Exhibit 99.2
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS OF BAIRNCO CORPORATION
AS OF MARCH 31, 2007
BAIRNCO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE QUARTERS ENDED MARCH 31, 2007 AND APRIL 1, 2006
(Unaudited)
2007 2006
- -----------------------------------------------------------------------------
NET SALES $48,727,000 $42,858,000
Cost of sales 33,596,000 30,078,000
----------- -----------
GROSS PROFIT 15,131,000 12,780,000
Selling and administrative expenses 14,124,000 11,067,000
----------- -----------
OPERATING PROFIT 1,007,000 1,713,000
Interest expense, net 468,000 136,000
----------- -----------
INCOME BEFORE INCOME TAXES 539,000 1,577,000
Provision for income taxes 194,000 565,000
----------- -----------
NET INCOME $ 345,000 $ 1,012,000
=========== ===========
Earnings per Share of Common Stock (Note 2):
Basic $ 0.05 $ 0.14
Diluted $ 0.05 $ 0.14
Weighted Average Number of Shares Outstanding:
Basic 7,157,000 7,191,000
Diluted 7,408,000 7,394,000
DIVIDENDS PER SHARE OF COMMON STOCK $ 0.10 $ 0.06
The accompanying notes are an integral part of these financial statements.
1
BAIRNCO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE QUARTERS ENDED MARCH 31, 2007 AND APRIL 1, 2006
(Unaudited)
Note 3
2007 2006
- --------------------------------------------------------------------------------
NET INCOME $ 345,000 $1,012,000
Other comprehensive income, net of tax:
FOREIGN CURRENCY TRANSLATION ADJUSTMENT 69,000 136,000
---------- ----------
COMPREHENSIVE INCOME $ 414,000 $1,148,000
========== ==========
The accompanying notes are an integral part of these financial statements.
2
BAIRNCO CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
AS OF MARCH 31, 2007 AND DECEMBER 31, 2006
(Unaudited)
2007 2006
--------------------- ---------------------
ASSETS:
Current Assets:
Cash and cash equivalents $ 1,606,000 $ 1,869,000
Accounts receivable, less allowances of $1,448,000
and $1,350,000, respectively 33,904,000 30,631,000
Inventories 35,633,000 33,608,000
Deferred income taxes 3,501,000 3,500,000
Other current assets 4,105,000 3,881,000
Assets held for sale -- 525,000
------------- -------------
Total current assets 78,749,000 74,014,000
------------- -------------
Plant and equipment, at cost 133,928,000 131,711,000
Accumulated depreciation and amortization (93,088,000) (91,057,000)
------------- -------------
Plant and equipment, net 40,840,000 40,654,000
------------- -------------
Cost in excess of net assets of purchased businesses, net 17,100,000 17,057,000
Other Intangible Assets, net of amortization of $310,000
and $241,000, respectively 3,739,000 3,808,000
Other assets 3,324,000 3,095,000
------------- -------------
$ 143,752,000 $ 138,628,000
============= =============
LIABILITIES & STOCKHOLDERS' INVESTMENT
Current Liabilities:
Short-term debt $ 7,303,000 $ 6,119,000
Current maturities of long-term debt 1,219,000 1,219,000
Accounts payable 14,692,000 13,584,000
Accrued expenses 11,988,000 12,153,000
------------- -------------
Total current liabilities 35,202,000 33,075,000
------------- -------------
Long-term debt 18,550,000 18,490,000
Deferred income taxes 4,260,000 4,259,000
Other liabilities 4,087,000 1,634,000
Commitments and contingencies (Note 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; 11,858,999
and 11,724,590 shares issued, respectively; 7,426,262
and 7,291,853 shares outstanding, respectively 118,000 117,000
Paid-in capital 52,727,000 51,916,000
Retained earnings 69,137,000 69,535,000
Accumulated Other Comprehensive Income (Loss)
Currency translation adjustment 3,588,000 3,519,000
Pension liability adjustment, net of $3,201,000 income tax (5,219,000) (5,219,000)
Treasury stock, at cost, 4,432,737 shares (38,698,000) (38,698,000)
------------- -------------
Total stockholders' investment 81,653,000 81,170,000
------------- -------------
$ 143,752,000 $ 138,628,000
============= =============
The accompanying notes are an integral part of these financial statements.
