UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q (Mark one) [X] QUARTERLY EXCHANGE REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 28, 1996 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number 1-8120 BAIRNCO CORPORATION (Exact name of registrant as specified in its charter) Delaware 13-3057520 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 2251 Lucien Way, Suite 300, Maitland, FL 32751 (Address of principal executive offices) (Zip Code) (407) 875-2222 (Registrant's telephone number, including area code) (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No (APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDING DURING THE PRECEDING FIVE YEARS) Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13, or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes No (APPLICABLE ONLY TO CORPORATE ISSUERS) Indicate the number of shares outstanding of each issuer's classes of common stock, as of the latest practicable date. 9,619,834 shares of Common Stock Outstanding as of October 25, 1996. PART I - FINANCIAL INFORMATION Item 1:	FINANCIAL STATEMENTS BAIRNCO CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME FOR THE QUARTERS ENDED SEPTEMBER 28, 1996 AND SEPTEMBER 30, 1995 (Unaudited) 1996 1995 Net sales $ 36,152,000 $ 37,386,000 Cost of sales 23,645,000 24,511,000 Gross profit 12,507,000 12,875,000 Selling and administrative expenses 8,965,000 9,292,000 Operating profit 3,542,000 3,583,000 Interest expense, net 417,000 479,000 Income before income taxes 3,125,000 3,104,000 Provision for income taxes 1,187,000 1,211,000 Net Income $ 1,938,000 $ 1,893,000 Primary and fully diluted earnings per share of common stock (Note 2) $ 0.20 $ 0.18 Dividends per share of common stock $ 0.05 $ 0.05 The accompanying notes are an integral part of these financial statements. BAIRNCO CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 28, 1996 AND SEPTEMBER 30, 1995 (Unaudited) 1996 1995 Net sales $111,569,000 $114,218,000 Cost of sales 72,368,000 73,767,000 Gross profit 39,201,000 40,451,000 Selling and administrative expenses 27,862,000 29,404,000 Operating profit 11,339,000 11,047,000 Interest expense, net 1,265,000 1,553,000 Income before income taxes 10,074,000 9,494,000 Provision for income taxes 3,828,000 3,639,000 Net Income $ 6,246,000 $ 5,855,000 Primary and fully diluted earnings per share of common stock (Note 2) $ 0.63 $ 0.56 Dividends per share of common stock $ 0.15 $ 0.15 The accompanying notes are an integral part of these financial statements. BAIRNCO CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 28, 1996 AND DECEMBER 31, 1995 (Unaudited) 1996 1995 ASSETS Current assets:		 Cash and cash equivalents $ 626,000 $ 608,000 Accounts receivable, less allowances of $901,000 and $763,000, respectively 23,006,000 21,472,000 Inventories (Note 3) 24,137,000 23,736,000 Deferred income taxes 3,395,000 3,396,000 Other current assets 3,194,000 2,130,000 Total current assets 54,358,000 51,342,000 Plant and equipment, at cost 84,441,000 77,792,000 Less - Accumulated depreciation and amortization (46,704,000) (43,343,000) Plant and equipment, net 37,737,000 34,449,000 Cost in excess of net assets of purchased businesses 7,972,000 8,152,000 Other assets 4,226,000 4,253,000 $104,293,000 $ 98,196,000 LIABILITIES & STOCKHOLDERS' INVESTMENT Current Liabilities: Short-term debt $ 5,421,000 $ 3,156,000 Current maturities of long-term debt 185,000 186,000 Accounts payable 8,148,000 7,885,000 Accrued expenses (Note 4) 11,447,000 11,765,000 Total current liabilities 25,201,000 22,992,000 Long-term debt 24,302,000 21,236,000 Deferred income taxes 3,217,000 3,215,000 Other liabilities 2,590,000 2,729,000 Stockholders' Investment:	 Preferred stock, par value $.01, 5,000,000 shares authorized, none issued -- -- Common stock, par value $.01, 30,000,000 shares authorized, 11,135,499 and 11,062,499 shares issued, respectively 111,000 111,000 Paid-in capital 50,988,000 50,833,000 Retained earnings 14,240,000 9,460,000 Treasury stock, at cost, 1,514,665 and 938,065 shares, respectively (16,356,000) (12,380,000) Total stockholders' investment 48,983,000 48,024,000 $104,293,000 $ 98,196,000 The accompanying notes are an integral part of these financial statements. BAIRNCO CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 28, 1996 AND SEPTEMBER 30, 1995 (Unaudited) 1996 1995 Cash Flows from Operating Activities: Net Income $ 6,246,000 $ 5,855,000 