VARLEN CORP, 10-K405, 1997-04-21

VARLEN CORP
10-K405, 1997-04-21
MOTOR VEHICLE PARTS & ACCESSORIES

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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934

For the fiscal year ended January 31, 1997

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

For the transition period from _______________ to _______________

Commission file number 0-5374

VARLEN CORPORATION
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)

DELAWARE 13-2651100
-------------------------- --------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

55 Shuman Boulevard
P. O. Box 3089
Naperville, Illinois 60566-7089
-------------------------- --------------
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code (630) 420-0400
--------------

Securities registered pursuant to Section 12(b) of the Act:

Name of each exchange
Title of each class on which registered
None None
------------------- ---------------------

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, Par Value $.10 Per Share
------------------------------------------
(Title of Class)

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

The aggregate market value of the voting stock held by non-affiliates of the
Registrant, as of April 1, 1997, was $102,977,048.

The number of outstanding shares of the Registrant's Common Stock, par value
$.10 per share, as of the close of business on April 1, 1997, was 5,780,822
shares.

<PAGE>

DOCUMENTS INCORPORATED BY REFERENCE

1. The Registrant's Proxy Statement filed pursuant to Regulation 14A within
120 days after January 31, 1997, is incorporated herein by reference to the
following extent: Industry Segments and Officers into Part I; Summary of
Operations, Summary of Financial Condition, Shares Listed, Quarterly Market
and Dividend Information, Management's Discussion and Analysis of Financial
Condition and Results of Operations, Consolidated Balance Sheets,
Consolidated Statements of Earnings, Consolidated Statements of
Stockholders' Equity and Consolidated Statements of Cash Flows with related
Notes and Independent Auditors' Report into Part II; and the information
set forth under the captions, Election of Directors, Executive Compensation
and Pension Plans, Compensation Committee Interlocks and Insider
Participation and Security Ownership of Certain Beneficial Owners and
Management into Part III.

<PAGE>

PART I

Item I. BUSINESS

GENERAL

Varlen Corporation (the "Registrant") designs, manufactures and markets
engineered industrial products primarily for specialized applications in the
transportation and analytical instruments markets. The Registrant's principal
business strategy is to employ its product development capabilities, advanced
manufacturing processes and marketing skills in market niches where the
Registrant can achieve a market leadership position. The Registrant's operations
are conducted primarily through subsidiaries that are relatively autonomous,
while its small corporate headquarters staff oversees financial controls and
provides strategic direction. Management continually emphasizes improvements in
quality, product performance and delivery time, cost reductions and other value
adding activities. Although many of the markets for the Registrant's products
are mature, the Registrant seeks growth opportunities through technological and
product improvement and by acquiring and developing new products that can be
sold through its distribution networks. In addition, the Registrant's
development efforts increasingly focus on new products specifically designed for
international markets.

DEVELOPMENT OF THE COMPANY

The Registrant was founded in 1969 by The Dyson-Kissner-Moran Corporation
(from which the Registrant repurchased in 1993 all of its outstanding stock) for
the purpose of acquiring and managing businesses which manufacture products for
industrial markets. The Registrant's original business produced parts for the
railroad industry; however, over the years the Registrant diversified its
operations to serve many markets. Since 1984, the Registrant has sold or
discontinued smaller businesses, heavily construction-related or bid businesses
and businesses manufacturing products where the Registrant could not apply its
design, manufacturing or marketing skills to create a competitive advantage.
Businesses acquired since 1986 include the Registrant's entire heavy-duty-truck
components business, automotive components business, research laboratory
appliance business (sold in mid-1996), and petroleum analyzer business as well
as additional domestic and foreign railroad components businesses. Recent
acquisitions include the purchase of Brenco, Incorporated in mid-1996, a
manufacturer and reconditioner of specialized tapered roller bearings for the
railroad industry with annual sales of approximately $110 million, and Karl
Georg, a German railcar cushioning device manufacturer with annual sales of
approximately $15 million purchased in January 1997. In addition to the
purchase of Brenco and Karl Georg in fiscal 1996, the Registrant formed StarTrak
L.L.C. to develop and sell satellite-based freightcar monitoring systems for the
railroad industry. Although each of the Registrant's businesses presents unique
design and marketing challenges, they each employ basic manufacturing processes,
such as machining, forging, casting, metal forming, welding and plastic molding,
that have historically been at the core of the Registrant's operations.

The following sets forth certain basic information with respect to the
Registrant's current businesses, which are divided into two industry segments:
transportation products and analytical instruments.

<PAGE>

PRODUCTS AND PRIMARY MARKETS

TRANSPORTATION PRODUCTS

HEAVY-DUTY TRUCKS AND TRAILERS - These products are sold primarily to North
American Class 8 truck and over-the-road trailer manufacturers. The primary
products are aluminum permanent mold and die-cast products including axle hubs,
suspension components, transmission housings, spring brake flanges and pistons,
and structural molded products including instrument panels, sleeper cab
accessories, and door sill assemblies.

RAILROAD - These products are sold in global markets to locomotive and railcar
manufacturers, railroads and railcar maintenance facilities, lessors, and track
maintenance contractors. The primary products are tapered roller bearings,
hydraulic cushioning devices, draft gears, buffers and discharge gates for
railcars, and HVAC systems, draft gears, valves and toilets for locomotives.
Additional products include remanufactured crankshafts and camshafts along with
railroad track fasteners.

AUTOMOTIVE - These products are sold primarily in North American markets to
original equipment automotive manufacturers, tier one suppliers and aftermarket
transmission rebuilders for use on cars and light trucks. The primary products
are automatic transmission components including reaction plates and the
Mechanical Diode-Registered Trademark- one-way clutch, steering column
components, and other precision stamped metal components and weldments.

ANALYTICAL INSTRUMENTS

These products are sold worldwide to oil refineries, petrochemical plants,
petroleum transporters, and large users of distillate products. The primary
products are automated laboratory quality control instruments, on-line process
analyzers, manual and semi-automatic physical property analyzers, portable
optoelectronic analyzers, certification samples and petroleum testing services.

TRANSPORTATION PRODUCTS

In the transportation products segment, the Registrant serves three basic
markets: the railroad industry, the heavy-duty truck and trailer industries,
and the automotive industry.

RAILROAD

Among the products manufactured by the Registrant for the railroad
industry are hydraulic cushioning and draft gear cushioning devices; tapered
roller bearings; heating, ventilating and air conditioning equipment; rail
anchors; buffer housings and brake block holders; hopper car outlet gates;
and valves and toilets.

Through its Brenco, Incorporated ("Brenco") subsidiary, acquired in
mid-1996, the Registrant is a leading manufacturer and reconditioner of tapered
roller bearings for locomotives and freight cars for both domestic and overseas
markets. The customer base for these products and services is made up of major
railroads, car builders and private fleet owners. The tapered roller bearing is
an anti-friction bearing that contains steel rollers that turn as the axle
rotates. They are particularly adapted to reducing friction where wheels are
used.

<PAGE>

The Registrant's most extensive line of products is its hydraulic
cushioning and draft gear cushioning devices, which are used globally and
are designed to minimize or prevent the damage that locomotives and freight cars
and their cargo can incur during coupling and normal operations. The Registrant
believes that it is the only company which offers railroads a complete range of
such devices utilizing hydraulic, steel friction and synthetic elastomer
technologies. Hydraulic cushioning is the preferred method of protecting high
value freight (such as automobiles, paper, and construction products) from
damage during shipment. The Registrant believes it is the leading producer of
hydraulic cushioning devices for North American railroads. The Registrant's
draft gears are used on locomotives and rail cars transporting less easily
damaged goods (coal, ore, grains, etc.), where such devices serve to protect the
rail cars themselves from damage. The Registrant provides shock cushioning
devices to builders of new freight cars and locomotives and also refurbishes and
retrofits devices already in service, including models originally manufactured
by others.

The Registrant is also a leading producer of rail anchors for North
American railroads and believes it offers the broadest range of styles and
sizes of these products. Rail anchors are precision, forged steel devices
which are attached directly to the rail track and are designed to prevent the
rail from longitudinal movement or buckling as a result of traffic and
temperature conditions. Rail anchors are manufactured to customer orders,
usually in large numbers requiring careful production scheduling, and are
required to meet specifications of organizations such as the American Railway
Engineers Association. The Registrant also produces outlet gates designed to
permit the discharge of a commodity from a covered hopper car, and is a
remanufacturer of crankshafts and camshafts for locomotives and large
stationary engines for North American railroads, locomotive rebuilders and
marine and industrial engine rebuilders. The Registrant also manufactures
engineered products for railroad locomotives including heating, ventilating
and air conditioning equipment, valves, toilets and refrigerators.

Through ongoing product development, the Registrant is committed to
expanding its market share in both the North American and international railroad
markets. Currently, the Registrant is focusing internationally on opportunities
in Europe, Asia and the former Soviet Union. The Registrant believes that its
experience and technological leadership in the North American railroad freight
market can be successfully transferred to these markets. As the European
community opens its borders, European rail hauls are becoming longer and use
heavier freight cars, requiring more sophisticated shock absorption and tapered
roller bearing products. A German railcar cushioning device manufacturer
acquired by the Registrant in late-1996 and a French railroad component
manufacturer acquired by the Registrant in mid-1994 further improves the
Registrant's access into the European railroad market place.

In recent years, North American railroads have been increasing their share
of the freight transportation market; however, many of the major railroads have
recently slowed spending on their fleet and rail maintenance due to industry
consolidation. In spite of the recent industry consolidation, the Registrant
believes that the continuing increase in the railroads share of the freight
transportation market should continue to create demand for the Registrant's
products as new locomotives and rail cars are built, old locomotives and rail
cars are refurbished and the railroads expend funds to maintain and improve
their tracks. As freight railroad systems are expanded and updated throughout
the world, the Registrant believes that its wide-range of highly engineered
products should be well positioned to meet the growing demand.

<PAGE>

In the railroad products portion of its business, the Registrant's products
compete on engineering features, quality, service and price. There are a small
number of competitors in each of the above described markets. New competitors
in the Registrant's rail products markets have been discouraged from entering
these markets because of the relatively large capital investment required, the
time it takes to receive railroad approval of particular designs and products
and the relatively mature status of these markets. However, the existing
competitors in these markets continue to compete intensely.

HEAVY-DUTY TRUCKS AND TRAILERS

The Registrant designs, manufactures and markets lightweight components for
heavy-duty over-the-road trucks and trailers. The customer base for these
products is original truck and trailer manufacturers and tier 1 component
manufacturers. Cast aluminum products offer cost advantages over forged
aluminum and significant weight saving advantages over steel and iron without
sacrificing strength. Due to U.S. highway weight regulations, lightweight
components can be an important consideration for heavy payload haulers. By
saving on their truck weight, haulers can carry an increased payload or,
alternatively, increase fuel efficiency.

The Registrant's truck component business has benefited from its new
product development, its customer base expansion and increased penetration with
key customers, such as Freightliner, who has been increasing its market share in
this industry, and PACCAR. With certain of these customers, the Registrant has
been able to establish itself as a sole source supplier of certain components.
A significant source of future growth in this business is expected to come from
structural molded plastic components for the interiors of heavy-duty trucks. To
meet the demand of multi-year contracts for structural molded plastic components
entered into during 1994 with Freightliner, its largest customer, the Registrant
purchased and equipped an additional plant facility during 1995 which began
production in the first quarter of fiscal 1996. This facility also produces
components for other customers.

The Registrant's heavy-duty truck products compete with similar products on
quality, engineering expertise, delivery and price. These products compete with
products that are functionally similar but are manufactured from different
materials or using different industrial processes. The Registrant believes that
its ability to offer products that are designed and engineered to solve customer
problems is a significant factor in establishing and maintaining these customer
relationships and enhancing its opportunities for expansion in export markets.

AUTOMOTIVE

For the automotive industry, the Registrant produces precision stamped
metal components predominantly for use in steering and transmission systems. The
Registrant's ability to design and engineer tight tolerance components that can
be manufactured in high volume with high quality ratings has enabled it to
become a direct supplier to original equipment manufacturers, principally
divisions of General Motors Corporation ("GM"), Chrysler Corporation
("Chrysler") and Ford Motor Company ("Ford"). The Registrant also sells
automotive parts to both U.S. and foreign-owned manufacturers that sell directly
to GM, Chrysler, Ford and U.S. production facilities of foreign-owned automobile
manufacturers. While the Registrant produces parts for all North American GM
passenger vehicles, the principal GM platforms for the Registrant's automotive
products consist of light trucks, vans and sport utility vehicles. Parts are
also produced for many Chrysler and Ford products.

<PAGE>

The Registrant's automotive business has been helped by providing parts for
popular new models and platforms. Among the Registrant's principal automotive
products are steel reaction plates that are used in automatic transmissions
including for pickup trucks, vans and sport utility vehicles whose sales have
increased as a percentage of the overall passenger vehicle market. In addition,
an increased focus on export sales has resulted in the Registrant receiving a
large order in 1996 to supply automobile transmission reaction plates to a GM
transmission facility in France which began in late 1996.

Future growth is expected to come from increased production of light
trucks, penetration of international markets, and the introduction of the
Mechanical Diode -Registered Trademark- one-way clutch ("MD clutch"). The MD
clutch is a patented product with many potential applications. It provides
superior operating characteristics over conventional one-way clutches used in
automatic transmissions. The first application will be at Ford Motor Company
for rear-wheel drive light passenger vehicles, starting with the 1998 model
year.

Competition for the sale of these products is intense, coming from numerous
companies, including divisions of automobile manufacturers, which have
comparable facilities and greater financial and other resources than the
Registrant. The Registrant competes for sales of these products on quality,
just-in-time delivery, price and particularly in regards to the MD clutch,
technological advances.

OTHER INFORMATION

Marketing of the Registrant's transportation products is done through sales
personnel employed by the Registrant and independent sales representatives. Each
product group is sold through separate marketing and distribution channels to a
different customer base.

The primary materials used for the manufacture of products in the
transportation products segment are cold rolled and hot rolled steel, special
alloy steel bar, castings, forgings, tubing and rod, aluminum ingots and plastic
resin. The Registrant has not experienced significant difficulties in obtaining
such materials, although long lead times exist for certain steel products. The
machinery and equipment used for the manufacturing of these products, which
management considers adequate for current operations, consist primarily of
heavy-duty forging and heat-treating equipment, metal cutting machine tools,
grinding equipment, heavy-duty metal stamping equipment, welding equipment,
injection molding presses, casting equipment, tools, dies, furnaces, molds,
painting and plating equipment.

Backlog for this industry segment was $75.1 million, $60.2 million and
$68.3 million as of January 31, 1997, January 31, 1996 and January 31, 1995,
respectively. All of the current backlog is expected to be filled during the
current fiscal year.

