<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. )
Filed by the Registrant /X/
Filed by a party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section 240.14a-11(c) or Section
240.14a-12
VARLEN
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/X/ No fee required
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1)
and 0-11
(1) Title of each class of securities to which transaction applies:
------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
------------------------------------------------------------------------
(5) Total fee paid:
------------------------------------------------------------------------
/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
------------------------------------------------------------------------
(3) Filing Party:
------------------------------------------------------------------------
(4) Date Filed:
------------------------------------------------------------------------
<PAGE>
VARLEN CORPORATION
55 SHUMAN BOULEVARD
P.O. BOX 3089
NAPERVILLE, ILLINOIS 60566-7089
--------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
MAY 29, 1997
-------------
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of Varlen
Corporation, a Delaware corporation (the "Company"), will be held at the Hyatt
Lisle, 1400 Corporetum Drive, Lisle, Illinois 60532 on Thursday, May 29, 1997,
at 10:00 A.M. (local time), for the following purposes:
1. To elect a Board of Directors.
2. To transact such other and further business as may properly come before
the meeting or any adjournment or adjournments thereof.
Common stockholders of record at the close of business on April 1, 1997 are
entitled to notice of and to vote at the meeting. A complete list of such
stockholders is open to the examination of any stockholder for any purpose
germane to the meeting, during ordinary business hours, at the offices of the
Company at 55 Shuman Boulevard, Naperville, Illinois 60566-7089.
A copy of the Company's Summary Annual Report for the fiscal year ended
January 31, 1997 is enclosed herewith.
By Order of the Board of Directors,
VICKI L. CASMERE,
SECRETARY
Dated: April 17, 1997
STOCKHOLDERS ARE URGED TO FILL IN, SIGN, DATE AND MAIL THE ENCLOSED PROXY. IF
YOU ATTEND THE MEETING AND VOTE IN PERSON, THE PROXY WILL NOT BE USED. IF MAILED
IN THE UNITED STATES IN THE ENCLOSED ENVELOPE, NO POSTAGE IS REQUIRED. THE
PROMPT RETURN OF YOUR PROXY WILL SAVE THE EXPENSE INVOLVED IN FURTHER
COMMUNICATION.
<PAGE>
VARLEN CORPORATION
55 SHUMAN BOULEVARD
P.O. BOX 3089
NAPERVILLE, ILLINOIS 60566-7089
--------------
PROXY STATEMENT
FOR ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 29, 1997
-------------
April 17, 1997
To the Stockholders:
This Proxy Statement is furnished to you in connection with the solicitation
by the Board of Directors of Varlen Corporation, a Delaware corporation (the
"Company"), of Proxies in the accompanying form to be used at the Annual Meeting
of Stockholders to be held at the Hyatt Lisle, 1400 Corporetum Drive, Lisle,
Illinois 60532 on Thursday, May 29, 1997, at 10:00 A.M. (local time) and at any
subsequent time which may be necessary by the adjournment thereof.
If you were a holder of record of Common Stock of the Company at the close
of business on April 1, 1997, you are entitled to vote at the meeting and your
presence is desired. If, however, you cannot be present in person, a form of
Proxy is enclosed which the Board of Directors of the Company requests you to
execute and return as soon as possible. You can, of course, revoke your Proxy at
any time before it is voted, if you so desire, either in person at the meeting
or by delivery of a duly executed written statement to that effect to the
Secretary of the Company.
The Company is paying all costs of the solicitation of Proxies, including
the expenses of printing and mailing to its stockholders this Proxy Statement
and the accompanying Notice of Annual Meeting of Stockholders and form of Proxy.
Officers or employees of the Company may solicit Proxies in person, or by mail,
telegram or telephone, but such persons will receive no compensation for such
work, other than their normal compensation as such officers or employees.
At the close of business on April 1, 1997, 5,780,822 shares of Common Stock
were outstanding and are entitled to vote at the Annual Meeting. Each
outstanding share is entitled to one vote. This Proxy Statement and the enclosed
Proxy are first being mailed to the stockholders of the Company on or about
April 17, 1997.
PROXIES AND VOTING
The persons named in the accompanying form of Proxy intend to vote Proxies
for the election of the nominees for director described herein unless authority
to vote for directors is withheld. In the event that any nominee at the time of
election shall be unable or unwilling to serve or is otherwise unavailable for
election (which contingency is not now contemplated or foreseen), and in
consequence other nominees shall be nominated, the persons named in the form of
Proxy shall have the discretion and authority to vote or to refrain from voting
in accordance with their judgment on such other nominations.
The presence in person or by proxy of a majority of the shares of Common
Stock outstanding and entitled to vote at the meeting is required for a quorum.
If a quorum is present, those nominees receiving a plurality of the votes cast
will be elected. Accordingly, neither shares withheld in the election of
directors
<PAGE>
nor abstentions will count as negative votes. The other matters being submitted
to stockholders at the meeting require the affirmative vote of a majority of the
shares voted (including abstention votes) for approval.
Shares held by brokers and other stockholder nominees sometimes are voted on
certain matters but not others. This can occur, for example, when the broker
does not have the discretionary authority to vote shares of Common Stock and is
instructed by the beneficial owner thereof to vote on a particular matter but is
not instructed on one or more others. These are known as "non-voted" shares.
With respect to the matters as to which shares are "non-voted," they will not be
counted as a vote.
PROPOSAL NO. 1 -- ELECTION OF DIRECTORS
Directors are to be elected to hold office until the next Annual Meeting of
Stockholders and until their respective successors shall have been elected and
qualified or until resignation, removal, disqualification or death as provided
in the By-laws of the Company. The nominees for director, together with certain
information furnished to the Company by each nominee (see also "Certain
Relationships and Related Transactions" and "Security Ownership of Certain
Beneficial Owners and Management" herein), are set forth below:
<TABLE>
<CAPTION>
COMMON STOCK OF THE
COMPANY BENEFICIALLY
OWNED AS OF
APRIL 1, 1997(1)
----------------------------
NAME, AGE AND DIRECTOR NUMBER PERCENT
POSITION WITH COMPANY SINCE OF SHARES OF CLASS
- ---------------------------------------------------------------------- -------- ----------------- --------
<S> <C> <C> <C>
Ernest H. Lorch, 64 .................................................. 1984 4,678shares(2) 0.1%
Chairman
Richard L. Wellek, 58 ................................................ 1983 139,162shares(3) 2.4%
President and Chief Executive Officer
Rudolph Grua, 68 ..................................................... 1993 1,452shares(4) *
L. William Miles, 63 ................................................. 1993 1,452shares(4) *
Greg A. Rosenbaum, 44 ................................................ 1985 6,730shares(4) 0.1%
Joseph J. Ross, 51 ................................................... 1994 2,299shares(4) *
Theodore A. Ruppert, 66 .............................................. 1971 524,982shares(5) 9.1%
</TABLE>
- ------------------------
* The number of shares of Common Stock beneficially owned is less than .1% of
class.
(1) As of April 1, 1997, all directors, nominees and officers of the Company as
a group (11 persons) owned beneficially 773,195 shares of the Company's
Common Stock (13.0% of class), 253,502 of which were held directly
(including shares which are deemed to be beneficially owned solely because
of the existence of currently exercisable options to acquire such shares,
debentures convertible into shares of the Company's Common Stock and shares
held by a sole trustee) and 519,693 of which were held subject to shared
voting and dispositive power.
(2) Of such shares, 2,465 are held directly and 2,213 are deemed to be
beneficially owned because of the ownership of debentures convertible into
shares of the Company's Common Stock.
2
<PAGE>
(3) Of such shares, 50,970 are deemed to be beneficially owned by Mr. Wellek
because he is the sole trustee of a trust of which he is the sole
beneficiary and 88,192 are deemed to be beneficially owned solely because of
the existence of currently exercisable options to acquire such shares.
(4) Held directly.
(5) Of such shares, 5,289 are held directly and 519,693 are deemed to be
beneficially owned by Mr. Ruppert solely because he is one of three trustees
of each of two trusts in which he and members of his family have an
interest.
Mr. Lorch is Of Counsel to Whitman Breed Abbott & Morgan, attorneys, a
position he has held since January 1993. He retired as Chairman and Chief
Executive Officer of The Dyson-Kissner-Moran Corporation ("DKM"), a private
investment company, in December 1992, a position he held since January 1992. DKM
owned approximately 30% of the Common Stock of the Company prior to the
Company's purchase of all of the Company's shares owned by DKM in January 1993.
Mr. Lorch was President of DKM from June 1984 to January 1992. Mr. Lorch is also
a director of Tyler Corporation, a retail supplier of automotive parts that also
provides products for fundraising programs and a Director of Dorsey Trailers,
Inc., a manufacturer of highway trailers.
Mr. Wellek was elected President and Chief Executive Officer of the Company
in December 1983. From 1968 through 1983 he held various executive and
operational positions at the Company.
Mr. Grua has been Vice Chairman of General Binding Corporation, a
manufacturer of business machines and related supplies, since January 1995 and a
director since May 1984. Prior to January 1995, Mr. Grua was President and Chief
Executive Officer of General Binding Corporation, positions he had held since
May 1984.
Mr. Miles is Vice President for Administration at Fairfield University,
Connecticut, a position he has held since July 1992. From February 1988 to June
1992 he was Senior Vice President of Call Interactive, a provider of interactive
telephone services. Mr. Miles is also a director of Bouton Corporation, a
manufacturer of safety glasses.
Mr. Rosenbaum has been President of Palisades Associates, Inc., a merchant
banking and consulting company, since August 1989. Mr. Rosenbaum is also a
director of Richey Electronics, Inc., a distributor of electronic components, a
position he has held since April 1993 and a director of McLaren/Hart, Inc., an
environmental services consulting firm to large corporations, including, among
others, the Company. Mr. Rosenbaum does not currently own any interest in
McLaren/Hart, Inc., but will have the opportunity to purchase an equity position
during 1997.
Mr. Ross is Chairman, President and Chief Executive Officer of Federal
Signal Corporation, a manufacturer of public safety, signaling and
communications equipment. He has been Chairman of Federal Signal since February
1990 and has served as its President and Chief Executive Officer since December
1987.
Mr. Ruppert is, and has been for more than the last five years, a general
partner in the Village Development Partnership, a real estate, manufacturing and
oil development holding company; Chairman, Chief Executive Officer and a
director of Glaize Development Corporation, a real estate developer; and a
director of Pioneer Bank & Trust Company. (See "Security Ownership of Certain
Beneficial Owners and Management" herein.)
During the fiscal year ended January 31, 1997 ("1996"), the Board of
Directors held nine meetings. The Board does not have a nominating committee; it
does have an Audit Committee consisting of
3
<PAGE>
Messrs. Grua, Ross and Ruppert and a Compensation Committee consisting of
Messrs. Lorch, Miles and Rosenbaum. The primary function of the Audit Committee,
which during 1996 held two meetings, is to review the scope and results of each
year's annual audit, as well as the Company's internal control procedures. The
primary functions of the Compensation Committee, which during 1996 held three
meetings, are to review and approve the compensation of the Company's executive
officers and operating unit presidents and to administer the Company's stock
option and purchase plans. Each director attended more than 85% of the meetings
of the Board of Directors and committees on which he served during 1996.
