<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
(Amendment No. )
Filed by Registrant /x/
Filed by Party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only(as permitted by Rule
14-6(e)(2)
/x/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Sec. 240.14a-11(c) or 240.14a-12
FEDERAL SIGNAL CORPORATON
Payment of Filing Fee (Check the appropriate box):
o $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), 14a-6(i)(2)
or Item 22(a)(2) of Schedule 14A.
o $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
o Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
Not applicable
2) Aggregate number of securities to which transaction applies:
Not applicable
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11(Set forth the amount on which the
filing fee is calculated and state how it was determined):
Not applicable
4) Proposed maximum aggregate value of transaction: Not applicable
5) Total fee paid: Not applicable
o Fee paid previously with preliminary materials
o Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing by registration for which the
offsetting fee was paid previously. Identify the previous filing by
registration statement number, or the Form or Schedule and the date of
its filing.
<PAGE>
FEDERAL SIGNAL LOGO
1415 West 22nd Street
Oak Brook, Illinois 60521
Notice of Annual Meeting of Shareholders
To Be Held on April 16, 1997
To the Stockholders of
Federal Signal Corporation
The Annual Meeting of Shareholders of Federal Signal Corporation
("Federal") for the year 1997 will be held at the Chicago Marriott Hotel-Oak
Brook, 1401 West 22nd Street, Oak Brook, Illinois, on Wednesday, April 16, 1997,
at 11:00 a.m., local time, for the following purposes:
1. To elect two directors of Federal; and
2. To transact such other business as may properly come before the
meeting or any adjournment thereof.
The Board of Directors has fixed the close of business, February 20 1997,
as the record date for determining the holders of Common Stock of Federal
entitled to notice of and to vote at the meeting or any adjournment thereof.
A copy of Federal's Financial Statements and its Annual Report for the year
ended December 31, 1996 and a Proxy Statement accompany this notice.
IMPORTANT! TO ASSURE THAT YOUR SHARES ARE REPRESENTED AT THE MEETING,
PLEASE SIGN, DATE AND RETURN PROMPTLY THE ENCLOSED PROXY CARD IN THE ENVELOPE
PROVIDED.
No postage is required if the proxy is mailed in the United States.
By order of the Board of Directors
KIM A. WEHRENBERG
Secretary
March 10, 1997
<PAGE>
FEDERAL SIGNAL LOGO
1415 West 22nd Street
Oak Brook, Illinois 60521
MAILING DATE
on or about
March 10, 1997
------------------
Proxy Statement for Annual Meeting of Shareholders
To Be Held on April 16, 1997
GENERAL INFORMATION
This proxy statement is furnished in connection with the solicitation of
proxies by the Board of Directors of Federal Signal Corporation ("Federal") for
use at the Annual Meeting of Shareholders to be held on Wednesday, April 16,
1997, and any adjournment thereof. Costs of solicitation will be borne by
Federal. Following the original solicitation of proxies by mail, certain
officers and regular employees of Federal may solicit proxies by
correspondence, telephone, telegraph, or in person, but without
extra compensation. Federal will reimburse brokers and other nominee holders for
their reasonable expenses incurred in forwarding the proxy materials to the
beneficial owners.
Each proxy solicited herewith will be voted as to each matter as the
stockholder directs thereon, but in the absence of such directions it will be
voted for the nominees specified herein. Any proxy solicited herewith may be
revoked by the stockholder at any time prior to the voting thereof, bu t a
revocation will not be effective until satisfactory evidence thereof has been
received by the Secretary of Federal.
VOTING SECURITIES
The holders of record of the Common Stock of Federal at the close of
business on February 20, 1997, will be entitled to vote at the meeting. At such
record date, there were outstanding 45,357,400 shares of Common Stock. A
majority of the outstanding shares will constitute a quorum at the meeti ng.
Abstentions and broker non-votes are counted to determine if a quorum is
present. Abstentions are counted as votes cast, whereas broker non-votes are not
counted as votes cast for determining whether a proposition has been approved.