Sales of transportation products to Freightliner amounted to 15% of total
sales in each of 1996, 1995 and 1994, respectively. Sales of transportation
products to GM amounted to 10% of total sales in 1994. In addition, the
Registrant's sales of cushioning devices and related parts for railroad
freight cars and locomotive engines accounted for 11% and 13% of the
Registrant's total sales in 1995 and 1994, respectively, and the Registrant's
sales of aluminum hubs and hub assemblies accounted for 12%, 14% and 10% of
the Registrant's total sales in 1996, 1995, and 1994, respectively.

<PAGE>

ANALYTICAL INSTRUMENTS

The Registrant designs, manufactures and markets instruments which analyze
the physical properties of petroleum, such as freeze point, flash point, pour
point, viscosity and vapor pressure; engages in the testing of petroleum
products; and sells petroleum product reference samples. The instruments,
testing services and reference samples are used for quality assurance purposes
to test for compliance with industry standards and to enhance refinery
efficiency. These products and services are used in petroleum refineries and by
end-users of petroleum products. The instruments consist of on-line process
analyzers and automatic and manual quality control laboratory analyzers. The
on-line analyzers are used to help control the refining process, by constantly
sampling the stream of petroleum products to provide data which assists in the
fine-tuning of the refining process. The automatic and manual laboratory
analyzers are used off-line to test petroleum samples for certain properties
such as flash point, pour point, cloud point, distillation and thermal
oxidation. Testing services are provided at the Registrant's in-house facility
which tests customer's petroleum products for thermal stability and viscosity.
Petroleum reference samples are used to calibrate petroleum analyzers to proper
specifications. The Registrant also has a strategic alliance with Boston
Advanced Technologies, Inc., a leader in the design of mid-range infrared
spectroscopic instruments, which complements its technology base and extends the
range of products offered through its distribution channels.

The Registrant's petroleum analysis instruments are sold world-wide to
petroleum refiners (of which there are over 600) and to transporters,
governmental agencies, pipeline companies and large users of petroleum products
(airlines, railroads and the U.S. military). Although the number of U.S.
refineries is declining, the Registrant's sales to overseas refiners and to
existing refineries in the process of upgrading and automating their production
processes are expected to provide growth opportunities in these product lines.
The Registrant continues to bring to market new instruments which are helping to
meet the petroleum industry's growing need for quality control and increased
process and laboratory productivity. The Registrant's ability to engineer
on-line analyzers for specific applications and to provide timely service at
their places of installation is of competitive importance. With manufacturing
facilities in the United States and Germany, and service and distribution
locations in key strategic domestic and international markets, the Registrant
believes it is well-positioned to maintain a leading position in this global
market. The Registrant's petroleum analysis instruments compete primarily on
product quality, engineering features, reliability and service. There are a
limited number of competitors in this narrow market, some of which use alternate
technologies.

The primary materials used for the manufacture of the products in this
segment are stainless steel, cold rolled carbon steel and electronic components.
The Registrant has not experienced any difficulties in obtaining such materials.
Marketing of these products is done through company sales personnel, independent
sales representatives and distributors throughout the U.S. and international
markets. The machinery and equipment used for the manufacturing of these
products, which management considers adequate for current operations, consist
primarily of metal forming, fabrication, welding, and painting equipment,
together with a complement of tools, dies, jigs and gauges.

<PAGE>

Backlog for this industry segment was $3.4 million, $3.5 million and $5.2
million as of January 31, 1997, January 31, 1996 and January 31, 1995,
respectively. The backlog of the Registrant's laboratory appliance operation
sold in 1996 and its tubular steel components operations sold in 1995 have been
excluded from these amounts. All of the current backlog is expected to be
filled during the current fiscal year.

EXPORT SALES

Export sales from the Registrant's United States operations were 10%, 10%
and 8%, respectively, of consolidated net sales in 1996, 1995 and 1994.

RESEARCH AND DEVELOPMENT

In 1996, 1995 and 1994, the Registrant spent $9.5 million, $5.9 million and
$4.4 million, respectively, on research and development activities, all of which
was Registrant sponsored. Of these amounts, research and development spending on
new products was $6.3 million, $3.1 million and $2.1 million for 1996, 1995 and
1994, respectively.

PATENTS, TRADE NAMES AND TRADEMARKS

The Registrant applies for and maintains patents, trade names and
trademarks where the Registrant believes that such patents, trade names and
trademarks are reasonably required to protect the Registrant's rights in its
products. The Registrant does not believe that any single patent, trade name or
trademark or related group of such rights, other than the "Brenco", "ConMet",
"Precision Scientific Petroleum Instruments" and "Herzog" trade names and
related trademarks, and the "Mechanical Diode -Registered Trademark- one-way
clutch" patent license are materially important to its businesses or its ability
to compete. In many instances the Registrant's technology is not patented but is
maintained by the Registrant as proprietary.

SEASONALITY

In non-recessionary times, the Registrant's first quarter has historically
been the strongest quarter of the year. During the second and fourth quarters,
the Registrant traditionally encounters scheduled vacation and holiday shutdowns
and slowdowns at customers' manufacturing plants.

EMPLOYEES

As of January 31, 1997, the Registrant employed a total of 2,850 persons,
2,608 of whom were employed in its Transportation Products segment, 221 of whom
were employed in its Analytical Instruments segment and 21 of whom were employed
at the Registrant's corporate headquarters. Of the employees employed by the
Transportation Products and Analytical Instruments segments, 709 and 45,
respectively, are covered by collective bargaining agreements. The Registrant
believes it has a good working relationship with its employees.

ENVIRONMENTAL MATTERS

The Registrant's manufacturing operations are subject to federal, state,
local and foreign environmental laws and regulations which impose limitations on
the discharge of pollutants into the air and water and establish standards for
the treatment, storage and disposal of hazardous waste. The

<PAGE>

Registrant has established a company-wide environmental compliance program that
stresses periodic environmental audits and management review of compliance
procedures at the operating company level. The Registrant believes that it is in
substantial compliance with applicable environmental laws and regulations.

Compliance with these environmental laws and regulations has not had, nor
is it expected to have, a material effect on the Registrant's earnings,
competitive position or capital expenditures through fiscal 1998. The amount of
capital expenditures expected to be spent on environmental compliance costs in
fiscal 1997 and 1998 are approximately $1,305,000 and $95,000, respectively.

<PAGE>

EXECUTIVE OFFICERS OF THE REGISTRANT

Reference is made to the information set forth under the caption "Officers" in
the Registrant's Proxy Statement filed pursuant to Regulation 14A within 120
days after January 31, 1997, which information is incorporated herein by
reference.

Item 2. PROPERTIES

The following table sets forth certain information with respect to the principal
properties of the Registrant. The expiration date of each applicable lease is
given for leased properties; all other properties are owned. Unless otherwise
noted, all properties are manufacturing facilities. All of the Registrant's
listed plants are being utilized, are in good operating condition and are
suitable for its current needs. These facilities are expected to meet the
Registrant's manufacturing needs in the foreseeable future.

Expiration Date Approximate
Approximate of Lease Capacity
Operation Square Feet (if applicable) Utilization(1)
- --------- ----------- --------------- --------------

Executive Office 10,000(2) 10/15/97 N/A
Naperville, IL

Transportation Products
- -----------------------

Portland, OR 166,000 N/A 75%
Clackamas, OR 55,000 N/A 85%
Bryson City, NC 162,000 N/A 60%(3)
Cashiers, NC 94,000 N/A 85%
Monroe, NC 114,000 N/A 90%
Saginaw, MI 77,000 N/A 65%
Melvindale, MI 45,000 N/A 50%
Vassar, MI 76,000 N/A 70%
Petersburg, VA 394,000 N/A 55%
Little Rock, AR 52,000 N/A 25%
Louisville, KY 45,000 1/31/99 25%
Sparks, NV 36,000 9/30/00 25%
Camp Hill, PA 95,000 N/A 50%
McPherson, KS 94,000 N/A 50%
Halberstadt, Germany 16,000 N/A 50%
Neitersen, Germany 79,000 12/31/11 50%
Ploermel, France 70,000 N/A 60%
Oak Creek, WI 72,000 N/A 40%
Bell Gardens, CA 18,000 N/A 40%
Chicago, IL 32,000 N/A 50%
Atchison, KS 60,000 N/A 45%

Analytical Instruments
- ----------------------

Bellwood, IL 42,000 5/31/01 35%
San Antonio, TX 28,000 4/30/99 35%
Lauda, Germany 24,000 N/A 20%

<PAGE>

(1) Full capacity being deemed a 24 hour day, 7 day week for this purpose.
(2) Office space.
(3) Location purchased in March 1995. Production began in the first fiscal
quarter of 1996.
N/A - Not Applicable.

Item 3. LEGAL PROCEEDINGS

Not applicable

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable

PART II

Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS

Reference is made to the information set forth under the captions "Quarterly
Market and Dividend Information" and "Shares Listed" in the Registrant's Proxy
Statement filed pursuant to Regulation 14A within 120 days after January 31,
1997, which information is hereby incorporated herein by reference. Note: The
information contained under the caption "Quarterly Market and Dividend
Information" in the Registrant's Proxy Statement includes over-the-counter
market quotations which reflect interdealer prices, without retail mark-up,
mark-down or commission and may not necessarily represent actual transactions.

Item 6. SELECTED FINANCIAL DATA

Reference is made to the information set forth under the captions "Summary of
Operations" and "Summary of Financial Condition" in the Registrant's Proxy
Statement filed pursuant to Regulation 14A within 120 days after January 31,
1997, which information is hereby incorporated herein by reference.

Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

Reference is made to the information set forth under the caption, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in the
Registrant's Proxy Statement filed pursuant to Regulation 14A within 120 days
after January 31, 1997, which information is hereby incorporated herein by
reference.

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Reference is made to the information set forth under the captions "Consolidated
Balance Sheets", "Consolidated Statements of Earnings", "Consolidated Statements
of Stockholders' Equity", "Consolidated Statements of Cash Flows", "Notes to
Consolidated Financial Statements" and "Independent Auditors' Report" in the
Registrant's Proxy Statement filed pursuant to Regulation 14A within 120 days
after January 31, 1997, which information is hereby incorporated herein by
reference.

<PAGE>

Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

Not applicable

PART III

Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Reference is made to the information set forth under the caption "Election of
Directors" in the Registrant's Proxy Statement filed pursuant to Regulation 14A
within 120 days after January 31, 1997, which information is incorporated herein
by reference, and to the information set forth under the caption "Executive
Officers of the Registrant", which appears as a separate item immediately
preceding Item 2 included in PART I hereof, which information is incorporated
herein by reference.

None of the executive officers bear any family relationship to one another. The
executive officers of the Registrant are elected annually by the Board of
Directors.

Item 11. EXECUTIVE COMPENSATION

Reference is made to the information set forth under the caption "Executive
Compensation" in the Registrant's Proxy Statement filed pursuant to Regulation
14A within 120 days after January 31, 1997, which information is hereby
incorporated herein by reference.

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Reference is made to the information set forth under the captions "Election of
Directors" and "Security Ownership of Certain Beneficial Owners and Management"
in the Registrant's Proxy Statement filed pursuant to Regulation 14A within 120
days after January 31, 1997, which information is hereby incorporated herein by
reference.

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Not applicable.

PART IV

Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K

(a)(1),
(a)(2)
& (d) FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
The consolidated financial statements, together with the related
notes and supporting schedule filed as part of this Form 10-K,
are listed in the accompanying Index to Consolidated Financial
Statements and Schedule.

(b) REPORTS ON FORM 8-K

None

<PAGE>

(a)(3)
& (c) EXHIBITS

Set forth below is a list of the Exhibits to this Form 10-K in
accordance with the requirements of Items 14(a)(3) and (c) of
Form 10-K and Item 601 of Regulation S-K:

(3) (i) Registrant's Articles of Incorporation, as amended through May
26, 1987 (incorporated herein by reference to Exhibit (3)(a) to
the Registrant's Annual Report on Form 10-K for the fiscal year
ended January 31, 1988) and as further amended through June 17,
1993 (incorporated herein by reference to Exhibit (3)(i) to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
January 31, 1996).

(ii) Registrant's By-laws, as amended through November 20, 1995
(incorporated herein by reference to Exhibit (3)(ii) to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
January 31, 1996) as further amended on June 17, 1996
(incorporated herein by reference to Exhibit (3)(ii) to the
Registrant's Quarterly Report on Form 10-Q for the fiscal quarter
ended August 3, 1996).

(4) (a) Rights Agreement dated as of June 17, 1996 (incorporated herein
by reference to Exhibit 4(a) to the Registrant's Quarterly Report
on Form 10-Q for the fiscal quarter ended August 3, 1996).

(b) Credit Agreement by and among the Registrant, the Borrowing
Subsidiaries and the Lenders Party Thereto and The First National
Bank of Chicago, as Agent, dated as of July 19, 1996
(incorporated herein by reference to Exhibit (4)(b) to the
Registrant's Quarterly Report on Form 10-Q for the fiscal quarter
ended August 3, 1996).

(c) Amendment No. 1 dated as of October 15, 1996 to Credit Agreement
dated as of July 19, 1996 (incorporated herein by reference to
Exhibit (4)(a) to the Registrant's Quarterly Report on Form 10-Q
for the fiscal quarter ended November 2, 1996).

(d) Amendment No. 2 dated as of January 17, 1997 to Credit Agreement
dated as of July 19, 1996.

(10) (a) Registrant's 1980 Incentive Stock Option Plan, as amended
(incorporated herein by reference to Exhibit (10)(b) to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
January 31, 1989) and as further amended on March 26, 1990
(incorporated herein by reference to Exhibit (10)(b) to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
January 31, 1990).

(b) Varlen Corporation Profit Sharing and Retirement Savings Plan as
amended and restated generally effective July 1, 1994
(incorporated herein by reference to Exhibit (10)(b) to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
January 31, 1995).

<PAGE>

reference to Exhibit (10)(g) to the Registrant's Annual Report on
Form 10-K for the fiscal year ended January 31, 1990).

(d) Varlen Corporation Excess Benefits Plan (incorporated herein by
reference to Exhibit (10)(i) to the Registrant's Annual Report on
Form 10-K for the fiscal year ended January 31, 1990).

(e) Varlen Corporation Supplemental Executive Retirement Plan
(incorporated herein by reference to Exhibit (10)(j) to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
January 31, 1990).

(f) Trust Agreement Between Varlen Corporation and Fidelity
Management Trust Company dated November 30, 1992 (incorporated
herein by reference to Exhibit (10)(g) to the Registrant's Annual
Report on Form 10-K for the fiscal year ended January 31, 1993).

