-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, O729PzjWMNqiXedyAOEBARa8lElFdc3PPT06VoXVojy3xFoBsx+DnS6d/vuhUu6m YdxXNtZ1DtjtlvFTlvUGKA== 0000912057-96-007050.txt : 19960426 0000912057-96-007050.hdr.sgml : 19960426 ACCESSION NUMBER: 0000912057-96-007050 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19960131 FILED AS OF DATE: 19960425 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: VARLEN CORP CENTRAL INDEX KEY: 0000103071 STANDARD INDUSTRIAL CLASSIFICATION: METAL FORGING & STAMPINGS [3460] IRS NUMBER: 132651100 STATE OF INCORPORATION: DE FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-05374 FILM NUMBER: 96550994 BUSINESS ADDRESS: STREET 1: 55 SHUMAN BLVD STREET 2: P O BOX 3089 CITY: NAPERVILLE STATE: IL ZIP: 60566-7089 BUSINESS PHONE: 7084200400 MAIL ADDRESS: STREET 1: 55 SHUMAN BLVD STREET 2: P O BOX 3089 CITY: NAPERVILLE STATE: IL ZIP: 60566-7089 10-K405 1 VARLEN CORPORATION FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended January 31, 1996 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ---------------- ------------------ Commission file number 0-5374 VARLEN CORPORATION - -------------------------------------------------------------------------------- (Exact name of Registrant as specified in its charter) DELAWARE 13-2651100 ------------------------------- ------------------ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 55 Shuman Boulevard P. O. Box 3089 Naperville, Illinois 60566-7089 --------------------------------- ------------------ (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (708) 420-0400 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered NONE NONE ------------------- --------------------- Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, PAR VALUE $.10 PER SHARE ---------------------------------------------- (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting stock held by non-affiliates of the Registrant, as of April 1, 1996, was $108,494,682. The number of outstanding shares of the Registrant's Common Stock, par value $.10 per share, as of the close of business on April 1, 1996, was 5,306,466 shares. DOCUMENTS INCORPORATED BY REFERENCE 1. The Registrant's 1995 Annual Report to Stockholders is incorporated herein by reference to the following extent: Industry Segments and Officers into Part I; and Quarterly Market and Dividend Information, Summary of Operations, Summary of Financial Condition, Shares Listed, Management's Discussion and Analysis of Financial Condition and Results of Operations, and the Consolidated Balance Sheets, Consolidated Statements of Earnings, Consolidated Statements of Stockholders' Equity and Consolidated Statements of Cash Flows with related Notes and Independent Auditors' Report into Part II. 2. The Registrant's Proxy Statement filed pursuant to Regulation 14A within 120 days after January 31, 1996, is incorporated herein by reference to the following extent: The information set forth under the captions, Election of Directors, Executive Compensation and Pension Plans, Compensation Committee Interlocks and Insider Participation and Security Ownership of Certain Beneficial Owners and Management into Part III. PART I Item I. BUSINESS GENERAL Varlen Corporation (the "Registrant") designs, manufactures and markets engineered industrial products primarily for specialized applications in the transportation and analytical instruments markets. The Registrant's principal business strategy is to employ its product development capabilities, advanced manufacturing processes and marketing skills in market niches where the Registrant can achieve a market leadership position. The Registrant's operations are conducted primarily through subsidiaries and divisions that are relatively autonomous, while its small corporate headquarters staff oversees financial controls and provides strategic direction. Management continually emphasizes improvements in quality, product performance and delivery time, cost reductions and other value adding activities. Although many of the markets for the Registrant's products are mature, the Registrant seeks growth opportunities through technological and product improvement and by acquiring and developing new products that can be sold through its distribution networks. In addition, the Registrant's development efforts increasingly focus on new products specifically designed for international markets. DEVELOPMENT OF THE COMPANY The Registrant was founded in 1969 by The Dyson-Kissner-Moran Corporation ("DKM") for the purpose of acquiring and managing businesses which manufacture products for industrial markets. The Registrant's original business produced parts for the railroad industry; however, over the years the Registrant diversified its operations to serve many markets. Since 1984, the Registrant has sold or discontinued smaller businesses, heavily construction-related or bid businesses and businesses manufacturing commodity products where the Registrant could not apply its design, manufacturing or marketing skills to create a competitive advantage. Businesses acquired since 1985 include the Registrant's entire heavy-duty-truck component, automotive parts, laboratory appliance and instrument businesses as well as additional domestic and foreign railroad component businesses. Although each of these businesses presents unique design and marketing challenges, they each employ basic manufacturing processes, such as machining, forging, casting, metal forming, welding and plastic molding, that have historically been at the core of the Registrant's operations. In 1993, the Registrant purchased all of its outstanding stock owned by DKM. The following sets forth certain basic information with respect to the Registrant's current businesses, which are divided into two industry segments: transportation products and analytical instruments. PRODUCTS AND PRIMARY MARKETS TRANSPORTATION PRODUCTS HEAVY-DUTY TRUCKS AND TRAILERS - These products are sold primarily to North American Class 8 truck and over-the-road trailer manufacturers. The primary products are aluminum permanent mold and die-casted products including axle hubs, suspension brackets, transmission housings, spring brake flanges and pistons, and structural molded products including door sill assemblies, instrument panels and sleeper cab accessories. RAILROAD - These products are sold in global markets to locomotive and railcar manufacturers, railroads and railcar maintenance facilities, lessors, and track maintenance contractors. The primary products are hydraulic cushioning devices, draft gears, buffers and discharge gates for railcars, and HVAC systems, draft gears, valves and toilets for locomotives. Additional products include remanufactured crankshafts and camshafts along with railroad track fastener systems. AUTOMOTIVE - These products are sold primarily in North American markets to original equipment automotive manufacturers, tier one suppliers and aftermarket transmission rebuilders for use on cars and light trucks. The primary products are automatic transmission reaction plates, steering column components, transmission components, seat frame brackets and other precision stamped metal components and weldments. ANALYTICAL INSTRUMENTS PETROLEUM INSTRUMENTS - These products are sold worldwide to oil refineries, petrochemical plants, petroleum transporters, and large users of distillate products. The primary products are automated laboratory quality control instruments, on-line process analyzers, manual and semi-automatic physical property analyzers, portable optoelectronic analyzers, certification samples and petroleum testing services. CONSTANT TEMPERATURE APPLIANCES - These products are sold worldwide to industrial, governmental, educational and clinical research and development laboratories. The primary products are waterbaths, incubators, ovens and autoclaves. TRANSPORTATION PRODUCTS In the transportation products segment, the Registrant serves three basic markets: the heavy-duty truck and trailer industries, the railroad industry and the automotive industry. HEAVY-DUTY TRUCKS AND TRAILERS The Registrant designs, manufactures and markets lightweight components for heavy-duty over-the-road trucks and trailers. The customer base for these products is original truck and trailer manufacturers and tier 1 component manufacturers. Cast aluminum products offer cost advantages over forged aluminum and significant weight saving advantages over steel without sacrificing strength. Due to U.S. highway weight regulations, lightweight components can be an important consideration for heavy payload haulers. By saving on their truck weight, haulers can carry an increased payload or, alternatively, increase fuel efficiency. The Registrant's truck component business has benefited from its new product development, its customer base expansion and increased penetration with key customers, such as Freightliner, who has been increasing its market share in this industry, and PACCAR. With certain of these customers, the Registrant has been able to establish itself as a sole source supplier of certain components. A significant source of future growth in this business is expected to come from structural molded plastic components for the interiors of heavy-duty trucks. During fiscal 1994, the Registrant received multi-year contracts from Freightliner, its largest customer, which could add $30 to $35 million in incremental annual sales by 1998 at estimated industry production levels. To meet the demand for these contracts, the Registrant purchased and equipped an additional plant facility during 1995 which began production in the first quarter of fiscal 1996. The Registrant's heavy-duty truck products compete with similar products on quality, engineering expertise, delivery and price. These products compete with products that are functionally similar but are manufactured from different materials or using different industrial processes. The Registrant believes that its ability to offer products that are designed and engineered to solve customer problems is a significant factor in establishing and maintaining these customer relationships and enhancing its opportunities for expansion in export markets. RAILROAD Among the products manufactured by the Registrant for the railroad industry are hydraulic cushioning and draft gear shock absorption devices; heating, ventilating and air conditioning equipment; rail anchors; buffer housings and brake block holders; hopper car outlet gates; and valves and toilets. The Registrant's most extensive line of products is its hydraulic cushioning and draft gear shock absorption devices, which are designed to minimize or prevent the damage that locomotives and freight cars and their cargo can incur during coupling and normal operations. The Registrant believes that it is the only company which offers railroads a complete range of such devices utilizing hydraulic, steel friction and synthetic elastomer technologies. Hydraulic cushioning devices weigh between 400 and 1200 pounds and are between three and five feet in length. Hydraulic cushioning is the preferred method of protecting high value freight (such as automobiles, paper, and construction products) from damage during shipment. The Registrant believes it is the leading producer of hydraulic cushioning devices for North American railroads. Draft gears weigh between 150 and 700 pounds and are between one and three feet in length. The Registrant's draft gears are used on locomotives and rail cars transporting less easily damaged goods (coal, ore, grains, etc.), where such devices serve to protect the rail cars themselves from damage. The Registrant provides shock absorption devices to builders of new freight cars and locomotives and also refurbishes and retrofits devices already in service, including models originally manufactured by others. Through ongoing product development, the Registrant is committed to expanding its market share in both the North American and international railroad industries. Currently, the Registrant is focusing on opportunities in Europe, Asia, the former Soviet Union and other international markets. The Registrant believes that its experience and technological leadership in the North American railroad freight market can be successfully transferred to international markets. As the European community opens its borders, European rail hauls are expected to become longer and use heavier freight cars, requiring more sophisticated shock absorption products. A French railroad component manufacturer acquired by the Registrant in mid-1994 improves the Registrant's access into the European railroad market place. In recent years, North American railroads have been increasing their share of the freight transportation market; however, many of the major railroads have recently slowed spending on their fleet and rail maintenance due to industry consolidation. In spite of the recent industry consolidation, the Registrant believes that the continuing increase in the railroads share of the freight transportation market should continue to create demand for the Registrant's products as new locomotives and rail cars are built, old locomotives and rail cars are refurbished and the railroads expend funds to maintain and improve their tracks. In order to take full advantage of this increased demand for railroad products, the Registrant acquired at the end of fiscal 1994 a manufacturer of engineered products for railroad locomotives, including heating, ventilating and air conditioning equipment, valves, toilets and refrigerators. As freight railroad systems are expanded and updated throughout the world, the Registrant believes that its wide-range of highly engineered products should be well positioned to meet the growing demand. A recent development is the receipt of an initial order for $500,000 of locomotive air conditioning systems from the Rail Ministry of the Peoples Republic of China ("China") which will begin shipment early in 1996. Discussions are under way for future contracts with China including a joint venture. The Registrant is also a leading producer of rail anchors for North American railroads and believes it offers the broadest range of styles and sizes of these products. Rail anchors are precision, forged steel devices which are attached directly to the rail track and are designed to prevent the rail from longitudinal movement or buckling as a result of traffic and temperature conditions. Approximately 5,000 to 8,000 rail anchors are used per mile of track. Rail anchors are manufactured to customer orders, usually in large numbers requiring careful production scheduling, and are required to meet specifications of organizations such as the Association of American Railroads. The Registrant also produces outlet gates designed to permit the discharge of a commodity from a covered hopper car, and is a remanufacturer of crankshafts and camshafts for locomotives and large stationary engines for North American railroads, locomotive rebuilders and marine and industrial engine rebuilders. In the railroad products portion of its business, the Registrant's products compete on engineering features, quality, service and price. There are a small number of competitors in each of the above described markets. New competitors in the Registrant's rail products markets have been discouraged from entering these markets because of the relatively large capital investment required, the time it takes to receive railroad approval of particular designs and products and the relatively mature status of these markets. However, the existing competitors in these markets continue to compete intensely. AUTOMOTIVE For the automotive industry, the Registrant produces precision stamped metal components for use in engine, steering, transmission and seating systems. The Registrant's ability to design and engineer tight tolerance components that can be manufactured in high volume with high quality ratings has enabled it to become a direct supplier to original equipment manufacturers, principally divisions of General Motors Corporation ("GM"), Chrysler Corporation ("Chrysler") and Ford Motor Company ("Ford"). The Registrant also sells automotive parts to both U.S. and foreign-owned manufacturers that sell directly to GM, Chrysler, Ford and U.S. production facilities of foreign-owned automobile manufacturers. While the Registrant produces parts for all North American GM passenger vehicles, the principal GM platforms for the Registrant's automotive products consist of light trucks, vans, sport utility vehicles and rear-wheel drive passenger cars. Parts are also produced for many Chrysler products including the "LH" and "Neon" programs and the Cirrus and Stratus models, and for many Ford products. The Registrant's automotive business has been helped by providing parts for popular new models and platforms. Among the Registrant's principal automotive products are steel reaction plates that are used in automobile and light truck transmissions, including mini-vans and sport utility vehicles whose sales have increased as a percentage of the overall passenger vehicle market. In addition, an increased focus on export sales has resulted in the Registrant receiving a large order in 1996 to supply automobile transmission reaction plates to a GM transmission facility in France beginning in late 1996. This order is expected to amount to $2.5 million in sales annually. Competition for the sale of these products is intense, coming from numerous companies, including divisions of automobile manufacturers, which have comparable facilities and greater financial and other resources than the Registrant. The Registrant competes for sales of these products on quality, just-in-time delivery and price. OTHER INFORMATION Marketing of the Registrant's transportation products is done through sales personnel employed by the Registrant and independent sales representatives. Each product group is sold through separate marketing and distribution channels to a different customer base. The primary materials used for the manufacture of products in the transportation products segment are cold rolled and hot rolled steel, special alloy steel, bar, castings, forgings, tubing and rod, aluminum ingots and plastic resin. The Registrant has not experienced significant difficulties in obtaining such materials, although long lead times exist for certain steel products. The machinery and equipment used for the manufacturing of these products, which management considers adequate for current operations, consist primarily of heavy-duty forging and heat-treating equipment, metal cutting machine tools, heavy-duty metal stamping equipment, welding equipment, injection molding presses, casting equipment, tools, dies, furnaces, molds, painting and plating equipment. Backlog for this industry segment was $60.2 million, $68.3 million and $46.2 million as of January 31, 1996, January 31, 1995 and January 31, 1994, respectively. All of the current backlog is expected to be filled during the current fiscal year. Sales of transportation products to Freightliner amounted to 15%, 15% and 14% of total sales in 1995, 1994 and 1993, respectively. Sales of transportation products to GM amounted to 10% and 11% of total sales in 1994 and 1993, respectively. In addition, the Registrant's sales of shock absorption devices and related parts for railroad freight cars and locomotive engines accounted for 11%, 13% and 14% of the Registrant's total sales in 1995, 1994 and 1993, respectively, and the Registrant's sales of aluminum hubs and hub assemblies accounted for 14%, 10% and 9% of the Registrant's total sales in 1995, 1994, and 1993, respectively. ANALYTICAL INSTRUMENTS In the analytical instruments segment, the Registrant produces the following categories of products: petroleum analysis instruments and related services and laboratory appliances. PETROLEUM ANALYSIS INSTRUMENTS AND RELATED SERVICES The Registrant designs, manufactures and markets instruments which analyze the physical properties of petroleum, such as freeze point, flash point, pour point, viscosity and vapor pressure; engages in the testing of petroleum products; and sells petroleum product reference samples. The instruments, testing services and reference samples are used for quality assurance purposes to test for compliance with industry standards and to enhance refinery efficiency. These products and services are used in petroleum refineries and by end-users of petroleum products. The instruments consist of on-line process analyzers and automatic and manual laboratory analyzers. The on-line analyzers are used to help control the refining process, by constantly sampling the stream of petroleum products to provide data which assists in the fine-tuning of the refining process. The automatic and manual laboratory analyzers are used off- line to test petroleum samples for certain properties such as flash point, pour point, cloud point, distillation and thermal oxidation. Testing services are provided at the Registrant's in-house facility which tests customer's petroleum products for thermal stability and viscosity. Petroleum reference samples are used to calibrate petroleum analyzers to proper specifications. In 1995, the Registrant entered into a strategic alliance with Boston Advanced Technologies, Inc., a leader in the design of mid-range infrared spectroscopic instruments, to complement its technology base and extend the range of products offered through its distribution channels. The Registrant's petroleum analysis instruments are sold world-wide to petroleum refiners (of which there are over 600) and to transporters, governmental agencies, pipeline companies and large users of petroleum products (airlines, railroads and the U.S. military). Although the number of U.S. refineries is declining, the Registrant's sales to overseas refiners and to existing refineries in the process of upgrading and automating their production processes are expected to provide growth opportunities in these product lines. The Registrant recently brought to market new instruments which are helping to meet the petroleum industry's growing need for quality control and increased process and laboratory productivity. The Registrant's ability to engineer on- line analyzers for specific applications and to provide timely service at their places of installation is of competitive importance. With manufacturing facilities in the United States and Germany, and service and distribution locations in key strategic domestic and international markets, the Registrant believes it is well-positioned to maintain a leading position in this global market. The Registrant's petroleum analysis instruments compete primarily on product quality, engineering features, reliability and service. There are a small number of competitors in this limited market, some of which use alternate technologies. LABORATORY APPLIANCES The Registrant designs, manufactures and markets laboratory appliances for the life sciences industry, which include water baths, ovens, micro-biological and cell biology incubators, autoclaves, safety refrigerators and vacuum pumps. These products are designed primarily to provide constant temperature conditions for organic research materials. These products are sold under well established brand names, such as "Precision-TM-" and "NAPCO-TM-". The Registrant's laboratory appliances are marketed domestically and internationally, primarily through two major distributors (Fisher Scientific and VWR Scientific). This market consists of industrial, educational, clinical and governmental laboratories. The Registrant's marketing staff provides sales support to the Registrant's distributors. Because laboratory appliances of the type produced by the Registrant are primarily used by life sciences research projects, the level of governmental and private sector spending for research affects sales of the Registrant's laboratory appliances. The Registrant believes that a moderation in pharmaceutical and biotechnology research in recent years has been an important factor affecting sales of the Registrant's laboratory appliances. Since the acquisition of the laboratory appliance business, the Registrant has invested in re-engineering and updating its products and production techniques in order to improve product quality, shorten production cycle time and lower manufacturing costs. In recent years, emphasis has been placed on international markets, including direct export sales and sales to U.S. distributors for foreign end-users. The Registrant's laboratory appliance business competes on product quality, features, reliability, delivery and price. User brand preference and the ability to maintain strong relationships with its distribution system and to provide customer service are of prime competitive importance as there is significant worldwide competition from several companies that specialize in the production of similar products in this fragmented industry. The Registrant is currently seeking a buyer for this business to allow it to focus more on its core businesses. OTHER INFORMATION The primary materials used for the manufacture of the products in this segment are stainless steel, cold rolled carbon steel and electronic components. The Registrant has not experienced any difficulties in obtaining such materials. Marketing of these products is done through company sales personnel, independent sales representatives and distributors throughout the U.S. and international markets. The machinery and equipment used for the manufacturing of these products, which management considers adequate for current operations, consist primarily of metal forming, fabrication, welding, and painting equipment, together with a complement of tools, dies, jigs and gauges. Backlog for this industry segment was $4.6 million, $6.6 million and $4.1 million as of January 31, 1996, January 31, 1995 and January 31, 1994, respectively. The backlog at January 31, 1995 and 1994 excludes the backlog for the Registrant's tubular steel components operation which was sold in 1995. All of the current backlog is expected to be filled during the current fiscal year. EXPORT SALES Export sales from the Registrant's United States operations were 10%, 8% and 7%, respectively, of consolidated net sales in 1995, 1994 and 1993. RESEARCH AND DEVELOPMENT In 1995, 1994 and 1993, the Registrant spent $5.9 million, $4.4 million and $4.3 million, respectively, on research and development activities, all of which was Registrant sponsored. Of these amounts, research and development spending on new products was $3.1 million, $2.1 million and $1.8 million for 1995, 1994 and 1993, respectively. PATENTS, TRADE NAMES AND TRADEMARKS The Registrant applies for and maintains patents, trade names and trademarks where the Registrant believes that such patents, trade names and trademarks are reasonably required to protect the Registrant's rights in its products. The Registrant does not believe that any single patent, trade name or trademark or related group of such rights, other than the "ConMet", "Precision-TM-", "NAPCO-TM-" and "Herzog" trade names and related trademarks, are materially important to its businesses or its ability to compete. In many instances the Registrant's technology is not patented but is maintained by the Registrant as proprietary. SEASONALITY In non-recessionary times, the Registrant's first quarter has historically been the strongest quarter of the year. During the second and fourth quarters, the Registrant traditionally encounters scheduled shutdowns and slowdowns at customers' manufacturing plants. EMPLOYEES As of January 31, 1996, the Registrant employed a total of 2,214 persons, 1,827 of whom were employed in its Transportation Products segment, 369 of whom were employed in its Analytical Instruments segment and 18 of whom were employed at the Registrant's corporate headquarters. Of the employees employed by the Transportation Products and Analytical Instruments segments, 765 and 142, respectively, are covered by collective bargaining agreements. The Registrant believes it has a good working relationship with its employees. ENVIRONMENTAL MATTERS The Registrant's manufacturing operations are subject to federal, state, local and foreign environmental laws and regulations which impose limitations on the discharge of pollutants into the air and water and establish standards for the treatment, storage and disposal of hazardous waste. The Registrant has established a company-wide environmental compliance program that stresses periodic environmental audits and management review of compliance procedures at the operating company level. The Registrant believes that it is in substantial compliance with applicable environmental laws and regulations. Compliance with these environmental laws and regulations has not had, nor is it expected to have, a material effect on the Registrant's earnings, competitive position or capital expenditures through fiscal 1997. The amount of capital expenditures expected to be spent on environmental compliance costs in fiscal 1996 and 1997 are approximately $135,000 and $152,000, respectively. EXECUTIVE OFFICERS OF THE REGISTRANT Reference is made to the information set forth under the caption "Officers" on the inside back cover of the Registrant's 1995 Annual Report to Stockholders, which information is hereby incorporated herein by reference. Item 2. PROPERTIES The following table sets forth certain information with respect to the principal properties of the Registrant. The expiration date of each applicable lease is given for leased properties; all other properties are owned. Unless otherwise noted, all properties are manufacturing facilities.
