THE COMPANY Bairnco Corporation is a diversified multinational company that operates two business sectors. Engineered materials and components are designed, manufactured and sold under the Arlon brand identity to electronic, industrial and commercial markets. These products are based on a common technology in coating, laminating, resin technology 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. STRATEGY Bairnco's strategy is to serve a broad range of niche markets with quality products and services, while providing extra value to its customers through focused and cost effective organizations and facilities. Bairnco strives to develop true partnership relationships with its customers in these selected markets through close cooperation in developing value added solutions to their needs. Bairnco seeks to identify and participate in those markets that will provide growth opportunities due to either technical developments or the changing needs of the customers. OBJECTIVES Bairnco believes that concentrating its resources in selected market niches can provide the basis to achieve both superior profitability and growth. Management's long term objectives are to achieve a 15% compound rate of earnings growth, a 20% return on stockholders' investment, and a 15% return on total capital employed. CONTENTS Financial Highlights 1 Letter to our Stockholders 2 Engineered Materials & Components (Arlon) 4 Replacement Products & Services (Kasco) 6 Directors and Management 8 Financial History 9 Management's Discussion and Analysis 10 Quarterly Results of Operations 12 Report of Independent Certified Public Accountants 13 Consolidated Financial Statements 14 Notes to Consolidated Financial Statements 18 FINANCIAL HIGHLIGHTS (In thousands except per share data) Percent Change 1996 1995 1994 96/95 95/94 Net Sales $ 150,234 $ 150,507 $ 145,522 0% 3% Operating Profit $ 14,956 $ 14,633 $ 13,654 2% 7% Net Income $ 8,335 $ 7,781 $ 7,255 7% 7% Earnings per Share $ 0.85 $ 0.75 $ 0.69 13% 9% Cash Dividends per Share $ 0.20 $ 0.20 $ 0.20 0% 0% Stockholders' Investment per Share $ 5.02 $ 4.60 $ 4.19 9% 10% Total Assets $ 102,600 $ 98,196 $ 102,772 4% (4%) Stockholders' Investment $ 49,464 $ 48,024 $ 43,997 3% 9% Average Shares Outstanding 9,851 10,440 10,500 (6%) (1%) Graphic - Bar Chart depicting Sales (y-axis) for six years - 1991 to 1996 (x-axis): Year Sales (in thousands) 1991 $128,566 1992 $135,581 1993 $134,958 1994 $145,522 1995 $150,507 1996 $150,234 Graphic - Bar Chart depicting Income from Continuing Operations (y-axis) for six years - 1991 to 1996 (x-axis): Year Income from Continuing Operations (in thousands) 1991 $6,643 1992 $7,755 1993 $ 817 1994 $7,255 1995 $7,781 1996 $8,355 Graphic - Bar Chart depicting Earnings per Share from Continuing Operations (y-axis) for six years - 1991 to 1996 (x-axis): Year Earnings per Share from Continuing Operations 1991 $0.61 1992 $0.72 1993 $0.08 1994 $0.69 1995 $0.75 1996 $0.85 LETTER TO OUR STOCKHOLDERS 1996 was a year of solid progress for Bairnco. Earnings increased despite level sales. Debt increased modestly as the result of the stock repurchase program and a small product line acquisition. Our strong financial condition improved. Significant personnel additions and promotions added to the management strength of our operations and headquarters. FINANCIAL RESULTS Sales of $150,234,000 in 1996 were level with $150,507,000 in 1995. Arlon's sales increased 4.1%. Sales to the graphics and electric insulation markets continued to grow which more than offset lower sales to the electronics industry caused by the industry inventory correction primarily during the second and third quarters. Kasco's sales decreased 8.5%, part of which was consistent with the program to refocus Kasco North America on its core business and part of which was totally unexpected due to the severe impact of BSE ("mad cow" disease) on meat consumption in Europe and its attendant impact on Kasco's replacement, and equipment business in Europe. In 1996, gross profit decreased 1.5% to $52,536,000 from $53,317,000 in the prior year. Gross profit margins declined to 35.0% from 35.4% last year. Arlon's gross profit increased 3.7% as a result of sales growth and a mix change, which was partially offset by lower yields in two plants caused by the gyrations in the electronics market during the year resulting in lower gross profit margins as a percent of sales. Kasco's gross profit declined 8.6% as a result of the sales decrease. The program to refocus Kasco's North America operations was substantially completed and gross profit margin increased 1.5% on lower sales. However these improvements were more than offset by the $1.1 million reduced gross profit in Europe most of which occurred in the second and third quarters from the BSE panic. Meat consumption and the confidence of the European meat processing and distribution markets began to recover in the fourth quarter. Selling and administrative expenses decreased $1,104,000 or 2.9% to $37,580,000 from $38,684,000 in 1995. As a percent of sales, these expenses decreased to 25.0% in 1996 from 25.7% in 1995. Selling expense decreased slightly. Kasco's expenses were reduced consistent with its plan. Arlon's sales and marketing expenses increased in accord with its continued investment in sales and marketing. Administrative expenses continued to be reduced both absolutely and as a percentage of sales. Research and development expenses increased 1.5% as Bairnco continued to invest in the development of new products and improved quality. New and improved products introduced in the last 5 years accounted for approximately 30% of our sales in 1996. Net interest expense decreased $301,000 or 14.9% from $2,026,000 to $1,725,000. The decrease was due primarily to lower interest rates. Income before income taxes increased 4.9% to $13,231,000 in 1996 as compared to $12,607,000 in 1995. The effective tax rate decreased to 37.0% from 38.3% in 1995. 	 Net income increased 7.1% to $8,335,000 in 1996 as compared to $7,781,000 in 1995. Earnings per share increased 13.3% to $.85 from $.75 last year. As a result of the stock repurchase program, the average number of shares outstanding in 1996 was 9,851,000, a 5.6% decrease from the 10,440,000 average outstanding in 1995. FINANCIAL MANAGEMENT Return on capital employed increased to 12.3% from 11.9% last year. Return on stockholders' investment increased to 17.2% compared to 16.7% last year. Management continues to make progress towards our long term objectives of a 20% return on stockholders' investment and a 15% return on total capital employed. In 1996, Bairnco's Board of Directors authorized the repurchase of up to $5,000,000 of its common stock. This authorization was in addition to the $2,420,000 still unused from the prior year $5,000,000 authorization. During the year the Company repurchased 803,900 shares for $5,412,000. The Board has authorized management to continue its stock repurchase program in 1997 subject to market conditions and the capital requirements of the business. Working capital as a percent of sales increased from 18.8% to 20.2%. The increase in other current assets is due to a tax refund expected to be received during the first quarter 1997. Net cash flows provided by operating activities were $13,612,000. These cash flows were more than sufficient to cover operating requirements, fund Bairnco's capital expenditure program, pay dividends and generate some excess cash. However, the acquisition, attendant capital expenditures and the stock repurchase program required $7.9 million in additional funds. Consequently, 1996 total debt increased to $28,179,000 from $24,578,000 at the end of 1995. Debt as a percent of equity increased to 57.0% from 51.2% in 1995. 	 Subsequent to year end, the reducing revolving credit agreement was amended to increase the maximum available borrowings to $45 million from $35 million and to extend the final maturity to December 31, 2001. At year end 1996, Bairnco had $23.3 million available under its revolving credit agreement, and $5.6 million available under short term lines of credit. 1996 capital expenditures were $10,131,000 as compared to a plan of $12,300,000. The reduction in capital expenditures from plan was due primarily to the deferment of a capacity addition from 1996 into future years. Again substantial improvements in operating efficiencies in 1996 and planned for 1997 permitted the postponement of this major capital expenditure. Depreciation and amortization were $6,305,000. The focus of the capital expenditure program during 1996 was primarily on required replacements, efficiency and quality improvements, and capacity additions. The capital expenditure plan for 1997 is approximately $13.3 million. Depreciation and amortization is estimated to be approximately $7.0 million. The planned capital expenditures include cost reduction projects, replacements, quality improvements, new product developments, new processing equipment, capacity additions and equipment to meet new environmental regulatory requirements primarily in California. Approximately $4 million of the planned expenditures are contingent upon the realization of the anticipated growth in several markets. DIVIDEND The quarterly $.05 per share cash dividend was maintained during the year. 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 & Films Division. Mr. Pruim was Acting President of Kasco North America from September 1995 to September 1996 and served as Bairnco's Controller since August 1994. 