EXECUTIVE COMPENSATION
REPORT OF COMPENSATION COMMITTEE
COMPENSATION PHILOSOPHY
The Executive Compensation program is administered by the Compensation
Committee of the Board of Directors, which is composed entirely of outside
directors, and is designed to attract, retain and motivate executive personnel
whose sustained performance will increase stockholder value through successful
achievement of short-term corporate goals and long-term company objectives. The
compensation program is directly integrated with the achievement of the
Company's strategic business plans. The following program components have been
designed to meet these objectives:
BASE SALARY
The base salary program is designed to pay for individual performance within
a structure that is internally equitable and externally competitive with
comparable companies. Base salaries are a function of:
(1) the relative value and potential impact of each position on the
performance of the Company. Value is measured by responsibilities,
complexity and scope of markets, sales volume, technological requirements,
business strategy, etc. The evaluation process results in the assignment of
a position grade;
(2) salary ranges, assigned to each pay grade, which establish a
competitive position with median salary compensation levels at comparable
companies;
(3) individual performance, within established base salary ranges.
The program is designed to provide executives who continue to meet
performance expectations with base compensation that is competitive with median
market rates at comparable companies. Each year the Company compares base
salary, bonus, and salary ranges of its executives to those of similar positions
in comparable companies as reported in a salary survey conducted by an
independent consulting firm. Independent surveys are also used to develop a
merit increase budget. Within this budget, executives may or may not receive a
base salary increase dependent upon performance in the prior year and their
position in their respective salary ranges. The amount of increase will vary
with individual performance against established performance objectives.
ANNUAL INCENTIVE -- a target bonus is paid when both financial performance
(E.G., consolidated return on invested capital/return on net assets employed)
and individual performance objectives are met. Financial goals are directly
related to the strategic business plan. Individual performance goals are value
added, representing achievements of annually agreed upon objectives within the
control of the executive beyond normal position expectations.
4
<PAGE>
If both objectives are not met, the bonus will be reduced. If performance is
below the minimum threshold for both objectives, there will be no bonus.
Similarly, if performance exceeds the objectives, a higher bonus will be paid,
subject to a cap.
LONG-TERM CONSISTENCY BONUS -- provides direct correlation of additional
compensation opportunity with consistent achievement of annual incentive goals
over a multi-year period. This bonus is contingent upon achievement of financial
and individual performance objectives for more than one year of a three-year
period. If minimum objectives are not met, no consistency bonus is paid.
STOCK OPTIONS -- rewards executives for long-term strategic management and
enhancement of stockholder value. Options also promote recruitment and retention
of key executive personnel by providing meaningful incentives dependent upon
successful corporate performance. Stock options are awarded based upon an
overall evaluation of each executive. Outstanding options held are not
considered in the award of new options.
1993 DEFERRED INCENTIVE STOCK PURCHASE PLAN
The Purchase Plan was adopted by the Board of Directors of the Company on
March 29, 1993, and became effective when it was approved by stockholders on May
25, 1993. The Purchase Plan provides for the offer to selected officers and
other key employees of rights to purchase Common Stock of the Company. Within
thirty days after receipt of an offer, each offeree seeking to participate in
the Purchase Plan must execute a deferred purchase right agreement evidencing
the offeree's commitment to purchase a specified number of shares of Common
Stock of the Company at a specified price at the expiration of five years.
Payments are made quarterly. A purchase right shall also entitle the offeree to
receive a cash bonus equivalent to the amount of dividends which would have been
payable on the number of shares the offeree committed to purchase under the
purchase right, when and as dividends are paid on the Common Stock.
COMPANY PERFORMANCE AND CHIEF EXECUTIVE OFFICER ("CEO") COMPENSATION
As discussed previously, the Company's executive compensation program,
including that of the CEO, is based on business performance, both short-term
(base salary and annual incentive bonus) and long-term (long-term consistency
bonus, stock purchase plan and stock options). The compensation of the CEO
serves as a model for this pay-for-performance program. Sales for the 1996
fiscal year were the highest in Company history while earnings were the second
highest. Net sales rose 6% to a record $409,475,000 from $386,987,000 in 1995.
While net earnings of $17,857,000 could not keep pace with the record net
earnings of $19,609,000 in 1995, earnings before interest, taxes, depreciation
and amortization were at a record $59,669,000 in 1996 or a 12% increase over the
$53,432,000 in 1995. The Company's book value per share increased to an all time
high of $19.10 or 15% above the $16.60 in 1995 and $13.42 in 1994, after
restatement for the 1996 10% stock dividend. In addition, significant steps were
taken to advance Varlen's long-term strategy.
Mr. Wellek's action and leadership played a key role in the achievement of
the Company's strategic objectives and strong performance. Varlen is now
significantly larger, more international, and positioned for further growth. Of
his annual incentive, 65% was objectively determined based upon return on
invested capital, which was 9.6% in 1996. Although this return was lower than
the record level set in 1995, it was consistent with the long-term strategic
direction the board of directors approved. The balance of the annual incentive,
35%, was based upon non-financial goals. Achievement of these non-financial
goals included the profitable divestiture of a non-strategic subsidiary,
organizational development and succession planning, and successfully completing
the acquisition and integration of Brenco, Incorporated. In
5
<PAGE>
addition, Mr. Wellek qualified for a long-term bonus based upon the Company's
performance over a multi-year period. Base salary adjustments for Mr. Wellek
were made after an independent competitive analysis was performed and was based
upon the Company's larger size and complexity as well as his performance.
OTHER MATTERS
The Revenue Reconciliation Act of 1993 limits the annual deduction a
publicly held corporation may take for certain types of compensation paid or
accrued with respect to certain executives to $1 million per year per executive
for taxable years beginning after December 31, 1993. The Company does not
believe that compensation currently paid to its executives is affected by the
limitation on tax deductibility. However, the Company intends to annually review
its compensation plans in the context of the requirements for tax deductibility
under the rules, and to determine whether, and to what extent, revisions of such
plans are necessary or desirable.
Respectfully submitted
Greg A. Rosenbaum (Chairman)
Ernest H. Lorch
L. William Miles
April 7, 1997
6
<PAGE>
SUMMARY COMPENSATION TABLE
The following table sets forth certain information regarding compensation
paid during each of the Company's last three fiscal years to the Company's Chief
Executive Officer and each of the Company's four executive officers who earned
compensation during fiscal 1996, based on salary and bonus earned during 1996.
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
------------------------------
ANNUAL COMPENSATION SECURITIES LONG-
UNDERLYING TERM
FISCAL ---------------------- STOCK INCENTIVE ALL OTHER
NAME PRINCIPAL POSITION YEAR SALARY BONUS(1) OPTIONS(2) PAYOUTS COMP.
- -------------------- -------------------- ------ ----------- -------- --------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Richard L. Wellek President, CEO and 1996 $ 405,828 $307,582 9,900 $236,172(8) $ 95,783(3)
Director 1995 382,092 288,751 9,075(11) 211,904(8) 101,515(3)
1994 364,596 275,625 9,680(11) 181,333(8) 85,542(3)
Raymond A. Jean Exec. VP and COO 1996 263,328 175,028 7,700 130,744(9) 53,544(4)
1995 247,506 158,000 7,865(11) 113,115(9) 55,913(4)
1994 231,667 145,722 7,260(11) 94,043(9) 45,018(4)
George W. Hoffman Vice President 1996 187,229 28,723 4,400 26,510(10) 20,806(5)
1995 178,615 78,480 4,235(11) 26,510(10) 34,150(5)
1994 171,422 37,500 4,840(11) 26,510(10) 22,186(5)
Richard A. Nunemaker VP Finance, CFO 1996 176,750 106,800 4,400 85,621(10) 33,059(6)
1995 169,083 98,890 4,235(11) 77,403(10) 35,109(6)
1994 160,333 97,222 4,840(11) 66,788(10) 31,604(6)
Vicki L. Casmere VP, General 1996 112,566 45,000 2,200 0 7,225(7)
Counsel and 1995 N/A N/A N/A N/A N/A
Secretary (12) 1994 N/A N/A N/A N/A N/A
</TABLE>
- --------------------------
(1) Reflects bonus earned during the fiscal year. All bonuses were paid during
the following fiscal year.
(2) Number of shares of Common Stock subject to options granted in 1996, 1995
and 1994, respectively.
(3) Consists of $12,875, $14,310 and $13,560 in Company contributions to the
Company's Profit Sharing and Retirement Savings Plan; $58,491, $62,521 and
$48,266 to the Company's Shadow 401(k) Plan; $12,000, $12,000 and $12,000
for services as a director of the Company and $12,417, $12,684 and $11,716
in other miscellaneous non-cash benefits in 1996, 1995 and 1994,
respectively.
(4) Consists of $12,875, $14,310 and $13,560 in Company contributions to the
Company's Profit Sharing and Retirement Savings Plan; $29,184, $30,653 and
$21,586 to the Company's Shadow 401(k) Plan and $11,485, $10,950 and $9,872
in other miscellaneous non-cash benefits in 1996, 1995 and 1994,
respectively.
(5) Consists of $6,403, $14,310 and $13,560 in Company contributions to the
Company's Profit Sharing and Retirement Savings Plan; $6,967, $6,306 and
$1,828 to the Company's Shadow 401(k) Plan and $7,436, $13,534 and $6,798 in
other miscellaneous non-cash benefits in 1996, 1995 and 1994, respectively.
(6) Consists of $12,875, $14,310 and $13,560 in Company contributions to the
Company's Profit Sharing and Retirement Savings Plan; $14,951, $15,790 and
$12,711 to the Company's Shadow 401(k) Plan and $5,233, $5,009 and $5,333 in
other miscellaneous non-cash benefits in 1996, 1995 and 1994, respectively.
(7) Consists of $2,869 in Company contributions to the Company's Profit Sharing
and Retirement Savings Plan and $4,356 in other miscellaneous non-cash
benefits.
7
<PAGE>
(8) Includes $66,275 in non-cash compensation earned under the Deferred
Incentive Stock Purchase Plan in each of 1996, 1995 and 1994.
(9) Includes $39,765 in non-cash compensation earned under the Deferred
Incentive Stock Purchase Plan in each of 1996, 1995 and 1994.
(10) Includes $26,510 in non-cash compensation earned under the Deferred
Incentive Stock Purchase Plan in each of 1996, 1995 and 1994.
(11) Restated for a 10 percent stock dividend in 1996.
(12) Ms. Casmere was appointed Vice President, General Counsel and Secretary of
the Company in April of 1996.
SUMMARY OF LONG-TERM INCENTIVE PLANS
The following table presents information concerning compensation earned
under long-term incentive plans during the most recent fiscal year for the
Company's Chief Executive Officer and each of the Company's three executive
officers who earned compensation under long-term incentive plans during fiscal
1996.
