<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:
/X/ Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/ / Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section240.14a-11(c) or
Section240.14a-12
VARLEN CORPORATION
- --------------------------------------------------------------------------------
(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:
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(2) Aggregate number of securities to which transaction applies:
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(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):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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/ / 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:
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(4) Date Filed:
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<PAGE>
VARLEN CORPORATION
55 SHUMAN BOULEVARD
P.O. BOX 3089
NAPERVILLE, ILLINOIS 60566-7089
--------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
MAY 27, 1998
-------------
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of Varlen
Corporation, a Delaware corporation (the "Company"), will be held at the
Radisson Hotel Lisle-Naperville, 3000 Warrenville Road, Lisle, Illinois 60532 on
Wednesday, May 27, 1998, at 10:00 A.M. (local time), for the following purposes:
1. To elect a Board of Directors.
2. To approve a proposal to amend the Company's Restated Certificate of
Incorporation to increase the authorized shares of Common Stock, par
value $.10 per share from 20,000,000 to 40,000,000.
3. To approve a proposal to adopt the Company's 1998 Long-Term Equity
Incentive Plan in the form approved by the Company's Board of Directors.
4. 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, 1998 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, 1998 is enclosed herewith.
By Order of the Board of Directors,
VICKI L. CASMERE,
SECRETARY
Dated: April 17, 1998
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 27, 1998
-------------
April 17, 1998
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 Radisson Hotel Lisle-Naperville, 3000
Warrenville Road, Lisle, Illinois 60532 on Wednesday, May 27, 1998, 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, 1998, you are entitled to vote at the meeting. 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.
In addition, the Company has retained D.F. King & Co., Inc. to assist in
soliciting proxies for a fee of not more than $5,000 plus reasonable
out-of-pocket expenses, which will be paid by the Company. 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, 1998, 13,382,157 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, 1998.
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.
<PAGE>
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 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 Proposal 1, "non-voted" shares will not be counted as a vote.
With respect to Proposals 2 and 3, "non-voted" shares will have the effect of a
vote against such proposals.
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 Bylaws 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, 1998(1)
----------------------------
NAME, AGE AND DIRECTOR NUMBER PERCENT
POSITION WITH COMPANY SINCE OF SHARES OF CLASS
- ---------------------------------------------------------------------- -------- ----------------- --------
<S> <C> <C> <C>
Ernest H. Lorch, 65 .................................................. 1984 7,732shares(2) 0.1%
Senior Chairman
Richard L. Wellek, 59 ................................................ 1983 155,542shares(3) 1.2%
Chairman and Chief Executive Officer
Raymond A. Jean, 55 .................................................. 1997 82,944shares(4) .6%
President and Chief Operating Officer
L. William Miles, 64 ................................................. 1993 2,893shares(2) *
Greg A. Rosenbaum, 45 ................................................ 1985 10,808shares(2) 0.1%
Joseph J. Ross, 52 ................................................... 1994 4,164shares(2) *
Theodore A. Ruppert, 67 .............................................. 1971 788,188shares(5) 5.9%
</TABLE>
- ------------------------
* The number of shares of Common Stock beneficially owned is less than .1% of
class.
(1) As of April 1, 1998, all directors, nominees and officers of the Company as
a group (11 persons) owned beneficially 1,119,299 shares of the Company's
Common Stock (8.2% of class), 339,760 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, shares
held by a sole trustee and shares held as a custodian) and 779,539 of which
were held subject to shared voting and dispositive power.
2
<PAGE>
(2) Held directly.
(3) Of such shares, 76,454 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 79,088 are deemed to be beneficially owned solely because of
the existence of currently exercisable options to acquire such shares.
(4) Of such shares, 6,000 are held directly, 75,624 are deemed to be
beneficially owned by Mr. Jean solely because of the existance of currently
exercisable options to acquire such shares and 1,320 are deemed to be
beneficially owned because they are held as a custodian for the benefit of
his daughter.
(5) Of such shares, 8,649 are held directly and 779,539 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 1990. 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 1990. Mr. Lorch is also
a director of Tyler Corporation, which is engaged in the information management
business primarily for county and city government and also operates in the
retail automotive parts business.
Mr. Wellek was elected Chairman of the Company in May 1997. He 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. Jean was elected President of the Company in May 1997. He was appointed
Executive Vice President and Chief Operating Officer in February 1993. Mr. Jean
joined the Company in 1988 as Group Vice President. Prior to joining the Company
he held a number of executive positions with Pneumo/Abex Corp., a subsidiary of
IC Industries, where his last position was as Group Vice President. Mr. Jean is
also a director of Lindberg Corporation, a commercial provider of heat treating.
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 subsidiary of American
Express Co., and 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 owns less than a 5% interest in McLaren/Hart.
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,
3
<PAGE>
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, 1998 ("1997"), the Board of
Directors held nine meetings. The Board has an Audit Committee consisting of
Messrs. Grua, Ross and Ruppert; a Compensation Committee consisting of Messrs.
Lorch, Miles and Rosenbaum and a Nominating and Organization Committee
consisting of Messrs. Ross, Lorch and Wellek. The primary function of the Audit
Committee, which during 1997 held two meetings, is to review the scope and
results of each year's annual independent audit, establish the scope and review
the results of the internal audit function and review the Company's internal
control procedures. The primary functions of the Compensation Committee, which
during 1997 held three meetings, are to determine the compensation of the
Company's executive officers and operating unit presidents and to administer the
Company's stock option and purchase plans. The primary function of the
Nominating and Organization Committee, which held one meeting during 1997, is to
advise the board on board membership, committee structure and Chief Executive
Officer succession. Each director attended more than 85% of the meetings of the
Board of Directors and committees on which he served during 1997.
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 of a majority of
nonemployee directors who are all 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. 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
4
<PAGE>
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.
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 -- An additional compensation opportunity is
directly correlated 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 financial objectives are not met, no consistency bonus is paid.
CONTINGENT STOCK AWARD -- As a result of a 1997 study by an independent
compensation consulting firm completed at the request of the Compensation
Committee, it was determined the long-term compensation for certain executives
needed to be enhanced for competitive reasons. The Compensation Committee and
the Board of Directors approved the implementation of a plan tied directly to
the improvement in the price of the Company's Common Stock over a targeted
period, usually five years.
STOCK OPTIONS -- This long-term compensation rewards management for
long-term strategic direction and enhancement of stockholder value. Options also
promote recruitment and retention of key management personnel by providing
meaningful incentives dependent upon successful corporate performance. Stock
options are awarded based upon an overall evaluation of each eligible employee.
Outstanding options held are not considered in the award of new options.
1993 DEFERRED INCENTIVE STOCK PURCHASE PLAN -- The "Stock 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, contingent stock, stock options and Stock Purchase Plan). The
compensation of the CEO serves as a model for this pay-for-performance program.
Sales and earnings for the 1997 fiscal year were the highest in Company history.
Net sales rose 27.5% to a record $522,254,000 from
5
<PAGE>
$409,475,000 in 1996. Net earnings increased 43.6% in 1997 to $25,651,000 or
$1.93 per diluted share-- both records. Earnings before interest, taxes,
depreciation and amortization was at a record $79,257,000 in 1997 or a 33%
increase over the $59,669,000 in 1996. All corporate financial goals were
exceeded. The Company's book value per share increased to an all time high of
$14.92 or 17% above the $12.73 in 1996 and $11.07 in 1995, after restatement for
the 1997 3 for 2 stock split in the form of a 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, 75% was objectively determined based upon return on
invested capital, which was 10.5% in 1997 compared to 9.6% in 1996. The balance
of the annual incentive, 25%, was based upon non-financial goals. Achievement of
these non-financial goals included strategic, organizational, and succession
planning. In addition, Mr. Wellek qualified for a long-term consistency bonus
based upon the Company's performance over a multi-year period. Base salary
adjustment for Mr. Wellek was made using data provided by independent
consultants and was based upon the Company's larger size and international
development, 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 believes that
compensation paid to its executives in 1998 will be affected by the limitation
on tax deductibility primarily due to the vesting of Common Stock purchases made
over the last five years under the Company's 1993 Deferred Incentive Stock
Purchase Plan. The Company annually reviews its compensation plans in the
context of the requirements for tax deductibility under the rules. The Company
intends that compensation realized upon the exercise of an option or SAR granted
under the Company's 1998 Long-Term Equity Incentive Plan (presented for
stockholder approval in this Proxy Statement) be regarded as "performance-based"
under Section 162(m) of the Internal Revenue Code and that such compensation be
deductible by the Company without regard to the limitation on tax deductibility
imposed by Section 162(m).
Respectfully submitted
Greg A. Rosenbaum (Chairman)
Ernest H. Lorch
L. William Miles
April 6, 1998
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 1997, based on salary and bonus earned during 1997.
<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 Chairman, CEO and 1997 $ 443,332 $ 15,000 $ 66,275(8) $105,677(3)
Director (12) 1996 405,828 307,582 14,850(11) 236,172(8) 95,783(3)
1995 382,092 288,751 13,613(11) 211,904(8) 101,515(3)
Raymond A. Jean President and COO 1997 290,992 12,000 39,765(9) 71,067(4)
(13)
1996 263,328 175,028 11,550(11) 130,744(9) 53,544(4)
1995 247,506 158,000 11,798(11) 113,115(9) 55,913(4)
George W. Hoffman Vice President 1997 198,880 5,250 26,510(10) 19,702(5)
1996 187,229 28,723 6,600(11) 26,510(10) 20,806(5)
1995 178,615 78,480 6,353(11) 26,510(10) 34,150(5)
Richard A. Nunemaker VP Finance, CFO 1997 184,667 6,750 26,510(10) 42,816(6)
1996 176,750 106,800 6,600(11) 85,621(10) 33,059(6)
1995 169,083 98,890 6,353(11) 77,403(10) 35,109(6)
Vicki L. Casmere VP, General 1997 141,667 3,000 0 20,000(7)
Counsel and 1996 112,566 45,000 3,300(11) 0 7,225(7)
Secretary (14) 1995 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 1997, 1996
and 1995, respectively.
(3) Consists of $15,200, $12,875 and $14,310 in Company contributions to the
Company's Profit Sharing and Retirement Savings Plan; $77,929, $58,491 and
$62,521 to the Company's Shadow 401(k) Plan; $0, $12,000 and $12,000 for
services as a director of the Company and $12,548, $12,417 and $12,684 in
other miscellaneous non-cash benefits in 1997, 1996 and 1995, respectively.
(4) Consists of $15,200, $12,875 and $14,310 in Company contributions to the
Company's Profit Sharing and Retirement Savings Plan; $42,296, $29,184 and
$30,653 to the Company's Shadow 401(k) Plan and $13,571, $11,485 and $10,950
in other miscellaneous non-cash benefits in 1997, 1996 and 1995,
respectively.
(5) Consists of $8,800, $6,403 and $14,310 in Company contributions to the
Company's Profit Sharing and Retirement Savings Plan; $3,707, $6,967 and
$6,306 to the Company's Shadow 401(k) Plan and $7,195, $7,436 and $13,534 in
other miscellaneous non-cash benefits in 1997, 1996 and 1995, respectively.
(6) Consists of $15,200, $12,875 and $14,310 in Company contributions to the
Company's Profit Sharing and Retirement Savings Plan; $20,722, $14,951 and
$15,790 to the Company's Shadow 401(k) Plan and $6,894, $5,233 and $5,009 in
other miscellaneous non-cash benefits in 1997, 1996 and 1995, respectively.
(7) Consists of $15,200 and $2,869 in Company contributions to the Company's
Profit Sharing and Retirement Savings Plan and $4,800 and $4,356 in other
miscellaneous non-cash benefits in 1997 and 1996, respectively.
(8) Includes $66,275 in non-cash compensation earned under the Stock Purchase
Plan in each of 1997, 1996 and 1995.
7
<PAGE>
(9) Includes $39,765 in non-cash compensation earned under the Stock Purchase
Plan in each of 1997, 1996 and 1995.
(10) Includes $26,510 in non-cash compensation earned under the Stock Purchase
Plan in each of 1997, 1996 and 1995.
(11) Restated for a 3 for 2 stock split in the form of a stock dividend in 1997.
(12) Mr. Wellek was elected Chairman in May 1997.
(13) Mr. Jean was elected President in May 1997.
(14) 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
1997.
<TABLE>
<CAPTION>
ESTIMATED FUTURE
PAYOUTS UNDER
NON-STOCK
PERFORMANCE OR PRICE-BASED 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
Stock Purchase Plan(3)(4)...................... 1997 68,062 April 30, 1998
Long-Term Consistency Bonus(7)................. 1997
Deferred Long-Term Incentive(8)................ 1997 April 7, 2002 $ 637,500
Raymond A. Jean
Stock Purchase Plan(3)(5)...................... 1997 40,837 April 30, 1998
Long-Term Consistency Bonus(7)................. 1997
Deferred Long-Term Incentive(8)................ 1997 April 7, 2002 425,000
George W. Hoffman
Stock Purchase Plan(3)(6)...................... 1997 27,225 April 30, 1998
Long-Term Consistency Bonus(7)................. 1997
Richard A. Nunemaker
Stock Purchase Plan(3)(6)...................... 1997 27,225 April 30, 1998
Long-Term Consistency Bonus(7)................. 1997
Deferred Long-Term Incentive(8)................ 1997 April 7, 2002 85,000
</TABLE>
- ------------------------
(1) These are Stock Purchase Plan rights which were granted on June 28, 1993 and
vest on June 28, 1998. These amounts were restated for a 3 for 2 stock split
in the form of a stock dividend in 1997.
(2) The final payment to acquire the Common Stock under the 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.
8
<PAGE>
(4) Compensation earned under the Stock Purchase Plan was $66,275 in 1997 and is
included in Long-Term Compensation in the Summary Compensation Table above.
(5) Compensation earned under the Stock Purchase Plan was $39,765 in 1997 and is
included in Long-Term Compensation in the Summary Compensation Table above.
(6) Compensation earned under the Stock Purchase Plan was $26,510 in 1997 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 1997 and paid in 1998 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.
(8) This deferred payment was granted in November of 1997 and is payable in
April of 2002 providing the executive is still an employee of the Company at
that time. The executive may, under certain circumstances, be entitled to a
pro-rata portion of this payment if he ceases to be an employee of the
Company prior to April of 2002.
DIRECTOR COMPENSATION
During 1997, the manner in which directors who are not employees of the
Company ("Nonemployee Directors") were paid was amended effective June 1, 1997.
Nonemployee Directors were previously paid $12,000 per year for their director
services which was increased to $18,000 per year effective June 1, 1997. The
Senior Chairman received $5,000 per year and each committee chairman received
$2,500 per year for serving in such capacity in addition to the director service
fee. Nonemployee Directors receive $750 per board of directors meeting attended
which increased to $1,000 effective June 1, 1997 ($250 per board of directors
meeting by telephone) and $750 per committee meeting attended which was
increased to $1,000 effective June 1, 1997 ($500 if the committee meeting is in
conjunction with a board of directors meeting). Nonemployee Directors also
receive an annual award of $12,000 of restricted Company Common Stock per year
granted as of the date of the Annual Meeting of Stockholders.
9
<PAGE>
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, 1998. The comparison assumes $100 was invested on January 31,
1993 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>
1993 $100.00 $100.00 $100.00
1994 $136.73 $112.83 $123.73
1995 $126.31 $113.43 $123.49
1996 $141.22 $157.23 $180.98
1997 $125.42 $198.63 $237.59
1998 $245.43 $252.06 $307.72
</TABLE>
10
<PAGE>
OPTION GRANTS DURING 1997
The following table provides information related to options granted to the
named executive officers during 1997:
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE
AT ASSUMED ANNUAL RATES OF
INDIVIDUAL GRANTS STOCK PRICE APPRECIATION
----------------------------------------------------------------------- FOR
NUMBER OF % OF TOTAL MARKET OPTION TERM(1)
SECURITIES OPTIONS GRANTED PRICE ON ---------------------------
UNDERLYING OPTIONS TO EMPLOYEES IN EXERCISE DATE OF EXPIRATION 0%
NAME GRANTED(2) 1996 PRICE(3) GRANT DATE -- 5% 10%
- ------------------------------ ------------------ --------------- -------- -------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Richard L. Wellek............. 15,000 13.0% $13.33 $13.33 04/07/07 $ 0 $125,747 $318,669
Raymond A. Jean............... 12,000 10.4 13.33 13.33 04/07/07 0 100,598 254,935
George W. Hoffman............. 5,250 4.5 13.33 13.33 04/07/07 0 44,012 111,534
Richard A. Nunemaker.......... 6,750 5.8 13.33 13.33 04/07/07 0 56,586 143,401
Vicki L. Casmere.............. 3,000 2.6 13.33 13.33 04/07/07 0 25,149 63,734
</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.