(g) Stock Purchase Agreement dated December 17, 1992 between The
Dyson-Kissner-Moran Corporation and the Registrant (incorporated
herein by reference to Exhibit 5(a) to the Registrant's Report on
Form 8-K dated January 8, 1993).

(h) Form of letter agreement between the Registrant and Richard L.
Wellek (incorporated herein by reference to Exhibit (10)(j) to
the Registrant's Annual Report on Form 10-K for the fiscal year
ended January 31, 1993).

(i) Form of letter agreement between the Registrant and each of
Richard A. Nunemaker, Raymond A. Jean and George W. Hoffman
(incorporated herein by reference to Exhibit (10)(k) to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
January 31, 1993).

(j) Trust Indenture for the Registrant's $69,000,000 6 1/2%
Convertible Subordinated Debentures Due 2003 from the Registrant
to the Harris Trust and Savings Bank (incorporated herein by
reference to Exhibit (4) to the Registrant's Report on Form 8-K
dated May 27, 1993).

(k) Registrant's 1993 Incentive Stock Option Plan adopted May 25,
1993 (incorporated herein by reference to Exhibit (10)(k) to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
January 31, 1994).

(l) Registrant's 1993 Directors Incentive Stock Grant Plan adopted
May 25, 1993 (incorporated herein by reference to Exhibit (10)(l)
to the Registrant's Annual Report on Form 10-K for the fiscal
year ended January 31, 1994).

(m) Registrant's 1993 Deferred Incentive Stock Purchase Plan adopted
May 25, 1993 (incorporated herein by reference to Exhibit (10)(m)
to the Registrant's Annual Report on Form 10-K for the fiscal
year ended January 31, 1994) as amended on February 3, 1997.

(n) Varlen Corporation Excess Benefit Plan Trust Agreement dated
December 1, 1994 (incorporated herein by reference to Exhibit
(10)(n) to the Registrant's Annual Report on Form 10-K for the
fiscal year ended January 31, 1995).

<PAGE>

(o) Form of Indemnification Agreement Dated as of June 17, 1996
(incorporated herein by reference to Exhibit 10 to the
Registrant's Quarterly Report on Form 10-Q for the fiscal quarter
ended August 3, 1996).

(11) Computation of Per Share Earnings for the Fiscal Years Ended
January 31, 1997, 1996 and 1995.

(13) 1996 Summary Annual Report to Stockholders.

(21) List of Subsidiaries.

(23) Consent of Deloitte & Touche LLP.

(24) Board of Directors' power of attorney for the signing of Varlen
Corporation's 1996 Annual Report on Form 10-K.

(27) Financial Data Schedule.

<PAGE>

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

VARLEN CORPORATION
(Registrant)

By: /s/ Richard A. Nunemaker
------------------------
Richard A. Nunemaker
Vice President, Finance and
Chief Financial Officer

Dated: April 18, 1997

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.

Signature Title Date
- --------- ----- ----

/s/ Richard L. Wellek President, Chief Executive April 18, 1997
Richard L. Wellek Officer and Director
(Principal Executive Officer)

/s/ Richard A. Nunemaker Vice President, Finance April 18, 1997
Richard A. Nunemaker and Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)

<PAGE>

Signature Date
- --------- ----

/s/ Richard A. Nunemaker April 18, 1997
- ------------------------
Richard A. Nunemaker
as attorney-in-fact for
Rudolph Grua, Director

/s/ Richard A. Nunemaker April 18, 1997
- ------------------------
Richard A. Nunemaker
as attorney-in-fact for
Ernest H. Lorch, Director

/s/ Richard A. Nunemaker April 18, 1997
- ------------------------
Richard A. Nunemaker
as attorney-in-fact for
L. William Miles, Director

/s/ Richard A. Nunemaker April 18, 1997
- ------------------------
Richard A. Nunemaker
as attorney-in-fact for
Greg A. Rosenbaum, Director

/s/ Richard A. Nunemaker April 18, 1997
- ------------------------
Richard A. Nunemaker
as attorney-in-fact for
Joseph J. Ross, Director

/s/ Richard A. Nunemaker April 18, 1997
- ------------------------
Richard A. Nunemaker
as attorney-in-fact for
Theodore A. Ruppert, Director

<PAGE>

VARLEN CORPORATION
AND SUBSIDIARIES

Annual Report (Form 10-K)

Consolidated Financial Statements and Schedule

Submitted in Response to Item 14

Years ended January 31, 1997, 1996 and 1995

<PAGE>

VARLEN CORPORATION
AND SUBSIDIARIES

Index to Consolidated Financial Statements and Schedule

Consolidated financial statements
incorporated by reference
- ---------------------------------

The consolidated balance sheets of the Registrant and subsidiaries as of January
31, 1997 and 1996, and the related consolidated statements of earnings,
consolidated statements of stockholders' equity and consolidated statements of
cash flows for each of the years in the three-year period ended January 31,
1997, together with the related notes and the report of Deloitte & Touche LLP,
independent auditors, all contained in the Registrant's Proxy Statement filed
pursuant to Regulation 14A within 120 days after January 31, 1997, are
incorporated herein by reference thereto. The following additional consolidated
financial information should be read in conjunction with the consolidated
financial statements in such Proxy Statement. All other schedules are omitted
as the required information is inapplicable or the information is presented in
the financial statements or related notes.

Additional consolidated financial information
- ---------------------------------------------

- Schedule:

- II - Valuation and Qualifying Accounts

<PAGE>

INDEPENDENT AUDITORS' REPORT

Board of Directors and Stockholders
Varlen Corporation
Naperville, Illinois

We have audited the consolidated financial statements of Varlen Corporation and
subsidiaries as of January 31, 1997 and 1996, and for each of the three years in
the period ended January 31, 1997, and have issued our report thereon dated
March 3, 1997; such consolidated financial statements and report are included in
your Proxy Statement for the 1997 Annual Meeting of Stockholders and are
incorporated herein by reference. Our audits also included the consolidated
financial statement schedule of Varlen Corporation and subsidiaries, listed in
Item 14. This consolidated financial statement schedule is the responsibility of
the corporation's management. Our responsibility is to express an opinion based
upon our audits. In our opinion, such consolidated financial statement schedule,
when considered in relation to the basic consolidated financial statements taken
as a whole, presents fairly in all material respects the information set forth
therein.

DELOITTE & TOUCHE LLP

March 3, 1997
Chicago, Illinois

<PAGE>

Schedule II

VARLEN CORPORATION
AND SUBSIDIARIES

Valuation and Qualifying Accounts

Three years ended January 31, 1997
(in thousands)

Additions
Balance at charged to Balance
beginning costs and at end
Description of Period expenses Deductions of period
----------- --------- -------- ---------- ---------

Allowance for doubtful
accounts (deducted from
accounts receivable):

<S> <C> <C> <C> <C>
Year ended 1/31/97 $ 1,318 $ 384(a) $ 247(b) $ 1,455
Year ended 1/31/96 1,318 407 407(b) 1,318
Year ended 1/31/95 1,207 371(a) 260(b) 1,318

Allowance related to
deferred tax assets:

Year ended 1/31/97 $ 1,570 $ 626 $ 959(d)(e) $ 1,237
Year ended 1/31/96 2,013 355 798(d)(e) 1,570
Year ended 1/31/95 1,465 868(c)(e) 320(d)(e) 2,013

</TABLE>

(a) Includes additions from companies acquired during the period.

(b) Write-offs, net of recoveries, foreign currency translation adjustments and
reserves related to certain companies disposed of during the period.

(d) Current and projected utilization and current expiration of acquired
operating losses.

(e) The amounts were offset against goodwill and not net earnings.

<PAGE>

INDEX TO EXHIBITS

(4) (a) Rights Agreement dated as of June 17, 1996 (incorporated herein
by reference to Exhibit 4(a) to the Registrant's Quarterly Report
on Form 10-Q for the fiscal quarter ended August 3, 1996).

(d) Amendment No. 2 dated as of January 17, 1997 to Credit Agreement
dated as of July 19, 1996.

(c) Registrant's 1989 Incentive Stock Option Plan, (incorporated
herein by reference to Exhibit (10)(h) to the Registrant's Annual
Report on Form 10-K for the fiscal year ended January 31, 1989)
and as further amended on March 26, 1990 (incorporated herein by
reference to Exhibit (10)(g) to the Registrant's Annual Report on
Form 10-K for the fiscal year ended January 31, 1990).

<PAGE>

(d) Varlen Corporation Excess Benefits Plan (incorporated herein by
reference to Exhibit (10)(i) to the Registrant's Annual Report on
Form 10-K for the fiscal year ended January 31, 1990).

<PAGE>

(11) Computation of Per Share Earnings for the Fiscal Years Ended
January 31, 1997, 1996 and 1995.

(13) 1996 Annual Report to Stockholders.

(21) List of Subsidiaries.

(23) Consent of Deloitte & Touche LLP.

(24) Board of Directors' power of attorney for the signing of Varlen
Corporation's 1996 Annual Report on Form 10-K.

(27) Financial Data Schedule.

<PAGE>

Execution Copy

AMENDMENT NO. 2
DATED AS OF JANUARY 17, 1997
TO CREDIT AGREEMENT
DATED AS OF JULY 19, 1996

THIS AMENDMENT NO. 2 TO CREDIT AGREEMENT ("AMENDMENT") is made as of this
17th day of January, 1997 by and among VARLEN CORPORATION, (the "BORROWER"), the
financial institutions parties thereto as lenders (the "LENDERS"), THE FIRST
NATIONAL BANK OF CHICAGO, as Agent (the "AGENT") under that certain Credit
Agreement dated as of July 19, 1996 by and among the Borrower, the Lenders and
the Agent as amended by Amendment No. 1 thereto dated as of October 15, 1996 (as
so amended, the "CREDIT AGREEMENT"). Capitalized terms used herein and not
otherwise defined herein shall have the meaning given to them in the Credit
Agreement.

WITNESSETH

WHEREAS, the Borrower, the Lenders and the Agent are parties to the Credit
Agreement; and

WHEREAS, the Borrower has requested certain amendments to the Credit
Agreement;

WHEREAS, the Borrower, the Lenders and the Agent have agreed to further
amend the Credit Agreement on the terms and conditions set forth herein.

NOW, THEREFORE, in consideration of the premises set forth above, the terms
and conditions contained herein, and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the Borrower, the
Lenders and the Agent have agreed to the following amendments to the Credit
Agreement.

1. AMENDMENT TO CREDIT AGREEMENT. Effective as of January 19, 1997, and
subject to the satisfaction of the conditions precedent set forth in Section 2
below, SECTION 2.5 of the Credit Agreement is hereby amended to delete the final
sentence thereof in its entirety and to substitute the following therefor:

ON JANUARY 19, 1997, THE APPLICABLE MARGIN SHALL BE BASED UPON THE
BORROWER'S STATUS AS OF NOVEMBER 2, 1996 CALCULATED ON A PRO FORMA BASIS AS
THOUGH THE CASH RECEIVED FROM BORROWER'S SALE OF ITS RAIL LINK SUBSIDIARY
HAD BEEN CONCLUDED PRIOR TO SUCH TIME, WHICH APPLICABLE MARGIN SHALL REMAIN
IN EFFECT UNTIL ADJUSTED PURSUANT TO THE PROVISIONS OF THIS SECTION 2.5 SET
FORTH ABOVE.

<PAGE>

2. CONDITIONS OF EFFECTIVENESS. This Amendment shall not become
effective unless (a) this Amendment shall have been executed by the Borrower,
the Agent and each of the Lenders on or before January 17, 1997.

3. REPRESENTATIONS AND WARRANTIES OF THE BORROWER. The Borrower hereby
represents and warrants as follows:

(a) This Amendment and the Credit Agreement as previously executed and as
amended hereby, constitute legal, valid and binding obligations of the Borrower,
enforceable against it in accordance with their terms (except as enforceability
may be limited by bankruptcy, insolvency or similar laws affecting the
enforcement of creditor's rights generally).

(b) Upon the effectiveness of this Amendment, the Borrower hereby
reaffirms all covenants, representations and warranties made in the Credit
Agreement and the other Loan Documents to the extent the same are not amended
hereby, agrees that all such covenants, representations and warranties shall be
deemed to have been remade as of the effective date of this Amendment.

(d) The Pro Forma Computation of the Leverage Ratio as of November 2, 1996
attached hereto as EXHIBIT A constitutes a true and accurate calculation of the
Borrower's Leverage Ratio as of such date calculated on a pro forma basis as
though the cash received from the Borrower's sale of its Rail Link subsidiary
had been concluded prior to such time.

4. REFERENCE TO THE EFFECT ON THE CREDIT AGREEMENT; SUBSTITUTION OF NOTES.

(a) Upon the effectiveness of Section 1 hereof, on and after the date
hereof, each reference in the Credit Agreement to "this Credit Agreement,"
"hereunder," "hereof," "herein" or words of like import shall mean and be a
reference to the Credit Agreement as amended hereby.

(b) Except as specifically amended above, the Credit Agreement and all
other documents, instruments and agreements executed and/or delivered in
connection therewith, shall remain in full force and effect, and are hereby
ratified and confirmed.

(c) The execution, delivery and effectiveness of this Amendment shall not,
except as expressly provided herein, operate as a waiver of any right, power of
remedy of the Agent or the Lenders, nor constitute a waiver of any provision of
the Credit Agreement or any other documents, instruments and agreements executed
and/or delivered in connection therewith.

5. GOVERNING LAW. THIS AMENDMENT SHALL BE CONSTRUED IN ACCORDANCE WITH
THE INTERNAL LAWS (AND NOT THE LAW OF CONFLICTS)

-2-

<PAGE>

OF THE STATE OF ILLINOIS, BUT GIVING EFFECT TO FEDERAL LAWS
APPLICABLE TO NATIONAL BANKS.

6. HEADINGS. Section headings in this Amendment are included herein for
convenience of reference only and shall not constitute a part of this Amendment
for any other purpose.

7. COUNTERPARTS. This Amendment may be executed in any number of
counterparts, all of which taken together shall constitute one agreement, and
any of the parties hereto may execute this Agreement by signing any such
counterpart. This Agreement shall be effective when it has been executed by the
Borrower, the Agent and each of the Lenders and each such party has notified the
Agent by facsimile or telephone that it has taken such action.

---- Remainder of this page intentionally blank -----

-3-

<PAGE>

IN WITNESS WHEREOF, this Amendment has been duly executed as of the day and
year first above written.