<TABLE>
<CAPTION>
ESTIMATED FUTURE
PAYOUTS UNDER NON-
STOCK PRICE-BASED
PERFORMANCE OR PLANS
NUMBER OF SHARES, OTHER PERIOD -------------------
UNITS OR OTHER UNTIL MATURATION DOLLAR VALUE OF
NAME RIGHTS(1) OR PAYOUT(2) ESTIMATED PAYOUT
- ------------------------------------------------------ ----------------- ----------------- -------------------
<S> <C> <C> <C>
Richard L. Wellek
Deferred Incentive Stock Plan(3)(4)............ 1996 45,375 April 30, 1998
Long-Term Consistency Bonus(7)................. 1996 $ 169,897
Raymond A. Jean
Deferred Incentive Stock Plan(3)(5)............ 1996 27,225 April 30, 1998
Long-Term Consistency Bonus(7)................. 1996 90,979
George W. Hoffman
Deferred Incentive Stock Plan(3)(6)............ 1996 18,150 April 30, 1998
Long-Term Consistency Bonus(7)................. 1996 0
Richard A. Nunemaker
Deferred Incentive Stock Plan(3)(6)............ 1996 18,150 April 30, 1998
Long-Term Consistency Bonus(7)................. 1996 59,111
</TABLE>
- ------------------------
(1) These are Deferred Incentive Stock Purchase Plan rights which were granted
in 1993. These amounts were restated for a 10 percent stock dividend in
1996.
(2) The final payment to acquire the Common Stock under the Deferred Incentive
Stock Purchase Plan is due April 30, 1998. Payments to acquire the shares
are made ratably over a five year period from the date of grant.
(3) This compensation represents the amortization of the difference between the
purchase price and fair market value of stock at the date of grant which is
amortized over five years. See discussion of the 1993 Deferred Incentive
Stock Purchase Plan in the Executive Compensation section of this Proxy
Statement.
(4) Compensation earned under the Deferred Incentive Stock Purchase Plan was
$66,275 in 1996 and is included in Long-Term Compensation in the Summary
Compensation Table above.
8
<PAGE>
(5) Compensation earned under the Deferred Incentive Stock Purchase Plan was
$39,765 in 1996 and is included in Long-Term Compensation in the Summary
Compensation Table above.
(6) Compensation earned under the Deferred Incentive Stock Purchase Plan was
$26,510 in 1996 and is included in Long-Term Compensation in the Summary
Compensation Table above.
(7) Represents compensation under the Long-Term Consistency Bonus which was
earned in 1996 and paid in 1997 and is included in Long-Term Compensation in
the Summary Compensation Table above. See additional discussion in the
Executive Compensation section of this Proxy Statement.
DIRECTOR COMPENSATION
During 1996, directors were paid $12,000 per year for their services with
the Chairman of the Board receiving an additional $5,000 per year and each
committee chairman receiving an additional $2,500 per year for serving in such
capacity. In addition, directors who are not employees of the Company ("Outside
Directors") receive $750 per board of directors meeting attended ($250 per board
of directors meeting by telephone) and $750 per committee meeting attended ($500
if the committee meeting is in conjunction with a board of directors meeting).
Outside Directors also receive an annual award of 363 shares of the Company's
Common Stock.
STOCK PERFORMANCE CHART
The following chart compares the change in the value of $100 invested in the
Company's Common Stock with $100 invested in the S&P 500 Index and the S&P
Manufacturing and Diversified Industry Group Index during the five fiscal years
ended January 31, 1997. The comparison assumes $100 was invested on January 31,
1992 in the Company's Common Stock and in each of the foregoing indices and
assumes reinvestment of dividends.
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL VALUE
(VARLEN CORPORATION, S&P 500, S&P MANUFACTURING AND DIVERSIFIED INDUSTRY GROUP)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
S&P MANUFACTURING AND DIVERSIFIED INDUSTRY GROUP
VARLEN CORPORATION S&P 500 INDEX INDEX
<S> <C> <C> <C>
1992 $100.00 $100.00 $100.00
1993 $183.17 $110.57 $107.60
1994 $250.44 $124.76 $133.13
1995 $231.36 $125.41 $132.87
1996 $258.67 $173.85 $194.74
1997 $229.74 $219.61 $255.64
</TABLE>
9
<PAGE>
OPTION GRANTS DURING 1996
The following table provides information related to options granted to the
named executive officers during 1996:
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE
INDIVIDUAL GRANTS AT ASSUMED ANNUAL RATES OF
----------------------------------------------------------------------- STOCK PRICE APPRECIATION
NUMBER OF % OF TOTAL MARKET FOR
SECURITIES OPTIONS GRANTED PRICE ON OPTION TERM(1)
UNDERLYING OPTIONS TO EMPLOYEES IN EXERCISE DATE OF EXPIRATION ---------------------------
NAME GRANTED(2) 1996 PRICE(3) GRANT DATE 0% 5% 10%
- ------------------------------ ------------------ --------------- -------- -------- ---------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Richard L. Wellek............. 9,900 11.5% $ 18.07 $ 20.91 04/02/06 $28,116 $158,303 $358,035
Raymond A. Jean............... 7,700 8.9 18.07 20.91 04/02/06 21,868 123,124 278,472
George W. Hoffman............. 4,400 5.1 18.07 20.91 04/02/06 12,496 70,357 159,127
Richard A. Nunemaker.......... 4,400 5.1 18.07 20.91 04/02/06 12,496 70,357 159,127
Vicki L.
Casmere..................... 2,200 2.5 18.07 20.91 04/02/06 6,248 35,178 79,563
</TABLE>
- ------------------------
(1) The potential realizable value portion of the foregoing table illustrates
value that might be realized upon exercise of the options immediately prior
to the expiration of their term, assuming the specified compounded rates of
appreciation on the Company's Common Stock over the term of the options.
These numbers do not take into account provisions providing for termination
of the option following termination of employment, nontransferability or
vesting periods.
(2) Options become exercisable 20% after each of the first four years since
their issuance with all options exercisable after 4 1/2 years.
(3) The option exercise price may be paid in cash or by delivery of shares of
Common Stock owned either by the optionee prior to the exercise of the
option or, for certain options with the consent of the Compensation
Committee, by the optionee as a result of the exercise of the option.
10
<PAGE>
OPTION EXERCISES DURING 1996 AND FISCAL YEAR END OPTION VALUES
The following table provides information related to options exercised by the
named executive officers during 1996 and the number and value of options held at
fiscal year end. The Company does not have any stock appreciation rights.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE- MONEY OPTIONS AT
OPTIONS AT FISCAL YEAR END FISCAL YEAR END(1)
SHARES ACQUIRED -------------------------- --------------------------
NAME ON EXERCISE VALUE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -------------------------------- ----------------- --------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Richard L. Wellek............... 0 $ 0 80,283 27,324 $ 738,427 $ 67,991
Raymond A. Jean................. 0 0 36,420 21,615 315,074 54,053
George W. Hoffman............... 0 0 21,422 12,870 180,300 32,100
Richard A. Nunemaker............ 0 0 14,729 12,870 116,121 32,100
Vicki L. Casmere................ 0 0 0 2,200 0 2,596
</TABLE>
- ------------------------
(1) The closing price for the Company's Common Stock as reported by the Nasdaq
National Market on January 31, 1997 was $19.25. Value is calculated on the
basis of the difference between the option exercise prices and $19.25
multiplied by the number of shares of Common Stock underlying the option.
SEVERANCE AND CHANGE IN CONTROL AGREEMENTS
The Company has severance agreements with Messrs. Wellek, Hoffman, Jean and
Nunemaker, which provide for payments to such executive officers in the event
their employment by the Company is terminated without cause (as defined) after a
"Change in Control" of the Company. Subject to the terms and conditions of these
agreements, such payments are to be made at the rate of the terminated executive
officer's base salary (including the average of annual cash bonuses for the
prior three years), on a monthly basis and for a period of three years in the
case of Mr. Wellek, or two years in the case of Messrs. Hoffman, Jean and
Nunemaker, commencing on the date of termination. For purposes of this
agreement, "Change in Control" means a change in control of a nature that would
be required to be reported in response to Item 6(e) of Schedule 14A of
Regulation 14A promulgated under the Exchange Act, or any successor provision
thereto, whether or not the Company is then subject to such reporting
requirement; provided, however, without limiting the generality of the
foregoing, a Change in Control shall be deemed to have occurred if: (i) any
Person or Group (as those terms are defined in Section 13(d) and 14(d) of the
Exchange Act) is or becomes the record or "Beneficial Owner" (as defined in Rule
13d-3 under the Exchange Act), directly or indirectly of 20% or more of the
securities of the Company entitled to vote generally in the election of
directors of the Company; or (ii) a reorganization, merger, consolidation,
complete liquidation or dissolution of the Company or the sale or disposition of
all or substantially all of the assets of the Company or other similar
transaction (in each case, other than pursuant to any bankruptcy, insolvency or
similar law) occurs; or (iii) a change occurs in the composition of a majority
of the board of directors of the Company as constituted on January 1, 1993,
excluding any change where nomination of a successor director was approved by at
least a majority of those members who are members of the board on January 1,
1993, or their successors if so approved for nomination by a majority of the
board. In addition, if Mr. Wellek receives "Change in Control" payments in
excess of certain limitations set forth in the Internal Revenue Code of 1986, as
amended (the "Code"), and is therefore subject to a 20% excise tax on such
payments, the Company will reimburse Mr. Wellek for such excise tax plus the
income and excise taxes thereon.
11
<PAGE>
PENSION PLANS
Effective January 1, 1986, the Company instituted the Varlen Profit Sharing
& Retirement Savings Plan (the "401(k) Plan"), a defined contribution plan, in
which Mr. Wellek, Mr. Jean, Mr. Hoffman, Mr. Nunemaker and Ms. Casmere are
participants. The Company also maintains the Supplemental Executive Retirement
Plan of Varlen Corporation and its Participating Subsidiaries (the "SERP Plan")
and the Varlen Corporation Excess Benefits Plan (the "Shadow 401(k) Plan") in
which Mr. Wellek, Mr. Jean, Mr. Hoffman, Mr. Nunemaker and Ms. Casmere
participate.
The following table sets forth, where applicable, the current covered
compensation under each plan and the total number of years of credited service
for benefit plan purposes for Mr. Wellek, Mr. Jean, Mr. Hoffman, Mr. Nunemaker
and Ms. Casmere. Covered compensation under the plans consists of total cash
compensation, except that the 401(k) Plan is limited by law to $150,000 in
calendar 1996 and $160,000 in calendar 1997. Under the SERP Plan, bonuses are
attributed to the year they are earned instead of the year they are paid.
Amounts paid in lieu of dividends under the Deferred Incentive Stock Purchase
Plan are excluded from compensation under the SERP and Shadow 401(k) plans.
<TABLE>
<CAPTION>
COVERED COMPENSATION
---------------------------------- CREDITED
SERP SHADOW SERVICE
NAME 401(K) PLAN 401(K) TO DATE
- --------------------------------------------------------------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
Richard L. Wellek.............................................. $ 150,000 $ 883,308 $ 883,308 29 years
Raymond A. Jean................................................ 150,000 529,336 529,336 9 years
George W. Hoffman.............................................. 150,000 215,952 215,952 17 years
Richard A. Nunemaker........................................... 150,000 342,661 342,661 11 years
Vicki L. Casmere............................................... 90,000 N/A N/A 4 months
</TABLE>
The 401(k) Plan is maintained for the benefit of all eligible salaried and
certain hourly employees of the Company and its participating subsidiaries,
including the officers mentioned above. The eligibility requirement of the
401(k) Plan is six months of continuous service. The Employee Retirement Income
Security Act of 1974 places certain limitations on amounts contributed under the
401(k) Plan.