OPTION EXERCISES DURING 1997 AND FISCAL YEAR END OPTION VALUES
The following table provides information related to options exercised by the
named executive officers during 1997 and the number and value of options held at
fiscal year end. The Company does not have any stock appreciation rights as of
January 31, 1998.
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF SECURITIES IN-THE-MONEY
UNDERLYING UNEXERCISED OPTIONS AT FISCAL YEAR
SHARES OPTIONS AT FISCAL YEAR END END(1)
ACQUIRED ON VALUE -------------------------- ---------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------- ----------- ----------- ----------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Richard L. Wellek.............. 12,500 $ 230,188 123,054 40,855 $ 2,178,326 $ 546,605
Raymond A. Jean................ 0 0 66,377 32,674 1,133,408 416,354
George W. Hoffman.............. 10,612 126,595 28,829 17,245 463,733 221,335
Richard A. Nunemaker........... 9,990 213,797 19,412 18,745 288,503 238,555
Vicki L. Casmere............... 0 0 660 5,640 8,422 68,126
</TABLE>
- ------------------------
(1) The closing price for the Company's Common Stock as reported by the Nasdaq
National Market on January 31, 1998 was $24.81. Value is calculated on the
basis of the difference between the option exercise prices and $24.81
multiplied by the number of shares of Common Stock underlying the option.
11
<PAGE>
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.
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 $160,000 in
calendar 1997 and $160,000 in calendar 1998. Under the SERP Plan, bonuses are
attributed to the year they are earned instead of the
12
<PAGE>
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.............................................. $ 160,000 $ $ 30 years
Raymond A. Jean................................................ 160,000 10 years
George W. Hoffman.............................................. 160,000 18 years
Richard A. Nunemaker........................................... 160,000 12 years
Vicki L. Casmere............................................... 160,000 1 Year
</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
($9,500 in calendar 1996 and 1997 and $10,000 in 1998). 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 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 1997),
the limit on covered compensation ($160,000 in calendar 1997), 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
13
<PAGE>
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
950,000............................................ 475,000 475,000 475,000 475,000
1,000,000........................................... 500,000 500,000 500,000 500,000
</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.
14
<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, 1998, 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>
Lazard Freres & Co. LLC................................................................... 849,270 6.4%
30 Rockefeller Plaza
New York, New York 10020
Berenice T. Ruppert, Richard W. Ruppert and Theodore A. Ruppert, as trustees.............. 779,539(1) 5.8%
One Barclay Woods Drive
St. Louis, Missouri 63124
The Prudential Insurance Company of America............................................... 736,355 5.5%
751 Broad Street
Newark, New Jersey 07102
</TABLE>
<TABLE>
<CAPTION>
NUMBER
OF SHARES
BENEFICIALLY PERCENT OF
NAME OF EXECUTIVE OFFICER OWNED CLASS
- ---------------------------------------------------------------------------------------- ------------ -----------
<S> <C> <C>
Richard L. Wellek....................................................................... 155,542(2) 1.2%
Raymond A. Jean......................................................................... 82,944(3) 0.6%
George W. Hoffman....................................................................... 35,970(4) 0.3%
Richard A. Nunemaker.................................................................... 26,245(5) 0.2%
Vicki L. Casmere........................................................................ 1,920(6) *
</TABLE>
- ------------------------
* The number of shares of Common Stock beneficially owned is less than .1% of
class.
(1) 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 8,649 shares held directly by Theodore A. Ruppert.
(2) Of such shares, 76,454 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 79,088 are deemed to be beneficially owned solely because of
his ownership of currently exercisable options to acquire such shares.
(3) Of such shares, 6,000 are held directly, 75,624 are deemed to be
beneficially owned solely because of his ownership of currently exercisable
options to acquire such shares and 1,320 are deemed to be beneficially owned
because they are held as a custodian for the benefit of his daughter.
(4) Of such shares, 5,049 are held directly and 30,921 are deemed to be
beneficially owned solely because of his ownership of currently exercisable
options to acquire such shares.
(5) Of such shares, 1,441 are held directly and 24,804 are deemed to be
beneficially owned solely because of his ownership of currently exercisable
options to acquire such shares.
(6) Deemed to be beneficially owned solely because of her ownership of currently
exercisable options to acquire such shares.
15
<PAGE>
PROPOSAL NO. 2--INCREASE THE NUMBER OF AUTHORIZED
SHARES OF THE COMPANY'S COMMON STOCK
The Board of Directors, by unanimous vote, has approved a proposal to amend
Article FOURTH of the Restated Certificate of Incorporation of the Company to
increase the number of shares of Common Stock, par value $.10 per share, which
the Company shall have the authority to issue from 20,000,000 shares to
40,000,000 shares.
Adoption of the proposal to increase the authorized number of shares of
Common Stock requires the affirmative vote of a majority of the outstanding
shares of Common Stock of the Company.
If the proposal is approved, the Board of Directors, without further
approval of the Company's stockholders, would be permitted to issue an
additional 20,000,000 shares of the Company's Common Stock from time to time as
the Board of Directors shall determine, and for such consideration as the Board
of Directors shall establish. The Board of Directors considers it prudent and in
the best interests of the Company and its stockholders that a substantial number
of shares of Common Stock are authorized by the Company's Certificate of
Incorporation and are available for issuance in order to provide the Company
with financing and business flexibility, such as in declaring stock dividends
and stock splits, structuring possible acquisitions of other businesses and
enabling the Company to raise additional capital if needed by issuing stock or
debt securities convertible into stock. At this time, the Company is not
considering any transaction which would require the issuance of any of the
proposed additional shares of Common Stock. There are currently no outstanding
shares of its authorized preferred stock. Exhibit A to this Proxy Statement sets
forth the relevant text of the first paragraph of Article Fourth of the
Certificate of Incorporation of the Company as presently constituted and as
proposed to be amended.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THIS PROPOSAL. IT IS THE
INTENTION OF THE PERSONS NAMED IN THE ACCOMPANYING FORM OF PROXY TO VOTE THE
SHARES REPRESENTED THEREBY IN FAVOR OF THE PROPOSAL TO AMEND THE COMPANY'S
RESTATED CERTIFICATE OF INCORPORATION UNLESS OTHERWISE INSTRUCTED IN THE PROXY.
PROPOSAL NO. 3--ADOPTION OF THE 1998 LONG-TERM EQUITY
INCENTIVE PLAN
The Board of Directors adopted the Varlen Corporation 1998 Long-Term Equity
Incentive Plan (the "1998 Plan") on February 2, 1998. The purpose and terms of
the 1998 Plan are described generally below, but that description is qualified
in its entirety by reference to Exhibit B hereto, to which reference is made for
a complete description of the 1998 Plan.
GENERAL
The Varlen Corporation 1998 Long-Term Equity Incentive Plan (the "1998
Plan"), which the Company has adopted subject to stockholder approval effective
June 1, 1998, provides for grants of stock options, stock appreciation rights
("SARs"), restricted stock, performance awards and any combination of the
foregoing to employees, officers and directors of, and certain other individuals
who perform significant services for, the Company and its subsidiaries. The
purpose of the 1998 Plan is to provide such individuals with incentives to
maximize stockholder value and otherwise contribute to the success of the
Company and to enable the Company to attract, retain and reward the best
available persons for positions of substantial responsibility.
The Company intends to grant such individuals equity incentives primarily
pursuant to the 1998 Plan, with the goal of eventually replacing the 1989
Incentive Stock Option Plan (the "1989 Plan"), the 1993
16
<PAGE>
Long-Term Equity Incentive Stock Option Plan (the "1993 Plan"), and the 1993
Directors Incentive Stock Grant Plan (the "1993 Directors Plan"). Under the 1989
Plan, all of the shares of Common Stock available for grant pursuant to their
terms will have been awarded by the date of the Annual Meeting of Stockholders.
The 1993 Plan and the 1993 Directors Plan will have shares remaining available
for grant of less than approximately .5% of the Common Stock outstanding as of
the date of the Annual Meeting of Stockholders. The Company intends for the 1989
and 1993 Plans and the 1993 Directors Plan to remain in effect, but plans to
utilize them for purposes of governing outstanding awards granted pursuant to
their terms and utilizing the remaining shares under the 1993 Plan and the 1993
Directors Plan for grants. The Company will make new awards if and to the extent
shares of Common Stock become available for reissuance under the 1993 and 1993
Director Plans (e.g., due to forfeiture of awards by the original grantees),
which the Company expects to result in a DE MINIMIS number of additional awards,
if any.
The 1998 Plan will be administered by the Compensation Committee. As grants
to be awarded under the 1998 Plan will be made entirely in the discretion of the
Compensation Committee, the recipients, amounts and values of future benefits to
be received pursuant to the Plan are not determinable.
A total of 500,000 shares of Common Stock, representing 3.75% of currently
outstanding Common Stock, will be available for issuance pursuant to the 1998
Plan, subject to adjustment in the event of a reorganization, stock split,
merger or similar change in the corporate structure of the Company or the
outstanding shares of Common Stock. Such shares may be, in whole or in part,
authorized and unissued or held as treasury shares. As of April 1, 1998, the
closing price of the Common Stock as reported on the Nasdaq Stock Market was
$37.875 per share.
The following is a summary of the terms of the 1998 Plan, which is qualified
in its entirety by reference to the 1998 Plan, a copy of which is attached as
Appendix A to this Proxy Statement.
TERMS OF THE 1998 PLAN
ELIGIBILITY. Directors and officers (whether or not employees) and
employees of and individuals performing significant services for the Company and
its subsidiaries, in each case as selected by the Compensation Committee, will
be eligible to receive grants pursuant to the 1998 Plan, except that only
employees may receive grants of incentive stock options. As of the date of this
Proxy Statement, there were approximately 75 employees and directors expected to
be eligible to participate in the 1998 Plan.
STOCK OPTIONS. Pursuant to the 1998 Plan, the Compensation Committee may
award grants of incentive stock options conforming to the provisions of Section
422 of the Internal Revenue Code of 1986, as amended (the "Code") ("incentive
options"), and other stock options ("non-qualified options"), subject to a
maximum award to any one grantee in any calendar year of options to purchase
Common Stock equal to 10% of the total number of shares authorized under the
Plan, and to a maximum fair market value of $100,000 of incentive options first
exercisable in any calendar year.
The exercise price of any option will be determined by the Compensation
Committee in its discretion, provided that the exercise price of any option may
not be less than 100% of the fair market value of a share of Common Stock on the
date of grant of the option, and the exercise price of an incentive option
awarded to a person who owns stock constituting more than 10% of the Company's
voting power may not be less than 110% of such fair market value on such date.
Unless otherwise determined by the Compensation Committee, the exercise
price of any option may be paid in cash, by delivery of shares of Common Stock
with a fair market value equal to the exercise price,
17
<PAGE>
by simultaneous sale through a broker of shares of Common Stock acquired upon
exercise, and/or by having the Company withhold shares of Common Stock otherwise
issuable upon exercise.
The Compensation Committee may in its discretion grant the participant a
"reload option" to purchase a number of shares of Common Stock equal to the
number so tendered or withheld if a participant elects to tender or withhold
shares of Common Stock in payment of any part of an option's exercise price. The
reload option may also include, if the Compensation Committee so chooses, the
right to purchase a number of shares of Common Stock equal to the number
tendered or withheld in satisfaction of any of the Company's tax withholding
requirements in connection with the exercise of the original option. The terms
of each reload option will be the same as those of the original exercised
option, except that the grant date will be the date of exercise of the original
option, and the exercise price will be the fair market value of the Common Stock
on the date of exercise of the original option.
The term of each option will be established by the Compensation Committee,
subject to a maximum term of ten years from the date of grant in the case of any
option and of five years from the date of grant in the case of an incentive
option granted to a person who owns stock constituting more than 10% of the
voting power of the Company. In addition, the 1998 Plan provides that all
options generally cease vesting on the date on which a grantee ceases to be a
director, officer or employee of, or to otherwise perform services for, the
Company or its subsidiaries. Options generally terminate 90 days after such
date, so long as the grantee does not compete with the Company during the 90-day
period.
There are, however, certain exceptions depending upon the circumstances of
cessation. In the case of a grantee's death or disability, all of the grantee's
options become fully vested and exercisable and remain so for one year after the
date of death or disability. In the event of retirement, a grantee's options may
become fully vested and exercisable in the discretion of the Compensation
Committee. Upon termination for cause, all options terminate immediately. And if
there is a change in control of the Company and a grantee is terminated from
being a director, officer or employee of, or from otherwise providing services
for, the Company and its subsidiaries within one year thereafter, all of the
grantee's options become fully vested and exercisable and remain so for one year
after the date of termination.
SARS. The Compensation Committee may grant SARs alone or in tandem with
stock options subject to such terms and conditions as it determines pursuant to
the 1998 Plan. SARs granted in tandem with options become exercisable only when,
to the extent and on the conditions that the related options are exercisable,
and they expire at the same time the related options expire. The exercise of an
option results in the immediate forfeiture of any related SAR to the extent the
option is exercised, and the exercise of an SAR results in the immediate
forfeiture of any related option to the extent the SAR is exercised.
Upon exercise of an SAR, the grantee will receive an amount in cash and/or
shares of Common Stock or other Company securities equal to the difference
between the fair market value of a share of Common Stock on the date of exercise
and the exercise price of the SAR or, in the case of an SAR granted in tandem
with options, the option to which the SAR relates, multiplied by the number of
shares as to which the SAR is exercised.
RESTRICTED STOCK. Under the 1998 Plan, the Compensation Committee may award
restricted stock subject to such conditions and restrictions, and for such
duration (which shall generally be at least six months), as it determines in its
discretion. A grantee will be required to pay the Company at least the aggregate
par value of any shares of restricted stock within ten days of the date of
grant, unless such shares are treasury shares. Except as otherwise provided by
the Compensation Committee, all restrictions on a grantee's restricted stock
will lapse at such time as the grantee ceases to be a director, officer or
employee
18
<PAGE>
of, or to otherwise perform services for, the Company and its subsidiaries, if
such cessation occurs due to a termination within one year after a change in
control of the Company or due to death, disability or (in the discretion of the
Compensation Committee) retirement. If cessation of employment or service occurs
for any other reason, all of a grantee's restricted stock as to which the
applicable restrictions have not lapsed will be forfeited immediately.
PERFORMANCE AWARDS. Pursuant to the 1998 Plan, the Compensation Committee
may grant performance awards contingent upon achievement by the grantee, the
Company and/or its subsidiaries or divisions of set goals and objectives
regarding specified performance criteria, such as return on equity, over a
specified performance cycle, in each case as designated by the Compensation
Committee. Performance awards may include specific dollar-value target awards,
performance units, the value of which is established by the Compensation
Committee at the time of grant, and/or performance shares, the value of which is
equal to the fair market value of a share of Common Stock on the date of grant.
The value of a performance award may be fixed or fluctuate on the basis of
specified performance criteria. A performance award may be paid out in cash
and/or shares of Common Stock or other Company securities.
Except as otherwise provided by the Compensation Committee, if a grantee
ceases to be a director, officer or employee of, or to otherwise perform
services for, the Company and its subsidiaries prior to completion of a
performance cycle, and if such cessation occurs due to termination within one
year after a change in control of the Company or due to death, disability or
retirement, the grantee will receive the portion of the performance award
payable to him or her based on achievement of the applicable performance
criteria over the elapsed portion of the performance cycle. If cessation of
employment or service occurs for any other reason prior to completion of a
performance cycle, the grantee will become ineligible to receive any portion of
a performance award.
VESTING. WITHHOLDING TAXES AND TRANSFERABILITY OF ALL AWARDS. The terms and
conditions of each award made under the 1998 Plan, including vesting
requirements, will be set forth consistent with the Plan in a written agreement
with the grantee. Unless the Compensation Committee determines otherwise, and in
certain other circumstances upon a participant's termination of employment or
performance of services for the Company and its subsidiaries as described above,
no award under the 1998 Plan may vest and become exercisable within six months
of the date of grant.
