errors in
the current year income statement that results from the correction of an error
existing in previously issued financial statements. The Corporation previously
used the roll-over method for quantifying identified financial statement
misstatements.
SAB 108 established an approach that requires quantification of financial
statement misstatements based on the effects of the misstatement on each of the
Corporation's financial statements and the related financial statement
disclosures. This approach is commonly referred to as the "dual approach"
because it requires quantification of errors under both the roll-over and iron
curtain methods. SAB 108 allows registrants to initially apply the dual approach
either by (1) retroactively adjusting prior financial statements as if the dual
approach had always been used or by (2) recording the cumulative effect of
initially applying the dual approach as adjustments to the carrying values of
assets and liabilities as of January 1, 2006 with an offsetting adjustment
recorded to the opening balance of retained earnings. Use of this "cumulative
effect" transition method requires detailed disclosure of the nature and amount
of each individual error being corrected through the cumulative adjustment and
how and when it arose.
11
With the adoption of SAB 108, the Corporation added an accrual and the
related deferred taxes pursuant to the Bairnco Corporation Non-Employee Director
Retirement Plan. Under this plan, outside directors, upon retirement from the
Board of Directors, shall receive annually for the number of years equal to the
number of years he or she has served on the Board of Directors of Bairnco as a
non-employee director, an amount equal to the non-employee director annual
retainer in effect at the time of his or her retirement. Such amount shall be
payable in quarterly installments. If the retired non-employee director should
die prior to receiving payments equal to the number of years served on the
Board, the director's beneficiary will either continue to receive the remaining
payments on a quarterly basis, or receive in a lump sum the net present value of
the remaining payments discounted at the then current thirty year U.S.
Government bond yield, based on whichever option was previously selected by such
director. The following table shows the impact of SAB 108 on the 2006
consolidated balance sheet:
As of December 31, 2006
Prior to the Adoption of Effect of Adopting
SAB 108 SAB 108 As Adjusted
------------------------ ------------------ ------------------
Current Assets - Deferred income taxes $ 3,496,000 $ 6,000 $ 3,500,000
Current Liabilities - Accrued expenses (11,644,000) (509,000) (12,153,000)
Deferred Income Taxes (4,447,000) 188,000 (4,259,000)
January 1, 2006 Retained Earnings (66,787,000) 315,000 (66,472,000)
The $509,000 liability reflects the net present value of accumulated
amounts that were earned from 1990 through 2006 and are payable through 2023.
Under the roll-over method, the impact on the Corporations results of operations
for any particular year was considered immaterial.
In February 2007, the FASB issued SFAS No. 159, THE FAIR VALUE OPTION FOR
FINANCIAL ASSETS AND FINANCIAL LIABILITIES ("SFAS 159"). SFAS 159 permits
entities to choose to measure many financial instruments and certain other items
at fair value. SFAS 159 is effective for financial statements issued for fiscal
years beginning after November 15, 2007, although earlier application is
encouraged. The Corporation has not yet determined what the implications of its
adoption, if any, will be on the consolidated financial position or results of
operations.
CASH AND CASH EQUIVALENTS:
The Corporation considers cash in banks, commercial paper, demand notes
and similar investments with an original maturity of less than three months from
date of purchase as cash and cash equivalents for the purposes of the
consolidated financial statements. Of the $1,869,000 of cash and cash
equivalents at December 31, 2006, $309,000 was denominated in British Pounds,
$46,000 in Mexican Pesos, $176,000 in Euros and $160,000 in Renminbis. Of the
$5,313,000 of cash and cash equivalents at December 31, 2005, $129,000 was
denominated in Canadian dollars, $1,290,000 in British Pounds, $179,000 in Euros
and $93,000 in Renminbis.
ACCOUNTS RECEIVABLE AND RELATED ALLOWANCES:
Credit is extended to customers based on an evaluation of a customers'
financial condition and, generally, collateral is not required. Accounts
receivable are generally due within 30 days for domestic customers and 60 days
for foreign customers and are stated at amounts due from customers net of an
allowance for doubtful accounts. Accounts outstanding longer than the
contractual payment terms are considered past due. The Corporation makes
judgments as to the collectibility of accounts receivable based on historical
trends and future expectations. Management estimates an allowance for doubtful
accounts which adjusts gross trade accounts receivable downward to its net
realizable value. Trade receivables are recorded net of allowances of $1,350,000
and $1,014,000 at December 31, 2006 and 2005, respectively. To determine the
allowance for sales returns, management uses historical trends to estimate
future period product returns. The allowance for doubtful accounts is based on
an analysis of all receivables for possible impairment issues, and historical
write-off percentages. The Corporation writes-off accounts receivable when they
become uncollectible, and payments subsequently received on such receivables are
credited to the allowance for doubtful accounts. The Corporation does not
generally charge interest on past due receivables.
Management's methodology for estimating the allowance for doubtful
accounts and sales allowance uses both a specific examination of accounts and a
general allowance. When management becomes aware that a specific customer is not
12
able to meet its financial obligations, the Corporation records a specific
allowance that reflects the level of credit risk in the customer's outstanding
receivable balance. In addition, the Corporation established a general allowance
based on certain percentages of its aged receivable balances.
Changes in the Corporation's allowance for doubtful accounts are as follows:
2006 2005
------------ -----------
Balance, beginning of year $ 1,014,000 $ 1,546,000
Bad debt expense 663,000 --
Accounts written-off (327,000) (477,000)
Recoveries and other -- (55,000)
----------- -----------
Balance, end of year $ 1,350,000 $ 1,014,000
=========== ===========
INVENTORIES:
Inventories are stated at the lower of cost or market. Inventory costs
include material, labor and manufacturing overhead related to the purchase and
production of inventories. Inventories are stated principally on a first-in,
first-out basis. The Corporation provides estimated inventory allowances for
shrinkage, excess, slow moving and obsolete inventory as well as inventory whose
carrying value is in excess of net realizable value.
PLANT AND EQUIPMENT:
The Corporation provides for depreciation and amortization 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 and amortization 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
Depreciation and amortization expense of plant and equipment of
$7,329,000, $7,413,000 and $7,629,000 was recognized during 2006, 2005 and 2004,
respectively.
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. The Corporation disposed of
approximately $2.4 million and $4.3 million of fully depreciated assets that
were no longer in use during the years ended December 31, 2006 and 2005,
respectively.
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.
COST IN EXCESS OF NET ASSETS OF PURCHASED BUSINESSES AND OTHER INTANGIBLE
ASSETS:
The Corporation accounts for goodwill and other intangible assets under
SFAS 142, GOODWILL AND OTHER INTANGIBLE ASSETS ("SFAS 142"). SFAS 142 provides
for the non-amortization of goodwill but requires that goodwill be subject to at
least an annual assessment for impairment by applying a fair-value based test on
January 1 st of each year. Other intangible assets with finite lives will be
amortized over their useful lives. Other intangible assets with indefinite lives
will be subject to a lower of cost or market impairment test. This annual
impairment testing of goodwill and other indefinite lived intangible assets
could result in more volatility in reported income, as impairment losses could
occur irregularly and in varying amounts.