EXPIRATION DATE APPROXIMATE APPROXIMATE OF LEASE CAPACITY OPERATION SQUARE FEET (IF APPLICABLE) UTILIZATION(1) - --------- ----------- --------------- -------------- Executive Office 10,000(2) 10/15/97 N/A Naperville, IL TRANSPORTATION PRODUCTS - ----------------------- Portland, OR 179,000 N/A 75% Clackamas, OR 55,000 N/A 85% Bryson City, NC 160,000 N/A N/A(3) Cashiers, NC 94,000 N/A 85% Monroe, NC 103,000 N/A 90% Saginaw, MI 77,000 N/A 65% Melvindale, MI 45,000 N/A 60% Vassar, MI 76,000 N/A 70% Camp Hill, PA 95,000 N/A 48% McPherson, KS 94,000 N/A 48% Ploermel, France 70,000 N/A 60% Oak Creek, WI 72,000 N/A 40% Bell Gardens, CA 18,000 N/A 50% Chicago, IL 32,000 N/A 50% Atchison, KS 60,000 N/A 46% ANALYTICAL INSTRUMENTS - ---------------------- Bellwood, IL 35,000 5/31/96 30% San Antonio, TX 28,000 4/30/99 65% Lauda, Germany 24,000 N/A 21%(4) Chicago, IL 125,000 9/15/97 50%
(1) Full capacity being deemed a 24 hour day, 7 day week for this purpose. (2) Office space. (3) Location purchased in March 1995. Production began in the first fiscal quarter of 1996. (4) Full capacity is based on German employment laws. N/A - Not Applicable. Item 3. LEGAL PROCEEDINGS Not applicable Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable PART II Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Reference is made to the information set forth under the captions "Quarterly Market and Dividend Information" and "Shares Listed" in the Registrant's 1995 Annual Report to Stockholders, which information is hereby incorporated herein by reference. Note: The information contained under the caption "Quarterly Market and Dividend Information" in the Registrant's 1995 Annual Report includes over-the-counter market quotations which reflect interdealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions. Item 6. SELECTED FINANCIAL DATA Reference is made to the information set forth under the captions "Summary of Operations" and "Summary of Financial Condition" in the Registrant's 1995 Annual Report to Stockholders, which information is hereby incorporated herein by reference. Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Reference is made to the information set forth under the caption, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Registrant's 1995 Annual Report to Stockholders, which information is hereby incorporated herein by reference. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Reference is made to the information set forth under the captions "Consolidated Balance Sheets", "Consolidated Statements of Earnings", "Consolidated Statements of Stockholders' Equity", "Consolidated Statements of Cash Flows", "Notes to Consolidated Financial Statements" and "Independent Auditors' Report" in the Registrant's 1995 Annual Report to Stockholders, which information is hereby incorporated herein by reference. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Reference is made to the information set forth under the caption "Election of Directors" in the Registrant's Proxy Statement filed pursuant to Regulation 14A within 120 days after January 31, 1996, which information is hereby incorporated herein by reference, and to the information set forth under the caption "Executive Officers of the Registrant", which appears as a separate item immediately preceding Item 2 included in PART I hereof, which information is hereby incorporated herein by reference. None of the executive officers bear any family relationship to one another. The executive officers of the Registrant are elected annually by the Board of Directors. Item 11. EXECUTIVE COMPENSATION Reference is made to the information set forth under the caption "Executive Compensation" in the Registrant's Proxy Statement filed pursuant to Regulation 14A within 120 days after January 31, 1996, which information is hereby incorporated herein by reference. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Reference is made to the information set forth under the captions "Election of Directors" and "Security Ownership of Certain Beneficial Owners and Management" in the Registrant's Proxy Statement filed pursuant to Regulation 14A within 120 days after January 31, 1996, which information is hereby incorporated herein by reference. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Not applicable. PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K (a) (1), (a) (2) & (d) FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE The consolidated financial statements, together with the related notes and supporting schedule filed as part of this Form 10-K, are listed in the accompanying Index to Consolidated Financial Statements and Schedule. (b) REPORTS ON FORM 8-K None (a) (3) & (c) EXHIBITS Set forth below is a list of the Exhibits to this Form 10-K in accordance with the requirements of Items 14(a) (3) and (c) of Form 10-K and Item 601 of Regulation S-K: (3) (i) Registrant's Articles of Incorporation, as amended through May 26, 1987 (incorporated herein by reference to Exhibit (3)(a) to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 31, 1988) and as further amended through June 17, 1993. (ii) Registrant's By-laws, as amended through November 20, 1995. (4) (a) Revolving Credit Agreement by and among the Registrant, the Borrowing Subsidiaries, the Lenders Party Thereto and The First National Bank of Chicago, as Agent, dated as of December 6, 1993 (incorporated herein by reference to Exhibit 4(a) to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 31, 1994). (b) First Amendment to the Revolving Credit Agreement dated as of March 17, 1995. (c) Consents for the extension of the Revolving Credit Agreement to December 6, 1998. (10) (a) Registrant's 1980 Incentive Stock Option Plan, as amended (incorporated herein by reference to Exhibit (10)(b) to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 31, 1989) and as further amended on March 26, 1990 (incorporated herein by reference to Exhibit (10)(b) to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 31, 1990). (b) Varlen Corporation Profit Sharing and Retirement Savings Plan as amended and restated generally effective July 1, 1994 (incorporated herein by reference to Exhibit (10) (b) to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 31, 1995). (c) Registrant's 1989 Incentive Stock Option Plan, (incorporated herein by reference to Exhibit (10)(h) to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 31, 1989) and as further amended on March 26, 1990 (incorporated herein by reference to Exhibit (10)(g) to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 31, 1990). (d) Varlen Corporation Excess Benefits Plan (incorporated herein by reference to Exhibit (10)(i) to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 31, 1990). (e) Varlen Corporation Supplemental Executive Retirement Plan (incorporated herein by reference to Exhibit (10)(j) to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 31, 1990). (f) Trust Agreement Between Varlen Corporation and Fidelity Management Trust Company dated November 30, 1992 (incorporated herein by reference to Exhibit (10)(g) to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 31, 1993). (g) Stock Purchase Agreement dated December 17, 1992 between The Dyson-Kissner-Moran Corporation and the Registrant (incorporated herein by reference to Exhibit 5(a) to the Registrant's Report on Form 8-K dated January 8, 1993). (h) Form of letter agreement between the Registrant and Richard L. Wellek (incorporated herein by reference to Exhibit (10)(j) to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 31, 1993). (i) Form of letter agreement between the Registrant and each of Richard A. Nunemaker, Raymond A. Jean and George W. Hoffman (incorporated herein by reference to Exhibit (10)(k) to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 31, 1993). (j) Trust Indenture for the Registrant's $69,000,000 61/2% Convertible Subordinated Debentures Due 2003 from the Registrant to the Harris Trust and Savings Bank (incorporated herein by reference to Exhibit (4) to the Registrant's Report on Form 8-K dated May 27, 1993). (k) Registrant's 1993 Incentive Stock Option Plan adopted May 25, 1993 (incorporated herein by reference to Exhibit (10)(k) to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 31, 1994). (l) Registrant's 1993 Directors Incentive Stock Grant Plan adopted May 25, 1993 (incorporated herein by reference to Exhibit (10)(l) to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 31, 1994). (m) Registrant's 1993 Deferred Incentive Stock Purchase Plan adopted May 25, 1993 (incorporated herein by reference to Exhibit (10)(m) to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 31, 1994). (n) Varlen Corporation Excess Benefit Plan Trust Agreement dated December 1, 1994 (incorporated herein by reference to Exhibit (10)(n) to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 31, 1995). (11) Computation of Per Share Earnings for the Fiscal Years Ended January 31, 1996, 1995 and 1994. (13) 1995 Annual Report to Stockholders. (21) List of Subsidiaries. (23) Consent of Deloitte & Touche LLP. (24) Board of Directors' power of attorney for the signing of Varlen Corporation's 1995 Annual Report on Form 10-K. (27) Financial Data Schedule. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. VARLEN CORPORATION (Registrant) By: /S/ RICHARD A. NUNEMAKER ------------------------ Richard A. Nunemaker Vice President, Finance and Chief Financial Officer Dated: April 25, 1996 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. SIGNATURE TITLE DATE - --------- ----- ---- /S/ RICHARD L. WELLEK President, Chief Executive April 25, 1996 - --------------------- Officer and Director Richard L. Wellek (Principal Executive Officer) /S/ RICHARD A. NUNEMAKER Vice President, Finance April 25, 1996 - ------------------------ and Chief Financial Officer Richard A. Nunemaker (Principal Financial Officer and Principal Accounting Officer) SIGNATURE DATE - --------- ---- /S/ RICHARD A. NUNEMAKER April 25, 1996 - ------------------------ Richard A. Nunemaker as attorney-in-fact for Rudolph Grua, Director /S/ RICHARD A. NUNEMAKER April 25, 1996 - ------------------------ Richard A. Nunemaker as attorney-in-fact for Ernest H. Lorch, Director /S/ RICHARD A. NUNEMAKER April 25, 1996 - ------------------------ Richard A. Nunemaker as attorney-in-fact for L. William Miles, Director /S/ RICHARD A. NUNEMAKER April 25, 1996 - ------------------------ Richard A. Nunemaker as attorney-in-fact for Greg A. Rosenbaum, Director /S/ RICHARD A. NUNEMAKER April 25, 1996 - ------------------------ Richard A. Nunemaker as attorney-in-fact for Joseph J. Ross, Director /S/ RICHARD A. NUNEMAKER April 25, 1996 - ------------------------ Richard A. Nunemaker as attorney-in-fact for Theodore A. Ruppert, Director VARLEN CORPORATION AND SUBSIDIARIES Annual Report (Form 10-K) Consolidated Financial Statements and Schedule Submitted in Response to Item 14 Years ended January 31, 1996, 1995 and 1994 VARLEN CORPORATION AND SUBSIDIARIES Index to Consolidated Financial Statements and Schedule CONSOLIDATED FINANCIAL STATEMENTS INCORPORATED BY REFERENCE The consolidated balance sheets of the Registrant and subsidiaries as of January 31, 1996 and 1995, and the related consolidated statements of earnings, consolidated statements of stockholders' equity and consolidated statements of cash flows for each of the years in the three-year period ended January 31, 1996, together with the related notes and the report of Deloitte & Touche LLP, independent auditors, all contained in the Registrant's 1995 Annual Report to Stockholders, are incorporated herein by reference thereto. The following additional consolidated financial information should be read in conjunction with the consolidated financial statements in such 1995 Annual Report to Stockholders. All other schedules are omitted as the required information is inapplicable or the information is presented in the financial statements or related notes. ADDITIONAL CONSOLIDATED FINANCIAL INFORMATION - Schedule: - II - Valuation and Qualifying Accounts INDEPENDENT AUDITORS' REPORT Board of Directors and Stockholders Varlen Corporation Naperville, Illinois We have audited the consolidated financial statements of Varlen Corporation and subsidiaries as of January 31, 1996 and 1995, and for each of the three years in the period ended January 31, 1996, and have issued our report thereon, dated March 4, 1996; such consolidated financial statements and report are included in your 1995 Annual Report to Stockholders and are incorporated herein by reference. Our audits also included the consolidated financial statement schedule of Varlen Corporation and subsidiaries, listed in Item 14. This consolidated financial statement schedule is the responsibility of the Corporation's management. Our responsibility is to express an opinion based upon our audits. In our opinion, such consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. DELOITTE & TOUCHE LLP March 4, 1996 Chicago, Illinois Schedule II VARLEN CORPORATION AND SUBSIDIARIES Valuation and Qualifying Accounts Three years ended January 31, 1996 (in thousands)
Additions Balance at charged to Balance beginning costs and at end Description of period expenses Deductions of period - ----------- --------- --------- ---------- --------- Allowance for doubtful accounts (deducted from accounts receivable): Year ended 1/31/96 $1,318 $ 407 $ 407(a) $1,318 Year ended 1/31/95 1,207 371 260(a) 1,318 Year ended 1/31/94 1,826 256 875(a) 1,207 Allowance related to deferred tax assets: Year ended 1/31/96 $2,013 $ 355 $ 798(c)(d) $1,570 Year ended 1/31/95 1,465 868(b)(d) 320(c)(d) 2,013 Year ended 1/31/94 1,423 42 --- 1,465
(a) Write-offs, net of recoveries, foreign currency translation adjustments and reserves related to certain companies disposed of during the period. (b) Includes $748 related to acquired net operating losses. (c) Current and projected utilization and current expiration of acquired operating losses. (d) The amounts were offset against goodwill and not net earnings. INDEX TO EXHIBITS (3) (i) Registrant's Articles of Incorporation, as amended through May 26, 1987 (incorporated herein by reference to Exhibit (3)(a) to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 31, 1988) and as further amended through June 17, 1993. (ii) Registrant's By-laws, as amended through November 20, 1995. (4) (a) Revolving Credit Agreement by and among the Registrant, the Borrowing Subsidiaries, the Lenders Party Thereto and The First National Bank of Chicago, as Agent, dated as of December 6, 1993 (incorporated herein by reference to Exhibit 4(a) to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 31, 1994). (b) First Amendment to the Revolving Credit Agreement dated as of March 17, 1995. (c) Consents for the extension of the Revolving Credit Agreement to December 6, 1998. (10) (a) Registrant's 1980 Incentive Stock Option Plan, as amended (incorporated herein by reference to Exhibit (10)(b) to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 31, 1989) and as further amended on March 26, 1990 (incorporated herein by reference to Exhibit (10)(b) to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 31, 1990). (b) Varlen Corporation Profit Sharing and Retirement Savings Plan as amended and restated generally effective July 1, 1994 (incorporated herein by reference to Exhibit (10) (b) to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 31, 1995). (c) Registrant's 1989 Incentive Stock Option Plan, (incorporated herein by reference to Exhibit (10)(h) to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 31, 1989) and as further amended on March 26, 1990 (incorporated herein by reference to Exhibit (10)(g) to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 31, 1990). (d) Varlen Corporation Excess Benefits Plan (incorporated herein by reference to Exhibit (10)(i) to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 31, 1990). (e) Varlen Corporation Supplemental Executive Retirement Plan (incorporated herein by reference to Exhibit (10)(j) to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 31, 1990). (f) Trust Agreement Between Varlen Corporation and Fidelity Management Trust Company dated November 30, 1992 (incorporated herein by reference to Exhibit (10)(g) to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 31, 1993). (g) Stock Purchase Agreement dated December 17, 1992 between The Dyson-Kissner-Moran Corporation and the Registrant (incorporated herein by reference to Exhibit 5(a) to the Registrant's Report on Form 8-K dated January 8, 1993). (h) Form of letter agreement between the Registrant and Richard L. Wellek (incorporated herein by reference to Exhibit (10)(j) to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 31, 1993). (i) Form of letter agreement between the Registrant and each of Richard A. Nunemaker, Raymond A. Jean and George W. Hoffman (incorporated herein by reference to Exhibit (10)(k) to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 31, 1993). (j) Trust Indenture for the Registrant's $69,000,000 6 1/2% Convertible Subordinated Debentures Due 2003 from the Registrant to the Harris Trust and Savings Bank (incorporated herein by reference to Exhibit (4) to the Registrant's Report on Form 8-K dated May 27, 1993). (k) Registrant's 1993 Incentive Stock Option Plan adopted May 25, 1993 (incorporated herein by reference to Exhibit (10)(k) to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 31, 1994). (l) Registrant's 1993 Directors Incentive Stock Grant Plan adopted May 25, 1993 (incorporated herein by reference to Exhibit (10)(l) to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 31, 1994). (m) Registrant's 1993 Deferred Incentive Stock Purchase Plan adopted May 25, 1993 (incorporated herein by reference to Exhibit (10)(m) to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 31, 1994). (n) Varlen Corporation Excess Benefit Plan Trust Agreement dated December 1, 1994 (incorporated herein by reference to Exhibit (10)(n) to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 31, 1995). (11) Computation of Per Share Earnings for the Fiscal Years Ended January 31, 1996, 1995 and 1994. (13) 1995 Annual Report to Stockholders. (21) List of Subsidiaries. (23) Consent of Deloitte & Touche LLP. (24) Board of Directors' power of attorney for the signing of Varlen Corporation's 1995 Annual Report on Form 10-K. (27) Financial Data Schedule. EX-3.(I) 2 CERTIFICATE OF AMENDMENT EXHIBIT 3(i) STATE OF DELAWARE OFFICE OF THE SECRETARY OF STATE -------------------------------- I, WILLIAM T. QUILLEN, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF AMENDMENT OF "VARLEN CORPORATION" FILED IN THIS OFFICE ON THE SEVENTEENTH DAY OF JUNE, A.D. 1993, AT 3 O'CLOCK P.M. A CERTIFIED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO NEW CASTLE COUNTY RECORDER OF DEEDS FOR RECORDING. * * * * * * * * * * /s/ William T. Quillen --------------------------------------- WILLIAM T. QUILLEN, SECRETARY OF STATE AUTHENTICATION: 4156171 DATE: 11/19/1993 933235239 CERTIFICATE OF AMENDMENT OF THE CERTIFICATE OF INCORPORATION OF VARLEN CORPORATION VARLEN CORPORATION, a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware (the "Corporation"), DOES HEREBY CERTIFY as follows: FIRST: The Certificate of Incorporation and Certificates of Amendment of Certificate of Incorporation of the Corporation were filed in the office of the Secretary of State of the State of Delaware on November 6, 1969, and May 24,1983 and May 26, 1987, respectively. SECOND: On March 29, 1993, the Board of Directors of the Corporation duly adopted resolutions setting forth the following proposed amendment to the Corporation's Certificate of Incorporation, declaring said amendment to be advisable and providing that the consent of the stockholders of the Corporation to said amendment be obtained at the 1993 Annual Meeting of Stockholders: RESOLVED that the Corporation's Certificate of Incorporation be amended by deleting the first paragraph of Article FOURTH in its entirety and substituting in lieu thereof the following: 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. THIRD: Thereafter, pursuant to the resolutions of the Corporation's Board of Directors, at the 1993 Annual Meeting of Stockholders called and held upon notice under Section 222 of the General Corporation Law of the State of Delaware, the holders of the majority of the outstanding stock of the Corporation entitled to vote thereon voted in favor of said amendment. FOURTH: The said amendment was duly adopted in accordance with the applicable provisions of Section 242 of the General Corporation Law of the State of Delaware. IN WITNESS WHEREOF, the Corporation has caused this certificate to be signed by Richard A. Nunemaker, Vice President, Finance and Chief Financial Officer of the Corporation, and attested by Stephen A. Magida, its Secretary, on this 25th day of May, 1993. VARLEN CORPORATION /s/ Richard A. Nunemaker ------------------------------ Richard A. Nunemaker Vice President, Finance and Chief Financial Officer Attest: By: /s/ Stephen A. Magida ----------------------------- Stephen A. Magida Secretary EX-3.(II) 3 BYLAWS EXHIBIT 3(ii) As amended through NOVEMBER 20, 1995 BY-LAWS OF VARLEN CORPORATION ARTICLE I STOCKHOLDERS SECTION 1. ANNUAL MEETINGS. Subject to change by resolution of the Board of Directors, the annual meeting of the stockholders of the Corporation for the purpose of electing directors and for the transaction of such other business as may be brought before the meeting shall be held on the fourth Tuesday in May of each year, if not a legal holiday, and if a legal holiday, then on the next succeeding day not a legal holiday. The meeting may be held at such time and such place within or without the State of Delaware as shall be fixed by the Board of Directors and stated in the notice of the meeting. SECTION 2. SPECIAL MEETINGS. Special meetings of the stockholders may be called at any time by the Board of Directors, by the Chairman of the Board or by the President of the Corporation. Special meetings shall be held on the date and at the time and place either within or without the State of Delaware specified in the notice thereof. SECTION 3. NOTICE OF MEETINGS. Except as otherwise expressly required by law or the Certificate of Incorporation of the Corporation, written notice stating the place and time of the meeting, and in the case of a special meeting, the purpose or purposes of such meeting, shall be given by the Secretary to each stockholder entitled to vote thereat at his address as it appears on the records of the Corporation not less than ten nor more than fifty days prior to the meeting. No business other than that stated in the notice shall be transacted at any special meeting. Notice of any meeting of stockholders shall not be required to be given to any stockholder who shall attend such meeting in person or by proxy; and if any stockholder shall, in person or by attorney thereunto duly authorized, in writing or by telegraph, cable or wireless, waive notice of any meeting, whether before or after such meeting be held, the notice thereof need not be given to him. Notice of any adjourned meeting of stockholders need not be given except as-provided in SECTION 4 of this ARTICLE 1. SECTION 4. OUORUM. Subject to the provisions of law in respect of the vote that shall be required for a specific action, the number of shares the holders of which shall be present or represented by proxy at any meeting of - stockholders in order to constitute a quorum for the transaction of any business shall be a majority of all the shares issued and outstanding and entitled to vote at such meeting. 