Adjustment to reconcile to net cash provided by operating activities: Depreciation and amortization 5,005,000 4,939,000 Loss on disposal of plant and equipment 37,000 196,000 Deferred income taxes 3,000 (741,000) Change in operating assets and liabilities: (Increase) in accounts receivable (1,534,000) (2,637,000) (Increase) in inventories (401,000) (4,413,000) (Increase) decrease in other current assets (1,064,000) 3,316,000 Increase (decrease) in accounts payable 263,000 (1,113,000) (Decrease) increase in accrued expenses (318,000) 2,777,000 Cash provided by discontinued operations -- 70,000 Other (745,000) 427,000 Net cash provided by operating activities 7,492,000 8,676,000 Cash Flows from Investing Activities: Capital Expenditures (8,296,000) (3,746,000) Proceeds from collection on notes receivable 620,000 -- Proceeds from sales of plant and equipment 67,000 160,000 Net cash (used in) investing activities (7,609,000) (3,586,000) Cash Flows from Financing Activities: Net borrowings (repayments) of external debt 4,947,000 (4,000,000) Payment of dividends (1,466,000) (1,576,000) Purchase of treasury stock (3,976,000) (607,000) Exercise of stock options 372,000 102,000 Net cash (used in) financing activities (123,000) (6,081,000) Effect of foreign currency exchange rate changes on cash and cash equivalents 258,000 429,000 Net increase (decrease) in cash and cash equivalents 18,000 (562,000) Cash and cash equivalents, beginning of period 608,000 1,478,000 Cash and cash equivalents, end of period $ 626,000 $ 916,000 The accompanying notes are an integral part of these financial statements. BAIRNCO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 28, 1996 (Unaudited) (1)	Basis of Presentation The accompanying consolidated 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 unaudited financial information included herein reflects all adjustments of a normal recurring nature which the Corporation's management considers necessary for a fair summarized presentation of the consolidated financial statements included in this Form 10-Q filing. The consolidated results of operations for the quarter and nine months ended September 28, 1996, are not necessarily indicative of the results of operations for the full year. (2) Earnings per Common Share Earnings per common share are based on the weighted average number of shares outstanding during the periods as follows: Third Quarter First Nine Months 1996 1995 1996 1995 Primary 9,829,000 10,474,367 9,955,000 10,492,388 Fully Diluted 9,829,000 10,474,974 9,955,000 10,494,956 Primary and fully diluted earnings per share include all common stock equivalents. Statements regarding the computation of earnings per share for the quarters and nine month periods ended September 28, 1996 and September 30, 1995 are included as Exhibit 11.1 and Exhibit 11.2, respectively, to this Quarterly Report on Form 10-Q. (3) Inventories Inventories consisted of the following as of September 28, 1996 and December 31, 1995: 1996 1995 Raw materials and supplies $ 4,630,000 $ 4,651,000 Work in process 5,276,000 5,451,000 Finished goods 14,231,000 13,634,000 Total inventories $24,137,000 $23,736,000 (4) Accrued Expenses Accrued expenses consisted of the following as of September 28, 1996 and December 31, 1995: 1996 1995 Salaries and wages $ 2,257,000 $ 2,312,000 Income taxes 199,000 360,000 Insurance 1,840,000 2,026,000 Litigation 1,861,000 1,942,000 Other accrued expenses 5,290,000 5,125,000 Total accrued expenses $11,447,000 $11,765,000 (5) Contingencies Bairnco Corporation and its subsidiaries are defendants in certain legal actions which are discussed more fully in Part II, Item 1 ("Legal Proceedings") of this filing. Item 2:	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the accompanying Consolidated Financial Statements and related notes and with Bairnco's Audited Consolidated Financial Statements and related notes for the year ended December 31, 1995. Bairnco Corporation is a diversified multinational company that operates two distinct businesses under the names Arlon and Kasco. Engineered materials and components are designed, manufactured and sold under the Arlon brand identity to electronic, industrial and commercial markets. These products are based on a common technology in coating, laminating and dispersion chemistry. Arlon's principal products include high performance materials for the printed circuit board industry, cast