13
The change in the carrying amount of cost in excess of net assets of
purchased businesses ("goodwill") for the years ended December 31, 2006 and 2005
is as follows:
Arlon EM Segment Arlon CM Segment Kasco Segment Total
---------------- ---------------- ------------- -------------
Balance, December 31, 2004 $ 645,000 $ 6,644,000 $ 7,253,000 $ 14,542,000
Impact of contingent consideration earn-out
(Note 2) -- 6,000 -- 6,000
Impact of exchange rate fluctuations on
foreign goodwill -- -- (109,000) (109,000)
------------ ------------ ------------ ------------
Balance, December 31, 2005 645,000 6,650,000 7,144,000 14,439,000
Impact of Atlanta SharpTech acquisition
(Note 2) -- -- 2,520,000 2,520,000
Impact of exchange rate fluctuations on
foreign goodwill -- -- 98,000 98,000
------------ ------------ ------------ ------------
Balance, December 31, 2006 $ 645,000 $ 6,650,000 $ 9,762,000 $ 17,057,000
============ ============ ============ ============
Other intangible assets at December 31, 2006 and 2005 consisted of the
following:
2006 2005
-------------------------------------------------------------------------------------
Range of Accumulated Accumulated
Life (Years) Gross Amount Amortization Gross Amount Amortization
-------------------------------------------------------------------------------------
Amortized Intangible Assets:
Customer relationships 16-20 $ 950,000 $ 8,000 $ -- $ --
Covenant not to compete 5 500,000 15,000 -- --
Engineering drawings 7 170,000 3,000 -- --
Other 5-10 279,000 215,000 279,000 159,000
---------- ---------- ---------- ----------
1,899,000 241,000 279,000 159,000
Unamortized Intangible Assets:
Trademarks & brand name n/a 2,150,000 -- -- --
---------- ---------- ---------- ----------
Other Intangible Assets $4,049,000 $ 241,000 $ 279,000 $ 159,000
========== ========== ========== ==========
Amortization expense recognized was $82,000 during 2006, $43,000 during
2005 and $39,000 during 2004. The change in carrying amount of other intangible
assets on the accompanying consolidated balance sheets for the years ended
December 31, 2006 and 2005 is as follows:
Arlon EM Segment Arlon CM Segment Kasco Segment Total
---------------- ---------------- ------------- -------------
Balance, December 31, 2004 $ 93,000 $ 47,000 $ -- $ 140,000
Other intangible asset additions -- -- 23,000 23,000
Amortization of other intangible assets (32,000) (6,000) (5,000) (43,000)
----------- ----------- ----------- -----------
Balance, December 31, 2005 61,000 41,000 18,000 120,000
Amortization of other intangible assets (31,000) (7,000) (44,000) (82,000)
Impact of Atlanta SharpTech acquisition
(Note 2) -- -- 3,770,000 3,770,000
----------- ----------- ----------- -----------
Balance, December 31, 2006 $ 30,000 $ 34,000 $ 3,744,000 $ 3,808,000
=========== =========== =========== ===========
14
The expected amortization expense of other intangible assets over the next five
years is as follows:
Year Amount
---- ----------
2007 $ 210,000
2008 189,000
2009 189,000
2010 189,000
2011 164,000
IMPAIRMENT OF LONG-LIVED ASSETS:
The Corporation accounts for the impairment of long-lived assets under
SFAS 144, ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS . Based
on management's annual evaluation, there was no impairment and no financial
impact on the results of operations and financial position of the Corporation
for the three year period ended December 31, 2006.
REVENUE RECOGNITION:
The Corporation sells a broad range of products and services to a
diversified base of customers around the world. Revenues are recognized when the
risks and rewards of ownership have substantively been transferred to customers.
This condition is normally met when the product has been shipped or the service
performed and title has been transferred to the customer, when persuasive
evidence of an arrangement exists, the price is fixed or determinable and
collection is reasonably assured.
In certain situations, namely consignment sales, the Corporation retains
title after shipment of the products to the customer. Title does not pass to the
customer and hence the sale is not recorded by the Corporation until the
products have been resold or used by the customer in production.
The majority of the Corporation's sales are for standard products and
services with customer acceptance occurring upon shipment of the product or
performance of the service. In situations where the customer does not accept
delivery of the product for valid and agreed upon reasons, the Corporation may
authorize the return of the product. Sales in any reporting period are shown net
of returns. Service revenues consist of repair and maintenance work performed on
equipment used at mass merchants, supermarkets and restaurants. Rental revenues
are derived from the rental of certain equipment to the food industry where
customers prepay for the rental period - usually 3 month to 6 month periods. For
prepaid rental contracts, sales revenue is recognized on a straight-line basis
over the term of the contract.
SHIPPING AND HANDLING COSTS:
Shipping and handling costs, such as freight to our customers'
destinations, are included in selling and administrative expenses on the
accompanying consolidated statements of operations. These costs, when included
in the sales price charged to our customers, are recognized in net sales. Total
shipping and handling costs included in selling and administrative expenses were
approximately $4.9 million for the year ended December 31, 2006, $4.5 million
for the year ended December 31, 2005 and $3.5 million for the year ended
December 31, 2004.
VENDOR REBATES:
The Corporation accounts for vendor volume rebates in accordance with the
guidance of Emerging Issues Task Force (" EITF ") 02-16, Accounting by a
Customer for Certain Consideration Received from a Vendor. V endor rebates or
refunds of a specified amount of cash consideration that are payable only upon
achieving a specified cumulative level of purchases, are accounted for as a
reduction of cost of sales in the accompanying consolidated statements of
operations.
15
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:
The Corporation's US insurance programs for general liability, automobile
liability, workers compensation and certain employee related health care
benefits are effectively self-insured. Claims in excess of self-insurance levels
are fully insured. Accrued expenses-insurance represents the estimated costs of
known and anticipated claims under these insurance programs. 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:
Effective January 1, 2006, the Corporation accounts for stock options
under SFAS 123R. Prior to this, the Corporation accounted for stock options
using the intrinsic value method of accounting in accordance with Accounting
Principles Board Opinion No. 25 ("APB No. 25"). Accordingly, no compensation
expense was recognized for stock options granted under any of the stock plans as
the exercise price of all options granted was equal to the current market value
of our stock on the grant date. The Corporation did adopt the disclosure
provisions of SFAS 148, ACCOUNTING FOR STOCK-BASED COMPENSATION - TRANSITION AND
DISCLOSURE ("SFAS 148") effective December 31, 2002.
In computing the expense under SFAS 123R and the disclosures under SFAS
148, the Corporation used the Black-Scholes model based on the following
assumptions:
For the Years Ended December 31,
---------------------------------------------
2006 2005 2004
---------------------------------------------
Expected Life 6.6 years 5.7 years 5.0 years
Volatility 26.9% 27.3% 27.8%
Risk-free interest rate 4.7% 4.5% 4.5%
Dividend yield 2.20% 2.47% 2.34%
Turnover 5.3% 5.5% 5.4%
Compensation expense for stock options computed under the Black-Scholes
model is amortized using the straight-line method over the vesting period.