2 At any meeting of stockholders, whether or not there shall be a quorum present, the holders of a majority of shares voting at the meeting, whether present in person at the meeting or represented by proxy at the meeting, may adjourn the meeting from time to time without notice other than by announcement at the meeting of the time and place of the adjourned meeting, except that a new notice must be sent out if the adjournment is for more than thirty days, or if a new record date for voting is fixed. At any adjourned meeting at which a quorum shall be present, any business may be transacted which might have been transacted at the meeting as originally called. SECTION 5. ORGANIZATION. The Chairman of the Board, or in his absence or nonelection the President, or in the absence of both the foregoing officers the Executive Vice President, or in the absence of any of the foregoing officers a Vice President, shall call meetings of the stockholders to order, and shall act as Chairman of such meetings. In the absence of the Chairman of the Board, the President, the Executive Vice President or a Vice President, the holders of a majority in number of the shares of the capital stock of the Corporation present in person or represented by proxy and entitled to vote at such meeting shall elect a Chairman, who may be the Secretary of the Corporation. The Secretary of the Corporation shall act as secretary of all meetings of the stockholders; but in the absence of the Secretary, the Chairman may appoint any person to act as secretary of the meeting. SECTION 6. VOTING. Each stockholder shall, except as otherwise provided by law or by the Certificate of Incorporation, at every meeting of the stockholders be entitled to one vote in person or by proxy for each share of capital stock entitled to vote held by such stockholder, but no proxy shall be voted after three years from its date, unless said proxy provides for a longer period. Upon the demand of any stockholder, the vote for directors and the vote upon any matter before the meeting shall be by ballot. Except as otherwise provided by law or by the Certificate of Incorporation or by these By-laws, all elections for directors shall be decided by plurality vote; all other matters shall be decided by votes cast thereon. A complete list of the stockholders entitled to vote at any meeting of stockholders, arranged in alphabetical order, with the address of each, and the number of shares held by each, shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. SECTION 7. INSPECTORS OF ELECTION. The Board of Directors may at any time appoint two or more persons to serve as Inspectors of Election at the next succeeding annual meeting of 3 stockholders or at any other meeting or meetings, and the Board of Directors may at any time fill any vacancy in the office of Inspector. If the Board of Directors fails to appoint Inspectors, or if any Inspector appointed be absent or refuse to act, or if his office becomes vacant and be not filled by the Board of Directors, the Chairman of any meeting of the stockholders may appoint one or more temporary Inspectors for such meeting. All proxies shall be filed with the Inspectors of Election of the meeting before being voted upon. SECTION 8. COUNTING WRITTEN CONSENTS; INSPECTORS. Within three (3) business days after the later of (x) the fixing by the Board of Directors of a record date for any proposed stockholder action or consent to be taken in writing in lieu of a meeting ("Stockholder Consent") and (y) any such record date established in any other manner, the Secretary or other officers of the Corporation shall engage a firm of independent inspectors of election ("Consent Inspectors") for the purpose of performing a ministerial review of the validity of any such proposed Stockholder Consent and revocations thereof. The cost of retaining such Consent Inspectors shall be borne by the Corporation. Stockholder Consent forms and revocations thereof shall be delivered to the Consent Inspectors upon receipt by (i) the Corporation, (ii) the stockholder or stockholders soliciting Stockholder Consents or soliciting revocations of Stockholder Consents (the "Soliciting Stockholders"), or (iii) the proxy solicitors or other authorized agents of the Corporation or the Soliciting Stockholders. As soon as Stockholder Consents and revocations thereof are received, the Consent Inspectors shall review the same and shall maintain a count of the number of valid and unrevoked Stockholder Consents. The Consent Inspectors shall keep such count confidential and, except as set forth below, shall not reveal the count to the Corporation, the Soliciting Stockholders, their respective representatives or any other person or entity. As soon as practicable (I) upon the request of the Corporation or the Soliciting Stockholders, and (II) after the earlier to occur of (x) the expiration of the solicitation period with respect to the particular Stockholder Consent and (y) the date on which the particular Stockholder Consent shall appear (to the Consent Inspectors) to have received the valid and unrevoked signatures of the requisite number of stockholders to become effective, the Consent Inspectors shall issue a preliminary report to the Corporation and the Soliciting Stockholders stating: (A) the number of valid Stockholder Consents; (B) the number of valid revocations of Stockholder Consents; (C) the number of valid and unrevoked Stockholder Consents; (D) the number of invalid Stockholder Consents; (E) the number of invalid revocations of Stockholder Consents; and (F) based thereon, whether the requisite number of valid and unrevoked Stockholder Consents has been obtained to authorize or take the action(s) specified therein. Unless the Corporation and the Soliciting Stockholders shall agree to a shorter or longer period, the Corporation and the Soliciting Stockholders shall have 48 hours after the delivery of the preliminary report of the Consent Inspectors pursuant to clause 4 "(II)" of the foregoing paragraph to review the Stockholder -Consents and revocations thereof and to advise the Consent Inspectors and opposing party in writing as to whether they intend to challenge such preliminary report. If no such written notice of an intention to challenge such preliminary report is received within 48 hours of its issuance by the Consent Inspectors, the Consent Inspectors shall issue to the Corporation and the Soliciting Stockholders their final report containing the information called for in clauses "(A)" through "(E)" of the foregoing paragraph and, based thereon, a certification as to whether the requisite number of valid and unrevoked Stockholder Consents has been obtained to authorize or take the action(s) specified therein. If the Corporation or the Soliciting Stockholders issue written notice of an intention to challenge the Consent Inspectors' preliminary report within 48 hours after its issuance, a challenge session shall be scheduled by the Consent Inspectors as promptly as practicable. A transcript of the challenge session shall be recorded by a certified court reporter or other person agreed upon by the Corporation and the Soliciting Stockholders. Following the completion of the challenge session, the Consent Inspectors shall as promptly as practicable issue their final report to the Corporation and the Soliciting Stockholders, which report shall contain (i) the information included in the most recent preliminary report, (ii) all changes in the vote totals as a result of the challenge session, and (iii) based thereon, a certification as to whether the requisite number of valid and unrevoked Stockholder Consents has been obtained to authorize or take the action(s) specified therein. A copy of any final report of the Consent Inspectors shall be included in the minute books of the Corporation. The Corporation shall give prompt notice to the stockholders of the results of any Stockholder Consent solicitation or the approval or taking of the action (s) specified therein by less than unanimous written consent. SECTION 9. NOTICE OF AND RECORD DATE FOR STOCKHOLDER CONSENTS; SOLICITATION PERIOD. Before there may be commenced any solicitation of Stockholder Consents by any Soliciting Stockholders, such Soliciting Stockholders (or an authorized agent thereof) shall deliver notice in writing of their intention to do so to the Secretary of the Corporation, which notice shall also set forth: (i) the names and addresses of such Soliciting Stockholders, (ii)the specific text of the Stockholder Consents proposed to be disseminated or published, (iii) the proposed date or dates on which such Soliciting Stockholders intend to solicit such Stockholder Consents and/or deliver Stockholder Consents to the Corporation, and (iv) a representation that each such Soliciting Stockholder is a stockholder of the Corporation entitled to execute and deliver Stockholder Consents as of the date of such notice and stating the number of shares of stock of the Corporation owned of record and beneficially by each such Soliciting Stockholder as of such date. within five (5) business days after the receipt by the Corporation of such a notice, the Board of Directors may, but shall not be required to: (A) subject to Section 213(b) of the Delaware General Corporation Law, establish a record date to determine the 5 stockholders entitled to execute (and revoke) such Stockholder Consents, and (B) in such event, establish the time period during which such Stockholder Consents (and revocations thereof) may be solicited. SECTION 10. NOMINATIONS FOR DIRECTORS. Nominations of nominees for election to the Board of Directors at a meeting of the stockholders may be made (i) by the Board of Directors, (ii) on behalf of the Board of Directors by any nominating or other authorized committee appointed by the Board of Directors, (iii) by the Chairman of such meeting or (iv) subject to the provisions of this Section 10, at a meeting of stockholders being held for that purpose by any stockholder of the Corporation entitled to vote for the election of directors at such meeting. Such nominations, other than those made by or on behalf of the Board or by the Chairman of the meeting, shall be made by notice in writing delivered to the Secretary of the Corporation, and received by him not less than thirty nor more than sixty days prior to the meeting of the stockholders called for the election of directors; provided, however, that if less than thirty-five days' notice of the meeting is given to stockholders, such nomination shall be delivered as prescribed hereinabove to the Secretary of the Corporation not later than the close of business on the seventh day following the day on which the notice of meeting was mailed. Each such notice shall set forth or include: (i) the name, age, business address and, if known, the residence address of each nominee proposed in such notice; (ii) the principal occupation or employment of each such nominee; (iii) the number of shares of stock of the Corporation which are held of record and beneficially by each such nominee and nominating stockholder; (iv) a representation and undertaking of such nominating stockholder that it is, and at the meeting will be, entitled to vote for the election of directors and that such stockholder intends to appear (in person or by proxy) at such meeting to nominate each such nominee; (v) the written consent of each such nominee to serve as a director of the Corporation if elected; and (vi) any information not required pursuant to any of the foregoing clauses concerning the nominee or nominating stockholder that would be required to be disclosed pursuant to Regulation 14A and/or Schedule 14A under the Securities Exchange Act of 1934, as amended, assuming for this purpose that such nominee or nominating stockholder was soliciting proxies for the election of each such nominee at a meeting of the stockholders of the Corporation. If the facts warrant and the Board of Directors or an authorized committee thereof or the Chairman of the meeting determines that a nomination was not made in accordance with the foregoing procedures, the nomination shall be void and not allowed. SECTION 11. BUSINESS AT STOCKHOLDER MEETINGS. The business and proposals to be considered or voted upon at a meeting of the stockholders may be offered (i) by the Board of Directors, (ii) on behalf of the Board of Directors by any authorized committee appointed by the Board of Directors, (iii) by the Chairman of the meeting or (iv) subject to the provisions of this Section 11, at such meeting by any stockholder of the Corporation entitled to vote on such proposals at such meeting. Such business 6 and proposals, other than those offered by or on behalf of the Board or by the Chairman of the meeting, shall be made by notice in writing delivered to the Secretary of the Corporation, and received by him not less than thirty nor more than sixty days prior to the meeting of the stockholders; provided, however, that if less than thirty-five days' notice of the meeting is given to stockholders, notice of such business and/or proposal shall be delivered as prescribed hereinabove to the Secretary of the Corporation not later than the close of business on the seventh day following the day on which the notice of meeting was mailed; and provided further, however, that such notice shall not be required with respect to any stockholder proposal that is included in the Corporation's proxy materials in accordance with Regulation 14A under the Securities Exchange Act of 1934, as amended. Each such notice shall set forth or include: (i) the general nature of each item of business that the proposing stockholder intends to bring before the meeting; (ii) if any specific proposal is to be offered for a vote of the stockholders, the text of the resolution or resolutions which the proposing stockholder contemplates to offer to be voted upon; (iii) the number of shares of stock of the Corporation which are held of record and beneficially by such proposing stockholder; (iv) a representation and undertaking of such proposing stockholder that it is, and at the meeting will be, entitled to vote on such proposals and that such stockholder intends to appear (in person or by proxy) at such meeting to offer each such item of business and each such proposal; and (v) any information not required pursuant to any of the foregoing clauses concerning each such item of business and each such proposal that would be required to be disclosed pursuant to Regulation 14A and/or Schedule 14A under the Securities Exchange Act of 1934, as amended, assuming for this purpose that such proposing stockholder was soliciting proxies for the adoption of such proposals at a meeting of the stockholders of the Corporation. If the facts warrant and the Board of Directors or an authorized committee thereof or the Chairman of the meeting determines that a proposal was not made in accordance with the foregoing procedures, the proposal shall be void and not allowed. ARTICLE II BOARD OF DIRECTORS SECTION 1. GENERAL POWERS. The property, affairs and business of the Corporation shall be managed by the Board of Directors. SECTION 2. NUMBER, QUALIFICATION AND TERM OF OFFICE. The number of directors shall be such as the Board of Directors may by resolution direct, but not less than three nor more than nine, except that where all the stock of the Corporation is owned beneficially and of record by either one or two stockholders, the number of directors may be less than three, but not less than the number of stockholders. Directors need not be stockholders. Each director shall hold office for the term for which he is appointed or elected and until his successor shall have been elected and shall qualify, or until his death or until he shall resign or shall 7 have been removed in the manner hereinafter provided. Directors need not be elected by ballot, except upon demand of any stockholder. SECTION 3. QUORUM AND MANNER OF ACTION. Except as otherwise provided by statute or these By-laws, one-half of the whole Board of Directors (but not less than two) shall be required to constitute a quorum for the transaction of business at any meeting, and the act of a majority of the directors present and voting at any meeting at which a quorum is present shall be the act of the Board of Directors. In the absence of a quorum, a majority of the directors present may adjourn any meeting from time to time until a quorum be had. Notice of any adjourned meeting need not be given. The directors shall act only as a board and individual directors shall have no power as such. SECTION 4. PLACE OF MEETING, ETC. The Board of Directors may hold its meetings, have one or more offices, and keep the books and records of the Corporation, at such place or places within or without the State of Delaware as the Board may from time to time determine or as shall be specified or fixed in the respective notices or waivers of notice thereof. SECTION 5. REGULAR MEETINGS. A regular meeting of the Board of Directors shall be held as soon as practicable after each annual meeting of stockholders, for the election of officers and the transaction of other business, and other regular meetings of said Board shall be held at such times and places as said Board shall direct. No notice shall be required for any regular meeting of the Board of Directors but a copy of every resolution fixing or changing the time or place of regular meetings shall be mailed to every director at least three days before the first meeting held in pursuance thereof. SECTION 6. SPECIAL MEETINGS. Special meetings of the Board of Directors may be called by the Chairman of the Board, the President, the Executive Vice President, a Vice President or any two Directors. The Secretary or an Assistant Secretary shall give notice of the time and place of each special meeting by mailing a written notice of the same to each Director at his last known post office address at least two days before the meeting or by causing the same to be delivered personally or to be transmitted by telegraph, cable, wireless, telephone or verbally at least twenty-four hours before the meeting to each Director. SECTION 7. ACTION BY CONSENT. Any action required or permitted to be taken at any meeting of the Board or of any committee thereof may be taken without a meeting, if prior to such action a written consent thereto is signed by all members of the Board or of such committee, as the case may be, and such written consent is filed with the minutes of proceedings of the Board or committee. SECTION 8. ORGANIZATION. At each meeting of the Board of Directors, the Chairman of the Board, or in his absence or nonelection the President, or in the absence of both of the 8 foregoing officers a director chosen by a majority of the directors, shall act as Chairman. The Secretary, or in his absence an Assistant Secretary, or in the absence of both the Secretary and Assistant Secretaries any person appointed by the Chairman, shall act as Secretary of the meeting. SECTION 9. RESIGNATIONS. Any director of the Corporation may resign at any time by giving written notice to the Board of Directors or to the President or to the Secretary of the Corporation. The resignation of any directors shall take effect at the time specified therein, and unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. SECTION 10. REMOVAL OF DIRECTORS. Any director may be removed, either with or without cause, at any time by the affirmative vote of a majority in interest of the holders of record of the stock having voting power at a special meeting of the stockholders called for the purpose; and the vacancy in the Board caused by any such removal may be filled by the stockholders at such meeting. SECTION 11. VACANCIES. Any vacancy in the Board of Directors caused by death, resignation, removal, disqualification, an increase in the number of directors, or any other cause may be filled by the majority vote of the remaining directors at any meeting, or by the stockholders of the Corporation at the next annual meeting or any special meeting called for the purpose, and each director so elected shall hold office for the unexpired term or for such lesser term as may be designated and until his successor be duly elected and qualified, or until his death or until he shall resign or shall have been removed in the manner herein provided. In case all the directors shall die or resign or be removed or disqualified, any stockholder having voting powers may call a special meeting of the stockholders, upon notice given as herein provided for meetings of the stockholders, at which directors for the unexpired term may be elected. SECTION 12. COMPENSATION OF DIRECTORS. Directors shall receive such sum for their services and expenses as may be directed by resolution of the Board; provided that nothing herein contained shall be construed to preclude any director from serving the Corporation in any other capacity and receiving compensation therefor. Members of special or standing committees may be allowed like compensation of their services and expenses. SECTION 13. COMMITTEES. By resolution or resolutions passed by a majority of the whole Board at any meeting of the Board of Directors, the directors may designate one or more committees, each committee to consist of two or more directors, which, to the extent provided in said resolution or resolutions, shall have and may exercise the powers of the Board of Directors in the management of the business and affairs of the Corporation, including the power and authority to authorize the seal of the Corporation to be affixed to all papers which may require it, to declare dividends and to authorize the issuance of shares of capital stock of the 9 Corporation. Further, the Board of Directors may designate one or more directors as alternate members of a committee who may replace an absent or disqualified member at any meeting. SECTION 14. EXECUTIVE COMMITTEE. The Board of Directors, by the affirmative vote of a majority of the members of the Board at the time in office, may appoint an Executive Committee, each of such members to be a director. The number of members of the Executive Committee shall be such as the Board of Directors by resolution directs, but not less than three nor more than nine. The Executive Committee, except as limited from time to time by the Board of Directors, shall have and may exercise, during the intervals between the meetings of the directors, all of the powers vested in the Board or committees generally, except to change the membership of the Executive Committee; provided, however, that in the absence or disqualification of any member of the Executive Committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent of disqualified member. The Executive Committee shall have power to authorize the seal of the Corporation to be affixed to all papers which may require it, to declare dividends and to authorize the issuance of shares of capital stock of the Corporation. The Board shall have the power at any time to fill vacancies in, to change the membership of, or to dissolve, the Executive Committee. The Executive Committee may make rules for the conduct of its business and may appoint such committees and assistants as it shall from time to time deem necessary. one-third of the Executive Committee, but not less than two, shall constitute a quorum for the transaction of business. Regular meetings of the Executive Committee shall be held at such times as the said Executive Committee shall from time to time by resolution determine. No notice shall be required for any regular meeting of the Executive Committee but a copy of every resolution fixing or changing the time or place of regular meetings shall be mailed to every member of the Executive Committee at least three days before the first meeting held in pursuance thereof. Special meetings of the Executive Committee may be called by the Chairman of the Executive Committee or the Secretary of the Executive Committee, or any two members thereof. The Secretary of the Corporation or the Secretary of the Executive Committee shall give notice of the time and place of each Special Meeting by mail at least two days before such meeting or by telegraph, cable, wireless, telephone or verbally at least 24 hours before the meeting to each member of the Executive Committee. ARTICLE III OFFICERS SECTION 1. NUMBER. The officers of the Corporation shall be a President, a Treasurer, and a Secretary. In addition, the Board may elect a Chairman of the Board, one or more Executive Vice Presidents, one or more Vice Presidents, and such other officers as may be appointed in accordance with the provisions of 10 SECTION 3 of this ARTICLE. Any number of offices may be held by the same person. The Chief Executive Officer of the Corporation shall be either the Chairman of the Board or the President, as determined by the Board. SECTION 2. ELECTION, TERM OF OFFICE AND OUALIFICATIONS. The officers shall be elected annually by the Board of Directors at their first meeting after each annual meeting of the stockholders of the Corporation. Each officer, except such officers as may be appointed in accordance with the provisions of SECTION 3 of this ARTICLE, shall hold office until his successor shall have been duly elected and qualified in his stead, or until his death or until he shall have resigned or shall have become disqualified or shall have been removed in the manner hereinafter provided. The Chairman of the Board shall be chosen from among the directors. SECTION 3. SUBORDINATE OFFICERS. The Board of Directors or the President may from time to time appoint such other officers, including one or more Assistant Treasurers and one or more Assistant Secretaries, and such agents and employees of the Corporation as may be deemed necessary or desirable. Such officers, agents and employees shall hold office for such period and upon such terms and conditions, have such authority and perform such duties as in these By-laws provided or as the Board of Directors or the President may from time to time prescribe. The Board of Directors or the President may from time to time authorize any officer to appoint and remove agents and employees and to prescribe the powers and duties thereof. SECTION 4. REMOVAL. Any officer may be removed either with or without cause, by the vote of a majority of the whole Board of Directors at a special meeting called for the purpose, or except in case of any officer elected by the Board of Directors, by any committee or superior officer upon whom the power of removal may be conferred by the Board of Directors or by these By-laws. SECTION 5. RESIGNATIONS. Any officer may resign at any time by giving written notice to the Board of Directors or to the President or to the Secretary. Any such resignation shall take effect at the date of receipt of such notice or at any later time specified therein; and unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. SECTION 6. VACANCIES. A vacancy in any office because of death, resignation, removal, disqualification or any other cause shall be filled for the unexpired portion of the term in the manner prescribed in these By-laws for regular election or appointment to such office. SECTION 7. THE CHAIRMAN OF THE BOARD. [intentionally left blank] SECTION 8. THE PRESIDENT. The President shall have general direction of the affairs of the Corporation and general supervision over its several officers, subject, however, to the 11 control of the Board of Directors and, if the Chairman of the Board be the Chief Executive Officer of the Corporation, the Chairman of the Board. The President shall at each annual meeting and from time to time report to the stockholders and to the Board of Directors all matters within his knowledge which the interest of the Corporation require to be brought to their notice; may sign with the Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary any and all certificates of stock of the Corporation; in the absence of the Chairman of the Board, shall preside at all meetings of the stockholders; shall sign and execute in the name of the Corporation all contracts, or other instruments authorized by the Board of Directors, except in cases where the signing and execution thereof shall be expressly declared or permitted by the Board or by these By-laws to some other officer or agent of the Corporation; and, in general, shall perform all duties incident to the office of President and such other duties as from time to time may be assigned to him by the Board of Directors or as are presented by these By-laws. SECTION 9. THE EXECUTIVE VICE PRESIDENT. The Executive Vice President, if one be elected, shall at the request of the President, or in his absence or disability, except as otherwise provided herein, perform the duties of the President, and, when so acting, shall have all the powers of, and be subject to all of the restrictions upon, the President; in the absence of the Chairman of the Board and the President, shall preside at all meetings of the stockholders; may sign with the Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary any or all certificates of stock of the Corporation; and shall perform such duties and have such powers as from time to time may be assigned to him by the President or the Board of Directors or prescribed by these By-laws. SECTION 10. THE VICE PRESIDENTS. Each Vice President shall have such powers and shall perform such duties as may from time to time be assigned to him by the Board of Directors or by the President. A Vice President may also sign with the Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary certificates of stock of the Corporation. SECTION 11. THE SECRETARY. The Secretary shall keep or cause to be kept in books provided for the purpose the minutes of the meetings of the stockholders, of the Board of Directors and of any committee when so required; shall see that all notices are duly given in accordance with the provisions of these By-laws and as required by law; shall be custodian of the records and of the seal of the Corporation and see that the seal is affixed to all documents, the execution of which on behalf of the Corporation under its seal is duly authorized in accordance with the provisions of these By-laws; shall keep or cause to be kept, a register of the post office address of each stockholder; may sign with the President, the Executive Vice President or Vice President certificates of stock of the Corporation; and, in general, the Secretary shall perform all duties incident to the office of Secretary and such other duties as may, from time to time, be assigned to him by the Board of Directors, or by the President. 