Our mission
Bairnco is an organization of people committed to providing value-added
industrial and commercial products and services to niche markets which meet
or exceed our customers' requirements leading to the creation of
stockholder and employee value.
Our strategy
Bairnco strives to develop true partnership relationships with its
customers in selected markets through close cooperation in developing value-
added solutions to their needs. Bairnco seeks to identify and participate
in those markets that will provide growth opportunities due to either
technical developments or the changing needs of customers.
Bairnco implements this mission and strategy through two business segments:
Engineered materials and components are designed, manufactured and sold
under the Arlon brand identity.
Replacement products and services are manufactured and distributed under
the Kasco brand identity.
Our objectives
Bairnco believes that concentrating its resources in selected market niches
can provide the basis to achieve both superior profitability and growth.
Management's long term objectives are to achieve:
15% compound rate of earnings growth
20% return on stockholders' investment
15% return on total capital employed.
Our values
Values are the core of Bairnco's corporate culture. They are the basis for
the decisions made regarding the development and deployment of people, the
improvement and investment in processes, and the manufacture and
distribution of products.
Bairnco's values are:
Personal and corporate integrity
The inevitability and opportunity of change
Continuous improvement and development
Total customer satisfaction
Decentralized organization and empowered employees
Superior rewards for superior performance
Have fun - enjoy your work and your life.
CONTENTS
Financial Highlights 1
Letter to Our Stockholders 2
Engineered Materials & Components (Arlon) 4
Replacement Products & Services (Kasco) 7
Directors and Management 8
Financial History 9
Management's Discussion and Analysis 10
Quarterly Results of Operations 14
Report of Independent Certified Public Accountants 15
Consolidated Financial Statements 16
Notes to Consolidated Financial Statements 20
FINANCIAL HIGHLIGHTS
(In thousands except per share data)
Percent Change
1998 1997 1996 98/97 97/96
Net Sales $156,456 $158,708 $150,234 (1%) 6%
Earnings before Interest, Provision
for Litigation Costs and Taxes (a) $ 12,029 $ 15,592 $ 14,956 (23%) 4%
Operating Profit $ 4,529 $ 15,592 $ 14,956 (71%) 4%
Net Income $ 1,594 $ 8,771 $ 8,335 (82%) 5%
Diluted Earnings per Share $ 0.18 $ 0.94 $ 0.85 (81%) 11%
Cash Dividends per Share $ 0.20 $ 0.20 $ 0.20 0% 0%
Stockholders' Investment per Average
Diluted Common Share Outstanding $ 5.27 $ 5.61 $ 5.02 (6%) 12%
Total Assets $118,555 $109,286 $102,600 8% 7%
Stockholders' Investment $ 46,438 $ 52,469 $ 49,464 (11%) 6%
Average Diluted Common Shares
Outstanding 8,818 9,350 9,851 (6%) (5%)
(a) Excludes impact of provision for litigation costs of $7.5 million (pre-
tax) in 1998.
Graphic - Bar Chart depicting Sales (y-axis) for five years - 1994 to
1998 (x-axis):
Year Sales (in thousands)
1994 $145,522
1995 $150,507
1996 $150,234
1997 $158,708
1998 $156,456
Graphic - Bar Chart depicting Operating Profit (y-axis) for five years - 1994
to 1998 (x-axis):
Year Operating Profit (in thousands)
1994 $13,654
1995 $14,633
1996 $14,956
1997 $15,592
1998 $ 4,529
1998(b) $12,029
(b) Excludes impact on operating profit of $7.5 million (pre-tax) provision
for litigation costs in the fourth quarter of 1998.
Graphic - Bar Chart depicting Net Income (y-axis) for five years - 1994
to 1998 (x-axis):
Year Net Income (in thousands)
1994 $7,255
1995 $7,781
1996 $8,335
1997 $8,771
1998 $1,594
1998(b) $6,320
(b) Excludes impact on net income of $7.5 million (pre-tax) provision for
litigation costs in the fourth quarter of 1998.
Graphic - Bar Chart depicting Diluted Earnings per Share (y-axis) for five
years - 1994 to 1998 (x-axis):
Year Diluted Earnings per Share (in thousands)
1994 $0.69
1995 $0.75
1996 $0.85
1997 $0.94
1998 $0.18
1998(b) $0.72
(b) Excludes impact on diluted earnings per share of $7.5 million (pre-tax)
provision for litigation costs in the fourth quarter of 1998.
LETTER TO OUR STOCKHOLDERS
1998 was a challenging year for Bairnco. Weak markets and price pressures
resulted in lower sales and earnings. While costs were reduced, the
decision was made, based on the future outlook, to both preserve and
continue to improve the core management competencies. We continue to
repurchase our stock. An acquisition that fits Arlon was completed.
Bairnco's financial condition remains strong.
In 1998 the court in the Transactions Lawsuit issued a series of opinions
that eliminated certain claims and parties from the case and set the stage
for discovery and trial as to the claims and parties that remain. In
particular, the court dismissed the RICO claims; all claims against third-
party professionals, including lawyers, accountants and investment bankers;
and all claims against individuals with the exception of Bairnco's former
chairman and president. The court also narrowed the scope of certain
claims against Bairnco and the other corporate defendants. With the
initial motions phase of the case now complete, Bairnco is prepared to
mount a vigorous defense on the merits. Toward that end, a $7,500,000
provision for litigation costs was taken in the fourth quarter.
FINANCIAL RESULTS
1998 consolidated sales of $156,456,000 decreased 1.4% from $158,708,000 in
1997. Arlon's sales decreased 3.8%. All markets served declined during
the year after a strong first quarter. The electrical and electronic
markets were the most depressed. The drop in the electronic market due to
the Asian crisis adversely affected many of the end users of our products.
Others of our OEM final customers were hurt by low priced competition from
Asian competitors. Further penetration in new market segments offset some
of the decline. Kasco's sales increased 4.4% through growth in the U.S.
base business, seasoning programs for in-store meal preparation, and in the
European operations.
In 1998, gross profit decreased 6.3% to $50,583,000 from $53,996,000 in the
prior year with gross profit margins declining to 32.3% from 34% last year.
Gross profit decreased at Arlon as the combined result of lower sales,
lower prices, and a continuing change in mix to lower margin commercial
products to serve the electronics and communications markets. Kasco's
gross profit decreased slightly due to the costs from discontinued products
and services.
Selling and administrative expenses, excluding the provision for litigation
costs, increased 0.4% to $38,554,000 from $38,404,000 in 1997. As a
percent of sales, these expenses increased to 24.6% in 1998 from 24.2% in
1997. Research and development expenses increased 4.8% as Bairnco
continued to invest in the development of new products and improved
quality. The average number of employees was reduced by 3.3% from last
year. Productivity as measured by sales per employee increased 1.9%.
Earnings before interest, the provision for litigation costs and taxes were
$12,029,000 down 22.9% from $15,592,000 in 1997. The decline is primarily
attributable to reduced gross profit.
In the fourth quarter of 1998 Bairnco recorded the $7,500,000 pre tax
provision for anticipated litigation costs.
Net interest expense increased from $1,834,000 to $1,998,000. The increase
was due to increased average debt outstanding primarily resulting from the
acquisition in the fourth quarter.
Income before income taxes decreased to $2,531,000 in 1998 as compared to
$13,758,000 in 1997. The effective tax rate was 37% as compared to 36.2% in
1997.
Net income decreased to $1,594,000 from $8,771,000. Diluted earnings per
common share fell to $.18 from $.94 in 1997 as a result of the decreased
operating income and the provision for litigation costs. The provision for
litigation costs reduced net income in 1998 by $4,726,000 or $.54 per
share. During 1998, Bairnco repurchased 737,400 shares of its common
stock. The diluted average number of shares outstanding in 1998 was
8,818,000 a 5.7% decrease from the 9,350,000 diluted average shares
outstanding in 1997.
MII ACQUISITION
Effective October 31,1998 Bairnco purchased MII International, Inc. ("MII"
- - formerly the Marking Films and Engineered Coated Products unit of The
Meyercord Co.) for approximately $8.3 million including the repayment of
its debt. Sales of MII for the six months ended September 30, 1998 were
approximately $6 million.
MII's adhesive coated graphic films are used in a variety of fleet, rail
car, and shipping container marking applications; OEM and screen print
applications; and other corporate specified programs. MII's engineered-
coated products include transfer adhesives, single and double-faced tapes,
specialty-coated foils, and other custom coated products. MII has a strong
presence in international markets.
The acquisition complemented Arlon's graphic films and industrial products
with product line extensions, additional brand recognition, product
development synergies, and penetration into new customer segments and
markets. The acquisition also expanded Arlon's coating and converting
capacity.
FINANCIAL MANAGEMENT
Excluding the provision for litigation costs, return on capital employed
decreased to 8.9% from 12.2% last year and return on stockholders'
investment in 1998 decreased to 12.2% compared to 17.4% last year.
In 1998, Bairnco's Board of Directors authorized the repurchase of up to
$5,000,000 of its common stock. This authorization was in addition to the
$3.7 million still unused from the prior year authorization. During the
year the company repurchased 737,400 shares for $6.2 million. The Board
has authorized management to continue its stock repurchase program in 1999
subject to market conditions and capital requirements of the business. At
year-end $2.5 million was available for additional stock repurchases. The
Board may consider additional authorizations if appropriate during the
year.
In the fourth quarter Bairnco amended its $50,000,000 reducing revolving
credit agreement to extend the first commitment reduction date to December
31, 2000 and the final maturity to December 31, 2003. At year-end 1998
Bairnco had $10.5 million available under its revolving credit agreement,
and $4.3 million available under short-term lines of credit.
Working capital as a percent of sales decreased from 22.5% to 21.3%.
Accounts receivable increased due to higher foreign sales. However higher
current liabilities as a result of the provision for litigation costs
resulted in lower working capital.
Net cash flows provided by operating activities were $14,116,000. These
cash flows were more than sufficient to cover operating requirements, fund
Bairnco's capital expenditure program, pay dividends, purchase treasury
stock and generate some excess cash. However, the acquisition required
$8.3 million in additional funds. Consequently 1998 total debt increased to
$37,844,000 from $30,318,000 at the end of 1997. Debt as a percent of
equity increased to 81.5% from 57.8% in 1997.