Had SFAS No. 123R been implemented in 2004, the Corporation's net income
and earnings per share would have been reduced to the amounts indicated below
for the years ended December 31, 2005 and 2004:
2005 2004
---------------------------------------
Net Income, as reported $ 3,600,000 $ 30,829,000
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects (43,000) (39,000)
----------- ------------
Net Income, pro forma $ 3,557,000 $ 30,790,000
=========== ============
Basic Earnings per Share:
As reported $ 0.49 $ 4.19
Pro forma $ 0.48 $ 4.18
Diluted Earnings per Share:
As reported $ 0.47 $ 4.07
Pro forma $ 0.47 $ 4.07
16
RESTRICTED STOCK AWARD PROGRAM:
During the second quarter 2003, the Compensation Committee of the Board of
Directors (the "Committee"), approved a restricted stock award program under the
Bairnco Corporation 2000 Stock Incentive Plan. The program provides long-term
incentive rewards to key members of the senior management team to further ensure
their retention as employees and the linkage of their performance to the
long-term performance of the Corporation. Under this new program, the Committee
granted 133,000 shares of restricted stock to officers and three key senior
management members in April 2003, 20,000 shares of restricted stock to one
officer in August 2005, 16,000 shares of restricted stock to four senior
management members in June 2006 and 1,500 shares of restricted stock to one
officer in January 2007. Under the terms of the restricted stock agreements,
each employee must remain employed by the Corporation for a period of 5 years
from the date of grant in order for the restricted stock to vest and the
restrictions to be lifted. If employment is terminated prior to vesting for any
reason other than death, disability or retirement, all restricted stock shall be
forfeited immediately and returned to the Corporation. In the event of a change
in control, shares outstanding under the program would vest immediately.
The fair market value of the 133,000 shares at the date of award of $5.10
per share has been recorded as "Unamortized cost of restricted stock awards"
(unearned compensation) and is shown, net of amortization, as a separate
component of stockholders' investment in the accompanying Consolidated Balance
Sheets. The fair market value of the 20,000 shares at the date of award of
$10.85 per share and the fair market value of the 16,000 shares at the date of
award of $11.86 per share are similarly reflected in the accompanying
consolidated financial statements. The unearned compensation is being amortized
over the vesting period of the shares. In accordance with APB Opinion 25, the
Corporation will recognize a compensation charge over the vesting period equal
to the fair market value of these shares on the date of the award. Total
compensation expense in 2006 related to the restricted stock awards was
$198,000.
TRANSLATION OF FOREIGN CURRENCIES:
For foreign subsidiaries, the local currency is the functional currency.
Assets and liabilities 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 average monthly rates of exchange in effect during the year.
Translation gains and losses are included as a component of stockholders'
investment.
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 and therefore
approximates rates currently offered to the Corporation for debt of the same
remaining maturities.
The carrying amount of the zero-interest note payable related to the
MOX-Tape? acquisition (refer to Note 2 to Consolidated Financial Statements) has
been recorded at a discount and approximates fair value, based on average
borrowing rates for the Corporation at the time of acquisition.
RECLASSIFICATIONS:
Certain reclassifications were made to prior year balances in order to
conform to the current year presentation. These reclassifications had no effect
on previously reported results of operations or stockholders' investment.
(2) ACQUISITIONS
On January 10, 2001, Bairnco purchased selected net assets ("Viscor") of
Viscor, Inc. The terms of Viscor's asset purchase agreement provide for
additional consideration to be paid by Bairnco if Viscor's results of operations
17
exceed certain targeted levels. Such additional consideration is paid
semi-annually in cash and is recorded when earned, by the achievement of certain
targeted levels for the preceding six month period, as additional goodwill. The
maximum amount of contingent consideration is approximately $4.5 million payable
over the 5-year period ended December 31, 2005. The Corporation recorded $6,000
and $67,000, respectively, in Cost in Excess as additional purchase price for
the years ended December 31, 2005 and 2004. The cumulative additional
consideration recorded as goodwill was approximately $1.0 million through
December 31, 2005.
On May 23, 2003, Bairnco purchased the MOX-Tape brand of products,
including inventory and related equipment, from Flexfab Horizons International,
Inc., ("Flexfab") of Hastings, Michigan. MOX-Tape products consist of
un-reinforced and reinforced silicone, self-fusing tapes used in a broad range
of applications and markets, including high temperature electrical and
mechanical insulation for the military, aerospace, automotive, utility and power
generation markets. The business has been moved to Arlon's Bear, Delaware plant.
The acquisition has been accounted for under the purchase method of accounting
and was financed through available borrowings under Bairnco's line of credit and
a $400,000, non-interest bearing note payable to Flexfab, payable in $100,000
installments over four years. The note was recorded at a discount, based on
average borrowing rates for the Corporation at the time of acquisition. The
purchase price was allocated to the assets acquired based on the fair market
value of the assets at the date of acquisition. The purchase price exceeded the
fair value of net assets acquired by approximately $0.5 million.
Effective October 1, 2006 Bairnco acquired through its wholly-owned
subsidiary Kasco Corporation, from Southern Saw Holdings, Inc. ("Southern Saw"),
a Georgia corporation, certain assets and assumed certain liabilities, including
trade accounts receivable, inventory, fixed assets, trade accounts payable and
specific accrued expenses of Southern Saw and its affiliate, Southern Saw
Service, L.P., a Georgia limited partnership (collectively "Atlanta SharpTech"),
for approximately $13.9 million. Atlanta SharpTech's revenues were approximately
$18.5 million for the fiscal year ended June 2006. The acquisition was financed
with borrowings available under Bairnco's Amended Credit Facility.
Atlanta SharpTech is a leading manufacturer of meat bandsaw blades, meat
grinder plates and knives, and other specialty cutting blades for wood, bakery,
medical, paper products, and handsaws. Atlanta SharpTech is also a provider of
repair and maintenance services for equipment in meat room, seafood, and bakery
departments in retail grocery chains across the US.
Atlanta SharpTech distributes cutting products, butcher supplies, and provides
repair services to retail grocery stores, US military bases, butcher shops,
slaughterhouses, and packing houses in the US through its route distribution
organization. Atlanta SharpTech also distributes blade products and meat grinder
plate & knife products domestically and globally via a distributor salesman
organization. The headquarters and manufacturing operations for Atlanta
SharpTech are located in Atlanta, Georgia, USA.
The following table summarizes the preliminary allocation of the purchase price
on October 1, 2006:
October 1, 2006
---------------
Current assets:
Accounts receivable $ 2,488,000
Inventories 2,302,000
Other current assets 218,000
Assets held for sale 525,000
-----------
5,533,000
Plant and Equipment 4,700,000
Costs in Excess of Net assets of Purchased Businesses 2,520,000
Intangibles 3,770,000
-----------
Assets Acquired $16,523,000
-----------
Current Liabilities:
Accounts payable $ 956,000
Accrued expenses 1,644,000
-----------
Liabilities Assumed $ 2,600,000
-----------
Total Purchase Price $13,923,000
===========
The excess of the purchase price over the fair values of assets acquired
and liabilities assumed of Atlanta Sharptech, including applicable transaction
costs, was allocated to goodwill. All of the goodwill is deductible as operating
18
expenses for tax purposes. The amount allocated to intangible assets was
attributed to the following categories based on an independent valuation:
October 1, 2006
---------------
Trade names $2,150,000
Customer relationships 950,000
Non-compete agreements 500,000
Engineering drawings 170,000
----------
$3,770,000
==========
The following table summarizes unaudited pro forma financial information
assuming the Atlanta Sharptech acquisition had occurred on January 1, 2006 and
2005. The unaudited pro forma financial information uses Atlanta Sharptech's
data for the months corresponding to Bairnco's December 31, year end. The
unaudited pro forma financial information does not necessarily represent what
would have occurred if the transaction had taken place on the dates presented
and should not be taken as representative of our future consolidated results of
operations or financial position. The plans for integration are in progress and
thus not all costs related to the integration, nor the operating synergies
expected from the integration, are reflected in the unaudited pro forma
financial information.