12 SECTION 12. ASSISTANT SECRETARIES. At the request of the Secretary, or in his absence or disability, the Assistant Secretaries shall perform the duties of the Secretary and, when so acting, shall have all the powers of, and be subject to all the restrictions upon, the Secretary. The Assistant Secretaries shall perform such other duties as from time to time may be assigned to them by the President, the Secretary or the Board of Directors. SECTION 13. THE TREASURER. The Treasurer shall have charge and custody of, and be responsible for, all funds and securities of the Corporation, and deposit all such funds in the name of the Corporation in such banks, trust companies or other depositories as shall be selected in accordance with the provisions of these By-laws; at all reasonable times exhibit his books of account and records, and cause to be exhibited the books of accounts and records of any corporation controlled by the Corporation, to any of the directors of the Corporation upon application during business hours at the office of the Corporation, or such other corporation, where such books and records are kept; render a statement of the condition of the finances of the Corporation at all regular meetings of the Board of Directors and a full financial report at the annual meeting of the stockholders; if called upon to do so, receive, and give receipts for, moneys due and payable to the Corporation from any source whatsoever; may sign with the President, the Executive Vice President or vice President certificates of stock of the Corporation; and, in general, perform all the duties incident to the office of Treasurer and such other duties as from time to time may be assigned to him by the Board of Directors. SECTION 14. ASSISTANT TREASURERS. At the request of the Treasurer, or in his absence or disability, the Assistant Treasurers shall perform the duties of the Treasurer, and, when so acting, shall have all the powers of, and be subject to all the restrictions upon, the Treasurer. The Assistant Treasurers shall perform such duties as from time to time may be assigned to them by the President, the Treasurer or the Board of Directors. SECTION 15. SALARIES. The salaries of the officers shall be fixed from time to time by the Board of Directors. No officer shall be prevented from receiving such salary by reason of the fact that he is also a director of the Corporation. ARTICLE IV CONTRACTS, CHECKS, DRAFTS, BANK ACCOUNTS, ETC. SECTION 1. CONTRACTS, ETC., HOW EXECUTED. The Board of Directors, except as in these By-laws otherwise provided, may authorize any officer or officers, employee or employees or agent or agents of the Corporation to enter into any contract or execute and deliver any instrument in the name of and on behalf of the Corporation, and such authority may be general or confined to specific instances; and, unless so authorized by the Board of Directors or by any committee or by these By-laws, no officer, employee or agent shall have any power or authority to bind the 13 Corporation by any contract or engagement or to pledge its credit or to render it liable pecuniarily for any purpose or to any amount. SECTION 2. CHECKS, DRAFTS, ETC. All checks, drafts or other orders for the payment of money, notes, or other evidences of indebtedness issued in the name of the Corporation shall be signed by such officer or officers, employee or employees or agent or agents of the Corporation as shall from time to time be determined by resolution of the Board of Directors. SECTION 3. DEPOSITS. All funds of the Corporation shall be deposited from time to time to the credit of the Corporation in such banks, trust companies or other depositories as the Board of Directors may from time to time designate, or as may be designated by any officer or officers, employee or employees or agent or agents of the Corporation to whom such power may be delegated by the Board of Directors, and for the purpose of such deposit, any officer or officers, employee or employees or agent or agents of the Corporation as shall from time to time be determined by resolution of the Board of Directors may endorse, assign and deliver checks, drafts and other orders for the payment of money which are payable to the order of the Corporation. SECTION 4. GENERAL AND SRECIAL BANK ACCOUNTS. The Board of Directors may from time to time authorize the opening and keeping with such banks, trust companies or other depositories as it may designate of general and special bank accounts, and may make such special rules and regulations with respect thereto, not inconsistent with the provisions of these By-laws, as it may deem expedient. SECTION 5. PROXIES. Except as otherwise in these By-laws or in the Certificate of Incorporation of the Corporation provided, and unless otherwise provided by resolution of the Board of Directors, the President may from time to time appoint an attorney or attorneys, or agent or agents, of the Corporation, in the name and on behalf of the Corporation, to cast the votes which the Corporation may be entitled to cast as a stockholder or otherwise in any other corporation any of whose stock or other securities may be held by the Corporation, at meetings of the holders of the stock or other securities of such other corporation, or to consent in writing to any action by such other corporation, and may instruct the person or persons so appointed as to the manner of casting such votes or giving such consent, and may execute or cause to be executed in the name and on behalf of the Corporation and under its corporate seal, or otherwise, all such written proxies or other instruments as he may deem necessary or proper in the premises. ARTICLE V SHARES AND THEIR TRANSFER SECTION 1. CERTIFICATES OF STOCK. Certificates for shares of the capital stock of the Corporation shall be in such 14 form not inconsistent with law as shall be approved by the Board of Directors. They shall be numbered in order of their issue, and shall be signed by the President, the Executive Vice President or Vice President and the Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary of the Corporation, and the seal of the Corporation shall be affixed thereto, provided that where any such certificate is signed by a transfer agent or an assistant transfer agent or by a transfer clerk acting on behalf of the Corporation and by a registrar, if any, the signatures of any such President, Executive Vice President, Vice President, Treasurer, Assistant Treasurer, Secretary or Assistant Secretary and the seal of the Corporation upon such certificate may be facsimiles. In case of any officer or officers who shall have signed, or whose facsimile signature or signatures shall have been used on any such certificate or certificates, shall cease to be such officer or officers of the Corporation, whether because of death, resignation or otherwise, before such certificate or certificates shall have been delivered by the Corporation, such certificate or certificates may nevertheless be adopted by the Corporation and be issued and delivered as though the person or persons who signed such certificate or certificates or whose facsimile signature shall have been used thereon had not ceased to be such officer or officers of the Corporation. SECTION 2. TRANSFER OF STOCK. Transfers of shares of the capital stock of the Corporation shall be made only on the books of the Corporation by the holder thereof, or by his attorney thereunto authorized by a power of attorney duly executed and filed with the Secretary of the Corporation, or a transfer agent of the Corporation, if any, and on surrender of the certificate or certificates for such shares properly endorsed. A person in whose name shares of stock stand on the books of the Corporation shall be deemed the owner thereof as regards the Corporation, and the Corporation shall not be bound to recognize any equitable or other claim to, or interest in, such shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware; provided that whenever any transfer of shares shall be made for collateral security, and not absolutely, such fact, if known to the Secretary or to said transfer agent, shall be so expressed in the entry of transfer. SECTION 3. ADDRESSES OF STOCKHOLDERS. Each stockholder shall designate to the Secretary of the Corporation an address at which notices of meetings and all other corporate notices may be served or mailed to him, and if any stockholder shall fail to designate such address, corporate notices may be served upon him by mail directed to him at his last known post office address. SECTION 4. LOST, DESTROYED AND MUTILATED CERTIFICATES. The holder of any stock issued by the Corporation shall immediately notify the Corporation of any loss, destruction or mutilation of the certificate therefor, or failing to receive a certificate of stock issued by the Corporation, and the Board of Directors or the Secretary of the Corporation may, in its or his discretion, cause to be issued to him a new certificate or certificates of stock, 15 upon compliance with such rules, regulations and/or procedure as may be prescribed or have been prescribed by the Board of Directors with respect to the issuance of new certificates in lieu of such lost, destroyed or mutilated certificate or certificates of stock issued by the Corporation which are not received. SECTION 5. TRANSFER AGENT AND REGISTRAR: REGULATIONS. The Corporation shall, if and whenever the Board of Directors shall so determine, maintain one or more transfer offices or agencies, each in the charge of a transfer agent designated by the Board of Directors, where the shares of the capital stock of the Corporation shall be directly transferable, and also one or more registry offices, each in the charge of a registrar designated by the Board of Directors, where such shares of stock shall be registered, and no certificate for shares of the capital stock of the Corporation, in respect of which a Registrar and/or Transfer Agent shall have been designated, shall be valid unless countersigned by such Transfer Agent and registered by such Registrar, if any. The Board of Directors shall also make such additional rules and regulations as it may deem expedient concerning the issue, transfer and registration of certificates for shares of the capital stock of the Corporation. ARTICLE VI SEAL The Board of Directors shall provide a suitable seal containing the name of the Corporation, which seal shall be in the charge of the Secretary and which may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise. If and when so directed by the Board of Directors, a duplicate of the seal may be kept and be used by any officer of the Corporation designated by the Board. ARTICLE VII MISCELLANEOUS PROVISIONS SECTION 1. FISCAL YEAR. The fiscal year of the Corporation shall end on January 31 of each year unless otherwise provided by the Board of Directors of the Corporation. SECTION 2. WAIVERS OF NOTICE. Whenever any notice whatever is required to be given by law, or under the provisions of the Certificate of Incorporation or of these Bylaws, a waiver thereof in writing, signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent thereto. SECTION 3. OUALIFYING IN FOREIGN JURISDICTIONS. The directors shall have the power at any time and from time to time to take or cause to be taken any and all measures which they may deem necessary for qualification to do business as a foreign corporation in any one or more foreign jurisdictions and for withdrawal therefrom. 16 SECTION 4. INDEMNIFICATION. The Corporation shall, to the full extent permitted by the General Corporation Law of Delaware and the Certificate of Incorporation, in each case as amended from time to time, indemnify all persons whom it has the power to indemnify pursuant thereto. without limiting the generality of the foregoing: (a) The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Corporation) by reason of the fact that he is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction or upon a plea of NOLO CONTENDERE or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful. (b) The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that he is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses (including attorneys, fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation and except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the Corporation unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper. 17 (c) To the extent that a director, officer, employee or agent of the Corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in paragraphs (a) and (b) , or in defense of any claim, issue or matter therein, he shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith. (d) Any indemnification under paragraphs (a) and (b) (unless ordered by a court) shall be made by the Corporation only as authorized in the specific case upon a determination that indemnification of the director, officer, employee or agent is proper in the circumstances because he has met the applicable standard of conduct set forth in paragraphs (a) and (b). Such determination shall be made (1) by the Board of Directors by a majority vote of a quorum consisting of directors who were not parties to such action, suit or proceeding, or (2) if such a quorum is not obtainable, or, even if obtainable a quorum of disinterested directors so directs, by independent legal counsel in a written opinion, or (3) by the stockholders. (e) Expenses incurred by an officer or director in defending a civil or criminal action, suit or proceeding shall be paid by the Corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such director or officer to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the Corporation as authorized in this SECTION. Such expenses incurred by other employees and agents may be so paid upon such terms and conditions, if any, as the Board of Directors deems appropriate. (f) The indemnification and advancement of expenses provided by or granted pursuant to the paragraphs of this SECTION shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any by-law, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office. (g) The Corporation shall have power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the Corporation would have the power to indemnify him against such liability under the provisions of this SECTION. (h) For purposes of this SECTION, references to "the corporation" shall include, in addition to the resulting 18 corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, and employees or agents, so that any person who is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under the provisions of this SECTION with respect to the resulting or surviving corporation as he would have with respect to such constituent corporation if its separate existence had continued. (i) For purposes of this SECTION, references to "other enterprises" shall include employee benefit plans; reference to "fines" shall include any excise taxes assessed on a person with respect to an employee benefit plan; and references to "serving at the request of the Corporation" shall include any service as a director, officer, employee or agent of the Corporation which imposes duties on, or involves services by, such director, officer, employee or agent with respect to an employee benefit plan, its participants, or beneficiaries; and a person who acted in good faith and in a manner he reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the best interests of the Corporation" as referred to in this SECTION. (j) The indemnification and advancement of expenses provided by, or granted pursuant to, this SECTION shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. (k) No amendment to or repeal or modification of this SECTION 4 shall adversely affect any right or protection of a director of a Corporation existing at the time of such amendment, repeal or modification. ARTICLE VIII AMENDMENTS All By-laws of the Corporation shall be subject to alteration or repeal, and new By-laws not inconsistent with any provision of the Certificate of Incorporation of the Corporation or any provision of law may be made, either by the affirmative vote of the holders of record of a majority of the outstanding stock of the Corporation entitled to vote in respect thereof, given at an annual meeting or at any special meeting, provided that notice of the proposed alteration or repeal or of the proposed new By-laws be included in the notice of such meeting, or by the Board of Directors at any regular or special meeting. EX-4.(B) 4 FIRST AMENDMENT TO REVOLVING CREDIT AGREEMENT EXHIBIT 4(b) FIRST AMENDMENT TO REVOLVING CREDIT AGREEMENT THIS FIRST AMENDMENT TO REVOLVING CREDIT AGREEMENT (the "Amendment"), dated as of March 17, 1995, is among Varlen Corporation (the "Borrower"), the lenders listed on the signature pages hereof (the "Lenders") and The First National Bank of Chicago, as agent (the "Agent"). WITNESSETH: WHEREAS, the Borrower, the Lenders and The First National Bank of Chicago, individually and as Agent, entered into that certain Revolving Credit Agreement dated as of December 6, 1993 (the "Existing Agreement"); WHEREAS, the Borrower, the Lenders and the Agent desire to amend the Existing Agreement to, among other things, change the pricing thereunder and specifically permit a certain expenditure on fixed assets, all as more fully described hereinafter; NOW, THEREFORE, in consideration of the premises herein contained, and for other good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereto hereby agree as follows: 1. DEFINED TERMS. Capitalized terms used herein and not otherwise defined shall have the meanings attributed to such terms in the Existing Agreement. 2. AMENDMENTS TO THE EXISTING AGREEMENT. Effective upon the satisfaction of the conditions precedent set forth in Section 4 hereof, the Existing Agreement is hereby amended as follows: (a) The table contained in Section 2.5 of the Existing Agreement is amended to read in its entirety as follows:
APPLICABLE MARGIN LEVEL I STATUS LEVEL II STATUS LEVEL III STATUS - ------------------------------------------------------------------------------- EUROCURRENCY RATE .50% .75% 1.0% - ------------------------------------------------------------------------------- FIXED CD RATE .625% .875% 1.125% - ------------------------------------------------------------------------------- COMMITMENT FEE .175% .20% .25% - ------------------------------------------------------------------------------- STANDBY LETTER OF CREDIT .50% .75% 1.0% FEE (FINANCIAL) - ------------------------------------------------------------------------------- STANDBY LETTER OF CREDIT .375% .375% .50% FEE (PERFORMANCE) - -------------------------------------------------------------------------------
(b) The, following definitions contained in Section 2.5 of the Existing Agreement are amended to read in their entirety as follows: "'Level I Status' exists at any date if, as of the last day of the then most recently ended fiscal quarter of the Borrower, either (i) the Interest Coverage Ratio is greater than 6.0 to 1.0 or (ii) the Implied Senior Indebtedness Rating is equivalent to a long term debt rating of BBB or higher by S&P or Baa or higher by Moody's. 'Level II Status' exists at any date if, as of the last day of the then most recently ended fiscal quarter of the Borrower, (i) the requirements necessary to achieve Level I Status shall not have been satisfied and (ii) the Interest Coverage Ratio is greater than or equal to 4.0 to 1.0 'Level III Status' exists at any date if the requirements necessary to achieve Level I Status or Level II Status shall not have been satisfied." (c) Section 6.18 of the Existing Agreement is hereby amended to read in its entirety as follows: "6.18. FIXED ASSET EXPENDITURES. The Borrower will not, nor will it permit any Subsidiary to, expend, or be committed to expend, as of any date of determination, on a cumulative basis from and after the Effective Date, an amount for the acquisition of fixed assets that, when expended, will exceed the sum of (i) $5,000,000 PLUS (ii) 150% of the Borrower's cumulative depredation expense, in the aggregate for the Borrower and its Subsidiaries, PROVIDED that all expenditures on the acquisition of fixed assets as part of the acquisition of the facility in Bryson City, North Carolina as described to the Agent in February, 1995 shall be excluded from and shall not count against the dollar limitation set forth in this Section." 3. REPRESENTATIONS AND WARRANTIES. The Borrower hereby confirms, reaffirms and restates as of the Effective Date (as defined in Section 4 of this Amendment) the representations and warranties set forth in Article V of the Existing Agreement provided that such representations and warranties shall be and hereby are amended as follows: each reference therein to "this Agreement", including, without limitation, such a reference included in the term "Loan Documents", shall be deemed to be a collective reference to the Existing Agreement, this Amendment and the Existing Agreement as amended by this Amendment. A Default under and as defined in the Existing Agreement as amended by this Amendment shall be deemed to have occurred if any representation or warranty made pursuant to the foregoing sentence of this Section 3 shall be materially false as of the date on which made. 4. CONDITIONS PRECEDENT. This Amendment and the amendments to the Existing Agreement provided for herein shall become effective on and as the date first set forth above Page 2 (the "Effective Date") provided that all of the following conditions precedent shall have been satisfied: (a) This Amendment shall have been duly executed and delivered by the Agent, the Borrower and the Lenders and consented to by each of the Guarantors. (b) No Default or Unmatured Default shall have occurred and be continuing. 5. EFFECT ON THE EXISTING AGREEMENT. Except as expressly amended hereby, all of the representations, warranties, terms, covenants and conditions of the Existing Agreement and the other Loan Documents (a) shall remain unaltered, (b) shall continue to be, and shall remain, in full force and effect in accordance with their respective terms, and (c) are hereby ratified and confirmed in all respects. Upon the effectiveness of this Amendment, all references in the Existing Agreement (including references in the Existing Agreement as amended by this Amendment) to "this Agreement" (and all indirect references such as "hereby", "herein", "hereof" and "hereunder") shall be deemed to be references to the Existing Agreement as amended by this Amendment. 6. EXPENSES. The Borrower shall reimburse the Agent for any and all reasonable costs, internal charges and out-of-pocket expenses (including attorneys' fee and time charges of attorneys for the Agent, which attorneys may be employees of the Agent) paid or incurred by the Agent in connection with the preparation, review, execution and delivery of this Amendment. 7. ENTIRE AGREEMENT. This Amendment, the Existing Agreement as amended by this Amendment and the other Loan Documents embody the entire agreement and understanding between the parties hereto and supersede any and all prior agreements and understandings between the parties hereto relating to the subject matter hereof. 8. GOVERNING LAW. This Amendment shall be construed in accordance with the internal laws (and not the law of conflicts) of the State of Illinois, but giving effect to federal laws applicable to a national banking association located in the State of Illinois. 9. COUNTERPARTS. This Amendment may be executed in any number of counterparts, all of which taken together shall constitute one agreement, and any of the parties hereto may execute this by signing any such counterpart. Page 3 IN WITNESS WHEREOF, the parties hereto have caused this First Amendment to Revolving Credit Agreement to be duly executed as of the date first above written. VARLEN CORPORATION By: /s/ Richard A. Nunemaker ---------------------------- Title: /s/ Vice President ------------------------- THE FIRST NATIONAL BANK OF CHICAGO, individually and as Agent By: /s/ Dianne Banta ---------------------------- Title: /s/ C. Banking Officer -------------------------- HARRIS TRUST AND SAVINGS BANK By: /s/ M. Elizabeth Gillian ---------------------------- Title: /s/ Vice President -------------------------- NATIONSBANK, N.A. (CAROLINAS) By: /s/ Carter E. Smith ---------------------------- Title: /s/ Assistant VP -------------------------- Page 4 ABN AMRO BANK N.V. By: /s/ Robert J. Graff ---------------------------- Title: /stamp/ Robert J. Graff ------------------------- /stamp/ Vice President ------------------------- By: /s/ Thomas M. Toep ---------------------------- Title: /s/ VP -------------------------- ACKNOWLEDGMENT AND CONSENT BY GUARANTORS Each of the undersigned Guarantors (i) acknowledges its receipt of a copy of and hereby consents to all the terms and conditions of the foregoing First Amendment to Revolving Credit Agreement and (ii) reaffirms its obligations under the Subsidiary Guaranty dated as of December 6, 1993 in favor of The First National Bank of Chicago, as agent. CHROME CRANKSHAFT CO. By: /s/ Richard A. Nunemaker ---------------------------- Title: /s/ Attorney-in-Fact -------------------------- CHROME CRANKSHAFT COMPANY OF ILLINOIS By: /s/ Richard A. Nunemaker ---------------------------- Title: /s/ Attorney-in-Fact -------------------------- CHROME LOCOMOTIVE, INC. By: /s/ Richard A. Nunemaker ---------------------------- Title: /s/ Attorney-in-Fact -------------------------- CONSOLIDATED METCO, INC. By: /s/ Richard A. Nunemaker ---------------------------- Title: /s/ Attorney-in-Fact -------------------------- FEMC, INC. By: /s/ Richard A. Nunemaker ---------------------------- Title: /s/ Attorney-in-Fact -------------------------- HEINICKE SCIENTIFIC, INC. By: /s/ Richard A. Nunemaker ---------------------------- Title: /s/ Attorney-in-Fact -------------------------- INTERNATIONAL METAL PRODUCTS CORPORATION By: /s/ Richard A. Nunemaker ---------------------------- Title: /s/ Attorney-in-Fact -------------------------- KEYSTONE INDUSTRIES, INC. By: /s/ Richard A. Nunemaker ---------------------------- Title: /s/ Attorney-in-Fact -------------------------- PAGE 6 KEYSTONE RAILWAY EQUIPMENT COMPANY By: /s/ Richard A. Nunemaker ---------------------------- Title: /s/ Attorney-in-Fact -------------------------- MEANS INDUSTRIES, INC. By: /s/ Richard A. Nunemaker ---------------------------- Title: /s/ Attorney-in-Fact -------------------------- NAPCO SCIENTIFIC COMPANY By: /s/ Richard A. Nunemaker ---------------------------- Title: /s/ Attorney-in-Fact -------------------------- NATIONAL METALWARES, INC. By: /s/ Richard A. Nunemaker ---------------------------- Title: /s/ Attorney-in-Fact -------------------------- PRECISION SCIENTIFIC, INC. By: /s/ Richard A. Nunemaker ---------------------------- Title: /s/ Attorney-in-Fact -------------------------- PAGE 7 RUSH ENTERPRISES, INC. By: /s/ Richard A. Nunemaker ---------------------------- Title: /s/ Attorney-in-Fact -------------------------- S-G DIESEL POWER, INC. By: /s/ Richard A. Nunemaker ---------------------------- Title: /s/ Attorney-in-Fact -------------------------- SAPULPA TANK COMPANY By: /s/ Richard A. Nunemaker ---------------------------- Title: /s/ Attorney-in-Fact -------------------------- SCW CORPORATION By: /s/ Richard A. Nunemaker ---------------------------- Title: /s/ Attorney-in-Fact -------------------------- SPECIAL METAL RINGS CORP. By: /s/ Richard A. Nunemaker ---------------------------- Title: /s/ Attorney-in-Fact -------------------------- PAGE 8 UNIT RAIL ANCHOR COMPANY, INC. By: /s/ Richard A. Nunemaker ---------------------------- Title: /s/ Attorney-in-Fact -------------------------- WEBCO TANK INCORPORATED By: /s/ Richard A. Nunemaker ---------------------------- Title: /s/ Attorney-in-Fact -------------------------- ALCOR PETROLEUM INSTRUMENTS, INC. By: /s/ Richard A. Nunemaker ---------------------------- Title: /s/ Attorney-in-Fact -------------------------- BEECHHEAD ASSOCIATES INCORPORATED By: /s/ Richard A. Nunemaker ---------------------------- Title: /s/ Attorney-in-Fact -------------------------- VARLEN INSTRUMENTS, INC. By: /s/ Richard A. Nunemaker ---------------------------- Title: /s/ Attorney-in-Fact -------------------------- PAGE 9 PRIME MANUFACTURING CORPORATION By: /s/ Richard A. Nunemaker ---------------------------- Title: /s/ Attorney-in-Fact -------------------------- PAGE 10 EX-4.