Unless otherwise determined by the Compensation Committee, a participant may
elect to deliver shares of Common Stock, or to have the Company withhold shares
of Common Stock otherwise issuable upon exercise or an option or SAR or grant or
vesting of restricted stock, in order to satisfy the Company's withholding
obligations in connection with any such exercise, grant or vesting.
Unless the Compensation Committee determines otherwise, no award made
pursuant to the 1998 Plan will be transferable other than by will or the laws of
descent and distribution or pursuant to a qualified domestic relations order,
and each award may be exercised only by the grantee or his or her guardian or
legal representative.
AMENDMENT AND TERMINATION OF THE 1998 PLAN. The Board may amend or
terminate the 1998 Plan in its discretion, except that no amendment will become
effective without prior approval of the Company's stockholders if such approval
is necessary for continued compliance with the performance-based compensation
exception of Section 162(m) of the Code or any stock exchange listing
requirements. Furthermore, any termination may not materially and adversely
affect any outstanding rights or obligations under the 1998 Plan without the
affected participant's consent.
19
<PAGE>
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE 1998 PLAN
The following discussion is intended only as a brief summary of the federal
income tax rules relevant to options or shares issued under the 1998 Plan, as
based upon the Code as currently in effect. These rules are highly technical and
subject to change in the future. Because federal income tax consequences will
vary as a result of individual circumstances, grantees should consult their
personal tax advisors with respect to the tax consequences associated with stock
options. Moreover, the following summary relates only to grantees' federal
income tax treatment, and the state, local and foreign tax consequences may be
substantially different.
NON-QUALIFIED OPTIONS. A grantee does not recognize any taxable income, and
the Company is not entitled to a deduction, upon the grant of a non-qualified
option. Upon the exercise of a non-qualified option, the grantee recognizes
ordinary income (subject to wage and employment tax withholding) equal to the
excess of the fair market value of the Common Stock acquired over the option
exercise price. However, in the case of a person subject to the short swing
trading restrictions of Section 16(b) of the Securities Exchange Act of 1934, as
amended, whose grant is exempted from matching thereunder pursuant to the
six-month holding provision of Rule 16b-3(d)(3) (a"16b-3(d)(3) Person"), income
is recognized, and such excess is determined by using the fair market value on
the later of the date of exercise and the date six months after the option grant
date unless such grantee elects to be taxed based on the fair market value of
the Company's Common Stock on the date of exercise by filing an election with
the Internal Revenue Service within 30 days after the exercise date to recognize
income on the exercise date (a "Section 83(b) Election"). A grantee's basis in
the Common Stock received is equal to such Common Stock's fair market value on
the date of exercise (or on the date six months after the option grant date, if
later, in the case on a grantee who is a 16b-3(d)(3) Person and who makes no
such Section 83(b) Election). The Company is entitled to a deduction equal to
the compensation taxable to the grantee.
If a grantee sells Common Stock acquired pursuant to the exercise of a
non-qualified option, such grantee will recognize capital gain or loss equal to
the difference between the selling price of the Common Stock and the grantee's
basis in the Common Stock. Such capital gain or loss is long- or short-term,
depending on whether the grantee has held the Common Stock for more than one
year. In the case of a grantee who is a 16b-3(d)(3) Person and who does not make
a Section 83(b) Election, any such capital gain will be short term unless the
Common Stock has been held for more than one year after the later of the
exercise date or the date six months after the option grant date. The Company is
not entitled to any deduction with respect to any capital gain recognized by the
grantee.
Capital losses on the sale of such Common Stock may be used to offset
capital gains. The net capital gain of an individual taxpayer is subject to a
maximum tax rate of 28% for capital assets held for more than one year. The
maximum rate is reduced to 20% for capital assets held more than 18 months. If
capital losses exceed capital gains, then up to $3,000 of the excess losses may
be deducted from ordinary income. Remaining capital losses may be carried
forward to future tax years.
INCENTIVE OPTIONS. An optionee does not recognize taxable income on the
grant or exercise of an incentive option. However, the excess of the Common
Stock's fair market value on the exercise date (the fair market value on the
exercise date or six months after the option grant date, whichever is later, is
likely to govern in the case of a 16b-3(d)(3) Person) over the option exercise
price will be included in the grantee's alternative minimum taxable income and
thereby may subject the grantee to an alternative minimum tax. Such alternative
minimum tax may be payable even though the grantee receives no cash upon the
exercise of his or her incentive option with which to pay such tax. Upon the
disposition of shares of Common Stock acquired pursuant to the exercise of an
incentive option (i) more than one year after the
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<PAGE>
date of exercise, and (ii) more than two years after the grant date (the
"Required Holding Periods"), the grantee recognizes long-term capital gain or
loss, as the case may be, measured by the difference between the Common Stock's
selling price and the exercise price. The Company is not entitled to any tax
deduction by reason of the grant or exercise of an incentive option, or a
disposition of stock received upon the exercise of an incentive option after the
Required Holding Periods have been satisfied.
If a grantee disposes of the shares of Common Stock acquired pursuant to the
exercise of an incentive option before the expiration of the Required Holding
Periods (a "Disqualifying Disposition"), the difference between the exercise
price of such shares and the lesser of (i) the fair market value of such shares
upon the date of exercise (the fair market value on the exercise date or six
months after the option grant date, whichever is later, is likely to govern in
the case of a 16b-3(d)(3) Person) or (ii) the selling price, will constitute
compensation taxable to the grantee as ordinary income. The Company is allowed a
corresponding tax deduction equal to the amount of compensation taxable to the
grantee. If the selling price of the Common Stock exceeds the fair market value
on the exercise date (or six months after the option grant date, if later, in
the case of a 16b-3(d)(3) Person), the excess will be taxable to the grantee as
capital gain (long-term or short-term, depending upon whether the grantee held
the Common Stock for more than one year). The Company is not allowed a deduction
with respect to any such capital gain recognized by the grantee.
USE OF SHARES TO PAY OPTION PRICE. If a grantee delivers previously
acquired shares of Common Stock, however acquired, in payment of all or any part
of the exercise price of a non-qualified option, the grantee will not, as a
result of such delivery, be required to recognize as taxable income or loss any
appreciation or depreciation in the value of the previously acquired shares
after their acquisition date. The grantee's tax basis in, and holding period
for, the previously acquired shares surrendered carries over to an equal number
of the option shares received on a share-for-share basis. The fair market value
of the shares received in excess of the shares surrendered constitutes
compensation taxable to the grantee as ordinary income (reduced by any portion
of the option price paid other than by delivering previously acquired shares).
Such income is recognized and such fair market value is determined on the date
of exercise, except in the case of 16b-3(d)(3) Persons as discussed above. The
tax basis for such shares is equal to their fair market value as so determined,
and such shares' holding period begins on the date on which the fair market
value of such shares is determined. The Company is entitled to a tax deduction
equal to the compensation recognized by the grantee.
If a grantee delivers previously acquired Common Stock (other than Common
Stock acquired upon exercise of an incentive option and not held for the
Required Holding Periods) in payment of all or part of the option price of an
incentive option, the grantee will not be required to recognize as taxable
income or loss any appreciation or depreciation in the value of the previously
acquired Common Stock after its acquisition date. The grantee's tax basis in,
and holding period (for capital gain, but not Disqualifying Disposition,
purposes) for the previously acquired Common Stock surrendered carries over to
an equal number of the option shares received on a share-for-share basis. Shares
received in excess of the shares surrendered have a tax basis equal to the
amount paid (if any) in excess of the previously acquired shares used to pay the
exercise price, and such shares' holding period will begin on the date of
exercise (with the possible exception of 16b-3(d)(3) Persons). Proposed
regulations provide that when an incentive option is exercised using previously
acquired Common Stock, a later Disqualifying Disposition of the shares received
will be deemed to have been a disposition of the shares having the lowest basis
first.
If a grantee pays the exercise price of an incentive option in whole or in
part with previously acquired Common Stock that was acquired upon the exercise
of an incentive option and that has not been held for the Required Holding
Periods, the grantee will recognize ordinary income (but not capital gain) under
the
21
<PAGE>
rules applicable to Disqualifying Dispositions. The Company will be entitled to
a corresponding deduction. The grantee's basis in the shares received in
exchange for the shares surrendered will be increased by the amount of ordinary
income the grantee recognizes.
ONE MILLION DOLLAR COMPENSATION LIMIT. The Revenue Reconciliation Act of
1993 limits the annual deduction a publicly held company may take for
compensation paid to its chief executive officer or any of its four other
highest compensated officers in excess of $1,000,000 per year, excluding for
this purpose compensation that is "performance-based" within the meaning of Code
Section 162(m). The Company intends that compensation realized upon the exercise
of an option or SAR granted under the 1998 Plan be regarded as
"performance-based" under Code Section 162(m) and that such compensation be
deductible without regard to the limits imposed by Code Section 162(m) on
compensation that is not performance based.
VOTE REQUIRED
The affirmative vote of a majority of the votes cast by the holders of
shares of Common Stock represented in person or by proxy at the meeting is
required for approval of the 1998 Plan. Approval of the 1998 Plan is required
for shares of Common Stock issued pursuant to the 1998 Plan to be listed for
trading on the Nasdaq Stock Market and for grants of options and SARs made
pursuant to the 1998 Plan to qualify as performance-based compensation
deductible by the Company without limitation under Section 162(m) of the Code.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THIS PROPOSAL. IT IS THE
INTENTION OF THE PERSONS NAMED IN THE ACCOMPANYING FORM OF PROXY TO VOTE THE
SHARES REPRESENTED THEREBY IN FAVOR OF RATIFICATION AND APPROVAL OF THE PLAN
UNLESS OTHERWISE INSTRUCTED IN THE PROXY.
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, 1999. 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.
22
<PAGE>
PROPOSALS OF STOCKHOLDERS
Proposals of stockholders intended to be presented at the 1999 Annual
Meeting of Stockholders must be received at the Company's executive offices on
or before December 18, 1998 for inclusion in the Company's Proxy Statement with
respect to such meeting.
VARLEN CORPORATION
By RICHARD L. WELLEK
Chairman 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, 1998, filed with the Securities and Exchange Commission, may be
obtained without charge by any stockholder of the Company of record as of April
1, 1998 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.
23
<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>
1997* 1996* 1995* 1994* 1993*
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net sales............................................ $ 522,254 $ 409,475 $ 386,987 $ 341,521 $ 291,908
---------- ---------- ---------- ---------- ----------
Earnings before income taxes......................... 45,481 31,831 34,706 25,854 18,723
Income tax expense................................... 19,830 13,974 15,097 11,092 7,957
---------- ---------- ---------- ---------- ----------
Net earnings......................................... $ 25,651 $ 17,857 $ 19,609 $ 14,762 $ 10,766
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
- -----------------------------------------------------------------------------------------------------------------
Gross profit as a percent of sales................... 24.8% 24.5% 25.0% 23.7% 24.0%
Net earnings as a percent of sales................... 4.9% 4.4% 5.1% 4.3% 3.7%
- -----------------------------------------------------------------------------------------------------------------
Effective tax rate................................... 43.6% 43.9% 43.5% 42.9% 42.5%
- -----------------------------------------------------------------------------------------------------------------
Per share data:
Basic.............................................. $ 2.41 $ 2.06 $ 2.21 $ 1.68 $ 1.23
Diluted............................................ 1.93 1.51 1.62 1.28 1.05
Cash dividends declared.............................. 0.24 0.24 0.23 0.22 0.22
- -----------------------------------------------------------------------------------------------------------------
Weighted average number of shares--basic............. 10,653 8,677 8,864 8,811 8,740
Weighted average number of shares--diluted........... 13,755 13,617 13,794 13,679 12,055
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
* The per share data and weighted average number of shares outstanding reflect
the new presentation of earnings per share, a 3 for 2 stock split effected in
the form of a stock dividend in 1997 and 10% stock dividends in both 1996 and
1995.
F-1
<PAGE>
VARLEN CORPORATION AND SUBSIDIARIES
SUMMARY OF FINANCIAL CONDITION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1997* 1996* 1995* 1994* 1993*
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Total assets......................................... $ 419,101 $ 393,878 $ 230,874 $ 220,186 $ 186,264
Working capital...................................... 74,024 69,461 67,044 57,713 49,046
Ratios:
Current assets to current liabilities............ 2.0/1 2.1/1 2.5/1 2.1/1 2.4/1
Average inventory turnover....................... 6.9 6.8 7.2 6.7 6.1
Average accounts receivable turnover............. 7.9 7.9 8.4 8.2 8.1
- -----------------------------------------------------------------------------------------------------------------
Net property, plant and equipment.................... $ 124,180 $ 124,580 $ 69,675 $ 59,636 $ 52,867
Capital expenditures................................. 18,776 18,193 23,427 14,701 11,240
Depreciation......................................... 19,136 15,373 11,819 11,885 10,295
- -----------------------------------------------------------------------------------------------------------------
Debt:
Senior debt........................................ $ 104,910 $ 117,626 $ 4,485 $ 3,855 $ 3,820
Senior debt as a percent of total capitalization... 34.5% 39.7% 2.6% 2.5% 2.8%
Total debt......................................... $ 104,910 $ 186,626 $ 73,485 $ 72,855 $ 72,820
Total debt as a percent of total capitalization.... 34.5% 62.9% 42.9% 48.0% 53.4%
- -----------------------------------------------------------------------------------------------------------------
Stockholders' equity................................. $ 198,792 $ 109,986 $ 97,953 $ 79,031 $ 63,644
Stockholders' equity per share....................... 14.92 12.73 11.07 8.95 7.23
Return on average stockholders' equity............... 17.2% 17.1% 21.4% 20.5% 18.0%
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
* The per share data and weighted average number of shares outstanding reflect
the new presentation of earnings per share, a 3 for 2 stock split effected in
the form of a stock dividend in 1997 and 10% stock dividends in both 1996 and
1995.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Year Ended January 31, 1998 (1997) as Compared to the Year Ended January 31,
1997 (1996).
OVERVIEW
The Company designs, manufactures and markets products used in the
manufacture of transportation equipment (Transportation Products segment) and
petroleum analysis equipment (Petroleum Analyzers segment, previously named
Analytical Instruments segment). 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 1997 were $522.3 million, up $112.8 million
or 27.5% from sales of $409.5 million in 1996. Sales increased in the
transportation products segment as a result of increased demand, broader product
offerings, and acquisitions while sales in the petroleum analyzer segment
declined primarily as a result of the disposition of a non-core business in mid
1996.
Net earnings for the year were $25.7 million up 43.6% from $17.9 million in
1996. Diluted earnings per share were $1.93 in 1997 up 27.8% from the $1.51 per
share in the prior year. Earnings per share increased by a lower percentage than
net earnings as a result of higher non-convertible debt interest in 1997.
Operating profit increased in the transportation products segment but was lower
in the petroleum analyzer segment following the trend in revenues.
TRANSPORTATION PRODUCTS
Transportation products revenues increased 33.1% to $484.4 million, as
compared to $364.0 million in 1996. The revenue increase resulted from improved
sales to all of the principal served industries, which had particularly strong
demand in the second half of 1997. Sales of heavy-duty truck and trailer
products increased as a result of increased industry demand as well as increased
company product content per truck produced by the industry. The increased
content resulted from sales of added products to existing as well as new
customers. Revenues from sales of railroad products increased as a result of
acquisitions, while revenues at existing businesses were flat. During 1997, the
Company benefited from a large domestic acquisition made in mid 1996 which
contributed an entire year's revenue in 1997 as well as several smaller
international acquisitions. Sales of automotive components increased as a result
of higher customer demand for light truck components as well as introduction in
mid year of a new product, the one-way clutch, used in automotive transmissions.
Operating profit in 1997 was $58.5 million (12.1% of segment sales) compared
to $37.4 million (10.3% of segment sales) during 1996. Following the trend in
sales, operating profit increased in all major industry product areas. Operating
profit on heavy-duty truck and trailer products increased more rapidly than
sales as a result of leverage on the fixed cost component in this area and cost
reductions. Automotive components operating profit increased during the year but
at a slower rate than revenues as development costs for prospective models of
the one-way clutch product were expensed without the benefit of related
revenues. Operating profit of railroad components followed the trend of sales
with acquisitions accounting for the entire earnings increase. The effects of
foreign currency exchange rates were not material.