3
BAIRNCO CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE QUARTERS ENDED MARCH 31, 2007 AND APRIL 1, 2006
(Unaudited)
2007 2006
------------ -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 345,000 $ 1,012,000
Adjustments to reconcile to net cash provided by
operating activities:
Depreciation and amortization 2,119,000 1,829,000
Earned compensation 54,000 45,000
(Gain) loss on disposal of plant and equipment (4,000) 28,000
Change in current assets and liabilities, net
of effect of acquisitions:
(Increase) in accounts receivable (609,000) (2,743,000)
(Increase) in inventories (1,966,000) (2,574,000)
(Increase) decrease in other current assets (222,000) 1,598,000
Increase (decrease) in accounts payable 1,001,000 (789,000)
Increase in accrued expenses 320,000 222,000
Other (399,000) (364,000)
----------- -----------
Net cash provided by (used in) by operating activities 639,000 (1,736,000)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,586,000) (1,676,000)
Proceeds from sale of plant and equipment 13,000 1,000
----------- -----------
Net cash (used in) investing activities (1,573,000) (1,675,000)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in short-term debt 1,172,000 (710,000)
Proceeds from long-term debt 509,000 2,500,000
Long-term debt repayments (449,000) (786,000)
Payment of dividends (1,242,000) (875,000)
Purchase of treasury stock -- (911,000)
Exercise of stock options 756,000 523,000
----------- -----------
Net cash provided by (used in) financing activities 746,000 (259,000)
----------- -----------
Effect of foreign currency exchange rate changes on cash
and cash equivalents (75,000) 25,000
----------- -----------
NET (DECREASE) IN CASH AND CASH EQUIVALENTS (263,000) (3,645,000)
Cash and cash equivalents, beginning of period 1,869,000 5,313,000
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,606,000 $ 1,668,000
=========== ===========
The accompanying notes are an integral part of these financial statements.
4
BAIRNCO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2007
(Unaudited)
(1) BASIS OF PRESENTATION
The accompanying consolidated condensed financial statements include the
accounts of Bairnco Corporation and its subsidiaries ("Bairnco" or the
"Corporation") after the elimination of all material intercompany accounts and
transactions.
The condensed consolidated balance sheet as of December 31, 2006, which
has been derived from audited financial statements, and the unaudited
consolidated condensed financial statements included herein have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission
for interim financial reporting. Certain financial information and note
disclosures which are normally included in annual financial statements prepared
in accordance with accounting principles generally accepted in the United States
have been condensed or omitted pursuant to those rules and regulations, although
management believes that the disclosures made are adequate to make the
information presented not misleading. Management believes the financial
statements include all adjustments of a normal and recurring nature necessary to
present fairly the results of operations for all interim periods presented.
The quarterly financial statements should be read in conjunction with the
December 31, 2006 audited consolidated financial statements. The consolidated
results of operations for the quarter ended March 31, 2007 are not necessarily
indicative of the results of operations for the full year.
New accounting pronouncements:
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.
In May 2005, the FASB issued Statement of Financial Accounting Standards
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
5
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 Effect of Adopting
of 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
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. 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
6
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.
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 Effect of Adopting
of SAB 108 SAB 108 As Adjusted
--------------------- ------------------ ------------------
Current Assets - Deferred income $ 3,496,000 $ 6,000 $ 3,500,000
taxes
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.
(2) EARNINGS PER COMMON SHARE
Earnings per share data is based on net income and not comprehensive
income. Computations of earnings per share for the quarters ended March 31, 2007
and April 1, 2006 are as follows:
7
2007 2006
----------- ----------
BASIC EARNINGS PER COMMON SHARE:
Net income $ 345,000 $1,012,000
Average common shares outstanding 7,157,000 7,191,000
---------- ----------
Basic Earnings per Common Share $ 0.05 $ 0.14
========== ==========
DILUTED EARNINGS PER COMMON SHARE:
Net income $ 345,000 $1,012,000
---------- ----------
Average common shares outstanding 7,157,000 7,191,000
Dilutive effect of restricted stock 106,000 85,000
Common shares issuable in respect to options issued
to employees with a dilutive effect 145,000 118,000
---------- ----------
Total diluted common shares outstanding 7,408,000 7,394,000
---------- ----------
Diluted earnings per share $ 0.05 $ 0.14
========== ==========
Basic earnings per common share were computed by dividing net income by
the weighted average number of common shares outstanding during the period.