and calendered vinyl film systems, custom engineered laminates and pressure sensitive adhesive systems, and calendered and extruded silicone rubber insulation products used in a broad range of industrial, consumer and commercial products. Replacement products and services are manufactured and distributed under the Kasco name principally to retail food stores and meat, poultry and fish processing plants throughout the United States, Canada and Europe. The principal products include replacement band saw blades for cutting meat, fish, wood and metal, and on site maintenance services for the retail food industry primarily in the meat and deli departments. Kasco also distributes equipment to the food industry in Canada and France. These products are sold under a number of brand names including Kasco in the United States and Canada, Atlantic Service in the United Kingdom, and Bertram & Graf and Biro in Continental Europe. Comparison of Third Quarter 1996 to Third Quarter 1995 Sales in the third quarter 1996 were $36,152,000, a decrease of 3.3% from $37,386,000 in 1995. Increased sales to the graphics and electrical insulation markets were more than offset by lower Kasco exports and equipment sales in France. As in the second quarter, sales to the electronics markets were lower during the third quarter due to inventory corrections made by customers in the electronics industry. However, sales to these markets improved over the second quarter indicating that the inventory correction is abating. Gross profit decreased 2.9% to $12,507,000 from $12,875,000 primarily due to reduced sales and attendant lower gross profit from the severe negative impact of the "Mad Cow" disease on meat consumption and the meat industry in Europe. The gross profit margin as a percent of sales increased from 34.4% to 34.6%. The increase is primarily attributable to increased sales of higher margin high performance microwave materials and improved manufacturing efficiencies at plants serving the graphics markets. Selling and administrative expenses decreased 3.5% to $8,965,000 from $9,292,000 primarily as a result of the ongoing impact of programs to make Kasco a more cost effective enterprise. As a percent of sales, selling and administrative expenses were reduced to 24.8% from 24.9%. Interest expense was reduced $62,000 to $417,000 for the third quarter from $479,000 last year. This reduction was the result of combined lower interest rates and lower average borrowings in the quarter. The effective tax rate for the third quarter of 1996 was 38% versus 39% for the third quarter of 1995. The provision for income taxes in both periods includes all applicable federal, state, local and foreign income taxes. Net income increased 2.4% to $1,938,000 as compared to $1,893,000 in the third quarter of 1995. Earnings per share increased 11.1% to $.20 from $.18 as a result of the increased net income and the reduced number of shares outstanding. Comparison of First Nine Months 1996 to First Nine Months 1995 Sales for the first nine months of 1996 were $111,569,000, a decrease of 2.3% from $114,218,000 in 1995. The decrease in sales was attributable to a 9.2% decline in Kasco's sales representing lower Kasco exports and equipment sales in France. Arlon's sales increased 1.2% over the same period as growth in the graphics and electrical insulation markets offset the declines in demand from the electronics markets. Gross profit decreased $1,250,000, or 3.1% in 1996, from $40,451,000 in the first nine months of 1995 primarily due to reduced sales and attendant lower gross profit from the severe negative impact of the "Mad Cow" disease on meat consumption and the meat industry in Europe. The gross profit margin as a percent of sales decreased from 35.4% to 35.1%. Despite the improved gross profit margin as a percent of sales in the third quarter, declines in first nine months 1996 versus 1995 continued as increases in Arlon's lower margin commercial electronics business and reduced volumes at the plants serving the electronics markets offset the increased sales of higher margin high performance microwave materials. For the first nine months of 1996, Kasco's gross profit margin as a percent of sales are relatively unchanged from 1995. Selling and administrative expenses decreased 5.2% to $27,862,000 from $29,404,000. As a percent of sales, selling and administrative expenses decreased to 25.0% from 