PETROLEUM ANALYZERS
Sales in the petroleum analyzers segment for 1997 decreased to $37.9 million
compared to $45.5 million in 1996. The decrease in revenues in this segment
occurred as a result of the sale of a non-strategic business in July 1996 which
accounted for $8.6 million of the decrease. The petroleum analyzer business had
slightly higher revenues for the full year despite weaker sales in the first
half of the year and an 8% negative impact as a result of foreign currency
exchange rates. In the fourth quarter of 1997, sales of petroleum analyzers
exceeded the prior year quarter as a result of higher customer demand.
Operating profit for the petroleum analyzers segment decreased to $4.7
million (12.5% of segment sales) from $9.8 million (21.5% of segment sales) in
the prior year's period. Operating profit declined in 1997 as a result of the
$3.7 million pre-tax gain on the sale of a non-strategic business in July 1996
and $1.2 million of operating profit from this business prior to sale. Operating
profit of the remaining
F-3
<PAGE>
petroleum analyzer business was slightly lower in 1997 than the prior year as a
result of $.5 million of negative effects of foreign currency translation
adjustments.
COST OF SALES
Consolidated gross margin was 24.8% in 1997 compared to 24.5% in 1996. Gross
margin increased in both business segments. In the transportation segment, the
increase was spread across all major product lines. The increase resulted from
improved throughput in the second half of the year, integration of prior year
acquisitions, and cost reductions, including selected reductions in raw material
costs. Selling prices in this segment were flat to slightly down. In the
petroleum analyzers segment, the gross margin improvement resulted from the sale
of a non-core business in 1996. The gross margin of remaining products was
unchanged.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses in 1997 were $74.9 million
(14.3% of sales) compared to $63.6 million (15.5% of sales) in 1996. The
increase in 1997 expenditures was the result of acquisitions as well as higher
expenses to support significantly increased revenues. As a percent of sales,
selling, general and administrative expenses declined in the transportation
segment to provide operating profit leverage from higher sales. At the petroleum
analyzers segment, selling, general and administrative expenses increased as a
percent of sales primarily due to the sale in 1996 of a non-core business.
INTEREST EXPENSE AND INCOME TAXES
Gross interest expense for 1997 was $9.5 million compared to $9.4 million
for the prior year's period. Interest on non-convertible senior debt increased
in 1997 as a higher senior debt was outstanding during 1997 than in 1996 due to
a significant acquisition in mid-1996. Interest on convertible subordinated debt
declined in 1997 due to conversion of this debt to equity during the third
quarter of 1997. Interest rates were unchanged year to year on average. Interest
income declined in 1997 due to lower temporary investments.
Income taxes were provided at an effective rate of 43.6% in 1997 and 43.9%
in 1996. The higher than statutory federal rate reflects non-deductible goodwill
amortization, higher taxes on foreign operations, and state income taxes as well
as the effects of a disposition in 1996.
FOURTH QUARTER
Sales for the fourth quarter of 1997 were $137.0 million, up from the $106.6
million reported in 1996. Sales were up substantially in the transportation
segment reflecting strength in all served industries. In the petroleum analyzers
segment, sales also increased reflecting improved customer demand, especially
outside of the United States.
Net earnings were $7.5 million or $.54 per share on a diluted basis in
1997's fourth quarter compared to $3.0 million or $.27 per share in the year-ago
period. Operating profit was up significantly in the transportation products
segment reflecting improvements in all business areas. In the petroleum
analyzers segment, operating profit also increased reflecting higher sales. The
effective income tax rate in the fourth quarter of 1997 was 42.6% compared to
42.9% in the 1996 quarter.
F-4
<PAGE>
CAPITAL RESOURCES AND LIQUIDITY
During the three-year period ended January 31, 1998, the Company generated
$192.4 million of cash flow defined as earnings before interest, taxes,
depreciation and amortization ("EBITDA"). As of January 31, 1998, the Company's
working capital was $74.0 million, its total assets were $419.1 million, its
total debt was $104.9 million and stockholders' equity was $198.8 million.
EBITDA was 8.5 times the net interest expense for the year.
Investing activities during the three-year period ended January 31, 1998,
included capital expenditures of $60.4 million. These capital expenditures were
primarily for machinery and equipment to support new products and to improve
productivity and efficiency. At January 31, 1998, the Company had no material
commitments to purchase machinery and equipment. However, it is anticipated that
capital spending will increase substantially in 1998 to support further business
growth.
To support its investing activities, the Company has a term loan and
revolving credit agreement which was entered into in 1996 and expires on July
19, 2002. The term loan portion of this facility ($100 million) was used to
finance a large acquisition in 1996. The $80 million revolving credit facility
will be used by the Company as the principal source of acquisition funding. At
January 31, 1998, the Company had no borrowings outstanding under this portion
of the facility. The percentage of debt to total capitalization at January 31,
1998, was 34.5% down from 62.9% at January 31, 1997. This reduction was
primarily a result of the Company's outstanding convertible subordinated
debentures being exchanged for common stock at various dates in the third
quarter of 1997. Cash and short-term investments were $6.2 million at the end of
fiscal 1997 compared to $3.1 million at the end of fiscal 1996. The Company
believes that internally generated funds will be sufficient to satisfy its
anticipated working capital needs, capital expenditures and scheduled debt
repayments.
OTHER MATTERS
The Company utilizes derivatives from time to time to mitigate both interest
rate risk and foreign currency risk. Derivatives are not used for speculative
purposes. The Company's derivatives at January 31, 1998, consist solely of
interest rate swap agreements which fix the interest rate on $40 million of its
floating rate term loan. The Company is exposed to credit risk by the
possibility of nonperformance by one of the counterparties to its interest rate
swap agreements. The risk of loss to the Company in the event of nonperformance
by the counterparties under these agreements is not significant. The Company
does not anticipate nonperformance by any of the counterparties.
During 1995 to 1997, the Company began evaluation of the various impacts of
the year 2000 on its software and processors. In 1996 and 1997, implementation
of needed modifications began in conjunction with the Company's ongoing
information systems and equipment improvement process, a process which is
continuing. Additionally, the Company is currently assessing readiness for year
2000 by third parties with whom it has significant business relationships. The
Company believes all software necessary to effectively operate and manage its
businesses will be replaced, modified or upgraded by the year 2000 and that any
related costs will not have a material impact on the operations, cash flows, or
financial condition of future periods.
The costs of the project and expected completion are based on management's
best estimates, which were derived utilizing numerous assumptions of future
events, including the continued availability of certain resources, third party
modification plans and other factors. However, there can be no guarantee that
these estimates will be achieved and actual results could differ materially from
those anticipated. Specific factors that might cause such material differences
include, but are not limited to, the availability
F-5
<PAGE>
and cost of personnel trained in this area, the ability to locate and correct
all relevant computer codes, and similar uncertainties. Additionally, there can
be no guarantee that the systems of other companies on which the Company's
systems rely will be timely converted, or that a failure to convert by another
company, or a conversion that is incompatible with the Company's systems, would
not have a material adverse effect on the Company.
The Financial Accounting Standards Board recently issued Standards No. 130
"Reporting Comprehensive Income", No. 131 "Disclosures about Segments of an
Enterprise and Related Information" and No. 132 "Employers' Disclosures about
Pensions and Other Postretirement Benefits". These Standards expand or modify
current disclosures and, accordingly, will have no impact on the Company's
reported financial position, results of operations or cash flows.
YEAR ENDED JANUARY 31, 1997 (1996) AS COMPARED TO THE YEAR ENDED JANUARY 31,
1996 (1995)
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 petroleum
analyzers segment declined as a result of a disposition in mid 1996 and 1995.
Net earnings for the year were $17.9 million or $1.51 per share on a diluted
basis. This represented a decrease of 8.9% from the $19.6 million or $1.62 per
share on a diluted basis in 1995. Operating profit increased in both business
segments, but higher net interest expense resulted in lower consolidated net
earnings.
Transportation products revenues increased 14.8% to $364.0 million, as
compared to $317.1 million in 1995. Sales of the Company's heavy-duty truck and
trailer products were lower 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.
Sales of railroad products increased significantly 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. Reduced exports sales coupled
with lower domestic railcar and locomotive build rates resulted in slightly
lower revenues from other railroad products. In late January 1997, the Company
purchased a German manufacturer of railroad cushioning devices which did not
have a material impact on 1996 operations. Sales of automotive products were
slightly higher despite flat industry production. Industry-wide demand for light
trucks was up again which continued 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 from the remaining railroad products as
well as from heavy-duty truck/trailer products. Declines in operating profit of
truck/trailer products reflected the effects of lower demand and selected price
reductions. Losses incurred on an export contract and a European facility as
well as domestic pricing pressures lowered earnings from railroad products.
Sales in the petroleum analyzers 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
F-6
<PAGE>
remaining petroleum analyzers segment's 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 petroleum analyzers 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 remaining petroleum analyzers segment's business was lower in 1996 than the
prior year following the decline in revenues.
Consolidated gross margin was 24.5% in 1996 compared to 25.0% in 1995. Gross
margin increased at the petroleum analyzers segment but declined at the
transportation products segment. Within the transportation products segment,
gross margin improved in the sale of automotive products 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
petroleum analyzers segment, gross margin increased primarily due to the sale of
lower margin businesses. The gross margin of the remaining business in the
petroleum analyzers segment increased slightly.
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.
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 efforts of dispositions in
both years.
F-7
<PAGE>
VARLEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
----------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Net sales.................................................................... $ 522,254 $ 409,475 $ 386,987
Cost of sales.............................................................. 392,584 309,027 290,052
---------- ---------- ----------
Gross profit................................................................. 129,670 100,448 96,935
Selling, general and administrative expenses............................... 74,887 63,607 57,762
---------- ---------- ----------
Earnings from operations..................................................... 54,783 36,841 39,173
Interest expense........................................................... (9,536) (9,402) (5,281)
Interest income............................................................ 234 662 814
Gain on sale of business................................................... -- 3,730 --
---------- ---------- ----------
Earnings before income taxes................................................. 45,481 31,831 34,706
Income tax expense......................................................... 19,830 13,974 15,097
---------- ---------- ----------
Net earnings................................................................. $ 25,651 $ 17,857 $ 19,609
---------- ---------- ----------
---------- ---------- ----------
Basic earnings per share..................................................... $ 2.41 $ 2.06 $ 2.21
---------- ---------- ----------
---------- ---------- ----------
Diluted earnings per share................................................... $ 1.93 $ 1.51 $ 1.62
---------- ---------- ----------
---------- ---------- ----------
Weighted average number of shares--basic..................................... 10,653 8,677 8,864
---------- ---------- ----------
---------- ---------- ----------
Weighted average number of shares--diluted................................... 13,755 13,617 13,794
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
VARLEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JANUARY 31,
----------------------
1998 1997
---------- ----------
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents............................................................... $ 6,206 $ 3,133
Accounts receivable, less allowance for doubtful accounts of $1,808 and $1,455.......... 70,972 62,088
Inventories:
Raw materials......................................................................... 22,343 23,795
Work in process....................................................................... 19,094 17,285
Finished goods........................................................................ 17,360 12,551
---------- ----------
58,797 53,631
---------- ----------
Deferred and refundable income taxes.................................................... 7,268 8,244
Other current assets.................................................................... 6,924 5,357
---------- ----------
Total current assets...................................................................... 150,167 132,453
---------- ----------
Property, plant and equipment:
Land.................................................................................... 4,404 5,436
Buildings............................................................................... 41,564 39,779
Machinery and equipment................................................................. 170,564 155,224
---------- ----------
216,532 200,439
Less accumulated depreciation........................................................... 92,352 75,859
---------- ----------
124,180 124,580
---------- ----------
Goodwill and other intangible assets, less accumulated amortization of $21,637 and
$18,128................................................................................. 140,675 133,419
Investments and other assets.............................................................. 4,079 3,426
---------- ----------
$ 419,101 $ 393,878
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-9
<PAGE>
VARLEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
JANUARY 31,
----------------------
1998 1997
---------- ----------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Current maturities of long-term debt.................................................... $ 195 $ 2,273
Accounts payable........................................................................ 33,026 26,623
Accrued expenses........................................................................ 38,763 32,366
Income taxes payable.................................................................... 4,159 1,730
---------- ----------
Total current liabilities................................................................. 76,143 62,992
---------- ----------
Long-term debt:
Convertible subordinated debentures..................................................... -- 69,000
Other long-term debt.................................................................... 104,715 115,353
---------- ----------
Total long-term debt...................................................................... 104,715 184,353
---------- ----------
Deferred income taxes..................................................................... 14,679 16,252
Other liabilities......................................................................... 24,772 20,295
Commitments and contingent liabilities.................................................... -- --
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: 13,322 and
8,637................................................................................. 1,332 576
Additional paid-in capital.............................................................. 105,813 37,473
Retained earnings....................................................................... 91,794 72,228
Deferred stock compensation............................................................. (147) (291)
---------- ----------
Total stockholders' equity................................................................ 198,792 109,986
---------- ----------
$ 419,101 $ 393,878
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-10
<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, 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
10% stock dividend.................................. 49 12,281 (12,330) -- -- --
Net earnings........................................ -- -- 19,609 -- -- 19,609
Cash dividends ($.23 per share)..................... -- -- (2,112) -- -- (2,112)
Purchase of treasury stock.......................... -- -- -- -- (965) (965)
Additional minimum pension liability................ -- -- 69 -- -- 69
Currency translation adjustments--unrealized........ -- -- 885 -- -- 885
----------- ---------- --------- ----- --------- ----------
Balance at January 31, 1996......................... 541 29,634 69,239 (496) (965) 97,953
Issuance of common stock under options.............. 1 226 (48) -- 88 267
Amortization of deferred stock compensation......... -- -- -- 205 -- 205
Cash received on stock subscriptions................ -- -- 233 -- -- 233
10% stock dividend.................................. 34 7,613 (11,764) -- 4,117 --
Net earnings........................................ -- -- 17,857 -- -- 17,857
Cash dividends ($.24 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
Issuance of common stock under options.............. 8 1,190 -- -- -- 1,198
Amortization of deferred stock compensation......... -- -- -- 197 -- 197
Cash received on stock subscriptions................ -- -- 322 -- -- 322
Deferred incentive stock purchase plan.............. -- 291 (238) (53) -- --
3 for 2 stock split................................. 443 -- (443) -- -- --
Conversion of convertible debentures................ 305 66,859 -- -- -- 67,164
Net earnings........................................ -- -- 25,651 -- -- 25,651
Cash dividends ($.24 per share)..................... -- -- (2,639) -- -- (2,639)
Additional minimum pension liability................ -- -- (70) -- -- (70)
Currency transaction adjustments--unrealized........ -- -- (3,017) -- -- (3,017)
----------- ---------- --------- ----- --------- ----------
Balance at January 31, 1998......................... $ 1,332 $ 105,813 $ 91,794 $ (147) $ -- $ 198,792
----------- ---------- --------- ----- --------- ----------
----------- ---------- --------- ----- --------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-11
<PAGE>
VARLEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
-----------------------------------
1998 1997 1996
---------- ----------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings................................................................ $ 25,651 $ 17,857 $ 19,609
Adjustments to reconcile net earnings to net cash provided by operating
activities:
Depreciation.............................................................. 19,136 15,373 11,819
Amortization.............................................................. 5,338 3,725 2,440
Deferred income taxes..................................................... (792) 1,165 476
Gain on sale of business.................................................. -- (3,730) --
Change in assets and liabilities net of effects from purchased and sold
businesses:
Accounts receivable, net................................................ (10,054) 1,572 2,751
Inventories............................................................. (2,813) 245 1,740
Refundable income taxes................................................. 2,496 (2,515) 8
Other current assets.................................................... (1,207) (44) (522)
Accounts payable........................................................ 6,675 3,047 (6,061)
Accrued expenses........................................................ 1,163 (9,623) (1,079)
Income taxes payable.................................................... 2,303 1,954 (1,803)
Other noncurrent assets................................................. (3,612) 899 1,878
Other noncurrent liabilities............................................ 4,115 1,181 859
---------- ----------- ----------
Total adjustments..................................................... 22,748 13,249 12,506
---------- ----------- ----------
Net cash provided by operating activities............................... 48,399 31,106 32,115
Cash flows from investing activities:
Fixed asset expenditures.................................................... (18,776) (18,193) (23,427)
Cost of purchased businesses, net of cash acquired and other long-term
investments............................................................... (12,869) (154,926) (6,253)
Sale of businesses.......................................................... -- 21,118 8,013
Sale of marketable securities............................................... -- 4,469 --
Disposals and other changes in property, plant and equipment................ 777 243 395
---------- ----------- ----------
Net cash used in investing activities..................................... (30,868) (147,289) (21,272)
---------- ----------- ----------
Cash flows from financing activities:
Proceeds from debt.......................................................... 63 111,083 1,107
Payments of debt............................................................ (12,737) (9,551) (82)
Issuance of common stock under option plans................................. 705 95 581
Cash received on stock subscriptions........................................ 322 233 388
Purchase of treasury stock.................................................. -- (3,240) (965)
Cash dividends paid......................................................... (2,639) (2,084) (2,112)
---------- ----------- ----------
Net cash (used in) provided by financing activities....................... (14,286) 96,536 (1,083)
---------- ----------- ----------
Effect of exchange rate changes on cash....................................... (172) (135) 59
---------- ----------- ----------
Net increase (decrease) in cash and cash equivalents.......................... 3,073 (19,782) 9,819
Cash and cash equivalents at beginning of year................................ 3,133 22,915 13,096
---------- ----------- ----------
Cash and cash equivalents at end of year...................................... $ 6,206 $ 3,133 $ 22,915
---------- ----------- ----------
---------- ----------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-12
<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 70%
and 79% of inventories, at January 31, 1998 and 1997, 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 $1,839,000 and $1,501,000 at
January 31, 1998 and 1997, 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: Basic earnings per share is computed on the basis of
the weighted average number of common shares outstanding during the period. The
computation of diluted earnings per share includes common equivalent shares
arising from stock incentive plans using the treasury stock method and the
weighted average number of shares that would have been issued upon conversion of
the convertible debentures including 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 STANDARDS: The Financial Accounting Standards Board (the
"Board") recently issued several Statements of Financial Accounting Standards
("Standards"):
F-13
<PAGE>
VARLEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In February 1997, the Board issued Standard No. 128 "Earnings Per Share"
which was adopted by the Company as of January 31, 1998. This Standard requires
the presentation of earnings per share on a Basic and Diluted basis. All
financial information presented in the accompanying financial statements and
footnotes reflect the requirements of this new Statement including any needed
restatements.