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. During 1996 the management development program, which is one of the keys to our success, continued to make progress in all operations. Many key positions were filled or upgraded through a combination of internal promotions and external additions. The ongoing improvement and development of all employees remains a critical and never ending element for Bairnco's success. SUMMARY AND OUTLOOK 1996 was another year of progress for Bairnco. Arlon's results continued to manifest the benefits of investing in the development of new products, new markets, and expanded sales, marketing and research efforts. The depressing impact of the electronics industry inventory correction during 1996 is not expected to recur in 1997. 	 The program of refocusing Kasco North America to become the preeminent supplier of cutting products and routine instore equipment services was substantially completed during the year. There were again expenses incurred in the continuing re-engineering and cost reduction programs. Throughout the year, in the North American operations, the benefits of these actions appeared in the improving financial results as compared to last year. We expect to see continuing benefits in 1997 and beyond from the actions taken. The positive impact of these programs was substantially offset by the impact of BSE on the European operations. BSE's negative impact appears to be behind us but the recovery will be gradual over the next several years. Kasco's entire organization is now focused on growing through providing superior products and services to its customers and core markets. The outlook for 1997 is for improved sales and earnings. The US economy is again expected to experience slow growth during 1997 with inflation remaining under control and the Federal Reserve Board maintaining interest rates within recent historical bands. It is expected that the combination of growth in new products and in certain niche markets will result in sales increases more than offsetting the low margin sales that have been eliminated. Improved earnings are expected both from increased sales and the continuing cost reduction and efficiency and yield improvement programs. Due to the relatively strong first quarter in 1996, the timing of product line pruning during 1996 and the anticipated implementation of programs in 1997, the first part of 1997 is expected to be level with last year with the improvements beginning during the second quarter. The continuing dedication and excellent performance of all our employees remains the key to our past and future success. Bairnco is dedicated to making 1997 a year of continuing improvement. Respectfully yours, Luke E. Fichthorn III Chairman and CEO ENGINEERED MATERIALS AND COMPONENTS BUSINESS Bairnco designs, manufactures, and sells engineered materials and components for the electronic, industrial and commercial markets under the Arlon brand name. These products are based on a common technology in coating, laminating, resin technology and dispersion chemistry. PRODUCTS AND APPLICATIONS CIRCUIT BOARD MATERIALS: Arlon Materials for Electronics has an international reputation as the premier supplier of high technology materials for the printed circuit board industry. The products include the high performance and high temperature materials of the Electronic Substrates product line, and the frequency dependent and low signal loss materials of the Microwave Materials product line. These products are marketed principally to printed circuit board manufacturers and OEM's by a direct sales force in concert with strong technical support teams. These materials are used in products for the commercial, military, industrial, computer and telecommunications markets. The economic factors affecting demand for these products include the level of economic activity in North America, Europe and Asia for high performance electronics, sophisticated defense electronics procurement, and telecommunication systems. The core of the Electronic Substrates line includes premium high temperature capable laminate products used in circuit boards for military electronics and sophisticated commercial applications. Product applications included next-generation commercial and military avionics systems combining demands for surface mount technology with high temperature fabrication and use temperatures, and high performance test fixturing for next-generation integrated circuits. Intermediate temperature laminates which provide both improved product reliability in the field and ease of manufacture are also key to the line. Specialty products have been developed for the surface mounting of computer chips on circuit boards and multi-chip modules which are growing segments of the printed circuit board market. Efforts at the Rancho Cucamonga, California facility continue to stress improved customer responsiveness both in product design as well as shortened delivery time. This facility is ISO 9002 (International Quality Standard) certified. The Microwave Materials product line produces the world's leading substrates for microwave applications. The business mix has moved from a predominantly military base to technology and cost driven commercial applications. The existing and emerging consumer products operating at microwave frequencies include digital cordless telephones, local and global cellular phone systems, direct broadcast satellite TV systems, global positioning satellite systems, and other personal communications equipment. Additional wireless opportunities for Arlon circuit board materials include local area networks for computers and public business exchange systems or PBX's where telephones operate as microcellular phones within the confines of a facility or complex. A major emerging market for wireless communications is the new phone systems which are being planned for a number of developing countries in Asia and South America. These systems will bypass the high cost of installing and maintaining a hard-wire infrastructure and will permit regional installation based on population density. This should be a large and growing market over the next decade as numerous countries become involved. The frequency dependent market area continues to drive toward lower cost to allow greater commercial and consumer penetration by new electronics applications. Increased activity in high speed digital applications and low cost, low signal loss materials has resulted in the development of a multi-layerable low loss product at Rancho Cucamonga. New product development continues with emphasis on low cost , low signal loss materials. The Arlon Microwave facility in Bear, Delaware continues to invest in equipment to convert from low volume military to high volume commercial materials. It is expected this facility will be ISO 9002 certified in 1997. 	 SPECIALTY GRAPHIC FILMS: Bairnco manufactures and markets, under the Calon brand name, cast and calendered vinyl films in a wide variety of colors and with varying face stocks and adhesive systems for specialty graphics which are used by commercial sign manufacturers and graphic printing houses, and in numerous commercial and governmental specification applications. The economic factors affecting this business are the general level of economic activity in the United States, Canada, Europe, South America and the Asian Basin. Arlon has entered into a strategic alliance with a United Kingdom based graphics and distribution company to further develop the European market. This new venture is expected to provide better and more cost effective services to Arlon's European distributors. Arlon N.V., Arlon's Belgium subsidiary which had served Europe, continued to under perform and was closed in 1996. The graphic film products are produced primarily at the Santa Ana facility which is ISO 9001 certified. Products are also produced and distributed from the East Providence facility. Continued investments in equipment and R&D resources yielded further improvements in quality and productivity. Additional quality and productivity gains are expected in 1997. Several new graphics products and colors were introduced in 1996. This market is expected to continue to grow modestly in excess of the economy. Price competition in the lower performance calendered vinyl films continued in 1996. Additional new products and colors are planned for introduction in 1997. It is also expected that the additional sales and marketing resources put in place during 1996 will result in better market penetration and that the new European market strategy will contribute positively to sales and earnings. Graphic - Arlon Adhesives & Films Division's new line of inkjet vinyl offers new application opportunities to the graphics industry. CUSTOM ENGINEERED LAMINATES AND ADHESIVE SYSTEMS: Bairnco manufactures and markets custom engineered laminates and adhesives systems under the Arlon brand name. The economic factors impacting this business are primarily the general level of industrial economic activity in the United States. Typical applications include insulating foam tapes for thermopane windows, electrical insulation, thermal insulation panels for appliances and cars, security tags and labels, durable printing stock for high speed laser printing systems, and custom engineered laminates for specific industrial applications. The combination of the Santa Ana, California and East Providence, Rhode Island operations provides a unique ability to meet the needs of new custom laminate applications. The