The 401(k) Plan provides for both employee and employer contributions.
Employees may contribute up to 14% of total cash compensation during the
calendar year, subject to certain limitations under Federal income tax law
($9,240 in calendar 1995 and $9,500 in calendar 1996 and 1997). Amounts
contributed by an employee are not subject to income tax until the funds are
withdrawn from the plan. Employer contributions are divided into two parts.
First, the Company pays 25% of the amount contributed by the employee, up to 6%
of total compensation. Second, there is a profit sharing contribution made to
the account of each participant regardless of whether any employee contributions
are made. The profit sharing contribution cannot be less than 2% of compensation
per year and may be higher, based on the financial performance of the Company
and established guidelines.
Participants are immediately 100% vested with respect to their own
contributions and any matching contributions. Profit sharing contributions are
subject to a vesting schedule under which the participant becomes 40% vested
after two years of service. An additional 20% vests after each additional year
of service thereafter until the participant becomes 100% vested after 5 years of
service. The vested portion of the participant's account balance becomes payable
in a lump sum or in installments upon the earliest to occur of retirement,
disability, death or termination of employment.
Effective January 1, 1988, the Shadow 401(k) Plan was instituted to provide
additional benefits to certain executives, as determined by the Board of
Directors. In this funded plan, benefits are earned based
12
<PAGE>
on the application of any or all three IRS limitations with respect to the
401(k) Plan. Participants' Shadow 401(k) Plan accounts are credited with
matching contributions or discretionary profit sharing contributions which are
disallowed from the 401(k) Plan because of the limit on individual contributions
($9,500 in calendar 1996), the limit on covered compensation ($150,000 in
calendar 1996), or the limit on total contributions of $30,000 or 25% of
compensation from all sources. Account balances are adjusted for investment
earnings or losses quarterly and all benefits earned are subject to the same
vesting and payment schedule as is applied to the 401(k) Plan.
The SERP Plan is an unfunded plan designed to provide supplemental
retirement benefits to certain executives selected by the Board of Directors. At
age 62 with 15 years of service, the executive is entitled upon retirement to
full supplemental retirement benefits which, when added to the executive's total
annual retirement benefit, equals 50% of the average of the five highest years
of the final ten years of covered compensation. Any such executive may retire at
age 55 or any age thereafter prior to age 62 with at least 15 years of service
with reduced benefits. Executives with less than 15 years of service can also
retire at age 62 or thereafter with reduced benefits. To compute the reduced
benefits, the 50% factor is reduced by 3.3% for each year of service less than
the required 15 years at age 62, and for each year of retirement prior to age
62.
The following table sets forth the annual retirement benefit payable under
the SERP Plan to participants retiring at age 62 in 1996. These benefits will be
reduced by any profit sharing benefits from the 401(k) Plan or the Shadow 401(k)
Plan, company funded retirement benefits from prior pension plans and 50% of
primary Social Security benefits. Benefits are unreduced for retirement starting
at age 62, with 15 years of credited service.
<TABLE>
<CAPTION>
ANNUAL BENEFITS FOR GIVEN YEARS OF SERVICE
----------------------------------------------
COVERED COMPENSATION 15 20 25 30
- ----------------------------------------------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
$150,000............................................. $ 75,000 $ 75,000 $ 75,000 $ 75,000
200,000............................................. 100,000 100,000 100,000 100,000
250,000............................................. 125,000 125,000 125,000 125,000
300,000............................................. 150,000 150,000 150,000 150,000
350,000............................................. 175,000 175,000 175,000 175,000
400,000............................................. 200,000 200,000 200,000 200,000
450,000............................................. 225,000 225,000 225,000 225,000
500,000............................................. 250,000 250,000 250,000 250,000
550,000............................................. 275,000 275,000 275,000 275,000
600,000............................................. 300,000 300,000 300,000 300,000
650,000............................................. 325,000 325,000 325,000 325,000
700,000............................................. 350,000 350,000 350,000 350,000
750,000............................................. 375,000 375,000 375,000 375,000
800,000............................................. 400,000 400,000 400,000 400,000
850,000............................................. 425,000 425,000 425,000 425,000
900,000............................................. 450,000 450,000 450,000 450,000
</TABLE>
The SERP Plan also contains optional methods of benefit payment, payments to
the surviving beneficiary of an employee and other qualifications to the
foregoing.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Messrs. Lorch, Miles and Rosenbaum, all independent directors, comprise the
Company's Compensation Committee.
13
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information with respect to the
ownership of shares of the Company's Common Stock by (i) persons who were the
beneficial owners, as of April 1, 1997, of more than 5% of the outstanding
shares of the Company's Common Stock and (ii) the Company's five most highly
compensated executive officers.
<TABLE>
<CAPTION>
NUMBER
OF SHARES
BENEFICIALLY PERCENT OF
NAME AND ADDRESS OF 5% BENEFICIAL OWNER OWNED CLASS
- ------------------------------------------------------------------------------------------ ----------- -----------
<S> <C> <C>
The Prudential Insurance Company of America............................................... 706,772 12.2%
751 Broad Street
Newark, New Jersey 07102
HBK Investments L.P....................................................................... 527,623(1) 8.4%
777 Main Street, Suite 2750
Fort Worth, Texas 76102
Berenice T. Ruppert, Richard W. Ruppert and Theodore A. Ruppert, as trustees.............. 519,693(2) 9.0%
One Barclay Woods Drive
St. Louis, Missouri 63124
Lazard Freres & Co. LLC................................................................... 400,380 6.9%
30 Rockefeller Plaza
New York, New York 10020
Putnam Investments, Inc................................................................... 364,727 6.3%
One Post Office Square
Boston, Massachusettes 02109
Pioneering Management Corporation......................................................... 360,000 6.2%
60 State Street
Boston, Massachusettes 02109
Dimensional Fund Advisors................................................................. 327,715 5.7%
1299 Ocean Avenue
Santa Monica, California 90401
Investment Counselors of Maryland, Inc.................................................... 322,000 5.6%
803 Cathedral Street
Baltimore, Maryland 21201
Barclays Global Investors, N.A............................................................ 309,598 5.4%
45 Fremont Street
San Francisco, California 94105
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
NUMBER
OF SHARES
BENEFICIALLY PERCENT
NAME OF EXECUTIVE OFFICER OWNED OF CLASS
- ------------------------------------------------------------------------------------------ ------------ -----------
<S> <C> <C>
Richard L. Wellek......................................................................... 139,162(3) 2.4%
Raymond A. Jean........................................................................... 47,549(4) 0.8%
George W. Hoffman......................................................................... 24,977(5) 0.4%
Richard A. Nunemaker...................................................................... 19,474(6) 0.3%
Vicki L. Casmere.......................................................................... 440(7) *
</TABLE>
- ------------------------
* The number of shares of Common Stock beneficially owned is less than .1% of
class.
(1) Such shares are deemed to be beneficially owned solely because of its
ownership of debentures convertible into shares of the Company's Common
Stock.
(2) Such shares are held by two trusts, each of which has three trustees. The
trusts are for the benefit of Berenice T. Ruppert and members of her family.
Excludes 5,289 shares held directly by Theodore A. Ruppert.
(3) Of such shares, 50,970 are deemed to be beneficially owned by Mr. Wellek
because he is the sole trustee of a trust of which he is the sole
beneficiary and 88,192 are deemed to be beneficially owned solely because of
his ownership of currently exercisable options to acquire such shares.
(4) Of such shares, 4,930 are held directly and 42,619 are deemed to be
beneficially owned solely because of his ownership of currently exercisable
options to acquire such shares.
(5) Of such shares, 3,346 are held directly and 21,631 are deemed to be
beneficially owned solely because of his ownership of currently exercisable
options to acquire such shares.
(6) Of such shares, 961 are held directly and 18,513 are deemed to be
beneficially owned solely because of his ownership of currently exercisable
options to acquire such shares.
(7) Deemed to be beneficially owned solely because of her ownership of currently
exercisable options to acquire such shares.
INDEPENDENT AUDITORS
The Board of Directors of the Company intends to appoint, subject to final
proposal acceptance, the firm of Deloitte & Touche LLP as its independent
auditors for the fiscal year ending January 31, 1998. Deloitte & Touche LLP
served in such capacity for the Company's preceding fiscal year. A
representative of Deloitte & Touche LLP is expected to be present at the Annual
Meeting of Stockholders and will be given an opportunity to make a statement if
he desires to do so and is expected to be available to respond to appropriate
questions.
OTHER MATTERS
The Board of Directors of the Company knows of no other matters which are to
be brought before the meeting. If any other matters should be presented for
proper action, it is the intention of the persons named in the Proxy to vote in
accordance with their discretion pursuant to the terms of the Proxy.
15
<PAGE>
PROPOSALS OF STOCKHOLDERS
Proposals of stockholders intended to be presented at the 1998 Annual
Meeting of Stockholders must be received at the Company's executive offices on
or before December 18, 1997 for inclusion in the Company's Proxy Statement with
respect to such meeting.
VARLEN CORPORATION
BY RICHARD L. WELLEK
President and Chief
Executive Officer
It is important that Proxies be returned promptly. Therefore, stockholders
who do not expect to attend the meeting in person are urged to fill in, sign,
date and return the enclosed Proxy.
A copy of the Company's Annual Report on Form 10-K for the fiscal year ended
January 31, 1997, filed with the Securities and Exchange Commission, may be
obtained without charge by any stockholder of the Company of record as of April
1, 1997 by writing to: Mr. Richard A. Nunemaker, Vice President, Finance and
Chief Financial Officer, Varlen Corporation, 55 Shuman Boulevard, P.O. Box 3089,
Naperville, Illinois 60566-7089.
16
<PAGE>
VARLEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SUMMARY OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1996 1995* 1994* 1993* 1992*
---------- ---------- ---------- ---------- ----------
<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>
* 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.
F-1
<PAGE>
VARLEN CORPORATION AND SUBSIDIARIES
SUMMARY OF FINANCIAL CONDITION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1996 1995* 1994* 1993* 1992*
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Total assets......................................... $ 393,878 $ 230,874 $ 220,186 $ 186,264 $ 180,666
- -----------------------------------------------------------------------------------------------------------------
Working capital...................................... $ 69,461 $ 67,044 $ 57,713 $ 49,046 $ 39,570
Ratios:
Current assets to current liabilities............ 2.1/1 2.5/1 2.1/1 2.4/1 1.9/1
Average inventory turnover....................... 6.8 7.2 6.7 6.1 5.7
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 was 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.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Year Ended January 31, 1997 (1996) as Compared to the Year Ended January 31,
1996 (1995).
OVERVIEW
The Company designs, manufactures and markets a diverse range of products in
its transportation products and analytical instruments business segments. These
products are marketed to the railroad, heavy-duty truck and trailer, automotive
and petroleum industries. The demand for the Company's products is affected by
domestic as well as international economic conditions. The Company's
manufacturing operations have a significant fixed cost component. Accordingly,
during periods of changing product demand, the profitability of many of the
Company's operations may change proportionately more than revenues of such
operations.