1998 capital expenditures were $5,976,000 as compared to a plan of
$12,000,000. Depreciation and amortization was $6,688,000. Capital
expenditures were cut back in light of changing market conditions.
Expenditures were focused on cost reduction projects, replacements and new
MIS systems and hardware that were installed during the year.
The capital expenditure plan for 1999 is approximately $8.2 million.
Depreciation and amortization is estimated to be approximately $7.0
million. The planned capital expenditures include cost reduction projects,
replacements, quality improvements, new product developments, new
processing equipment, MIS hardware and software, and limited capacity
additions.
DIVIDEND
The quarterly $.05 per share cash dividend was maintained during the year.
MANAGEMENT
During 1998 the management development program, which is one of the keys
to our future success, continued to make progress in all operations.
Significant additions and changes were made to strengthen operations
management which has lead to lower scrap and started to improve
efficiencies. Also we have further strengthened our sales organizations
to further penetrate certain market segments. During 1998, a Six-Sigma
program was initiated in two of our operations as part of our continuous
improvement program. For 1999, additional projects have been selected and
training will be expanded to include representatives for all our domestic
operations. We expect this program to accelerate the yields from our
continuous improvement program. The ongoing improvement and development
of all our employees remains a critical and never-ending element for
Bairnco's success.
OUTLOOK
Our management team has action plans in place designed to recover most of
the ground lost in 1998. In general we expect little improvement in
demand from our industrial markets served. Although most markets
stabilized after the sharp drop in the second quarter of 1998, the
recovery from those low levels has been and is expected to be modest.
Arlon's management team continues to improve efficiencies and quality to
more effectively compete in the electronic, electric, graphic, custom and
industrial markets. Although there is no meaningful recovery expected in
the markets served, the combined effect of the acquisition, improved
efficiencies, product developments and penetration of new market segments
should return Arlon to growing sales and earnings.
Kasco North America's programs to become the preeminent supplier of
cutting products and routine in-store equipment services are continuing.
Kasco's seasoning program for in-store meal preparation continued to grow.
Kasco North American operations earnings are expected to resume their
improving trend based on some increased market share but primarily from
cost reductions and efficiency improvements that were made in 1998 and
which are continuing in 1999. Kasco's management expects 1999 to see
Kasco back on its plan for continued improvements.
The outlook for 1999 is for improved sales and earnings. The US
industrial economy is expected to experience very slow growth during 1999
with inflation remaining under control and the Federal Reserve Board
maintaining low interest rates. Asia is expected to slowly recover but
represent continued strong competition to industrial America. We expect
the combination of growth from new products, higher growth in certain
niche markets, and a full year of the results of the acquisition will
result in increased sales. Improved earnings are expected both from the
increased sales and from continuing efficiency and yield improvement
programs.
The continuing dedication and excellent performance of our teammates
remains the key to our past and future success. We are all dedicated to
making 1999 a year of continuing improvement.
Respectfully yours,
/s/ Luke E. Fichthorn III
Luke E. Fichthorn III
Chairman and CEO
Arlon Engineered Materials and Components
Bairnco designs, manufactures, and sells engineered materials and
components for the electronic, industrial and commercial markets under the
Arlon brand identity. These products are based on common technologies in
coating, laminating, polymers, and dispersion chemistry.
Arlon Materials for Electronics has an international reputation as the
premier supplier of high technology materials for the printed circuit board
industry. These products are marketed principally to printed circuit board
manufacturers and OEM's by a direct sales force in concert with strong
technical support teams in the U.S. and through distributors and
manufacturers representatives in Europe, the Far East, and South America.
Our Electronic Substrates product line includes high temperature, high
performance thermoset laminates and prepreg bonding plies used in circuit
boards for sophisticated commercial applications and military electronics.
These applications require materials that withstand high continuous or
widely varying operating temperatures, provide ease of field repairability,
are highly reliable, and improve board fabrication yields. Intermediate
temperature laminates, which provide improved product reliability and ease
of manufacture at a lower cost, are also key to the line.
The Microwave Materials product line offers application matched, reinforced
PTFE and other resin based laminates providing high yields and high
performance for low signal-loss and frequency-dependent microwave
applications. The applications for this product line include microwave
antennas, digital cordless telephones, cellular phone systems, direct
broadcast satellite TV systems, personal communications networks, global
positioning satellites, local area networks, collision avoidance systems,
and radar detection systems.
Recently developed products which made commercial inroads in 1998 include:
. Arlon's 25N series, a laminate system based on aromatic polyolefin resin
that offers many of the performance advantages of PTFE materials with
the cost and processing advantages of traditional thermoset materials,
targeted for commercial electronics.
. Arlon's Thermount nonwoven, aramid reinforced materials that offer many
advantages for specialty applications at a more attractive cost-
performance ratio than woven aramids.
. Arlon's AD Series substrate materials: a specialized PTFE based laminate
system that offers all the performance characteristics of PTFE with
lower cost targeted for commercial applications.
. Arlon's 33N and 35N polyimide laminate systems provide high temperature
capability while reducing production time for board fabricators.
PHOTO - Coater operators inspect Thermount 85NT being produced at Arlon's
Rancho Cucamonga, CA facility. Thermount 85NT is a new product being
widely used for surface mount applications in sophisticated commercial
and military aircraft avionics circuit boards.
PHOTO - Lay up operators at the Bear, DE facility assemble Arlon's AD Series
laminates in a new clean room. AD Series substrate materials designate
a cost competitive PTFE based system that offers the performance
characteristics of traditional PTFE at a lower cost.
Bairnco manufactures and markets, under the Calon brand name, cast and
calendered vinyl films in a wide variety of colors, face stocks and
adhesive systems. These vinyl films are used in commercial and electrical
signage, point of purchase displays, highway signage, fleet markings, and
other commercial advertising applications.
We have continued to invest in new product development and to improve the
quality of our current product line. During 1998 we introduced ProFleet, a
pressure sensitive vinyl product specifically designed for fleet and
vehicle graphics. ProFleet features an ultra-durable 2mil high performance
cast vinyl and an adhesive formulated to reduce installation time and labor
costs. We also introduced a product line of electrostatic media in
September 1998. The Imageburst electrostatic media line includes StatPrint
HP, StatPrint Intermediate, StatPrint Promotional and overlaminates.
In November of 1998 we announced the purchase of MII International, Inc., a
manufacturer of adhesive coated films for use in the graphics and
industrial markets. MII's product lines complement Arlon's current vinyl
product lines, and will provide product line extensions, additional brand
recognition, product development synergies, and penetration into new
customer segments and markets. The acquisition has also expanded Arlon's
coating and converting capacity.
PHOTO - Arlon's Imageburst StatPrint Intermediate - Series 4000 vinyl, in
conjunction with the appropriate overlaminate, was used for the floor
graphics created for collegiate basketball's 1998 Western Athletic
Conference (WAC) games. StatPrint 4000 is a 3-mil, calendered vinyl
with permanent, clean-removing adhesive (up to 2 years).
PHOTO - Arlon's ProFleet vinyl, used for fleet markings and large format
graphics, is specially designed for flat, riveted and corrugated
surfaces.
PHOTO - Arlon has improved their line of translucent vinyl films. The product
has been modified for improved compatibility with thermoforming and
improved flexibility. This product improvement supports Arlon's sales
in the electrical and commercial signage markets.
Arlon also manufactures and markets custom-engineered laminates and coated
products. Typical applications include insulating foam tapes for thermopane
windows, specialty flexible circuit materials, electrical insulation
materials for motors and transformers, thermal insulation panels for
appliances and cars, identification cards and labels, durable printing
stock, and other custom engineered laminates for specific industrial
applications.
The keys to Arlon's success in custom-engineered laminates and coated
products are our knowledge base of materials and adhesives technology and
our understanding of customer applications. Our sales engineers and
product managers are dedicated to understanding customer requirements and
developing product specifications that meet those customer needs.
PHOTO - Arlon glazing tapes consist of a closed-cell copolymer foam coated
on both sides with an aggressive acrylic adhesive system. This
adhesive system provides optimum compatibility with a variety of
sash materials.
Bairnco manufactures a line of silicone rubber materials used in a broad
range of consumer, industrial and commercial products. Typical
applications and products include:
. Silicone rubber for molding composites
. Silicone rubber insulating tape for electric traction motor coil windings
. Insulation for industrial flexible heaters
. Silicone products for high temperature hose and duct markets
. Insulating tape for electrical splices
. Compliant, thermally or electrically conductive silicone sheet adhesive
known as ThermabondTM
In 1999 we will continue to focus application development efforts on
thermally and electrically conductive sheet adhesives for electrical and
electronic markets, as well as broaden our hose and duct material product
line.
PHOTO - An Arlon operator uses a micrometer to measure thickness of
flexible heater material. This production line performs precision
calendering and fabric coating to produce a family of silicone
products for industrial markets.
Kasco Replacement Products and Services
Kasco is the leading manufacturer and supplier of replacement products and
services principally to supermarkets; meat and deli operations; and meat,
poultry and fish processing plants throughout the United States, Canada and
Europe. These products and services include:
. Band saw blades for cutting meat and fish
. Chopper plates and knives for grinding meat
. Seasoning products
. Preventive maintenance for equipment in meat and deli operations
. Other related butcher supply products.
Kasco also manufactures small band saw blades for cutting metal and wood,
and large band saw blades for use at lumber mills. Kasco has manufacturing
operations in St. Louis, Missouri; Gwent, Wales, United Kingdom; and
Pansdorf, Germany. In Canada and France, in addition to providing its
replacement products, Kasco distributes equipment used in the supermarket
industry and in the food processing industry.
During 1998, Kasco made several product design improvements to its band saw
blades and its chopper plates and knives. Kasco has introduced a line of
premium wood cutting band saw blades for use by professional cabinetry and
furniture makers and serious hobbyists.
The Mealtime Solutions seasoning program continues to be a success as sales
for home meal replacement items within supermarkets increase. Mealtime
Solutions offers a package of seasoning blends, recipes and instructions
which allows a supermarket to present value-added products in their meat
and deli departments. During 1998 Kasco developed several new product
lines which expand their Mealtime Solutions program into deli and seafood
departments.
In North America, Kasco supplies its products and services directly to the
supermarket and meat cutting industries through a continent-wide network of
service professionals and exclusive distributors. During 1998, Kasco
increased its emphasis on preventive maintenance, increasing the value-
added service its network of professionals provides to customers.