East Providence facility was certified ISO 9001 during 1996. Arlon is now focusing on developing additional engineered laminates, coatings and pressure sensitive systems for specific industrial applications. In addition to focused sales efforts, certain engineered laminates and coated products are now being marketed through the electronic and silicone products sales teams. SILICONE RUBBER TECHNOLOGIES: Bairnco manufactures a line of silicone rubber materials used in a broad range of consumer, industrial and commercial products. This business is sensitive to the level of general industrial and consumer spending in the United States. Typical applications of these materials include silicone rubber for molding composites, silicone rubber insulating tape for electric traction motor windings, industrial flexible heaters, power utility insulating tapes, as wall as, many thermal and electrical conductivity applications. The silicone rubber product line provides significant opportunity for Arlon in a number of areas. During 1996 further progress was made in both the development and applications of Thermabond(tm), a range of thermally conductive silicone products designed for the dissipation of heat from electronic circuit boards. Further progress was also made during the year in identifying new channels of distribution to serve international markets. The distributor agreement with Airtech, a leading supplier of vacuum bagging materials to the composite industry, continues to develop opportunities in industrial as well as defense and aerospace composite applications. In January of 1996, Arlon acquired the silicone rubber tape product line of Permacel, Inc.. During the year the Permacel line was integrated into the Bear, Delaware facility and now provides additional capacity and a broader range of capability including the ability to calender ultra-thin silicone rubber materials both with a supporting backbone as well as unsupported. 1997 is expected to be a year of continued growth for existing and new engineered products. Graphic - Arlon's Thermabond(tm), a conductive silicone-sheet adhesive, is laser-cut to conform to PCB and heat-sink configurations and forms a flexible bond to transfer energy away from a densely populated board. REPLACEMENT PRODUCTS AND SERVICES BUSINESS Bairnco, through its multinational Kasco operations, manufactures and supplies replacement products and services principally to retail food stores and meat, poultry and fish processing plants throughout the United States, Canada and Europe. Replacement band saw blades are also sold for use in wood and metal industries. The French and Canadian operations also distribute equipment to the supermarket and food processing industries in their respective markets. PRODUCTS AND APPLICATIONS Kasco manufactures band saw blades for cutting, and chopper plates and knives for grinding meat in supermarkets and packing plants, band saw blades used in frozen fish factories, small band saw blades for cutting metal and wood, and large band saw blades for lumber mills. Kasco formulates, manufactures and markets seasoning products for the meat and deli departments of supermarkets which are primarily used in the preparation of instore products. Kasco distributes related supply products to supermarkets and other customers. Kasco also provides preventive maintenance and repair parts and service for a broad range of supermarket equipment primarily in the meat and deli areas in selected markets. VAN SERVICE: In North America, Kasco supplies its products and services directly to the supermarket and meat cutting industries through a continent-wide network of service professionals. These service professionals make regularly scheduled calls on the accounts in their region. They supply the Company's products and provide related equipment maintenance services. Kasco's service professionals are continuously trained in the service and maintenance of equipment used in the meat preparation areas of retail food outlets. The field computerization program permits the service professionals to more efficiently service their customer base. Graphic - Kasco's continent-wide network of service professionals provides quick, efficient and practical solutions to its customers. REPAIR SERVICE: Kasco integrated its service centers with its van service network in North America during the fourth quarter of 1996. This integration was designed to both improve the cost effectiveness and provide improved timely equipment maintenance. The integration will result in lower revenues in 1997 but improved profit contribution. The repair service operations provide preventive maintenance programs and emergency repair programs for a broad range of equipment primarily in the meat preparation and deli areas of supermarkets and other retail food outlets in their geographical areas. SEASONING: Seasoning represents an emerging opportunity for Kasco to provide new value added programs to the meat and deli departments of its supermarket customers. As supermarkets increasingly compete with the restaurant trade for the consumers food dollars, they are turning to prepared foods. Kasco is well positioned to support its customers with its comprehensive "Mealtime Solutions" seasoning program. "Mealtime Solutions" offers a package of seasoning blends, recipes and instruction which allows a supermarket to present value added products in their meat and deli departments. Graphic - Kasco offers its customers "Mealtime Solutions", a value added seasoning program. SPECIAL PRODUCTS: Through its special products group, Kasco supplies band saw blades to OEMs in the meat cutting industry and band saw blades for cutting wood and metal to the OEMs supplying machines to those industries. Special products also sells through general distribution and is responsible for export sales throughout the world with the exception of Europe where such sales are the responsibility of the three operations in Europe. EQUIPMENT DISTRIBUTION: In France, in addition to providing its standard products, Kasco distributes equipment used in the supermarket industry and in the food processing industry. In Canada Kasco has reduced its equipment distribution activity during 1996 to those select markets where it provides superior value and service to its customers. MANUFACTURING Kasco and its subsidiaries have manufacturing operations in St. Louis, Missouri; City of Industry, California; Toronto, Canada; Gwent, Wales, United Kingdom; and Pansdorf, Germany. During 1996, Kasco's continuous improvement programs combined with significant capital and process investments resulted in superior quality bands, improved on time deliveries and improved productivity. Continuing improvements are expected in 1997. DIRECTORS (individual photographs) 1.	Luke E. Fichthorn III 	Chairman and CEO 	Bairnco Corporation 2.	Charles T. Foley 	President 	Estabrook Capital Management, Inc. 3.	Richard A. Shantz 	Private Investor 4.	William F. Yelverton 	CEO - Individual Insurance Group 	Prudential Insurance Company of America MANAGEMENT (individual photographs) 1.	Jeffrey M. Berresford 	President 	Kasco Corporation 2.	Robert M. Carini 	President 	 Arlon Materials for Electronics 3.	Linda M. Metcalf 	Vice President Administration & Secretary 			 	 Bairnco Corporation 4.	Elmer G. Pruim 	President 	 Arlon Adhesives & Films 5.	J. Robert Wilkinson 	Vice President Finance & Treasurer 	 Bairnco Corporation FINANCIAL HISTORY 1996 1995 1994 1993 1992 Summary of Operations ($ in thousands) Net sales $ 150,234 150,507 145,522 134,958 135,581 Gross profit $ 52,536 53,317 53,177 52,645 54,714 Earnings before interest, charges & taxes (a) $ 14,956 14,633 13,654 13,617 15,846 Operating profit $ 14,956 14,633 13,654 4,874 15,846 Interest expense, net $ 1,725 2,026 2,144 2,248 2,911 Income before income taxes $ 13,231 12,607 11,510 2,626 12,935 Provision for income taxes $ 4,896 4,826 4,255 1,809 5,180 Income from continuing operations $ 8,335 7,781 7,255 817 7,755 Return from continuing operations on: Net sales % 5.5 5.2 5.0 0.6 5.7 Stockholders' investment % 17.2 16.7 17.4 1.4 12.1 Capital employed % 12.3 11.9 10.6 2.0 8.6 Year-End Position ($ in thousands) Working capital $ 30,341 28,350 26,277 20,098 18,983 Plant and equipment, net $ 38,276 34,449 36,289 38,654 39,232 Total assets excluding discontinued operations $ 102,600 98,196 99,243 95,547 98,916 Net assets of discontinued operations $ -- -- 3,529 12,434 34,337 Total assets $ 102,600 98,196 102,772 107,981 133,253 Total debt $ 28,179 24,578 31,775 43,718 45,733 Stockholders' investment $ 49,464 48,024 43,997 38,515 62,055 Capital employed - total $ 77,643 72,602 75,772 82,233 107,788 Capital employed - proforma (b) $ 77,643 72,602 75,772 82,233 85,895 Per Share Data Primary and fully diluted income from continuing operations $ 0.85 0.75 0.69 0.08 0.72 Cash dividend $ 0.20 0.20 0.20 0.20 0.20 Stockholders' investment $ 5.02 4.60 4.19 3.67 5.91 Market price: High $ 8-1/2 6 5-1/2 8-1/2 8-1/4 Low $ 5-1/2 3-7/8 3 3-3/8 5-5/8 Other Data (in thousands) Depreciation and amortization $ 6,305 6,314 6,502 6,700 5,808 Capital expenditures $ 10,131 4,831 5,176 6,318 13,195 Average shares outstanding (c) 9,851 10,440 10,500 10,500 10,749 Current ratio 2.4 2.2 2.0 1.8 1.7 Number of common stockholders 1,773 1,967 2,198 2,326 2,440 Average number of employees 825 874 915 920 935 Sales per employee $ 182,100 172,200 159,040 146,700 145,000 (a) Excludes impact of non-recurring litigation and restructuring costs of $8,743 (pre-tax) in 1993. (b) Stockholders' investment