VARLEN CORPORATION,
AS THE BORROWER

By: /s/ Richard A. Nunemaker
------------------------------------

Print Name: Richard A. Nunemaker
-----------------------------

Title:
---------------------------------

THE FIRST NATIONAL BANK OF CHICAGO,
INDIVIDUALLY AND AS AGENT

By: /s/ Julia A. Bristow
------------------------------------

Print Name: Julia A. Bristow
-----------------------------

Title: Managing Director
---------------------------------

HARRIS TRUST AND SAVINGS BANK

By: /s/ Paul P. McDonald
------------------------------------

Print Name:
-----------------------------

Title:
---------------------------------

Signature Page to Varlen Amendment No. 2

<PAGE>

NATIONSBANK, N.A.

By: /s/ Lisa S. Donoghue
------------------------------------

Print Name: Lisa S. Donoghue
----------------------------

Title: Vice President
---------------------------------

NATIONSBANK, N.A.

By: /s/ Laurie D. Flom
------------------------------------

Print Name: LAURIE D. FLOM
----------------------------

Title: VICE PRESIDENT
---------------------------------

By: /s/ David C. Sagers
------------------------------------

Print Name: DAVID C. SAGERS
----------------------------

Title: Vice President
---------------------------------

Signature Page to Varlen Amendment No. 2

<PAGE>

VARLEN CORPORATION
PROFORMA COMPUTATION OF THE LEVERAGE RATIO
AS OF NOVEMBER 2, 1996

PROFORMA
LEVERAGE CASH FROM LEVERAGE
RATIO @ THE SALE OF RATIO @
11/2/96 RAIL LINK 11/2/96
-------- ---------- --------

TOTAL DEBT 193,625 193,625
CASH IN EXCESS OF $1.5 MILLION (1,392) (9,000) (10,392)
-------- ----------- --------

TOTAL (A) 192,233 (9,000) 183,233
-------- ----------- --------
-------- ----------- --------

EARNINGS BEFORE INTEREST AND TAXES 46,580 46,580
DEPRECIATION 17,069 17,069
AMORTIZATION 4,621 4,621
-------- ----------- --------

EBITDA(B) 68,270 0 68,270
-------- ----------- --------
-------- ----------- --------

LEVERAGE RATIO (A)/(B) 2.68
--------
--------

MARGIN LEVEL III
--------
--------

<PAGE>

AMENDMENT TO
VARLEN CORPORATION
1993 DEFERRED INCENTIVE STOCK PURCHASE PLAN

The compensation committee of the board of directors of Varlen Corporation
passed a resolution on February 3, 1997 amending the Corporation's 1993
Deferred Incentive Stock Purchase Plan by deleting Section 7(1) in its entirety
and replacing it with the following:

(1) Price. The purchase price per share of Common Stock payable
under the terms of each Purchase Right granted hereunder shall be as
determined by the Committee in its discretion but:

(i) for Employees who are not required to file Forms 3,4 and 5
under the Securities Exchange Act of 1934 as amended (the "1934 Act"),
shall not be less than the lower of the following: a) three dollars
($3.00) below the fair market value of the Common Stock on the day the
Purchase Right is granted; or (b) the book value of the Common Stock
on that date. The fair market value of Common Stock shall be as
determined by taking the average of the high/ask price and the low/bid
price for the Common Stock on such date.

(ii) for Employees who are required to file Forms 3,4 and 5 under
the 1934 Act, shall not be less than book value of the Common Stock on
such date.

<PAGE>
Exhibit 11
VARLEN CORPORATION AND SUBSIDIARIES
COMPUTATION OF PER SHARE EARNINGS
(Thousands, Except Per Share Amounts)

<TABLE>
<CAPTION>
Primary Earnings Per Share: For The Year Ended
- --------------------------- ----------------------------------
1/31/97 1/31/96 1/31/95
---------- ---------- ----------
<S> <C> <C> <C>
Net earnings $ 17,857 $ 19,609 $ 14,762
---------- ---------- ----------
---------- ---------- ----------
Computation of the Weighted Average Number of
Shares Outstanding as Used in the Primary
Earnings Per Share Computation:

Weighted average number of shares outstanding 5,785 5,920 5,873

Shares assumed issued under the treasury
stock method 238 221 191
---------- ---------- ----------

Weighted average number of shares outstanding, as adjusted 6,023 6,141 6,064
---------- ---------- ----------
---------- ---------- ----------

Primary Earnings Per Share $ 2.96 $ 3.19 $ 2.44
---------- ---------- ----------
---------- ---------- ----------

Fully Diluted Earnings Per Share:
- --------------------------------

Reconciliation of net earnings per the consolidated financial
statements to the amount used for the fully diluted computation:

Net earnings $ 17,857 $ 19,609 $ 14,762

Add interest on 6 1/2% convertible subordinated
debentures, net of income tax effects 2,736 2,736 2,736
---------- ---------- ----------

Net earnings, as adjusted $ 20,593 $ 22,345 $ 17,498
---------- ---------- ----------
---------- ---------- ----------

Computation of the Weighted Average Number of
Shares Outstanding as Used in the Fully
Diluted Earnings Per Share Computation:

Weighted average number of shares outstanding 5,785 5,920 5,873

Shares assumed issued under the treasury
stock method 239 225 209

Shares issuable from assumed exercise of
6 1/2% convertible subordinated debentures 3,054 3,054 3,054
---------- ---------- ----------

Weighted average number of shares outstanding, as adjusted 9,078 9,199 9,136
---------- ---------- ----------
---------- ---------- ----------

Fully Diluted Earnings Per Share $ 2.27 $ 2.43 $ 1.92
---------- ---------- ----------
---------- ---------- ----------

</TABLE>

<PAGE>

VARLEN CORPORATION

[PHOTO]

1996 SUMMARY ANNUAL REPORT

Design: Hirsch O'Connor Design, Chicago
<PAGE>

VARLEN AT A GLANCE
- ------------------------------------------------------------------------------

This report is in a summary format. It is a new format for Varlen Corporation
and is intended to present 1996 results in a simple, readable style. The more
detailed financial information included in previous annual reports is now part
of the Proxy Statement, which was distributed to shareowners along with this
report. A copy of the Proxy Statement may be obtained from Varlen Corporation
upon request. See the inside back cover for details.

TRUCK / TRAILER
- ------------------------------------------------------------------------------

PRIMARY MARKETS:

Class 8 trucks and over-the-road
trailer manufacturers - domestic
and international.

PRIMARY PRODUCTS:

ALUMINUM PERMANENT MOLD
AND DIE CASTINGS

- - Axle hubs

- - Suspension components [PHOTO]

- - Transmission housings

- - Spring brake flanges and
pistons

STRUCTURAL MOLDED PLASTIC
COMPONENTS

- - Instrument panels

- - Sleeper cab accessories

- - Door sill assemblies

AUTOMOTIVE
- ------------------------------------------------------------------------------

PRIMARY MARKETS:

Original equipment automotive
manufacturers and tier one
suppliers. Aftermarket transmission
rebuilders. Parts are used on cars
and light trucks. Domestic and
international markets.

PRIMARY PRODUCTS:

AUTOMATIC TRANSMISSION [PHOTO]
REACTION PLATES

MECHANICAL DIODE-Registered
Trademark- ONE-WAY CLUTCH

STEERING COLUMN COMPONENTS

TRANSMISSION COMPONENTS

PRECISION STAMPED METAL
COMPONENTS AND WELDMENTS

<PAGE>

R A I L R O A D
- ------------------------------------------------------------------------------

PRIMARY MARKETS:

Locomotive and railcar
manufacturers, railroads and
railcar maintenance
facilities, lessors, and track
maintenance contractors.
Global markets.

PRIMARY PRODUCTS:
RAILCARS

- Tapered roller bearings

- Hydraulic cushioning

- Draft gears

- Buffers

[PHOTO] - Discharge gates

LOCOMOTIVES

- HVAC systems

- Draft gears

- Tapered roller bearings

- Valves

- Toilets

- Remanufactured crankshafts
and camshafts

RAILROAD TRACK FASTENER
SYSTEMS

A N A L Y T I C A L I N S T R U M E N T S
- ------------------------------------------------------------------------------

PRIMARY MARKETS:

Instrumentation to improve
yield, certify products and
monitor regulatory standards.
Used by oil refineries,
petrochemical plants,
petroleum transporters, and
large users of distillate
products. Global markets.

[PHOTO] PRIMARY PRODUCTS:

AUTOMATED LABORATORY QUALITY
CONTROL INSTRUMENTS

ON-LINE PROCESS ANALYZERS

MANUAL AND SEMI-AUTOMATIC
PHYSICAL PROPERTY ANALYZERS

PORTABLE OPTOELECTRONIC
ANALYZERS

CERTIFICATION SAMPLES

PETROLEUM TESTING SERVICES

1
--
<PAGE>

F I N A N C I A L H I G H L I G H T S
- ------------------------------------------------------------------------------

1996

SEGMENT

RESULTS
- -------

- --------------------------------------------

NET SALES
by Segment

[PIE CHART]

/ / Transportation
Products
88.9%

/ / Analytical
Instruments
11.1%

- --------------------------------------------

OPERATING PROFIT
by Segment

[PIE CHART]

/ / Transportation
Products
79.3%

/ / Analytical
Instruments
20.7%

*Includes a $3.7 Million Pre-tax Gain
on the Sale of a Division.

- --------------------------------------------

VARLEN CORPORATION AND SUBSIDIARIES

(IN THOUSANDS, EXCEPT PER SHARE DATA)

1996(a) 1995(a) 1994(a)
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FOR THE YEAR
Net Sales. . . . . . . . . . . . . . . . . . . . . . . . . $409,475 $386,987 $341,521
Operating Profit (b) . . . . . . . . . . . . . . . . . . . 47,188 45,890 36,447
Net Earnings . . . . . . . . . . . . . . . . . . . . . . . 17,857 19,609 14,762
Net Earnings as a Percent of Sales . . . . . . . . . . . . 4.4% 5.1% 4.3%
Return on Average Stockholders' Equity . . . . . . . . . . 17.1% 21.4% 20.5%
Return on Invested Capital . . . . . . . . . . . . . . . . 9.6% 13.8% 12.4%
Capital Expenditures . . . . . . . . . . . . . . . . . . . $ 18,193 $ 23,427 $ 14,701
Depreciation and Amortization. . . . . . . . . . . . . . . 19,098 14,259 14,664
- ---------------------------------------------------------------------------------------------------------
AT YEAR END
Working Capital. . . . . . . . . . . . . . . . . . . . . . $ 69,461 $ 67,044 $ 57,713
Net Property, Plant and Equipment. . . . . . . . . . . . . 124,580 69,675 59,636
Total Debt . . . . . . . . . . . . . . . . . . . . . . . . 186,626 73,485 72,855
Stockholders' Equity . . . . . . . . . . . . . . . . . . . 109,986 97,953 79,031
Senior Debt as a Percent of Total Capitalization . . . . . 39.7% 2.6% 2.5%
Total Debt as a Percent of Total Capitalization. . . . . . 62.9% 42.9% 48.0%
- ---------------------------------------------------------------------------------------------------------
PER SHARE DATA
Primary Earnings Per Share . . . . . . . . . . . . . . . . $ 2.96 $ 3.19 $ 2.44
Fully Diluted Earnings Per Share . . . . . . . . . . . . . 2.27 2.43 1.92
Dividends Declared . . . . . . . . . . . . . . . . . . . . 0.36 0.35 0.33
Stockholders' Equity . . . . . . . . . . . . . . . . . . . 19.10 16.60 13.42
- ---------------------------------------------------------------------------------------------------------
</TABLE>

(a) Throughout this report the years ended January 31, 1997, 1996 and 1995 are
referred to as 1996, 1995, and 1994, respectively. The per share data in
1995 and 1994 reflect restatement for a 10% stock dividend in 1996. In
addition, the per share data in 1994 includes the affects of a 10% stock
dividend in 1995.

(b) Before corporate and net interest expenses.

2
- --
<PAGE>

L E T T E R TO FELLOW STOCKHOLDERS AND ASSOCIATES
- ------------------------------------------------------------------------------

Whether you call it "reinventing" or "reconfiguring," 1996 was a year of
significant change at Varlen.

1996 STRATEGIC ACTIONS ARE TRANSFORMING VARLEN

Through a series of strategic actions, we continued to transform the company
into a focused manufacturer of engineered products for the transportation and
petroleum industries. We:

- POSTED RECORD SALES of $409,475,000, and earnings per share of $2.27
(including the gain) were the second best in our history. This was
accomplished in spite of two of our core markets weakening. North
American production of large over-the-road trucks and trailers dropped
by 21 percent and 20 percent, respectively, and the railroad
freightcar build rate fell 5 percent.

- ACQUIRED BRENCO, INCORPORATED, a leading manufacturer and
reconditioner of railroad journal bearings serving markets throughout
the world, in July. This was the largest acquisition in Varlen's
history.

- SOLD A NON-STRATEGIC LABORATORY EQUIPMENT SUBSIDIARY in July for a
$2.1 million after-tax gain.

- FORMED A JOINT VENTURE, STARTRAK L.L.C., in August to develop and sell
satellite-based freightcar monitoring systems for the railroad
industry.

- ACQUIRED KARL GEORG, a premier German manufacturer of railcar
cushioning devices in January 1997. This company complements Varlen's
U.S.- and French-based railroad cushioning businesses and makes us the
European market leader.

- OPENED A WORLD-CLASS MANUFACTURING FACILITY to produce structural
plastic components for trucks.

PREPARING FOR FUTURE GROWTH

During fiscal 1996, we took important strides toward further long-term
profitable growth. We made a large investment in the railroad industry -- both
domestic and international. Two strategic acquisitions, combined with our
existing railroad operations, make this our largest market, representing about
45 percent of 1997 projected revenues. Why such a large commitment to the
railroad industry? We see many growth opportunities. Varlen can apply its
advanced technologies to world markets where investments and maintenance
spending will increase due to market share gains (against other forms of
transport), privatization, mergers, industrial development, and economic
expansion. Railroads are an important part of the industrial world's
infrastructure, and increasing expenditures will be required to maintain,
modernize, and expand railroad systems. To more effectively serve these markets,
we believe it is important for Varlen to have greater mass. Then we can better
benefit from investments in product development and new technologies as well as
marketing synergies.

Edgar Representation of Data Points Used In Printed Graph
- --------------------------------

NET SALES
in millions

[GRAPH]

- ---- -----
1996 $409,475
1995 $386,987
1994 $341,521
1993 $291,908
1992 $266,054
- --------------------------------

"DURING FISCAL
1996, WE TOOK
IMPORTANT STRIDES
TOWARD FURTHER
LONG-TERM
PROFITABLE
GROWTH."