PHOTO - Kasco's Mealtime Solutions seasoning program offers a package of
seasoning blends, recipes, and instructions which allows a
supermarket to present an attractive, ready-to-cook home meal to
their customers.
PHOTO - The Predator Series of splitter blades from Kasco features a Gold
Tooth Hardening process which offers high speed, high volume cutting
and less waste, straighter cuts, less workplace noise, and less
operator fatigue.
Directors
1.Luke E. Fichthorn III
Chairman and CEO
Bairnco Corporation
2.Charles T. Foley
President
Estabrook Capital Management, Inc.
3.Richard A. Shantz
Private Investor
4.William F. Yelverton
Independent Business Consultant
Management:
1.Jeffrey M. Berresford
President
Kasco Corporation
2.Robert M. Carini
Vice President
Arlon, Inc.
3.James W. Lambert
Controller
Bairnco Corporation
4.Elmer G. Pruim
Vice President
Arlon, Inc.
5.J. Robert Wilkinson
Vice President Finance & Treasurer
Bairnco Corporation
FINANCIAL HISTORY
1998 1997 1996 1995 1994
Summary of Operations ($ in thousands)
Net sales $156,456 158,708 150,234 150,507 145,522
Gross profit $ 50,583 53,996 52,536 53,317 53,177
Earnings before interest, provision
for litigation costs & taxes (a) $ 12,029 15,592 14,956 14,633 13,654
Operating profit $ 4,529 15,592 14,956 14,633 13,654
Interest expense, net $ 1,998 1,834 1,725 2,026 2,144
Income before income taxes $ 2,531 13,758 13,231 12,607 11,510
Provision for income taxes $ 937 4,987 4,896 4,826 4,255
Net income $ 1,594 8,771 8,335 7,781 7,255
Return from operations on:
Net sales % 1.0 5.5 5.5 5.2 5.0
Stockholders' investment % 3.1 17.4 17.2 16.7 17.4
Capital employed % 3.3 12.2 12.3 11.9 10.6
Year-End Position ($ in thousands)
Working capital $ 33,259 35,712 30,341 28,350 26,277
Plant and equipment, net $ 41,402 39,913 38,276 34,449 36,289
Total assets excluding discontinued
operations $118,555 109,286 102,600 98,196 99,243
Net assets of discontinued operations $ -- -- -- -- 3,529
Total assets $118,555 109,286 102,600 98,196 102,772
Total debt $ 37,844 30,318 28,179 24,578 31,775
Stockholders' investment $ 46,438 52,469 49,464 48,024 43,997
Capital employed $ 84,282 82,787 77,643 72,602 75,772
Per Common Share Data
Income from continuing operations:
- Basic $ 0.18 0.96 0.85 0.75 0.69
- Diluted $ 0.18 0.94 0.85 0.75 0.69
Cash dividend $ 0.20 0.20 0.20 0.20 0.20
Stockholders' investment $ 5.27 5.61 5.02 4.60 4.19
Market price:
High $ 11-3/8 11-1/4 8-1/2 6 5-1/2
Low $ 5-9/16 6-3/8 5-1/2 3-7/8 3
Other Data (in thousands)
Depreciation and amortization $ 6,688 6,516 6,305 6,314 6,502
Capital expenditures $ 5,976 8,789 10,131 4,831 5,176
Average common shares outstanding 8,655 9,151 9,753 10,433 10,500
Diluted common shares outstanding 8,818 9,350 9,851 10,440 10,500
Current ratio 2.2 2.6 2.4 2.2 2.0
Number of common stockholders 1,436 1,574 1,773 1,967 2,198
Average number of employees 822 850 825 874 915
Sales per employee $190,340 186,710 182,100 172,200 159,040
(a) Excludes impact of provision for litigation costs of $7.5 million
(pre-tax) in 1998.
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion should be read in conjunction with the
Consolidated Financial Statements and related notes which begin on page 18.
Results of Operations: 1998 Compared to 1997
1998 consolidated sales of $156,456,000 decreased 1.4% from $158,708,000 in
1997. Arlon's sales decreased 3.8%. All markets served declined during the
year after a strong first quarter. The electrical and electronic markets
were the most depressed. The drop in the electronic market due to the
Asian crisis adversely affected many of the end users of Arlon's products.
Others of Arlon's OEM final customers were hurt by low priced competition
from Asian competitors. Further penetration in new market segments offset
some of the decline. Kasco's sales increased 4.4% through growth in the
U.S. base business, seasoning programs for in-store meal preparation, and
in the European operations.
In 1998, gross profit decreased 6.3% to $50,583,000 from $53,996,000 in the
prior year with gross profit margins declining to 32.3% from 34% last year.
Gross profit decreased at Arlon as the combined result of lower sales,
lower prices, and a continuing change in mix to lower margin commercial
products to serve the electronic/communication markets. Kasco's gross
profit decreased slightly due to the costs from discontinued products and
services.
In 1998 the court in the Transactions Lawsuit (refer to Note 11 to the
Consolidated Financial Statements) issued a series of opinions that
eliminated certain claims and parties from the case and set the stage for
discovery and trial as to the claims and parties that remain. In
particular, the court dismissed the RICO claims; all claims against third-
party professionals, including lawyers, accountants and investment bankers;
and all claims against individuals with the exception of Bairnco's former
chairman and president. The court also narrowed the scope of certain
claims against Bairnco and the other corporate defendants. With the
initial motions phase of the case now complete, Bairnco is prepared to
mount a vigorous defense on the merits. Toward that end, a $7,500,000
provision for litigation costs was taken in the fourth quarter of 1998
(refer to Note 2 to the Consolidated Financial Statements).
Selling and administrative expenses, excluding the provision for litigation
costs, increased 0.4% to $38,554,000 from $38,404,000 in 1997. As a
percent of sales, these expenses increased to 24.6% in 1998 from 24.2% in
1997. Research and development expenses increased 4.8% as Bairnco
continued to invest in the development of new products and improved
quality. Based on sharp swings in order input throughout the year and
management's continuing belief in the future of the Corporation's key
markets, the decision was made to cut costs but not to impair the core
management competencies that have been developed. The average number of
employees was reduced by 3.3% from last year. Productivity as measured by
sales per employee increased 1.9%.
Earnings before interest, the provision for litigation costs and taxes were
$12,029,000 down 22.9% from $15,592,000 in 1997. The decline is primarily
attributable to reduced gross profit.
In the fourth quarter of 1998 Bairnco recorded the $7,500,000 pre-tax
provision for anticipated litigation costs.
Net interest expense increased from $1,834,000 to $1,998,000. The increase
was due to increased average debt outstanding primarily resulting form the
acquisition in the fourth quarter.
Income before income taxes decreased to $2,531,000 in 1998 as compared to
$13,758,000 in 1997. The effective tax rate was 37% as compared to 36.2% in
1997. The provision for income taxes in both years includes all applicable
federal, state, local and foreign income taxes. Audits of the
Corporation's consolidated US federal income tax returns have been
completed for all years through 1992.
Net income decreased to $1,594,000 from $8,771,000. Diluted earnings per
common share fell to $.18 from $.94 in 1997 as a result of the decreased
operating income and the provision for litigation costs. The provision for
litigation costs reduced net income in 1998 by $4,726,000 or $.54 per
share.
Results of Operations: 1997 Compared to 1996
Net sales for the year ended December 31, 1997 increased 5.6% to
$158,708,000 from $150,234,000 in 1996. Arlon's sales increased 8.3% as all
markets served experienced growth although there was substantial volatility
within the electronics market. Kasco's sales declined 0.2% as growth in
the US markets, especially in the seasonings for ready-to-cook foods for
supermarkets and special products areas, was offset by the planned
discontinuation of equipment sales in certain Canadian markets and the
negative impact of currency translation rates on sales of Kasco's European
operations.
In 1997, gross profit increased 2.8% to $53,996,000 from $52,536,000 in the
prior year. Gross profit increased 2.6% at Arlon and 1.0% at Kasco with
increased sales. However, the strong US dollar also negatively impacted
the translation of foreign gross profit. Gross profit margins declined to
34.0% from 35.0% in 1996. Profit margins were lower primarily due to plant
and labor inefficiencies caused by swings in demand during the year, new
equipment start-ups at three plants, and the two week strike at the Bear,
Delaware facility
Selling and administrative expenses increased 2.2% to $38,404,000 from
$37,580,000 in 1996. As a percent of sales, these expenses decreased to
24.2% in 1997 from 25.0% in 1996. Selling expenses were relatively
unchanged. General and administrative expenses increased $543,000 or 4.4%
reflecting the Company's on-going investment in recruiting, management
development and incentive compensation programs. Research and development
expenses increased 17.2% as Bairnco continued to invest in the development
of new products and improved quality.
Operating profit in 1997 was $15,592,000, or 9.8% of net sales, compared to
operating profit in 1996 of $14,956,000, or 10.0% of net sales.
Net interest expense increased $109,000 or 6.3% from $1,725,000 to
$1,834,000. The increase was due to increased average debt outstanding.
Income before income taxes increased 4.0% to $13,758,000 in 1997 as
compared to $13,231,000 in 1996. The effective tax rate decreased to 36.2%
from 37.0% in 1996 due primarily to the tax benefits attendant with
Bairnco's foreign sales corporation.
Net income increased 5.2% to $8,771,000 in 1997 as compared to $8,335,000
in 1996. Diluted earnings per share increased 10.6% to $.94 from $.85 in
1996. As a result of the stock repurchase program, the average number of
diluted shares outstanding in 1997 was 9,350,000, a 5.1% decrease from the
9,851,000 average outstanding in 1996.
Liquidity and Capital Resources
At December 31, 1998, Bairnco had working capital of $33.3 million compared
to $35.7 million at December 31, 1997. The increase in accounts receivable
relates primarily to the growth in export sales which have longer payment
terms. Current deferred tax assets increased with the increase in accrued
expenses primarily resulting from the $7.5 million provision for litigation
costs. Other current assets decreased primarily as a result of the
settlement of certain non-trade related receivables in the first quarter
1998. The increase in accrued expenses results primarily from provision
for litigation costs.
As of December 31, 1998, the reducing revolving credit agreement was
amended to extend the first commitment reduction date to December 31, 2000
and the final maturity to December 31, 2003.