(C) 5 CONSENTS FOR REVOLVING CREDIT AGREEMENT EXHIBIT 4(c) ------------ [LOGO] FIRST CHICAGO THE FIRST NATIONAL BANK OF CHICAGO CONSENT NOTICE To: The First National Bank of Chicago. as agent One First National Plaza Chicago, Illinois 60670 Re: Revolving Credit Agreement dated as of December 6. 1993 (the "Credit Agreement") by and among Varlen Corporation, the Borrowing Subsidiaries and the Lenders party thereto; capitalized terms used herein and not otherwise defined are used as defined in the Credit Agreement We have received a copy of the Extension Request dated September 8, 1995 from Varlen Corporation. The undersigned Lender hereby irrevocably consents to the extension of the Facility Termination Date to December 6, 1998 as requested in the Extension Request. THE FIRST NATIONAL BANK OF CHICAGO By: /s/ Julia A. Bristow ----------------------------------- Title: Managing Director -------------------------------- Nationsbank [Letterhead] [LOGO] NATIONSBANK September 19, 1995 CONSENT NOTICE TO: The First National Bank of Chicago, as Agent One First National Plaza Chicago, Illinois 60670 RE: Revolving Credit Agreement dated as of December 6, 1993 (the "Credit Agreement") by and among Varlen Corporation, the Borrowing Subsidiaries and the Leaders party thereto; capitalized terms used herein and not otherwise defined are used as defined in the Credit Agreement. We have received a copy of the Extension Request dated September 8, 1995 from Varlen Corporation. The undersigned Lender hereby irrevocably consents to the extension of the Facility Termination Date to December 6, 1998 as requested in the Extension Request. NationsBank, N.A. (Carolinas) /s/ Carter E. Smith ------------------------ Carter E. Smith Assistant Vice President USA [Olympic Logo] Official Sponsor 1994/1996 Member FDIC [LOGO] ABN-AMRO Bank CHICAGO BRANCH 135 South LaSalle Street Chicago, Illinois 60674-9135 (312) 904-2957 CONSENT NOTICE To: The First National Bank of Chicago, as agent One First National Plaza Chicago, Illinois 60670 Re: Revolving Credit Agreement dated as of December 6, 1993 (the "Credit Agreement") by and among Varlen Corporation, the Borrowing Subsidiaries and the Lenders party thereto; capitalized terms used herein and not otherwise defined are used as defined in the Credit Agreement We have received a copy of the Extension Request dated September 8, 1995 from Varlen Corporation. The undersigned Lender hereby irrevocably consents to the extension of the Facility Termination Date to December 6, 1998 as requested in the Extension Request. ABN AMRO Bank N.V. By: /s/ Adrienne H. Baker ------------------------------- Title: Assistant Vice President ---------------------------- By: /s/ Shirley Kempel ------------------------------- Title: Vice President ---------------------------- CONSENT NOTICE To: The First National Bank of Chicago, as agent One First National Plaza Chicago, Illinois 60670 Re: Revolving Credit Agreement dated as of December 6, 1993 (the "Credit Agreement") by and among Varlen Corporation, the Borrowing Subsidiaries and the Lenders party thereto; capitalized terms used herein and not otherwise defined are used as defined in the Credit Agreement We have received a copy of the Extension Request dated September 8, 1995 from Varlen Corporation. The undersigned Lander hereby irrevocably consents to the extension of the Facility Termination Date to December 6, 1998 as requested in the Extension Request. * By: /s/ Patrick J. McDonnell -------------------------- Title: PATRICK J. MCDONNELL ----------------------- VICE PRESIDENT *Insert name of Lender EX-11 6 COMPUTATION OF EARNINGS EXHIBIT 11 VARLEN CORPORATION AND SUBSIDIARIES Exhibit 11 COMPUTATION OF PER SHARE EARNINGS (Thousands, Except Per Share Amounts)
For The Year Ended --------------------------------------- PRIMARY EARNINGS PER SHARE: 1/31/96 1/31/95 1/31/94 --------- --------- --------- Net earnings $ 19,609 $ 14,762 $ 10,766 --------- --------- --------- --------- --------- --------- Computation of the Weighted Average Number of Shares Outstanding as Used in Primary Earnings Per Share Computation: Weighted average number of shares outstanding 5,382 5,339 5,297 Shares assumed issued under the treasury stock method 201 174 145 --------- --------- --------- Weighted average number of shares outstanding, as adjusted 5,583 5,513 5,442 --------- --------- --------- --------- --------- --------- Primary Earnings Per Share $ 3.51 $ 2.68 $ 1.98 --------- --------- --------- --------- --------- --------- FULLY DILUTED EARNINGS PER SHARE: Reconciliation of net earnings per the consolidated financial statements to the amount used for the fully diluted computation: Net earnings $ 19,609 $ 14,762 $ 10,766 Add interest on 6 1/2% convertible subordinated debentures, net of income tax effects 2,736 2,736 1,874 --------- --------- --------- Net earnings, as adjusted $ 22,345 $ 17,498 $ 12,640 --------- --------- --------- --------- --------- --------- Computation of the Weighted Average Number of Shares Outstanding as Used in the Fully Duluted Earnings Per Share Computation: Weighted average number of shares outstanding 5,382 5,339 5,297 Shares assumed issued under the treasury stock method 205 190 169 Shares issuable from assumed exercise of 6 1/2% convertible subordinated debentures 2,776 2,776 1,863 --------- --------- --------- Weighted average number of shares outstanding, as adjusted 8,363 8,305 7,329 --------- --------- --------- --------- --------- --------- Fully Diluted Earnings Per Share $ 2.67 $ 2.11 $ 1.73 --------- --------- --------- --------- --------- ---------
EX-13 7 ANNUAL REPORT Varlen Corporation Annual Report 1995 Manufacturer of Precision Engineered Products VARLEN AT A GLANCE OUTPERFORMING OUR MARKETS TRUCK / TRAILER PRIMARY MARKETS: Class 8 trucks and over-the-road trailer manufacturers - domestic and international. PRODUCTS: ALUMINUM PERMANENT MOLD AND DIE CASTINGS * Axle hubs * Suspension brackets * Transmission housings * Spring brake flanges and pistons STRUCTURAL MOLDED PLASTIC COMPONENTS * Door sill assemblies * Instrument panels * Sleeper cab accessories RAILROAD PRIMARY MARKETS: Locomotive and railcar manufacturers, railroads and railcar maintenance facilities, lessors, and track maintenance contractors. Global markets. PRODUCTS: RAILCARS * Hydraulic cushioning * Draft gears * Buffers * Discharge gates LOCOMOTIVES * HVAC systems * Draft gears * Valves * Toilets REMANUFACTURED CRANKSHAFTS AND CAMSHAFTS RAILROAD TRACK FASTENER SYSTEMS AUTOMOTIVE PRIMARY MARKETS: Original equipment automotive manufacturers and tier one suppliers. Aftermarket transmission rebuilders. Parts are used on cars and light trucks. Domestic and international markets. PRODUCTS: AUTOMATIC TRANSMISSION REACTION PLATES STEERING COLUMN COMPONENTS TRANSMISSION COMPONENTS SEAT FRAME BRACKETS PRECISION STAMPED METAL COMPONENTS AND WELDMENTS PETROLEUM ANALYZERS PRIMARY MARKETS: Instrumentation to improve yield, certify products and monitor regulatory standards. Used by oil refineries, petrochemical plants, petroleum transporters, and large users of distillate products. Global markets. PRODUCTS: AUTOMATED LABORATORY QUALITY CONTROL INSTRUMENTS ON-LINE PROCESS ANALYZERS MANUAL AND SEMI-AUTOMATIC PHYSICAL PROPERTY ANALYZERS PORTABLE OPTOELECTRONIC ANALYZERS CERTIFICATION SAMPLES PETROLEUM TESTING SERVICES 1 FINANCIAL HIGHLIGHTS Varlen Corporation and Subsidiaries (In thousands, except per share data)
1995(a) 1994(a) 1993(a) FOR THE YEAR Net Sales. . . . . . . . . . . . . . . . . . . . . . . . . . $386,987 $341,521 $291,908 Net Earnings . . . . . . . . . . . . . . . . . . . . . . . . 19,609 14,762 10,766 Net Earnings as a Percent of Sales . . . . . . . . . . . . . 5.1% 4.3% 3.7% Return on Average Stockholders' Equity . . . . . . . . . . . 21.4% 20.5% 18.0% Return on Invested Capital . . . . . . . . . . . . . . . . . 13.8% 12.4% 10.5% Capital Expenditures . . . . . . . . . . . . . . . . . . . . $ 23,427 $ 14,701 $ 11,240 Depreciation and Amortization. . . . . . . . . . . . . . . . 14,259 14,664 12,901 - --------------------------------------------------------------------------------------------------------- AT YEAR END Working Capital. . . . . . . . . . . . . . . . . . . . . . . $ 67,044 $ 57,713 $ 49,046 Net Property, Plant and Equipment. . . . . . . . . . . . . . 69,675 59,636 52,867 Total Debt . . . . . . . . . . . . . . . . . . . . . . . . . 73,485 72,855 72,820 Stockholders' Equity . . . . . . . . . . . . . . . . . . . . 97,953 79,031 63,644 Senior Debt as a Percent of Total Capitalization . . . . . . 2.6% 2.5% 2.8% Total Debt as a Percent of Total Capitalization. . . . . . . 42.9% 48.0% 53.4% - --------------------------------------------------------------------------------------------------------- PER SHARE DATA Primary Earnings Per Share . . . . . . . . . . . . . . . . . $ 3.51 $ 2.68 $ 1.98 Fully Diluted Earnings Per Share . . . . . . . . . . . . . . 2.67 2.11 1.73 Dividends Declared . . . . . . . . . . . . . . . . . . . . . 0.39 0.36 0.36 Stockholder's Equity . . . . . . . . . . . . . . . . . . . . 18.26 14.76 11.94 - ---------------------------------------------------------------------------------------------------------
(a) Throughout this report the years ended January 31, 1996, 1995 and 1994 are referred to as 1995, 1994, and 1993, respectively. The per share data in 1994 and 1993 reflect restatement for a 10% stock dividend in 1995. 1995 SEGMENT RESULTS 2 LETTER TO A FELLOW SHAREOWNERS AND ASSOCIATES Public company management is often accused of writing "puffy" or self- congratulatory letters to shareholders, this is not our style. At the risk of being charged with "breaking our arms while patting ourselves on the back," we would like to highlight some key accomplishments of 1995. - Third consecutive record year: - Sales increased 13 percent - Net earnings increased 33 percent - 13.8 percent return on invested capital - a record - 21.4 percent return on equity - a record - International sales now 19 percent - Productivity increased 6 percent over the prior year - A non-strategic business unit was sold - 10 percent stock dividend paid, effectively increasing the cash dividend by 10 percent - 500,000 share common stock repurchase authorized Most of 1995's growth was internal - the result of increased market penetration and expanding markets. Investments Varlen made and is making in product development, market expansion and cost reduction are paying off. We continue to aggressively fund the growth of our existing operating units. Our key criteria is that investments must exceed our cost of capital. In 1995, our capital expenditures were $23,400,000 and for the last five years totaled $67,000,000 - 130 percent of depreciation. Varlen's results speak for themselves. We feel Varlen is still capable of growing faster. To quicken our pace of growth, we have to look externally to acquisitions, joint ventures and other forms of corporate partnering. From this perspective, 1995 was a frustrating year. We devoted a great deal of time and a fair amount of expense in an attempt to accelerate our strategic growth plan. Our one success was in the formation of an alliance between our petroleum analyzer business unit and Boston Advanced Technologies, Inc., a manufacturer of instruments using optoelectronic technology. Strategic acquisition candidates were identified but we were unwilling to compete with the very high prices offered by others at the top of the business cycle. Another factor was the reluctance of targeted companies to sell their businesses. The mergers and acquisitions market seems to have returned to the excessive days of the 1980's where bank credit was "easy" and large pools of equity funding were available. Varlen has, and will continue to take, a disciplined approach to growth. This does not mean that we will be a wallflower. We are focused on strategic acquisitions of manufacturers of engineered industrial products. The projected return from any acquisition or partnership must exceed our cost of capital and enhance Varlen's market position. We are increasing our corporate development effort and with a very strong balance sheet are well positioned to aggressively pursue external growth. "VARLEN HAS A HISTORY OF OUTPERFORMING ITS MARKETS AND WE EXPECT TO DO SO IN THE FUTURE." 3 LETTER TO FELLOW SHAREOWNERS AND ASSOCIATES CONTINUED GLOBAL GROWTH Varlen's revenues from exports and foreign operations climbed to 19 percent of total sales, up from 16 percent in 1994 and up sharply from the beginning of the decade. Our goal is to have international revenues at a minimum of 25 percent. We plan to accomplish this by developing more products specifically designed for foreign markets, increasing market share, expanding our geographic reach, and through strategic acquisitions. We feel the greatest opportunities are in products for the railroad industry and petroleum analyzers, although recently we received our first meaningful non-North American export orders for aluminum trailer hubs and automatic transmission reaction plates. FINANCIAL GOALS Since the end of the last recession in 1991, Varlen has had a compound annual growth rate of 54 percent in earnings and 14 percent in sales. While we would like to maintain this momentum, the fact that Varlen's transportation products segment serves cyclical industries makes it difficult. We are dedicated to long- term growth and ask that Varlen's performance be measured over the entire length of a business cycle. VARLEN'S FINANCIAL OBJECTIVES ARE: - - RETURN ON INVESTED CAPITAL: average during the business cycle of 10 percent. We have exceeded this target for the past three years and plan to do so again in 1996. This measurement is the key element in the incentive compensation program for Varlen management. - - RETURN ON EQUITY: average during the business cycle of 15 percent. To achieve this objective, we must perform well above the 15 percent average in years when economic conditions are favorable. We have significantly surpassed this target during the past three years (20 percent average) and are focused on doing so again in the coming year. - - RETURN ON SALES: 10 percent pre-tax. While improving, we have not met this goal in recent years. We strive to achieve our earnings goals while focusing on cash flow, making long-term investments in our businesses, and maintaining a strong balance sheet. - - SALES GROWTH: average 12 percent. Although we desire to grow at a rapid pace, we never lose sight that return on invested capital is one of the most critical measures for adding economic value. SHAREOWNERS VALUE Varlen's mission statement begins with the declaration that our "primary objective is to increase the long-term value of its shareowners' investment". We take this commitment seriously. During the past five years the compound annual return on an investment in Varlen stock was 29%, assuming reinvestment of dividends. If a $100 investment was made on January 31, 1991, it would have been worth $362 on January 31, 1996. This return is significantly higher than the 16% compound annual return on an investment in the S&P 500. We endeavor to manage Varlen to reward long-term shareowners. 4 OUTLOOK For 1996, the North American sales of heavy-duty trucks/trailers and new freightcars and locomotives are projected by some analysts to fall as much as 30 to 35 percent from their very high 1995 levels. While this is a precipitous drop, one should keep in mind that the projected production will still be at very healthy levels. Although the North American railroad industry may be weaker in 1996, we expect to compensate by increasing international and aftermarket sales. Automotive industry sales of light vehicles may be flat or fall slightly, but we anticipate our performance in this market to continue to improve. Varlen's petroleum analyzer business is expected to grow in 1996 as new products are introduced and our distribution network is expanded. Varlen has a history of outperforming its markets and we expect to do so in the future. We intend to expand globally, increase market penetration, and quicken the pace of new product development. Varlen's operating units are strong and well positioned to take advantage of growth opportunities even in weakening markets. We are very enthusiastic about your company's long-term prospects and will continue to invest in its future. In July 1995 we sold a non-strategic business, a manufacturer of tubular products for consumer markets. Recently, we announced plans to divest our research laboratory appliance business. This industry is experiencing consolidation at both the manufacturing and distribution levels. We have decided that future expenditures are better invested where Varlen can maintain critical mass, such as in our transportation products segment and in instruments for the petroleum and petrochemical industries. Excluding any sale gain or loss, the absence of these two businesses could create approximately $0.12 to $0.15 per share in earnings dilution in 1996. The proceeds from these divestitures will be reinvested in future acquisitions with greater profit potential. In many ways Varlen's 1995 outstanding performance reflects our associates' ongoing commitment to our customers, continuous improvement and a willingness to embrace change--thank you. We also extend our appreciation for the support of Varlen shareowners and the loyalty of our customers and suppliers. /s/ Ernest H. Lorch /s/ Richard L. Wellek Ernest H. Lorch Richard L. Wellek Chairman of the Board President and Chief Executive Officer March 6, 1996 5 THE VARLEN MISSION VARLEN'S PRIMARY OBJECTIVE IS TO INCREASE THE LONG-TERM VALUE OF ITS SHAREOWNERS' INVESTMENT. THIS WILL BE ACHIEVED BY BUILDING UPON OUR EMPLOYEES' CREATIVITY AND THEIR COMMITMENT TO SERVING CUSTOMERS BETTER AND MORE EFFICIENTLY THAN OUR COMPETITORS DO IN THE MARKETS WHERE VARLEN CHOOSES TO COMPETE. VARLEN WILL INVEST RESOURCES IN SELECTED INDUSTRIAL MARKETS WHERE IT HAS, OR CAN OBTAIN, A LEADERSHIP POSITION; WE WILL REDEPLOY RESOURCES FROM MARKETS WHERE WE CANNOT. WE WILL CONTINUE TO ENHANCE OUR GLOBAL PRESENCE. VARLEN'S ENGINEERED PRODUCTS FOR THE NICHE MARKETS IN WHICH IT PARTICIPATES ARE CHARACTERIZED BY DIFFERENTIABLE PROCESS TECHNOLOGY EMPLOYED IN THEIR MANUFACTURE AND/OR SUPERIOR PERFORMANCE ATTRIBUTES. OUR DEDICATION TO CONTINUOUS IMPROVEMENT WILL BE UNRELENTING. REVIEW OF OPERATIONS TRANSPORTATION PRODUCTS In last year's report we promised to get a lot better, and we did! In spite of weak pricing and rising material costs, our productivity increases, new programs, and market penetration gains generated operating profit growth of 32 percent on a net sales increase of 21 percent. The markets Varlen serves may be considered mundane, but the results do not have to be. While we derived a great deal of satisfaction from our 1995 results in this segment, we have not been resting on our laurels. On the contrary, we have been taking advantage of our earnings gains to invest in our businesses to further strengthen the competitive advantages we enjoy in our markets. Varlen invested a record $22,400,000 in 1995 to support the internal growth and cost reduction efforts of our transportation segment plants. This infusion of capital, up 76 percent from $12,800,000 last year and 2.3 times depreciation, will improve operations and increase Varlen's ability to serve its customers. The North American heavy-duty truck and trailer markets operated at capacity levels for most of 1995, and we were able to capitalize on that strength. Through new programs and share gains, along with the rise in base demand, Varlen sales and operating profit in this market reached record levels. Unfortunately, these markets lost considerable momentum in the last quarter, and expectations for 1996 are for our OEM customers to be down about 30 percent. But even with this industry pull back, the full year impact of new programs we started in mid 1995, combined with the production ramp-up of components for Freightliner's new Century Class truck, should allow Varlen to substantially outperform the market. In fact, our state-of-the-art facility in Bryson City, North Carolina, is now starting up 6 production to support a four-fold increase over the structural plastic interior content value we have on current generation Freightliner trucks. As trucking companies push to increase payload and reduce operating expenses, demand for our lightweight technology--design and application of aluminum and structural plastic components--is expected to grow. Recognizing that the surest way to grow is by satisfying customers, we are working hard to transform more of our customer OEM relationships into working partnerships. This is done not only by being relentless in striving to meet and exceed service levels, but also by providing engineered solutions to design problems. These initiatives are expected to continue generating breakthrough revenue gains. Pull-through marketing efforts with trailer fleet owners have generated solid share gains for our proprietary aluminum hubs. Our North American market share has grown by 28% over the last two years, and we believe the potential for future growth is substantial. Also, interest for our lightweight hubs is growing in international markets, and development projects are active with OEM accounts in Europe and Japan. North American factories produced about two percent fewer light passenger vehicles in 1995 than they did in 1994. Nevertheless, Varlen had record operating profit in this market as margins were increased by improving manufacturing yields through a sharp focus placed on reducing the variation in our manufacturing processes. Although we always delivered high-quality products to our customers, it was costing us too much to achieve this quality because of defects that we needed to inspect for and correct. The goal for 1996 is to further reduce the defect rate--the number of products that do not make it through our production lines error free the first time--and to again realize a margin gain. We believe that in the next few years, this "process capability" initiative can further reduce cost, speed our responsiveness to customers, and add to our manufacturing capacity. We are bringing in technical expertise where needed, and we are training our own "champions" to lead this effort. Although the auto portion of the market is not expected to rebound in 1996, increasing popularity of sport utility vehicles and light trucks--the strongest portion of our market--is expected to enable us to outperform the combined light vehicle market. For the future, we are making the technical investments to provide more value added products, with a focus on being a specialist in the manufacturing of automatic transmission reaction plates. These investments are enhancing our capability and reputation and were instrumental in recently winning plate business from GM-Europe. During 1995, Varlen's railroad operating profit increased 42 percent on a sales increase of 39 percent over 1994, and our leading niche positions should assist us in outperforming the market in 1996. Unfortunately, the weakness in industrial production, a fourth quarter drop in traffic hauled, and investment decision delays due to the big western railroad mergers will be derailing both freight car and locomotive builds for 1996. We plan to compensate by increasing aftermarket and international sales. [PHOTO] Structural plastic interior components for Class 8 trucks are manufactured in a new world class plant. 7 REVIEW OF OPERATIONS For our shock control devices, we expect to increase sales with advanced products based on our proprietary energy absorption technology. More engineering resources are now focused on beating competitors to market with new and improved products for both North America and Europe. Our track fastener operation is now benefiting from a major process upgrade in 1995 that enhanced its competitive edge to make further penetration in international markets. Our locomotive business unit formed in 1995 is expected to increase earnings by more effectively reaching out and satisfying customers' aftermarket needs. We are aggressively pursuing new sources of railroad growth. International marketing efforts have been intensified, and several joint ventures are being considered. Technology leadership across our product lines affords us opportunities to provide customers with the advanced products they require. As evidenced by recent orders from China for air conditioning equipment, these opportunities reach out globally. We expect foreign sales to increase significantly over the next several years. ANALYTICAL INSTRUMENTS At the end of 1994, we announced our intention to sell our tubular products business which we did in July, 1995. Despite the loss of this unit's earnings for the second half, operating profit grew by 6 percent in this segment over 1994. Because of low government funding levels and with pharmaceutical companies focused on improving the utilization of their laboratories, the research laboratory appliance market remained depressed in 1995 and our sales declined. Nevertheless, through improvements in manufacturing operations and fixed cost reductions, operating profit at our laboratory appliance business reached a record level--32 percent over 1994. Recently, we announced we were actively seeking a buyer for this business because we determined it was not likely we could sustain a leadership position. Until the unit is sold, we expect the export business to remain robust and help deliver a good income stream. Varlen Instruments--this segment's flagship business serving the petroleum industry with instruments used to measure the physical property of crude oil and its derivatives--delivered strong sales and operating profit for the year. Although adversely affected by the high deutsche mark, the full year impact of our direct sales effort in North America, along with increasing distribution effectiveness, bolstered results. We also entered into a strategic alliance with Boston Advanced Technologies--a leader in the design of mid-range infrared spectroscopic instruments--to complement our technology base and extend the range of products offered through our distribution channels. Beyond increasing our investment in engineering and development, we intend to better leverage our resources by improving the efficiency with which we bring products to market. New products are the cornerstone of the growth initiative for this business group, and this effort must deal with better project scheduling and management of design capacity. This focused objective of increasing time-to-market efficiency will be supplemented with an aggressive search for more niche acquisitions and alliances to further leverage our distribution capability. 8 INVENTORY MANAGEMENT Since the late 1980's, Varlen has been focused on programs targeting improved inventory management. The results have been excellent, with the absolute inventory level increasing from $35.9 million to $36.5 million between fiscal 1988 and fiscal 1995, while sales nearly doubled. This represents a 38 percent increase in turnover. Of equal importance was the reduced cycle time in our plants which improved manufacturing efficiency and productivity, thereby increasing our ability to respond to customer needs. OPERATING OUTLOOK While all of us at Varlen share a vision of becoming a premier company, few of us believe we have reached that distinction. To the contrary, we believe we are capable of further leaps in operating performance over the years ahead. We are confident we are on the right path and are committed to creating the environment necessary to fulfill that vision. /s/ Raymond A. Jean RAYMOND A. JEAN EXECUTIVE VICE PRESIDENT AND CHIEF OPERATING OFFICER [Photo] Automated production processes are used to produce automatic transmission reaction plates in order to insure high quality and low cost. 9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SUMMARY OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