2006 2005
------------- -------------
Net Sales $ 193,330,000 $ 183,659,000
Net Income 5,605,000 3,903,000
Basic earnings per share of common stock $ 0.78 $ 0.54
Diluted earnings per share of common stock 0.76 0.53
(3) EARNINGS PER SHARE
The Corporation computes earnings per share ("EPS") under SFAS 128, EARNINGS PER
SHARE. The following disclosures comply with the requirements of SFAS 128.
2006 2005 2004
-----------------------------------------------
Basic Earnings per Common Share:
Net Income $ 4,962,000 $ 3,600,000 $30,829,000
Average common shares outstanding 7,147,000 7,350,000 7,362,000
----------- ----------- -----------
Basic Earnings Per Common Share $ 0.69 $ 0.49 $ 4.19
=========== =========== ===========
Diluted Earnings per Common Share:
Net Income $ 4,962,000 $ 3,600,000 $30,829,000
Average common shares outstanding 7,147,000 7,350,000 7,362,000
Dilutive effect of restricted stock 101,000 82,000 64,000
Common shares issuable in respect to
options issued to employees with a dilutive
effect 139,000 181,000 143,000
----------- ----------- -----------
Total diluted common shares outstanding 7,387,000 7,613,000 7,569,000
----------- ----------- -----------
Diluted Earnings Per Common Share $ 0.67 $ 0.47 $ 4.07
=========== =========== ===========
19
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 include the effect of all dilutive stock
options and restricted stock shares.
(4) INCOME TAXES
The components of income before income taxes and the provision (benefit) for
domestic and foreign income taxes are as follows:
2006 2005 2004
-------------------------------------------
Income before Income Taxes:
Domestic (excluding income from
spun off subsidiary) $ 4,470,000 $ 4,572,000 $ 5,616,000
Foreign 884,000 965,000 1,875,000
----------- ----------- -----------
Total Income before Income Taxes $ 5,354,000 $ 5,537,000 $ 7,491,000
=========== =========== ===========
Provision (Benefit) for Income Taxes:
Domestic:
Currently payable $ 3,237,000 $ 1,191,000 $ 1,168,000
Deferred (3,355,000) 318,000 776,000
Foreign:
Currently payable 462,000 480,000 408,000
Deferred 48,000 (52,000) 20,000
----------- ----------- -----------
Total Provision for Income Taxes $ 392,000 $ 1,937,000 $ 2,372,000
=========== =========== ===========
Bairnco's net current and non-current deferred tax assets (liabilities)
include the following at December 31:
2006 2005
----------------------------
Current Deferred Tax Items:
Accrued expenses $ 927,000 $ 1,026,000
Inventories 1,961,000 1,422,000
Receivables 278,000 377,000
Foreign tax credits 334,000 480,000
----------- -----------
Net Current Deferred Tax Asset 3,500,000 3,305,000
----------- -----------
Non-Current Deferred Tax Items:
Fixed assets (4,033,000) (6,762,000)
Pensions (837,000) (3,609,000)
Intangible assets (172,000) (62,000)
Foreign tax credits 1,287,000 1,197,000
Other (504,000) (552,000)
----------- -----------
Net Non-Current Deferred Tax Liability (4,259,000) (9,788,000)
----------- -----------
Net Deferred Tax Liability $ (759,000) $(6,483,000)
=========== ===========
20
Management expects that future operations will generate sufficient taxable
income to realize the existing deferred tax assets and as a result, the
Corporation has not recorded any valuation allowances against these deferred tax
assets.
In 2006, 2005 and 2004 the Corporation's effective tax rates were 7.3%,
35.0% and 31.7%, 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:
2006 2005 2004
-----------------------------------------------------
Computed income taxes at statutory rate $ 1,820,000 $ 1,883,000 $ 2,547,000
State and local taxes, net of federal tax benefit 223,000 214,000 52,000
Dividend income 334,000 141,000 636,000
Foreign income taxed at different rates 209,000 100,000 (210,000)
Tax credits (457,000) (167,000) (636,000)
Benefit of Extraterritorial Income Exclusion (311,000) (315,000) (416,000)
Benefit of Production Activities Deduction (137,000) (109,000) --
Meals and entertainment 43,000 43,000 58,000
Change in Accounting Method (1,554,000) -- --
Other, net 222,000 147,000 341,000
----------- ----------- -----------
Provision for Income Taxes $ 392,000 $ 1,937,000 $ 2,372,000
=========== =========== ===========
On October 22, 2004, the American Jobs Creation Act of 2004 (the "Act")
was signed into law. The Act created a temporary incentive for US multinationals
to repatriate accumulated income earned outside the US at an effective tax rate
of 5.25%. To take advantage of the temporary incentive, in 2005 the Corporation
repatriated $1,826,000 of foreign earnings under the Act. The additional US tax
liability as a result of repatriating earnings under the Act was $141,000.
The rate reconciling item of $167,000 in 2005 for tax credits is an
estimate of the amount of foreign tax credits that were repatriated with the
earnings under the Act. The Corporation cannot use the foreign tax credits
repatriated under the Act or net operating loss carry forwards to reduce the
taxable earnings repatriated under the Act. The Corporation expects to use the
foreign tax credits repatriated under the Act in future years to offset future
US tax. The foreign tax credits that may be utilized to reduce the Corporation's
US tax liability is limited to the amount of total US tax multiplied by the
proportion of foreign source income to total worldwide income in future years.
The Corporation's foreign tax credits will begin to expire in 2011 and continue
through 2015.
In addition to the foreign earnings repatriated under the Act, the
Corporation also repatriated $732,600 of previously taxed earnings during 2005.
In January 2006, the Corporation repatriated an additional $977,000 of
previously taxed earnings. The previously taxed earnings repatriated in 2005 and
in January 2006 are not subject to tax in the US. With the repatriation of the
previously taxed earnings in January 2006, the Corporation has exhausted its
pool of previously taxed earnings that were available to bring back to the US.
The repatriation of earnings under the Act is not allowed beyond 2005.
Provision has not been made for US income taxes on approximately $5.3
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.
Effective January 1, 2002, the Internal Revenue Service ("IRS") eliminated
all tax benefits associated with Foreign Sales Corporations, and the Bairnco FSC
dissolved accordingly. As a replacement tax benefit for exporters, the IRS
enacted the Extraterritorial Income Exclusion, a statutory exclusion from
taxable income. The income exclusion is calculated based on a percentage of
foreign trade income and use of a non-US entity is not required to get the
benefit of the exclusion. Effective January 1, 2005, the Extraterritorial Income
Exclusion began a phase-out which will be completed in 2007. For transactions
during 2005 and 2006, the income exclusion is 80% and 60% of the exclusion
otherwise allowed, respectively. The Corporation expects to receive a benefit of
$311,000 under the Extraterritorial Income Exclusion in 2007.