In June 1997, the Board issued Standards No. 130 "Reporting Comprehensive
Income" and No. 131 "Disclosures about Segments of an Enterprise and Related
Information". Standard No. 130 establishes standards for the reporting and
display of comprehensive income and its components and is effective for the
Company's first quarter of 1998 reporting. Standard No. 131 establishes
standards for reporting information about operating segments and related
disclosures about products and services, geographic areas and major customers
and is effective for the Company's 1998 year end reporting. These Standards
expand or modify current disclosures and, accordingly, will have no impact on
the Company's reported financial position, results of operations or cash flows.
The Company is currently assessing the impact of Standard No. 131 on its
reportable operating segments and related disclosures.
In February 1998, the Board issued Standard No. 132 "Employers' Disclosures
about Pensions and Other Postretirement Benefits" which is effective for the
Company's 1998 year end reporting. This Standard revises disclosures about
pension and other postretirement benefit plans and will have no impact on the
Company's reported financial position, results of operations or cash flows.
(j) DERIVATIVE FINANCIAL INSTRUMENTS: The Company currently uses interest
rate swaps 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 products used in the
manufacturing of transportation equipment in its Transportation Products segment
and petroleum analyzers in its Petroleum Analyzers segment. The companies in
each segment were aggregated based on the similarity of the products
manufactured, production processes, types of customers, distribution methods and
economic factors impacting the companies in each segment. The demand for the
Company's products is affected by domestic as well as international economic
conditions.
3. ACQUISITIONS
In October 1997, the Company purchased the railroad divisions of Ringfeder
GmbH located in Germany and Hanacke Zelzarny a Perovny, a.s. located in the
Czech Republic. These entities are suppliers to the Company's German railcar
cushioning device maker Karl Georg Bahntechnik GmbH which was purchased
effective in December 1996. In November 1997, the Company purchased the
Petrospec-Registered Trademark- product line of portable laboratory and process
petroleum analyzers from Boston Advanced Technologies, Inc., for which it had
been the exclusive worldwide distributor of these products. These acquisitions
were financed with cash on hand and through the Company's existing credit
facility.
In June 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
F-14
<PAGE>
VARLEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. ACQUISITIONS (CONTINUED)
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 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. 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
Brenco 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 $.15 per
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.
5. SUPPLEMENTARY CASH FLOW INFORMATION
<TABLE>
<CAPTION>
1997 1996 1995
---------- ----------- ---------
(In thousands)
<S> <C> <C> <C>
Cash paid during the year for:
Interest................................................ $ 9,183 $ 9,168 $ 5,134
---------- ----------- ---------
---------- ----------- ---------
Income taxes (net)...................................... $ 15,032 $ 13,409 $ 16,185
---------- ----------- ---------
---------- ----------- ---------
Purchase of businesses:
Fair value of assets acquired........................... $ 15,350 $ 207,784 $ 1,003
Cash paid, net of cash acquired......................... (12,869) (154,926) (1,003)
---------- ----------- ---------
Liabilities assumed..................................... $ 2,481 $ 52,858 $ --
---------- ----------- ---------
---------- ----------- ---------
</TABLE>
F-15
<PAGE>
VARLEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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>
1997 1996
---------------------- ----------------------
CARRYING FAIR Carrying Fair
AMOUNT VALUE Amount Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Term loan.................................... $ 100,000 $ 100,000 $ 107,000 $ 107,000
Revolving credit facility.................... -- -- 4,000 4,000
Convertible subordinated debentures.......... -- -- 69,000 70,208
Industrial revenue bonds and other debt...... 4,715 4,676 4,353 4,332
---------- ---------- ---------- ----------
Total long-term debt......................... $ 104,715 $ 104,676 $ 184,353 $ 185,540
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
The carrying amounts for cash and cash equivalents, accounts receivable,
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.
7. LONG-TERM DEBT
Long-term debt at year end is comprised of the following (in thousands):
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Term loan............................................................. $ 100,000 $ 107,000
Revolving credit facility............................................. -- 4,000
6.5% convertible subordinated debentures due 2003..................... -- 69,000
Industrial revenue bonds and other debt............................... 4,910 6,626
---------- ----------
104,910 186,626
Less current portion.................................................. (195) (2,273)
---------- ----------
Long-term debt........................................................ $ 104,715 $ 184,353
---------- ----------
---------- ----------
</TABLE>
F-16
<PAGE>
VARLEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. LONG-TERM DEBT (CONTINUED)
In July 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 6.6% at January 31, 1998. 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 Company's debt during
1997 was approximately 7.0%.
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, 1998,
$32,069,000 was available for dividend distributions under these provisions.
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%.
In September 1997, the Company completed the call of its 6.5% Convertible
Subordinated Debentures Due 2003. Substantially all of the debentures were
voluntarily converted into approximately 4,582,000 shares (after restatement for
the 1997 3 for 2 stock split) of Common Stock of the Company including
conversions occurring just prior to the call for redemption.
Scheduled repayments of long-term debt in each of the next five years are
$10,195,000, $16,152,000, $22,138,000, $26,750,000 and $26,085,000. 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. COMMITMENTS, CONTINGENT LIABILITIES AND OTHER
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 $3,051,000 in 1997,
$2,401,000 in 1996 and $1,936,000 in 1995. At January 31, 1998, the aggregate
minimum future rental commitments under the non-cancelable leases with terms in
excess of
F-17
<PAGE>
VARLEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. COMMITMENTS, CONTINGENT LIABILITIES AND OTHER (CONTINUED)
one year were approximately $7,201,000. Amounts due annually in each of the next
five years are $2,403,000, $1,918,000, $1,136,000, $792,000 and $629,000.
The Company and its subsidiaries are subject to various claims arising in
the ordinary course of business and are parties to various legal proceedings
which constitute litigation incidental to the business of the Company and its
subsidiaries. In the opinion of the Company's management, none of these
proceedings or claims are material to the business or the financial condition of
the Company.
Accrued expense at January 31, 1998 and January 31, 1997 include
$13,184,000, and $9,768,000, respectively, for certain accrued employee
benefits. Research and development costs charged to earnings were $7,970,000 in
1997, $9,540,000 in 1996 and $5,948,000 in 1995.
9. INCOME TAXES
Earnings before income taxes were derived from the following sources (in
thousands):
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Domestic..................................................... $ 42,936 $ 31,590 $ 34,273
Foreign...................................................... 2,545 241 433
--------- --------- ---------
Total...................................................... $ 45,481 $ 31,831 $ 34,706
--------- --------- ---------
--------- --------- ---------
</TABLE>
Income tax expense consists of the following (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Current:
Federal.................................................... $ 16,245 $ 10,857 $ 11,025
State and local............................................ 2,977 2,095 2,537
Foreign.................................................... 1,568 602 758
--------- --------- ---------
Total.................................................... 20,790 13,554 14,320
Deferred:
Federal.................................................... (1,232) 463 742
State and local............................................ 4 (299) (146)
Foreign.................................................... 268 256 181
--------- --------- ---------
Total.................................................... (960) 420 777
--------- --------- ---------
Income tax provision......................................... $ 19,830 $ 13,974 $ 15,097
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-18
<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, 1998 January 31, 1997
-------------------- --------------------
ASSET LIABILITY Asset Liability
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Accounts receivable................................................... $ 751 $ -- $ 633 $ 811
Inventories........................................................... 912 671 839 656
Operating losses...................................................... 658 -- 611 --
Foreign tax credits................................................... 1,213 -- 626 --
State income taxes.................................................... -- 271 -- 195
Fixed assets.......................................................... -- 16,572 -- 16,763
Pension............................................................... 531 -- 1,302 --
Vacation pay.......................................................... 1,520 -- 1,298 --
Workers' compensation................................................. 816 -- 813 --
Warranty.............................................................. 3,702 -- 2,786 --
Deferred compensation................................................. 1,933 -- 1,887 --
Employee health and welfare........................................... 798 -- 679 --
Intangible assets..................................................... -- 6,688 -- 6,626
Retiree health and welfare............................................ 2,125 -- 1,955 --
Other................................................................. 4,166 463 2,579 225
--------- --------- --------- ---------
Subtotal.............................................................. 19,125 24,665 16,008 25,276
Valuation allowance................................................... (1,871) -- (1,237) --
--------- --------- --------- ---------
Total................................................................. $ 17,254 $ 24,665 $ 14,771 $ 25,276
--------- --------- --------- ---------
--------- --------- --------- ---------
</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. Use of the losses in the future will primarily reduce goodwill
associated with those acquisitions.
During 1997, the valuation allowance was increased $587,000 to reflect
excess unused foreign tax credits and $47,000 to offset the benefit of current
operating losses of a foreign subsidiary.
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>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Income tax provision at statutory federal tax rate........... $ 15,918 $ 11,141 $ 12,147
State income taxes (net of federal benefit).................. 2,098 1,146 1,500
Foreign operations........................................... 911 774 787
Goodwill amortization........................................ 996 909 676
Other........................................................ (93) 4 (13)
--------- --------- ---------
Income tax provision......................................... $ 19,830 $ 13,974 $ 15,097
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-19
<PAGE>
VARLEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. INCOME TAXES (CONTINUED)
At January 31, 1998, the Company had remaining net operating loss
carryforwards of $1,975,000 of which $1,920,000 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 $1,213,000, subject to the
valuation allowance discussed above, expire in 2002 and 2003.
10. COMPUTATION OF EARNINGS PER SHARE
The following table presents the computation of basic and diluted earnings
per share for the years ended January 31, 1998, 1997 and 1996 (in thousands,
except for per share amounts):
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Net earnings--basic.......................................... $ 25,651 $ 17,857 $ 19,609
Decrease in interest expense, net of income taxes, for the
assumed conversion of the convertible debentures........... 900 2,736 2,736
--------- --------- ---------
Adjusted net earnings--diluted............................... $ 26,551 $ 20,593 $ 22,345
--------- --------- ---------
--------- --------- ---------
Average shares outstanding--basic............................ 10,653 8,677 8,864
Diluted effect of stock options.............................. 479 359 349
Conversion of convertible debentures......................... 2,623 4,581 4,581
--------- --------- ---------
Average shares outstanding--diluted.......................... 13,755 13,617 13,794
--------- --------- ---------
--------- --------- ---------
Basic earnings per share..................................... $ 2.41 $ 2.06 $ 2.21
--------- --------- ---------
--------- --------- ---------
Diluted earnings per share................................... $ 1.93 $ 1.51 $ 1.62
--------- --------- ---------
--------- --------- ---------
</TABLE>
11. 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.
F-20
<PAGE>
VARLEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. RETIREMENT PLANS (CONTINUED)
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. Under the Brenco Supplemental Pension Plan, a defined contribution
plan, employee deferrals of compensation may be made of up to 20% of eligible
pay with the Company providing additional annual contributions to participant's
accounts of 20% of eligible pay. The Company makes contributions to
union-sponsored multi-employer defined benefit plans in accordance with
negotiated labor contracts.
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, 1998 and 1997 (in thousands):
<TABLE>
<CAPTION>
OVERFUNDED PLANS Underfunded Plans
-------------------- --------------------
JANUARY 31, January 31,
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Actuarial present value of:
Vested benefits....................................................... $ 22,157 $ 6,381 $ 4,242 $ 15,486
Non-vested benefits................................................... 873 263 1,002 1,237
--------- --------- --------- ---------
Accumulated benefit obligation.......................................... 23,030 6,644 5,244 16,723
Effect of projected salary increases.................................... 3,775 -- 1,210 4,748
--------- --------- --------- ---------
Projected benefit obligation............................................ 26,805 6,644 6,454 21,471
Fair value of plan assets (primarily equity and fixed income
investments).......................................................... 27,992 7,297 882 15,409
--------- --------- --------- ---------
Funded status at January 31............................................. 1,187 653 (5,572) (6,062)
Unrecognized net gain................................................... (3,086) (332) (258) (1,311)
Unrecognized prior service cost......................................... 833 851 (26) (34)
Liability at date of transition......................................... 111 139 319 391
Adjustment for the minimum liability.................................... -- -- (249) (147)
--------- --------- --------- ---------
(Accrued) prepaid pension cost.......................................... $ (955) $ 1,311 $ (5,786) $ (7,163)
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
During fiscal 1997, the Brenco Retirement Plan, which was underfunded in
1996, became overfunded and is now included in the overfunded plans column at
January 31, 1998. This plan accounts for approximately $19,000,000 in both
projected benefit obligations and fair value of plan assets at January 31, 1998
and accrued pension costs of $2,500,000 at January 31, 1998.
F-21
<PAGE>
VARLEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. RETIREMENT PLANS (CONTINUED)
Net retirement plan expense for 1997, 1996 and 1995 consists of the
following (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Service cost-benefits earned during the period.................................... $ 1,297 $ 888 $ 474
Net deferral and amortization..................................................... 3,540 615 1,002
Interest on projected benefit obligation.......................................... 2,089 1,273 664
Actual return on plan assets...................................................... (5,354) (1,626) (1,379)
--------- --------- ---------
Net defined benefit pension expense............................................... 1,572 1,150 761
Net multi-employer defined benefit pension expense................................ 623 494 501
Net defined contribution plan expense............................................. 4,092 2,873 2,654
--------- --------- ---------
$ 6,287 $ 4,517 $ 3,916
--------- --------- ---------
--------- --------- ---------
</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 7.25% and 5%, respectively, in 1997 and 7.5%
and 5%, respectively, in both 1996 and 1995. The expected long-term rate of
return on plan assets was 9% in 1997 and 1995 and ranged from 8.5% to 9% in
1996.
12. 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 $61,000
during 1997, $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.