Diluted earnings per common share include the effect of all dilutive stock
options and restricted stock shares. There were no anti-dilutive options
outstanding as of March 31, 2007.
(3) COMPREHENSIVE INCOME
Comprehensive income includes net income as well as certain other
transactions shown as changes in stockholders' investment. For the quarters
ended March 31, 2007 and April 1, 2006, Bairnco's comprehensive income includes
net income plus the change in net asset values of foreign divisions as a result
of translating the local currency values of net assets to U.S. dollars at
varying exchange rates. Accumulated other comprehensive income consists of
foreign currency translation adjustments and minimum pension liability
adjustments. There are currently no tax expenses or benefits associated with the
foreign currency translation adjustments.
(4) DEBT
Long-term debt consisted of the following as of March 31, 2007 and
December 31, 2006, respectively:
2007 2006
----------- -----------
Term loan $14,627,000 $14,907,000
Revolving credit notes 130,000 214,000
Non-interest bearing note payable 100,000 100,000
China foreign loan facility 4,912,000 4,488,000
----------- -----------
19,769,000 19,709,000
Less: Current maturities 1,219,000 1,219,000
----------- -----------
Total $18,550,000 $18,490,000
=========== ===========
The Corporation has a five year, Senior Secured Credit Facility ("Credit
Facility") with Bank of America, N.A. which permits a maximum loan commitment of
$42 million and includes a five year, $15.0 million term loan and up to a $27
million revolving credit facility, including a $13.0 million sub-limit for
letters of credit and a $3.0 million sub-limit for foreign currency loans. The
Credit Facility has an expiration date of November 8, 2011 and 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.
At March 31, 2007, Bairnco's total debt outstanding was $27,072,000
compared to $25,828,000 at the end of 2006. At March 31, 2007, $14,627,000 was
outstanding on the term loan under the Credit Facility. This loan has scheduled
principal payments of $1,119,000 in 2007 (of which $280,000 had been paid
through March 31, 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 March 31, 2007, averaged
7.17%.
At December 31, 2006, $130,000 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 March 31, 2007 averaged 5.75%.
In addition, approximately $7.7 million of irrevocable standby letters of
credit were outstanding under the Credit Facility, which are not reflected in
the accompanying consolidated financial statements. $2.5 million of the letters
of credit guarantee various insurance activities and $5.2 million represents
letters of credit securing borrowings of the same amount for the China foreign
8
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 March 31, 2007, the
Corporation had approximately $12.0 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. Interest
rates on amounts borrowed under the China foreign loan facility averaged 6.3% at
March 31, 2007.
The Corporation has other short-term debt outstanding due in 2007 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 Credit Facility totaled $6,519,000 at March 31, 2007 at an
average rate of 7.2%. Outstanding foreign short-term borrowings totaled $784,000
at March 31, 2007, all of which is denominated in Euros, at an average rate of
5.5%.
The Credit Facility contains a financial covenant which requires the
Corporation to meet minimum fixed charge coverage ratios. At March 31, 2007, the
Corporation was in compliance with all covenants contained in the Credit
Facility.
(5) INVENTORIES
Inventories consisted of the following as of March 31, 2007 and December
31, 2006:
2007 2006
- ----------------------------------------------------------------------
Raw materials and supplies $ 9,233,000 $ 8,549,000
Work in process 9,133,000 9,325,000
Finished goods 17,267,000 15,734,000
----------- -----------
Total inventories $35,633,000 $33,608,000
=========== ===========
(6) ACCRUED EXPENSES
Accrued expenses consisted of the following as of March 31, 2007 and
December 31, 2006:
2007 2006
- ----------------------------------------------------------------------
Salaries and wages $ 1,785,000 $ 2,883,000
Income taxes 123,000 --
Insurance 1,769,000 1,837,000
Other accrued expenses 8,311,000 7,433,000
----------- -----------
Total accrued expenses $11,988,000 $12,153,000
=========== ===========
Accrued expenses-insurance: The Corporation's U.S. insurance programs for
general liability, automobile liability, workers compensation and certain
employee related health care benefits are effectively self-insured for claims
incurred below the maximum amounts stipulated by the associated insurance
policies for each case and in the aggregate. 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.