21
In November 2005, Bairnco filed a notification with the Internal Revenue
Service that it planned to increase its basis for income tax accounting purposes
in certain real property and related improvements acquired as part of an asset
purchase in 1989. The Corporation and its advisors concluded that a reasonable
passage of time from the filing of the notification occurred during the third
quarter of 2006 for the IRS to question this position. The Corporation filed its
2005 federal income tax return in the third quarter of 2006 utilizing the
increased income tax basis. This tax return treatment for financial statement
purposes resulted in an increase in deferred tax assets of $0.7 million, a
reduction in income tax payable of $0.9 million and a related reduction in the
provision for income taxes of $1,554,000 (the "Property Tax Benefit") in the
third quarter of 2006.
In June 2006, the FASB issued FIN 48 which clarifies the accounting for
uncertainty in income taxes in an enterprise's financial statements in
accordance with SFAS 109. FIN 48 provides a recognition threshold and
measurement attribute for the financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return. The interpretation
also provides guidance on de-recognition, classification, interest and
penalties, accounting in interim periods, disclosure, and transition. FIN 48 is
effective for fiscal years beginning after December 15, 2006, although earlier
application of the provisions of the interpretation is encouraged. The
Corporation has completed its initial assessment of the impact of FIN 48 and
does not believe its adoption in the first quarter of 2007 will have a material
impact on the Corporation's consolidated financial statements.
The Corporation's consolidated federal income tax returns have been
audited by the IRS through the year ended December 31, 2002, and no other years
are currently under audit. The federal income tax returns for the years ending
December 31, 2003, 2004, 2005 and 2006 are Bairnco's only remaining unexamined
federal income tax returns filed in an open year.
(5) ACCRUED EXPENSES
Accrued expenses consisted of the following as of December 31, 2006 and 2005,
respectively:
2006 2005
----------- -----------
Salaries and wages $ 2,883,000 $ 2,354,000
Income taxes -- 54,000
Insurance 1,837,000 2,300,000
Other accrued expenses 7,433,000 4,698,000
----------- -----------
Total accrued expenses $12,153,000 $ 9,406,000
=========== ===========
(6) DEBT AND LEASE COMMITMENTS
Long-term debt consisted of the following as of December 31, 2006 and 2005,
respectively:
2006 2005
----------------------------
Term loan $14,907,000 $ --
Revolving credit notes 214,000 4,387,000
Non-interest bearing note payable (Note 2) 100,000 199,000
China foreign loan facility 4,488,000 2,617,000
----------- -----------
Less: Current maturities 1,219,000 134,000
----------- -----------
Total $18,490,000 $ 7,069,000
=========== ===========
As of September 30, 2006, the Corporation had a three year, $25 million
unsecured revolving Credit Facility ("Credit Facility"). The Credit Facility had
a maturity date of April 30, 2008. On October 10, 2006, the Corporation entered
22
into an agreement with Bank of America, N.A. and Wachovia Bank, N.A. that
amended and increased the Credit Facility to a maximum loan commitment of $33
million. This amended credit facility ("Amended Credit Facility") was
collateralized by substantially all of the domestic assets of the Corporation
and had a maturity date of November 10, 2006. The additional availability under
the Amended Credit Facility was used to finance Bairnco's purchase of Atlanta
SharpTech for approximately $13.9 million.
On November 9, 2006, the Corporation entered into a five year, $42,000,000
Senior Secured Credit Facility ("Secured Credit Facility") with Bank of America,
N.A. that refinanced and replaced the Amended Credit Facility. The $42,000,000
facility is apportioned as follows: a five-year $15,000,000 term loan and up to
a $27,000,000 revolving credit facility, including a $13,000,000 sub-limit for
letters of credit and a $3,000,000 sub-limit for foreign currency loans. The
Secured Credit Facility is secured by a first lien on substantially all of the
domestic assets of the Corporation, the capital stock of domestic subsidiaries,
and 65% of the capital stock of foreign subsidiaries. The Secured Credit
Facility matures on November 8, 2011.
At December 31, 2006, $14,907,000 was outstanding on the term loan under
the Secured Credit Facility. This loan has scheduled principal payments of
$1,119,000 in 2007, 2008, 2009 and 2010, and $1,026,000 in 2011, with the
balance due at maturity. Interest rates vary on the term loan and are set from
time to time in relationship to one of several reference rates, as selected by
the Corporation. Interest rates on the term loan at December 31, 2006, averaged
7.16%.
At December 31, 2006, $214,000 of revolving credit notes under the Secured
Credit Facility was outstanding and included in long-term debt, of which all was
foreign borrowings denominated in Canadian Dollars. Interest rates vary on the
revolving credit notes and are set at the time of borrowing in relationship to
one of several reference rates as selected by the Corporation. Interest rates on
revolving credit notes outstanding at December 31, 2006 averaged 6.01%.
Approximately $7.7 million of irrevocable standby letters of credit were
outstanding under the Secured Credit Facility, which are not reflected in the
accompanying consolidated financial statements, and also which reduce the unused
borrowing availability under the Secured Credit Facility. $2.5 million of the
letters of credit guarantee various insurance activities and $5.2 million
represent letters of credit securing borrowing for the China foreign loan
facility. These letters of credit mature at various dates and have automatic
renewal provisions subject to prior notice of cancellation.
A commitment fee is paid on the unused portion of the total credit
facility. The amount the Company can borrow at any given time is based upon a
formula that takes into account, among other things, eligible inventory and
accounts receivable, which can result in borrowing availability of less than the
full amount of the Secured Credit Facility. As of December 31, 2006, the Company
had approximately $6.9 million of unused borrowing availability under the
Secured Credit Facility.
The China foreign loan facility reflects borrowing by the Company's
Chinese facilities through Bank of America, Shanghai, China, which is secured by
four US dollar denominated letters of credit totaling $5.2 million. As of
December 31, 2006, of the $4,488,000 owed, $838,000 is denominated in Chinese
Renminbi and $3,650,000 is denominated in US Dollars. Interest rates on amounts
borrowed under the China foreign loan facility averaged 6.3% at December 31,
2006.
The annual maturity requirements for long-term debt due after December 31, 2007,
are summarized as follows:
Year Ended December 31,
2008 $ 1,119,000
2009 1,119,000
2010 1,119,000
2011 15,133,000
-----------
Total long-term debt $18,490,000
===========
The Corporation has other short-term debt outstanding which consists of
lines of credit with domestic and foreign financial institutions to meet
short-term working capital needs. Outstanding domestic short-term borrowings
under the Secured Credit Facility totaled $5,333,000 at December 31, 2006 at an
average rate of 6.96%. Outstanding foreign short-term borrowings totaled
$786,000 at December 31, 2006. Of the $786,000 outstanding, $679,000 is
denominated in Euros with an average rate of 5.5% and $107,000 is denominated in
Canadian Dollars at an average rate of 6.0%.
