[Bairnco Logo]

 

 

 

January 24, 2007

 

 

Dear Fellow Stockholder:

 

On June 22, 2006, Steel Partners, L.P. (Steel Partners), through a wholly owned subsidiary BZ Acquisition Corp., announced an unsolicited tender offer to purchase all of the issued and outstanding common stock of Bairnco Corporation for $12.00 per share in cash, without interest, subject to a number of significant conditions (the Offer).

 

After a thorough review of this Offer, Bairncos existing strategic business plan, and other strategic alternatives, the Companys Board of Directors determined that the Offer is inadequate, opportunistic and not in the best interests of all of the Companys stockholders. Accordingly, the Companys Board has recommended that you reject the Offer and not tender your shares.

 

Protect Your Interests  Do Not Support Steel Partners

 

We strongly urge you to reject Steel Partners efforts to replace your Board. As part of its plan to acquire Bairnco at a price that the Board of Directors has determined to be inadequate and not in the best interests of all of Bairncos stockholders, Steel Partners recently commenced a process to solicit your written consents to take control of your Board by removing the directors that you have elected and replacing them with a slate of nominees that have been handpicked by Steel Partners.

 

Your Board Has and Will Continue to Act in the Best Interests of the Company and All of its Stockholders

 

The Companys existing Board of Directors is open-minded, independent and better suited to act in the best interests of ALL the Companys stockholders than Steel Partners slate of handpicked nominees. Your current Board has always upheld its fiduciary duty to act in the best interests of ALL of the Companys stockholders and will continue to do so. There is no guarantee that Steel Partners slate of nominees would act in a similar manner due to the ties these nominees have to one another and their affiliations with Steel Partners, which has an interest in the Offer that is not the same as that of the Companys other stockholders. In essence, a vote for Steel Partners slate of nominees is a vote to give away control of the Company without getting a control premium, or an adequate price for your stock.

 

The Offer Dramatically Undervalues Bairnco

 

The Board believes that Steel Partners $12.00 per share Offer dramatically undervalues Bairnco and would deny stockholders value that is rightfully yours:

 

 

 

 

 

Note:  All earnings and net income numbers exclude the impact of professional fees related to the Offer and Steel Partners consent solicitation and certain related matters and a tax benefit from an increased basis for income tax accounting purposes in certain real property and related improvements booked during the third quarter of 2006.

 

 

We urge you to protect your investment in Bairnco and reject Steel Partners efforts to take control of your Company. In order to do so, do not sign Steel Partners gold consent card. If you have previously signed a gold consent card, you may revoke that consent by signing, dating and mailing the enclosed WHITE Consent Revocation Card immediately. Finally, even if you have not signed Steel Partners consent card, you can show your support for your Board by signing, dating and mailing the enclosed WHITE Consent Revocation Card. Regardless of the number of shares you own, your revocation of consent is important. Please act today.

 

We appreciate your continued support.

 

On Behalf of the Board of Directors,
 

 

Sincerely,
 

 

/s

 

Luke E. Fichthorn, III,
Chairman and CEO
Bairnco Corporation

 

If you have any questions about revoking any consent you may have previously granted or require assistance, please call:

 

[Georgeson Logo]
17 State Street  10^th Floor
New York, NY 10004
Banks and Brokers Call 212.440.9800
All others call Toll-Free 1.866.695.6077

COMPENSATION DISCUSSION AND ANALYSIS

 

The executive compensation program of the Company has been designed to motivate, reward, attract, and retain the management deemed essential to ensure the success of the Company. The program seeks to align executive compensation with Company objectives, business strategy, and financial performance. In applying these principles, the Company seeks to:

 

 

The compensation programs of the Company for its executive officers and key employees are generally administered by or under the direction of the Compensation Committee and are reviewed on an annual basis to ensure that remuneration levels and benefits are competitive and reasonable using the guidelines described above. The particular elements of the compensation programs for such persons are set forth in more detail below.

 

The Committee utilizes publicly available professional compensation surveys and labor market studies, including those prepared by Hewitt and Mercer, to make informed decisions regarding pay and benefit practices. Surveys prepared by management are also used to periodically ensure that the Company is maintaining its labor market competitiveness. These internally-developed surveys compare the Companys compensation program to the compensation programs of similar sized industrial companies. The Company does not retain compensation consultants to advise the Company on compensation matters. While the Company does not set compensation at set percentage levels compared to the market, the Committee does seek to provide salary, incentive compensation opportunity and employee benefits that fall within the average practice of the Companys competitors and the labor markets in which it participates.

 

Base Salary.  Base salary levels are primarily determined by the Committee at levels the Committee deems necessary or appropriate to attract the level of competence needed for the position. The Committee reviews base salary levels annually based on individual performance from prior years, current industry conditions and current market considerations to ensure that base salary levels for the Companys executive officers and key employees are competitive within a range that the Committee considers to be reasonable and necessary.

 

Performance Bonus.  The Company provides incentive compensation to its executive officers and key employees in the form of annual cash bonuses relating to financial and operational achievements during the prior year through the Companys Management Incentive Compensation (MIC) Program.