3
--
<PAGE>

L E T T E R T O F E L L O W S T O C K H O L D E R S A N D
A S S O C I A T E S continued
- -------------------------------------------------------------------------------

Edgar Representation of Data Points Used In Printed Graph
- ----------------------------------

Fully Diluted E.P.S.
Before Accounting
Change
in dollars

[GRAPH]

- ---- -------
1996 $2.27
1995 $2.43
1994 $1.92
1993 $1.57
1992 $0.95
- ----------------------------------

The railroad industry is not the only transportation market we are
pursuing. In 1996, we opened a world-class manufacturing facility to produce
structural plastic components for manufacturers of trucks. As production of
recently introduced models of Freightliner and Paccar Class 8 trucks increases,
Varlen will benefit by expanding its content per vehicle of lightweight aluminum
and plastic components. This will help offset the softening in this market
projected for 1997. In the coming years, Varlen's content per vehicle for other
manufacturers of heavy-duty trucks and trailers is expected to expand as new
programs begin.

We also continue to invest in our automotive business, which we expect will
grow in 1997. Increased production of light trucks, penetration of international
markets, and the introduction of the Mechanical Diode-Registered Trademark-
one-way clutch (MD clutch) will drive this growth -- even if North American
light vehicle production stagnates or falls slightly in the current year. The MD
clutch, developed by Brenco but now part of Varlen's automotive business, is an
exciting product with significant growth prospects. It is a new and patented
version of a one-way clutch used in automatic transmissions. The first
application will be at Ford Motor Company for rear-wheel drive light passenger
vehicles, starting with the 1998 model year.

VARLEN'S LONG-TERM VIEW

We often use "long-term" when describing strategies, investments, and growth.
This may not be fashionable at a time when many focus only on quarterly
earnings. Put simply, we believe the most effective way to build an industrial
company that best serves its customers, employees, and investors is to manage
with a long-term view. This means spending time and money to develop markets,
products, and people. Varlen's capital expenditures have exceeded depreciation
since 1992. During this time, we made significant investments to increase
productivity, improve quality, bring new programs and products to market, and
expand capacity to serve a growing list of customers. This has fueled compounded
average annual growth of 39% for earnings and 12% for sales over the last five
years. Research and development expenditures have been increased, for we feel
strongly that new products will help us to maintain leadership in our niche
markets and improve margins. Each of our businesses introduced successful new
products last year and has more in the pipeline for 1997.

International growth takes patience as well as a great deal of time and
investment. Why do we bother? Many of our domestic markets are mature and
growing slowly. We see opportunities for our products and technologies beyond
North American borders. In addition, we participate in a global market and must
think and act that way in order to maintain existing market positions and
develop new ones. Varlen's customers are going global and so are its
competitors. A good example is in the heavy-duty truck market, where four of six
U. S. manufacturers either are owned by a foreign company or own a foreign truck
manufacturer. The petroleum analyzer market has always been an international
one, global sourcing is a way of life in the automotive industry, and the
railroad industry is moving in that direction.

Varlen is a manufacturing company that focuses on engineered products. To
maintain our strong market positions and grow, we will continue to think
LONG-TERM. While some segments of the financial community do not always reward
this philosophy, we cannot be deterred from our strategy of building long-term
value.

4
- --
<PAGE>

We ask that investors evaluate Varlen on:

- Performance over the length of a business cycle in comparison to our
served markets.

- Strategic actions taken over the last five years.

- Internal growth prospects.

- Leading niche market positions.

Edgar Representation of Data Points Used In Printed Graph
- ----------------------------------

Earnings Before
Interest, Taxes
Depreciation and
Amortization
in millions

[GRAPH]

- ---- -------
1996 $59,669
1995 $53,432
1994 $45,280
1993 $37,734
1992 $31,144
- ----------------------------------

"WE ARE VERY
ENTHUSIASTIC
ABOUT YOUR
COMPANY'S
LONG-TERM
PROSPECTS AND
WILL CONTINUE
TO INVEST IN
ITS FUTURE."

GROWTH EXPECTED IN 1997

Many industry analysts forecast 1997 production of heavy-duty trucks/trailers,
freightcars, and passenger vehicles will fall from their 1996 levels. In the
past few years, we have driven down our breakeven point. Combined with the
flexibility of our operations and new products and programs, this will help us
better weather the market cycles. While some of the transportation equipment
industries Varlen serves could weaken by 10-20% in the current year, keep in
mind that projected production will still be at historically healthy levels.

Even in the face of declining markets, we expect Varlen will grow as a
result of the acquisitions made last year, new products, new markets, and
increases in market share. We are working hard to regain our earnings momentum,
and our bottom line improvements should start to keep pace with the top line
growth as the year unfolds. As the MD clutch shipments begin in mid-year and the
production rates of the new Freightliner and PACCAR truck models expand as 1997
progresses, Varlen should begin to leverage the investments made in these
programs. Demand for our petroleum analyzers should grow due to a combination of
improved market conditions and the planned introduction of new instruments.

For a more in-depth review of 1996 operations and 1997 market outlook
please see the "Review of Operations" starting on page 6.

Varlen has a history of outperforming its markets. The strategic actions
taken in fiscal 1996 will allow it to continue to do so. Our operations are
strong and able to take advantage of growth opportunities, even in softening
markets. We are very enthusiastic about your company's long-term prospects and
will continue to invest in its future. Come along with us for the ride.

To our new employees who joined Varlen from Brenco and Karl Georg --
welcome and thank you for your hard work and commitment during the transition.
We also express our appreciation to all of the Varlen stockholders, employees,
customers, and suppliers for their continued support and commitment.

/s/ Ernest H. Lorch /s/ Richard L. Wellek
Ernest H. Lorch Richard L. Wellek
Chairman of the Board President and Chief Executive Officer

March 6, 1997

5
--
<PAGE>

R E V I E W OF OPERATIONS

M I S S I O N
- --------------------------------------------------------------------------------
VARLEN'S PRIMARY OBJECTIVE IS TO INCREASE THE LONG-TERM VALUE OF ITS
STOCKHOLDERS' INVESTMENT. THIS WILL BE ACHIEVED BY BUILDING UPON OUR EMPLOYEES'
CREATIVITY AND THEIR COMMITMENT TO SERVING CUSTOMERS BETTER AND MORE
EFFICIENTLY THAN OUR COMPETITORS DO IN THE MARKETS WHERE VARLEN CHOOSES TO
COMPETE. VARLEN WILL INVEST RESOURCES IN SELECTED INDUSTRIAL MARKETS WHERE IT
HAS, OR CAN OBTAIN, A LEADERSHIP POSITION; WE WILL REDEPLOY RESOURCES FROM
MARKETS WHERE WE CANNOT. WE WILL CONTINUE TO ENHANCE OUR GLOBAL PRESENCE.
VARLEN'S ENGINEERED PRODUCTS FOR THE NICHE MARKETS IN WHICH IT PARTICIPATES ARE
CHARACTERIZED BY DIFFERENTIABLE PROCESS TECHNOLOGY EMPLOYED IN THEIR
MANUFACTURE AND/OR SUPERIOR PERFORMANCE ATTRIBUTES. OUR DEDICATION TO
CONTINUOUS IMPROVEMENT WILL BE UNRELENTING.
- --------------------------------------------------------------------------------

1996 - SOLID RESULTS
IN A CHALLENGING YEAR

While demand in the automotive segment stayed at high levels, our other key
markets weakened during 1996. New railcar deliveries and North American truck
and trailer production were off from 1995 levels by 5%, 21%, and 20%,
respectively. Although light vehicle production remained strong, the General
Motors strikes hurt results. Despite these external factors, Varlen delivered
the second best earnings' results in its history!

[PHOTO]

Internally, we continued to invest for the future. Product development costs
remained high and included a major HVAC equipment program for China's locomotive
and transit car markets. A large number of new tools and a plant in Bryson City,
North Carolina, were brought on line to support new model introductions for our
two largest truck customers -- Freightliner and PACCAR. Our instrument business
rationalized manufacturing facilities in Germany and consolidated North American
administration and some manufacturing. These underlying initiatives
drove up our costs in 1996 but provide the base for future profit growth.

ACQUISITION INTEGRATION IS ON SCHEDULE

Our recent acquisitions -- Brenco and Karl Georg -- will also contribute to
1997's growth. In addition to building on their strengths and capabilities, we
believe that as we have done with other acquisitions, introducing VARLEN
DISCIPLINES will focus these organizations to enhance their competitive
advantage:

- - A planning process designed to identify niche opportunities, along with
aggressive market- and product-specific growth strategies.

- - A willingness to invest in cutting-edge manufacturing techniques and
technologies.

- - A focus on return on net assets and cash flow as key measures of
operational success.

[PHOTO]

VARLEN'S MECHANICAL DIODE-Registered Trademark-
ONE-WAY CLUTCH FOR AUTOMATIC TRANSMISSIONS IS A
SIGNIFICANT TECHNOLOGICAL ADVANCEMENT.
PRODUCTION WILL BEGIN IN THE SPRING OF 1997.

6
- --
<PAGE>

We are excited about these businesses' prospects. Karl Georg, which
complements our domestic and French-based railroad cushioning businesses, gives
us the strategic position to become the premier energy absorption system
supplier in Europe and Scandinavia. Brenco adds products with a high engineering
content and expands our participation in the repair and upgrade market.
Internationally, their presence provides us with mass to help build a more
effective distribution network.

Through our equity investment in StarTrak L.L.C., we expect to leverage our
knowledge of train dynamics and key component engineering capabilities in
bearings and cushioning, to develop a cost-effective railcar monitoring system,
and establish a real-time communication service business for our rail customers
for transmitting information on car health conditions.

CORE BUSINESSES POSITIONED FOR GROWTH

RAILROAD PRODUCTS - While the North American railcar fleet will not be expanding
in the near-term, we believe the rail industry remains an attractive market.
Except for slight dips in recessionary times, rail traffic has shown
year-over-year gains over the last 25 years, and our railroad companies stand to
benefit from more specific positive trends. Demand for replacement of our "wear
and tear" products (such as anchors, discharge gates, cushioning devices, and
bearings) will rise as longer trains of heavier carloads make more trips over
greater distances in shorter times.

[PHOTO]
BRENCO IS THE LEADING NORTH AMERICAN
MANUFACTURER OF RAILROAD FREIGHTCAR
TAPERED ROLLER BEARINGS. INTERNATIONAL
SALES OF THESE HIGHLY ENGINEERED
PRODUCTS ARE GROWING.

Approximately 50 percent of Varlen railroad sales are aftermarket related,
and our businesses all have action plans for increasing their penetration.

The secular shift from direct current (DC) locomotives to higher horsepower
alternating current (AC) locomotives, along with rising transit car demand,
bodes well for our locomotive component and bearing businesses. Anticipated
intermodal traffic gains and heavy coal car requirements also should stimulate
demand for our new proprietary energy absorption devices serving these railcar
segments.

[PHOTO]

We expect our direct investments in France and Germany will help European rail
customers take full advantage of the revolution in their rail-freight market,
brought on by economic unification and privatization. Our objective is to
leverage our technology into a leading share position as Europe embraces U.S.
style rail-freight methodology:

Edgar Representation of Data Points Used In Printed Graph
- --------------------------------------

Net Earnings
in millions

[GRAPH]

- ---- --------
1996 $17,857
1995 $19,609
1994 $14,762
1993 $10,766
1992 $6,317
- --------------------------------------

- --------------------------------------

Book Value Per Share
in dollars

[GRAPH]

- ---- ------
1996 $19.10
1995 $16.60
1994 $13.42
1993 $10.85
1992 $9.36
- --------------------------------------
7
--
<PAGE>

R E V I E W OF OPERATIONS continued

intermodal systems, center car coupling, and hydraulic cushioning. We expect
sales of U.S.-made components to complement what Varlen produce overseas.

[PHOTO]

The Far East market, and other rapidly developing nations where railroads will
play a key role in economic growth, also are expected to be a major source of
opportunity for all our railroad businesses. Marketing resources are being
pooled to attract and motivate high-caliber distributors and sales agents.

TRUCK/TRAILER PRODUCTS - The North American heavy-duty truck and trailer markets
are forecast to be down again for 1997. If this is a modest decline, Varlen's
productivity increases, new programs, and penetration gains actually should
generate growth in this environment. Start-up costs for components on
Freightliner's and PACCAR's new trucks are behind us. The trucks' ongoing
production ramp-up, along with our much higher content per vehicle, will allow
us to substantially outperform the market. In addition, as trucking companies
push to increase payload and reduce operating expenses, demand for our
lightweight technology -- design and application of aluminum and structural
plastic components -- continues to grow. For example, Mack trucks recently
decided to offer our hubs as standard equipment on their conventional trucks,
and new Peterbilt trucks will have our structural molded plastic instrument
panels.

The pull-through marketing efforts with trailer fleet owners for our fully
assembled aluminum axle hubs continue to gain market share for Varlen. In the
second half of 1996, as trailer production dropped 16 percent from 1995, our
sales to this market increased 5 percent. Interest in our hubs and structural
aluminum castings also is growing in international markets, and development
projects are underway with several original equipment manufacturer (OEM)
accounts in Europe and Japan.

AUTOMOTIVE PRODUCTS - North American factories produced about the same number of
automobiles and light trucks in 1996 as they did in 1995. Varlen, however, had
record results in this market as margins increased due to improving
manufacturing yields. We believe this "process excellence" initiative can
further reduce cost, increase our responsiveness to customers, and add to our
manufacturing capacity.

Although the 1997 light vehicle market is expected to weaken, several factors
will enable us to outperform the market. The rising popularity of light trucks
plays into our hands -- it is the strongest portion of the market for us. The
full-year impact of programs started in 1996 and others targeted for 1997
introduction -- including a second program for GM Powertrain-Europe -- also will
stimulate growth.

Our greatest vehicle for future growth in this market is the Mechanical
Diode-Registered Trademark- one-way clutch (MD clutch) -- an innovative,
patented product acquired through

[PHOTO]

VARLEN'S MECHANICAL DIODE-Registered
Trademark- ONE-WAY CLUTCH FOR AUTOMATIC
TRANSMISSIONS IS A SIGNIFICANT
TECHNOLOGICAL ADVANCEMENT. PRODUCTION
WILL BEGIN IN THE SPRING OF 1997.

8
- --
<PAGE>

the Brenco acquisition. While our first major program is for Ford transmissions,
to begin shipping in July 1997, we are working with other OEMs on many projects.
The MD clutch currently is sold in the aftermarket as a drop-in replacement for
some GM transmissions. This device has great growth potential because of its
superior performance characteristics: increased durability, reliability, an
improved "shift-feel" quality, and, in most applications, reduced cost.