23
The Secured Credit Facility contains a financial covenant which requires
the Corporation to meet a minimum fixed charge coverage ratio. At December 31,
2006, the Corporation was in compliance with all covenants contained in the
Credit Agreement.
LEASES:
The Corporation leases certain property and equipment under various
operating lease arrangements that expire over the next 8 years. Future minimum
lease payments under scheduled operating leases that have initial or remaining
non-cancelable terms in excess of one year are as follows:
Year Ended December 31,
2007 $ 3,173,000
2008 2,458,000
2009 2,212,000
2010 1,485,000
2011 1,330,000
2012 and thereafter 1,727,000
-------------
Total minimum payments $12,385,000
=============
Rent expense for all operating leases amounted to approximately $3.3
million, $3.1 million, and $3.2 million for the years ended December 31, 2006,
2005, and 2004 respectively.
(7) STOCK OPTIONS
The Corporation has a stock incentive plan which was established in 1990
("1990 Plan") and expired in 2000. The expiration of the 1990 Plan had no effect
on any stock options then outstanding. On April 21, 2000, the shareholders of
the Corporation approved the Bairnco 2000 Stock Incentive Plan ("2000 Plan").
The 2000 Plan permits the grant of options to purchase not more than 750,000
shares of common stock. The 2000 Plan provides for the grant of non-qualified
options and options qualifying as incentive stock options under the Internal
Revenue Code to officers and other key executive and management employees, and
to 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
83,334 shares of common stock at an option price equal to the fair market value
on the date of grant. These options became fully exercisable on May 31, 2000 and
remain exercisable for ten years from the date they first became exercisable.
Changes in the stock options granted under the 1990 Plan during 2006, 2005
and 2004 were as follows:
2006 2005 2004
------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
------------------------------------------------------------------------
Outstanding at
beginning of year 245,169 $ 6.26 271,244 $ 6.25 324,160 $ 6.27
Exercised (87,958) 5.89 (19,000) 5.85 (39,058) 6.19
Canceled (1,250) 6.65 (7,075) 7.10 (13,858) 6.91
------- -------- ------- -------- ------- --------
Outstanding at
end of year 155,961 $ 6.46 245,169 $ 6.26 271,244 $ 6.25
======= ======== ======= ======== ======= ========
Exercisable at
end of year 155,961 $ 6.46 245,169 $ 6.26 271,244 $ 6.25
======= ======== ======= ======== ======= ========
24
No shares were available for grants under the 1990 Plan as of December 31,
2006, 2005 and 2004. The weighted average remaining life of the 155,961 options
outstanding at December 31, 2006 was 3.5 years. The intrinsic value of the
87,958 options exercised in 2006 was $268,000.
Changes in the stock options granted under the 2000 Plan during 2006, 2005 and
2004 were as follows:
2006 2005 2004
------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
------------------------------------------------------------------------
Outstanding at
beginning of
year 175,675 $ 6.57 170,025 $ 5.92 162,400 $ 5.57
Granted 31,600 11.68 27,450 10.78 20,250 8.79
Exercised (8,325) 6.32 (10,625) 5.81 (11,150) 6.10
Canceled (6,225) 9.55 (11,175) 7.74 (1,475) 5.53
------- -------- ------- -------- ------- --------
Outstanding at
end of year 192,725 $ 7.32 175,675 $ 6.57 170,025 $ 5.92
======= ======== ======= ======== ======= ========
Exercisable at
end of year 118,638 $ 5.99 98,465 $ 5.79 68,607 $ 5.94
======= ======== ======= ======== ======= ========
At December 31, 2006, 2005 and 2004, 527,175, 552,550 and 568,825 shares,
respectively, were available for option grants under the 2000 Plan.
The weighted-average remaining life of the 192,725 options outstanding at
December 31, 2006 was 9.2 years. The weighted-average grant-date fair value of
the 31,600 options granted during 2006 was $2.23 per option. The intrinsic value
of the 8,325 options exercised in 2006 was $35,000.
As of December 31, 2006, outstanding options have the following ranges of
exercise prices and weighted average remaining lives:
Ranges of Exercise Prices
-----------------------------------------------
$3.38 to $5.70 $5.71 to $8.40 $8.41 to $11.92 All Ranges
-------------- -------------- --------------- ----------
Outstanding stock options:
Number of options 105,452 165,784 77,450 348,686
Weighted average exercise price $5.09 $6.31 $10.80 $6.94
Weighted average remaining life 8.2 years 4.1 years 9.9 years 6.6 years
Exercisable stock options:
Number of options 85,614 164,709 24,276 274,599
Weighted average exercise price $5.10 $6.31 $10.01 $6.26
Weighted average remaining life 7.7 years 4.1 years 6.2 years 5.4 years
$32,500 of stock option expense, net of $17,500 of tax, was charged against net
income in 2006. There were no charges to income in connection with stock option
grants or exercises during 2005 and 2004.
25
(8) 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 the Employee Retirement
Income Security Act of 1974 ("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 an unfunded supplemental
plan in the United States of America to provide retirement benefits in excess of
levels provided under the Corporation's other plans.
The Corporation's Canadian subsidiary provides retirement benefits for its
employees through a defined contribution plan. The plan was converted from a
defined benefit plan in 1993 and, upon conversion a surplus was generated that
is maintained in a separate holding account to fund the employer portion of
contributions. As of December 31, 2006 and 2005, the plan had approximately $2.3
million and $2.1 million, respectively, in the holding account. The employer
portion of contributions for 2006 and 2005 was $56,000 and $57,000,
respectively. The Corporation's European 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 Corporation's measurement date of its US pension plans is November
30th. The projected benefit obligation, accumulated benefit obligation and fair
value of plan assets for pension plans with plan assets in excess of accumulated
benefit obligations were $40,757,000, $40,757,000 and $43,641,000, respectively,
at November 30, 2006, and $44,313,000, $41,382,000 and $41,792,000,
respectively, at November 30, 2005. The projected benefit obligation,
accumulated benefit obligation and fair value of plan assets for the pension
plan with accumulated benefit obligations in excess of plan assets were
$2,413,000, $2,413,000 and $1,728,000, respectively, at November 30, 2006, and
$660,000, $660,000 and $0, respectively, at November 30, 2005.
The following table describes the funded status of US pension plans:
2006 2005
-----------------------------
Change in Benefit Obligation:
Benefit obligation at November 30, 2005
and 2004, respectively $ 44,973,000 $ 41,304,000
Service cost 385,000 1,062,000
Interest cost 2,446,000 2,483,000
Amendments 74,000 --
Actuarial (gain) loss (1,883,000) 2,522,000
Benefits paid (2,825,000) (2,398,000)
------------ ------------
Benefit obligation at November 30, 2006
and 2005, respectively 43,170,000 44,973,000
------------ ------------
Change in Plan Assets:
Fair value of plan assets at November
30, 2005 and 2004, respectively 41,792,000 38,973,000
Actual return on plan assets 6,375,000 1,345,000
Employer contributions 6,000 3,850,000
Benefits paid (2,804,000) (2,376,000)
------------ ------------
Fair value of plan assets at November
30, 2006 and 2005, respectively 45,369,000 41,792,000
------------ ------------
Funded status 2,199,000 (3,181,000)
Unrecognized prior service cost 84,000 185,000
Unrecognized net actuarial loss 8,336,000 13,695,000
------------ ------------
Prepaid pension costs at November 30, 2006
and 2005, respectively 10,619,000 10,699,000
December accruals (1,000) (88,000)
December contributions 2,000 2,000
Accumulated other comprehensive income (8,420,000) --
------------ ------------
Prepaid pension costs at year end $ 2,200,000 $ 10,613,000
============ ============
26
The prepaid pension costs noted above as of December 31, 2005, are included in
Other Assets in the accompanying Consolidated Balance Sheet.