At December 31, 1998, $37.8 million of total debt was outstanding compared
to $30.3 million at the end of 1997. As of December 31, 1998,
approximately $10.5 million was available for borrowing under the
Corporation's secured reducing revolving credit agreement, as amended. In
addition, approximately $4.3 million was available under various short-term
domestic and foreign uncommitted credit facilities. Debt as a percent of
equity increased to 81.5% at the end of 1998 from 57.8% at the end of 1997.
The increase was due to the $7.5 million provision for litigation costs
which reduced equity by $4,726,000 and the increased debt resulting from
the MII acquisition and stock repurchase program.
Bairnco made $5,976,000 of capital expenditures in 1998 as compared to its
plan of approximately $12.0 million. Capital expenditures were
significantly reduced in light of changing market conditions and were
focused on cost reduction projects, replacements and new MIS systems and
hardware that were installed during the year. Total capital expenditures
in 1999 are expected to be approximately $8.2 million. Depreciation and
amortization is estimated to be approximately $7.0 million. The planned
capital expenditures include cost reduction projects, replacements, quality
improvements, new product developments, new processing equipment, MIS
hardware and software, and limited capacity additions.
In 1998, Bairnco's Board of Directors authorized an additional $5,000,000
to be available for the ongoing repurchase of its common stock. The
authorization was in addition to the $3.7 million still unused from the
prior year $5,000,000 authorization. During 1998, Bairnco repurchased
737,400 shares of its common stock for $6.2 million. The diluted average
number of shares outstanding in 1998 was 8,818,000 a 5.7% decrease from the
9,350,000 diluted average shares outstanding in 1997. The Board has
authorized management to continue its stock repurchase program in 1999
subject to market conditions and the capital requirements of the business.
Cash provided by operating activities plus the amounts available under the
existing credit facilities are expected to be sufficient to fulfill
Bairnco's anticipated cash requirements in 1999.
Year 2000 Date Conversion
As previously stated in Bairnco's 1997 Annual Report on Form 10-K, the
Corporation has evaluated and identified its internal risks of software
failure due to processing errors arising from calculations using the Year
2000 date. The plan that was established to maintain the integrity of its
financial systems and ensure the reliability of its operating systems is
proceeding on schedule. The total estimated cost of achieving Year 2000
compliance remains at approximately $250,000 and includes software and
installation costs. Of this amount, approximately $175,000 had been
incurred through December 31, 1998 with the remainder expected to be
incurred during 1999.
In January of 1998 Bairnco adopted a formal plan to address the Year 2000
issue. This plan has defined roles, identified staff members to execute
the plan, set target dates, and provided a detailed budget. The plan also
incorporates the use of outside consultants. The plan is periodically
updated and modified, and progress is monitored against it to ensure that
target dates are being met and that the Corporation designates whatever
resources are necessary to meet the plan's requirements.
Bairnco has compiled a checklist for all areas that may be affected by this
issue. The Corporation has formed task forces at each of its operating
divisions and charged them with doing thorough and complete audits of their
facilities using the checklist as a guide. The Corporation is aware of
some hardware issues and has assembled a plan to have the outmoded
equipment replaced during 1999.
Bairnco has assessed the software in use at all of its operations and
identified applications that do not currently process using a four-digit
field to record the date. The Corporation is in the process of adapting or
replacing any such programs and expects to have the work completed on
schedule. Through December 31, 1998, four of the seven North American
locations' operating information technology ("IT") systems plus all of the
European locations' IT systems had been upgraded to be Year 2000 compliant
with the remaining four US locations expected to be completed by the end of
the second quarter of 1999. These four divisions were in various stages of
validation and implementation of the upgraded systems.
Bairnco has contacted the majority of its suppliers and customers with whom
the Corporation has a material business relationship regarding their Year
2000 state of readiness. The responses to date have indicated they are, or
expect to be, Year 2000 compliant.
Based on the results of our efforts to date as discussed above, the
Corporation believes it will not experience any material disruption in its
operations due to Year 2000 issues with its computer software programs and
operating systems or its interface with key suppliers and vendors. However,
the implementation and validation of Bairnco's IT and non-IT systems, and
the evaluation of the state of readiness of Bairnco's material business
partners are ongoing. The disruption in service of any critical suppliers
or the failure of the Corporation's operating systems to comply, could
result in a shutdown of the operations affected for the duration of the
disruption.
The Corporation has not analyzed the risks of a "most reasonably likely
worst case scenario" nor has it developed a contingency plan to address
this uncertainty. The Corporation's efforts to date have been focused on
ensuring the impact of Year 2000 issues is minimized. It is management's
intention to analyze the risks of this uncertainty and determine whether to
develop such a plan. This process is scheduled for completion during the
first half of 1999.
Other Matters
Bairnco Corporation and its subsidiaries are defendants in a number of
legal actions and proceedings that are discussed in more detail in Note 10
to the Consolidated Financial Statements. Management of Bairnco believes
that the disposition of these actions and proceedings will not have a
material adverse effect on the consolidated results of operations or the
financial position of Bairnco Corporation and its subsidiaries as of
December 31, 1998.
Outlook
Management is not aware of any adverse trends that would materially affect
the Company's strong financial position. The outlook for 1999 is for
improved sales and earnings. It is expected that the combination of growth
from new products, higher growth in certain niche markets and a full year
of the results of the acquisition will result in increased sales. Improved
earnings are expected both from increased sales and from continuing
efficiency and yield improvement programs.
Quarterly Results of Operations (Unaudited)
(In thousands except per share data)
1st 2nd 3rd 4th Total
1998 1997 1998 1997 1998 1997 1998 1997 1998 1997
Net Sales $ 42,125 $ 37,445 $ 37,651 $ 41,128 $ 37,747 $ 39,814 $ 38,933 $ 40,321 $156,456 $158,708
Cost of sales 28,442 24,465 24,905 27,020 25,922 26,228 26,604 26,999 105,873 104,712
Gross Profit 13,683 12,980 12,746 14,108 11,825 13,586 12,329 13,322 50,583 53,996
Selling and
administrative
expenses 9,716 9,116 9,717 9,981 9,461 9,717 9,660 9,590 38,554 38,404
Provision for
litigation
costs -- -- -- -- -- -- 7,500 -- 7,500 --
Operating
Profit 3,967 3,864 3,029 4,127 2,364 3,869 (4,831) 3,732 4,529 15,592
Interest
expense, net 481 415 508 460 502 486 507 473 1,998 1,834
Income before
income taxes 3,486 3,449 2,521 3,667 1,862 3,383 (5,338) 3,259 2,531 13,758
Provision for
income taxes 1,290 1,276 933 1,320 689 1,218 (1,975) 1,173 937 4,987
Net Income $ 2,196 $ 2,173 $ 1,588 $ 2,347 $ 1,173 $ 2,165 $ (3,363)$ 2,086 $ 1,594 $ 8,771
Basic Earnings
per Share $ 0.25 $ 0.23 $ 0.18 $ 0.26 $ 0.14 $ 0.24 $ (0.40)$ 0.23 $ 0.18 $ 0.96
Diluted
Earnings per
Share $ 0.24 $ 0.23 $ 0.18 $ 0.25 $ 0.14 $ 0.23 $ (0.40)$ 0.23 $ 0.18 $ 0.94
Market Price:
High $ 11-3/8 $ 7-5/8 $ 11-3/8 $ 8-3/8 $ 9-1/8 $ 11 $ 7-1/8 $ 11-1/4 $ 11-3/8 $ 11-1/4
Low 9-13/16 6-3/8 8-7/8 6-7/8 5-9/16 8 5-3/4 6-11/16 5-9/16 6-3/8
"Safe Harbor" Statement under the Private Securities Reform Act of 1995
Certain of the statements contained in this annual report (other than the
financial statements and statements of historical fact), including, without
limitation, statements as to management expectations and belief presented
under the captions "Letter to Our Stockholders" and "Management's
Discussion and Analysis", are forward-looking statements. Forward-looking
statements are made based upon management's expectations and belief
concerning future developments and their potential effect upon the
Corporation. There can be no assurance that future developments will be in
accordance with management's expectations or that the effect of future
developments on the Corporation will be those anticipated by management.
The Corporation wishes to caution readers that the assumptions which form
the basis for forward-looking statements with respect to or that may impact
earnings for the year ended December 31, 1999 and thereafter include many
factors that are beyond the Corporation's ability to control or estimate
precisely. These risks and uncertainties include, but are not limited to,
the market demand and acceptance of the Corporation's existing and new
products; the impact of competitive products; changes in the market for
raw or packaging materials which could impact the Corporation's
manufacturing costs; changes in product mix; changes in the pricing of the
products of the Corporation or its competitors; the loss of a significant
customer or supplier; production delays or inefficiencies; disruptions in
operations due to labor disputes; the unanticipated costs and disruption in
operations due to Year 2000 non-compliance; the costs and other effects of
complying with environmental regulatory requirements; losses due to natural
disasters where the Corporation is self-insured, the costs and other
effects of legal and administrative cases and proceedings, settlements and
investigations; and changes in US or international economic or political
conditions, such as inflation or deflation, or fluctuations in interest or
foreign exchange rates.
While the Corporation periodically reassesses material trends and
uncertainties affecting the Corporation's results of operations and
financial condition in connection with its preparation of the stockholders'
letter and management's discussion and analysis contained in its annual
reports, the Corporation does not intend to review or revise any particular
forward-looking statement referenced herein in light of future events.
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders of Bairnco Corporation:
We have audited the accompanying consolidated balance sheets of
Bairnco Corporation (a Delaware corporation) and subsidiaries as of
December 31, 1998 and 1997, and the related consolidated statements of
income, comprehensive income, stockholders' investment and cash flows
for each of the three years in the period ended December 31, 1998.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position
of Bairnco Corporation and subsidiaries as of December 31, 1998 and
1997, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles.