F-2
<PAGE>
OPERATIONS
The Company's sales for fiscal 1996 were $409.5 million, up $22.5 million or
5.8% from sales of $387.0 million in 1995. Sales increased in the transportation
products segment as a result of acquisitions while sales in the analytical
instruments segment declined as a result of dispositions in mid 1996 and 1995.
Net earnings for the year were $17.9 million or $2.27 per share on a fully
diluted basis. This represented a decrease of 8.9% from the $19.6 million or
$2.43 per share on a fully diluted basis in 1995. Operating profit increased in
both business segments, but higher net interest expense resulted in lower
consolidated net earnings.
TRANSPORTATION PRODUCTS
Transportation products revenues increased 14.8% to $364.0 million, as
compared to $317.1 million in 1995. The Company's heavy-duty truck and trailer
business had lower sales than during the prior year period as a result of
significantly lower industry demands offset partly by greater customer
penetration with new and existing products. During 1996, production began on
components for a new truck introduced by a large customer. Although this program
contributed approximately $9 million of sales, volumes were not sufficient to
provide profits during 1996.
Revenues increased significantly at the railroad business as a result of the
largest acquisition in the Company's history in July 1996. The acquisition
extended the Company's participation globally in the rail industry with tapered
roller bearings used on railcars and locomotives. At our other rail businesses,
reduced export sales coupled with lower domestic railcar and locomotive build
rates resulted in slightly lower revenues. In late January 1997, the Company
purchased a German manufacturer of railroad cushioning devices which did not
have a material impact on 1996 operations. The Company's automotive components
business had slightly higher sales despite flat industry production.
Industry-wide demand for light trucks was up again which continues to benefit
the Company.
Operating profit in 1996 was $37.4 million (10.3% of segment sales) compared
to $36.9 million (11.6% of segment sales) during 1995. Significant profitability
improvements in automotive products driven by reduction of material cost and
productivity improvements as well as the impact of the railroad acquisition
offset earnings declines experienced in the remaining railroad products
businesses as well as the heavy-duty truck/trailer business. Declines in
operating profit at the truck/trailer business reflected the effects of lower
demand and selected price reductions. At the railroad business, losses incurred
on an export contract and a European facility as well as domestic pricing
pressures lowered earnings.
ANALYTICAL INSTRUMENTS
Sales in the analytical instruments segment for 1996 decreased to $45.5
million compared to $69.9 million in 1995. The decrease in revenues in this
segment occurred primarily as a result of the sale of non-strategic businesses
in July 1995 and July 1996 which accounted for $22.4 million of the decrease.
The petroleum analyzer business had lower revenues for the full year due to
weaker sales in the first half of the year. However in the fourth quarter of
1996, sales of petroleum analyzers exceeded the prior year quarter as a result
of higher customer demand.
Operating profit for the analytical instruments segment increased to $9.8
million (21.5% of segment sales) from $9.0 million (12.9% of segment sales) in
the prior year's period. Operating profit improved in 1996 as a result of a $3.7
million pre-tax gain on the sale of a business in July 1996. Operating profit of
the
F-3
<PAGE>
remaining petroleum analyzer business was lower in 1996 than the prior year
following the decline in revenues.
COST OF SALES
Consolidated gross margin was 24.5% in 1996 compared to 25.0% in 1995. Gross
margin increased at the analytical instruments segment but declined at the
transportation products segment. Within the transportation products segment,
gross margin improved at the automotive business due to improved productivity
and lower material costs but declined elsewhere as a result of lower throughput
and, in certain instances, less favorable prices. In the analytical instruments
segment, gross margin increased primarily due to the sale of lower margin
businesses. The gross margin of the petroleum analyzer business increased
slightly.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses in 1996 were $63.6 million
(15.5% of sales) compared to $57.8 million (14.9% of sales) in 1995. The
increase in 1996 expenditures was primarily the result of the significant
business acquired net of the business divested. Expenditures elsewhere were $1.1
million higher in 1996 than the prior year as a result of increased spending on
engineering, product development, and marketing. In both segments, selling,
general and administrative expenses were higher when expressed as a percent of
sales, due to the effects of acquisition and divestiture activities and the
previously noted increased spending.
INTEREST EXPENSE AND INCOME TAXES
Gross interest expense for 1996 was $9.4 million compared to $5.3 million
for the prior year's period. Borrowings increased substantially to finance two
acquisitions including one of which was the largest in Company history. Average
interest rates increased slightly over that of last year's period. Interest
income was $.2 million lower in 1996 as a result of decreased levels of
temporary investments during the second half of 1996.
Income taxes were provided at an effective rate of 43.9% in 1996 and 43.5%
in 1995. The higher than statutory federal rate reflects non-deductible goodwill
amortization which substantially increased in 1996, higher taxes on foreign
operations, and state income taxes as well as the effects of dispositions in
both years.
FOURTH QUARTER
Sales for the fourth quarter of 1996 were $106.6 million, up from the $88.1
million reported in 1995. Sales were up substantially in the transportation
segment reflecting a large 1996 acquisition as well as increased railroad
products revenues elsewhere. Sales of automotive and heavy-duty truck and
trailer products declined slightly. In the analytical instruments segment, the
mid-year divestiture resulted in lower 1996 sales when compared to the prior
year quarter. Sales at the remaining petroleum analyzer business increased.
Net earnings were $3.0 million or $.41 per share on a fully diluted basis in
1996's fourth quarter compared to $3.3 million or $.44 per share in the year-ago
period. Operating profit was up in the transportation products segment as a
result of a large acquisition in July 1996. In the analytical instruments
segment, operating profit declined due to the mid-year 1996 disposition. The
operating profit at the
F-4
<PAGE>
remaining petroleum analyzer business increased during 1996's fourth quarter
despite unfavorable currency translation effects. The effective income tax rate
in the fourth quarter of 1996 was 42.9% compared to 43.5% in the 1995 quarter.
CAPITAL RESOURCES AND LIQUIDITY
During the three-year period ended January 31, 1997, the Company generated
$158.4 million of cash flow defined as earnings before interest, taxes,
depreciation and amortization ("EBITDA"). As of January 31, 1997, the Company's
working capital was $69.5 million, its total assets were $393.9 million, its
total debt was $186.6 million and stockholders' equity was $110.0 million.
EBITDA was 6.8 times the interest expense for the year.
Investing activities during the three-year period ended January 31, 1997
included capital expenditures of $56.3 million. These capital expenditures were
primarily for machinery and equipment to support new products and to improve
productivity and efficiency. At January 31, 1997, the Company had no material
commitments to purchase machinery and equipment.
To support its investing activities, the Company has a $190.0 million term
loan and revolving credit agreement which was entered into in 1996 and expires
on July 19, 2002. The $110.0 million term loan portion of this facility was used
to finance a large acquisition in 1996. The $80.0 million revolving credit
facility will be used by the Company as the principal source of acquisition
funding. At January 31, 1997, the Company had $107.0 million outstanding under
the term loan portion of the facility and $4.0 million outstanding under the
revolving credit portion of the facility. The percentage of debt to total
capitalization at January 31, 1997 was 62.9% up from 42.9% at January 31, 1996.
Cash and short-term investments were $3.1 million at the end of fiscal 1996
compared to $22.9 million at the end of fiscal 1995. The Company believes that
internally generated funds will be sufficient to satisfy its anticipated working
capital needs, capital expenditures and scheduled debt repayments.
YEAR ENDED JANUARY 31, 1996 (1995) AS COMPARED TO THE YEAR ENDED JANUARY 31,
1995 (1994)
The Company's sales for fiscal 1995 were $387.0 million, up $45.5 million or
13.3% from sales of $341.5 million in 1994. Sales increased in the
transportation products segment due to higher demand and acquisitions. Sales
declined in the analytical instruments segment primarily as a result of a
disposition in mid-1995.
Net earnings for the year were $19.6 million or $2.43 per share on a fully
diluted basis. This represented a 32.8% increase over the $14.8 million or $1.92
per share on a fully diluted basis in 1994. Profits increased in both business
segments, with the transportation segment having the greatest increase.
Transportation products revenues increased 21.1% to $317.1 million, as
compared to $261.8 million in 1994. The Company's heavy-duty truck and trailer
business had higher sales than during the prior year period as a result of
increased industry demands and greater customer penetration with new and
existing products. Also during 1995, a contract was signed with a large truck
customer to produce components for a new truck to be introduced in early 1996.
No revenues were generated in 1995, although start-up costs were incurred for
this contract. Revenues increased at the railroad business as a result of two
1994 acquisitions, while comparable business revenues were flat. The acquisition
extended the Company's participation in European railroad components and
domestic and international locomotive components. During the latter half of
1995, mergers of several of the largest domestic railroads caused a delay in
demand for certain railroad products. The Company's automotive components
business had lower sales
F-5
<PAGE>
due to elimination of certain low margin products. Industry-wide demand for
light trucks was up which benefited the Company.
Operating profit in 1995 was $36.9 million (11.6% of segment sales) compared
to $28.0 million (10.7% of segment sales) during 1994. Higher volume in the
heavy-duty truck and trailer business resulted in improved operating profit. At
the automotive parts business, operating profit increased despite lower revenues
as a result of improved productivity and efficiency. Railroad components'
operating profit improved as a result of higher efficiency, cost containment and
acquisitions.
Sales in the analytical instruments segment for 1995 decreased to $69.9
million compared to $79.7 million in 1994. The decrease in revenues in this
segment occurred as a result of the sale of a non-strategic business in July
1995 whose contribution to sales in 1995 was $12.9 million lower than that in
1994. If the effects of this business were eliminated, revenues in the remainder
of the segment increased $3.0 million. The petroleum analyzer business had
increased revenues offsetting a small decline in sales of research laboratory
instruments. The increase in sales resulted from higher sales of on-line
instruments, positive currency adjustments ($2.3 million) and increased sales
through company-owned distributors.
Operating profit for the analytical instruments segment increased to $9.0
million (12.9% of segment sales) from $8.5 million (10.7% of segment sales) in
the prior year's period. Operating profit improved in 1995 in all business areas
except the business sold in 1995. Improved profit resulted from cost reductions
in the research laboratory appliance business and the positive effect of
currency translation ($.3 million) in the petroleum analyzer business.
Consolidated gross margin was 25.0% in 1995 compared to 23.7% in 1994. Gross
margin increased at both business segments. Within the transportation products
segment, gross margin improved at the automotive and railroad businesses but
declined at the heavy-duty truck and trailer business. A significant increase in
the automotive gross margin resulted from improved productivity and efficiency.
Heavy-duty truck and trailer gross margin declined due to increased raw material
prices that could not be offset by higher selling prices. In the analytical
instruments segment, gross margin increased due to cost reduction and improved
productivity at the research laboratory appliance business as well as a greater
1995 margin at the disposed business.
Selling, general and administrative expenses in 1995 were $57.8 million
(14.9% of sales) compared to $50.4 million (14.8% of sales) in 1994. In the
transportation products segment, selling, general and administrative expenses
were flat when expressed as a percent of sales while they were higher as a
percent of sales in the analytical instruments segment primarily due to the
previously-mentioned divestiture whose expenses as a percentage of sales were
lower than that of the other companies in the analytical instruments segment.
During the year, the Company increased its spending on engineering, research and
product development.