ANALYTICAL INSTRUMENTS - This business serves the petroleum industry with
equipment used to measure the physical properties of crude oil and its
derivatives. It experienced reduced sales and operating profit (excluding the
gain on the sale of our laboratory equipment business) for the year. After a
very weak first half, orders rebounded in the second half and industry prospects
are more upbeat than they have been in several years. Gasoline and aviation fuel
usage is rising briskly in most parts of the globe, crude oil prices are high,
and the large integrated oil companies are again earning solid returns. These
positive drivers are expected to sustain the order momentum that started
building in the second half of 1996.

Our instrument business continues to increase the effectiveness of its
international distribution channel. Designated area managers for different parts
of the globe work closely with local sales agents, lend technical and marketing
support, and ensure a superior level of customer service.

[PHOTO]

WITH THE ACQUISITION OF
KARL GEORG IN JANUARY 1997,
VARLEN IS NOW THE LARGEST
MANUFACTURER OF EUROPEAN
STYLE RAILCAR BUFFERS.

In recent years, we increased our investment in product development, and
product rollouts of new and upgraded instruments are expected to increase
revenues in 1997. Some products were developed by our strategic partner, Boston
Advanced Technologies, Inc. whose innovative spectroscopic instruments have
significant growth potential.

WHAT IT MEANS TO BE A NICHE MARKET LEADER

The goal of our operating philosophy is to become the leader in the niche
markets we serve. And in the key markets relevant to our success and future
growth, proprietary products and processes have allowed our companies to assume
a market leadership role. This focus on market leadership is more than just
aggressive marketing initiatives and a high market share. It means enhancing our
manufacturing and product technologies to offer the highest-quality products. It
means avoiding complacency, no matter how strong our competitive position. It
means using innovative product development to make our products obsolete before
competitors can. Most importantly, market leadership means continual improvement
in every aspect of our businesses.

We have been working hard at continuous improvement. We have invested in
advanced manufacturing technologies in all our businesses to sharpen our
capabilities and skills as a cost-efficient, high-productivity leader. Thirteen
of our 24 plants are ISO or QS-9000 certified, and another 7 are determined to
qualify for the award by the end of 1997. We

Edgar Representation of Data Points Used In Printed Graph
- ----------------------------------

Research
and Development
Expenditures
in millions

[GRAPH]

- ---- -----
1996 $9,540
1995 $5,948
1994 $4,366
1993 $4,342
1992 $3,609
- ----------------------------------

redesigned work flows and material systems and created focused factories. We
increased and upgraded our engineering talent, and far more attention is placed
on employee training. In our very price-conscious markets, these imperatives
help provide Varlen with the competitive advantages essential to achieve
sustainable earnings growth.

THE OUTLOOK IS POSITIVE

Varlen is operating more efficiently -- and serving customers more effectively
- -- than ever before. But we can still do better. We recognize that we must
"raise the bar" on our basic business processes to achieve the growth and
productivity targets we seek. We must become even closer partners with our
customers, proposing solutions as their needs change. We are excited by the
future, seeing change as an opportunity and, most importantly, convinced that
our best days are ahead of us.

/s/ Raymond A. Jean

Raymond A. Jean
Executive Vice President and Chief
Operating Officer

9
--
<PAGE>

SUMMARY OF OPERATIONS

(IN THOUSANDS, EXCEPT PER SHARE DATA) 1996 1995* 1994* 1993* 1992*
- -----------------------------------------------------------------------------------------------------------------------------------
STATEMENT OF EARNINGS DATA:
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales. . . . . . . . . . . . . . . . . . . . . . . . $409,475 $386,987 $341,521 $291,908 $266,054
-----------------------------------------------------------------------
Earnings before income taxes . . . . . . . . . . . . . . 31,831 34,706 25,854 18,723 14,374
Income tax expense . . . . . . . . . . . . . . . . . . . 13,974 15,097 11,092 7,957 6,706
-----------------------------------------------------------------------
Earnings before cumulative effect of change in
accounting principle . . . . . . . . . . . . . . . . . 17,857 19,609 14,762 10,766 7,668
Cumulative effect of change in accounting principle. . . -- -- -- -- (1,351)
-----------------------------------------------------------------------
Net earnings . . . . . . . . . . . . . . . . . . . . . . $ 17,857 $ 19,609 $ 14,762 $ 10,766 $ 6,317
-----------------------------------------------------------------------
-----------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------

Gross profit as a percent of sales . . . . . . . . . . . 24.5% 25.0% 23.7% 24.0% 23.8%
Earnings before cumulative effect of change in
accounting principle as a percent of sales . . . . 4.4% 5.1% 4.3% 3.7% 2.9%
- -----------------------------------------------------------------------------------------------------------------------------------
Effective tax rate before cumulative effect of change
in accounting principle . . . . . . . . . . . . . . . 43.9% 43.5% 42.9% 42.5% 46.7%
- -----------------------------------------------------------------------------------------------------------------------------------
Per share data--primary:

Earnings before change in accounting principle . . . $ 2.96 $ 3.19 $ 2.44 $ 1.80 $ 0.95

Net earnings . . . . . . . . . . . . . . . . . . . . 2.96 3.19 2.44 1.80 0.78
Per share data--fully diluted:

Earnings before change in accounting principle . . . 2.27 2.43 1.92 1.57 0.95
Net earnings . . . . . . . . . . . . . . . . . . . . 2.27 2.43 1.92 1.57 0.78
Dividends declared . . . . . . . . . . . . . . . . . . . 0.36 0.35 0.33 0.33 0.33
- -----------------------------------------------------------------------------------------------------------------------------------
Weighted average number of shares--primary . . . . . . . 6,023 6,141 6,064 5,986 8,081

Weighted average number of shares--fully diluted . . . . 9,078 9,199 9,136 8,062 8,081
- -----------------------------------------------------------------------------------------------------------------------------------

</TABLE>

SUMMARY OF FINANCIAL CONDITION
<TABLE>
<CAPTION>

Average accounts receivable turnover . . . . . . . . 7.9 8.4 8.2 8.1 7.5
- -----------------------------------------------------------------------------------------------------------------------------------

Net property, plant and equipment. . . . . . . . . . . . $124,580 $ 69,675 $ 59,636 $ 52,867 $ 54,779

Capital expenditures . . . . . . . . . . . . . . . . . . 18,193 23,427 14,701 11,240 9,567

Depreciation . . . . . . . . . . . . . . . . . . . . . . 15,373 11,819 11,885 10,295 9,488
- -----------------------------------------------------------------------------------------------------------------------------------

Debt:

Senior debt. . . . . . . . . . . . . . . . . . . . . . $117,626 $ 4,485 $ 3,855 $ 3,820 $ 74,679

Senior debt as a percent of total capitalization . . . 39.7% 2.6% 2.5% 2.8% 58.1%

Total debt . . . . . . . . . . . . . . . . . . . . . . $186,626 $ 73,485 $ 72,855 $ 72,820 $ 74,679

Total debt as a percent of total capitalization. . . . 62.9% 42.9% 48.0% 53.4% 58.1%
- -----------------------------------------------------------------------------------------------------------------------------------

Stockholders' equity . . . . . . . . . . . . . . . . . . $109,986 $ 97,953 $ 79,031 $ 63,644 $ 53,788
Stockholders' equity per share . . . . . . . . . . . . . 19.10 16.60 13.42 10.85 9.36
Return on average stockholders' equity . . . . . . . . . 17.1% 21.4% 20.5% 18.0% 8.5%
- -----------------------------------------------------------------------------------------------------------------------------------

</TABLE>

* The per share data and weighted average number of shares outstanding were
restated for a 10% stock dividend in 1996. In addition, 1994, 1993 and
1992 include the affects of a 10% stock dividend in 1995 and 1992 also
includes the affects of a 3 for 2 stock split effected in the form of a
stock dividend in 1993.

10
- ---
<PAGE>

CONSOLIDATED STATEMENTS OF EARNINGS
Varlen Corporation and Subsidiaries

<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $409,475 $386,987 $341,521
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 309,027 290,052 260,469
------------------------------------------
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,448 96,935 81,052
Selling, general and administrative expenses . . . . . . . . . . . . . . . . . . . 63,607 57,762 50,436
------------------------------------------
Earnings from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,841 39,173 30,616
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (9,402) (5,281) (5,249)
Interest income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 662 814 487
Gain on sale of business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,730 -- --
------------------------------------------
Earnings before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,831 34,706 25,854
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,974 15,097 11,092
------------------------------------------
Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 17,857 $ 19,609 $ 14,762
------------------------------------------
------------------------------------------
Primary earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2.96 $ 3.19 $ 2.44
------------------------------------------
------------------------------------------
Fully diluted earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2.27 $ 2.43 $ 1.92
------------------------------------------
------------------------------------------
Weighted average number of shares--primary . . . . . . . . . . . . . . . . . . . . . 6,023 6,141 6,064
------------------------------------------
------------------------------------------
Weighted average number of shares--fully diluted . . . . . . . . . . . . . . . . . . 9,078 9,199 9,136
------------------------------------------
------------------------------------------
</TABLE>

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
DEFERRED TOTAL
ADDITIONAL STOCK STOCK-
COMMON PAID-IN RETAINED COMPEN- TREASURY HOLDERS'
(IN THOUSANDS, EXCEPT PER SHARE DATA) STOCK CAPITAL EARNINGS SATION STOCK EQUITY
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT FEBRUARY 1, 1994. . . . . . . . . . . . . . . . $485 $16,140 $47,943 $ (924) $ -- $ 63,644
Issuance of common stock under options . . . . . . . . . . 2 281 -- -- -- 283
Amortization of deferred stock compensation. . . . . . . . -- -- -- 222 -- 222
Cash received on stock subscriptions . . . . . . . . . . . -- -- 243 -- -- 243
Cost of common stock for the purchase of business. . . . . -- 95 -- -- -- 95
Net earnings . . . . . . . . . . . . . . . . . . . . . . . -- -- 14,762 -- -- 14,762
Cash dividends ($.33 per share). . . . . . . . . . . . . . -- -- (1,942) -- -- (1,942)
Additional minimum pension liability . . . . . . . . . . . -- -- 80 -- -- 80
Currency translation adjustments--unrealized . . . . . . . -- -- 1,644 -- -- 1,644
---------------------------------------------------------------------

BALANCE AT JANUARY 31, 1995. . . . . . . . . . . . . . . . 487 16,516 62,730 (702) -- 79,031
Issuance of common stock under options . . . . . . . . . . 5 837 -- -- -- 842
Amortization of deferred stock compensation. . . . . . . . -- -- -- 206 -- 206
Cash received on stock subscriptions . . . . . . . . . . . -- -- 388 -- -- 388
Stock dividend . . . . . . . . . . . . . . . . . . . . . . 49 12,281 (12,330) -- -- --
Net earnings . . . . . . . . . . . . . . . . . . . . . . . -- -- 19,609 -- -- 19,609
Cash dividends ($.35 per share). . . . . . . . . . . . . . -- -- (2,112) -- -- (2,112)
Purchase of treasury stock . . . . . . . . . . . . . . . . -- -- -- -- (965) (965)
Additional minimum pension liability . . . . . . . . . . . -- -- 69 -- -- 69
Currency translation adjustments--unrealized . . . . . . . -- -- 885 -- -- 885
---------------------------------------------------------------------

BALANCE AT JANUARY 31, 1996. . . . . . . . . . . . . . . . 541 29,634 69,239 (496) (965) 97,953
Issuance of common stock under options . . . . . . . . . . 1 226 (48) -- 88 267
Amortization of deferred stock compensation. . . . . . . . -- -- -- 205 -- 205
Cash received on stock subscriptions . . . . . . . . . . . -- -- 233 -- -- 233
Stock dividend . . . . . . . . . . . . . . . . . . . . . . 34 7,613 (11,764) -- 4,117 --
Net earnings . . . . . . . . . . . . . . . . . . . . . . . -- -- 17,857 -- -- 17,857
Cash dividends ($.36 per share). . . . . . . . . . . . . . -- -- (2,084) -- -- (2,084)
Purchase of treasury stock . . . . . . . . . . . . . . . . -- -- -- -- (3,240) (3,240)
Additional minimum pension liability . . . . . . . . . . . -- -- (6) -- -- (6)
Currency translation adjustments--unrealized . . . . . . . -- -- (1,199) -- -- (1,199)
---------------------------------------------------------------------
BALANCE AT JANUARY 31, 1997. . . . . . . . . . . . . . . . $576 $37,473 $72,228 $ (291) $ -- $ 109,986
---------------------------------------------------------------------
---------------------------------------------------------------------
</TABLE>

See accompanying condensed notes to consolidated financial statements.

11
---
<PAGE>

CONSOLIDATED BALANCE SHEETS
Varlen Corporation and Subsidiaries

<TABLE>
<CAPTION>
JANUARY 31,
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1997 1996
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,133 $ 22,915
Accounts receivable, less allowance for doubtful accounts of $1,455 and $1,318 . . . 62,088 43,297
Inventories:
Raw materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,795 18,230
Work in process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,285 8,760
Finished goods. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,551 9,501
-------------------------
53,631 36,491
-------------------------
Deferred and refundable income taxes . . . . . . . . . . . . . . . . . . . . . . . . 8,244 4,344
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,357 4,467
-------------------------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132,453 111,514
-------------------------
Property, plant and equipment:
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,436 3,385
Buildings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39,779 23,298
Machinery and equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150,468 98,327
Construction in progress. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,756 12,269
-------------------------
200,439 137,279
Less accumulated depreciation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75,859 67,604
-------------------------
124,580 69,675
-------------------------
Goodwill and other intangible assets, less accumulated
amortization of $18,128 and $15,684. . . . . . . . . . . . . . . . . . . . . . . . . . 133,419 42,837
Investments and other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,426 6,848
-------------------------
$393,878 $230,874
-------------------------
-------------------------
- -------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:

Current maturities of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,273 $ 87
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,623 20,954
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,366 22,313
Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,730 1,116
-------------------------
Total current liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62,992 44,470
-------------------------
Long-term debt:
Convertible subordinated debentures. . . . . . . . . . . . . . . . . . . . . . . . . 69,000 69,000
Other long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115,353 4,398
-------------------------
Total long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 184,353 73,398
-------------------------
Deferred income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,252 4,539
Other liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,295 10,514
Stockholders' equity:
Preferred stock, par value $1.00 per share; authorized
500 shares, issuable in series; none issued. . . . . . . . . . . . . . . . . . . . . -- --
Common stock, par value $.10 per share; authorized
20,000 shares; issued: 5,758 and 5,946 . . . . . . . . . . . . . . . . . . . . . . . 576 541
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37,473 29,634

Retained earnings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72,228 69,239
Deferred stock compensation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (291) (496)
Common stock held in treasury, at cost; 45 shares. . . . . . . . . . . . . . . . . . . -- (965)
-------------------------
Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109,986 97,953
-------------------------
$393,878 $230,874
-------------------------
-------------------------
</TABLE>

See accompanying condensed notes to consolidated financial statements.