The prepaid pension costs noted above as of December 31, 2006, are included in
several different accounts as noted below:
Non-current assets - Other Assets $ 2,885,000
Current liabilities - Accrued expenses (49,000)
Non-current liabilities - Other Liabilities (636,000)
-----------
$ 2,200,000
===========
Amounts recognized in the consolidated balance sheets of the Corporation consist
of the following as of December 31, 2005:
2005
-------------
Prepaid benefit cost $ 11,245,000
Accrued benefit liability - long-term (660,000)
Accumulated other comprehensive income 114,000
------------
Net amount recognized at November 30 10,699,000
December accruals (88,000)
December contributions 2,000
------------
Net amount recognized at December 31 $ 10,613,000
============
The following assumptions were used for purposes of computing the net periodic
pension cost and determining the benefit obligation of all US salaried employee
plans:
Used for Net Periodic Pension Cost
in Fiscal Year January through Used for Benefit Obligations as of
Assumption December of November 30
---------- ---------------------------------- ----------------------------------
2006 2005 2006 2005
---- ---- ---- ----
Discount rate 5.78% 6.1% 5.70% 5.78%
Salary increase 3.5% 3.5% (Not applicable) 3.5%
Long-term rate of return 8.5% 8.5% (Not applicable) (Not applicable)
27
The following assumptions were used for purposes of computing the net periodic
pension cost and determining the benefit obligation of all US hourly employee
plans:
Used for Net Periodic Pension Cost
in Fiscal Year January through Used for Benefit Obligations as of
Assumption December of November 30
---------- ---------------------------------- ----------------------------------
2006 2005 2006 2005
---- ---- ---- ----
Discount rate 5.78% 6.1% 5.70% 5.78%
Salary increase (Not applicable) (Not applicable) (Not applicable) (Not applicable)
Long-term rate of return 8.5% 8.5% (Not applicable) (Not applicable)
Net periodic pension cost for the US plans included the following for the years
ended December 31:
2006 2005 2004
------------------------------------------
Service cost-benefits earned during the year $ 323,000 $ 1,065,000 $ 1,020,000
Interest cost on projected benefit obligation 2,441,000 2,491,000 2,389,000
Expected return on plan assets (3,492,000) (3,250,000) (3,056,000)
Amortization of net obligation at date of transition -- -- 32,000
Amortization of prior service cost 15,000 56,000 49,000
Amortization of accumulated losses 659,000 595,000 666,000
Curtailment loss 70,000 93,000 --
----------- ----------- -----------
Net periodic pension cost $ 16,000 $ 1,050,000 $ 1,100,000
=========== =========== ===========
The major categories of plan assets as of November 30, 2006 and 2005 were as
follows:
2006 2005
------------------------------------------------------------------
Major Categories Fair Value % of Total Fair Fair Value % of Total
of Plan Assets Value of Plan of Plan Fair Value of
Assets Assets Plan Assets
---------------- -------------- --------------- ---------- -------------
Equity funds $ 33,598,000 74.0% $ 26,935,000 64.5%
Fixed income funds 11,337,000 25.0% 10,658,000 25.5%
Cash and cash equivalents 434,000 1.0% 4,199,000 10.0%
------------ ------------
Total $ 45,369,000 $ 41,792,000
============ ============
Effective March 31, 2006, Bairnco froze the Bairnco Corporation Retirement
Plan (the "Plan") and initiated employer contributions to its 401(k) plan. A
base contribution of 1% of pay will be made to each participant's account, plus
the Corporation will match 50% of up to 4% of pay contributed by the employee.
Employer contributions to the 401(k) plan in 2006 were $542,000 and are
estimated at approximately $800,000 for 2007.
As a result of the Plan freeze, all unamortized prior service costs in the
Plan as of March 31, 2006 was recognized as a curtailment loss.
Assuming no adverse changes in 2007 to the discount rate used for
measuring the benefit obligation and assuming the rate of return on assets
equals or exceeds the discount rate, then the Corporation does not expect to
contribute to the US plans in 2007.`
28
Expected benefit payments for each of the next five years and for years six
through ten are as follows:
Fiscal Year Amount
----------- -----------
2007 $ 2,533,000
2008 2,551,000
2009 2,604,000
2010 2,650,000
2011 2,717,000
2012 through 2016 15,116,000
INVESTMENT POLICY:
All investments will be made solely in the interest of the plan
participants and their beneficiaries in order to provide prudent growth over
time consistent with preservation of principal while providing liquidity so that
benefits may be paid. Plan investments will be done through investment managers,
as appointed by the Investment Committee, and be diversified so as to minimize
the risk of large losses. All actions by investment managers shall be made in
accordance with the fiduciary standards established by ERISA, as amended, and
other applicable laws and regulations.
The general classes of investment funds include equities, fixed income
(bond funds) and cash equivalents. Equity investments include common, preferred
and convertible stock, including both domestic and foreign issues. Plan assets
may be invested 100% in equity funds although the range of equity fund
investments is typically in the 55% to 75% of total market value of plan assets.
Fixed income funds include US Government obligations, marketable non-convertible
preferred stock and corporate bonds, insurance contracts, zero coupon securities
and certificates of deposit. Cash equivalents include investments with a
maturity of less than one year and shall include US Government securities,
repurchase agreements, bank certificates of deposit, prime commercial paper and
short term investments.
Investments or activities strictly prohibited include short sales, margin
purchases, or any form of stock borrowing, privately placed or non-marketable
securities, restricted securities, domestic common stocks not listed on the New
York, American, or NASDAQ Stock Exchanges, derivative investments, investments
of more than 10% of the specific fund's assets in securities of any one issuer,
except for US Government obligations, and investments in equities in any single
industry in excess of 20% (at cost) of total plan assets. Up to 20% (at cost) of
total plan assets may be invested in international equity funds.
Investment managers have full responsibility for investment selection and
diversification within the limits of the investment restrictions set forth
herein and as may be additionally imposed by the Investment Committee. The Plan
Administrator shall supply the Investment Committee with the performance results
of all investments and investment managers, benchmarked against their peer's
performance, at least quarterly.
Bairnco's expected long term rate of return on plan assets is based on
historical returns of its investment funds as adjusted to reflect expectations
of future returns taking into consideration forecasts of long term expected
inflation rates.
(9) REPORTABLE SEGMENT DATA
Operating segments are components of an enterprise that:
o Engage in business activities from which they may earn revenues and
incur expenses,
o 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
o 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 three reportable segments - Arlon
Electronic Materials segment, Arlon Coated Materials segment and Kasco
Replacement Products and Services segment.