F-22
<PAGE>
VARLEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (CONTINUED)
The following table sets forth the plan's funded status, reconciled with
amounts recognized in the Company's consolidated balance sheets at January 31,
1998 and 1997 (in thousands):
<TABLE>
<CAPTION>
January 31
--------------------
1998 1997
--------- ---------
<S> <C> <C>
Accumulated postretirement benefit obligation (APBO):
Retirees............................................................... $ (1,352) $ (1,079)
Fully eligible active plan participants................................ (801) (827)
Other active plan participants......................................... (3,695) (3,051)
--------- ---------
Total APBO............................................................... (5,848) (4,957)
Plan assets at fair value (primarily fixed income securities).......... 197 227
--------- ---------
APBO in excess of plan assets............................................ (5,651) (4,730)
Unrecognized net loss (gain)............................................. 647 283
Unrecognized prior service cost.......................................... (280) (306)
--------- ---------
Accrued postretirement benefit cost...................................... $ (5,284) $ (4,753)
--------- ---------
--------- ---------
</TABLE>
Net postretirement benefit costs for 1997, 1996 and 1995 consist of the
following (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Service cost--benefits attributed to service during the year.......... $ 281 $ 227 $ 147
Interest on accumulated postretirement benefit obligation............. 348 302 242
Net deferral and amortization......................................... (53) (42) (42)
Actual return on plan assets.......................................... 15 6 2
--------- --------- ---------
Net postretirement benefit cost....................................... $ 591 $ 493 $ 349
--------- --------- ---------
--------- --------- ---------
</TABLE>
The assumed health care cost trend rate used in measuring the APBO for
pre-age 65 employees is 9% in 1998, declining approximately 1% per year to 5.5%
in 2002, and for post-age 65 employees is 6% in 1998 and ultimately declining
.5% to 5.5% in 1999. The weighted average discount rate used in determining the
APBO was 7.25% in 1997 and between 7.5% and 7.75% in 1996. Salary increases are
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 1997, 1996 and 1995.
If the health care cost trend rate assumptions were increased by 1 percent,
the APBO as of January 31, 1998 would be increased by 17%. The effect of this
change on the sum of the service cost and interest cost in 1997 would be an
increase of 23%.
13. STOCK INCENTIVE PLANS
The Company had three stock option plans in effect during 1997. 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
F-23
<PAGE>
VARLEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. STOCK INCENTIVE PLANS (CONTINUED)
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>
1997 1996 1995
---------------------- ---------------------- ----------------------
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......................................... 573,758 $ 9.33 464,220 $ 8.51 481,998 $ 7.91
Granted......................................... 115,500 13.27 129,563 12.34 94,380 10.68
Exercised....................................... (84,462) 8.34 (12,122) 7.88 (83,529) 6.95
Expired or terminated........................... (17,182) 11.66 (7,903) 10.93 (28,629) 10.05
--------- ----------- --------- ----------- --------- -----------
Options outstanding at year end................. 587,614 $ 10.18 573,758 $ 9.33 464,220 $ 8.51
--------- ----------- --------- ----------- --------- -----------
--------- ----------- --------- ----------- --------- -----------
Options exercisable at year end................. 304,848 $ 8.26 297,001 $ 7.36 211,991 $ 6.28
--------- ----------- --------- ----------- --------- -----------
--------- ----------- --------- ----------- --------- -----------
Options available for grant at year end......... 169,520 267,838 389,498
--------- --------- ---------
--------- --------- ---------
Weighted-average fair value of options granted
during the year................................ $ 4.89* $ 5.69* $ 5.20*
----------- ----------- -----------
----------- ----------- -----------
</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 $12,000 in shares of Common Stock at par value to each director
who is not an employee of the Company or $6,000 in shares of Common Stock if the
director takes office after the six month anniversary of the previous annual
meeting of the Company. An aggregate of 40,826 shares of Common Stock are
available for grant under this plan of which 16,802 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 272,250 rights are available for grant under this plan, of
which 190,574 are outstanding at $7.35 per right and 26,250, which were granted
in 1997, are
F-24
<PAGE>
VARLEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. STOCK INCENTIVE PLANS (CONTINUED)
outstanding at $10.79 per right. The weighted-average fair value of the rights
granted in 1997 is $4.65 per right as determined using the Black-Scholes
valuation model. There are 41,133 rights available for issuance at January 31,
1998.
The Company has adopted the disclosure-only provisions of SFAS No. 123.
Compensation expense recognized in income in 1997, 1996 and 1995 for stock-based
employee compensation awards under APB 25 totaled approximately $405,000,
$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 pro forma amounts shown below (in thousands,
except per share amounts):
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C> <C>
Net earnings..................................... As reported $ 25,651 $ 17,857 $ 19,609
Pro forma $ 25,458 $ 17,767 $ 19,571
Basic earnings per share......................... As reported $ 2.41 $ 2.06 $ 2.21
Pro forma $ 2.39 $ 2.05 $ 2.21
Diluted earnings per share....................... As reported $ 1.93 $ 1.51 $ 1.62
Pro forma $ 1.92 $ 1.51 $ 1.62
</TABLE>
The following table summarizes the weighted average remaining contractual
life and weighted average exercise price of options outstanding at January 31,
1998 and the weighted average exercise price of options exercisable at January
31, 1998:
<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>
$4 to $7...................... 153,537 3.4 $ 5.81 153,537 $ 5.81
$7 to $11..................... 166,521 6.1 10.51 109,363 10.39
$11 to $16.................... 264,556 8.3 12.44 41,948 11.67
$16 to $21.................... 3,000 9.8 20.88 -- --
----------- -----------
587,614 304,848
----------- -----------
----------- -----------
</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 the following weighted
average assumptions used for 1997, 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, five years for The Deferred Incentive
Stock Purchase Plan.
F-25
<PAGE>
VARLEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. 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>
1997
Transportation products............... $ 484,397 $ 58,466 $ 369,055 $ 18,465 $ 22,382
Petroleum analyzers**................. 37,857 4,727 38,944 192 1,339
---------- ----------- ----------- ------------ ------------
522,254 63,193 407,999 18,657 23,721
Corporate............................. -- (8,410) 11,102 119 753
Net interest expense.................. -- (9,302) -- -- --
---------- ----------- ----------- ------------ ------------
Total................................. $ 522,254 $ 45,481 $ 419,101 $ 18,776 $ 24,474
---------- ----------- ----------- ------------ ------------
---------- ----------- ----------- ------------ ------------
1996
Transportation products............... $ 363,999 $ 37,407 $ 348,417 $ 17,628 $ 16,543
Petroleum analyzers**................. 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
Petroleum analyzers**................. 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
---------- ----------- ----------- ------------ ------------
---------- ----------- ----------- ------------ ------------
</TABLE>
- ------------------------
* Includes a $3.7 million pre-tax gain on the sale of a division.
** This business segment was formerly known as the Analytical Instruments
segment.
Sales to one customer by a company in the transportation products segment
aggregated 15% of consolidated net sales in each of 1997, 1996, and 1995. In
addition, sales of one product to customers of the transportation products
segment aggregated 12%, 12% and 14% of consolidated net sales in 1997, 1996 and
1995, respectively, and sales of two other products to customers of the
transportation product segment were 14% of one product and 11% of another
product of consolidated net sales in 1997 and 1995, respectively.
F-26
<PAGE>
VARLEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. 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>
1997
Domestic Operations...................................... $ 469,265 $ 35,432 $ 370,727
European Operations...................................... 52,989 1,453 48,374
---------- ---------- -----------
522,254 36,885 419,101
Corporate and net interest expense....................... -- (11,234) --
---------- ---------- -----------
Total.................................................... $ 522,254 $ 25,651 $ 419,101
---------- ---------- -----------
---------- ---------- -----------
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
---------- ---------- -----------
---------- ---------- -----------
</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 11%, 10% and
10%, respectively, of consolidated net sales in 1997, 1996, and 1995.
15. STOCKHOLDERS' EQUITY
On September 29, 1997, the Company's Board of Directors declared a
three-for-two stock split in the form of a stock dividend payable on November
18, 1997, to stockholders of record on October 31, 1997. The dividend resulted
in the issuance of approximately 4.4 million new shares of Common Stock. All
share and per share amounts have been restated to reflect the stock dividend.
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 522,000 new shares of Common
Stock and the reissuance of the remaining 262,500 shares of Common Stock held in
treasury.
F-27
<PAGE>
VARLEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. STOCKHOLDERS' EQUITY (CONTINUED)
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, 1998, 181,000 shares (before restatement for the stock dividends) 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 805,500 new shares of
Common Stock.
Retained earnings at January 31, 1998 includes $380,000 for stock
subscriptions receivable, $2,734,000, net of deferred income taxes, for
unrealized currency translation losses and $124,000, net of deferred income
taxes, for an additional minimum pension liability. 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.
16. 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 $45.45. 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-28
<PAGE>
VARLEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. 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................................................ 1997 $ 123,975 $ 125,471 $ 135,830 $ 136,978
1996 91,975 91,025 119,898 106,577
Gross profit............................................. 1997 29,405 30,397 33,882 35,986
1996 23,797 22,479 28,245 25,927
Net earnings............................................. 1997 5,009 5,438 7,675 7,529
1996 4,822 5,900 4,137 2,998
Basic earnings per share................................. 1997 0.58 0.63 0.64 0.57
1996 0.55 0.68 0.48 0.35
Diluted earnings per share............................... 1997 0.42 0.45 0.52 0.54
1996 0.40 0.49 0.35 0.27
</TABLE>
QUARTERLY MARKET AND DIVIDEND INFORMATION
<TABLE>
<CAPTION>
1997 1996
----------------------- -----------------------
FISCAL QUARTER HIGH LOW High Low
-------------------------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
First........................... 15 21/64 12 11/64 15 6/16 13 5/8
Second.......................... 21 37/64 15 15 58/64 13 3/16
Third........................... 31 5/6 19 37/64 15 3/4 13 59/64
Fourth.......................... 30 1/4 23 1/4 15 12 1/2
</TABLE>
The Company paid a $.06 quarterly dividend in both 1997 and 1996. The
Company estimates its number of shareholders of Common Stock, $.10 par value, is
approximately 3,300 as of January 31, 1998, which includes approximately 400
shareholders of record and 2,900 who hold shares in "nominee" or "street" name.
F-29
<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
Chairman and Vice President, Finance and
Chief Executive Officer Chief Financial Officer
March 2, 1998
</TABLE>
F-30
<PAGE>
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying consolidated balance sheets of Varlen
Corporation and subsidiaries as of January 31, 1998 and 1997, and the related
consolidated statements of earnings, stockholders' equity and cash flows for
each of the three years in the period ended January 31, 1998, appearing on pages
F-8 through F-12. 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, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
January 31, 1998, in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Chicago, Illinois
March 2, 1998
F-31
<PAGE>
OFFICERS
<TABLE>
<S> <C> <C>
RICHARD L. WELLEK, age 59 GEORGE W. HOFFMAN, age 57 VICKI L. CASMERE, age 40
Chairman (1997) and Chief Vice President (1990); Vice President, General
Executive Officer; President President of Keystone Counsel and Secretary (1996);
and Chief Executive Officer Industries (1984); Executive Corporate Counsel of Caremark
(1983); Various Varlen Vice President of Operations Inc. (1992-1996), Vice
Executive and Operational of Keystone Industries President (1994); B.S.
positions (1968-1983); B.S. (1979-1984); B.S. Chemical Finance University of
Industrial Management Engineering University of Illinois; J.D. The John
University of Illinois Pittsburgh Marshall Law School
RAYMOND A. JEAN, age 55 RICHARD A. NUNEMAKER, age 49
President (1997) and Chief Vice President, Finance and
Operating Officer; Executive Chief Financial Officer
Vice President and Chief (1991); Vice President,
Operating Officer (1993); Controller (1987); B.S.
Group Vice President Accountancy; M.A.S.
(1988-1992); B.S. Engineering University of Illinois,
Physics University of Maine; C.P.A.
MBA University of Chicago
</TABLE>
SHARES LISTED
Varlen Corporation common stock is traded on the Nasdaq Stock Market under
the symbol VRLN.
F-32
<PAGE>
EXHIBIT A
RELEVENT TEXT OF ARTICLE FOURTH PRIOR TO THE PROPOSED AMENDMENT
TO THE RESTATED CERTIFICATE OF INCORPORATION OF VARLEN CORPORATION
FOURTH: The total number of shares of all classes of stock which the
Corporation is authorized to issue is twenty million five hundred thousand
(20,500,000), of which five hundred thousand (500,000) shares shall be Preferred
Stock with a par value of one dollar ($1.00) per share and of which twenty
million (20,000,000) shares shall be Common Stock with a par value of ten cents
($.10) per share. The amount of the authorized stock of the Corporation of any
class or classes may be increased or decreased by the affirmative vote of the
holders of a majority of the stock of the Corporation entitled to vote.
PROPOSED AMENDMENT TO ARTICLE FOURTH
OF THE CERTIFICATE OF INCORPORATION OF VARLEN CORPORATION
The first paragraph of Article FOURTH shall be replaced with the following
paragraph:
FOURTH: The total number of shares of all classes of stock which the
Corporation is authorized to issue is forty million five hundred thousand
(40,500,000), of which five hundred thousand (500,000) shares shall be Preferred
Stock with a par value of one dollar ($1.00) per share and of which forty
million (40,000,000) shares shall be Common Stock with a par value of ten cents
($.10) per share. The amount of the authorized stock of the Corporation of any
class or classes may be increased or decreased by the affirmative vote of the
holders of a majority of the stock of the Corporation entitled to vote.
A-1
<PAGE>
EXHIBIT B
VARLEN CORPORATION
1998 LONG-TERM EQUITY INCENTIVE PLAN
1. PURPOSE.
This plan shall be known as the Varlen Corporation 1998 Long-Term Equity
Incentive Plan (the "Plan"). The purpose of the Plan shall be to promote the
long-term growth and profitability of Varlen Corporation (the "Company") and its
Subsidiaries by (i) providing certain directors, officers and other employees
of, and certain other individuals who perform significant services for, the
Company and its Subsidiaries with incentives to maximize stockholder value and
otherwise contribute to the success of the Company and (ii) enabling the Company
to attract, retain and reward the best available persons for positions of
substantial responsibility. Grants of incentive or nonqualified stock options,
stock appreciation rights ("SARs"), either alone or in tandem with options,
restricted stock, performance awards, or any combination of the foregoing may be
made under the Plan.
2. DEFINITIONS.
(a) "BOARD OF DIRECTORS" and "BOARD" mean the board of directors of
Varlen Corporation.
(b) "CAUSE" means the occurrence of one of the following events:
(i)
Conviction of a felony or any crime or offense lesser than a
felony involving the property of the Company or a Subsidiary; or
(ii)
Conduct that has caused demonstrable and serious injury to the
Company or a Subsidiary, monetary or otherwise; or
(iii)
Willful refusal to perform, or substantial disregard of, duties
properly assigned, as determined by the Company; or
(iv)
Breach of duty of loyalty to the Company or a Subsidiary or other
act of fraud or dishonesty with respect to the Company or a
Subsidiary.
(c) "CHANGE IN CONTROL" means the occurrence of one of the following
events:
(i)
if any "person" or "group" as those terms are used in Sections
13(d) and 14(d) of the Exchange Act, other than an Exempt Person,
is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the
Exchange Act), directly or indirectly, of securities of the Company
representing 50% or more of the combined voting power of the Company's
then outstanding securities; or
(ii)
during any period of two consecutive years, individuals who at
the beginning of such period constitute the Board and any new
directors whose election by the Board or nomination for election by the
Company's stockholders was approved by at least two-thirds of the
directors then still in office who either were directors at the beginning
of the period or whose election was previously so approved, cease for any
reason to constitute a majority thereof; or
B-1
<PAGE>
(iii)
the stockholders of the Company approve a merger or consolidation
of the Company with any other corporation, other than a merger or
consolidation (A) which would result in all or a portion of the voting
securities of the Company outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by being
converted into voting securities of the surviving entity) more than 50%
of the combined voting power of the voting securities of the Company or
such surviving entity outstanding immediately after such merger or
consolidation or (B) following which the Company's chief executive
officer and directors retain their positions with the surviving entity
(and constitute at least a majority of the surviving entity's board of
directors); or
(iv)
the stockholders of the Company approve a plan of complete
liquidation of the Company or an agreement for the sale or
disposition by the Company of all or substantially all the Company's
assets, other than a sale to an Exempt Person.
(d) "CODE" means the Internal Revenue Code of 1986, as amended.
(e) "COMMITTEE" means the Compensation Committee of the Board, which
shall consist solely of two or more members of the Board, or a subcommittee
thereof consisting solely of two or more members of the full Committee, as
appointed by the Board.
(f) "COMMON STOCK" means the common stock, par value $.10 per share, of
the Company, and any other shares into which such stock may be changed by
reason of a recapitalization, reorganization, merger, consolidation or any
other change in the corporate structure or capital stock of the Company.