1995 1994* 1993* 1992* 1991* STATEMENT OF EARNINGS DATA: - ---------------------------------------------------------------------------------------------------------------------------------- Net sales. . . . . . . . . . . . . . . . . . . . . . . . . . $386,987 $341,521 $291,908 $266,054 $230,517 -------- -------- -------- -------- -------- Earnings before income taxes . . . . . . . . . . . . . . . . 34,706 25,854 18,723 14,374 7,334 Income tax expense . . . . . . . . . . . . . . . . . . . . . 15,097 11,092 7,957 6,706 3,890 -------- -------- -------- -------- -------- Earnings before cumulative effect of change in accounting principle . . . . . . . . . . . . . . . . . . . 19,609 14,762 10,766 7,668 3,444 Cumulative effect of change in accounting principle. . . . . -- -- -- (1,351) -- -------- -------- -------- -------- -------- Net earnings . . . . . . . . . . . . . . . . . . . . . . . . $ 19,609 $ 14,762 $ 10,766 $ 6,317 $ 3,444 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- - ---------------------------------------------------------------------------------------------------------------------------------- Gross profit as a percent of sales . . . . . . . . . . . . . 25.0% 23.7% 24.0% 23.8% 21.9% Earnings before cumulative effect of change in accounting principle as a percent of sales . . . . . . . . 5.1% 4.3% 3.7% 2.9% 1.5% - ---------------------------------------------------------------------------------------------------------------------------------- Effective tax rate before cumulative effect of change in accounting principle. . . . . . . . . . . . . . . . . . 43.5% 42.9% 42.5% 46.7% 53.0% - ---------------------------------------------------------------------------------------------------------------------------------- Per share data--primary: Earnings before change in accounting principle . . . . . . $ 3.51 $ 2.68 $ 1.98 $ 1.04 $ 0.46 Net earnings . . . . . . . . . . . . . . . . . . . . . . . 3.51 2.68 1.98 0.86 0.46 Per share data--fully diluted: Earnings before change in accounting principle . . . . . . 2.67 2.11 1.73 1.04 0.46 Net earnings . . . . . . . . . . . . . . . . . . . . . . . 2.67 2.11 1.73 0.86 0.46 Dividends declared . . . . . . . . . . . . . . . . . . . . . 0.39 0.36 0.36 0.36 0.36 - ---------------------------------------------------------------------------------------------------------------------------------- Weighted average number of shares--primary . . . . . . . . . 5,583 5,513 5,442 7,346 7,412 Weighted average number of shares--fully diluted . . . . . . 8,363 8,305 7,329 7,346 7,412 - ----------------------------------------------------------------------------------------------------------------------------------
SUMMARY OF FINANCIAL CONDITION (IN THOUSANDS, EXCEPT PER SHARE DATA)
1995 1994* 1993* 1992* 1991* BALANCE SHEET DATA: - ---------------------------------------------------------------------------------------------------------------------------------- Total assets . . . . . . . . . . . . . . . . . . . . . . . . $230,874 $220,186 $186,264 $180,666 $182,279 Working capital. . . . . . . . . . . . . . . . . . . . . . . 67,044 57,713 49,046 39,570 38,632 Ratios: Current assets to current liabilities. . . . . . . . . . 2.5/1 2.1/1 2.4/1 1.9/1 2.0/1 Average inventory turnover . . . . . . . . . . . . . . . 7.2 6.7 6.1 5.7 5.0 Average accounts receivable turnover . . . . . . . . . . 8.4 8.2 8.1 7.5 7.3 - ---------------------------------------------------------------------------------------------------------------------------------- Net property, plant and equipment. . . . . . . . . . . . . . $ 69,675 $ 59,636 $ 52,867 $ 54,779 $ 58,436 Capital expenditures . . . . . . . . . . . . . . . . . . . . 23,427 14,701 11,240 9,567 7,949 Depreciation . . . . . . . . . . . . . . . . . . . . . . . . 11,819 11,885 10,295 9,488 8,794 - ---------------------------------------------------------------------------------------------------------------------------------- Debt: Senior debt. . . . . . . . . . . . . . . . . . . . . . . . $ 4,485 $ 3,855 $ 3,820 $ 74,679 $ 63,261 Senior debt as a percent of total capitalization . . . . . 2.6% 2.5% 2.8% 58.1% 46.4% Total debt . . . . . . . . . . . . . . . . . . . . . . . . $ 73,485 $ 72,855 $ 72,820 $ 74,679 $ 63,261 Total debt as a percent of total capitalization. . . . . . 42.9% 48.0% 53.4% 58.1% 46.4% - ---------------------------------------------------------------------------------------------------------------------------------- Stockholders' equity. . . . . . . . . . . . . . . . . . . . . $ 97,953 $ 79,031 $ 63,644 $ 53,788 $ 73,031 Stockholders' equity per share. . . . . . . . . . . . . . . . 18.26 14.76 11.94 10.30 9.85 Return on average stockholders' equity . . . . . . . . . . . 21.4% 20.5% 18.0% 8.5% 4.8% - ----------------------------------------------------------------------------------------------------------------------------------
* The per share data and weighted average number of shares outstanding were restated for a 10% stock dividend in 1995. In addition, 1992 and 1991 include the affects of a 3 for 2 stock split effected in the form of a stock dividend in 1993. 10 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS YEAR ENDED JANUARY 31, 1996 (1995) AS COMPARED TO THE YEAR ENDED JANUARY 31, 1995 (1994) OVERVIEW The Company designs, manufactures and markets a diverse range of products in its transportation products and analytical instruments business segments. These products are marketed to the railroad, heavy-duty truck and trailer, and automotive industries, as well as to the life sciences research and petroleum industries. The demand for the Company's products is affected by domestic as well as international economic conditions. The Company's manufacturing operations have a significant fixed cost component. Accordingly, during periods of changing product demand, the profitability of many of the Company's operations may change proportionately more than revenues of such operations. During the fourth quarter of 1995, the Company changed the name of its laboratory equipment segment to the analytical instruments segment. OPERATIONS The Company's sales for fiscal 1995 were $387.0 million, up $45.5 million or 13.3% from sales of $341.5 million in 1994. Sales increased in the transportation products segment due to higher demand and acquisitions. Sales declined in the analytical instruments segment primarily as a result of a disposition in mid-1995. Net earnings for the year were $19.6 million or $2.67 per share on a fully diluted basis. This represented a 32.8% increase over the $14.8 million or $2.11 per share on a fully diluted basis in 1994. Profits increased in both business segments, with the transportation segment having the greatest increase. TRANSPORTATION PRODUCTS Transportation products revenues increased 21.1% to $317.1 million, as compared to $261.8 million in 1994. The Company's heavy-duty truck and trailer business had higher sales than during the prior year period as a result of increased industry demands and greater customer penetration with new and existing products. Also during 1995, a contract was signed with a large truck customer to produce components for a new truck to be introduced in early 1996. No revenues were generated in 1995, although start-up costs were incurred for this contract. Revenues increased at the railroad business as a result of two 1994 acquisitions, while comparable business revenues were flat. The acquisitions extended the Company's participation in European railroad components and domestic and international locomotive components. During the latter half of 1995, mergers of several of the largest domestic railroads caused a delay in demand for certain railroad products. The Company's automotive components business had lower sales due to elimination of certain low margin products. Industry-wide demand for light trucks was up which benefited the Company. Operating profit in 1995 was $36.9 million (11.6% of segment sales) compared to $28.0 million (10.7% of segment sales) during 1994. Higher volume in the heavy-duty truck and trailer business resulted in improved operating profit. At the automotive parts business, operating profit increased despite lower revenues as a result of improved productivity and efficiency. Railroad components' 11 operating profit improved as a result of higher efficiency, cost containment and acquisitions. ANALYTICAL INSTRUMENTS Sales in the analytical instruments segment for 1995 decreased to $69.9 million compared to $79.7 million in 1994. The decrease in revenues in this segment occurred as a result of the sale of a non-strategic business in July 1995 whose contribution to sales in 1995 was $12.9 million lower than that in 1994. If the effects of this business were eliminated, revenues in the remainder of the segment increased $3.0 million. The petroleum analyzer business had increased revenues offsetting a small decline in sales of research laboratory instruments. The increase in sales resulted from higher sales of on- line instruments, positive currency adjustments ($2.3 million) and increased sales through company-owned distributors. Operating profit for the analytical instruments segment increased to $9.0 million (12.9% of segment sales) from $8.5 million (10.7% of segment sales) in the prior year's period. Operating profit improved in 1995 in all business areas except the business sold in 1995. Improved profit resulted from cost reductions in the research laboratory appliance business and the positive effect of currency translation ($.3 million) in the petroleum analyzer business. COST OF SALES Consolidated gross margin was 25.0% in 1995 compared to 23.7% in 1994. Gross margin increased at both business segments. Within the transportation products segment, gross margin improved at the automotive and railroad businesses but declined at the heavy-duty truck and trailer business. A significant increase in the automotive gross margin resulted from improved productivity and efficiency. Heavy-duty truck and trailer gross margin declined due to increased raw material prices that could not be offset by higher selling prices. In the analytical instruments segment, gross margin increased due to cost reduction and improved productivity at the research laboratory appliance business as well as a greater 1995 margin at the disposed business. SELLING, GENERAL AND ADMINISTRATIVE Selling, general and administrative expenses in 1995 were $57.8 million (14.9% of sales) compared to $50.4 million (14.8% of sales) in 1994. In the transportation products segment, selling, general and administrative expenses were flat when expressed as a percent of sales while they were higher as a percent of sales in the analytical instruments segment primarily due to the previously-mentioned divestiture whose expenses as a percentage of sales were lower than that of the other companies in the analytical instruments segment. During the year, the Company increased its spending on engineering, research and product development. INTEREST EXPENSE AND INCOME TAXES Gross interest expense for 1995 was $5.3 million compared to $5.2 million for the prior year's period. Borrowings and average interest rates were relatively unchanged. Interest income was $.3 million higher in 1995 as a result of increased levels of temporary investments during the year. Income taxes were provided at an effective rate of 43.5% in 1995 and 42.9% in 1994. The higher than statutory federal rate reflects non-deductible goodwill amortization, higher taxes on foreign operations, and state income taxes. FOURTH QUARTER Sales for the fourth quarter of 1995 were $88.1 million, down from the $94.6 million reported in 1994. Sales were flat in total in the transportation segment although heavy-duty truck and trailer sales were up while other business areas declined. In the analytical instruments segment, the mid-year divestiture was the principal cause of lower sales. Net earnings were $3.3 million or $.48 per share on a fully diluted basis in 1995's fourth quarter compared to $3.2 million or $.46 per share in the year ago period. Operating profit was up in the transportation products segment where a significant earnings improvement in the automotive parts business offset declines elsewhere. During the fourth quarter of 1995, the heavy-duty truck and trailer business incurred $.5 million of start-up costs on a new facility. Excluding these costs, operating profit would have improved at this business. In the analytical instruments segment, operating profit declined principally due to the mid-year 1995 disposition. The effective income tax rate in the fourth quarter of 1995 was 43.5% compared to 42.9% in the 1994 quarter. 12 CAPITAL RESOURCES AND LIQUIDITY During the three-year period ended January 31, 1996, the Company generated $84.3 million of cash from operating activities. As of January 31, 1996, the Company's working capital was $67.0 million, its total assets were $230.9 million, its total debt, excluding current portion, was $73.4 million and stockholders' equity was $98.0 million. Investing activities during the three-year period ended January 31, 1996 included capital expenditures of $49.4 million. These capital expenditures were primarily for machinery and equipment to support new products and to improve operating efficiency and included $9.6 million to acquire and equip a new facility in 1995. At January 31, 1996, the Company had no material commitments to purchase machinery and equipment. To support its investing activities, the Company has an $80 million revolving credit agreement which expires on December 6, 1998. This credit facility will be used by the Company as the principal source of acquisition funding. At January 31, 1996, the Company had no debt outstanding under this credit facility. The percentage of debt to total capitalization at January 31, 1996 was 42.9%, down from 48.0% at January 31, 1995. Cash and short-term investments were $22.9 million at the end of fiscal 1995 compared to $13.1 million at the end of fiscal 1994. The Company believes that internally generated funds will be sufficient to satisfy its anticipated working capital needs, capital expenditures and scheduled debt repayments. YEAR ENDED JANUARY 31, 1995 (1994) AS COMPARED TO THE YEAR ENDED JANUARY 31, 1994 (1993) The Company's sales for fiscal 1994 were $341.5 million, up $49.6 million or 17.0% from sales of $291.9 million in 1993. Sales increased in both business segments and all business areas exceeded prior year sales, including the impact of acquisitions and excluding the impacts of dispositions. Net earnings were $14.8 million or $2.11 per share on a fully diluted basis. This represented a 37.1% increase over the $10.8 million or $1.73 per share on a fully diluted basis in 1993. Net earnings in 1993 included a third quarter special pre-tax charge of $2.0 million ($1.1 million after tax) taken against the Company's research laboratory appliance products operation. The impact of this charge on 1993 net earnings per share was $.14 on a fully diluted basis. The charge reflected costs incurred in connection with a work force reduction, installation of a new management team, valuation of certain inventory and other realignments designed to resize this unit and return it to profitability. Transportation products revenues increased 19.3% to $261.8 million, as compared to $219.5 million in 1993. The Company's automotive parts and large truck and trailer businesses had higher sales than during the prior year period as a result of increased customer demand and new products partially offset by selected lower selling prices. The railroad business also had increased sales in 1994 as a result of sales from acquired businesses which more than offset the impacts of lower unit sales and prices in certain of the base businesses. During the second half of 1994, the Company acquired two strategically important railroad products companies and recontinued certain previously discontinued railroad products related operations, none of which had a material impact during 1994. Operating profit was $28.0 million (10.7% of segment sales) compared to $27.9 million (12.7% of segment sales) during 1993. Limited ability to pass on higher material costs through selling price increases, productivity limitations from over-utilization of capacity at certain facilities, and in the railroad business production limitations early in the year and lower selling prices throughout most of the year negatively affected the operating profit margin percentage. This resulted in flat operating profit on a significant increase in segment sales. Large truck and trailer industry sales were again substantially higher in the 1994 periods than in the prior year and the Company benefited from this improvement. In addition, the Company's largest heavy-duty truck customer maintained its number one market share position during 1994 and increased sales penetration occurred at another significant large truck customer. Automotive industry sales, especially light truck sales, increased during 1994 over the year's earlier periods which benefited the Company's automotive parts operations. The Company also benefited from its 13 parts being on many of the more popular automobile models, including certain new models. Demand for the Company's railroad products, excluding acquisitions and recontinuances, did not increase despite increased railroad revenue ton miles and increased new freight car builds, principally due to lower purchases of the Company's maintenance of way products. Sales in the analytical instruments segment for 1994 increased to $79.7 million compared to $72.4 million in 1993. The increase in revenues in this segment occurred in all business areas after excluding the effects of a small laboratory products facility disposed of in 1993. The petroleum instrument business had the greatest sales increase principally as a result of acquisitions in both late 1993 and 1994. Increased revenues also occurred in the research laboratory appliance businesses and tubular metal goods business primarily as a result of increased unit sales, although small price increases contributed. Operating profit for the analytical instruments segment increased to $8.5 million (10.7% of segment sales) from $2.0 million (2.7% of segment sales) in the prior year's period. Operating earnings improved in 1994 in all business areas. At the research laboratory appliance business, operating earnings were significantly increased as a result of cost containment actions taken in 1993. In 1993 operating profits were negatively affected by the previously discussed $2.0 million charge taken against the research laboratory appliance operation and $.6 million of pre-tax costs and losses related to the operation of, and the establishment of a reserve for, the disposition of the small laboratory products facility. Increased 1994 petroleum instrument profits resulted from late 1993 and 1994 acquisitions while improvement in performance at the tubular metal products business resulted from sales of new products. During 1994, foreign currency fluctuations had a $.5 million positive impact on sales and a $.1 million positive impact on pre-tax earnings in this segment. Consolidated gross margin was 23.7% in 1994 compared to 24.0% in 1993. The analytical instruments segment gross margin increased in all businesses during the year. In the tubular metal goods and laboratory appliance businesses, the improvement was the result of cost reduction programs as selling price increases only approximated material cost increases. The petroleum instruments business gross margin increased as a result of 1993 and 1994 acquisitions. The gross margin in the transportation products segment decreased during the year. This resulted from increased raw material costs, principally aluminum and steel, which could not always be recovered by increased selling prices. Additionally, selling price reductions were made on certain products. In the automotive parts and large truck and trailer businesses, productivity was negatively affected by over-utilization of capacity and higher than normal new product introductions. Selling, general and administrative expenses of $50.4 million, 14.8% of sales in 1994, were lower as a percent of sales than the 1993 level of 15.5%. In the transportation products segment, selling, general and administrative expenses as a percent of sales increased slightly versus 1993 due to increased engineering and product development expenses and the impact of a European acquisition. In the analytical instruments segment, selling, general and administrative expenses decreased during 1994 compared to 1993 principally as a result of the $2.0 million charge at the laboratory appliance business in 1993. Gross interest expense for 1994 was $5.2 million compared to $6.3 million for the prior year's period. Interest expense reflected lower interest rates on lower average borrowings. Interest income was $.3 million higher in 1994 as a result of increased levels of temporary investments during the year. Income taxes were provided at an effective rate of 42.9% in 1994 and 42.5% in 1993. The higher than statutory federal rate reflects non-deductible goodwill amortization, higher taxes on foreign operations and state income taxes. 14 CONSOLIDATED STATEMENTS OF EARNINGS VARLEN CORPORATION AND SUBSIDIARIES
(In thousands, except per share data) YEAR ENDED JANUARY 31, 1996 1995 1994 Net sales. . . . . . . . . . . . . . . . . . . . . . . . . . $386,987 $341,521 $291,908 Cost of sales . . . . . . . . . . . . . . . . . . . . . . 290,052 260,469 221,988 -------- -------- -------- Gross profit . . . . . . . . . . . . . . . . . . . . . . . . 96,935 81,052 69,920 Selling, general and administrative expenses. . . . . . . 57,762 50,436 45,087 -------- -------- -------- Earnings before interest and income taxes. . . . . . . . . . 39,173 30,616 24,833 Interest expense. . . . . . . . . . . . . . . . . . . . . (5,281) (5,249) (6,332) Interest income . . . . . . . . . . . . . . . . . . . . . 814 487 222 -------- -------- -------- Earnings before income taxes . . . . . . . . . . . . . . . . 34,706 25,854 18,723 Income tax expense (note 8) . . . . . . . . . . . . . . . 15,097 11,092 7,957 -------- -------- -------- Net earnings . . . . . . . . . . . . . . . . . . . . . . . . $ 19,609 $ 14,762 $ 10,766 -------- -------- -------- -------- -------- -------- Primary earnings per share . . . . . . . . . . . . . . . . . $ 3.51 $ 2.68 $ 1.98 -------- -------- -------- -------- -------- -------- Fully diluted earnings per share . . . . . . . . . . . . . . $ 2.67 $ 2.11 $ 1.73 -------- -------- -------- -------- -------- -------- Weighted average number of shares--primary. . . . . . . . . . 5,583 5,513 5,442 -------- -------- -------- -------- -------- -------- Weighted average number of shares--fully diluted. . . . . . . 8,363 8,305 7,329 -------- -------- -------- -------- -------- --------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Deferred Total Additional stock stock- Common paid-in Retained compen- Treasury holders' (In thousands, except per share data) stock capital earnings sation stock equity BALANCE AT FEBRUARY 1, 1993. . . . . . . . . . . . $452 $12,757 $63,734 $ -- $(23,155) $53,788 Issuance of common stock under options . . . . . . 1 309 (71) -- 892 1,131 Deferred incentive stock purchase plan . . . . . . -- 2,577 (1,550) (1,027) -- -- Amortization of deferred stock compensation. . . . -- -- -- 103 -- 103 Cash received on stock subscriptions . . . . . . . -- -- 222 -- -- 222 3 for 2 stock split (note 13). . . . . . . . . . . 30 -- (22,293) -- 22,263 -- Cost of common stock for the purchase of business (note 3). . . . . . . . . . 2 497 -- -- -- 499 Net earnings . . . . . . . . . . . . . . . . . . . -- -- 10,766 -- -- 10,766 Cash dividends ($.36 per share). . . . . . . . . . -- -- (1,927) -- -- (1,927) Additional minimum pension liability . . . . . . . -- -- (194) -- -- (194) Currency translation adjustments unrealized. . . . -- -- (744) -- -- (744) ----- ------- ------- ----- ------- ------- BALANCE AT JANUARY 31, 1994. . . . . . . . . . . . 485 16,140 47,943 (924) -- 63,644 Issuance of common stock under options . . . . . . 2 281 -- -- -- 283 Amortization of deferred stock compensation. . . . -- -- -- 222 -- 222 Cash received on stock subscriptions . . . . . . . -- -- 243 -- -- 243 Cost of common stock for the purchase of business (note 3). . . . . . . . . . -- 95 -- -- -- 95 Net earnings . . . . . . . . . . . . . . . . . . . -- -- 14,762 -- -- 14,762 Cash dividends ($.36 per share). . . . . . . . . . -- -- (1,942) -- -- (1,942) Additional minimum pension liability . . . . . . . -- -- 80 -- -- 80 Currency translation adjustments--unrealized. . . -- -- 1,644 -- -- 1,644 ----- ------- ------- ----- ------- ------- BALANCE AT JANUARY 31, 1995. . . . . . . . . . . . 487 16,516 62,730 (702) -- 79,031 Issuance of common stock under options . . . . . . 5 837 -- -- -- 842 Amortization of deferred stock compensation. . . . -- -- -- 206 -- 206 Cash received on stock subscriptions . . . . . . . -- -- 388 -- -- 388 Stock dividend (note 13) . . . . . . . . . . . . . 49 12,281 (12,330) -- -- -- Net earnings . . . . . . . . . . . . . . . . . . . -- -- 19,609 -- -- 19,609 Cash dividends ($.39 per share). . . . . . . . . . -- -- (2,112) -- -- (2,112) Purchase of treasury stock (note 13) . . . . . . . -- -- -- -- (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 ----- ------- ------- ----- ------- ------- ----- ------- ------- ----- ------- -------