Gross interest expense for 1995 was $5.3 million compared to $5.2 million
for the prior year's period. Borrowings and average interest rates were
relatively unchanged. Interest income was $.3 million higher in 1995 as a result
of increased levels of temporary investments during the year.
Income taxes were provided at an effective rate of 43.5% in 1995 and 42.9%
in 1994. The higher than statutory federal rate reflects non-deductible goodwill
amortization, higher taxes on foreign operations, and state income taxes.
F-6
<PAGE>
VARLEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
----------------------------------
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>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
VARLEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JANUARY 31,
----------------------
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
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
VARLEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
JANUARY 31,
----------------------
1997 1996
---------- ----------
<S> <C> <C>
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 notes to consolidated financial statements.
F-9
<PAGE>
VARLEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DEFERRED TOTAL
ADDITIONAL STOCK STOCK-
COMMON PAID-IN RETAINED COMPEN- TREASURY HOLDERS'
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 notes to consolidated financial statements.
F-10
<PAGE>
VARLEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
-----------------------------------
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 notes to consolidated financial statements.
F-11
<PAGE>
VARLEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
F-12
<PAGE>
VARLEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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. OVERVIEW OF THE COMPANY
The Company designs, manufactures and markets a diverse range of products in
its transportation products and analytical instruments business segments. These
products are marketed to the railroad, heavy-duty truck and trailer, automotive
and petroleum industries. The demand for the Company's products is affected by
domestic as well as international economic conditions.
3. 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 for the purchase of all of 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 unaudited consolidated
results of operations on a pro forma basis as though Brenco had been acquired on
February 1, 1995 are as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
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
</TABLE>
The pro forma financial information is not necessarily indicative of the
operating results that would have occurred had the Brenco acquisition been
consummated as of February 1, 1995, nor are they necessarily indicative of
future operating results.
F-13
<PAGE>
VARLEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. ACQUISITIONS (CONTINUED)
On January 16, 1995, the Company purchased the assets of the Railroad
Division of Prime Manufacturing Corporation ("Prime"), located in Oak Creek,
Wisconsin. Prime manufactures a wide range of engineered products for railroad
locomotives, including heating, ventilating and air conditioning equipment;
valves and refrigerators. Prime's products are sold to both original equipment
manufacturers and the aftermarket.
On August 18, 1994, the Company acquired Acieries de Ploermel ("AP"), a
steel foundry located in the Brittany region of northwest France. AP specializes
in railroad products and is an approved source for most of the national
railroads in Europe. AP also provides castings for valve manufacturers and, to a
lesser extent, for the auto industry.
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.
4. DISPOSITIONS
On November 8, 1996, the Company sold Brenco's Rail Link, Inc. subsidiary
("Rail Link"), a railroad switching services and short-line railroad operator to
Genesee & Wyoming, Inc. for $9.0 million in cash and additional proceeds based
upon future performance. The earnings of Rail Link since its acquisition through
its date of sale, along with the gain on its sale, are excluded from earnings.
The earnings of Rail Link have been recorded as adjustments to the carrying
amount of its assets with the gain on its sale treated as an adjustment of the
purchase price allocation.
On July 30, 1996, the Company sold the laboratory appliance division of its
Precision Scientific, Inc. subsidiary, a manufacturer of research laboratory
appliances for approximately $12.0 million in cash net of selling costs. This
sale resulted in a gain of $3.7 million ($2.1 million after-tax) or $.23 per
fully diluted share. Net sales from this company for 1996 through the date of
sale were approximately $8.6 million.
On July 18, 1995, the Company sold its National Metalwares, Inc. subsidiary,
a maker of tubular steel components for manufacturers of consumer durables, to a
private investment group for approximately $8.5 million in cash net of selling
costs. Net sales from this subsidiary for 1995 through the date of sale were
approximately $11.0 million.
F-14
<PAGE>
VARLEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. SUPPLEMENTARY CASH FLOW INFORMATION
<TABLE>
<CAPTION>
1996 1995 1994
----------- --------- ---------
(In thousands)
<S> <C> <C> <C>
Cash paid during the year for:
Interest................................................. $ 9,168 $ 5,134 $ 5,096
----------- --------- ---------
----------- --------- ---------
Income taxes (net)....................................... $ 13,409 $ 16,185 $ 10,220
----------- --------- ---------
----------- --------- ---------
Purchase of businesses:
Fair value of assets acquired............................ $ 207,784 $ 1,003 $ 15,230
Cash paid, net of cash acquired.......................... (154,926) (1,003) (7,800)
Common stock issued for purchase......................... -- -- (95)
----------- --------- ---------
Liabilities assumed...................................... $ 52,858 $ -- $ 7,335
----------- --------- ---------
----------- --------- ---------
</TABLE>
6. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts and fair value of the Company's financial instruments
at year end are as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995
---------------------- --------------------
CARRYING FAIR Carrying Fair
AMOUNT VALUE Amount Value
---------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Term loan...................................... $ 107,000 $ 107,000 $ -- $ --
Revolving credit facility...................... 4,000 4,000 -- --
Convertible subordinated debentures............ 69,000 70,208 69,000 74,175
Industrial revenue bond and other debt......... 4,353 4,332 4,398 4,397
---------- ---------- --------- ---------
Total long-term debt........................... $ 184,353 $ 185,540 $ 73,398 $ 78,572
---------- ---------- --------- ---------
---------- ---------- --------- ---------
</TABLE>
The carrying amounts for cash and cash equivalents, accounts receivable,
marketable securities, accounts payable and current maturities of long-term debt
are reasonable estimates of their fair value. The term loan and revolving credit
facility are borrowed at current market rates and thus reflect their fair value.
The fair value of the convertible subordinated debentures is their quoted market
value. The fair value of industrial revenue bonds and other debt are estimated
using discounted cash flow analysis and market rates for similar financial
instruments.
F-15
<PAGE>
VARLEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. LONG-TERM DEBT
Long-term debt at year end is comprised of the following (in thousands):
<TABLE>
<CAPTION>
1996 1995
---------- ---------
<S> <C> <C>
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
---------- ---------
---------- ---------
</TABLE>
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 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%.
The Agreement contains provisions which require the Company to maintain a
specified level of net worth and comply with various financial ratios and
includes, among other provisions, restrictions on leases, investments, dividend
payments and the incurrence of additional indebtedness. At January 31, 1997,
$22,072,000 was available for dividend distributions under these provisions.
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.
Industrial revenue bonds, due in 2004, and other notes payable are secured
by the property, plant and equipment purchased with the proceeds of such debt.
Interest on the bonds is paid at rates ranging from 6.8% to 7.0%.
F-16
<PAGE>
VARLEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. LONG-TERM DEBT (CONTINUED)
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.
8. LEASES AND ACCRUED EXPENSES
The Company and its subsidiaries occupy various manufacturing and office
facilities and use certain equipment under operating lease arrangements. Total
rent expense under such agreements amounted to approximately $2,401,000 in 1996,
$1,936,000 in 1995 and $1,429,000 in 1994. At January 31, 1997, the aggregate
minimum future rental commitments under the non-cancelable leases with terms in
excess of one year were approximately $6,264,000. Amounts due annually in each
of the next five years are $1,975,000, $1,622,000, $1,013,000, $796,000 and
$514,000.
Accrued expense at January 31, 1997 and January 31, 1996 include $9,768,000,
and $9,567,000, respectively, for certain accrued employee benefits. Research
and development costs charged to earnings were $9,540,000 in 1996, $5,948,000 in
1995 and $4,366,000 in 1994.
9. INCOME TAXES
Earnings before income taxes were derived from the following sources (in
thousands):
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Domestic..................................................... $ 31,590 $ 34,273 $ 23,871
Foreign...................................................... 241 433 1,983
--------- --------- ---------
Total...................................................... $ 31,831 $ 34,706 $ 25,854
--------- --------- ---------
--------- --------- ---------
</TABLE>
Income tax expense consists of the following (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Current:
Federal.................................................... $ 10,857 $ 11,025 $ 9,365
State and local............................................ 2,095 2,537 2,141
Foreign.................................................... 602 758 886
--------- --------- ---------
Total.................................................... 13,554 14,320 12,392
Deferred:
Federal.................................................... 463 742 (1,113)
State and local............................................ (299) (146) (564)
Foreign.................................................... 256 181 377
--------- --------- ---------
Total.................................................... 420 777 (1,300)
--------- --------- ---------
Income tax provision......................................... $ 13,974 $ 15,097 $ 11,092
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-17
<PAGE>
VARLEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. INCOME TAXES (CONTINUED)
Deferred tax assets and liabilities are comprised of the following (in
thousands):
<TABLE>
<CAPTION>
JANUARY 31, 1997 January 31, 1996
-------------------- --------------------
ASSET LIABILITY Asset Liability
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Accounts receivable................................................... $ 633 $ 811 $ 553 $ --
Inventories........................................................... 839 656 711 755
Operating losses...................................................... 611 -- 1,608 --
Foreign tax credits................................................... 626 -- -- --
State income taxes.................................................... -- 195 -- 526
Fixed assets.......................................................... -- 16,763 40 5,144
Pension............................................................... 1,302 -- -- 524
Vacation pay.......................................................... 1,298 -- 1,021 --
Workers' compensation................................................. 813 -- 885 --
Warranty.............................................................. 2,786 -- 923 --
Deferred compensation................................................. 1,887 -- 1,088 --
Employee health and welfare........................................... 679 -- 552 --
Intangible assets..................................................... -- 6,626 -- 2,347
Retiree health and welfare............................................ 1,955 -- 1,366 --
Other................................................................. 2,579 225 2,000 76
--------- --------- --------- ---------
Subtotal.............................................................. 16,008 25,276 10,747 9,372
Valuation allowance................................................... (1,237) -- (1,570) --
--------- --------- --------- ---------
Total................................................................. $ 14,771 $ 25,276 $ 9,177 $ 9,372
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
The valuation allowance relates principally to net operating losses of
acquired subsidiaries and excess unused foreign tax credits. The use of such
losses and credits in reducing future tax liabilities is subject to substantial
limitations. Any use of the losses in the future will reduce goodwill associated
with those acquisitions.
During 1996, the valuation allowance was reduced $959,000 to reflect expired
losses and losses used to reduce current tax liabilities and increased $626,000
to reflect excess unused foreign tax credits.
Income tax expense differs from the amount of income tax determined by
applying the statutory federal rate to pre-tax income because of the following
(in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Income tax provision at statutory federal tax rate........... $ 11,141 $ 12,147 $ 9,049
State income taxes (net of federal benefit).................. 1,146 1,500 895
Foreign operations........................................... 774 787 569
Goodwill amortization........................................ 909 676 278
Other........................................................ 4 (13) 301
--------- --------- ---------
Income tax provision......................................... $ 13,974 $ 15,097 $ 11,092
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-18
<PAGE>
VARLEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. INCOME TAXES (CONTINUED)
At January 31, 1997, the Company had remaining net operating loss
carryforwards of $1,834,000 which will not expire, including loss carryforwards
subject to the valuation allowance discussed above. These arose principally as a
result of the acquisition of foreign operations and will reduce income taxes
payable to the extent of future taxable income from those operations. Foreign
tax credit carryovers of $626,000, subject to the valuation allowance discussed
above, expire in 2002.