Orlando, Florida
January 21, 1999
Arthur Andersen LLP
CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31, 1998, 1997 and 1996
Bairnco Corporation and Subsidiaries
1998 1997 1996
Net Sales $156,456,000 $158,708,000 $150,234,000
Cost of sales 105,873,000 104,712,000 97,698,000
Gross Profit 50,583,000 53,996,000 52,536,000
Selling and administrative expenses 38,554,000 38,404,000 37,580,000
Provision for litigation costs
(Note 2) 7,500,000 -- --
Operating Profit 4,529,000 15,592,000 14,956,000
Interest expense, net 1,998,000 1,834,000 1,725,000
Income before Income Taxes 2,531,000 13,758,000 13,231,000
Provision for income taxes (Note 5) 937,000 4,987,000 4,896,000
Net Income $ 1,594,000 $ 8,771,000 $ 8,335,000
Basic Earnings per Share of Common
Stock (Note 4) $ 0.18 $ 0.96 $ 0.85
Diluted Earnings per Share of Common
Stock (Note 4) $ 0.18 $ 0.94 $ 0.85
Dividends per Share of Common Stock $ 0.20 $ 0.20 $ 0.20
The accompanying notes are an integral part of these consolidated financial
statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the years ended December 31, 1998, 1997 and 1996
Bairnco Corporation and Subsidiaries
1998 1997 1996
Net Income $ 1,594,000 $ 8,771,000 $ 8,335,000
Other comprehensive income,
net of tax:
Foreign currency translation
adjustment (Note 1) 173,000 (710,000) (18,000)
Comprehensive Income $ 1,767,000 $ 8,061,000 $ 8,317,000
The accompanying notes are an integral part of these consolidated financial
statements.
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997
Bairnco Corporation and Subsidiaries
1998 1997
Assets
Current Assets:
Cash and cash equivalents $ 822,000 $ 1,217,000
Accounts receivable, less allowances of
$1,224,000 and $943,000, respectively 27,999,000 24,939,000
Inventories:
Raw materials and supplies 5,701,000 5,646,000
Work in process 6,604,000 6,402,000
Finished goods 13,874,000 14,350,000
26,179,000 26,398,000
Deferred income taxes (Note 5) 4,137,000 2,641,000
Other current assets 1,709,000 2,748,000
Total current assets 60,846,000 57,943,000
Plant and Equipment, at cost:
Land 1,846,000 1,541,000
Buildings and leasehold interests and improvements 18,115,000 16,659,000
Machinery and equipment 77,330,000 71,670,000
97,291,000 89,870,000
Less - Accumulated depreciation and amortization (55,889,000) (49,957,000)
41,402,000 39,913,000
Cost in Excess of Net Assets of Purchased
Businesses (Note 1) 11,840,000 7,607,000
Other Assets (Note 1) 4,467,000 3,823,000
$118,555,000 $109,286,000
Liabilities and Stockholders' Investment
Current Liabilities:
Short-term debt (Note 7) $ 4,373,000 $ 3,018,000
Current maturities of long-term debt (Note 7) -- 9,000
Accounts payable 9,022,000 8,661,000
Accrued expenses (Note 6) 14,192,000 10,543,000
Total current liabilities 27,587,000 22,231,000
Long-Term Debt (Note 7) 33,471,000 27,291,000
Deferred Income Taxes (Note 5) 2,912,000 4,098,000
Other Liabilities 8,147,000 3,197,000
Stockholders' Investment (Notes 4, 7 and 8):
Preferred stock, par value $.01, 5,000,000 shares
authorized, none issued -- --
Common stock, par value $.01, 30,000,000 shares
authorized, 11,187,224 and 11,160,774 issued,
respectively 112,000 112,000
Paid-in capital 49,165,000 49,030,000
Retained earnings 22,670,000 22,802,000
Currency translation adjustment (Note 1) 1,745,000 1,572,000
Treasury stock, at cost, 2,904,165 and 2,166,765
shares, respectively (27,254,000) (21,047,000)
Total stockholders' investment 46,438,000 52,469,000
$118,555,000 $109,286,000
The accompanying notes are an integral part of these consolidated financial
statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1998, 1997 and 1996
Bairnco Corporation and Subsidiaries
1998 1997 1996
Cash Flows from Operating Activities:
Net income $ 1,594,000 $ 8,771,000 $ 8,335,000
Adjustments to reconcile to net cash
provided by operating activities:
Depreciation and amortization 6,688,000 6,516,000 6,305,000
(Gain) loss on disposal of plant
and equipment (13,000) 34,000 203,000
Deferred income taxes (2,751,000) 1,265,000 373,000
Change in operating assets and
liabilities:
(Increase) in accounts
receivable, net (1,033,000) (3,874,000) (147,000)
Decrease (increase) in inventories 2,117,000 (3,406,000) (442,000)
Decrease (increase) in other
current assets 1,125,000 956,000 (1,628,000)
(Decrease) increase in accounts
payable (38,000) 1,510,000 (460,000)
Increase (decrease) in accrued
expenses 2,204,000 (480,000) (426,000)
Other 4,223,000 472,000 734,000
Net cash provided by operating
activities 14,116,000 11,764,000 12,847,000
Cash Flows from Investing Activities:
Capital expenditures (5,976,000) (8,789,000) (10,131,000)
Payment for purchased businesses,
net of cash acquired (8,423,000) -- --
Proceeds from sale of plant and
equipment 123,000 219,000 138,000
Net cash (used in) investing
activities (14,276,000) (8,570,000) (9,993,000)
Cash Flows from Financing Activities:
Net borrowings of external debt 7,746,000 2,434,000 3,968,000
Payment of dividends (1,726,000) (1,827,000) (1,937,000)
Purchase of treasury stock (6,207,000) (3,255,000) (5,412,000)
Exercise of stock options 135,000 26,000 472,000
Net cash (used in) financing
activities (52,000) (2,622,000) (2,909,000)
Effect of foreign currency exchange
rate changes on cash and cash
equivalents (183,000) (210,000) 302,000
Net (decrease) increase in cash and
cash equivalents (395,000) 362,000 247,000
Cash and cash equivalents, beginning
of year 1,217,000 855,000 608,000
Cash and cash equivalents, end of
year $ 822,000 $ 1,217,000 $ 855,000
Supplemental Disclosures of Cash Flow
Information:
Cash paid during the year for:
Interest $ 2,008,000 $ 1,824,000 $ 1,696,000
Income taxes $ 2,402,000 2,805,000 5,378,000
The accompanying notes are an integral part of these consolidated
financial statements.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT
For the years ended December 31, 1998, 1997 and 1996
Bairnco Corporation and Subsidiaries
Currency
Common Paid-in Retained Translation Treasury
Stock Capital Earnings Adjustment Stock
Balance, December 31, 1995 $111,000 $48,533,000 $ 9,460,000 $2,300,000 $(12,380,000)
Net income -- -- 8,335,000 -- --
Cash dividends ($.20 per
share) -- -- (1,937,000) -- --
Issuance of 93,000 shares
pursuant to exercise of
stock options 1,000 471,000 -- -- --
Acquisition of treasury
stock (803,900 shares
at cost) -- -- -- -- (5,412,000)
Currency translation
adjustment (Note 1) -- -- -- (18,000) --
Balance, December 31, 1996 112,000 49,004,000 15,858,000 2,282,000 (17,792,000)
Net income -- -- 8,771,000 -- --
Cash dividends ($.20 per
share) -- -- (1,827,000) -- --
Issuance of 5,275 shares
pursuant to exercise of
stock options -- 26,000 -- -- --
Acquisition of treasury
stock (424,800 shares
at cost) -- -- -- -- (3,255,000)
Currency translation
adjustment (Note 1) -- -- -- (710,000) --
Balance, December 31, 1997 112,000 49,030,000 22,802,000 1,572,000 (21,047,000)
Net income -- -- 1,594,000 -- --
Cash dividends ($.20 per
share) -- -- (1,726,000) -- --
Issuance of 26,450 shares
pursuant to exercise of
stock options -- 135,000 -- -- --
Acquisition of treasury
stock (737,400 shares
at cost) -- -- -- -- (6,207,000)
Currency translation
adjustment (Note 1) -- -- -- 173,000 --
Balance, December 31, 1998 $112,000 $49,165,000 $22,670,000 $1,745,000 $(27,254,000)
The accompanying notes are an integral part of these consolidated
financial statements.
(1) Nature of Operations and Summary of Significant Accounting Policies
Nature of operations:
Bairnco Corporation is a diversified multinational company that operates
two business sectors: Engineered Materials and Components which are
designed, manufactured and sold under the Arlon brand identity to
electronic, industrial and commercial markets worldwide; and, Replacement
Products and Services which are manufactured and distributed under the
Kasco brand identity principally to retail food stores and meat, poultry
and fish processing plants throughout the United States, Canada and Europe.
Arlon's products are based on a common technology in coating, laminating
and dispersion chemistry. Arlon's principal products include high
performance materials for the printed circuit board industry, cast and
calendered vinyl film systems, custom engineered laminates and pressure
sensitive adhesive systems, and calendered and extruded silicone rubber
insulation products used in a broad range of industrial, consumer and
commercial products.
Kasco's principal products include replacement band saw blades for
cutting meat, fish, wood and metal, on-site maintenance services and
seasonings for ready-to-cook foods for the retail food industry primarily
in the meat and deli departments. Kasco also distributes equipment to the
food industry in Canada and France.
Principles of consolidation:
The accompanying consolidated financial statements include the accounts
of Bairnco Corporation and its subsidiaries (Bairnco or the Corporation)
after the elimination of all material inter-company accounts and
transactions.
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates.
Consolidated statements of cash flows:
The Corporation considers cash in banks, commercial paper, demand notes
and similar investments with a maturity of less than three months as cash
and cash equivalents for the purposes of the consolidated statements of
cash flows.
Certain reclassifications were made to prior year balances in order to
conform to the current year presentation.
Inventories:
Inventories are stated at cost, which is not in excess of market.
Inventory costs include material, labor and overhead. Inventories are
stated principally on a first-in, first-out (FIFO) basis.
Plant and equipment:
The Corporation provides for depreciation of plant and equipment
principally on a straight-line basis by charges to income in amounts
estimated to allocate the cost of these assets over their useful lives.
Rates of depreciation vary among the several classifications as well as
among the constituent items in each classification, but generally fall
within the following ranges:
Years
Buildings and leasehold interests and improvements 5 - 40
Machinery and equipment 3 - 20
When property is sold or otherwise disposed of, the asset cost and
accumulated depreciation are removed from the accounts and any resulting
gain or loss is included in the statement of income.
Leasehold interests and improvements are amortized over the terms of the
respective leases, or over their estimated useful lives, whichever is
shorter.
Maintenance and repairs are charged to operations. Renewals and
betterments are capitalized.
Accelerated methods of depreciation are used for income tax purposes,
and appropriate provisions are made for the related deferred income taxes.