Each stockholder of record will be entitled to one vote for each share of Common
Stock standing in the name of the holder on the books of Federal on the record
date.
1
<PAGE>
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS
The following table sets forth information as of December 31, 1996 (unless
otherwise noted) with respect to (i) any person who is known to Federal to be
the beneficial owner of more than 5% of Federal's Common Stock, which is
Federal's only class of outstanding voting securities, and (ii) each director,
and all directors and officers as a group:
<TABLE>
<CAPTION>
Amount and
Nature of
Beneficial Percent of
Name Ownership Class
---- ---------- ----------
<S> <C> <C>
Beneficial Owner of More than 5% of Federal's Common
Stock:.................................................... None
Each Director and Five Executive Officers and Executive
Officers
and Directors as a Group:(1)
J. Patrick Lannan, Jr., Director....................... 262,328(2) .58%
James A. Lovell, Jr., Director......................... 28,413(3) .06%
Thomas N. McGowen, Jr., Director....................... 34,666 .08%
Walter R. Peirson, Director............................ 28,359(3) .06%
Joseph J. Ross, Director and Executive Officer......... 811,751(3) 1.79%
Richard R. Thomas, Director............................ 136,848(3) .30%
Henry L. Dykema, Executive Officer..................... 21,441(3) .04%
Kim A. Wehrenberg, Executive Officer................... 200,547(3) .44%
Richard L. Ritz, Executive Officer..................... 56,805(3) .12%
Robert W. Racic, Executive Officer..................... 44,439(3) .10%
All Directors and Executive Officers as a group (12
persons).............................................. 1,669,948 3.68%
</TABLE>
- ---------------
(1) The information contained in this table is based upon information furnished
to Federal by the individuals named above. Except as set forth in the following
footnotes, each director claims sole voting and investment power with respect to
these shares.
(2) This figure includes 17,899 shares owned by Mr. Lannan's wife. Mr. Lannan
disclaims beneficial ownership with respect to these shares. It also includes
18,848 shares for which he shares voting and investment power.
(3) These figures include options shares exercisable within 60 days as follows:
Mr. Lovell, 15,303; Mr. Peirson, 6,594; Mr. Ross, 620,181; Mr. Dykema, 3,500;
Mr. Wehrenberg, 105,399; Mr. Ritz, 34,722; and Mr. Racic, 11,266. These figures
also include stock award shares pursuant to Federal's Stock Benefit Plan which
are subject to certain restrictions under the plan, as follows: Mr. Ross, 13,334
; Mr. Dykema, 12,250; Mr. Wehrenberg, 5,493; Mr. Ritz, 3,251 and
Mr. Racic, 1,493.
2
<PAGE>
ELECTION OF DIRECTORS
Federal's Board of Directors consists of six directors divided into three
classes with one class term expiring each year. Mr. Walter R. Peirson and Mr.
Joseph J. Ross are nominated as Class I directors for election at this Annual
Meeting for a term to expire at the 2000 Annual Meeting or until their
successors are elected and qualified.
The accompanying proxy card permits a stockholder to direct whether his or
her shares are to be voted for, or withheld from the vote for the nominees.
Each proxy will be voted as the stockholder directs thereon; however, if no
such direction is given, it is the present intention of the persons named in
the proxy card to vote such proxies for the election of the above-named
nominees as directors. If on account of death or unforeseen contingencies the
nominees shall not be available for election, the
persons named in the proxy will vote the proxies for such other persons as the
Nominating Committee may nominate as directors so as to provide a full board.
The nominees receiving the highest number of votes cast will be elected as
directors.
Information regarding the nominees for election and the directors
continuing in office is set forth below:
<TABLE>
<CAPTION>
Year First Year Present Principal Occupation
Became Term or Employment for
Name Age Director Expires Last Five Years(1)
---- --- ---------- ------------ --------------------
<S> <C> <C> <C> <C>
Nominees:
Joseph J. Ross.................... 51 1986 1997 Mr. Ross is Chairman, President and
Chief Executive Officer of Federal.