and capital employed adjusted on a proforma basis for discontinued operations NRV writedown and loss on discontinuance recorded in 1993. (c) Assuming full dilution. MANAGEMENT'S DISCUSSION AND ANALYSIS The following discussion should be read in conjunction with the Consolidated Financial Statements and related notes which begin on page 14. Results of Operations: 1996 Compared to 1995 Net sales for 1996 of $150,234,000 were level with net sales for 1995 of $150,507,000. Arlon's sales increased 4.1%. Sales to the graphics and electrical insulation markets continued to grow which more than offset lower sales to the electronics industry caused by the industry inventory correction primarily in the second and third quarters. Kasco's sales decreased 8.5%, part of which was consistent with the program to refocus Kasco North America on its core business and part of which was due to the severe impact of BSE ("mad cow" disease) on meat consumption in Europe and its attendant impact on Kasco's replacement and equipment business in Europe. In 1996, gross profit decreased 1.5% to $52,536,000 from $53,317,000 in the prior year. Gross profit margins declined to 35.0% from 35.4% last year. Arlon's gross profit increased 3.7% as a result of sales growth and a mix change, which was partially offset by lower yields in two plants caused by the gyrations in the electronics market during the year resulting in lower gross profit margins as a percent of sales. Kasco's gross profit declined 8.6% as a result of the sales decrease. The program to refocus Kasco's North America operations was substantially completed and gross profit margin increased 1.5% on lower sales. However these improvements were more than offset by the $1.1 million reduced gross margin in Europe most of which occurred in the second and third quarters from the BSE panic. Meat consumption and the confidence of the European meat processing and distribution markets began to recover in the fourth quarter. Selling and administrative expenses decreased $1,104,000 or 2.9% to $37,580,000 from $38,684,000 in 1995. As a percent of sales, these expenses decreased to 25.0% in 1996 from 25.7% in 1995. Selling expense decreased slightly. Kasco's expenses were reduced consistent with its plan. Arlon's sales and marketing expenses increased in accord with its continued investment in sales and marketing. Administrative expenses continued to be reduced both absolutely and as a percentage of sales. Research and development expenses increased 1.5% as Bairnco continued to invest in the development of new products and improved quality. Operating profit in 1996 was $14,956,000, or 10.0% of net sales, compared to operating profit in 1995 of $14,633,000, or 9.7% of net sales. Net interest expense decreased $301,000 or 14.9% from $2,026,000 to $1,725,000. The decrease was due primarily to lower interest rates. Income before income taxes increased 4.9% to $13,231,000 in 1996 as compared to $12,607,000 in 1995. The effective tax rate decreased to 37.0% from 38.3% in 1995 due primarily to the tax benefits attendant with the establishment of Bairnco's foreign sales corporation. The provision for income taxes in both years includes all applicable federal, state, local and foreign income taxes. Audits of the Corporation's consolidated US federal income tax returns have been completed for all years through 1992. 	 Net income increased 7.1% to $8,335,000 in 1996 as compared to $7,781,000 in 1995. Earnings per share increased 13.3% to $.85 from $.75 last year. As a result of the stock repurchase program, the average number of shares outstanding in 1996 was 9,851,000, a 5.6% decrease from the 10,440,000 average outstanding in 1995. Results of Operations: 1995 Compared to 1994 Net sales increased 3.4% to $150,507,000 in 1995 from $145,522,000 in 1994. Sales of Arlon engineered materials and components increased 7.8% due to growing sales to the high end and microwave printed circuit board markets. Sales of Kasco replacement products and services declined 4.1% due to the planned reduction in Kasco's North American service center revenues as part of the program to focus Kasco on its core business. In 1995, gross profit increased nominally to $53,317,000 from $53,177,000 in the prior year. The favorable impact from increased sales was offset by the decline in gross profit margins to 35.4% from 36.5% last year. Arlon's gross profit increased only 3.1% as a result of the growth in lower margin commercial products and margin erosion in certain market segments due to competitive pressures. Kasco's gross profit declined 3.5% as a result of the 4.1% sales decrease, whereas its gross profit margin increased slightly due to an improved sales mix and reduced manufacturing costs. Selling and administrative expenses decreased $839,000 or 2.1% to $38,684,000 from $39,523,000 in 1994. As a percent of sales, these expenses decreased to 25.7% in 1995 from 27.2% in 1994. Selling expenses decreased slightly as the reductions in Kasco from focusing on the core business were partially offset by the continued investment in sales and marketing expense to grow selected Arlon segments. Administrative expenses continued to be reduced both absolutely and as a percentage of sales. Research and development expenses increased 3.0% as Bairnco continued to invest in the development of new products and improved quality. Operating profit in 1995 was $14,633,000, or 9.7% of net sales, compared to operating profit in 1994 of $13,654,000, or 9.4% of net sales. Net interest expense decreased to $2,026,000 in 1995 from $2,144,000 in 1994 due primarily to a $7.2 million reduction in debt of which approximately $3.5 million occurred during the fourth quarter of 1995. Income before income taxes increased 9.5% to $12,607,000 in 1995 as compared to $11,510,000 in 1994. The effective tax rate increased to 38.3% in 1995 from 37.0% in 1994. The lower effective tax rate in 1994 resulted from the benefit of foreign losses which were booked at a higher tax rate. The provision for income taxes in both years includes all applicable federal, state, local and foreign income taxes. Net income increased 7.3% to $7,781,000 in 1995 as compared to $7,255,000 in 1994. Earnings per share increased 8.7% to $.75 from $.69 last year. The average number of shares outstanding in 1995 was 10,440,000, a 0.6% decrease from the 10,500,000 average outstanding in 1994 due to the stock repurchase program. Liquidity and Capital Resources At December 31, 1996, Bairnco had working capital of $30.3 million compared to $28.4 million at December 31, 1995. The increase in other current assets is primarily due to a tax refund expected to be received during the first quarter 1997. The decrease in other assets primarily reflects payments on the long term portion of the notes receivable on the discontinued operations disposed of during 1995 (refer to Note 2 to the Consolidated Financial Statements). Subsequent to year end, the reducing revolving credit agreement was amended to increase the maximum available borrowings to $45 million from $35 million and to extend the final maturity to December 31, 2001. At December 31, 1996, $28.2 million of total debt was outstanding compared to $24.6 million at the end of 1995. As of December 31, 1996, approximately $23.3 million was available for borrowing under the Corporation's secured reducing revolving credit agreement, as amended. In addition, approximately $5.6 million was available under various short term domestic and foreign uncommitted credit facilities. Debt as a percent of equity increased to 57.0% at the end of 1996 from 51.2% at the end of 1995. Bairnco made $10,131,000 of capital expenditures in 1996 as compared to its plan of approximately $12.3 million. The reduction in capital expenditures from plan was due primarily to the deferment of a capacity addition from 1996 into future years. Again, substantial improvements in operating efficiencies in 1996 and planned for 1997 permitted the postponement of this major capital expenditure. Total capital expenditures in 1997 are expected to be approximately $13.3 million. Approximately $4.0 million of the planned expenditures are contingent upon realization of the anticipated growth in several markets. In 1996, Bairnco's Board of Directors authorized the repurchase of up to $5,000,000 of its common stock. The authorization was in addition to the $2,420,000 still unused from the prior year $5,000,000 authorization. During the year the Company repurchased 803,900 shares for $5,412,000. The Board has authorized management to continue its stock repurchase program in 1997 subject to market conditions and the capital requirements of the business. Cash provided by operating activities plus the amounts available under the existing credit facilities are expected to be sufficient to fulfill Bairnco's anticipated cash requirements in 1997. Other Matters Bairnco Corporation and its subsidiaries are defendants in a number of legal actions and proceedings which are discussed in more detail in Note 10 to the Consolidated Financial Statements. Management of Bairnco believes that the disposition of these actions and proceedings will not have a material adverse effect on the consolidated results of operations or the financial position of Bairnco Corporation and its subsidiaries as of December 31, 1996. Outlook Management is not aware of any adverse trends that would materially affect the Company's strong financial position. The outlook for 1997 is for improved sales and earnings. It