12
- ---
<PAGE>

CONSOLIDATED STATEMENTS OF CASH FLOWS
Varlen Corporation and Subsidiaries

<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
(IN THOUSANDS) 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 17,857 $ 19,609 $ 14,762
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation. . . . . . . . . . . . . . . . . . . . . . . . . . . 15,373 11,819 11,885
Amortization. . . . . . . . . . . . . . . . . . . . . . . . . . . 3,725 2,440 2,779
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . 1,165 476 (1,748)
Gain on sale of business. . . . . . . . . . . . . . . . . . . . . (3,730) -- --
Change in assets and liabilities net of effects from
purchased and sold businesses:
Accounts receivable, net. . . . . . . . . . . . . . . . . 1,572 2,751 (9,532)
Inventories . . . . . . . . . . . . . . . . . . . . . . . 245 1,740 2,156
Refundable income taxes . . . . . . . . . . . . . . . . . (2,515) 8 130
Other current assets. . . . . . . . . . . . . . . . . . . (44) (522) (768)
Accounts payable. . . . . . . . . . . . . . . . . . . . . 3,047 (6,061) 6,363
Accrued expenses. . . . . . . . . . . . . . . . . . . . . (9,623) (1,079) 2,207
Income taxes payable. . . . . . . . . . . . . . . . . . . 1,954 (1,803) 2,431
Other noncurrent assets . . . . . . . . . . . . . . . . . 899 1,878 93
Other noncurrent liabilities. . . . . . . . . . . . . . . 1,181 859 379
---------------------------------------
Total adjustments . . . . . . . . . . . . . . . . . . 13,249 12,506 16,375
---------------------------------------
Net cash provided by operating activities. . . . . . . . . . . 31,106 32,115 31,137
---------------------------------------
Cash flows from investing activities:
Fixed asset expenditures . . . . . . . . . . . . . . . . . . . . (18,193) (23,427) (14,701)
Cost of purchased businesses, net of cash acquired and other
long-term investments. . . . . . . . . . . . . . . . . . . . . (154,926) (6,253) (7,800)
Sale of businesses . . . . . . . . . . . . . . . . . . . . . . . 21,118 8,013 --
Sale of marketable securities. . . . . . . . . . . . . . . . . . 4,469 -- --
Disposals and other changes in property, plant and equipment . . 243 395 1,067
---------------------------------------
Net cash used in investing activities. . . . . . . . . . . . . (147,289) (21,272) (21,434)
---------------------------------------
Cash flows from financing activities:
Proceeds from debt . . . . . . . . . . . . . . . . . . . . . . . . 111,083 1,107 33
Payments of debt . . . . . . . . . . . . . . . . . . . . . . . . . (9,551) (82) (331)
Issuance of common stock under option plans. . . . . . . . . . . . 95 581 161
Cash received on stock subscriptions . . . . . . . . . . . . . . . 233 388 243
Purchase of treasury stock . . . . . . . . . . . . . . . . . . . . (3,240) (965) --
Cash dividends paid. . . . . . . . . . . . . . . . . . . . . . . . (2,084) (2,112) (1,942)
---------------------------------------
Net cash provided by (used in) financing activities. . . . . . 96,536 (1,083) (1,836)
---------------------------------------
Effect of exchange rate changes on cash. . . . . . . . . . . . . . . (135) 59 61
---------------------------------------

Net (decrease) increase in cash and cash equivalents . . . . . . . . (19,782) 9,819 7,928
Cash and cash equivalents at beginning of year . . . . . . . . . . . 22,915 13,096 5,168
---------------------------------------
Cash and cash equivalents at end of year . . . . . . . . . . . . . . $ 3,133 $ 22,915 $13,096
---------------------------------------
---------------------------------------

</TABLE>

See accompanying condensed notes to consolidated financial statements.

13
---
<PAGE>

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Varlen Corporation and Subsidiaries

(The complete financial statement footnotes can be found in the Company's 1997
Proxy Statement)

- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include
the accounts of Varlen Corporation and all of its subsidiaries (the "Company").
All significant intercompany balances and transactions have been eliminated.

(b) USE OF ESTIMATES: The preparation of 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,
disclosure of contingent assets and liabilities and reported amounts of revenues
and expenses during the reporting period. Actual results could differ from those
estimates.

(c) CASH AND CASH EQUIVALENTS: The Company considers all highly liquid
investments purchased with a maturity of three months or less from the date of
purchase to be cash equivalents.

(d ) INVENTORIES: Inventories are stated at the lower of cost or market. Cost of
inventories is determined using the last-in, first-out (Lifo) method for 79% and
73% of inventories, at January 31, 1997 and 1996, respectively. The first-in,
first-out (Fifo) method is used for all remaining inventories. If the Fifo
method of determining inventory costs had been used for all inventories,
inventories would have increased approximately $1,501,000 and $2,138,000 at
January 31, 1997 and 1996, respectively.

(e) PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment are recorded at
cost. Depreciation is provided on the straight-line method over the estimated
useful lives of the assets. The useful lives of buildings range from 10 to 45
years and the useful lives of machinery and equipment range from 3 to 12 years.

(f) LONG-LIVED ASSETS: Goodwill is amortized on a straight-line basis over a
period of 15 to 40 years. The carrying amount of goodwill and other long-lived
assets is evaluated annually to determine if adjustment to the amortization or
depreciation period or to the unamortized balance is warranted. Such evaluation
is based principally on the expected utilization of long-lived assets and the
projected undiscounted cash flows of the operations to which the long-lived
assets are deployed. Other intangible assets are amortized on a straight-line
basis over their useful lives.

(g) EARNINGS PER SHARE: Primary earnings per share is computed on the basis of
the weighted average number of common shares outstanding during the period plus
common equivalent shares arising from stock incentive plans using the treasury
stock method. The computation of fully diluted earnings per share includes the
weighted average number of shares that would have been issued upon conversion of
the convertible debentures and the effect on net earnings for the reduction in
the after-tax interest expense on the converted debentures.

(h) FOREIGN CURRENCY TRANSLATION: Foreign currency financial statements of
foreign operations where the local currency is the functional currency are
translated using exchange rates in effect at period end for assets and
liabilities and average exchange rates during the period for results of
operations. Related translation adjustments are reported as a component of
Stockholders' Equity. Gains and losses from foreign currency transactions are
included in earnings.

(i) NEW ACCOUNTING STANDARD: In October 1995, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standard No. 123 "Accounting for
Stock-Based Compensation" which was adopted by the Company in 1996. This
Statement allows for, and the Company elected to, retain its current accounting
for employee stock-based compensation arrangements under Accounting Principles
Board Opinion No. 25 with certain additional disclosures. The adoption of this
standard did not have a material effect on the Company's results of operations
or financial position.

(j) DERIVATIVE FINANCIAL INSTRUMENTS: The Company uses derivatives to transfer
or reduce the risk of interest rate volatility. The amount to be paid or
received from interest rate swaps is charged or credited to interest expense
over the lives of the interest rate swap agreements.

- --------------------------------------------------------------------------------
2. ACQUISITIONS

Effective December 31 ,1996, the Company purchased Karl Georg ("Georg"), a
German railcar cushioning device manufacturer for cash and deferred payments.
Georg has two manufacturing facilities in Germany with annual revenues of
approximately $15.0 million.

On June 15, 1996, the Company, a wholly-owned subsidiary of the Company and
Brenco, Incorporated ("Brenco"), a manufacturer and reconditioner of specialized
tapered roller bearings for the railroad industry with headquarters in Virginia,
entered into an acquisition agreement or the purchase of all Brenco's
outstanding common stock for $16.125 per share. As a result of the tender offer
which expired on July 18, 1996, the Company owned approximately 96% of the
outstanding common stock of Brenco. On August 23, 1996, the remaining
non-tendered shares were canceled and converted into the right to receive
$16.125 per share, making Brenco a wholly-owned subsidiary of the Company. The
total purchase price for the common stock of Brenco was approximately $165
million in cash and was financed with a $190 million credit facility from the
Company's existing bank group plus cash on hand. The consolidated results of
operations on a pro forma basis as though Brenco had been acquired on February
1, 1995 are as follows (in thousands):

- --------------------------------------------------------------------------------
1996 1995
- --------------------------------------------------------------------------------
Net sales. . . . . . . . . . . . . . . . . . . . $470,352 $505,149
Net earnings . . . . . . . . . . . . . . . . . . 18,580 21,598
Net earnings per share-primary . . . . . . . . . $ 3.08 $ 3.52
Net earnings per share-fully diluted . . . . . . 2.35 2.65
- --------------------------------------------------------------------------------

The pro forma financial information is not necessarily indicative of the
operating results that would have occurred had the Brenco acquisition been
consumated as of February 1, 1995, nor are they necessarily indicative of future
operating results.

The acquisitions have been accounted for by the purchase method of accounting
with the excess of the purchase price over the fair value of the net assets
acquired amortized over a period of 15 to 40 years. The operating results of the
businesses acquired have been included in the accompanying consolidated results
of operations from the respective dates of acquisition.

14
- ---
<PAGE>

- --------------------------------------------------------------------------------
3. LONG-TERM DEBT

Long-term debt at year end is comprised of the following (in thousands):

- --------------------------------------------------------------------------------
1996 1995
- --------------------------------------------------------------------------------
Term loan. . . . . . . . . . . . . . . . . . . . $107,000 $ --
Revolving credit facility. . . . . . . . . . . . 4,000 --
6.5% convertible subordinated
debentures due 2003 . . . . . . . . . . . . . 69,000 69,000
Industrial revenue bonds and other debt. . . . . 6,626 4,485
-----------------------
186,626 73,485
Less current portion . . . . . . . . . . . . . . (2,273) (87)
-----------------------
Long-term debt . . . . . . . . . . . . . . . . . $184,353 $ 73,398
-----------------------
-----------------------

- --------------------------------------------------------------------------------

On July 19, 1996, the Company entered into a $190 million term loan and
revolving credit agreement (the "Agreement") which replaced its $80 million
revolving credit facility. This Agreement was obtained to facilitate the Brenco
acquisition as well as future acquisitions. The Agreement is in the form of two
facilities. Facility "A" is a term-loan of $110 million and facility "B" is a
revolving credit facility with an $80 million capacity. The term loan comes due
on July 19, 2002 and requires escalating quarterly principal payments which
began in October 1996. The revolving credit facility requires no prepayments and
comes due on July 19, 2002 with two optional one year extensions. The Agreement
provides for interest at one of three market interest rates selected by the
Company plus an applicable margin which is dependent upon the market interest
rate chosen and the relationship of debt to cash flow. The highest interest rate
under the Agreement was the prime rate with maximum commitment fees of 3/8 of 1%
on the unused portion of the line of credit. Pursuant to the Agreement the
Company has entered into four interest rate swap agreements with durations of
one to three years. The swap agreements effectively convert $40 million of its
term loan from variable interest rate debt to fixed interest rate debt with an
average fixed interest rate of 6.9%. While the Company is exposed to credit loss
on its interest rate swaps in the event of non-performance by the the
counterparties to such swaps, management believes such non-performance is
unlikely to occur given the financial resources of the counterparties. The
average interest rate on all of the Agreement borrowings during 1996 was
approximately 7.2%.

In 1993, the Company issued $69 million aggregate principal amount of 6.5%
Convertible Subordinated Debentures Due 2003. These unsecured debentures are
convertible into Common Stock of the Company at $22.59 per share and are
callable in whole or in part after June 3, 1996 at the option of the Company at
specified redemption prices plus accrued interest.

Scheduled repayments of long-term debt in each of the next five years are
$9,273,000, $10,194,000, $16,173,000, $22,164,000 and $26,163,000. The term loan
repayments due in the next twelve months are classified as long-term on the
consolidated balance sheets as the Company has the ability and intent to
refinance these repayments under its revolving credit facility.

- --------------------------------------------------------------------------------
4. INDUSTRY SEGMENTS

Information relating to the Company's segments is as follows (in thousands):

<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
NET OPERATING IDENTIFIABLE CAPITAL DEPRECIATION
SALES PROFIT ASSETS EXPENDITURES AMORTIZATION
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996
Transportation
products. . . . $363,999 $37,407 $348,417 $17,628 $16,543
Analytical
instruments . . 45,476 9,781* 34,695 431 1,731
--------------------------------------------------------------------
409,475 47,188 383,112 18,059 18,274
Corporate. . . . . -- (6,617) 10,766 134 824
Net interest
expense . . . . -- (8,740) -- -- --
--------------------------------------------------------------------
Total. . . . . . . $409,475 $31,831 $393,878 $18,193 $19,098
--------------------------------------------------------------------
--------------------------------------------------------------------
1995
Transportation
products. . . . $317,122 $36,855 $150,801 $22,428 $10,609
Analytical
instruments . . 69,865 9,035 57,207 904 2,925
--------------------------------------------------------------------
386,987 45,890 208,008 23,332 13,534
Corporate. . . . . -- (6,717) 22,866 95 725
Net interest
expense . . . . -- (4,467) -- -- --
--------------------------------------------------------------------
Total. . . . . . . $386,987 $34,706 $230,874 $23,427 $14,259
--------------------------------------------------------------------
--------------------------------------------------------------------
1994
Transportation
products. . . . $261,835 $27,952 $139,851 $12,763 $10,653
Analytical
instruments . . 79,686 8,495 59,039 1,839 3,339
--------------------------------------------------------------------
341,521 36,447 198,890 14,602 13,992
Corporate. . . . . -- (5,831) 21,296 99 672
Net interest
expense . . . . -- (4,762) -- -- --
--------------------------------------------------------------------
Total. . . . . . . $341,521 $25,854 $220,186 $14,701 $14,664
--------------------------------------------------------------------
--------------------------------------------------------------------
</TABLE>
* INCLUDES A $3.7 MILLION PRE-TAX GAIN ON THE SALE OF A DIVISION.
- --------------------------------------------------------------------------------

Sales to one customer by a company in the transportation products segment
aggregated 15% of consolidated net sales in each of 1996, 1995, and 1994. Sales
to another customer by a different company in the transportation products
segment aggregated 10% of consolidated net sales in 1994. In addition, sales of
one product to customers of the transportation products segment aggregated 12%,
14% and 10% of consolidated net sales in 1996, 1995 and 1994, respectively and
sales of another product to customers of the transportation product segment were
11% and 13% of consolidated net sales in 1995 and 1994, respectively.