Depreciation expense of $6,509,000, $6,333,000 and $6,123,000 was
recognized during 1998, 1997 and 1996, respectively.
Cost in excess of net assets of purchased businesses:
Cost in excess of net assets of purchased businesses acquired prior to
1971 of approximately $3.5 million is not being amortized since, in the
opinion of management, there has been no diminution in value. For
businesses acquired subsequent to 1970, the cost in excess of net assets of
purchased businesses, aggregating $10,020,000 and $5,625,000 at December
31, 1998 and 1997, respectively, is being amortized over 40 years. The
increase is due to the acquisition of MII (refer to Note 3 to the
Consolidated Financial Statements). Accumulated amortization at December
31, 1998 and 1997, was $1,665,000 and $1,504,000, respectively.
Amortization expense of $147,000, $146,000 and $149,000 was recognized
during 1998, 1997 and 1996, respectively.
At each balance sheet date, the Corporation evaluates the realizability
of its cost in excess of net assets of purchased businesses based upon
expectations of non-discounted cash flows and operating income for each
division having a material cost in excess of net assets of purchased
businesses balance. Based upon its most recent analysis, the Corporation
believes that no material impairment of its cost in excess of net assets of
purchased businesses exists at December 31, 1998.
Intangibles:
Intangible assets of purchased businesses, net of amortization, are
included in other assets and totaled $123,000 and $99,000 at December 31,
1998 and 1997, respectively. These items are amortized over their
estimated lives, which generally range from three to twenty years.
Amortization expense recognized was $32,000 during 1998, $37,000 during
1997 and $33,000 during 1996.
Revenue recognition:
Revenues are recognized when products are shipped or when services are
rendered.
Income taxes:
The Corporation accounts for income taxes using an asset and liability
approach that requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that have
been recognized in the Corporation's financial statements or tax returns.
In estimating future tax consequences, the Corporation generally considers
all expected future events other than enactment of changes in the tax law
or changes in tax rates. Changes in tax laws or rates will be recognized
in the future years in which they occur. Temporary differences between
income for financial reporting and income tax purposes arise primarily from
the timing of the deduction of certain accruals and from the use of
accelerated methods of depreciation for income tax reporting purposes
compared to the method of depreciation used for financial reporting
purposes.
Accrued expenses-insurance:
Accrued expenses-insurance represents the estimated costs of known and
anticipated claims under the Corporation's general liability, automobile
liability, property and workers compensation insurance policies for all of
its US operations. The Corporation provides reserves on reported claims
and claims incurred but not reported at each balance sheet date based upon
the estimated amount of the probable claim or the amount of the deductible,
whichever is lower. Such estimates are reviewed and evaluated in light of
emerging claim experience and existing circumstances. Any changes in
estimates from this review process are reflected in operations currently.
Stock options:
The Corporation accounts for stock options under Accounting Principles
Board Opinion No. 25 ("APB 25"), under which no compensation expense has
been recognized. In October 1995, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"), which is effective for years
beginning after December 15, 1995. SFAS 123 established financial
accounting and reporting standards for stock-based employee compensation
plans. The statement defines a fair value based method of accounting for
an employee stock option or similar equity instrument and encourages all
entities to adopt that method of accounting for all of their stock
compensation plans. However, it also allows an entity to continue to
measure compensation costs for those plans using the intrinsic value based
method of accounting prescribed by APB 25, but requires pro-forma
disclosure of net income and earnings per share for the effects on
compensation expense had the accounting guidance for SFAS 123 been adopted.
Compensation costs determined consistent with SFAS 123 did not have a
material impact on the accompanying consolidated net earnings and earnings
per share.
Translation of foreign currencies:
Balance sheet accounts of foreign subsidiaries are translated at the
rates of exchange in effect at the balance sheet date while income and
expenses are translated at the monthly average rates of exchange in effect
during the year.
Fair value of financial instruments:
The carrying values of cash and cash equivalents, accounts receivable,
accounts payable and accrued liabilities, approximate fair value due to the
short-term maturities of these assets and liabilities.
The carrying amount of the Corporation's short-term and long-term debt
approximates fair value, since the debt is at floating rates or rates
approximating rates currently offered to the Corporation for debt of the
same remaining maturities.
Comprehensive income:
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
("SFAS 130"), which is effective for years beginning after December 15,
1997. SFAS 130 established standards for reporting and displaying
comprehensive income and its components in a full set of general-purpose
financial statements. This statement requires that all items of
comprehensive income are classified by their nature in a financial
statement and that the accumulated balance of other comprehensive income be
displayed separately from retained earnings and additional paid-in capital
in the equity section of a statement of financial position. Bairnco
adopted SFAS 130 effective January 1, 1998. The comparative prior period
financial statements have been reclassified to conform to the current
period presentation.
Comprehensive income includes net income as well as certain other
transactions shown as changes in stockholders' investment. For Bairnco,
comprehensive income includes net income plus the change in net asset
values of foreign divisions as a result of translating the local currency
values of net assets to US dollars at varying exchange rates. Accumulated
other comprehensive income consists solely of foreign currency translation
adjustments. There are currently no tax expenses or benefits associated
with the foreign currency translation adjustments.
Reportable segments:
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131, "Disclosures about Segments of
an Enterprise and Related Information" ("SFAS 131"), which is effective for
fiscal years beginning after December 15, 1997. SFAS 131 introduces a new
model for segment reporting called the management approach. The management
approach is based on the way the chief operating decision-maker organizes
segments within a company for making operating decisions and assessing
performance.
SFAS 131 requires disclosures for each segment that are similar to those
required under previous standards with the addition of quarterly disclosure
requirements and a finer partitioning of geographic disclosures. It
requires limited segment data on a quarterly basis. It also requires
geographic data by country, as opposed to broader geographic regions
permitted under previous standards.
Bairnco adopted SFAS 131 effective January 1, 1998 and prior year
segment information and disclosures have been restated, where applicable,
to conform to the current year presentation.
Pension Accounting:
In February 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 132, "Employers'
Disclosures about Pensions and other Postretirement Benefits" ("SFAS 132"),
which is effective for fiscal years beginning after December 15, 1997.
SFAS 132 standardizes the disclosure requirements for pensions and other
postretirement benefits and requires additional information on changes in
the benefit obligations and fair value of plan assets while eliminating
certain prior disclosures that are no longer considered useful.
Bairnco adopted SFAS 132 effective January 1, 1998 and prior year
pension disclosures have been restated, where applicable, to conform to the
current year presentation.
(2) Provision for Litigation Costs
In the fourth quarter of 1998, Bairnco recorded a $7,500,000 pre-tax
provision for litigation costs. The litigation provision added to the
existing reserves for asbestos-related litigation expenditures due to a
change in the estimate to defend the Transaction Lawsuit (refer to
Management's Discussion and Analysis and Note 11 to Consolidated Financial
Statements). $2.5 million of this provision for litigation costs is
included in accrued expenses with the remaining $5.0 million included in
other liabilities in the Corporation's consolidated balance sheet for the
year ended December 31, 1998.
After recognition of related tax benefits, the litigation provision
reduced net income in 1998 by $4.7 million or approximately $.54 diluted
earnings per common share.
(3) Acquisition
On October 31, 1998, Bairnco purchased MII International, Inc. ("MII")
for approximately $8.3 million including the repayment of its debt. MII
manufactures adhesive coated films for use in the graphics and industrial
markets. The transaction was accounted for as a purchase and was financed
with long-term debt. The purchase price exceeded the fair value of net
assets acquired by approximately $4.0 million which is being amortized on a
straight-line basis over 40 years. The results of operations of MII are
included in the accompanying consolidated financial statements from the
date of acquisition.
The following summarized unaudited pro forma financial information
assumes the acquisition had occurred on January 1 of each year:
Pro Forma Information
(in thousands, except per share data) 1998 1997
Net sales $167,865 $174,184
Net income $ 1,782 $ 9,053
Basic earnings per share $ 0.21 $ 0.99
Diluted earnings per share $ 0.20 $ 0.97
These amounts include MII's actual results in 1997 and for the first ten
months of 1998 prior to acquisition and actual results for the two months
in 1998 after acquisition. The amounts are based upon certain assumptions
and estimates, and do not reflect any benefit from economies which might be
achieved from combined operations. The pro forma results do not
necessarily represent results which would have occurred if the acquisition
had taken place on the basis assumed above, nor are they indicative of the
results of future combined operations.
(4)Earnings per Share
The Corporation accounts for earnings per share ("EPS") under Financial
Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"). The
following disclosures comply with the requirements of SFAS 128.
1998 1997 1996
Basic Earnings per Common Share:
Net Income $ 1,594,000 $ 8,771,000 $ 8,335,000
Average common shares outstanding 8,655,000 9,151,000 9,753,000
Basic Earnings Per Common Share $ 0.18 $ 0.96 $ 0.85
Diluted Earnings per Common Share:
Net Income $ 1,594,000 $ 8,771,000 $ 8,335,000
Average common shares outstanding 8,655,000 9,151,000 9,753,000
Common shares issuable in respect
to options issued to employees,
with a dilutive effect 163,000 199,000 98,000
Total diluted common shares
outstanding 8,818,000 9,350,000 9,851,000
Diluted Earnings Per Common Share $ 0.18 $ 0.94 $ 0.85
Basic earnings per common share were computed by dividing net income by
the weighted average number of shares of common stock outstanding during
the year. Diluted earnings per common share includes the effect of all
dilutive stock options.
(5) Income Taxes
The components of income before income taxes and the provisions for
domestic and foreign income taxes are as follows:
1998 1997 1996
Income before Income Taxes:
Domestic $ 1,187,000 $12,765,000 $13,176,000
Foreign 1,344,000 993,000 55,000
Total Income before Income Taxes $ 2,531,000 $13,758,000 $13,231,000
Provision for Income Taxes:
Domestic:
Currently payable $ 3,266,000 $ 3,616,000 $ 4,096,000
Deferred (2,688,000) 1,102,000 594,000
Foreign:
Currently payable 422,000 106,000 452,000
Deferred (63,000) 163,000 (246,000)
Total Provision for Income Taxes $ 937,000 $ 4,987,000 $ 4,896,000
Bairnco's net current and non-current deferred tax assets (liabilities)
include the following at December 31:
1998 1997 1996
Current Deferred Tax Items:
Accrued Expenses $ 2,840,000 $ 1,584,000 $ 1,887,000
Inventories 977,000 847,000 872,000
Other 320,000 210,000 163,000
Net Current Deferred Tax Asset 4,137,000 2,641,000 2,922,000
Non-Current Deferred Tax Items:
Fixed Assets (3,539,000) (3,291,000) (2,889,000)
Pensions (1,273,000) (1,051,000) (1,149,000)
Intangible Assets (13,000) 21,000 15,000
Provision for Litigation Costs 1,700,000 -- --
Other 213,000 223,000 909,000
Net Non-Current Deferred Tax
Liability (2,912,000) (4,098,000) (3,114,000)
Net Deferred Tax Asset (Liability) $ 1,225,000 $(1,457,000) $ (192,000)
Management expects that future operations will generate sufficient
taxable income to realize the existing net temporary differences. As a
result, the Corporation has not recorded any valuation allowances against
its deferred tax assets.