(g) "COMPETITION" is deemed to occur if a person whose employment with
the Company or its Subsidiaries has terminated obtains a position as a
full-time or part-time employee of, as a member of the board of directors
of, or as a consultant or advisor with or to, or acquires an ownership
interest in excess of 5% of, a corporation, partnership, firm or other
entity that engages in any of the businesses of the Company or any
Subsidiary with which the person was involved in a management role at any
time during his or her last five years of employment with or other service
for the Company or any Subsidiaries.
(h) "DISABILITY" means a disability that would entitle an eligible
participant to payment of monthly disability payments under any Company
disability plan or as otherwise determined by the Committee.
(i) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
(j) "EXEMPT PERSON" means any employee benefit plan of the Company or a
trustee or other administrator or fiduciary holding securities under an
employee benefit plan of the Company.
(k) "FAIR MARKET VALUE" of a share of Common Stock of the Company means,
as of the date in question, the officially-quoted closing selling price of
the stock (or if no selling price is quoted, the bid price) on the principal
securities exchange on which the Common Stock is then listed for trading
(including for this purpose the Nasdaq National Market) (the "Market") for
the immediately preceding trading day or, if the Common Stock is not then
listed or quoted in the Market, the Fair Market Value shall be the fair
value of the Common Stock determined in good faith by the Committee;
provided, however, that when shares received upon exercise of an option are
immediately sold in the open market, the net sale price received may be used
to determine the Fair Market Value of any shares used to pay the exercise
price or withholding taxes and to compute the withholding taxes.
B-2
<PAGE>
(l) "INCENTIVE STOCK OPTION" means an option conforming to the
requirements of Section 422 of the Code and any successor thereto.
(m) "NON-EMPLOYEE DIRECTOR" has the meaning given to such term in Rule
16b-3 under the Exchange Act.
(n) "NONQUALIFIED STOCK OPTION" means any stock option other than an
Incentive Stock Option.
(o) "OTHER COMPANY SECURITIES" mean securities of the Company other than
Common Stock, which may include, without limitation, unbundled stock units
or components thereof, debentures, preferred stock, warrants and securities
convertible into or exchangeable for Common Stock or other property.
(p) "RETIREMENT" means retirement as defined under any Company pension
plan or retirement program or termination of one's employment on retirement
with the approval of the Committee.
(q) "SUBSIDIARY" means a corporation or other entity of which
outstanding shares or ownership interests representing 50% or more of the
combined voting power of such corporation or other entity entitled to elect
the management thereof, or such lesser percentage as may be approved by the
Committee, are owned directly or indirectly by the Company.
3. ADMINISTRATION.
The Plan shall be administered by the Committee; provided that the Board
may, in its discretion, at any time and from time to time, resolve to administer
the Plan, in which case the term "Committee" shall be deemed to mean the Board
for all purposes herein. The Committee shall consist of at least two directors.
Subject to the provisions of the Plan, the Committee shall be authorized to (i)
select persons to participate in the Plan, (ii) determine the form and substance
of grants made under the Plan to each participant, and the conditions and
restrictions, if any, subject to which such grants will be made, (iii) modify
the terms of grants made under the Plan, (iv) interpret the Plan and grants made
thereunder, (v) make any adjustments necessary or desirable in connection with
grants made under the Plan to eligible participants located outside the United
States and (vi) adopt, amend, or rescind such rules and regulations, and make
such other determinations, for carrying out the Plan as it may deem appropriate.
Decisions of the Committee on all matters relating to the Plan shall be in the
Committee's sole discretion and shall be conclusive and binding on all parties.
The validity, construction, and effect of the Plan and any rules and regulations
relating to the Plan shall be determined in accordance with applicable federal
and state laws and rules and regulations promulgated pursuant thereto. No member
of the Committee and no officer of the Company shall be liable for any action
taken or omitted to be taken by such member, by any other member of the
Committee or by any officer of the Company in connection with the performance of
duties under the Plan, except for such person's own willful misconduct or as
expressly provided by statute.
The expenses of the Plan shall be borne by the Company. The Plan shall not
be required to establish any special or separate fund or make any other
segregation of assets to assume the payment of any award under the Plan, and
rights to the payment of such awards shall be no greater than the rights of the
Company's general creditors.
4. SHARES AVAILABLE FOR THE PLAN.
Subject to adjustments as provided in Section 15, an aggregate of 500,000
shares of Common Stock (the "Shares") may be issued pursuant to the Plan. Such
Shares may be in whole or in part authorized and unissued, or shares which are
held by the Company as treasury shares. If any grant under the Plan expires or
terminates unexercised, becomes unexercisable or is forfeited as to any Shares,
such unpurchased or
B-3
<PAGE>
forfeited Shares shall thereafter be available for further grants under the Plan
unless, in the case of options granted under the Plan, related SARs are
exercised.
Without limiting the generality of the foregoing provisions of this Section
4 or the generality of the provisions of Sections 3, 6 or 17 or any other
section of this Plan, the Committee may, at any time or from time to time, and
on such terms and conditions (that are consistent with and not in contravention
of the other provisions of this Plan) as the Committee may, in its sole
discretion, determine, enter into agreements (or take other actions with respect
to the options) for new options containing terms (including exercise prices)
more (or less) favorable than the outstanding options.
5. PARTICIPATION.
Participation in the Plan shall be limited to those directors (including
Non-Employee Directors) and officers (including non-employee officers) of, and
employees and other individuals performing significant services for (including
non-employees to whom offers of employment have been extended by), the Company
and its Subsidiaries, in each case as selected by the Committee (including
participants located outside the United States). Nothing in the Plan or in any
grant thereunder shall confer any right on a participant to continue in the
employ of, or the performance of services for the Company or shall interfere in
any way with the right of the Company to terminate the employment or performance
of services of a participant at any time. By accepting any award under the Plan,
each participant and each person claiming under or through him or her shall be
conclusively deemed to have indicated his or her acceptance and ratification of,
and consent to, any action taken under the Plan by the Company, the Board or the
Committee.
Incentive Stock Options or Nonqualified Stock Options, SARs, alone or in
tandem with options, restricted stock awards, performance awards, or any
combination thereof, may be granted to such persons and for such number of
Shares as the Committee shall determine (such individuals to whom grants are
made being sometimes herein called "optionees" or "grantees," as the case may
be). Determinations made by the Committee under the Plan need not be uniform and
may be made selectively among eligible individuals under the Plan, whether or
not such individuals are similarly situated. A grant of any type made hereunder
in any one year to an eligible participant shall neither guarantee nor preclude
a further grant of that or any other type to such participant in that year or
subsequent years.
6. INCENTIVE AND NONQUALIFIED OPTIONS.
The Committee may from time to time grant to eligible participants Incentive
Stock Options, Nonqualified Stock Options, or any combination thereof; provided
that the Committee may grant Incentive Stock Options only to eligible employees
of the Company or its subsidiaries (as defined for this purpose in Section
424(f) of the Code). In any one calendar year, the Committee shall not grant to
any one participant options or SARs to purchase a number of shares of Common
Stock in excess of 10% of the total number of shares authorized under the Plan.
The options granted shall take such form as the Committee shall determine,
subject to the following terms and conditions.
It is the Company's intent that Nonqualified Stock Options granted under the
Plan not be classified as Incentive Stock Options, that Incentive Stock Options
be consistent with and contain or be deemed to contain all provisions required
under Section 422 of the Code and any successor thereto, and that any
ambiguities in construction be interpreted in order to effectuate such intent.
If an Incentive Stock Option granted under the Plan does not qualify as such for
any reason, then to the extent of such nonqualification, the stock option
represented thereby shall be regarded as a Nonqualified Stock Option duly
granted under
B-4
<PAGE>
the Plan, provided that such stock option otherwise meets the Plan's
requirements for Nonqualified Stock Options.
(a) PRICE. The price per Share deliverable upon the exercise of each
option ("exercise price") shall be established by the Committee, except that
in the case of the grant of any option, the exercise price may not be less
than 100% of the Fair Market Value of a share of Common Stock as of the date
of grant of the option, and in the case of the grant of any Incentive Stock
Option to an employee who, at the time of the grant, owns more than 10% of
the total combined voting power of all classes of stock of the Company or
any of its Subsidiaries, the exercise price may not be less that 110% of the
Fair Market Value of a share of Common Stock as of the date of grant of the
option, in each case unless otherwise permitted by Section 422 of the Code.
(b) PAYMENT. Options may be exercised, in whole or in part, upon
payment of the exercise price of the Shares to be acquired. Unless otherwise
determined by the Committee, payment shall be made (i) in cash (including
check, bank draft or money order), (ii) by delivery of outstanding shares of
Common Stock with a Fair Market Value on the date of exercise equal to the
aggregate exercise price payable with respect to the options' exercise,
(iii) by simultaneous sale through a broker reasonably acceptable to the
Committee of Shares acquired on exercise, as permitted under Regulation T of
the Federal Reserve Board, (iv) by authorizing the Company to withhold from
issuance a number of Shares issuable upon exercise of the options which,
when multiplied by the Fair Market Value of a share of Common Stock on the
date of exercise is equal to the aggregate exercise price payable with
respect to the options so exercised or (v) by any combination of the
foregoing. Options may also be exercised upon payment of the exercise price
of the Shares to be acquired by delivery of the optionee's promissory note,
but only to the extent specifically approved by and in accordance with the
policies of the Committee.
In the event a grantee elects to pay the exercise price payable with respect
to an option pursuant to clause (ii) above, (A) only a whole number of share(s)
of Common Stock (and not fractional shares of Common Stock) may be tendered in
payment, (B) such grantee must present evidence acceptable to the Company that
he or she has owned any such shares of Common Stock tendered in payment of the
exercise price (and that such tendered shares of Common Stock have not been
subject to any substantial risk of forfeiture) for at least six months prior to
the date of exercise, and (C) Common Stock must be delivered to the Company.
Delivery for this purpose may, at the election of the grantee, be made either by
(A) physical delivery of the certificate(s) for all such shares of Common Stock
tendered in payment of the price, accompanied by duly executed instruments of
transfer in a form acceptable to the Company, or (B) direction to the grantee's
broker to transfer, by book entry, such shares of Common Stock from a brokerage
account of the grantee to a brokerage account specified by the Company. When
payment of the exercise price is made by delivery of Common Stock, the
difference, if any, between the aggregate exercise price payable with respect to
the option being exercised and the Fair Market Value of the share(s) of Common
Stock tendered in payment (plus any applicable taxes) shall be paid in cash. No
grantee may tender shares of Common Stock having a Fair Market Value exceeding
the aggregate exercise price payable with respect to the option being exercised
(plus any applicable taxes).
In the event a grantee elects to pay the exercise price payable with respect
to an option pursuant to clause (iv) above, (A) only a whole number of Share(s)
(and not fractional Shares) may be withheld in payment and (B) such grantee must
present evidence acceptable to the Company that he or she has owned a number of
shares of Common Stock at least equal to the number of Shares to be withheld in
payment of the exercise price (and that such owned shares of Common Stock have
not been subject to any substantial risk of forfeiture) for at least six months
prior to the date of exercise. When payment of the exercise price
B-5
<PAGE>
is made by withholding of Shares, the difference, if any, between the aggregate
exercise price payable with respect to the option being exercised and the Fair
Market Value of the Share(s) withheld in payment (plus any applicable taxes)
shall be paid in cash. No grantee may authorize the withholding of Shares having
a Fair Market Value exceeding the aggregate exercise price payable with respect
to the option being exercised (plus any applicable taxes). Any withheld Shares
shall no longer be issuable under such option.
(c) TERMS OF OPTIONS. The term during which each option may be
exercised shall be determined by the Committee, but, except as otherwise
provided herein, in no event shall an option be exercisable in whole or in
part, in the case of a Nonqualified Stock Option or an Incentive Stock
Option (other than as described below), more than ten years from the date it
is granted or, in the case of an Incentive Stock Option granted to an
employee who at the time of the grant owns more than 10% of the total
combined voting power of all classes of stock of the Company or any of its
Subsidiaries, if required by the Code, more than five years from the date it
is granted. All rights to purchase Shares pursuant to an option shall,
unless sooner terminated, expire at the date designated by the Committee.
The Committee shall determine the date on which each option shall become
exercisable and may provide that an option shall become exercisable in
installments. The Shares constituting each installment may be purchased in
whole or in part at any time after such installment becomes exercisable,
subject to such minimum exercise requirements as may be designated by the
Committee. Unless otherwise provided herein or in the terms of the related
grant, an optionee may exercise an option only if he or she is, and has
continuously since the date the option was granted, been a director, officer
or employee of, or performed other services for, the Company or a
Subsidiary. Prior to the exercise of an option and delivery of the Shares
represented thereby, the optionee shall have no rights as a stockholder with
respect to any Shares covered by such outstanding option (including any
dividend or voting rights).
(d) LIMITATIONS ON GRANTS. If required by the Code, the aggregate Fair
Market Value (determined as of the grant date) of Shares for which an
Incentive Stock Option is exercisable for the first time during any calendar
year under all equity incentive plans of the Company and its Subsidiaries
(as defined in Section 422 of the Code) may not exceed $100,000.
(e) TERMINATION; CHANGE IN CONTROL.
(i)
If a participant ceases to be a director, officer or employee of,
or to perform other services for, the Company and any Subsidiary
due to death or Disability, all of the participant's options and SARs
shall become fully vested and exercisable and shall remain so for a
period of one year from the date of such death or Disability, but in no
event after the expiration date of the options or SARs. Notwithstanding
the foregoing, if the Disability giving rise to the termination of
employment is not within the meaning of Section 422(e)(3) of the Code,
Incentive Stock Options not exercised by such participant within 90 days
after the date of termination of employment will cease to qualify as
Incentive Stock Options and will be treated as Nonqualified Stock Options
under the Plan if required to be so treated under the Code.
(ii)
If a participant ceases to be a director, officer or employee of,
or to perform other services for, the Company and any Subsidiary
upon the occurrence of his or her Retirement, all of the participant's
options and SARs which are then vested shall remain exercisable for 90
days after the date of Retirement, but in no event after the expiration
date of the options or SARs, provided that the participant does not
engage in Competition during such 90-day period unless he or she receives
written consent to do so from the Committee. Upon the occurrence of such
B-6
<PAGE>
Retirement, all of the participant's options and SARs which are not yet
vested shall become fully vested and exercisable only at the discretion
of, and on the terms prescribed by, the Committee.
(iii)
If a participant ceases to be a director, officer or employee of,
or to perform other services for, the Company or a Subsidiary due
to Cause, all of the participant's options and SARs shall be forfeited
immediately upon such cessation, whether or not then exercisable.
(iv)
Unless otherwise determined by the Committee, if a participant
ceases to be a director, officer or employee of, or to otherwise
perform services for, the Company or a Subsidiary for any reason other
than death, Disability, Retirement or Cause, (A) all of the participant's
options and SARs that were exercisable on the date of such cessation
shall remain exercisable for, and shall otherwise terminate at the end
of, a period of 90 days after the date of such cessation, but in no event
after the expiration date of the options or SARs, provided that the
participant does not engage in Competition during such 90-day period
unless he or she receives written consent to do so from the Committee and
(B) all of the participant's options and SARs that were not exercisable
on the date of such cessation shall be forfeited immediately upon such
cessation.
(v)
Unless the Committee decides to otherwise provide for the
accelerated vesting of all options and SARs in the event of a
Change in Control, if there is a Change in Control of the Company and
participant is terminated from being a director, officer or employee of,
or from performing other services for, the Company or any Subsidiary
within one year following such Change in Control, all of the
participant's options and SARs shall become fully vested and exercisable
immediately upon the date of such cessation and shall remain so for a
period of one year from the date of such cessation, but in no event after
the expiration date of the options or SARs. Notwithstanding the
foregoing, Incentive Stock Options not exercised by such participant
within 90 days after the date of termination of employment will cease to
qualify as Incentive Stock Options and will be treated as Nonqualified
Stock Options under the Plan if required to be so treated under the Code.