 

The MIC bonus pool contains 1,000 points which are allocated to executives and key employees at the beginning of each performance year, in the Compensation Committees discretion, based on responsibilities and contributions to the success of the business. The bonus pool is funded based on meeting and exceeding financial targets in two areas: return on net worth and earnings per share. The Company chose return on net worth and earnings per share because it believed that Executives should be rewarded for increasing shareholder value.

 

The bonus pool is funded as follows:

 

 

 

At the end of the year, the bonus pool is divided by 1,000 points to determine the value per point.

 

MIC participants work throughout the year against an established set of goals and objectives. At the end of the year, they receive a grade that judges the percentage of completion against those goals and objectives.

 

The annual incentive award payable to an executive officer cannot exceed the maximum amount allocable to him from the bonus pool. In the case of corporate administrative and financial officers, incentive compensation decisions are made primarily on the basis of the assistance and performance of the officer in implementing corporate objectives within the scope of his or her responsibilities. In the case of operational officers, incentive compensation decisions are made primarily on the basis of operational results of the business operations for which the officer is responsible. Although the achievement of certain financial objectives as measured by a business segments earnings are considered in determining incentive compensation, other subjective and less quantifiable criteria are also considered. In this regard, the Committee takes into account specific achievements that are expected to affect future earnings and results or that had an identifiable impact on the prior years results. Placing an emphasis on incentive compensation is consistent with our philosophy of rewarding executives for meeting and exceeding the Companys goals and exceptional individual performance.

 

MIC payouts are determined by multiplying (i) the points assigned to the executive at the beginning of the performance year times (ii) the personal performance grade earned by the executive for the performance year times (iii) the point value. The Company has not yet determined MIC payouts for 2006.

 

Stock Incentive Plan.  The Company also provides long-term incentive compensation to its executive officers and key employees through stock options and restricted shares. The 2000 Bairnco Stock Incentive Plan (the Stock Incentive Plan) was approved by shareholders at the 2000 Annual Meeting of Shareholders. As originally established, the Stock Incentive Plan provided for stock option awards. In April 2003, the Board of directors amended the Stock Incentive Plan to add a restricted stock award program. The restricted stock award program permits the committee to grant to an employee an award consisting of shares of Bairnco stock that are subject to specified forfeiture and transfer restrictions. Upon the lapse of these restrictions, the restricted stock award becomes vested. Generally, a restricted stock award under the Stock Incentive Plan becomes vested if the recipient remains employed until the fifth anniversary of the date of the award. The restricted stock award recipient receives dividends and voting rights during the vesting period. Under the terms of the Stock Incentive Plan, the Committee has complete discretion in determining eligibility for participation and the number of stock options or restricted stock shares, if any, to be granted to a participant. Stock option and restricted stock awards may be made from the shares of the Companys Common Stock originally approved by the shareholders for issuance under the Stock Incentive Plan. The Committee has established and follows guidelines with respect to the granting of options and restricted stock awards under the Stock Incentive Plan to employees. The use of these instruments is intended to provide incentives to the Companys executive officers and key employees to work toward the long-term growth of the Company by providing them with a benefit that will increase only to the extent the value of the Common Stock increases. Options and restricted shares are not granted by the Committee as a matter of course as part of the regular compensation of any executive or key employee. The decision to grant options or restricted shares is based on the perceived incentive that the grant will provide and the benefits that the grant may have on long-term stockholder value. The determination of the number of shares granted is based on the level and contribution of the employee. Consideration is also given to the anticipated contribution of the business operations for which the optionee has responsibility to overall stockholder value.

 

The Compensation Committee has only granted two equity awards to named executive officers since 2003, when it granted 50,000 stock options (vesting over three years) to the Chief Executive Officer and restricted stock awards to certain of the Companys executive officers, including the named executive officers. All of the restricted stock grants vest on the fifth anniversary of the grant date in 2008. The Company believes that these equity awards appropriately align the interests of the executives with the interests of the Companys shareholders.

 

Bairnco Retirement Plan

 

The Company maintains the Bairnco Corporation Retirement Plan (the Bairnco Plan), a non-contributory defined benefit pension plan, for certain of the Companys and its U.S. subsidiaries salaried and hourly employees. The Bairnco Plan was frozen effective as of March 31, 2006, and as a result, no new participants will enter the plan and the benefits of current participants were being frozen as of that date.

 

Pension benefits payable under the frozen plan are based on a formula that considers the participants years of service with the Company and final average compensation levels. The Company froze the Bairnco Plan because the Company believes that, on a going forward basis, the Companys 401(k) will provide a better retirement compensation vehicle for its employees and will be more cost efficient for the Company. For further discussion of the pension plan, see the Pension Benefits table below and accompanying narrative.

 

Pursuant to his employment agreement, Mr. Fichthorn will receive a special retirement supplement that is intended to provide him a retirement benefit comparable to what he would have received under the Bairnco Plan (described above) if his combined past service as a director of Bairncos former subsidiary, Keene Corporation, and Bairnco were treated as years of service under that plan.