Information relating to the Company by geographic area is as follows (in
thousands):

- -----------------------------------------------------------------------
NET NET IDENTIFIABLE
SALES EARNINGS ASSETS
- -----------------------------------------------------------------------
1996
Domestic Operations . . $381,993 $27,321* $366,051
European Operations . . 27,482 187 27,827
----------------------------------------
409,475 27,508 393,878
Corporate and net
interest expense . . . -- (9,651) --
----------------------------------------
Total. . . . . . . . . . $409,475 $17,857 $393,878
----------------------------------------
----------------------------------------
1995
Domestic Operations. . . $358,881 $26,179 $198,346

European Operations. . . 28,106 360 32,528
----------------------------------------
386,987 26,539 230,874
Corporate and net
interest expense . . . -- (6,930) --
----------------------------------------
Total. . . . . . . . . . $386,987 $19,609 $230,874
----------------------------------------
----------------------------------------
1994
Domestic Operations. . . $320,863 $20,145 $191,527
European Operations. . . 20,658 1,288 28,659
----------------------------------------
341,521 21,433 220,186
Corporate and net
interest expense . . . -- (6,671) --
----------------------------------------
Total. . . . . . . . . . $341,521 $14,762 $220,186
----------------------------------------
----------------------------------------

* INCLUDES A $2.1 MILLION AFTER-TAX GAIN ON THE SALE OF A DIVISION.
- --------------------------------------------------------------------------------
Export sales from the Company's United States operations were 10%, 10% and 8%,
respectively, of consolidated net sales in 1996, 1995 and 1994.

15
---
<PAGE>

REPORT BY MANAGEMENT

TO THE STOCKHOLDERS AND BOARD OF DIRECTORS OF VARLEN CORPORATION:

Management is responsible for the consolidated financial statements which have
been prepared by the Company in accordance with generally accepted accounting
principles applied on a consistent basis. The financial statements necessarily
include amounts based on judgements and estimates by management as required by
the accounting process. Management also prepared the other financial information
in this document.

The Company's system of internal accounting control, which is applied by
operating and financial managers, has been designed to provide reasonable
assurance that assets are safeguarded, that transactions are executed and
recorded in accordance with management's established policies and procedures,
and that accounting records are adequate for preparation of financial statements
and other financial information. The design, monitoring and revision of internal
accounting control systems involve, among other things, management's judgment
with respect to the relative cost and expected benefits of specific control
measures.

Varlen's internal audit function reviews the accounting records, financial
controls and practices on a planned, rotational basis to determine compliance
with corporate policies. The consolidated financial statements have been audited
by Deloitte & Touche LLP, independent auditors appointed by the Board of
Directors. Their responsibility is to audit the Company's consolidated financial
statements in accordance with generally accepted auditing standards and to
express their opinion with respect to the statements being presented fairly in
conformity with generally accepted accounting principles.

The Audit Committee, which is composed solely of outside directors, meets with
and reviews the activities of corporate financial management and the independent
auditors to ascertain that each is properly discharging its responsibility. The
independent auditors and management have unrestricted access to the Audit
Committee, which meets periodically to review accounting, auditing, internal
control and financial reporting matters.

/s/ Richard L. Wellek /s/ Richard A. Nunemaker

RICHARD L. WELLEK RICHARD A. NUNEMAKER
President and Vice President, Finance and
Chief Executive Officer Chief Financial Officer
March 3, 1997

INDEPENDENT AUDITORS' REPORT

TO THE BOARD OF DIRECTORS AND STOCKHOLDERS
VARLEN CORPORATION, NAPERVILLE, ILLINOIS

We have audited the consolidated balance sheets of Varlen Corporation and
subsidiaries as of January 31, 1997 and 1996, and the related consolidated
statements of earnings, stockholders' equity, and cash flows for each of the
three years in the period ended January 31, 1997. Such consolidated financial
statements and our report thereon dated March 3, 1997, expressing an unqualified
opinion (which are not included herein) are included in the proxy statement for
the 1997 annual meeting of stockholders. The accompanying condensed consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on such condensed consolidated financial
statements in relation to the complete consolidated financial statements.

In our opinion, the information set forth in the accompanying condensed
consolidated balance sheets as of January 31, 1997 and 1996 and the related
condensed consolidated statements of earnings, stockholders' equity, and cash
flows for each of the three years in the period ended January 31, 1997 is fairly
stated in all material respects in relation to the basic consolidated financial
statements from which it has been derived.

/s/ Deloitte & Touche LLP

Deloitte & Touche LLP
Chicago, Illinois
March 3, 1997

18
- ---
<PAGE>
BOARD OF DIRECTORS

RUDOLPH GRUA, age 68-
*Vice Chairman and Director of General Binding Corporation

ERNEST H. LORCH, age 64/ /
Chairman of the Board
*Of Counsel to Whitman Breed Abbott & Morgan, Attorneys
Director of Tyler Corporation and Dorsey Trailers, Inc.

L. WILLIAM MILES, age 63/ /
*Vice President for Administration, Fairfield University, Connecticut

GREG A. ROSENBAUM, age 44/ /
*President, Palisades Associates, Inc.Director of Richey Electronics, Inc.

JOSEPH J. ROSS, age 51-
*Chairman, President and Chief Executive Officer of Federal Signal Corporation

THEODORE A. RUPPERT, age 66-
*General Partner, Village Development
Chairman, Chief Executive Officer and
Director of Glaize Development and
Director of Pioneer Bank and Trust

RICHARD L. WELLEK, age 58
*President and Chief Executive Officer

* Principal Occupation
- - Member Audit Committee
/ / Member Compensation Committee

OFFICERS

RICHARD L. WELLEK, age 58
President and Chief Executive Officer (1983); Various Varlen Executive and
Operational positions (1968-1983); B.S. Industrial Management University of
Illinois

RAYMOND A. JEAN, age 54
Executive Vice President and Chief Operating Officer (1993); Group Vice
President (1988-1992); B.S. Engineering Physics University of Maine; MBA
University of Chicago

GEORGE W. HOFFMAN, age 56
Vice President (1990); President of Keystone Industries (1984); Executive Vice
President of Operations of Keystone Industries (1979-1984); B.S. Chemical
Engineering University of Pittsburgh

RICHARD A. NUNEMAKER, age 48
Vice President, Finance and Chief Financial Officer (1991); Vice President,
Controller (1987); B.S. Accountancy; M.A.S. University of Illinois, C.P.A.

VICKI L. CASMERE, age 39
Vice President, General Counsel and Secretary (1996); Corporate Counsel of
Caremark Inc. (1992-1996), Vice President (1994); B.S. Finance University of
Illinois; J.D. The John Marshall Law School

GENERAL INFORMATION

TRANSFER AGENT
Harris Trust & Savings Bank
111 West Monroe Street
Chicago, Illinois 60690

INDEPENDENT AUDITORS
Deloitte & Touche LLP
Two Prudential Plaza
180 North Stetson Avenue
Chicago, Illinois 60601

SHARES LISTED
Varlen Corporation common stock is traded on the Nasdaq Stock Market under the
symbol VRLN and its 6 1/2 percent convertible subordinated debentures are traded
on the Nasdaq SmallCap Market under the symbol VRLNG.

INFORMATION CONTACT:
Richard A. Nunemaker
Vice President, Finance and Chief Financial Officer
55 Shuman Boulevard
P.O. Box 3089
Naperville, Illinois 60566-7089
(630) 420-0400

ANNUAL MEETING
The Annual Meeting of Stockholders will be held at 10 a.m. (local time)
Thursday, May 29, 1997 at the Hyatt Lisle, 1400 Corporetum Drive Lisle, Illinois
60532

SAFE HARBOR PROVISION
This Summary Annual Report contains outlook and other forward-looking statements
which are not historical facts. These forward-looking statements are based upon
certain assumptions about a number of important factors. While the Company
believes that its assumptions are reasonable, it cautions that there are
inherent difficulties in predicting these factors, that they are subject to
change at any time and that any such change could cause the Company's actual
results to differ materially from those projected in its forward-looking
statements. Among the factors that could cause actual results to differ
materially are: expectations of market growth and size; the demand for the
Company's products and other market acceptance risks; the presence in the market
of competitors with greater financial resources, and the impact of competitive
products and pricing: actual product purchases under existing purchase
agreements and the loss of any significant customers; general market conditions;
the ability of the Company to develop new products; capacity and supply
constraints or difficulties; productivity and efficiency of operations;
availability of resources; the results of the Company's financing efforts; the
effect of the Company's accounting policies; and the effects of general
economic, trade, legal, social and economic conditions. Other risk factors may
be detailed from time to time in the Company's Securities and Exchange
Commission filings. The Company assumes no obligation to update its
forward-looking statements or advise of changes in the assumptions and factors
on which they are based.

FORM 10-K AND PROXY STATEMENT:
Stockholders may obtain a copy of the most recent Form 10-K and Proxy Statement
as filed by the Company with the SEC without charge by addressing a written
request to Richard A. Nunemaker, Vice President, Finance and Chief Financial
Officer, Varlen Corporation at the corporate office.

<PAGE>

[LOGO]
Varlen Corporation
55 Shuman Blvd., P.O. Box 3089
Naperville, Illinois 60566-7089
(630) 420-0400

VARLEN WORLDWIDE
- ----------------------------------------

[LOGO]
ACIERIES DE PLOERMEL

[LOGO]
BRENCO, INCORPORATED

[LOGO]
CHROME CRANKSHAFT COMPANIES

[LOGO]
CONSOLIDATED METCO, INC.

[LOGO]
KARL GEORG

[LOGO]
KEYSTONE RAILWAY
EQUIPMENT COMPANY

[LOGO]
MEANS INDUSTRIES, INC.

[LOGO]
PRIME MANUFACTURING CORPORATION

[LOGO]
UNIT RAIL ANCHOR COMPANY, INC.

[LOGO]
VARLEN INSTRUMENTS INC.
Manufacturers of:
[LOGO]
[LOGO]
[LOGO]

- - Service & Distribution
Manufacturing
[PHOTO]

[LOGO] PRINTED ON RECYCLED PAPER

- - Front Cover From left to right: A red chevy blazer truck, a freight train,
an eighteen wheel truck, and an oil refinery.

- - Inside Front Cover From Top to Bottom: A truck dashboard, an axle hub,
housing for a truck turbocharger, a mechanical diode one way clutch, clutch
plates and a shift fork assembly.

- - First Page From Top to Bottom: a heating ventilating and air conditioning
unit, a tapered roller bearing, a rail anchor attached to a rail, a cooling
water drain valve, a hydraulic cushioning device and two petroleum
analyzers.

- - Page 6: A red chevy blazer truck on top of the page and a drawing of a
Mechanical Diode One-Way Clutch at the bottom of the page.

- - Page 7: A drawing of a tapered roller bearing on top of the page and a
picture of a freight train on the bottom of the page.

- - Page 8: A picture of an eighteen wheel truck on top of the page and a
drawing of two cushioning devices at the bottom of the page.

- - Page 9: A picture of an oil refinery in the middle of the page.

- - Outside of the Back Cover: A map of selected parts of the globe showing the
manufacturing, and service and distribution locations of the Registrant.

<PAGE>

Exhibit (21)

LIST OF SUBSIDIARIES

The following table sets forth certain information with respect to the
significant subsidiaries of the Registrant. All of the voting securities of
each subsidiary are owned by the Registrant (or a wholly owned subsidiary of the
Registrant) and its financial statements are included in the consolidated
financial statements of the Registrant.

Jurisdiction of
Name Incorporation
---- -------------

Acieries de Ploermel France
Brenco, Incorporated Virginia
Chrome Crankshaft Co. Delaware
Chrome Crankshaft Company of Illinois Illinois
Consolidated Metco, Inc. Delaware
Eisenbahntechnik Halberstadt GmbH Germany
Full Steam Ahead Rebuilding, Inc. Virginia
Karl Georg Bahntechnik GmbH Germany
Keystone Industries, Inc. Delaware
Means Industries, Inc. Michigan
Quality Bearing Service of Kentucky, Inc. Virginia
Quality Bearing Service of Missouri, Inc. Virginia
Quality Bearing Service of Nevada, Inc. Virginia
Prime Manufacturing Corporation Delaware
Unit Rail Anchor Company, Inc. Delaware
Varlen Instruments Inc. Delaware
Walter Herzog GmbH Germany

<PAGE>

INDEPENDENT AUDITORS' CONSENT

Varlen Corporation:

We consent to the incorporation by reference in the Registration Statements
of Varlen Corporation and subsidiaries on Form S-8, File No. 33-35085; Form
S-8, File No. 33-55132; Form S-8, File No. 33-60995; Form S-3, File
No. 33-72218; Form S-3, File No. 33-61826 and Form S-8/S-3, File No. 33-72480
of our reports dated March 3, 1997, appearing in and incorporated by reference
in this Annual Report on Form 10-K of Varlen Corporation and subsidiaries for
the year ended January 31, 1997.

DELOITTE & TOUCHE LLP

April 18, 1997
Chicago, Illinois

<PAGE>

VARLEN CORPORATION

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned
directors of Varlen Corporation (the "Company") does hereby irrevocably
constitute and appoint Richard A. Nunemaker, his attorney-in-fact and agent
to sign and execute in his name and on his behalf, in any and all
capacities in which he may be required to sign, an Annual Report of the
Company on Form 10-K under the Securities and Exchange Act of 1934 for the
fiscal year ended January 31, 1997, to be filed with the Securities and
Exchange Commission, and any amendments, revisions or supplements thereto,
including any exhibits, schedules and documents in connection therewith and
any other instruments necessary or incidental thereto, all as fully and to
the same effect as he might or could do in person if present and acting,
and does hereby ratify and confirm all that his attorney-in-fact shall do
or cause to be done incident to or in connection with the foregoing or by
virtue of the foregoing.

IN WITNESS WHEREOF, each of the undersigned has duly executed
this Power of Attorney this 7th day of April, 1997.

/s/ Ernest H. Lorch /s/ Greg A. Rosenbaum
----------------------------- -------------------------------
Ernest H. Lorch, Greg A. Rosenbaum,
Chairman of the Board Director
and Director

/s/ Rudolph Grua /s/ L. William Miles
----------------------------- -------------------------------
Rudolph Grua, L. William Miles,
Director Director

/s/ Theodore A. Ruppert /s/ Joseph J. Ross
----------------------------- -------------------------------
Theodore A. Ruppert, Joseph J. Ross,
Director Director

<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENT OF EARNINGS AND THE CONSOLIDATED BALANCE SHEETS AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-31-1997
<PERIOD-END> JAN-31-1997
<CASH> 3,133
<SECURITIES> 0
<RECEIVABLES> 62,088
<ALLOWANCES> 0
<INVENTORY> 53,631
<CURRENT-ASSETS> 132,453
<PP&E> 200,439
<DEPRECIATION> 75,859
<TOTAL-ASSETS> 393,878
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<BONDS> 184,353
0
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<COMMON> 576
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<SALES> 409,475
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