(f) GRANT OF RELOAD OPTIONS. The Committee may provide (either at the
time of grant or exercise of an option), in its discretion, for the grant to
a grantee who exercises all or any portion of an option ("Exercised
Options") and who pays all or part of such exercise price with shares of
Common Stock, of an additional option (a "Reload Option") for a number of
shares of Common Stock equal to the sum (the "Reload Number") of the number
of shares of Common Stock tendered or withheld in payment of such exercise
price for the Exercised Options plus, if so provided by the Committee, the
number of shares of Common Stock, if any, tendered or withheld by the
grantee or withheld by the Company in connection with the exercise of the
Exercised Options to satisfy any federal, state or local tax withholding
requirements. The terms of each Reload Option, including the date of its
expiration and the terms and conditions of its exercisability and
transferability, shall be the same as the terms of the Exercised Option to
which it relates, except that (i) the grant date for each Reload Option
shall be the date of exercise of the Exercised Option to which it relates
and (ii) the exercise price for each Reload Option shall be the Fair Market
Value of the Common Stock on the grant date of the Reload Option.
7. STOCK APPRECIATION RIGHTS.
The Committee shall have the authority to grant SARs under this Plan, either
alone or to any optionee in tandem with options (either at the time of grant of
the related option or thereafter by amendment to an outstanding option). SARs
shall be subject to such terms and conditions as the Committee may specify.
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No SAR may be exercised unless the Fair Market Value of a share of Common
Stock of the Company on the date of exercise exceeds the exercise price of the
SAR or, in the case of SARs granted in tandem with options, any options to which
the SARs correspond. Prior to the exercise of the SAR and delivery of the cash
and/or Shares represented thereby, the participant shall have no rights as a
stockholder with respect to Shares covered by such outstanding SAR (including
any dividend or voting rights).
SARs granted in tandem with options shall be exercisable only when, to the
extent and on the conditions that any related option is exercisable. The
exercise of an option shall result in an immediate forfeiture of any related SAR
to the extent the option is exercised, and the exercise of an SAR shall cause an
immediate forfeiture of any related option to the extent the SAR is exercised.
Upon the exercise of an SAR, the participant shall be entitled to a
distribution in an amount equal to the difference between the Fair Market Value
of a share of Common Stock on the date of exercise and the exercise price of the
SAR or, in the case of SARs granted in tandem with options, any option to which
the SAR is related, multiplied by the number of Shares as to which the SAR is
exercised. The Committee shall decide whether such distribution shall be in
cash, in Shares having a Fair Market Value equal to such amount, in Other
Company Securities having a Fair Market Value equal to such amount or in a
combination thereof.
All SARs will be exercised automatically on the last day prior to the
expiration date of the SAR or, in the case of SARs granted in tandem with
options, any related option, so long as the Fair Market Value of a share of
Common Stock on that date exceeds the exercise price of the SAR or any related
option, as applicable. An SAR granted in tandem with options shall expire at the
same time as any related option expires and shall be transferable only when, and
under the same conditions as, any related option is transferable.
8. RESTRICTED STOCK.
The Committee may at any time and from time to time grant Shares of
restricted stock under the Plan to such participants and in such amounts as it
determines. Each grant of restricted stock shall specify the applicable
restrictions on such Shares, the duration of such restrictions (which shall be
at least six months except as otherwise provided in the third paragraph of this
Section 8), and the time or times at which such restrictions shall lapse with
respect to all or a specified number of Shares that are part of the grant.
The participant will be required to pay the Company the aggregate par value
of any Shares of restricted stock (or such larger amount as the Board may
determine to constitute capital under Section 154 of the Delaware General
Corporation Law, as amended) within ten days of the date of grant, unless such
Shares of restricted stock are treasury shares. Unless otherwise determined by
the Committee, certificates representing Shares of restricted stock granted
under the Plan will be held in escrow by the Company on the participant's behalf
during any period of restriction thereon and will bear an appropriate legend
specifying the applicable restrictions thereon, and the participant will be
required to execute a blank stock power therefor. Except as otherwise provided
by the Committee, during such period of restriction the participant shall have
all of the rights of a holder of Common Stock, including but not limited to the
rights to receive dividends and to vote, and any stock or other securities
received as a distribution with respect to such participant's restricted stock
shall be subject to the same restrictions as then in effect for the restricted
stock.
Unless the Committee decides to otherwise provide for the lapse of all
restrictions in the event of a Change in Control, if there is a Change in
Control and participant is terminated from being a director, officer or employee
of, or from performing other services for, the Company and any Subsidiary within
one year following such Change in Control or at such time as a participant
ceases to be a director, officer or
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<PAGE>
employee of, or to otherwise perform services for, the Company and its
Subsidiaries due to death or Disability during any period of restriction, all
restrictions on Shares granted to such participant shall lapse. Except as
otherwise provided by the Committee, at such time as a participant ceases to be
a director, officer or employee of, or to otherwise perform services for, the
Company or its Subsidiaries for any other reason, all Shares of restricted stock
granted to such participant on which the restrictions have not lapsed or do not
thereupon lapse shall be immediately forfeited to the Company. Upon the
occurrence of Retirement prior to the end of any period of restriction, the
Committee, at its discretion, may allow such restrictions to lapse.
9. PERFORMANCE AWARDS.
Performance awards may be granted to participants at any time and from time
to time as determined by the Committee. The Committee shall have complete
discretion in determining the size and composition of performance awards so
granted to a participant and the appropriate period over which performance is to
be measured (a "performance cycle"). Performance awards may include (i) specific
dollar-value target awards (ii) performance units, the value of each such unit
being determined by the Committee at the time of issuance, and/or (iii)
performance Shares, the value of each such Share being equal to the Fair Market
Value of a share of Common Stock.
The value of each performance award may be fixed or it may be permitted to
fluctuate based on a performance factor (e.g., return on equity) selected by the
Committee.
The Committee shall establish performance goals and objectives for each
performance cycle on the basis of such criteria and objectives as the Committee
may select from time to time, including, without limitation, the performance of
the participant, the Company, one or more of its Subsidiaries or divisions or
any combination of the foregoing. During any performance cycle, the Committee
shall have the authority to adjust the performance goals, objectives and/or
cycle duration for such cycle for such reasons as it deems equitable.
The Committee shall determine the portion of each performance award that is
earned by a participant on the basis of the Company's performance over the
performance cycle in relation to the performance goals for such cycle. The
earned portion of a performance award may be paid out in Shares, cash, Other
Company Securities, or any combination thereof, as the Committee may determine.
A participant must be a director, officer or employee of, or otherwise
perform services for, the Company or its Subsidiaries at the end of the
performance cycle in order to be entitled to payment of a performance award
issued in respect of such cycle; provided, however, that, except as otherwise
determined by the Committee, if a participant ceases to be a director, officer
or employee of, or to otherwise perform services for, the Company and its
Subsidiaries upon his or her death, Retirement, or Disability prior to the end
of the performance cycle, the participant shall earn a proportionate portion of
the performance award based upon the elapsed portion of the performance cycle
and the Company's performance over that portion of such cycle.
If there is a Change in Control and participant is terminated from being a
director, officer or employee of, or from performing other services for, the
Company or any Subsidiary within one year following such Change in Control, a
participant shall earn no less than the proportionate portion of the performance
award that the participant would have earned if the performance cycle(s) had
terminated as of the date of such cessation following the Change in Control.
10. WITHHOLDING TAXES.
(a) PARTICIPANT ELECTION. Unless otherwise determined by the
Committee, a participant may elect to deliver shares of Common Stock (or
have the Company withhold shares acquired upon
B-9
<PAGE>
exercise of an option or SAR or deliverable upon grant or vesting of
restricted stock, as the case may be) to satisfy, in whole or in part, the
amount the Company is required to withhold for taxes in connection with the
exercise of an option or SAR or the delivery of restricted stock upon grant
or vesting, as the case may be. Such election must be made on or before the
date the amount of tax to be withheld is determined. Once made, the election
shall be irrevocable. The fair market value of the shares to be withheld or
delivered will be the Fair Market Value as of the date the amount of tax to
be withheld is determined. In the event a participant elects to deliver
shares of Common Stock pursuant to this Section 10(a), such delivery must be
made subject to the conditions and pursuant to the procedures set forth in
Section 6(b) with respect to the delivery of Common Stock in payment of the
exercise price of options.
(b) COMPANY REQUIREMENT. The Company may require, as a condition to
any grant or exercise under the Plan or to the delivery of certificates for
Shares issued hereunder, that the grantee make provision for the payment to
the Company, either pursuant to Section 10(a) or this Section 10(b), of any
federal, state or local taxes of any kind required by law to be withheld
with respect to any grant or any delivery of Shares. The Company, to the
extent permitted or required by law, shall have the right to deduct from any
payment of any kind (including salary or bonus) otherwise due to a grantee,
an amount equal to any federal, state or local taxes of any kind required by
law to be withheld with respect to any grant or to the delivery of Shares
under the Plan, or to retain or sell without notice a sufficient number of
the Shares to be issued to such grantee to cover any such taxes, the payment
of which has not otherwise been provided for in accordance with the terms of
the Plan, provided that the Company shall not sell any such Shares if such
sale would be considered a sale by such grantee for purposes of Section 16
of the Exchange Act that is not exempt from matching thereunder.
11. WRITTEN AGREEMENT; VESTING.
Each employee to whom a grant is made under the Plan shall enter into a
written agreement with the Company that shall contain such provisions, including
without limitation vesting requirements, consistent with the provisions of the
Plan, as may be approved by the Committee. Unless the Committee determines
otherwise and except as otherwise provided in Sections 6, 7, 8 and 9 in
connection with a Change in Control or certain occurrences of termination, no
grant under this Plan may be exercised, and no restrictions relating thereto may
lapse, within six months of the date such grant is made.
12. TRANSFERABILITY.
Unless the Committee determines otherwise, no option, SAR, performance
award, or restricted stock granted under the Plan shall be transferable by a
participant otherwise than by will or the laws of descent and distribution or
pursuant to a qualified domestic relations order as defined by the Code. Unless
the Committee determines otherwise, an option, SAR, or performance award may be
exercised only by the optionee or grantee thereof or his guardian or legal
representative; provided that Incentive Stock Options may be exercised by such
guardian or legal representative only if permitted by the Code and any
regulations promulgated thereunder.
13. LISTING, REGISTRATION AND QUALIFICATION.
If the Committee determines that the listing, registration or qualification
upon any securities exchange or under any law of Shares subject to any option,
SAR, performance award or restricted stock grant is necessary or desirable as a
condition of, or in connection with, the granting of same or the issue or
purchase of Shares thereunder, no such option or SAR may be exercised in whole
or in part, no such performance award may be paid out and no Shares may be
issued unless such listing, registration or qualification is effected free of
any conditions not acceptable to the Committee.
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<PAGE>
It is the intent of the Company that the Plan comply in all respects with
Section 162(m) of the Code, that awards made hereunder comply in all respects
with Rule 16b-3 under the Exchange Act, that any ambiguities or inconsistencies
in construction of the Plan be interpreted to give effect to such intention and
that if any provision of the Plan is found not to be in compliance with Section
162(m), such provision shall be deemed null and void to the extent required to
permit the Plan to comply with Section 162(m), as the case may be.
14. TRANSFER OF EMPLOYEE.
The transfer of an employee from the Company to a Subsidiary, from a
Subsidiary to the Company, or from one Subsidiary to another shall not be
considered a termination of employment; nor shall it be considered a termination
of employment if an employee is placed on military or sick leave or such other
leave of absence which is considered by the Committee as continuing intact the
employment relationship.
15. ADJUSTMENTS.
In the event of a reorganization, recapitalization, stock split, stock
dividend, combination of shares, merger, consolidation, distribution of assets,
or any other change in the corporate structure or shares of the Company, the
Committee shall make such adjustment as it deems appropriate in the number and
kind of Shares or other property reserved for issuance under the Plan, in the
number and kind of Shares or other property covered by grants previously made
under the Plan, and in the exercise price of outstanding options and SARs. Any
such adjustment shall be final, conclusive and binding for all purposes of the
Plan. In the event of any merger, consolidation or other reorganization in which
the Company is not the surviving or continuing corporation or in which a Change
in Control is to occur, all of the Company's obligations regarding options,
SARs, performance awards, and restricted stock that were granted hereunder and
that are outstanding on the date of such event shall, on such terms as may be
approved by the Committee prior to such event, be assumed by the surviving or
continuing corporation or canceled in exchange for property (including cash).
Without limitation of the foregoing, in connection with any transaction of
the type specified by clause (iii) of the definition of a Change in Control in
Section 2(c), the Committee may, in its discretion, (i) cancel any or all
outstanding options under the Plan in consideration for payment to the holders
thereof of an amount equal to the portion of the consideration that would have
been payable to such holders pursuant to such transaction if their options had
been fully exercised immediately prior to such transaction, less the aggregate
exercise price that would have been payable therefor, or (ii) if the amount that
would have been payable to the option holders pursuant to such transaction if
the vested portion of their options had been fully exercised immediately prior
thereto would be less than the aggregate exercise price that would have been
payable therefor, cancel any or all such options for no consideration or payment
of any kind. Payment of any amount payable pursuant to the preceding sentence
may be made in cash or, in the event that the consideration to be received in
such transaction includes securities or other property, in cash and/or
securities or other property in the Committee's discretion.
16. TERMINATION AND MODIFICATION OF THE PLAN.
The Board of Directors or the Committee, without approval of the
stockholders, may modify or terminate the Plan, except that no modification
shall become effective without prior approval of the stockholders of the Company
if stockholder approval would be required for continued compliance with the
performance-based compensation exception of Section 162(m) of the Code or any
listing requirement of the principal stock exchange on which the Common Stock is
then listed.
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<PAGE>
17. AMENDMENT OR SUBSTITUTION OF AWARDS UNDER THE PLAN.
The terms of any outstanding award under the Plan may be amended from time
to time by the Committee in its discretion in any manner that it deems
appropriate (including, but not limited to, acceleration of the date of exercise
of any award and/or payments thereunder or of the date of lapse of restrictions
on Shares); provided that, except as otherwise provided in Section 15, no such
amendment shall adversely affect in a material manner any right of a participant
under the award without his or her written consent. The Committee may, in its
discretion, permit holders of awards under the Plan to surrender outstanding
awards in order to exercise or realize rights under other awards, or in exchange
for the grant of new awards, or require holders of awards to surrender
outstanding awards as a condition precedent to the grant of new awards under the
Plan.
18. COMMENCEMENT DATE; TERMINATION DATE.
The date of commencement of the Plan shall be June 1, 1998, subject to
approval by the shareholders of the Company. The Plan may terminate upon the
adoption of a resolution of the Board terminating the Plan, in which event
termination of the Plan shall not materially and adversely affect any of the
rights or obligations of any person, without his consent, under any grant of
options or other incentives theretofore granted under the Plan.
19. GOVERNING LAW.
The Plan shall be governed by the corporate laws of the State of Delaware,
without giving effect to any choice of law provisions.
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<PAGE>>
PROXY PROXY
VARLEN CORPORATION
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
FOR THE ANNUAL MEETING OF STOCKHOLDERS ON MAY 27, 1998
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 Radisson Hotel Lisle - Naperville, 3000 Warrenville Road, Lisle, Illinois
60532, on Wednesday, May 27, 1998, 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/
THE BOARD OF DIRECTORS RECOMMEND A VOTE FOR ALL NOMINEES FOR
DIRECTOR AND FOR PROPOSALS 2 AND 3
<TABLE>
<CAPTION>
<S> <C>
Withheld For all
For all from all nominees except as
nominees nominees marked below
1. Election of Directors for a One Year Term:
Nominees: Raymond A. Jean, Ernest H. Lorch, / / / / / /
L. William Miles, Greg A. Rosenbaum,
Joseph J. Ross, Theodore A. Ruppert and
Richard L. Wellek.
* Withhold my vote for the following nominees:
- -----------------------------------------------------------
Comments:
For Against Abstain
2. To approve a proposal to amend the Company's
Restated Certificate of Incorporation to / / / / / /
increase the authorized shares of Common Stock,
par value $.10 per share from 20,000,000 to
40,000,000.
For Against Abstain
3. To approve a proposal to adopt the Company's 1998
Long-Term Equity Incentive Plan in the form / / / / / /
approved by the Company's Board of Directors.
4. In their discretion, upon any other matter which
may properly come before the Annual Meeting of
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 and FOR proposals 2 and 3.
-------------------------------------------------------------
-------------------------------------------------------------
Signature(s)
Dated , 1998
-------------------------
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.
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,
1998, and of its Annual Report for the fiscal year ended January 31, 1998.
</TABLE>