See accompanying notes to consolidated financial statements. 15 CONSOLIDATED BALANCE SHEETS VARLEN CORPORATION AND SUBSIDIARIES
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) JANUARY 31, 1996 1995 ASSETS: Current assets: Cash and cash equivalents. . . . . . . . . . . . . . . . . . . $ 22,915 $ 13,096 Accounts receivable, less allowance for doubtful accounts of $1,318 and $1,318. . . . . . . . . . . . . . . . 43,297 48,838 Inventories (note 1): Raw materials. . . . . . . . . . . . . . . . . . . . . . . . 18,230 17,774 Work in process. . . . . . . . . . . . . . . . . . . . . . . 8,760 12,890 Finished goods . . . . . . . . . . . . . . . . . . . . . . . 9,501 9,686 -------- -------- 36,491 40,350 -------- -------- Deferred and refundable income taxes . . . . . . . . . . . . . 4,344 5,229 Other current assets . . . . . . . . . . . . . . . . . . . . . 4,467 4,022 -------- -------- Total current assets . . . . . . . . . . . . . . . . . . . . . . 111,514 111,535 -------- -------- Property, plant and equipment (note 6): Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,385 3,392 Buildings. . . . . . . . . . . . . . . . . . . . . . . . . . . 23,298 23,814 Machinery and equipment. . . . . . . . . . . . . . . . . . . . 98,327 98,172 Construction in progress . . . . . . . . . . . . . . . . . . . 12,269 -- -------- -------- 137,279 125,378 Less accumulated depreciation. . . . . . . . . . . . . . . . . 67,604 65,742 -------- -------- 69,675 59,636 -------- -------- Goodwill and other intangible assets, less accumulated amortization of $15,684 and $15,071. . . . . . . . . . . . . . 42,837 46,292 Investments and other assets . . . . . . . . . . . . . . . . . . 6,848 2,723 -------- -------- $230,874 $220,186 -------- -------- -------- -------- - ----------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS EQUITY: Current liabilities: Current maturities of long-term debt . . . . . . . . . . . . . $ 87 $ 67 Accounts payable . . . . . . . . . . . . . . . . . . . . . . . 20,954 27,365 Accrued expenses (note 7). . . . . . . . . . . . . . . . . . . 22,313 23,526 Income taxes payable . . . . . . . . . . . . . . . . . . . . . 1,116 2,864 -------- -------- Total current liabilities. . . . . . . . . . . . . . . . . . . . 44,470 53,822 -------- -------- Long-term debt (note 6): Convertible subordinated debentures. . . . . . . . . . . . . . 69,000 69,000 Other long-term debt . . . . . . . . . . . . . . . . . . . . . 4,398 3,788 -------- -------- Total long-term debt . . . . . . . . . . . . . . . . . . . . . . 73,398 72,788 -------- -------- Deferred income taxes. . . . . . . . . . . . . . . . . . . . . 4,539 4,838 Other liabilities. . . . . . . . . . . . . . . . . . . . . . . 10,514 9,707 Stockholders' equity (notes 6, 11 and 13): Preferred stock, par value $1.00 per share; authorized 500 shares, issuable in series; none issued. . . . . . . . -- -- Common stock, par value $.10 per share; authorized 20,000 shares; issued: 5,405 (1/31/96) and 5,352 (1/31/95) 541 487 Additional paid-in capital . . . . . . . . . . . . . . . . . 29,634 16,516 Retained earnings. . . . . . . . . . . . . . . . . . . . . . 69,239 62,730 Deferred stock compensation. . . . . . . . . . . . . . . . . (496) (702) Common stock held in treasury, at cost; 41 shares. . . . . . (965) -- -------- -------- Total stockholders equity. . . . . . . . . . . . . . . . . . . . 97,953 79,031 -------- -------- $230,874 $220,186 -------- -------- -------- --------
See accompanying notes to consolidated financial statements. 16 CONSOLIDATED STATEMENTS OF CASH FLOWS VARLEN CORPORATION AND SUBSIDIARIES
Year ended January 31, (In thousands) 1996 1995 1994 INCREASE (DECREASE) IN CASH Cash flows from operating activities: Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 19,609 $ 14,762 $ 10,766 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,819 11,885 10,295 Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,440 2,779 2,606 Deferred income taxes. . . . . . . . . . . . . . . . . . . . . . . . 476 (1,748) (570) Change in assets and liabilities net of effects from purchased and sold businesses: Accounts receivable, net . . . . . . . . . . . . . . . . . . . . 2,751 (9,532) 2,198 Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . 1,740 2,156 (3,054) Refundable income taxes. . . . . . . . . . . . . . . . . . . . . 8 130 124 Other current assets . . . . . . . . . . . . . . . . . . . . . . (522) (768) (319) Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . (6,061) 6,363 (76) Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . (1,079) 2,207 1,994 Income taxes payable . . . . . . . . . . . . . . . . . . . . . . (1,803) 2,431 (2,275) Other noncurrent assets. . . . . . . . . . . . . . . . . . . . . 1,878 93 (1,906) Other noncurrent liabilities . . . . . . . . . . . . . . . . . . 859 379 1,290 -------- -------- -------- Total adjustments. . . . . . . . . . . . . . . . . . . . . . . . 12,506 16,375 10,307 -------- -------- -------- Net cash provided by operating activities. . . . . . . . . . . . . 32,115 31,137 21,073 -------- -------- -------- Cash flows from investing activities: Fixed asset expenditures . . . . . . . . . . . . . . . . . . . . . . (23,427) (14,701) (11,240) Cost of purchased business and other long-term investments . . . . . (6,253) (7,800) (5,437) Sale of business . . . . . . . . . . . . . . . . . . . . . . . . . . 8,013 -- 2,000 Disposals and other changes in property, plant and equipment . . . . 395 1,067 298 -------- -------- -------- Net cash used in investing activities. . . . . . . . . . . . . . . (21,272) (21,434) (14,379) -------- -------- -------- Cash flows from financing activities: Proceeds from debt . . . . . . . . . . . . . . . . . . . . . . . . . 1,107 33 69,013 Payments of debt . . . . . . . . . . . . . . . . . . . . . . . . . . (82) (331) (70,659) Issuance of common stock under option plans. . . . . . . . . . . . . 581 161 802 Cash received on stock subscriptions . . . . . . . . . . . . . . . . 388 243 222 Purchase of treasury stock . . . . . . . . . . . . . . . . . . . . . (965) -- -- Cash dividends paid. . . . . . . . . . . . . . . . . . . . . . . . . (2,112) (1,942) (1,927) -------- -------- -------- Net cash used in financing activities. . . . . . . . . . . . . . . (1,083) (1,836) (2,549) -------- -------- -------- Effect of exchange rate changes on cash. . . . . . . . . . . . . . . . 59 61 (269) -------- -------- -------- Net increase in cash and cash equivalents. . . . . . . . . . . . . . . 9,819 7,928 3,876 Cash and cash equivalents at beginning of year . . . . . . . . . . . . 13,096 5,168 1,292 -------- -------- -------- Cash and cash equivalents at end of year . . . . . . . . . . . . . . . $ 22,915 $ 13,096 $ 5,168 -------- -------- -------- -------- -------- --------
See accompanying notes to consolidated financial statements. 17 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 73% and 66% of inventories, at January 31, 1996 and 1995, 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 $2,138,000 and $1,355,000 at January 31, 1996 and 1995, 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. Other intangible assets are amortized on a straight-line basis over their useful lives. (g) EARNINGS PER SHARE: Primary earnings per share is computed on the basis of the weighted average number of common shares outstanding during the period plus common equivalent shares arising from stock incentive plans using the treasury stock method. The computation of fully diluted earnings per share includes the weighted average number of shares that would have been issued upon conversion of the convertible debentures and the effect on net earnings for the reduction in the after-tax interest expense on the converted debentures. (h) FOREIGN CURRENCY TRANSLATION: Foreign currency financial statements of foreign operations where the local currency is the functional currency are translated using exchange rates in effect at period end for assets and liabilities and average exchange rates during the period for results of operations. Related translation adjustments are reported as a component of Stockholders' Equity. Gains and losses from foreign currency transactions are included in earnings. (i) DERIVATIVE AND FINANCIAL INSTRUMENTS: The Company does not currently utilize derivative financial instruments. However, the Company periodically reviews the potential benefit of utilizing derivatives to minimize foreign currency exchange, interest rate and commodity price risks. (j) STOCK-BASED COMPENSATION: In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No.123, "Accounting for Stock-Based Compensation," which the Company will adopt in 1996. The Company intends to retain the current method of accounting for employee stock-based compensation arrangements with certain additional disclosures as allowed under this Statement. The new standard is not expected to have a material effect on the Company's financial position or results of operations. 2. OVERVIEW OF THE COMPANY The Company designs, manufactures and markets a diverse range of products in its transportation products and analytical instruments business segments. These products are marketed to the railroad, heavy-duty truck and trailer, and automotive industries, as well as to the life sciences research and petroleum industries. The demand for the Company's products is affected by domestic as well as international economic conditions. During the fourth quarter of 1995, the Company changed the name of its laboratory equipment segment to the analytical instruments segment. 3. DIVESTITURE AND ACQUISITIONS 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 less selling costs. Net sales from this subsidiary for 1995 through the date of sale were approximately $11.0 million. On January 16, 1995, the Company purchased the assets of the Railroad Division of Prime Manufacturing Corporation ("Prime"), located in Oak Creek, Wisconsin. The acquisition was made for $5.9 million in cash and $25,000 (1,100 shares) of Company common stock. The Company also purchased the related land and building in 1995 for approximately $1.0 million. Prime manufactures a wide range of engineered products for railroad locomotives, including heating, ventilating and air conditioning equipment; valves and refrigerators. Prime's products are sold to both original equipment manufacturers and the aftermarket. On September 30, 1994, the Company purchased the North American distribution rights for its Walter Herzog GmbH ("Herzog") German subsidiary from UIC, Inc., Herzog's previous North American distributor, for $1.8 million in cash and deferred payments including $70,000 (3,300 shares) of Company common stock. The Company also formed on that date, Varlen Instruments, Inc., a wholly owned North American distributor for the products of Herzog as well as Alcor Petroleum Instruments, Inc. and Precision Scientific Petroleum Instruments Company, two other operations of the Company. On August 18, 1994, the Company acquired Acieries de Ploermel ("AP"), a steel foundry located in the Brittany region of northwest France. The Company initially made an equity investment and provided loan guarantees totaling approximately $1.1 million. The Company has injected working capital, refinanced AP's debt to reduce interest costs and utilized local and French government grants and interest-free loans. AP specializes in railroad products and is an approved source for most of the national railroads in Europe. AP also provides castings for valve manufacturers and, to a lesser extent, for the auto industry. On November 23, 1993, the Company acquired the petroleum analysis equipment and testing services division of San Antonio-based Alcor, Inc., a privately held company. The acquisition was made for $5.4 million in cash and $499,000 (21,505 shares) of Company common stock. The acquired business designs, develops, manufactures and sells petroleum 18 analysis equipment. It is also engaged in the testing of petroleum products in its laboratory and the sale of petroleum product reference samples. The acquired business markets its products and services under the name of Alcor Petroleum Instruments, Inc. 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. These transactions were financed with cash on hand. 4. SUPPLEMENTAL CASH FLOW INFORMATION
- ------------------------------------------------------------------------------------------ (IN THOUSANDS) 1995 1994 1993 - ------------------------------------------------------------------------------------------ Cash paid during the year for: Interest. . . . . . . . . . . . . . . . . . $ 5,134 $ 5,096 $ 5,809 -------- ------- ------- -------- ------- ------- Income taxes (net). . . . . . . . . . . . . $16,185 $10,220 $10,343 -------- ------- ------- -------- ------- ------- Purchase of businesses (note 2): Fair value of assets acquired . . . . . . . $ 1,003 $15,230 $ 6,240 Cash paid . . . . . . . . . . . . . . . . . (1,003) (7,800) (5,437) Common stock issued for purchase . . . . . . . . . . . . . . . -- (95) (499) ------- ------- ------- Liabilities assumed . . . . . . . . . . . . $ 0 $ 7,335 $ 304 ------- ------- ------- ------- ------- -------
5. 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):
- ---------------------------------------------------------------------------------------------------- 1995 1994 - ---------------------------------------------------------------------------------------------------- CARRYING FAIR Carrying Fair AMOUNT VALUE Amount Value - ---------------------------------------------------------------------------------------------------- Convertible subordinated debentures . . . . . . . . . . . . . . . . $69,000 $74,175 $69,000 $69,173 Industrial revenue bonds and other debt . . . . . . . . . . . . . . 4,398 4,397 3,788 3,901 ------- ------- ------- ------- Total long-term debt . . . . . . . . . . . . $73,398 $78,572 $72,788 $73,074 ------- ------- ------- ------- ------- ------- ------- ------- - ----------------------------------------------------------------------------------------------------
The carrying amounts for cash and cash equivalents, accounts receivable, marketable securities, accounts payable and current maturities of long-term debt are reasonable estimates of their fair value. The fair value of the convertible subordinated debentures is their quoted market values. The fair value of industrial revenue bonds and other debt are estimated using discounted cash flow analysis and market rates for similar financial instruments. 6. LONG-TERM DEBT Long-term debt at year end is comprised of the following (in thousands):
- ------------------------------------------------------------------------------- 1995 1994 - ------------------------------------------------------------------------------- 6.5% Convertible Subordinated Debentures Due 2003. . . . . . . . . . . . . . . . . $69,000 $69,000 Industrial revenue bonds and other debt. . . . . . . . 4,485 3,855 ------- ------- 73,485 72,855 Less current maturities. . . . . . . . . . . . . . . . (87) (67) ------- ------- Long-term debt . . . . . . . . . . . . . . . . . . . . $73,398 $72,788 ------- ------- ------- ------- - -------------------------------------------------------------------------------
In 1993, the Company issued $69,000,000 aggregate principal amount of 6.5% Convertible Subordinated Debentures Due 2003. These unsecured debentures are convertible into Common Stock of the Company at $24.85 per share and are callable in whole or in part after June 3, 1996 at the option of the Company at specified redemption prices plus accrued interest. The proceeds from the issuance were used to reduce all outstanding debt under the Company's revolving credit agreement. At January 31, 1996, the Company had an unused $80,000,000 revolving line of credit (the "Agreement"). The Agreement allows for borrowings in a variety of currencies and 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 interest expense to cash flow. The highest interest rate available under the Agreement at January 31, 1996 was the prime rate with maximum commitment fees of 1/4 of 1% on the unused portion of the line of credit. The Agreement terminates on December 6, 1998 with an optional one year extension. 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, 1996, $27,642,000 was available for dividend distributions. 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%. Scheduled repayments of long-term debt in each of the next five years are $87,000, $65,000, $175,000, $172,000 and $169,000. 7. LEASES, ACCRUED EXPENSES AND RESEARCH AND DEVELOPMENT COSTS 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 $1,936,000 in 1995, $1,429,000 in 1994 and $1,021,000 in 1993. At January 31, 1996, the aggregate minimum future rental commitments under the non-cancelable leases with terms in excess of one year were approximately $3,040,000. Amounts due annually in each of the next five years are $1,260,000, $782,000, $434,000, $157,000 and $142,000. Accrued expenses at January 31, 1996, include $9,567,000 for certain accrued employee benefits. Accrued expenses at January 31, 1995 include $9,216,000 for certain accrued employee benefits and $4,353,000 for various insurance accruals. Research and development costs charged to earnings were $5,948,000 in 1995, $4,366,000 in 1994 and $4,342,000 in 1993. 8. INCOME TAXES Earnings before income taxes were derived from the following sources (in thousands):
- ------------------------------------------------------------------- 1995 1994 1993 - ------------------------------------------------------------------- Domestic . . . . . . . . . . . $34,273 $23,871 $16,688 Foreign. . . . . . . . . . . . 433 1,983 2,035 ------- ------- ------- Total. . . . . . . . . . . . $34,706 $25,854 $18,723 ------- ------- ------- ------- ------- ------- - -------------------------------------------------------------------
19 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Income tax expense consists of the following (in thousands):
- ------------------------------------------------------------------- 1995 1994 1993 - ------------------------------------------------------------------- Current: Federal . . . . . . . . . . . $11,025 $ 9,365 $ 6,220 State and local . . . . . . . 2,537 2,141 1,754 Foreign . . . . . . . . . . . 758 886 701 ------- ------- ------- Total. . . . . . . . . . . . 14,320 12,392 8,675 ------- ------- ------- Deferred: Federal . . . . . . . . . . . 742 (1,113) (667) State and local . . . . . . . (146) (564) (96) Foreign . . . . . . . . . . . 181 377 45 ------- ------- ------- Total. . . . . . . . . . . . 777 (1,300) (718) ------- ------- -------- Income tax provision . . . . . $15,097 $11,092 $ 7,957 ------- ------- -------- ------- ------- --------
Deferred tax assets and liabilities are comprised of the following (in thousands):
JANUARY 31, 1996 January 31, 1995 - ---------------------------------------------------------------------------- ASSET LIABILITY Asset Liability - ---------------------------------------------------------------------------- Accounts receivable. . . . . $ 553 $ -- $ 510 $ -- Inventories. . . . . . . . . 711 755 493 509 Operating losses . . . . . . 1,608 -- 2,222 -- State income taxes . . . . . -- 526 -- 622 Fixed assets . . . . . . . . 40 5,144 -- 5,488 Pension. . . . . . . . . . . -- 524 76 316 Vacation pay . . . . . . . . 1,021 -- 1,008 -- Workers' compensation. . . . 885 -- 2,028 -- Warranty . . . . . . . . . . 923 -- 855 -- Deferred compensation. . . . 1,088 -- 1,061 -- Employee health and welfare. . . . . . . . 552 -- 441 -- Intangible assets. . . . . . -- 2,347 -- 2,029 Retiree health and welfare. . . . . . . . 1,366 -- 1,324 -- Other. . . . . . . . . . . . 2,000 76 1,575 234 ------- ------ ------- ------ Subtotal . . . . . . . . . . 10,747 9,372 11,593 9,198 Valuation allowance. . . . . (1,570) -- (2,013) -- ------- ------ ------- ------ Total. . . . . . . . . . . . $ 9,177 $9,372 $ 9,580 $9,198 ------- ------ ------- ------ ------- ------ ------- ------ - --------------------------------------------------------------------------
The valuation allowance relates principally to built-in losses (the excess of tax basis over fair market value of the net assets) and net operating losses of acquired subsidiaries. The use of such losses in reducing future tax liabilities is subject to substantial limitations. Any such use in the future will reduce goodwill associated with those acquisitions. During 1995, the valuation allowance was increased $355,000 to offset the benefit of current operating losses of a foreign subsidiary and reduced $798,000 to reflect expired losses and losses used to reduce current tax liabilities. 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):
- --------------------------------------------------------------------------- 1995 1994 1993 - --------------------------------------------------------------------------- Income tax provision at statutory federal tax rate . . . . . . . . . . . $12,147 $ 9,049 $6,553 Tax rate changes . . . . . . . . . . . . -- -- (178) State income taxes (net of federal benefit) . . . . . . . 1,500 895 1,052 Foreign operations . . . . . . . . . . . 787 569 403 Goodwill amortization. . . . . . . . . . 676 278 277 Other. . . . . . . . . . . . . . . . . . (13) 301 (150) ------- ------- ------ Income tax provision . . . . . . . . . . $15,097 $11,092 $7,957 ------- ------- ------ ------- ------- ------ - ---------------------------------------------------------------------------
At January 31, 1996, the Company had remaining net operating loss carryforwards of $2,397,000 expiring between 1997 and 2006 and $2,373,000 which will not expire, including loss carryforwards subject to the valuation allowance discussed above. These arose principally as a result of certain acquisitions and foreign operations and will reduce income taxes payable to the extent of future taxable income from those operations. 9. 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. Substantially all salaried employees are covered by a defined contribution plan. 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 sold the assets and liabilities of National Metalwares in 1995. Accordingly, all activity related to the National Metalwares pension plan is excluded from the January 31, 1996 funded status information. In 1994, a new defined benefit plan was added which did not have a material impact on the financial statements. Under the Varlen Corporation Profit Sharing and Retirement Savings Plan, employee deferrals of compensation may be made and the Company will match up to 25% of the first 6% deferred by each employee. Additionally, discretionary amounts of not less than 2% of eligible salaries and wages are contributed by the Company. The Company makes contributions to union-sponsored multi-employer defined benefit plans in accordance with negotiated labor contracts. 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, 1996 and 1995 (in thousands):
- ------------------------------------------------------------------------------- Overfunded Underfunded Plan Plans - ------------------------------------------------------------------------------- January 31, January 31, 1996 1995 1996 1995 - ------------------------------------------------------------------------------- Actuarial present value of: Vested benefits . . . . . . . $2,785 $330 $ 5,137 $ 6,153 Non-vested benefits . . . . . 142 30 742 1,144 ------ ---- ------- ------- Accumulated benefit obligation . . . . . . . . . . . 2,927 360 5,879 7,297 Effect of projected salary increases. . . . . . . . . . . . -- -- 715 786 ------ ---- ------- ------- Projected benefit obligation . . . 2,927 360 6,594 8,083 Fair value of plan assets (primarily short-term and fixed income investments). . . . 3,050 462 4,152 5,109 ------ ---- ------- ------- Funded status at January 31. . . . 123 102 (2,442) (2,974) Unrecognized net gain. . . . . . . (39) (64) (593) (113) Unrecognized prior service cost . . . . . . . . . . 354 10 530 723 (Asset) liability at date of transition . . . . . . . . . . . 91 (45) 549 742 Adjustment for the minimum liability. . . . . . . . -- -- (685) (1,372) ------ ---- ------- ------- Prepaid (accrued) pension cost . . . . . . . . . . $ 529 $ 3 $(2,641) $(2,994) ------ ---- ------- ------- ------ ---- ------- ------- - -------------------------------------------------------------------------------
20 Net retirement plan expense for 1995, 1994 and 1993 consists of the following (in thousands):
- ---------------------------------------------------------------------- 1995 1994 1993 - ---------------------------------------------------------------------- Service cost-benefits earned during the period. . . . . . . . . . $ 474 $ 593 $ 418 Net deferral and amortization. . . . . 1,002 (351) 133 Interest on projected benefit obligation . . . . . . . . . . . . . 664 626 512 Actual return on plan assets . . . . . (1,379) 39 (456) ------ ----- ----- Net defined benefit pension expense. . . . . . . . . . . . . . . 761 907 607 Net multi-employer defined benefit pension expense. . . . . . . 501 376 253 Net defined contribution plan expense . . . . . . . . . . . . 2,654 2,156 1,966 ------ ----- ----- $3,916 $3,439 $2,826 ------ ----- ----- ------ ----- ----- - ----------------------------------------------------------------------
The weighted average discount rate and rate of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligation were 7.5% and 5%, respectively, in 1995 and 8.25% and 5%, respectively, in 1994, and 7.5% and 5%, respectively, in 1993. The expected long-term rate of return on plan assets was 9% in 1995, 1994 and 1993. 10. POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS 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 $20,000 during 1995 and $50,000 during 1994. The following table sets forth the plan's funded status, reconciled with amounts recognized in the Company's consolidated balance sheets at January 31, 1996 and 1995 (in thousands):
January 31, - ------------------------------------------------------------------------ 1996 1995 - ------------------------------------------------------------------------ Accumulated postretirement benefit obligation (APBO): Retirees . . . . . . . . . . . . . . . . . . . $ (947) $ (719) Fully eligible active plan participants. . . . (689) (431) Other active plan participants . . . . . . . . (1,941) (1,719) ------- ------- Total APBO . . . . . . . . . . . . . . . . . . . (3,577) (2,869) Plan assets at fair value. . . . . . . . . . . 242 257 ------- ------- APBO in excess of plan assets. . . . . . . . . . (3,335) (2,612) Unrecognized net gain. . . . . . . . . . . . . . (93) (489) ------- ------- Accrued postretirement benefit cost. . . . . . . $(3,428) $(3,101) ------- ------- ------- ------- - ------------------------------------------------------------------------
Net postretirement benefit costs for 1995, 1994 and 1993 consist of the following (in thousands):