9
(7) STOCK INCENTIVE PLAN
Effective January 1, 2006, the Corporation accounts for stock options
under SFAS 123R (refer to Note 1 to Consolidated Condensed Financial
Statements). 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 Quarter Ended
---------------------------------
March 31, 2007 April 1, 2006
---------------------------------
Expected Life 6.6 years 6.8 years
Volatility 26.9% 27.1%
Risk-free interest rate 4.7% 4.5%
Dividend yield 2.2% 2.48%
Turnover 5.3% 5.67%
Compensation expense for stock options computed under the Black-Scholes
model is amortized using the straight-line method over the vesting period.
(8) PENSION PLANS
Net periodic pension (benefit) cost for the U.S. plans included the
following for the quarters ended March 31, 2007 and April 1, 2006:
Quarter Ended Quarter Ended
March 31, 2007 April 1, 2006
---------------------------------
Service cost-benefits earned during the year $ 17,000 $ 296,000
Interest cost on projected benefit obligation 595,000 634,000
Expected return on plan assets (929,000) (853,000)
Amortization of prior service cost 5,000 11,000
Amortization of accumulated losses 88,000 210,000
Curtailment loss -- 67,000
========= =========
Net periodic pension (benefit) cost $(224,000) $ 365,000
========= =========
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 2007 are now estimated at $900,000.
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.
10
(9) REPORTABLE SEGMENT DATA
Bairnco's segment disclosures are prepared in accordance with SFAS No.
131. There are no differences to the 2006 annual report in the basis of
segmentation or in the basis of measurement of segment profit or loss included
herein. Financial information about the Corporation's operating segments for the
quarters ended March 31, 2007 and April 1, 2006 as required under SFAS No. 131
is as follows:
2007 2006
----------------------------------
NET SALES
Arlon Electronic Materials $ 17,206,000 $ 15,533,000
Arlon Coated Materials 15,685,000 16,128,000
Kasco 15,836,000 11,197,000
Headquarters -- --
------------ ------------
$ 48,727,000 $ 42,858,000
============ ============
OPERATING PROFIT (LOSS)
Arlon Electronic Materials $ 3,104,000 $ 2,569,000
Arlon Coated Materials (339,000) 93,000
Kasco 833,000 347,000
Headquarters (2,591,000) (1,296,000)
------------ ------------
$ 1,007,000 $ 1,713,000
============ ============
The total assets of the segments as of March 31, 2007 and December 31,
2006 are as follows:
2007 2006
----------------------------------
Arlon Electronic Materials $ 39,015,000 $ 35,251,000
Arlon Coated Materials 46,303,000 45,266,000
Kasco 47,292,000 47,090,000
Headquarters 11,142,000 11,021,000
------------ ------------
$143,752,000 $138,628,000
============ ============
(10) CONTINGENCIES
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 March 31, 2007.
(11) SUBSEQUENT EVENT
On April 13, 2007, as a result of a tender offer (the "Offer") pursuant to
an Agreement and Plan of Merger (the "Merger Agreement") dated as of February
23, 2007 by and among Steel Partners II, L.P., a Delaware limited partnership
("Steel Partners"), BZ Acquisition Corp., a Delaware corporation ("BZA"), and
Bairnco, BZA acquired approximately 88.9% of the outstanding common stock of
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Bairnco. WHX Corporation, a Delaware corporation ("WHX"), acquired Steel
Partners' entire interest in BZA pursuant to a Stock Purchase Agreement, dated
April 12, 2007, and accordingly has acquired control of Bairnco through its
ownership of BZA. The consideration for each share was $13.50 in cash.