 

401(K) Plan

 

Effective April 1, 2006, Bairnco began making contributions to its existing 401(k) Retirement Savings Plan to compensate for the loss of continuing participation in the Companys pension plan. Those contributions take two forms:

 

 

Employment Agreement

 

In 1990, the Company entered into an employment agreement with Mr. Luke Fichthorn III that will expire December 31, 2007. The agreement provides that if Mr. Fichthorn dies while an employee, his surviving spouse or estate will receive a death benefit equal to three times the sum of (i) his base salary, and (ii) the highest bonus paid to him during the prior three years or the current year. If Mr. Fichthorns employment terminates due to disability, he will receive 75% of his base salary for two years and 55% of such salary thereafter until the disability ends or his supplemental retirement benefits commence. If the Company terminates Mr. Fichthorns employment without cause or breaches the agreement in a material fashion leading Mr. Fichthorn to terminate his employment, the Company will pay Mr. Fichthorn a lump sum benefit equal to the sum of (i) four times his then base salary, and (ii) the highest bonus paid or payable to him during the prior three years or the current year. The agreement also provides that regardless of the reason for his termination, Mr. Fichthorn and his spouse would have been entitled to receive medical, health and hospitalization benefits following his termination until he attains age 65 (or, in the event of his death, until his spouse attains age 65). Mr. Fichthorn is age 65 and therefore is no longer eligible for such continued welfare benefits.

 

For more information regarding the severance protections provided by these agreements, see Employment Agreement with Mr. Fichthorn below.

 

Change of Control Agreements

 

Change of control agreements protect income for key executives who would likely be involved in decisions regarding and/or successful implementation of merger/acquisition activity and at risk for job loss if a take-over occurs. The Board believed it was important to adopt such agreements in order to provide an incentive for executives to remain employed with the Company throughout the turmoil and uncertainty that an unsolicited tender offer such as Steel Partners Offer can cause. Prior to adopting the Change in Control agreements, the Board consulted with a human resources consulting firm and determined that the terms and amounts payable under the

Change of Control Agreement were reasonable and consistent with severance arrangements for executives of companies similar to the Company.

 

The Company has entered into change in control agreements with eight senior executives (including three executive officers) including Kenneth L. Bayne, Lawrence C. Maingot, Larry D. Smith, Daniel T. Holverson, Elmer G. Pruim, Robert M. Carini, Brian E. Turner and Morgan Ebin. Pursuant to these agreements, the Company will provide severance benefits to such executive officers if their employment is terminated within 24 months of a change in control of the Company, unless such termination is (i) due to death or retirement, (ii) by the Company for cause or due to disability or (iii) by the executive without good reason. The amount of severance will be equal to the sum of (a) the highest annual rate of salary in the twelve months preceding the executive officers termination date and (b) the higher of the executive officers average annual bonus for the past two completed fiscal years or the executive officers target bonus for the fiscal year in which the termination occurs. In addition to these severance amounts, the executive officers will be entitled to a pro rata annual bonus for the year in which their termination of employment occurs and to continue participating in the Companys welfare benefit programs for up to one year following termination of their employment. If the executive officers become entitled to severance under the Change in Control Agreements, they will not be entitled to severance pay under any other agreement with the Company. These provisions enable the executive to make decisions that are in the best interest of shareholders without being distracted or influenced in the exercise of his or her business judgment by personal concerns. Change of control agreements are typically offered to executives in the marketplace and thus are necessary to attract and retain executives as well as protect shareholders interests. For more information regarding the change of control protections provided by these agreements, see Change of Control Agreements, below.

 

Compensation Earned by the Chief Executive Officer

 

In considering the CEOs base salary, the Committee reviewed the Companys general financial performance and the progress in improving operating performance. The Committee also reviewed the CEOs base salary against an internally developed salary survey of equivalent positions in public companies of a similar size. This information showed Mr. Fichthorns salary to be in the average range for industrial companies the size of the Company. The Committee also considered the time period elapsed from Mr. Fichthorns date of last increase in May of 2005. On May 1, 2006, he received a salary increase of 2.5% resulting in a current salary for Mr. Fichthorn of $471,500. In accordance with his contract, Mr. Fichthorn is eligible for 25% of an MIC pool generated by a formula in his contract. However, since 2001, Mr. Fichthorn has voluntarily waived this portion of his contract on a year-to-year basis and has agreed to participate in the MIC pool that covers the Companys officers.

 

162(m) Disclosure

 

Based on current levels of compensation, no executive officer is expected to receive compensation for 2006 services that would be non-deductible under Section 162(m) of the Internal Revenue Code. Accordingly, the Compensation Committee has not considered any revisions to its policies and programs in response to this provision of law.

 

COMPENSATION OF MANAGEMENT

 

General

 

The following table sets forth information regarding the compensation paid, distributed, or accrued for services rendered during 2006 to the Chief Executive Officer, the Chief Financial Officer and each of the two other most highly compensated executive officers of Bairnco (collectively the Named Executives).

 

SUMMARY COMPENSATION TABLE

 

 

 

 

 

 

 

 

 

 

 

GRANT OF PLAN-BASED AWARDS

 

 

 

 

 

 

OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END