is expected that the combination of growth from new products and in certain niche markets will result in sales increases more than offsetting the low margin sales that have been eliminated. Improved earnings are expected both from increased sales and the continuing cost reduction and efficiency and yield improvement programs. Due to the relatively strong first quarter in 1996, the timing of product line pruning during 1996 and the anticipated implementation of programs in 1997, the first part of 1997 is expected to be level with last year with the improvements beginning during the second quarter. Quarterly Results of Operations (Unaudited) (In thousands except per share data) 1st 1st 2nd 2nd 3rd 3rd 4th 4th Total Total 1996 1995 1996 1995 1996 1995 1996 1995 1996 1995 Net Sales $38,094 $38,523 $37,323 $38,309 $36,152 $37,386 $38,665 $36,289 $150,234 $150,507 Cost of sales 24,656 24,794 24,067 24,462 23,645 24,511 25,330 23,423 97,698 97,190 Gross Profit 13,438 13,729 13,256 13,847 12,507 12,875 13,335 12,866 52,536 53,317 Selling and administrative expenses 9,621 10,132 9,276 9,980 8,965 9,292 9,718 9,280 37,580 38,684 Operating Profit 3,817 3,597 3,980 3,867 3,542 3,583 3,617 3,586 14,956 14,633 Interest expense, net 415 547 433 527 417 479 460 473 1,725 2,026 Income before income taxes 3,402 3,050 3,547 3,340 3,125 3,104 3,157 3,113 13,231 12,607 Provision for income taxes 1,293 1,159 1,348 1,269 1,187 1,211 1,068 1,187 4,896 4,826 Net Income $ 2,109 $ 1,891 $ 2,199 $ 2,071 $ 1,938 $ 1,893 $ 2,089 $ 1,926 $ 8,335 $ 7,781 Earnings per Share $ 0.21 $ 0.18 $ 0.22 $ 0.20 $ 0.20 $ 0.18 $ 0.22 $ 0.19 $ 0.85 $ 0.75 Market Price: High $ 8-1/2 $ 4-7/8 $ 7-5/8 $ 4-7/8 $ 7-3/8 $ 5-1/2 $ 6-7/8 $ 6 $ 8-1/2 $ 6 Low 5-7/8 3-7/8 6-5/8 3-7/8 5-1/2 4-3/8 5-3/4 4-3/8 5-1/2 3-7/8 "Safe Harbor" Statement under the Private Securities Reform Act of 1995 Certain of the statements contained in this annual report (other than the financial statements and statements of historical fact), including, without limitation, statements as to management expectations and belief presented under the captions "Letter to Our Stockholders" and "Management's Discussion and Analysis", are forward-looking statements. Forward-looking statements are made based upon management's expectations and belief concerning future developments and their potential effect upon the Corporation. There can be no assurance that future developments will be in accordance with management's expectations or that the effect of future developments on the Corporation will be those anticipated by management. The Corporation wishes to caution readers that the assumptions which form the basis for forward-looking statements with respect to or that may impact earnings for the year ended December 31, 1997 and thereafter include many factors that are beyond the Corporation's ability to control or estimate precisely. These risks and uncertainties include, but are not limited to, the market demand and acceptance of the Corporation's existing and new products, the impact of competitive products, changes in the market for raw or packaging materials, which could impact the Corporation's manufacturing costs, changes in product mix, changes in the pricing of the products of the Corporation or its competitors, the loss of a significant customer or supplier, production delays or inefficiencies, the costs and other effects of complying with environmental regulatory requirements, the costs and other effects of legal and administrative cases and proceedings, settlements and investigations, and changes in US or international economic or political conditions, such as inflation or fluctuations in interest or foreign exchange rates. While the Corporation periodically reassesses material trends and uncertainties affecting the Corporation's results of operations and financial condition in connection with its preparation of the stockholders' letter and management's discussion and analysis contained in its annual reports, the Corporation does not intend to review or revise any particular forward-looking statement referenced herein in light of future events. REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Stockholders of Bairnco Corporation: We have audited the accompanying consolidated balance sheets of Bairnco Corporation (a Delaware corporation) and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of income, stockholders' investment and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Bairnco Corporation and subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. Orlando, Florida January 23, 1997 Arthur Andersen LLP CONSOLIDATED STATEMENTS OF INCOME For the years ended December 31, 1996, 1995 and 1994 Bairnco Corporation and Subsidiaries 1996 1995 1994 Net Sales $ 150,234,000 $ 150,507,000 $ 145,522,000 Cost of sales 97,698,000 97,190,000 92,345,000 Gross Profit 52,536,000 53,317,000 53,177,000 Selling and administrative expenses 37,580,000 38,684,000 39,523,000 Operating Profit 14,956,000 14,633,000 13,654,000 Interest expense, net 1,725,000 2,026,000 2,144,000 Income before Income Taxes 13,231,000 12,607,000 11,510,000 Provision for income taxes (Note 4) 4,896,000 4,826,000 4,255,000 Net Income $ 8,335,000 $ 7,781,000 $ 7,255,000 Earnings per Share of Common Stock (Note 3) $ 0.85 $ 0.75 $ 0.69 Dividends per Share of Common Stock $ 0.20 $ 0.20 $ 0.20 The accompanying notes are an integral part of these financial statements. CONSOLIDATED BALANCE SHEETS December 31, 1996 and 1995 Bairnco Corporation and Subsidiaries 1996 1995 Assets Current Assets: Cash and cash equivalents $ 855,000 $ 608,000 Accounts receivable, less allowances of $822,000 and $763,000, respectively 21,476,000 21,472,000 Inventories: Raw materials and supplies 4,733,000 4,651,000 Work in process 5,999,000 5,451,000 Finished goods 12,767,000 13,634,000 23,499,000 23,736,000 Deferred income taxes (Note 4) 2,922,000 3,396,000 Other current assets (Note 2) 3,748,000 2,130,000 Total current assets 52,500,000 51,342,000 Plant and Equipment, at cost: Land 1,560,000 1,534,000 Buildings and leasehold interests and improvements 16,451,000 16,332,000 Machinery and equipment 66,520,000 59,926,000 84,531,000 77,792,000 Less - Accumulated depreciation and amortization (46,255,000) (43,343,000) 38,276,000 34,449,000 Cost in Excess of Net Assets of Purchased Businesses (Note 1) 7,922,000 8,152,000 Other Assets (Notes 1 and 2) 3,902,000 4,253,000 $102,600,000 $ 98,196,000 Liabilities and Stockholders' Investment Current Liabilities: Short-term debt (Note 6) $ 3,337,000 $ 3,156,000 Current maturities of long-term debt (Note 6) 125,000 186,000 Accounts payable 7,383,000 7,885,000 Accrued expenses (Note 5) 11,314,000 11,765,000 Total current liabilities 22,159,000 22,992,000 Long-Term Debt (Note 6) 24,717,000 21,236,000 Deferred Income Taxes (Note 4) 3,114,000 3,215,000 Other Liabilities 3,146,000 2,729,000 Stockholders' Investment (Notes 3, 6 and 7): Preferred stock, par value $.01, 5,000,000 shares authorized, none issued -- -- Common stock, par value $.01, 30,000,000 shares authorized, 11,155,499 and 11,062,499 issued, respectively 112,000 111,000 Paid-in capital 49,004,000 48,533,000 Retained earnings 15,858,000 9,460,000 Currency translation adjustment (Note 1) 2,282,000 2,300,000 Treasury stock, at cost, 1,741,965 and 938,065 shares, respectively (17,792,000) (12,380,000) Total stockholders' investment 49,464,000 48,024,000 $102,600,000 $ 98,196,000 The accompanying notes are an integral part of these financial statements. CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended December 31, 1996, 1995 and 1994 Bairnco Corporation and Subsidiaries 1996 1995 1994 Cash Flows from Operating Activities: Income from continuing operations $ 8,335,000 $ 7,781,000 $ 7,255,000 Adjustments to reconcile to net cash provided by operating activities: Depreciation and amortization 6,305,000 6,314,000 6,502,000 Loss on disposal of plant and equipment 203,000 294,000 18,000 Deferred income taxes 373,000 1,561,000 242,000 Change in operating assets and liabilities: (Increase) in accounts receivable, net (4,000) (587,000) (1,953,000) Decrease (increase) in inventories 237,000 (3,694,000) (549,000) (Increase) decrease in other current assets (1,618,000) 3,205,000 (2,629,000) (Decrease) increase in accounts payable (502,000) (1,877,000) 2,399,000 (Decrease) in accrued expenses (451,000) (1,019,000) (1,498,000) Cash provided by discontinued operations -- 1,988,000 4,863,000 Other 734,000 699,000 (115,000) Net cash provided by operating activities 13,612,000 14,665,000 14,535,000 Cash Flows from Investing Activities: Capital expenditures (10,131,000) (4,831,000) (5,176,000) Proceeds from sale of plant and equipment 138,000 328,000 1,728,000 Proceeds from sale of discontinued operations -- 100,000 2,865,000 Net cash (used in) investing activities (9,993,000) (4,403,000) (583,000) Cash Flows from Financing Activities: Net borrowings (repayment) of external debt 3,968,000 (7,427,000) (12,107,000) Payment of dividends (1,937,000) (2,087,000) (2,100,000) Purchase of treasury stock (5,412,000) (2,580,000) -- Exercise of stock options 472,000 560,000 -- Net cash (used in) financing activities (2,909,000) (11,534,000) (14,207,000) Effect of foreign currency exchange rate changes on cash and cash equivalents (463,000) 402,000 350,000 Net increase (decrease) in cash and cash equivalents 247,000 (870,000) 95,000 Cash and cash equivalents, beginning of year 608,000 1,478,000 1,383,000 Cash and cash equivalents, end of year $ 855,000 $ 608,000 $ 1,478,000 Supplemental Disclosures of Cash Flow Information: Cash paid (received) during the year for: Interest $ 1,696,000 $ 1,992,000 $ 2,242,000 Income Taxes $ 5,378,000 $ (310,000) $ (533,000) Noncash investing activities: Notes Received from Sale of Discontinued Operations $ -- $ 2,500,000 $ -- The accompanying notes are an integral part of these financial statements. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT For the years ended December 31, 1996, 1995 and 1994 Bairnco Corporation and Subsidiaries Retained Currency Common Paid-In Earnings Translation Treasury Stock Capital (Deficit) Adjustment Stock Balance, December 31, 1993 $109,000 $47,975,000 $(1,389,000) $1,620,000 $ (9,800,000) Net income -- -- 7,255,000 -- -- Cash dividends ($.20 per share) -- -- (2,100,000) -- -- Currency translation adjustment (Note 1) -- -- -- 327,000 -- Balance, December 31, 1994 109,000 47,975,000 3,766,000 1,947,000 (9,800,000) Net income -- -- 7,781,000 -- -- Cash dividends ($.20 per share) -- -- (2,087,000) -- -- Issuance of 110,375 shares pursuant to exercise of stock options 2,000 558,000 -- -- -- Acquisition of treasury stock (486,200 shares at cost) -- -- -- -- (2,580,000) Currency translation adjustment (Note 1) -- -- -- 353,000 -- Balance, December 31, 1995 111,000 48,533,000 9,460,000 2,300,000 (12,380,000) Net income -- -- 8,335,000 -- -- Cash dividends ($.20 per share) -- -- (1,937,000) -- -- Issuance of 93,000 shares pursuant to exercise of stock options 1,000 471,000 -- -- -- Acquisition of treasury stock (803,900 shares at cost) -- -- -- -- (5,412,000) Currency translation adjustment (Note 1) -- -- -- (18,000) -- Balance, December 31, 1996 $112,000 $49,004,000 $15,858,000 $ 2,282,000 $(17,792,000) The accompanying notes are integral part of these financial statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) Nature of Operations and Summary of Significant Accounting Policies Nature of operations: Bairnco Corporation is a diversified multinational company that operates two business sectors: Engineered Materials and Components which are designed, manufactured and sold under the Arlon brand identity to electronic, industrial and commercial markets worldwide; and, Replacement Products and Services which are manufactured and distributed under the Kasco name 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, resin technology and dispersion chemistry. Arlon's principal products include high performance materials for the printed circuit board industry, cast and calendered vinyl film systems, custom engineered laminates and pressure sensitive adhesive systems, and calendered and extruded silicone rubber insulation products used in a broad range of industrial, consumer and commercial products. Kasco's principal products include replacement band saw blades for cutting meat, fish, wood and metal, 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. Principles of consolidation: The accompanying consolidated financial statements include the accounts of Bairnco Corporation and its subsidiaries (Bairnco or the Corporation) after the elimination of all material intercompany accounts and transactions. The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Consolidated statements of cash flows: The Corporation considers cash in banks, commercial paper, demand notes and similar investments with a maturity of less than three months as cash and cash equivalents for the purposes of the consolidated statements of cash flows. Inventories: Inventories are stated at cost, which is not in excess of market. Inventory costs include material, labor and overhead. Inventories are stated principally on a first-in, first-out (FIFO) basis. Plant and equipment: The Corporation provides for depreciation of plant and equipment principally on a straight-line basis by charges to income in amounts estimated to allocate the cost of these assets over their useful lives. Rates of depreciation vary among the several classifications as well as among the constituent items in each classification, but generally fall within the following ranges: Years Buildings and leasehold interests and improvements 5 - 40 Machinery and equipment 3 - 20 When property is sold or otherwise disposed of, the asset cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is included in the statement of income. Leasehold interests and improvements are amortized over the terms of the respective leases, or over their estimated useful lives, whichever is shorter. Maintenance and repairs are charged to operations. Renewals and betterments are capitalized. Accelerated methods of depreciation are used for income tax purposes, and appropriate provisions are made for the related deferred income taxes. Depreciation expense of $6,123,000, $6,131,000 and $6,197,000 was recognized during 1996, 1995 and 1994, respectively. Cost in excess of net assets of purchased businesses: Cost in excess of net assets of purchased businesses acquired prior to 1971 of approximately $3.5 million is not being amortized since, in the opinion of management, there has been no diminution in value. For businesses acquired subsequent to 1970, the cost in excess of net assets of purchased businesses, aggregating $5,833,000 and $5,931,000 at December 31, 1996 and 1995, respectively, is being amortized over 40 years. Accumulated amortization at December 31, 1996 and 1995, was $1,396,000 and $1,265,000, respectively. Amortization expense of $149,000, $150,000 and $146,000 was recognized during 1996, 1995 and 1994, respectively. At each balance sheet date, the Corporation evaluates the realizability of its cost in excess of net assets of purchased businesses based upon expectations of nondiscounted cash flows and operating income for each division having a material cost in excess of net assets of purchased businesses balance. Based upon its most recent analysis, the Corporation believes that no material impairment of its cost in excess of net assets of purchased businesses exists at December 31, 1996. Intangibles: Intangible assets of purchased businesses, net of amortization, are included in other assets and totaled $136,000 and $94,000 at December 31, 1996 and 1995, respectively. These items are amortized over their estimated lives, which generally range from three to twenty years. Amortization expense recognized was $33,000 during 1996 and 1995, and $159,000 during 1994. Long-lived assets: Effective January 1, 1996, the Corporation adopted Statement of Financial Accounting Standards No. 121, Accounting for Impairment of Long-Lived Assets ("SFAS 121"). SFAS 121 requires the Corporation to review the recoverability of long-lived assets, including certain identifiable intangibles to be held and used, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The implementation of SFAS 121 had no impact on the accompanying consolidated financial statements. Revenue recognition: Revenues are recognized when products are shipped or when services are rendered. Income taxes: The Corporation accounts for income taxes using an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Corporation's financial statements or tax returns. In estimating future tax consequences, the Corporation generally considers all expected future events other than enactment of changes in the tax law or changes in tax rates. Changes in tax laws or rates will be recognized in the future years in which they occur. Temporary differences between income for financial reporting and income tax purposes arise primarily from the timing of the deduction of certain accruals and from the use of accelerated methods of depreciation for income tax reporting purposes compared to the method of depreciation used for financial reporting purposes. Accrued expenses: Accrued expenses-insurance represents the estimated costs of known and anticipated claims under the Corporation's general liability, automobile liability, property and workers compensation insurance policies for all of its US operations. The Corporation provides reserves on reported claims and claims incurred but not reported at each balance sheet date based upon the estimated amount of the probable claim or the amount of the deductible, whichever is lower. Such estimates are reviewed and evaluated in light of emerging claim experience and existing circumstances. Any changes in estimates from this review process are reflected in operations currently. Stock options: The Corporation accounts for stock options under Accounting Principles Board Opinion No. 25 ("APB 25"), under which no compensation expense has been recognized. In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), which is effective for years beginning after December 15, 1995. SFAS 123 established financial accounting and reporting standards for stock-based employee compensation plans. The statement defines a fair value based method of accounting for an employee stock option or similar equity instrument and encourages all entities to adopt that method of accounting for all of their stock compensation plans. However, it also allows an entity to continue to measure compensation costs for those plans using the intrinsic value based method of accounting prescribed by APB 25, but requires pro-forma disclosure of net income and earnings per share for the effects on compensation expense had the accounting guidance for SFAS 123 been adopted. Compensation costs determined consistent with SFAS 123 did not have a material impact on the accompanying consolidated net earnings and earnings per share. Translation of foreign currencies: Balance sheet accounts of foreign subsidiaries are translated at the rates of exchange in effect at the balance sheet date while income and expenses are translated at the monthly average rates of exchange in effect during the year. Fair value of financial instruments: The carrying values of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, approximate fair value due to the short-term maturities of these assets and liabilities. The interest rates on the notes receivable (see Note 2 to the Consolidated Financial Statements) are reset at least quarterly to reflect current market rates. Consequently, the carrying values of the notes receivable approximate fair value. The carrying amount of the Corporation's short-term and long-term debt approximates fair value, since the debt is at floating rates or rates approximating rates currently offered to the Corporation for debt of the same remaining maturities. Reclassifications: Certain reclassifications were made to prior year balances in order to conform to the current year presentation (2)	Discontinued Operations Bairnco adopted a restructuring plan effective December 31, 1993, which included a formal plan of divestiture relating to the businesses that comprised Bairnco's Specialty Construction Products segment and secure communications electronics operations. During 1994, the majority of the Specialty Construction businesses were sold. The smallest and last remaining operation of the Specialty Construction business was sold on December 29, 1995. The secure communications business was sold on November 30, 1995. The net sales price of the discontinued operations sold in 1995 was $2.6 million and consisted of $100,000 in cash and two promissory notes. The current portion of the promissory notes is $550,000 and is included in Other Current Assets in the Consolidated Balance Sheet as of December 31, 1996 and 1995. The remaining $1,017,000 at December 31, 1996 and $1,950,000 at December 31, 1995 represents the net long term portion of the promissory notes and is included in Other Assets in the Consolidated Balance Sheet as of December 31, 1996 and 1995, respectively. No gain or loss was recognized on the sale of these operations in 1994, 1995 nor 1996. As part of the asset purchase agreements for the two discontinued operations disposed of in 1995, the Corporation has guaranteed certain lease payments of one facility and remains the lessee/guarantor of a second facility even though such obligations have been transferred to the respective buyers. The total lease payments guaranteed as of December 31, 1996 amounted to approximately $821,000. In the event the Corporation is called upon to satisfy these guarantees, such payments would be offset by certain buyout provisions which could reduce the total lease payments by as much as $335,000, in addition to any recoveries from sub-leasing the property of which the Corporation remains the lessee/guarantor. Net sales from the discontinued operations for the years ended December 31, 1995 and 1994 were $10.6 million and $20.2 million, respectively. The 1995 and 1994 losses of the discontinued operations approximated the prior estimates. (3)	Earnings per Share Primary and fully-diluted earnings per share are equal within each of the years ended December 31, 1996, 1995 and 1994. Earnings per share are based on the weighted average number of common shares outstanding during the year as follows: 1996 1995 1994 Primary 9,851,000 10,436,000 10,500,000 Fully-Diluted 9,851,000 10,440,000 10,500,000 Primary and fully-diluted shares outstanding reflect all common stock equivalents (primarily outstanding stock options as described in Note 7 to the Consolidated Financial Statements) to the extent they are not antidilutive. (4)	Income Taxes The components of income from continuing operations before income taxes and the provisions for domestic and foreign income taxes on continuing operations are as follows: 1996 1995 1994 Income before Income Taxes: Domestic $13,176,000 $11,360,000 $11,096,000 Foreign 55,000 1,247,000 414,000 Total Income before Income Taxes $13,231,000 $12,607,000 $11,510,000 Provision for Income Taxes: Domestic: Currently payable $ 4,096,000 $ 1,671,000 $ 3,731,000 Deferred 594,000 2,413,000 751,000 Foreign: Currently payable 452,000 943,000 (135,000) Deferred (246,000) (201,000) (92,000) Total Provision for Income Taxes $ 4,896,000 $ 4,826,000 $ 4,255,000 Bairnco's restated net current and non-current deferred tax assets (liabilities) are comprised of the following at December 31: 1996 1995 1994 Current Deferred Tax Items: Accrued Expenses $ 1,887,000 $ 2,211,000 $ 2,528,000 Inventories 872,000 961,000 980,000 Other 163,000 224,000 256,000 Tax Credit Carryforwards -- -- 1,177,000 Net Current Deferred Tax Asset 2,922,000 3,396,000 4,941,000 Non-Current Deferred Tax Items: Fixed Assets (2,889,000) (2,650,000) (2,749,000) Pensions (1,149,000) (938,000) (781,000) Intangible Assets 15,000 (107,000) (102,000) Other 909,000 480,000 (111,000) Net Non-Current Deferred Tax Liability (3,114,000) (3,215,000) (3,743,000) Net Deferred Tax (Liability) Asset $ (192,000) $ 181,000 $ 1,198,000 Management expects that future operations will generate sufficient taxable income to realize the existing net temporary differences. As a result, the Corporation has not recorded any valuation allowances against its deferred tax assets. As a result of tax benefits of approximately $1.1 and $7.7 million to be realized from the discontinued operations sold in 1995 and 1994, respectively, certain reclassifications were made between current and deferred income taxes and net assets of discontinued operations. Other current assets on the balance sheet include current income taxes receivable of approximately $1.1 million at December 31, 1996. In 1996, 1995 and 1994 the Corporation's effective tax rates were 37.0%, 38.3% and 37.0%, respectively, of income before income taxes. An analysis of the differences between these rates and the US federal statutory income tax rate is as follows: 1996 1995 1994 Computed income taxes at statutory rate $ 4,499,000 $ 4,287,000 $ 3,910,000 State and local taxes, net of federal tax benefit 321,000 205,000 310,000 Dividend income 198,000 193,000 185,000 Amortization of goodwill 9,000 9,000 43,000 Foreign income taxed at different rates 187,000 318,000 (368,000) Tax credits (271,000) (281,000) (242,000) Benefit of Foreign Sales Corporation (413,000) -- -- Other, net 366,000 95,000 417,000 Provision for income taxes $ 4,896,000 $ 4,826,000 $ 4,255,000 Audits of the federal income tax returns of the Corporation and its subsidiaries have been completed through 1992. Provision has not been made for US income taxes on approximately $3.3 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. (5)	Accrued Expenses Accrued expenses consisted of the following as of December 31, 1996 and 1995, respectively: 1996 1995 Salaries and wages $ 2,708,000 $ 2,312,000 Income taxes 245,000 360,000 Insurance 2,648,000 2,026,000 Litigation 1,654,000 1,942,000 Other accrued expenses 4,059,000 5,125,000 Total accrued expenses $ 11,314,000 $ 11,765,000 (6)	Debt Long-term debt consisted of the following as of December 31, 1996 and 1995, respectively: 1996 1995 Revolving Credit Notes $21,707,000 $18,099,000 Equipment Loans 115,000 290,000 Industrial Revenue Bonds 3,000,000 3,000,000 Other 20,000 33,000 24,842,000 21,422,000 Less Current Maturities 125,000 186,000 Total $24,717,000 $21,236,000 Subsequent to year end, the Corporation's secured, reducing revolving credit agreement ("Credit Agreement") with a consortium of four banks led by Bank of America, Illinois, and including SunTrust Bank, NBD Bank and First Union Bank of Florida, was amended. The amendment effectively extended the expiration date of the Credit Agreement from August 31, 1999 to December 31, 2001 and increased the revolving credit facility's maximum loan commitment of $35 million at December 31, 1996 to $45 million. The Credit Agreement also includes a letter of credit facility of at least $10 million, although the letter of credit facility may be increased up to $20 million with a corresponding decrease in the revolving credit facility. At December 31, 1996, $21.7 million of revolving credit was outstanding and payable in 2001. In addition, approximately $8.3 million of irrevocable standby letters of credit were outstanding under the Credit Agreement, which are not reflected in the accompanying consolidated financial statements. $5.0 million of the letters of credit guarantee various trade and insurance activities. An outstanding $3.3 million letter of credit supports the Industrial Revenue Bonds. Interest rates vary on the revolving credit and are set at the time of borrowing in relationship to one of several reference rates, as selected by the Corporation at the time of the borrowing. Interest rates on the revolving credit outstanding at December 31, 1996, were 6.4% on US borrowings and 4.1% on European borrowings. A commitment fee is paid on the unused portion of the total credit. The interest rate on the Industrial Revenue Bonds was 4.6% at December 31, 1996. Substantially all of the assets of the Corporation and its US subsidiaries are pledged as collateral under the Credit Agreement, which expires on December 31, 2001. The Credit Agreement, as amended, contains covenants which require the Corporation to meet minimum interest coverage ratios and which limit the ratio of total debt to capital employed as defined in the Credit Agreement. In addition, minimum levels of