Pursuant to the Merger Agreement, on April 24, 2007, BZA was merged with
and into Bairnco with Bairnco continuing as the surviving corporation as a
wholly owned subsidiary of WHX (the "Merger"). At the effective time of the
Merger, each Bairnco common share then outstanding (other than shares owned by
BZA or its direct parent entity, shares owned by Bairnco as treasury stock and
shares held by stockholders who properly exercise their appraisal rights) was
automatically converted into the right to receive $13.50 per share in cash
without interest and subject to applicable withholding taxes. Immediately prior
to the Merger, BZA held approximately 90.1% of the outstanding shares of
Bairnco. The proceeds required to fund the closing of the Offer and the
resulting Merger and to pay related fees and expenses were approximately $101.5
million.
Funds for payment of the shares purchased in the Offer were obtained
pursuant to two loans. Steel Partners extended to BZA a bridge loan, which is
guaranteed by WHX on an unsecured basis, in a principal amount up to $90,000,000
pursuant to a Loan and Security Agreement ("Bridge Loan Agreement"). In
addition, Steel Partners extended to WHX a $15,000,000 Subordinated loan, which
is unsecured at the WHX level, pursuant to a Subordinated Loan and Security
Agreement ("Subordinated Loan Agreement"), between WHX, as borrower, and Steel
Partners, as lender. WHX contributed the $15,000,000 proceeds of the
subordinated loan to BZA as a capital contribution.
Borrowings under the Bridge Loan Agreement bear (i) cash interest at a
rate per annum equal to the prime rate of JP Morgan Chase plus 1.75% and (ii)
pay-in-kind interest at a rate per annum equal to 4.5% for the first 90 days the
loan is outstanding and 5% (instead of 4.5%) for the balance of the term, each
as adjusted from time to time. The minimum aggregate interest rate on borrowings
under the Bridge Loan Agreement is 14.5% per annum for the first 90 days the
loan is outstanding, and 15% (instead of 14.5%) per annum for the balance of the
term, and the maximum aggregate interest rate on borrowings under the Bridge
Loan Agreement is 18% per annum. The cash interest rate and the pay-in-kind
interest rate may be adjusted from time to time, by agreement of Steel Partners
and Bairnco, so long as the aggregate interest rate remains the same. Interest
is payable monthly in arrears. The obligations under the Bridge Loan Agreement
are guaranteed by certain of Bairnco's subsidiaries and collateralized by a
junior lien on the assets of Bairnco and certain of its subsidiaries and capital
stock of certain of Bairnco's subsidiaries. Obligations under the Bridge Loan
Agreement will also be guaranteed by WHX on an unsecured basis. The scheduled
maturity date of the indebtedness under the Bridge Loan Agreement is the earlier
to occur of (i) June 30, 2008 and (ii) such time as Bairnco obtains any
replacement financing. Indebtedness under the Bridge Loan Agreement may be
prepaid without penalty or premium.
Borrowings under the Subordinated Loan Agreement bear pay-in-kind interest
at a rate per annum equal to the prime rate of JP Morgan Chase plus 7.75%,
adjusted from time to time, with a minimum interest rate of 16% per annum and a
maximum interest rate of 19% per annum. Interest is payable monthly in arrears.
The obligations under the Subordinated Loan Agreement are guaranteed by Bairnco
and certain of its subsidiaries and collateralized by a junior lien on the
assets of Bairnco and certain of its subsidiaries and capital stock of certain
of Bairnco's subsidiaries. The indebtedness under the Subordinated Loan
Agreement will mature on the second anniversary of the issuance of the
subordinated loan and may be prepaid without penalty or premium.
The Loan Agreements contain customary representations, warranties,
covenants, events of default and indemnification provisions. Following the
Merger, (i) the indebtedness under the Bridge Loan Agreement and the related
security interests will be subordinated to the indebtedness and related security
interests granted under Bairnco's existing senior credit facility with Bank of
America, N.A., and (ii) the guarantees of the indebtedness under the
Subordinated Loan Agreement and the related security interests will be
subordinated to all indebtedness and security interests described in the
preceding clause (i).
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