The Arlon Electronic Materials and Arlon Coated Materials segments design,
manufacture, market and sell laminated and coated products 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.
29
Among the products included in the Arlon Electronic Materials segment are
high technology materials for the printed circuit board industry and silicone
rubber products for insulating tapes and flexible heaters. Among the products
included in the Arlon Coated Materials segment are vinyl films for graphics art
applications, foam tapes used in window glazing, and electrical and thermal
insulation products.
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, taxes receivable 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, 2006, 2005 and 2004 is as follows:
Operating Capital Depreciation/
Net Sales Profit (Loss) Assets Expenditures Amortization
--------- ------------- ------ ------------ ------------
2006
- ----
Arlon EM $ 60,866,000 $ 9,121,000 $ 35,251,000 $ 6,037,000 $ 2,185,000
Arlon CM 67,124,000 1,152,000 45,266,000 778,000 2,657,000
Kasco 50,838,000 2,404,000 47,090,000 1,523,000 2,125,000
Headquarters -- (6,611,000) 11,021,000 338,000 444,000
------------ ------------ ------------ ------------ ------------
Total $178,828,000 $ 6,066,000 $138,628,000 $ 8,676,000 $ 7,411,000
============ ============ ============ ============ ============
2005
- ----
Arlon EM $ 53,741,000 $ 6,774,000 $ 31,035,000 $ 3,380,000 $ 2,360,000
Arlon CM 68,218,000 2,232,000 45,932,000 420,000 2,770,000
Kasco 43,941,000 354,000 30,436,000 2,818,000 2,014,000
Headquarters -- (3,769,000) 18,365,000 686,000 312,000
------------ ------------ ------------ ------------ ------------
Total $165,900,000 $ 5,591,000 $125,768,000 $ 7,304,000 $ 7,456,000
============ ============ ============ ============ ============
2004
- ----
Arlon EM $ 51,274,000 $ 6,656,000 $ 24,283,000 $ 1,403,000 $ 2,412,000
Arlon CM 71,752,000 3,798,000 46,262,000 2,467,000 2,567,000
Kasco 42,470,000 1,585,000 30,290,000 1,258,000 2,610,000
Headquarters -- (3,982,000) 17,946,000 868,000 79,000
------------ ------------ ------------ ------------ ------------
Total $165,496,000 $ 8,057,000 $118,781,000 $ 5,996,000 $ 7,668,000
============ ============ ============ ============ ============
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The Corporation has operations in Canada, Mexico, China and several
European countries. Information about the Corporation's operations by
geographical area for the years ended December 31, 2006, 2005 and 2004 is as
follows:
Sales to External Long-lived
Customers Segment Assets
------------------------------------------
2006
- ----
United States $149,608,000 $ 51,574,000
France 14,348,000 265,000
Other Foreign 14,872,000 13,300,000
2005
- ----
United States $138,657,000 $ 56,078,000
France 14,095,000 285,000
Other Foreign 13,148,000 3,761,000
2004
- ----
United States $139,148,000 $ 53,482,000
France 14,544,000 395,000
Other Foreign 11,804,000 3,875,000
(10) CONTINGENCIES
During the third quarter 2004, Bairnco obtained final resolutions of three
long-pending lawsuits.
In one of these lawsuits (the "Transactions Lawsuit"), trustees
representing asbestos claimants brought claims of over $700 million against
Bairnco, its subsidiaries, and other defendants. A judgment in favor of the
defendants was affirmed in May 2004 by the U.S. Court of Appeals for the Second
Circuit. Plaintiffs' time to seek review by the United States Supreme Court of
the Court of Appeals' decision expired in August 2004.
A second lawsuit by these trustees against Bairnco (the "NOL Lawsuit"),
involving a dispute over federal income tax refunds that had been held in escrow
since the 1990s, was settled in September 2004. Pursuant to a settlement
agreement dated September 10, 2004, Bairnco received $24,695,000 (about 70
percent of the escrowed funds), and the NOL Lawsuit was dismissed with
prejudice. Subsequent to December 31, 2004, a review of tax information on the
settlement of the NOL Lawsuit resulted in a $1,015,000 tax receivable and
related income which, along with the $24,695,000 settlement, is included in
Income from Spun off Subsidiary in the accompanying Consolidated Statements of
Income.
The final resolution of the Transactions Lawsuit in favor of Bairnco
resulted in the final resolution of a third lawsuit brought by these trustees
(the "Properties Lawsuit"), involving a dispute over the title to certain real
and personal property. In 2001, when the Properties Lawsuit was dismissed,
without prejudice, against Bairnco and its Arlon subsidiary, the parties agreed
that this dispute would be determined in accordance with the final resolution of
the Transactions Lawsuit.
Management of Bairnco is not aware of any other pending actions of which
the Corporation and its subsidiaries are defendants, the disposition of which
would have a material adverse effect on the consolidated results of operations
or the financial position of Bairnco and its subsidiaries as of December 31,
2006.
(11) SUBSEQUENT EVENT
On June 22, 2006, Steel Partners II, L.P. ("Steel Partners II") commenced
an unsolicited cash tender offer for all of the outstanding common stock of the
Corporation for $12.00 per share, without interest (as amended, the "Offer"). On
February 2, 2007, Steel Partners II amended the Offer to $13.35 per share.
On February 23, 2007, the Corporation signed a definitive merger agreement
to be acquired by BZ Acquisition Corp. ("BZA"), an affiliate of Steel Partners
II, for $13.50 per share, in cash. The merger agreement was unanimously approved
31
by the Corporation's Board. Pursuant to the terms of the merger agreement, on
March 2, 2007, Steel Partners II amended the Offer to reflect the $13.50 per
share offer price, and extended the Offer through March 16, 2007. All
shareholders of record on March 5, 2007 will continue to be entitled to receive
the declared first quarter dividend of $0.10 per share, for total cash proceeds
of $13.60 per share.
Completion of the Offer is subject to customary conditions, including the
valid tender of sufficient shares, which, when added to shares then owned by
Steel Partners II and its affiliates, constitute more than 50% of the total
number of outstanding shares on a fully diluted basis. There is no financing
condition.
Following the completion of the Offer, subject to customary conditions,
BZA will merge with and into the Corporation, pursuant to which each share not
tendered into the Offer will be converted automatically into the right to
receive $13.50 in cash.
The Offer could close as early as March 16, 2007. If BZA acquires
sufficient shares in the Offer that, together with shares then owned by Steel
Partners II and its affiliates, represent more than 90% of the outstanding
shares of the Corporation, the back-end merger will close promptly after the
completion of the Offer, without obtaining a shareholder vote. If, following the
completion of the Offer, Steel Partners II and its affiliates own more than 50%
of the shares of the Corporation on a fully diluted basis but less than 90% of
the outstanding shares, the back-end merger, which would be subject to approval
by the Corporation's stockholders (including Steel Partners II and its
affiliates), would be expected to close in the first half of 2007.
Further information relating to the Offer can be found in the
Corporation's Solicitation/Recommendation Statement on Schedule 14D-9 and
amendments thereto, which are available on the SEC's website at www.sec.gov
or on the Corporation's web site at www.bairnco.com .
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