In 1998, 1997 and 1996 the Corporation's effective tax rates were 37.0%,
36.2% and 37.0%, respectively, of income before income taxes. An analysis
of the differences between these rates and the US federal statutory income
tax rate is as follows:
1998 1997 1996
Computed income taxes at
statutory rate $ 861,000 $ 4,678,000 $4,499,000
State and local taxes, net of
federal tax benefit 64,000 368,000 321,000
Dividend income -- 1,303,000 198,000
Amortization of goodwill 9,000 9,000 9,000
Foreign income taxed at different
rates (98,000) (69,000) 187,000
Tax credits (31,000) (1,182,000) (271,000)
Benefit of Foreign Sales Corporation (270,000) (289,000) (413,000)
Other, net 402,000 169,000 366,000
Provision for income taxes $ 937,000 $ 4,987,000 $4,896,000
Audits of the federal income tax returns of the Corporation and its
subsidiaries have been completed through 1992.
Provision has not been made for US income taxes on approximately
$3.1 million of undistributed earnings of international subsidiaries.
These earnings could become subject to additional tax if they were remitted
as dividends or if the Corporation should sell its stock in the
subsidiaries. It is not practicable to estimate the amount of additional
tax that might be payable on the foreign earnings; however, the Corporation
believes that US foreign tax credits would largely eliminate any US income
tax incurred.
(6) Accrued Expenses
Accrued expenses consisted of the following as of December 31, 1998 and
1997, respectively:
1998 1997
Salaries and wages $ 2,669,000 $ 2,353,000
Income taxes 633,000 139,000
Insurance 2,462,000 2,216,000
Litigation 3,580,000 1,461,000
Other accrued expenses 4,848,000 4,374,000
Total accrued expenses $14,192,000 $10,543,000
(7) Debt
Long-term debt consisted of the following as of December 31, 1998 and
1997, respectively:
1998 1997
Revolving Credit Notes $30,471,000 $24,291,000
Industrial Revenue Bonds 3,000,000 3,000,000
Other -- 9,000
33,471,000 27,300,000
Less Current Maturities -- 9,000
Total $33,471,000 $27,291,000
On December 31, 1998, the Corporation's secured, reducing revolving
credit agreement (the "Credit Agreement") with a consortium of four banks
led by Bank of America, Illinois, and including SunTrust Bank, First Union
Bank of Florida and First National Bank of Maryland, was amended. The
amendment effectively extended the first commitment reduction date to
December 31, 2000 and the expiration date of the Credit Agreement from
December 31, 2001 to December 31, 2003. The Credit Agreement also includes
a letter of credit facility of $7 million, although the letter of credit
facility may be increased up to $20 million with a corresponding decrease
in the revolving credit facility. Effective December 31, 1998, the letter
of credit facility was increased by $2.0 million to $9.0 million with a
corresponding decrease in the revolving credit facility. At December 31,
1998, $30.5 million of revolving credit was outstanding and payable from
2001 through 2003. In addition, approximately $8.2 million of irrevocable
standby letters of credit were outstanding under the Credit Agreement,
which are not reflected in the accompanying consolidated financial
statements. $5.2 million of the letters of credit guarantee various trade
and insurance activities. An outstanding $3.0 million letter of credit
supports the Industrial Revenue Bonds. Interest rates vary on the revolving
credit and are set at the time of borrowing in relationship to one of
several reference rates, as selected by the Corporation at the time of the
borrowing. Interest rates on the revolving credit outstanding at December
31, 1998, were approximately 6.1% on US borrowings and ranged from
approximately 3.9% to 7.1% on European borrowings. A commitment fee is
paid on the unused portion of the total credit. The interest rate on the
Industrial Revenue Bonds was approximately 3.9% at December 31, 1998.
Substantially all of the assets of the Corporation and its US
subsidiaries are pledged as collateral under the Credit Agreement, which
expires on December 31, 2003.
The Credit Agreement contains covenants, which require the Corporation
to meet minimum interest coverage ratios, and which limit the ratio of
total debt to capital employed as defined in the Credit Agreement. In
addition, minimum levels of stockholders' investment must be maintained.
At December 31, 1998 the Corporation was in compliance with all covenants
contained in the Credit Agreement.
The Corporation has other short-term debt outstanding at rates of 5.9%
to 6.5% due in 1999.
The annual maturity requirements for long-term debt due after December
31, 1998, are summarized as follows:
Year Ended December 31,
1999 $ --
2000 --
2001 3,000,000
2002 3,000,000
2003 27,471,000
Total Long-term Debt $33,471,000
(8) Stock Options
The Corporation has a stock incentive plan which was established in 1990
("1990 Plan"). The 1990 Plan permits the grant of options to purchase not
more than 2,500,000 shares of common stock. The 1990 Plan provides for the
grant of non-qualified options and options qualifying as incentive stock
options under the Internal Revenue Code to key employees and each outside
Director of the Corporation at an option price equal to the fair market
value on the date of grant. Non-qualified stock options may also be
granted at book value. The term of each option may not exceed 10 years
from the date the option becomes exercisable (or, in the case of an
incentive stock option, 10 years from the date of grant).
A senior executive of the Corporation presently holds performance based,
non-qualified stock options granted under the 1990 Plan to purchase a total
of 250,000 shares of common stock at option prices equal to the fair market
value on the date of grant. Two-thirds of these performance options became
exercisable as a result of the Corporation's earnings performance in 1992
and 1995 with the remaining one-third becoming fully exercisable on the
tenth anniversary of the date of grant if the executive is still employed
by the Corporation. These options remain exercisable for ten years from
the date they first become exercisable.
Changes in the stock options granted under the 1990 Plan during 1998,
1997 and 1996 were as follows:
1998 1997 1996
Wtd Avg Wtd Avg Wtd Avg
1998 Exercise 1997 Exercise 1996 Exercise
Options Price Options Price Options Price
Outstanding at
beginning of year 633,750 $5.89 684,225 $5.71 716,950 $5.56
Granted 52,625 8.20 33,400 8.24 78,000 6.32
Exercised (26,450) 5.13 (5,275) 4.93 (93,000) 5.09
Canceled (12,975) 6.75 (78,600) 5.39 (17,725) 5.28
Outstanding at
end of year 646,950 $6.09 633,750 $5.89 684,225 $5.71
Exercisable at
end of year 461,813 $5.79 465,563 $5.70 501,513 $5.62
At December 31, 1998, 1997 and 1996, 1,450,825, 1,490,475 and 1,495,925
shares, respectively, were available for option grants under the 1990 Plan.
The weighted average contractual life of the 646,950 options outstanding at
December 31, 1998 was 3.17 years. There were no charges to income in
connection with stock option grants or exercises during 1998, 1997 and
1996.
(9) Pension Plans
The Corporation has several pension plans which cover substantially all
of its employees. The benefits paid under these plans generally are based
on employees' years of service and compensation during the last years of
employment. Annual contributions made to the US plans are determined in
compliance with the minimum funding requirements of ERISA using a different
actuarial cost method and actuarial assumptions than are used for
determining pension expense for financial reporting purposes. Plan assets
consist primarily of publicly traded equity and debt securities. The
Corporation maintains unfunded supplemental plans in the United States to
provide retirement benefits in excess of levels provided under the
Corporation's other plans. The Corporation's foreign subsidiaries provide
retirement benefits for employees consistent with local practices. The
foreign plans are not significant in the aggregate and therefore are not
included in the following disclosures.
The following table describes the funded status of US pension plans:
1998 1997
Change in Benefit Obligation:
Benefit obligation at September 30,
1997 and 1996, respectively $ 25,638,000 $ 24,241,000
Service cost 756,000 754,000
Interest cost 1,895,000 1,815,000
Actuarial loss 2,071,000 211,000
Benefits paid (1,457,000) (1,383,000)
Benefit obligation at September 30,
1998 and 1997, respectively 28,903,000 25,638,000
Change in Plan Assets:
Fair value of plan assets at
September 30, 1997 and 1996,
respectively 30,433,000 24,371,000
Actual return on plan assets 1,142,000 6,276,000
Employer contributions 667,000 1,148,000
Benefits paid (1,436,000) (1,362,000)
Fair value of plan assets at
September 30, 1998 and 1997,
respectively 30,806,000 30,433,000
Funded status 1,903,000 4,796,000
Unrecognized net transition obligation 349,000 447,000
Unrecognized prior service cost 266,000 323,000
Unrecognized net actuarial loss (gain) 744,000 (2,839,000)
Prepaid pension costs at September 30,
1998 and 1997, respectively 3,262,000 2,727,000
Fourth quarter accruals (26,000) (125,000)
Fourth quarter contributions 52,000 55,000
Prepaid pension costs at yearend $ 3,288,000 $ 2,657,000
The projected benefit obligation, accumulated benefit obligation and
fair value of plan assets for the pension plan with plan assets in excess
of accumulated benefit obligations were $25,448,000, $22,705,000 and
$28,380,000, respectively, at September 30, 1998, and $22,534,000,
$20,223,000 and $28,066,000, respectively, at September 30, 1997. The
projected benefit obligation, accumulated benefit obligation and fair value
of plan assets for the pension plans with accumulated benefit obligations
in excess of plan assets were $3,455,000, $3,396,000 and $2,426,000,
respectively, at September 30, 1998, and $3,105,000, $3,036,000 and
$2,368,000, respectively, at September 30, 1997.