10. RETIREMENT PLANS
The Company maintains a variety of retirement plans, including pension
plans, covering substantially all employees, and supplemental retirement plans,
covering executives. Defined benefit plans cover the majority of union employees
and are based on an amount per year of service formula and also certain non-
union employees based on an average compensation formula. Substantially all
salaried employees are covered by defined contribution plans. The Company makes
contributions to the plans in accordance with ERISA and IRS regulations and
amortizes past service cost over the average remaining service life of active
employees.
As discussed in note 3, the Company acquired all of the outstanding shares
of Brenco in 1996. Accordingly, all activity related to Brenco's two defined
benefit plans have been included in accrued pension cost and net defined benefit
pension expense since acquisition. In addition, activity related to Brenco's
defined contribution plan has been included in net defined contribution plan
expense since acquisition. Brenco's impact on accrued pension cost at January
31, 1997 and net defined benefit pension expense from the acquisition date
through January 31, 1997 is $4,249,000 and $420,000, respectively. Brenco's
impact on defined contribution plan expense for the same period is $483,000.
As discussed in note 4, the Company sold the assets and liabilities of the
laboratory appliance division of Precision Scientific, Inc. in 1996.
Accordingly, all activity related to the employees of the laboratory appliance
division of Precision Scientific, Inc.'s defined benefit plan has been excluded
from the January 31, 1997 funded status information.
Under the Varlen Corporation Profit Sharing and Retirement Savings Plan,
employee deferrals of compensation may be made and the Company will match up to
25% of the first 6% deferred by each employee. Additionally, discretionary
amounts of not less than 2% of eligible salaries and wages are contributed by
the Company. The Company makes contributions to union-sponsored multi-employer
defined benefit plans in accordance with negotiated labor contracts.
F-19
<PAGE>
VARLEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. RETIREMENT PLANS (CONTINUED)
The following table sets forth the funded status of the Company's defined
benefit and supplemental pension plans and amounts recognized in the Company's
consolidated balance sheets at January 31, 1997 and 1996 (in thousands):
<TABLE>
<CAPTION>
OVERFUNDED PLANS Underfunded Plans
-------------------- --------------------
JANUARY 31, January 31,
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Actuarial present value of:
Vested benefits........................................................ $ 6,381 $ 2,785 $ 15,486 $ 5,137
Non-vested benefits.................................................... 263 142 1,237 742
--------- --------- --------- ---------
Accumulated benefit obligation........................................... 6,644 2,927 16,723 5,879
Effect of projected salary increases..................................... -- -- 4,748 715
--------- --------- --------- ---------
Projected benefit obligation............................................. 6,644 2,927 21,471 6,594
Fair value of plan assets (primarily short-term and fixed income
investments)........................................................... 7,297 3,050 15,409 4,152
--------- --------- --------- ---------
Funded status at January 31.............................................. 653 123 (6,062) (2,442)
Unrecognized net gain.................................................... (332) (39) (1,311) (593)
Unrecognized prior service cost.......................................... 851 354 (34) 530
Liability at date of transition.......................................... 139 91 391 549
Adjustment for the minimum liability..................................... -- -- (147) (685)
--------- --------- --------- ---------
Prepaid (accrued) pension cost........................................... $ 1,311 $ 529 $ (7,163) $ (2,641)
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
Net retirement plan expense for 1996, 1995 and 1994 consists of the
following (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Service cost-benefits earned during the period..................................... $ 888 $ 474 $ 593
Net deferral and amortization...................................................... 615 1,002 (351)
Interest on projected benefit obligation........................................... 1,273 664 626
Actual return on plan assets....................................................... (1,626) (1,379) 39
--------- --------- ---------
Net defined benefit pension expense................................................ 1,150 761 907
Net multi-employer defined benefit pension expense................................. 494 501 376
Net defined contribution plan expense.............................................. 2,873 2,654 2,156
--------- --------- ---------
$ 4,517 $ 3,916 $ 3,439
--------- --------- ---------
--------- --------- ---------
</TABLE>
The weighted average discount rate and rate of increase in future
compensation levels used in determining the actuarial present value of the
projected benefit obligation were 7.5% and 5%, respectively, in 1996 and 1995,
and 8.25% and 5%, respectively, in 1994. The expected long-term rate of return
on plan assets ranged from 8.5% and 9% in 1996 and 9% in both 1995 and 1994.
F-20
<PAGE>
VARLEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
Certain of the Company's subsidiaries maintain benefit plans which provide
their employees postretirement medical and life insurance benefits. Eligibility
for the plans range from employees retiring at age 55 with a minimum of 5 years
of service to employees retiring at age 65 with a minimum of 15 years of
service. The Company continues to fund benefit costs primarily on a
pay-as-you-go basis and made benefit payments totaling approximately $34,000
during 1996 and $20,000 during 1995. As discussed in note 3, the Company
acquired all of the outstanding shares of Brenco in 1996. Accordingly, amounts
related to Brenco's postretirement benefits has been included in accrued
postretirement benefit cost and net postretirement benefit cost since
acquisition. Brenco's impact on accrued postretirement benefit cost at January
31, 1997 and net postretirement benefit cost from the acquisition date through
January 31, 1997 is $906,000 and $70,000, respectively.
The following table sets forth the plan's funded status, reconciled with
amounts recognized in the Company's consolidated balance sheets at January 31,
1997 and 1996 (in thousands):
<TABLE>
<CAPTION>
January 31
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Accumulated postretirement benefit obligation (APBO):
Retirees............................................................... $ (1,079) $ (947)
Fully eligible active plan participants................................ (827) (689)
Other active plan participants......................................... (3,051) (1,941)
--------- ---------
Total APBO............................................................... (4,957) (3,577)
Plan assets at fair value (primarily fixed income securities).......... 227 242
--------- ---------
APBO in excess of plan assets............................................ (4,730) (3,335)
Unrecognized net gain.................................................... (23) (93)
--------- ---------
Accrued postretirement benefit cost...................................... $ (4,753) $ (3,428)
--------- ---------
--------- ---------
</TABLE>
Net postretirement benefit costs for 1996, 1995 and 1994 consist of the
following (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Service cost--benefits attributed to service during the year.......... $ 227 $ 147 $ 203
Interest on accumulated postretirement benefit obligation............. 302 242 233
Net deferral and amortization......................................... (42) (42) (20)
Actual return on plan assets.......................................... 6 2 (16)
--------- --------- ---------
Net postretirement benefit cost....................................... $ 493 $ 349 $ 400
--------- --------- ---------
--------- --------- ---------
</TABLE>
The assumed health care cost trend rate used in measuring the APBO for
pre-age 65 employees is 10% in 1997, declining approximately 1% per year to 5.5%
in 2002, and for post-age 65 employees is 7% in 1997 declining 1% to 6% in 1998;
and ending at 5.5% in 2002. The weighted average discount rate used in
determining the APBO was between 7.5% and 7.75%, in 1996 and 7.75% in 1995.
Salary increases are
F-21
<PAGE>
VARLEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (CONTINUED)
assumed to be 5% per year to retirement age in both years and the expected
long-term rate of return on plan assets, was 9% in each of 1996, 1995 and 1994.
If the health care cost trend rate assumptions were increased by 1 percent,
the APBO as of January 31, 1997 would be increased by 18%. The effect of this
change on the sum of the service cost and interest cost in 1996 would be an
increase of 21%.
12. STOCK INCENTIVE PLANS
The Company had three stock option plans in effect during 1996. One of the
stock option plans expired on March 31, 1990 as to future grants. Under the
three plans, either Incentive Stock Options or Non-qualified Stock Options can
be granted, as determined by the Compensation Committee of the Company's Board
of Directors (the "Committee"). Non-qualified Stock Options can be granted for
terms of up to 10 years and with an option price that is less than the market
value of the Company's common stock on the date of grant, but if less than
market value, then not less than book value; such option price may not be less
than 50% of market value under the 1989 plan and not less than 85% of market
value under the 1993 plan. Incentive Stock Options can be granted for terms of
up to 10 years and with an option price that is not less than the market value
of the Company's Common Stock on the date of grant. A summary of the changes in
outstanding stock options, including options granted under prior plans is as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
---------------------- ---------------------- ----------------------
WEIGHTED Weighted Weighted
AVERAGE Average Average
EXERCISE Exercise Exercise
SHARES PRICE Shares Price Shares Price
--------- ----------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at beginning of
period......................................... 309,480 $ 12.76 321,332 $ 11.86 277,167 $ 10.58
Granted......................................... 86,375 18.51 62,920 16.02 64,130 16.59
Exercised....................................... (8,040) 11.82 (55,686) 10.43 (18,362) 8.77
Expired or terminated........................... (9,118) 16.40 (19,086) 15.07 (1,603) 16.19
--------- ----------- --------- ----------- --------- -----------
Options outstanding at year end................. 378,697 $ 14.00 309,480 $ 12.76 321,332 $ 11.86
--------- ----------- --------- ----------- --------- -----------
--------- ----------- --------- ----------- --------- -----------
Options exercisable at year end................. 196,791 141,327 128,048
--------- --------- ---------
--------- --------- ---------
Options available for grant at year end......... 182,408 259,665 303,499
--------- --------- ---------
--------- --------- ---------
Weighted-average fair value of options granted
during the year................................ $ 8.54* $ 7.80*
--------- ---------
--------- ---------
</TABLE>
- ------------------------
* Determined using the Black-Scholes valuation model.
The Company also has two stock compensation plans which have been in effect
since 1993. The Directors Incentive Stock Grant Plan provides for the automatic
annual award of 363 shares of Common
F-22
<PAGE>
VARLEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. STOCK INCENTIVE PLANS (CONTINUED)
Stock at par value to each director who is not an employee of the Company. An
aggregate of 27,225 shares of Common Stock are available for grant under this
plan of which 8,349 have been granted. The Deferred Incentive Stock Purchase
Plan provides for an offer to selected officers and other key employees, as
determined by the Committee, of rights to purchase Common Stock of the Company
at a price determined by the Committee which cannot be less than (1) book value
at the grant date for executive officers or (2) the lesser of book value or
$3.00 below market price on the date of the grant for other key employees.
Quarterly deposits are made by the participant over a five-year period toward
the purchase price of the shares, which are issued to the participant upon
receipt of the final payment under the plan. An aggregate of 181,500 rights are
available for grant under this plan, of which 140,662 have been granted at
$11.02 per right.
The Company has adopted the disclosure-only provisions of SFAS No. 123.
Compensation expense recognized in income in 1996 and 1995 for stock-based
employee compensation awards under APB 25 totaled approximately $393,000 and
$344,000, respectively. If the Company had elected to recognize compensation
expense for its stock-based compensation plans consistent with the methods
prescribed by SFAS No. 123, net earnings and net earnings per share would have
been changed to the unaudited pro forma amounts shown below (in thousands,
except per share amounts):
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C> <C>
Net earnings................................................ As reported $ 17,857 $ 19,609
Pro forma $ 17,767 $ 19,571
Primary earnings per share.................................. As reported $ 2.96 $ 3.19
Pro forma $ 2.95 $ 3.19
Fully diluted earnings per share............................ As reported $ 2.27 $ 2.43
Pro forma $ 2.26 $ 2.43
</TABLE>
The following table summarizes the weighted average remaining contractual
life and weighted average exercise price of options outstanding at January 31,
1997 and the weighted average exercise price of options exercisable at January
31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
----------------------------------------- OPTIONS EXERCISABLE
WGTD. AVG. ------------------------
NUMBER REMAINING WGTD. AVG. NUMBER WGTD. AVG.
OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
RANGE OF EXERCISE PRICES AT YEAR END LIFE PRICE AT YEAR END PRICE
- ------------------------------ ----------- --------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$7 to $11..................... 123,326 4.5 $ 8.62 123,326 $ 8.62
$11 to $16.................... 65,656 5.4 14.63 43,640 14.23
$16 to $21.................... 189,715 8.4 17.29 29,825 16.38
----------- -----------
378,697 196,791
----------- -----------
----------- -----------
</TABLE>
The fair value of stock options used to compute the pro forma net earnings
and net earnings per share disclosures is the estimated present value at grant
date using the Black-Scholes option-pricing model with
F-23
<PAGE>
VARLEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. STOCK INCENTIVE PLANS (CONTINUED)
the following weighted average assumptions used for 1996 and 1995: dividend
yield of 1.5%; expected volatility of 24.6%; risk free interest rates ranging
from 6.2% to 7.1%; and an expected life of seven years.
13. INDUSTRY SEGMENTS
Information relating to the Company's segments is as follows (in thousands):
<TABLE>
<CAPTION>
OPERATING IDENTIFIABLE CAPITAL DEPRECIATION
NET 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.
F-24
<PAGE>
VARLEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. INDUSTRY SEGMENTS (CONTINUED)
Information relating to the Company by geographic area is as follows (in
thousands):
<TABLE>
<CAPTION>
NET IDENTIFIABLE
NET SALES EARNINGS ASSETS
---------- --------- -----------
<S> <C> <C> <C>
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
---------- --------- -----------
---------- --------- -----------
</TABLE>
- ------------------------
* 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, 1994.
14. STOCKHOLDERS' EQUITY
On May 29, 1996, the Company's Board of Directors declared a 10% stock
dividend payable on July 15, 1996 to stockholders of record on July 1, 1996. The
dividend resulted in the issuance of approximately 348,000 new shares of Common
Stock and the reissuance of the remaining 175,000 shares of Common Stock held in
treasury. All share and per share amounts have been restated to reflect the
stock dividend.
On January 4, 1996, the Company's Board of Directors authorized the purchase
of up to 500,000 shares of its Common Stock or the equivalent amount of its
6 1/2 percent convertible subordinated debentures by the Company. As of January
31, 1997, 181,000 shares (before restatement for the 1996 10%
F-25
<PAGE>
VARLEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. STOCKHOLDERS' EQUITY (CONTINUED)
stock dividend) of the Company's Common Stock were purchased under this
authorization and recorded as treasury shares, at cost.
On May 22, 1995, the Company's Board of Directors authorized a 10% stock
dividend payable on July 10, 1995 to stockholders of record on June 23, 1995.
The dividend resulted in the issuance of approximately 537,000 new shares of
Common Stock. In addition, the quarterly cash dividend was maintained at $.09
per share.
Retained earnings at January 31, 1997 includes $464,000 for stock
subscriptions receivable, $283,000, net of deferred income taxes, for unrealized
currency translation gains and $51,000, net of deferred income taxes, for an
additional minimum pension liability. Retained earnings at January 31, 1996
includes $697,000 for stock subscriptions receivable, $1,482,000, net of
deferred income taxes, for unrealized currency translation gains and $45,000,
net of deferred income taxes, for an additional minimum pension liability.
Retained earnings at January 31, 1995 includes $1,085,000 for stock
subscriptions receivable, $597,000, net of deferred income taxes, for unrealized
currency translation gains and $114,000, net of deferred income taxes, for an
additional minimum pension liability.
15. STOCK PURCHASE RIGHTS
On June 18, 1996, the Company's Board of Directors declared a dividend
distribution of one Preferred Share Purchase Right on each outstanding share of
Common Stock of the Company. The Rights are designed to assure that all of the
Company's shareholders receive fair and equal treatment in the event of any
proposed takeover of the Company and to guard against partial tender offers,
open market accumulations and other tactics designed to gain control of the
Company without paying all shareholders a control premium. The Rights do not
prevent a takeover, but encourage anyone seeking to acquire the Company to
negotiate with the Company's Board of Directors prior to attempting a takeover.
Each Right entitles shareholders to buy one one-thousandth of a share of
newly created Series A Junior Participating Preferred Stock of the Company at an
exercise price of $75. The Rights can be exercised if a person or group acquires
15% or more of the Company's Common Stock or announces a tender offer for 15% or
more of the Common Stock. The Company's Board is entitled to redeem the Rights
at one cent per Right at any time before any such person hereafter acquires 15%
or more of the outstanding Common Stock.
If a person acquires 15% or more of the Company's outstanding Common Stock,
each Right entitles its holder to purchase, at the Right's exercise price, a
number of shares of the Company's Common Stock having a market value at that
time of twice the Right's exercise price. Rights held by the 15% holder become
void and cannot be exercised to purchase shares at the bargain purchase price.
If the Company is acquired in a merger or other business combination
transaction after a person acquires 15% or more of the Company's Common Stock,
each Right entitles its holder to purchase, at the Right's then-current exercise
price, a number of the acquiring company's common shares having a market value
at that time of twice the Right's exercise price.
F-26
<PAGE>
VARLEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. INTERIM FINANCIAL INFORMATION (UNAUDITED)
The following information is presented in thousands of dollars, except per
share amounts:
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
---------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net sales................................................. 1996 $ 91,975 $ 91,025 $ 119,898 $ 106,577
1995 106,969 97,753 94,209 88,056
Gross profit.............................................. 1996 23,797 22,479 28,245 25,927
1995 27,358 24,078 23,685 21,814
Net earnings.............................................. 1996 4,822 5,900 4,137 2,998
1995 6,156 4,933 5,217 3,303
Primary earnings per share................................ 1996 0.79 0.98 0.69 0.50
1995 1.01 0.80 0.84 0.54
Fully diluted earnings per share.......................... 1996 0.60 0.73 0.53 0.41
1995 0.75 0.60 0.64 0.44
</TABLE>
QUARTERLY MARKET AND DIVIDEND INFORMATION
<TABLE>
<CAPTION>
1996 1995
--------------------- ---------------------
FISCAL QUARTER HIGH LOW High Low
-------------------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
First........................... 23 1/16 20 29/64 20 3/64 17 9/64
Second.......................... 23 55/64 19 49/64 23 41/64 19
Third........................... 23 5/8 20 7/8 25 58/64 20 11/16
Fourth.......................... 22 1/2 18 3/4 24 25/32 19 5/16
</TABLE>
The Company paid a $.09 quarterly dividend in both 1996 and 1995. The
Company estimates its number of shareholders of Common Stock, $.10 par value, is
approximately 3,300 as of January 31, 1997, which includes approximately 430
shareholders of record and 2,870 shares held in "nominee" or "street" name.
F-27
<PAGE>
REPORT BY MANAGEMENT
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 judgments 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.
<TABLE>
<S> <C>
Richard L. Wellek Richard A. Nunemaker
President and Vice President, Finance and
Chief Executive Officer Chief Financial Officer
March 3, 1997
</TABLE>
F-28
<PAGE>
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying 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, appearing on pages
F-7 through F-11. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Varlen Corporation and
subsidiaries as of January 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
January 31, 1997, in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Chicago, Illinois
March 3, 1997
F-29
<PAGE>
OFFICERS
<TABLE>
<S> <C> <C>
RICHARD L. WELLEK, age 58 GEORGE W. HOFFMAN, age 56 VICKI L. CASMERE, age 39
President and Chief Executive Vice President (1990); Vice President, General
Officer (1983); Various President of Keystone Counsel and Secretary (1996);
Varlen Executive and Industries (1984); Executive Corporate Counsel of Caremark
Operational positions Vice President of Operations Inc. (1992-1996), Vice
(1968-1983); B.S. Industrial of Keystone Industries President (1994); B.S.
Management University of (1979-1984); B.S. Chemical Finance University of
Illinois Engineering University of Illinois; J.D. The John
Pittsburgh Marshall Law School
RAYMOND A. JEAN, age 54 RICHARD A. NUNEMAKER, age 48
Executive Vice President and Vice President, Finance and
Chief Operating Officer Chief Financial Officer
(1993); Group Vice President (1991); Vice President,
(1988-1992); B.S. Engineering Controller (1987); B.S.
Physics University of Maine; Accountancy; M.A.S.
MBA University of Chicago University of Illinois,
C.P.A.
</TABLE>
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.
F-30
<PAGE>
PROXY PROXY
VARLEN CORPORATION
BOARD OF DIRECTORS PROXY--ANNUAL MEETING OF STOCKHOLDERS--MAY 29, 1997
THE UNDERSIGNED hereby appoints RICHARD L. WELLEK, THEODORE A. RUPPERT and
RICHARD A. NUNEMAKER, with full power of substitution and revocation, as proxies
to vote all the stock outstanding in the name of the undersigned entitled to
vote at the Annual Meeting of Stockholders of Varlen Corporation to be held at
the Hyatt Lisle, 1400 Corporetum Drive, Lisle, Illinois 60532, on Wednesday, May
29, 1997, at 10:00 A.M. (local time) and at any adjournment or adjournments
thereof, with the same powers as the undersigned would possess if personally
present, as specified herein:
(Continued and to be DATED AND SIGNED on REVERSE SIDE)
<PAGE>
VARLEN CORPORATION
PLEASE MARK VOTE IN OVAL IN THE FOLLOWING MANNER USING DARK INK ONLY. /X/
Withheld For all nomi-
DIRECTORS For all from all nees except as
RECOMMEND nominees nominees noted below
1. Election of Directors for FOR ALL / / / / / /
a One Year Term: NOMINEES
Nominees: Ernest H. Lorch,
Richard L. Wellek, Greg A.
Rosenbaum, Theodore A. Ruppert,
Rudolph Grua, L. William Miles
and Joseph J. Ross.
* Withhold my vote for the following nominees:
- -----------------------------------------------
Comments:
A majority of such proxies as shall be present at the meeting (or if only one
shall be present then that one) may exercise all the power of the proxies
hereunder. The undersigned hereby revokes all proxies heretofore given with
respect to the voting of such stock at such Annual Meeting. The undersigned
hereby acknowledges receipt of the Company s Proxy Statement dated April 17,
1997, and of its Annual Report for the fiscal year ended January 31, 1997.
2. In their discretion, upon any other matter which may properly come before the
Annual Meeting or any adjournment or adjournments thereof.
THE PROXIES WILL VOTE AS INSTRUCTED HEREIN. IF NO CHOICE IS SPECIFIED,
PROXIES WILL VOTE FOR THE ELECTION OF ALL NOMINEES FOR DIRECTOR.
- ----------------------------------------------------------------
- ----------------------------------------------------------------
Signature(s)
Dated , 1997
----------------------------------------
Signature of Stockholder should correspond exactly with name as stenciled
hereon. When signing as an agent, attorney, executor, administrator, trustee,
guardian or corporate official, please give your full title as such. Each
joint owner or trustee should sign the proxy.
Please date, sign and return this Proxy in the enclosed envelope.