- --------------------------------------------------------------------- 1995 1994 1993 - --------------------------------------------------------------------- Service cost--benefits attributed to service during the year . . . . . . . $147 $203 $151 Interest on accumulated postretirement benefit obligation. . . . 242 233 243 Net deferral and amortization. . . . . . . (42) (20) -- Actual return on plan assets . . . . . . . 2 (16) (16) ---- ---- ---- Net postretirement benefit cost. . . . . . $349 $400 $378 ---- ---- ---- ---- ---- ---- - ---------------------------------------------------------------------
The assumed health care cost trend rate used in measuring the accumulated postretirement benefit obligation for pre-age 65 employees is 11% in 1996, declining approximately 1% per year to 5.5% in 2003, and for post-age 65 employees is 8% in 1996 declining 1% per year to 6% in 1998 and ending at 5.5% in 2003. In 1995 and 1994, the weighted average discount rate used in determining the accumulated postretirement benefit obligation was 7.75 % and 8.5%, respectively, 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, consisting primarily of fixed income securities, was 9% in 1995, 1994 and 1993. If the health care cost trend rate assumptions were increased by 1%, the accumulated postretirement benefit obligation as of January 31, 1996 would be increased by 17%. The effect of this change on the sum of the service cost and interest cost in 1995 would be an increase of 21%. 11. STOCK INCENTIVE PLANS The Company had three stock option plans in effect during 1995. One of the stock option plans expired on March 31, 1990 as to future grants. The most recent plan was adopted in May, 1993 pursuant to which an aggregate of 247,500 shares of the Company's common stock are available for grant. The remaining plan was adopted in May, 1989 pursuant to which an aggregate of 330,000 shares of the Company's common stock were available for grant. Under the three plans, either Incentive Stock Options or Non-qualified Stock Options can be granted, as determined by the Compensation Committee of the Company's Board of Directors (the "Committee"). Non-qualified Stock Options can be granted for terms of up to 10 years and with an option price that is less than the market value of the Company's common stock on the date of grant, but if less than market value, then not less than book value; such option price may not be less than 50% of market value under the 1989 plan and not less than 85% of market value under the 1993 plan. Incentive Stock Options can be granted for terms of up to 10 years and with an option price that is not less than the market value of the Company's common stock on the date of grant. Of the 281,377 options outstanding as of January 31, 1996, 128,479 are currently exercisable, with the remaining options becoming exercisable over the next 4-1/2 years. A summary of the changes in outstanding stock options, including options granted under prior plans, follows:
- ---------------------------------------------------------------------------- Shares 1995 1994 1993 - ---------------------------------------------------------------------------- Outstanding at beginning of year. . . . . . 292,160 252,010 286,765 Granted. . . . . . . . . . . . 57,200 58,300 64,488 Exercised. . . . . . . . . . . (50,632) (16,693) (84,475) Expired or terminated. . . . . (17,351) (1,457) (14,768) ----------------------------------------- Outstanding at end of year. . . . . . . . . 281,377 292,160 252,010 ----------------------------------------- Available for grant at end of year . . . . . . . 236,059 275,908 332,750 ----------------------------------------- ----------------------------------------- Price range of options: Outstanding. . . . . . . . . . $7.88-18.30 $7.88-19.85 $7.88-19.85 ----------- ----------- ----------- ----------- ----------- ----------- Exercised. . . . . . . . . . . $8.48-19.85 $7.88-16.94 $7.07-12.73 ----------- ----------- ----------- ----------- ----------- ----------- - ----------------------------------------------------------------------------
21 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Company also had two stock compensation plans in effect during 1995 and 1994. The Directors Incentive Stock Grant Plan provides for the automatic annual award of 330 shares of Common Stock at par value to each director who is not an employee of the Company. An aggregate of 24,750 shares of Common Stock are available for grant under this plan of which 5,610 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 book value at the grant date. 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 165,000 rights are available for grant under this plan, of which 127,875 have been granted at $12.12 per right. 12. INDUSTRY SEGMENTS Information relating to the Company's segments is as follows (in thousands):
- ----------------------------------------------------------------------------------------------------- Operating Identifiable Capital Depreciation Net Sales Profit Assets Expenditures Amortization - ----------------------------------------------------------------------------------------------------- 1995 Transportation products. . . . . $317,122 $36,855 $150,801 $22,428 $10,609 Analytical instruments*. . . . . 69,865 9,035 57,207 904 2,925 -------- ------- -------- ------- ------- 386,987 45,890 208,008 23,332 13,534 Corporate. . . . . . . . . . . . -- (6,717) 22,866 95 725 Net interest expense . . . . . . -- (4,467) -- -- -- -------- ------- -------- ------- ------- Total. . . . . . . . . . . . . . $386,987 $34,706 $230,874 $23,427 $14,259 -------- ------- -------- ------- ------- -------- ------- -------- ------- ------- 1994 Transportation products. . . . . $261,835 $27,952 $139,851 $12,763 $10,653 Analytical instruments*. . . . . 79,686 8,495 59,039 1,839 3,339 -------- ------- -------- ------- ------- 341,521 36,447 198,890 14,602 13,992 Corporate. . . . . . . . . . . . -- (5,831) 21,296 99 672 Net interest expense . . . . . . -- (4,762) -- -- -- -------- ------- -------- ------- ------- Total. . . . . . . . . . . . . . $341,521 $25,854 $220,186 $14,701 $14,664 -------- ------- -------- ------- ------- -------- ------- -------- ------- ------- 1993 Transportation products. . . . . $219,543 $27,876 $117,278 $10,039 $ 9,947 Analytical instruments*. . . . . 72,365 1,958 55,852 1,163 2,735 -------- ------- -------- ------- ------- 291,908 29,834 173,130 11,202 12,682 Corporate. . . . . . . . . . . . -- (5,001) 13,134 38 219 Net interest expense . . . . . . -- (6,110) -- -- -- -------- ------- -------- ------- ------- Total. . . . . . . . . . . . . . $291,908 $18,723 $186,264 $11,240 $12,901 -------- ------- -------- ------- ------- -------- ------- -------- ------- ------- - ----------------------------------------------------------------------------------------------
* THE ANALYTICAL INSTRUMENTS SEGMENT WAS FORMERLY THE LABORATORY EQUIPMENT SEGMENT. Information relating to the Company by geographic area is as follows (in thousands):
- --------------------------------------------------------------------------------- Net Identifiable Net Sales Earnings Assets - --------------------------------------------------------------------------------- 1995 Domestic operations. . . . . . . . . . . $358,881 $26,179 $198,346 European operations. . . . . . . . . . . 28,106 360 32,528 -------- ------- -------- 386,987 26,539 230,874 Corporate and net interest expense . . . -- (6,930) -- -------- ------- -------- Total. . . . . . . . . . . . . . . . . . $386,987 $19,609 $230,874 -------- ------- -------- -------- ------- -------- 1994 Domestic operations. . . . . . . . . . . $320,863 $20,145 $191,527 European operations. . . . . . . . . . . 20,658 1,288 28,659 -------- ------- -------- 341,521 21,433 220,186 Corporate and net interest expense . . . -- (6,671) -- -------- ------- -------- Total. . . . . . . . . . . . . . . . . . $341,521 $14,762 $220,186 -------- ------- -------- -------- ------- -------- 1993 Domestic operations. . . . . . . . . . . $275,523 $15,925 $166,196 European operations. . . . . . . . . . . 16,385 1,866 20,068 -------- ------- -------- 291,908 17,791 186,264 Corporate and net interest expense . . . -- (7,025) -- -------- ------- -------- Total. . . . . . . . . . . . . . . . . . $291,908 $10,766 $186,264 -------- ------- -------- -------- ------- -------- - -------------------------------------------------------------------------------
Export sales from the Company's United States operations were 10%, 8% and 7%, respectively, of consolidated net sales in 1995, 1994, 1993. Sales to one customer by a company in the transportation products segment aggregated 15%, 15% and 14%, respectively, of consolidated net sales in 1995, 1994 and 1993. Sales to another customer by a different company in the transportation products segment aggregated 10% and 11%, respectively, of consolidated net sales in 1994 and 1993. In addition, sales of two products to customers of the transportation products segment aggregated 14%, 10% and 9% and 11%, 13% and 14% of consolidated net sales in 1995, 1994 and 1993, respectively. 22 13. STOCKHOLDERS' EQUITY 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, 1996, 41,000 shares of the Company's Common Stock had been purchased under this authorization, is recorded as treasury shares at cost and can be used for general corporate purposes. 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 488,000 new shares of Common Stock. In addition, the quarterly cash dividend was maintained at $.10 per share. On August 23, 1993, the Company's Board of Directors authorized a three- for-two stock split in the form of a stock dividend payable on October 14, 1993, to stockholders of record on September 30, 1993. The split resulted in the reissuance of approximately 1,433,300 shares of Common Stock held in treasury and the issuance of approximately 336,600 new shares of Common Stock. In addition, the quarterly cash dividend was adjusted to maintain the net amount of the dividend payment at its previous level. All share and per share amounts have been restated to retroactively reflect both the stock dividend and the stock split. Retained earnings at January 31, 1996 includes $697,000 for stock subscriptions receivable, $1,482,000, net of deferred income taxes, for unrealized currency translation gains and $45,000, net of deferred income taxes, for an additional minimum pension liability. Retained earnings at January 31, 1995 includes $1,085,000 for stock subscriptions receivable, $597,000, net of deferred income taxes, for unrealized currency translation gains and $114,000, net of deferred income taxes, for an additional minimum pension liability. Retained earnings at January 31, 1994 includes $1,328,000 for stock subscriptions receivable, $1,047,000, net of deferred income taxes, for unrealized currency translation losses and $194,000, net of deferred income taxes, for an additional minimum pension liability. 14. INTERIM FINANCIAL INFORMATION (UNAUDITED) The following information is presented in thousands of dollars, except per share amounts:
- ---------------------------------------------------------------------------------------------------- 1st 2nd 3rd 4th Quarter Quarter Quarter Quarter - ---------------------------------------------------------------------------------------------------- Net sales. . . . . . . . . . . . . . . . . 1995 $106,969 $97,753 $94,209 $88,056 1994 79,900 77,961 89,017 94,643 Gross profit . . . . . . . . . . . . . . . 1995 27,358 24,078 23,685 21,814 1994 19,524 18,761 21,004 21,763 Net earnings . . . . . . . . . . . . . . . 1995 6,156 4,933 5,217 3,303 1994 3,630 3,734 4,237 3,161 Primary earnings per share . . . . . . . . 1995 1.11 0.88 0.93 0.59 1994 0.66 0.68 0.77 0.57 Fully diluted earnings per share . . . . . 1995 0.82 0.67 0.70 0.48 1994 0.52 0.53 0.60 0.46 - ----------------------------------------------------------------------------------------------------
QUARTERLY MARKET AND DIVIDEND INFORMATION
1995 1994 Fiscal Quarter HIGH LOW High Low - ------------------------------------------------------------------------------- First. . . . . . . . . . . . 22 3/64 18 55/64 26 23/64 17 3/64 Second . . . . . . . . . . . 26 20 29/32 19 3/32 16 23/64 Third. . . . . . . . . . . . 28 1/2 22 3/4 21 23/64 17 1/2 Fourth . . . . . . . . . . . 27 1/4 21 1/4 24 35/64 18 3/16 - -------------------------------------------------------------------------------
The Company paid a $.10 quarterly dividend in 1995 and a $.09 quarterly dividend in 1994. The Company estimates its number of shareholders of Common Stock, $.10 par value, is 2,000 as of January 31, 1996 which includes approximately 430 shareholders of record and 1,570 shares held in "nominee" or "street" name. 23 REPORT BY MANAGEMENT Management is responsible for the consolidated financial statements presented in this report 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 the annual report. The Company's system of internal accounting control, which is applied by operating and financial managers, has been designed to provide reasonable assurance that assets are safeguarded, that transactions are executed and recorded in accordance with management's established policies and procedures, and that accounting records are adequate for preparation of financial statements and other financial information. The design, monitoring and revision of internal accounting control systems involve, among other things, management's judgment with respect to the relative cost and expected benefits of specific control measures. Varlen's internal audit function reviews the accounting records, financial controls and practices on a planned, rotational basis to determine compliance with corporate policies. The consolidated financial statements have been audited by Deloitte & Touche LLP, independent auditors appointed by the Board of Directors. Their responsibility is to audit the Company's consolidated financial statements in accordance with generally accepted auditing standards and to express their opinion with respect to the statements being presented fairly in conformity with generally accepted accounting principles. The Audit Committee, which is composed solely of outside directors, meets with and reviews the activities of corporate financial management and the independent auditors to ascertain that each is properly discharging its responsibility. The independent auditors and management have unrestricted access to the Audit Committee, which meets periodically to review accounting, auditing, internal control and financial reporting matters. /s/ Richard L. Wellek /s/ Richard A. Nunemaker Richard L. Wellek Richard A. Nunemaker President and Vice President, Finance and Chief Executive Officer Chief Financial Officer March 4, 1996 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Varlen Corporation, Naperville, IL, We have audited the accompanying consolidated balance sheets of Varlen Corporation and subsidiaries as of January 31, 1996 and 1995, and the related consolidated statements of earnings, stockholders' equity and cash flows for each of the three years in the period ended January 31, 1996. These consoli- dated 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, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended January 31, 1996, in conformity with generally accepted accounting principles. /s/ Deloitte & Touche LLP Deloitte & Touche LLP Chicago, Illinois March 4, 1996 24 BOARD OF DIRECTORS RUDOLPH GRUA, age 67 ** *Vice Chairman and Director of General Binding Corporation ERNEST H. LORCH, age 63 *** Chairman of the Board *Of Counsel to Whitman Breed Abbott & Morgan, Attorneys Director of Tyler Corporation L. WILLIAM MILES, age 62 *** *Vice President for Administration, Fairfield University, Connecticut Director of Bouton Corporation GREG A. ROSENBAUM, age 43 *** *President, Palisades Associates, Inc. Director of Richey Electronics, Inc. JOSEPH J. ROSS, age 50 ** *Chairman, President and Chief Executive Officer of Federal Signal Corporation THEODORE A. RUPPERT, age 65 ** *General Partner, Village Development Chairman, Chief Executive Officer and Director of Glaize Development and Director of Pioneer Bank and Trust RICHARD L. WELLEK, age 57 *President and Chief Executive Officer * Principal Occupation ** Member Audit Committee *** Member Compensation Committee OFFICERS RICHARD L. WELLEK, age 57 President and Chief Executive Officer (1983); Various Varlen Executive and Operational positions (1968-1983); B.S. Industrial Management University of Illinois RAYMOND A. JEAN, age 53 Executive Vice President and Chief Operating Officer (1993); Group Vice President (1988-1992); B.S. Engineering Physics University of Maine; MBA University of Chicago GEORGE W. HOFFMAN, age 55 Railroad Group Vice President (1990); Executive, Keystone Railway Equipment Company subsidiary (1979-1994); B.S. Chemical Engineering University of Pittsburgh RICHARD A. NUNEMAKER, age 47 Vice President, Finance and Chief Financial Officer (1991); Vice President, Controller (1987); B.S. Accountancy; M.A.S. University of Illinois, C.P.A. VICKI L. CASMERE, age 38 Vice President, General Counsel and Secretary (1996); Corporate Counsel of Caremark Inc. (1992-1996), Vice President (1994); Corporate Counsel of Baxter Healthcare Corporation (1988-1992); B.S. Finance University of Illinois; J.D. The John Marshall Law School GENERAL INFORMATION TRANSFER AGENT Harris Trust & Savings Bank 111 West Monroe Street Chicago, Illinois 60690 INDEPENDENT AUDITORS Deloitte & Touche LLP Two Prudential Plaza 180 North Stetson Avenue Chicago, Illinois 60601 SHARES LISTED Varlen Corporation common stock is traded on the NASDAQ Stock Market under the symbol VRLN and its 6-1/2 percent convertible subordinated debentures are traded on the NASDAQ SmallCap Market under the symbol VRLNG. INFORMATION CONTACT: Richard A. Nunemaker Vice President, Finance and Chief Financial Officer 55 Shuman Boulevard P.O. Box 3089 Naperville, Illinois 60566-7089 (708) 420-0400 ANNUAL MEETING The Annual Meeting of Stockholders will be held at 10 a.m. (local time) Wednesday, May 29, 1996 at the Hyatt Lisle, 1400 Corporetum Drive Lisle, Illinois 60532 FORM 10-K: Stockholders may obtain a copy of Form 10-K for the year ended January 31, 1996 as filed by the Company with the SEC without charge by addressing a written request to Richard A. Nunemaker, Vice President, Finance and Chief Financial Officer, Varlen Corporation at the corporate office. OPERATING DIVISIONS AND SUBSIDIARIES - ------------------------------------------------------------------------------- Acieries de Ploermel Means Industries, Inc. Alcor Petroleum Instruments, Inc. Precision Scientific Petroleum Instruments Company Chrome Crankshaft Companies Prime Manufacturing Corporation Consolidated Metco, Inc. Unit Rail Anchor Company Walter Herzog GmbH Varlen Instruments, N. A. Keystone Railway Equipment Company Varlen Corporation 55 Shuman Blvd., P.O. Box 3089 Naperville, Illinois 60566-7089 (708) 420-0400 Printed on Recycled Paper GRAPHIC APPENDIX - - FRONT COVER - ON THE UPPER LEFT HAND CORNER IS A PICTURE OF A RAILROAD CAR SHOCK ABSORPTION DEVICE. ON THE UPPER RIGHT HAND CORNER IS A STAMPED AUTOMOTIVE PART. ON THE LOWER LEFT HAND CORNER IS A PETROLEUM ANALYTICAL INSTRUMENT. ON THE LOWER RIGHT HAND CORNER IS AN ALUMINUM TRUCK HUB. - - INSIDE FRONT COVER - ON THE UPPER LEFT SIDE ARE THREE ALUMINUM TRUCK HUBS AND A TRUCK DASHBOARD. ON THE UPPER RIGHT SIDE IS A RAILROAD CAR DRAFT GEAR, A LOCOMOTIVE HEATING, VENTILATING AND AIR CONDITIONING UNIT AND TWO RAIL ANCHORS ON A PIECE OF RAILROAD TRACK. - - PAGE #1 - ON THE UPPER LEFT SIDE ARE SEVERAL AUTOMOTIVE TRANSMISSION CLUTCH PLATES. ON THE UPPER RIGHT SIDE ARE THREE PETROLEUM ANALYZERS. - - PAGE #2 - ON THE BOTTOM OF THE PAGE ARE TWO PIE GRAPHS SHOWING FISCAL 1995 NET SALES BY SEGMENT AND FISCAL 1995 OPERATING PROFIT BY SEGMENT. THE TRANSPORTATION PRODUCTS SEGMENT NET SALES WERE 81.9% OF TOTAL NET SALES AND THE ANALYTICAL INSTRUMENTS SEGMENT NET SALES WERE 18.1% OF TOTAL NET SALES. THE TRANSPORTATION PRODUCTS SEGMENT OPERATING PROFIT WAS 80.3% OF TOTAL OPERATING PROFIT AND THE ANALYTICAL INSTRUMENTS SEGMENT OPERATING PROFIT WAS 19.7% OF TOTAL OPERATING PROFIT. - - PAGE #3 - ON THE BOTTOM RIGHT SIDE OF THE PAGE ARE TWO BAR GRAPHS DEPICTING RETURN ON AVERAGE STOCKHOLDERS' EQUITY FOR FISCAL 1991 THROUGH 1995 AND RETURN ON INVESTED CAPITAL FOR FISCAL 1991 THROUGH 1995. THE RETURN ON AVERAGE STOCKHOLDERS' EQUITY FROM FISCAL 1991 THROUGH FISCAL 1995 WAS 4.8%, 8.5%, 18.0%, 20.5% AND 21.4%, RESPECTIVELY. THE RETURN ON INVESTED CAPITAL FROM FISCAL 1991 THROUGH 1995 WAS 5.1%, 7.1%, 10.5%, 12.4% AND 13.8%, RESPECTIVELY. - - PAGE #4 - ON THE LEFT SIDE ARE THREE BAR GRAPHS DEPICTING NET SALES, NET EARNINGS AND FULLY DILUTED EARNINGS PER SHARE BEFORE ACCOUNTING CHANGE FROM FISCAL 1991 THROUGH 1995. NET SALES FROM FISCAL 1991 THROUGH 1995 IN THOUSANDS WAS $230,517, $266,054, $291,908, $341,521, AND $386,987, RESPECTIVELY. NET EARNINGS IN THOUSANDS FOR FISCAL 1991 THROUGH 1995 WAS $3,444, $6,317, $10,766, $14,762 AND $19,609, RESPECTIVELY. FULLY DILUTED EARNINGS PER SHARE BEFORE ACCOUNTING CHANGE FROM FISCAL 1991 THROUGH 1995 WERE $.46, $.86, $1.73, $2.11 AND $2.67, RESPECTIVELY. - - PAGE #5 - ON THE RIGHT SIDE IS A BAR GRAPH DEPICTING INTERNATIONAL REVENUES AS A PERCENT OF TOTAL REVENUES FROM FISCAL 1991 THROUGH 1995 AND A LINEAR GRAPH DEPICTING THE FIVE YEAR CUMULATIVE SHAREHOLDER VALUE FROM FISCAL 1991 THROUGH 1995 OF VARLEN CORPORATION'S STOCK IN COMPARISON TO THE S&P 500 INDEX AND THE S&P MANUFACTURING AND DIVERSIFIED INDUSTRY GROUP INDEX. INTERNATIONAL REVENUES AS A PERCENT OF TOTAL REVENUES FROM FISCAL 1991 THROUGH 1995 WERE 14.5%, 16.0%, 14.2%, 15.9% AND 18.5%, RESPECTIVELY. THE FIVE YEAR CUMULATIVE SHAREHOLDER VALUE OF $100 INVESTED IN VARLEN STOCK AT THE BEGINNING OF FISCAL 1991 FOR THE PERIOD ENDING FISCAL 1991 THROUGH 1995 WAS $142, $258, $351, $324 AND $362, RESPECTIVELY. THE FIVE YEAR CUMULATIVE VALUE OF $100 INVESTED IN THE S&P MANUFACTURING & DIVERSIFIED INDUSTRY GROUP INDEX AT THE BEGINNING OF FISCAL 1991 FOR THE PERIOD ENDING FISCAL 1991 THROUGH 1995 WAS $119, $128, $158, $157 AND $230, RESPECTIVELY. THE FIVE YEAR CUMULATIVE VALUE OF $100 INVESTED IN THE S&P 500 INDEX AT THE BEGINNING OF FISCAL 1991 FOR THE PERIOD ENDING FISCAL 1991 THROUGH 1995 WAS $122, $135, $152, $153 AND $211, RESPECTIVELY. - - PAGE #6 - ON THE LEFT SIDE ARE TWO BAR GRAPHS DEPICTING SALES PER EMPLOYEE AND RESEARCH AND DEVELOPMENT EXPENDITURES FROM FISCAL 1991 THROUGH 1995. THE SALES PER EMPLOYEE IN THOUSANDS OF DOLLARS FROM FISCAL 1991 THROUGH 1995 WERE $123, $138, $145, $154 AND $163, RESPECTIVELY. THE RESEARCH AND DEVELOPMENT EXPENDITURES IN THOUSANDS OF DOLLARS FROM FISCAL 1991 THROUGH 1995 WERE $2,810, $3,609, $4,342, $4,366 AND $5,948, RESPECTIVELY. - - PAGE #7 - ON THE RIGHT HAND SIDE ARE TWO PICTURES OF VARLEN CORPORATION'S NEW PLANT IN BRYSON CITY NORTH CAROLINA. - - PAGE #8 - ON THE LEFT SIDE ARE TWO BAR GRAPHS DEPICTING CAPITAL EXPENDITURES AND INVENTORY TURNOVER FROM FISCAL 1991 THROUGH 1995. THE CAPITAL EXPENDITURES FROM FISCAL 1991 THROUGH 1995 IN THOUSANDS OF DOLLARS WERE $7,949, $9,567, $11,240, $14,701 AND $23,427, RESPECTIVELY. THE INVENTORY TURNOVER IN NUMBER OF TURNS FROM FISCAL 1991 THROUGH 1995 WERE 5.0, 5.7, 6.1, 6.7 AND 7.2, RESPECTIVELY. - - PAGE #9 - ON THE RIGHT ARE TWO PICTURES OF A VARLEN CORPORATION AUTOMOTIVE STAMPING PLANT. - - PAGE #11 - ON THE BOTTOM ARE TWO BAR GRAPHS DEPICTING BOOK VALUE PER SHARE AND NET MARGIN AND PRE-TAX MARGIN FOR FISCAL 1991 THROUGH 1995. THE BOOK VALUE PER SHARE FOR FISCAL 1991 THROUGH 1995 WERE $9.85, $10.30, $11.94, $14.76 AND $18.26, RESPECTIVELY. THE NET MARGIN FOR FISCAL 1991 THROUGH 1995 IN PERCENTS WERE 1.5%, 2.4%, 3.7%, 4.3% AND 5.1%, RESPECTIVELY. THE PRE-TAX MARGIN FOR FISCAL 1991 THROUGH 1995 IN PERCENTS WERE 3.2%, 5.4%, 6.4%, 7.6% AND 9.0%, RESPECTIVELY. - - OUTSIDE BACK COVER - AT THE BOTTOM IS A WORLDWIDE MAP DEPICTING THE MANUFACTURING AND SERVICE AND DISTRIBUTION LOCATIONS OF VARLEN CORPORATION'S PLANTS AND OFFICES. EX-21 8 LIST OF SUBSIDIARIES EXHIBIT 21 Exhibit (21) LIST OF SUBSIDIARIES The following table sets forth certain information with respect to the significant subsidiaries of the Registrant. All of the voting securities of each subsidiary are owned by the Registrant (or a wholly owned subsidiary of the Registrant) and its financial statements are included in the consolidated financial statements of the Registrant. Jurisdiction of Name Incorporation ---- -------------- Acieries de Ploermel France Alcor Petroleum Instruments, Inc. Delaware Chrome Crankshaft Co. Delaware Chrome Crankshaft Company of Illinois Illinois Consolidated Metco, Inc. Delaware Keystone Industries, Inc. Delaware Means Industries, Inc. Michigan Precision Scientific, Inc. Delaware Prime Manufacturing Corporation Delaware Unit Rail Anchor Company Delaware Varlen Instruments, Inc. Delaware Walter Herzog GmbH Germany EX-23 9 CONSENT OF DELOITTE & TOUCHE EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT Varlen Corporation: We consent to the incorporation by reference in the Registration Statements of Varlen Corporation and subsidiaries on Form S-8, File No. 33-35085 and Form S-8, File No. 33-55132 and Form S-3, File No. 33-72218 and Form S-3, File No. 33-61826 and Form S-8/S-3, File No. 33-72480 of our reports, dated March 4, 1996, appearing in and incorporated by reference in this Annual Report on Form 10-K of Varlen Corporation and subsidiaries for the year ended January 31, 1996. DELOITTE & TOUCHE , LLP April 24, 1996 Chicago, Illinois EX-24 10 POWER OF ATTORNEY EXHIBIT 24 VARLEN CORPORATION POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned directors of Varlen Corporation (the "Company") does hereby irrevocably constitute and appoint Richard A. Nunemaker, his attorney- in-fact and agent to sign and execute in his name and on his behalf, in any and all capacities in which he may be required to sign, an Annual Report of the Company on Form 10-K under the Securities and Exchange Act of 1934 for the fiscal year ended January 31, 1996, to be filed with the Securities and Exchange Commission, and any amendments, revisions or supplements thereto, including any exhibits, schedules and documents in connection therewith and any other instruments necessary or incidental thereto, all as fully and to the same effect as he might or could do in person if present and acting, and does hereby ratify and confirm all that his attorney-in-fact shall do or cause to be done incident to or in connection with the foregoing or by virtue of the foregoing. IN WITNESS WHEREOF, each of the undersigned has duly executed this Power of Attorney this 4th day of April, 1996. /s/ Ernest H. Lorch /s/ Greg A. Rosenbaum ------------------- --------------------- Ernest H. Lorch, Greg A. Rosenbaum, Chairman of the Board Director and Director /s/ Rudolph Grua /s/ L. William Miles ---------------- -------------------- Rudolph Grua, L. William Miles, Director Director /s/ Theodore A. Ruppert /s/ Joseph J. Ross ----------------------- ------------------ Theodore A. Ruppert, Joseph J. Ross, Director Director EX-27 11 FINANCIAL DATA SCHEDULE
5 YEAR JAN-31-1996 JAN-31-1996 22,915 0 43,297 0 36,491 111,514 137,279 67,604 230,874 44,470 73,398 0 0 541 97,412 230,874 386,987 386,987 290,052 290,052 0 0 5,281 34,706 15,097 19,609 0 0 0 19,609 3.51 2.67
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