25.7%, the result of the ongoing impact of programs to make Kasco a more cost effective enterprise. Interest expense decreased $288,000 from the first nine months of 1995. This reduction was the result of combined lower interest rates and lower average borrowings in the first nine months of 1996. The effective tax rate for the first nine months of 1996 was 38% versus 38.3% for the first nine months of 1995. The provision for income taxes in both periods includes all applicable federal, state, local and foreign income taxes. Net income increased 6.7% to $6,246,000 as compared to $5,855,000 in the first nine months of 1995. Earnings per share increased 12.5% to $.63 from $.56 as a result of increased net income and fewer average shares outstanding. Liquidity and Capital Resources At September 28, 1996, Bairnco had working capital of $29.2 million compared to $28.4 million at December 31, 1995. The increase in accounts receivable relates to the increase in export business which has longer payment terms. Other current assets increased as a result of an overpayment of estimated federal income taxes for the third quarter 1996. During the third quarter Bairnco repurchased 192,300 shares of the Corporation's common stock at a total cost of $1,264,000. Through September 28, a total of 576,600 shares have been repurchased in 1996. At September 28, 1996, Bairnco's total debt outstanding was $29,908,000 compared to $24,578,000 at the end of 1995. This increase was primarily due to the stock repurchases and the first quarter acquisition of a small silicone product line. At September 28, 1996 approximately $19.7 million was available for borrowing under the Corporation's secured reducing revolving credit agreement, as amended. In addition, approximately $3.2 million was available under various short-term domestic and foreign uncommitted credit facilities. Bairnco made approximately $2.4 million of capital expenditures during the third quarter of 1996 bringing the total capital expenditures for the nine months ended September 28, 1996 to $8,296,000. Total capital expenditures in 1996 are now expected to be approximately $11.5 million which includes approximately $2.5 million related to the small silicone product line acquisition. Cash provided by operating activities plus the amounts available under the existing credit facilities are expected to be sufficient to fulfill Bairnco's anticipated cash requirements in 1996. Management Effective October 1, 1996, Jeff Berresford was appointed President of Kasco Corporation. Mr. Berresford was previously Vice President of Marketing for the Food and Beverage Division of Ecolab, Inc. Effective October 14, 1996, Elmer Pruim was appointed President of Arlon's Adhesives and Films Division. Mr. Pruim has previously served as Bairnco's Controller since August 1994 and was Acting President of Kasco North America from September 1995 to September 1996. Effective October 21, 1996, Linda Metcalf was appointed Vice President Administration and Secretary of Bairnco. Mrs. Metcalf was previously Managing Director of Human Resources at CBIS. Other Matters Bairnco Corporation and its subsidiaries are defendants in a number of legal actions and proceedings which are discussed in more detail in Part II, Item 1 ("Legal Proceedings") of this filing. Management of Bairnco believes that the disposition of these actions and proceedings will not have a material adverse effect on the consolidated results of operations or the financial position of Bairnco Corporation and its subsidiaries as of September 28, 1996. Outlook Management is not aware of any adverse trends that would materially affect the Corporation's strong financial position. Although several of Bairnco's served markets continued to be soft during the third quarter, it is expected that 1996 will be another year of continued improvement. PART II - OTHER INFORMATION Item 1:	LEGAL PROCEEDINGS Since its announcement in January 1990 of its intention to spin off Keene Corporation ("Keene"), Bairnco has been named as a defendant in a number of personal injury, property damage and wrongful death cases in which it is alleged that Bairnco is derivatively liable for the asbestos-related claims against Keene. On December 6, 1993, Keene filed for protection under Chapter 11 of the Bankruptcy Code. On June 8, 1995, the Creditors' Committee commenced an adversary proceeding in the Bankruptcy Court against