The discount rate used in determining the actuarial present value of the
projected benefit obligations in the table above was 7.0% at September 30,
1998 and 7.5% at September 30, 1997. The rate of projected pay increases,
where applicable, was 5% at both September 30, 1998 and 1997. The expected
long-term rate of return on retirement plan assets was 9% at both September
30, 1998 and 1997.
Amounts recognized in the consolidated balance sheets of the Corporation
consist of the following:
1998 1997
Prepaid benefit cost $ 3,382,000 $ 2,845,000
Accrued benefit liability (969,000) (668,000)
Intangible asset 849,000 550,000
Net amount recognized at September 30 3,262,000 2,727,000
Fourth quarter accruals (26,000) (125,000)
Fourth quarter contributions 52,000 55,000
Net amount recognized at December 31 $ 3,288,000 $ 2,657,000
Net periodic pension cost for the US plans included the following:
1998 1997 1996
Service cost-benefits earned
during the year $ 752,000 $ 771,000 $ 716,000
Interest cost on projected
benefit obligation 1,918,000 1,823,000 1,695,000
Expected return on plan assets (2,722,000) (2,252,000) (2,018,000)
Amortization of net obligation at
date of transition 99,000 99,000 99,000
Amortization of prior service cost 56,000 61,000 26,000
Amortization of accumulated loss -- -- 7,000
Net periodic pension cost $ 103,000 $ 502,000 $ 525,000
(10) Reportable Segment Data
Operating segments are components of an enterprise that:
a.Engage in business activities from which they may earn revenues and
incur expenses,
b.Whose operating results are regularly reviewed by the company's chief
operating decision-maker to make decisions about resources to be allocated
to the segment and assess its performance, and
c.For which discrete financial information is available.
Operating segments with similar products and services, production
processes, types of customers, and sales channels are combined into
reportable segments for disclosure purposes. Bairnco has two reportable
segments - the Arlon Engineered Materials and Components segment and the
Kasco Replacement Products and Services segment.
The Arlon Engineered Materials and Components segment designs, manufactures
and sells laminated and coated materials to the electronic, industrial and
commercial markets under the Arlon and Calon brand names. These products
are based on common technologies in coating, laminating, polymers, and
dispersion chemistry. Among the products included in this segment are high
technology materials for the printed circuit board industry, vinyl films
for graphics art applications, foam tapes used in window glazing,
electrical and thermal insulation products, and silicone rubber products
for insulating tapes and flexible heaters.
The Kasco Replacement Products and Services segment manufactures, sells and
services products and equipment used in supermarkets, meat and deli
operations, and meat, poultry, and fish processing plants throughout the
United States, Canada and Europe. It also manufactures and sells small
band saw blades for cutting wood and metal, and large band saw blades for
use at lumber mills.
Bairnco evaluates segment performance based on income before interest and
taxes and excluding allocation of headquarters expense. Segment income and
assets are measured on a basis that is consistent with the methods
described in the summary of significant accounting policies. Segment
assets exclude US deferred income taxes and assets attributable to US
employee benefit programs. Inter-segment transactions are not material.
No customer accounts for 10% or more of consolidated revenue.
Financial information about the Corporation's operating segments for the
years ended December 31, 1998, 1997 and 1996 is as follows:
Operating Capital Depreciation/
Net Sales Profit (Loss) Assets Expenditures Amortization
1998
Arlon $107,736,000 $ 12,698,000 $ 72,880,000 $ 2,925,000 $3,952,000
Kasco 48,720,000 3,085,000 38,215,000 3,022,000 2,676,000
Headquarters -- (11,254,000)(a) 7,460,000 29,000 60,000
Total $156,456,000 $ 4,529,000 $118,555,000 $ 5,976,000 $6,688,000
1997
Arlon $112,036,000 $ 15,873,000 $ 64,530,000 $ 5,438,000 $3,665,000
Kasco 46,672,000 3,495,000 37,703,000 3,252,000 2,791,000
Headquarters -- (3,776,000) 7,053,000 99,000 60,000
Total $158,708,000 $ 15,592,000 $109,286,000 $ 8,789,000 $6,516,000
1996
Arlon $103,449,000 $ 16,159,000 $ 58,498,000 $ 7,255,000 $3,312,000
Kasco 46,785,000 2,649,000 35,328,000 2,830,000 2,933,000
Headquarters -- (3,852,000) 8,774,000 46,000 60,000
Total $150,234,000 $ 14,956,000 $102,600,000 $10,131,000 $6,305,000
(a) Includes impact of $7.5 million (pre-tax) provision for litigation
costs.
The Corporation has operations in Canada and several European countries.
Information about the Corporation's operations by geographical area for the
years ended December 31, 1998, 1997 and 1996 is as follows:
Sales to External Long-lived Segment
Customers Assets
1998
United States $133,005,000 $48,109,000
France 12,821,000 218,000
Other Foreign 10,630,000 4,997,000
1997
United States $136,010,000 $42,478,000
France 12,238,000 209,000
Other Foreign 10,460,000 5,169,000
1996
United States $124,154,000 $40,272,000
France 12,179,000 267,000
Other Foreign 13,901,000 5,823,000
(11) Contingencies
Bairnco and its subsidiaries are among the defendants in a lawsuit
pending in the U.S. District Court for the Southern District of New
York (the "Transactions Lawsuit") in which it is alleged that Bairnco
and others are derivatively liable for the asbestos-related claims
against its former subsidiary, Keene Corporation ("Keene"). The
plaintiffs in the Transactions Lawsuit are the trustees of Keene
Creditors Trust ("KCT"), a successor in interest to Keene. In the
Transactions Lawsuit complaint, the KCT alleges that certain sales of
assets by Keene to other subsidiaries of Bairnco were fraudulent
conveyances and otherwise violative of state law, as well as being
violative of the civil RICO statute, 18 U.S.C. Section 1964. The
complaint seeks compensatory damages of $700 million, interest,
punitive damages, and trebling of the compensatory damages pursuant to
civil RICO. In a series of decisions that remain subject to appeal,
the court has dismissed plaintiff's civil RICO claims; dismissed 14 of
the 21 defendants named in the complaint; and partially granted
defendants' motions for summary judgment on statute of limitations
grounds. Discovery is now underway as to the remaining claims and
defendants.
Keene was spun off in 1990, filed for relief under Chapter 11 of the
Bankruptcy Code in 1993, and emerged from Chapter 11 pursuant to a
plan of reorganization approved in 1996 (the "Keene Plan"). The Keene
Plan provided for the creation of the KCT, and transferred the
authority to prosecute the Transactions Lawsuit from the Official
Committee of Unsecured Creditors of Keene (which initiated the lawsuit
in the Bankruptcy Court in 1995) to the KCT. The Keene Plan further
provided that only the KCT, and no other entity, can sue Bairnco in
connection with the claims in the Transactions Lawsuit complaint.
Therefore, although a number of other asbestos-related personal injury
and property damage cases against Bairnco nominally remain pending in
courts around the country, it is expected that the resolution of the
Transactions Lawsuit in substance will resolve all such claims.
Bairnco also is the defendant in a separate action by the KCT (the
"NOL Lawsuit"), also pending in the United States District Court for
the Southern District of New York, in which the KCT seeks the
exclusive benefit of tax refunds attributable to the carryback by
Keene of certain net operating losses ("NOL Refunds"), notwithstanding
certain provisions of applicable tax sharing agreements between Keene
and Bairnco. (As with the Transactions Lawsuit, the NOL Lawsuit was
commenced during Keene's Chapter 11 case and, pursuant to the Keene
Plan, the KCT became the plaintiff in the lawsuit and the lawsuit was
moved from the bankruptcy Court to the District Court.) Pending
resolution of the NOL Lawsuit, any refunds actually received are to be
placed in escrow. Through December 31, 1998, approximately $28.5
million of NOL Refunds had been received and placed in escrow. There
can be no assurance whatsoever that resolution of the NOL Lawsuit will
result in the release of any portion of the NOL Refunds to Bairnco..
Bairnco and its Arlon subsidiary also are among the defendants in a
third action by the KCT (the "Properties Lawsuit"), commenced December
8, 1998 and pending in the United States District Court for the
Southern District of New York. In the Properties Lawsuit complaint,
the KCT seeks a declaratory judgment that it owns certain patents and
real property purchased by Arlon from Keene in 1989, based on the
allegations that technical title to these assets was not conveyed at
the time of the sale and that no proof of claim specifically
referencing these assets was filed during Keene's Chapter 11 case.
Management believes that Bairnco has meritorious defenses to all
claims or liability purportedly derived from Keene and that it is not
liable, as an alter ego, successor, fraudulent transferee or
otherwise, for the asbestos-related claims against Keene or with
respect to Keene products.
Bairnco Corporation and its subsidiaries are defendants in a number of
other actions. Management of Bairnco believes that the disposition of
these other actions, as well as the actions and proceedings described
above, will not have a material adverse effect on the consolidated
results of operations or the financial position of Bairnco Corporation
and its subsidiaries as of December 31, 1998.
CORPORATE INFORMATION
Corporate Office
Suite 300, 2251 Lucien Way
Maitland, Florida 32751
(407) 875-2222
www.bairnco.com
Principal Facilities
Bear, Delaware
East Providence, Rhode Island
Northbrook, Illinois
Rancho Cucamonga, California
St. Louis, Missouri
Santa Ana, California
Toronto, Ontario, Canada
Gwent, Wales, United Kingdom
Paris, France
Pansdorf, Germany
Transfer Agent and Registrar
Trust Company Bank
P.O. Box 4625
Atlanta, Georgia 30302
(404) 588-7815
Independent Certified Public Accountants
Arthur Andersen LLP
200 South Orange Avenue, Suite 2100
Orlando, Florida 32801
(407) 841-4601
Stock Listing
Bairnco common stock is listed on the New York Stock Exchange.
Symbol - BZ.
Annual Meeting
The annual stockholders meeting will be held at Bairnco's Corporate Office
on April 22, 1999 at 9:00 a.m.
Form 10-K
Stockholders may obtain without charge a copy of Bairnco's Form 10-K filed
with the Securities and Exchange Commission by writing to Investor
Relations at the Corporate Office address.
Investor Relations Information
Contact J. Robert Wilkinson, Vice President Finance and Treasurer, Bairnco
Corporation
(407) 875-2222, extension 228.
BAIRNCO CORPORATION
Suite 300, 2251 Lucien Way
Maitland, Florida 32751
407-875-2222
FAX 407-875-3398
www.bairnco.com