stockholders' investment must be maintained. At December 31, 1996 the Corporation was in compliance with all covenants contained in the Credit Agreement. The Corporation has equipment loans, mortgages and other debt outstanding at rates of 5.8% to 8.5% due in 1997 and 1998. The annual maturity requirements for long-term debt due after December 31, 1996, are summarized as follows: Year Ended December 31, 1997 $ 125,000 1998 10,000 1999 -- 2000 -- 2001 21,707,000 Due after December 31, 2001 3,000,000 Total Long-Term Debt $24,842,000 (7)	Stock Options The Corporation has a stock incentive plan which was established in 1990 ("1990 Plan"). The 1990 Plan permits the grant of options to purchase not more than 2,500,000 shares of common stock. The 1990 Plan provides for the grant of non-qualified options and options qualifying as incentive stock options under the Internal Revenue Code to key employees and each outside Director of the Corporation at an option price equal to the fair market value on the date of grant. Non-qualified stock options may also be granted at book value. The term of each option may not exceed 10 years from the date the option becomes exercisable (or, in the case of an incentive stock option, 10 years from the date of grant). A senior executive of the Corporation presently holds performance based, non-qualified stock options granted under the 1990 Plan to purchase a total of 250,000 shares of common stock at option prices equal to the fair market value on the date of grant. Two-thirds of these performance options became exercisable as a result of the Corporations earnings performance in 1992 and 1995 with the remaining one-third becoming fully exercisable on the tenth anniversary of the date of grant if the executive is still employed by the Corporation. These options remain exercisable for ten years from the date they first become exercisable. Changes in the stock options granted under the 1990 Plan during 1996, 1995 and 1994 were as follows: 1996 1996 1995 1995 1994 1994 Wtd Avg Wtd Avg Wtd Avg Exercise Exercise Exercise Options Price Options Price Options Price Outstanding at beginning of year 716,950 $5.56 982,150 $5.44 1,086,287 $5.44 Granted 78,000 $6.32 21,600 $4.70 32,500 $4.55 Exercised (93,200) $5.09 (110,375) $5.06 -- $ -- Canceled (17,725) $5.28 (176,425) $5.13 (136,637) $5.22 Outstanding at end of year 684,225 $5.71 716,950 $5.56 982,150 $5.44 Exercisable at end of year 501,513 $5.62 506,917 $5.48 666,397 $5.36 At December 31, 1996, 1995 and 1994, 1,495,925, 1,556,200 and 1,401,375 shares, respectively, were available for option grants under the 1990 Plan. The weighted average contractual life of the 684,225 options outstanding at December 31, 1996 was 4.46 years. There were no charges to income in connection with stock option activity during the years presented. (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 ERISA using a different actuarial cost method and actuarial assumptions than are used for determining pension expense for financial reporting purposes. Plan assets consist primarily of publicly traded equity and debt securities. The Corporation maintains unfunded supplemental plans in the United States to provide retirement benefits in excess of levels provided under the Corporation's other plans. The Corporation's foreign subsidiaries provide retirement benefits for employees consistent with local practices. The foreign plans are not significant in the aggregate and therefore are not included in the following disclosures. The following table describes the funded status of US pension plans. Overfunded plans are those in which the amount provided for future benefits (fair value of plan assets) exceeds the accumulated benefit obligation (actuarial present value of benefits earned to date based on present pay levels). 1996 1996 1995 1995 Overfunded Underfunded Overfunded Underfunded Actuarial present value of benefit obligation: Vested $(19,242,000) $(2,476,000) $(18,137,000) $(2,409,000) Non-vested (225,000) (24,000) (427,000) (66,000) Accumulated benefit obligation (19,467,000) (2,500,000) (18,564,000) (2,475,000) Additional amounts related to projected pay increases (2,209,000) (65,000) (2,670,000) (69,000) Projected benefit obligation (21,676,000) (2,565,000) (21,234,000) (2,544,000) Plan assets at fair value 22,531,000 1,841,000 20,172,000 1,587,000 Plan assets in excess of (less than) projected benefit obligation 855,000 (724,000) (1,062,000) (957,000) Unrecognized net transition obligation 255,000 291,000 334,000 330,000 Unrecognized prior service costs (83,000) 94,000 (61,000) 116,000 Unrecognized net loss 1,171,000 207,000 2,514,000 307,000 Adjustment to recognize minimum liability -- (527,000) -- (685,000) Prepaid (accrued) pension costs recognized in balance sheet at September 30 2,198,000 (659,000) 1,725,000 (889,000) Fourth quarter accruals (91,000) (64,000) (225,000) (48,000) Fourth quarter contributions -- 65,000 169,000 44,000 Effect of curtailment -- -- (36,000) -- Prepaid (accrued) pension costs at December 31 $ 2,107,000 $ (658,000) $ 1,633,000 $ (893,000) The discount rate used in determining the actuarial present value of the projected benefit obligations in the table above was 7.5% at both September 30, 1996 and 1995. The rate of projected pay increases, where applicable, was 5% at both September 30, 1996 and 1995. The expected long-term rate of return on retirement plan assets was 9% at both September 30, 1996 and 1995. Net periodic pension cost for the US plans included the following: 1996 1995 1994 Service cost-benefits earned during the year $ 716,000 $ 858,000 $ 915,000 Interest cost on projected benefit obligation 1,695,000 1,646,000 1,493,000 Return on plan assets: Expected return-(gain) (2,018,000) (1,666,000) (1,803,000) Asset gain (loss) 434,000 2,879,000 (2,774,000) Actual return-(gain) loss (2,452,000) (4,545,000) 971,000 Net amortization and deferral 566,000 3,135,000 (2,584,000) Net periodic pension cost $ 525,000 $ 1,094,000 $ 795,000 (9) Business Segment Data The Corporation operates two distinct businesses: Arlon - Engineered Materials and Components' segment; and, Kasco - Replacement Products and Services' segment. Information about the Corporation's major lines of business for the years ended December 31, 1996, 1995 and 1994 is as follows: Segment Depreciation Operating Capital and Net Sales Profit(Loss) Assets (a) Expenditures Amortization 1996 Arlon $103,449,000 $16,159,000 $ 61,118,000 $ 7,255,000 $3,312,000 Kasco 46,785,000 2,649,000 35,161,000 2,830,000 2,933,000 Corporate -- (3,852,000) 6,321,000 46,000 60,000 Total $150,234,000 $14,956,000 $102,600,000 $10,131,000 $6,305,000 1995 Arlon $ 99,391,000 $15,389,000 $ 55,108,000 $ 1,999,000 $3,274,000 Kasco 51,116,000 2,889,000 38,690,000 2,805,000 2,975,000 Corporate -- (3,645,000) 4,398,000 27,000 65,000 Total $150,507,000 $14,633,000 $ 98,196,000 $ 4,831,000 $6,314,000 1994 Arlon $ 92,214,000 $15,712,000 $ 50,234,000 $ 2,084,000 $3,562,000 Kasco 53,308,000 2,197,000 39,317,000 3,083,000 2,874,000 Corporate -- (4,255,000) 9,692,000 9,000 66,000 Total $145,522,000 $13,654,000 $ 99,243,000 $ 5,176,000 $6,502,000 The Corporation has operations in Canada and several European countries. Information about the Corporation's operations by geographical area for the years ended December 31, 1996, 1995 and 1994 is as follows: Segment Operating Net Sales Profit Assets (a) 1996 United States $124,154,000 $ 14,564,000 $ 84,269,000 Foreign 26,080,000 392,000 18,331,000 Total $150,234,000 $ 14,956,000 $102,600,000 1995 United States $122,510,000 $ 12,797,000 $ 77,917,000 Foreign 27,997,000 1,836,000 20,279,000 Total $150,507,000 $ 14,633,000 $ 98,196,000 1994 United States $119,045,000 $ 12,754,000 $ 80,579,000 Foreign 26,477,000 900,000 18,664,000 Total $145,522,000 $ 13,654,000 $ 99,243,000 (a) Excludes net assets of discontinued operations of $3,529,000 for 1994. (10)	Contingencies Since its announcement in January 1990 of its intention to spin off 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 the 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 filing 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 December 31, 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. 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 December 31, 1996. CORPORATE INFORMATION Corporate Office Suite 300, 2251 Lucien Way Maitland, Florida 32751 (407) 875-2222 Principal Facilities Bear, Delaware City of Industry, California East Providence, Rhode Island Rancho Cucamonga, California St. Louis, Missouri Santa Ana, California Toronto, Ontario, Canada Gwent, Wales, United Kingdom Paris, France Pansdorf, Germany Transfer Agent and Registrar Trust Company Bank P.O. Box 4625 Atlanta, Georgia 30302 (404) 588-7815 Independent Certified Public Accountants Arthur Andersen LLP 200 South Orange Avenue, Suite 2100 Orlando, Florida 32801 (407) 841-4601 Stock Listing Bairnco common stock is listed on the New York Stock Exchange. Symbol - BZ. Annual Meeting The annual stockholders meeting will be held at the Sheraton Orlando North, 600 North Lake Destiny Road, Maitland, Florida 32751, on April 18, 1997 at 10:00 a.m. Form 10-K Stockholders may obtain without charge a copy of Bairnco's Form 10-K filed with the Securities and Exchange Commission by writing to Investor Relations at the Corporate Office address. Investor Relations Information Contact Investor Relations at Bairnco's Corporate Office. BAIRNCO CORPORATION Suite 300, 2251 Lucien Way Maitland, Florida 32751 (407) 875-2222 FAX (407) 875-3398