Bairnco, certain of its present and former officers and directors, and others alleging that the transfer of assets for value by Keene to other subsidiaries of Bairnco and the spin-offs of certain subsidiaries by Bairnco, were fraudulent and otherwise violative of law and seeking compensatory damages of $700 million, plus interest and punitive damages (the "Transactions Lawsuit"). The complaint in the Transactions Lawsuit includes a count under the civil RICO statute, 18 U.S.C. Section 1964, pursuant to which compensatory damages are trebled. Management believes that Bairnco has meritorious defenses to all claims or liability purportedly derived from Keene and that it is not liable, as an alter ego, successor, fraudulent transferee or otherwise, for the asbestos-related claims against Keene or with respect to Keene products. Bairnco is party to a separate action brought by Keene in the United States Bankruptcy Court for the Southern District of New York, in which Keene seeks exclusive benefit of tax refunds attributable to the carryback by Keene of certain net operating losses ("NOL Refunds"), notwithstanding certain provisions of tax sharing agreements between Keene and Bairnco (the "NOL Lawsuit"). (After filingthis action the NOL Lawsuit, Keene ceded control of the action to the Creditors' Committee.) Pending resolution of the NOL Lawsuit, any refunds actually received are to be placed in escrow. Through September 28, 1996, approximately $28.5 million of NOL Refunds had been received and placed in escrow. There can be no assurance whatsoever that resolution of the NOL Lawsuit will result in the release of any portion of the NOL Refunds to Bairnco. The IRS has taken the position that the NOL refunds, which are issued on a provisional basis, ultimately might be disapproved or reduced by the congressional Joint Committee on Taxation and in that event would have to be returned to the government in whole or in part. There can be no assurance that the NOL refunds ultimately will be approved. Keene's plan of reorganization was approved and became effective on July 31, 1996. The plan, as approved, creates a Creditors Trust that has succeeded to all of Keene's asbestos liabilities, and also has succeeded to the right to prosecute both the Transactions Lawsuit and the NOL Lawsuit. The plan also includes a permanent injunction under which only the Creditors Trust, and no other entity, can sue Bairnco in connection with the claims asserted in the Transactions Lawsuit. Prior to confirmation, Bairnco and other defendants in the Transactions Lawsuit had entered into a stipulation (the "Transactions Stipulation") that calls for the Transactions Lawsuit to be litigated in the District Court. The anticipated effect of these various provisions is that all claims and claimants against Bairnco that relate to Keene's asbestos liabilities should be consolidated for a single, binding resolution in the Transactions Lawsuit in the District Court. In keeping with the Transactions Stipulation, the parties have moved to withdraw the reference - that is, they have requested that the District Court assume from the Bankruptcy Court all responsibility for overseeing the Transactions Lawsuit. Pending action on this request, proceedings in the Transactions Lawsuit are stayed. Bairnco Corporation and its subsidiaries are defendants in a number of other actions. Management of Bairnco believes that the disposition of these other actions, as well as the actions and proceedings described above, will not have a material adverse effect on the consolidated results of operations or the financial position of Bairnco Corporation and its subsidiaries as of September 28, 1996. Item 2:	OTHER INFORMATION None. Item 3:	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. Item 4:	EXHIBITS Exhibit 11.1:	Calculation of Primary and Fully Diluted Earnings per Share for the Quarters ended September 28, 1996 and September 30, 1995. Exhibit 11.2:	Calculation of Primary and Fully Diluted Earnings per Share for the Nine Months ended September 28, 1996 and September 30, 1995. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, Bairnco has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. BAIRNCO CORPORATION (Registrant) /s/ J. Robert Wilkinson J. Robert Wilkinson Vice President Finance and Treasurer (Chief Financial Officer) DATE: November 8, 1996 EXHIBITS TO FORM 10-Q FOR QUARTER ENDED September 28, 1996