He has served as President and Chief
Executive Officer since December,
1987 and also became Chairman in
February, 1990 and is a director of
Varlen Corporation.
Walter R. Peirson................. 70 1987 1997 Mr. Peirson retired in 1989 as
Executive Vice President and as a
director of Amoco Corporation (a
petroleum company) and he serves as a
director of Consolidated Natural Gas
Company.
Continuing Directors:
Thomas N. McGowen, Jr. ........... 71 1974 1998 Mr. McGowen is an attorney. He is
also a director of Energy West
Corporation and Ribi Immunochem
Research, Inc.
Richard R. Thomas................. 63 1994 1998 Mr. Thomas retired in 1994 as
President of the Tool Group of
Federal Signal Corporation.
J. Patrick Lannan, Jr. ........... 58 1978 1999 Mr. Lannan is President and a
director of the Lannan Foundation for
the support of the visual arts,
literature and rural native American
communities.
James A. Lovell, Jr. ............. 68 1984 1999 Mr. Lovell is President of Lovell
Communications (a consulting
company). He retired in 1990 as
Executive Vice President, Corporate
Staff and as a director of Centel
Corporation (a telecommunications
company).
</TABLE>
- ---------------
(1) The information contained in this table is based upon information furnished
to Federal by the individuals named above.
3
<PAGE>
BOARD OF DIRECTORS AND COMMITTEES
Pursuant to its by-laws, Federal has established standing audit,
nominating, compensation/stock option, pension and executive committees.
The Audit Committee reviews and recommends to the Board of Directors
internal accounting and financial controls, auditing practices and procedures
and accounting principles to be employed in the preparation of Federal's
financial statements and the review of financial statements by independent
public accountants. The Audit Committee also makes recommendations concerning
the engagement of independent public accountants to audit the annual financial
statements and the scope of the audit to be undertaken by such accountants.
In addition, the Audit Committee considers the performance of non-audit services
by such accountants, including the effect which the performance of such
non-audit services may have upon the independence of the accountants. The
by-laws prohibit a director who is also an employee of Federal from serving on
the Audit Committee. The members of the Audit Committee are
James A. Lovell, Jr., Chairman, Richard R. Thomas and Walter R. Peirson.
The Nominating Committee evaluates and recommends to the Board of Directors
candidates for election or re-election as directors. No determination has been
made regarding the consideration of or procedure for the recommendation of
nominees by stockholders. The members of the Nominating Committee are
Joseph J. Ross, Chairman, Thomas N. McGowen, Jr. and James A. Lovell, Jr.
The Compensation/Stock Option Committee reviews and recommends to the Board
of Directors policies, practices and procedures relating to compensation of
managerial employees and the establishment and administration of employee
benefit plans. The members of the Compensation/Stock Option Committee are
Walter R. Peirson, Chairman, Thomas N. McGowen, Jr. and J. Patrick Lannan, Jr.
The Pension Committee reviews and recommends to the Board of Directors
policies, practices and procedures relating to Federal's various pension,
savings and similar retirement plans and programs and to the investment of the
funds associated with these plans. The members of the Pension Committe e are J.
Patrick Lannan, Jr., Chairman, and Walter R. Peirson.
During 1996, the Board of Directors held a total of five meetings and the
Executive Committee of the Board, which generally exercises the power and
authority of the Board in the intervals between full board meetings, held one
meeting. The members of the Executive Committee are Thomas N. McGowe n, Jr.,
Chairman, Joseph J. Ross and James A. Lovell, Jr. During 1996, the
Compensation/Stock Option Committee held five meetings; the Nominating Committee
held two meetings; the Audit Committee held three meetings; and the Pension
Committee met twice. No director attended less than 75% of the meetings of the
Board and of each committee of which he was a member.
As compensation for services to Federal, each director who is not also an
officer of Federal receives director's fees at a current annual rate of $22,000.
In addition, each such director receives additional fees for serving on
committees of the Board as follows: Executive Committee chairman--$ 5,000, other
members--$2,500; Audit or Compensation/Stock Option Committee chairman--$3,500,
other members--$2,500; Pension Committee chairman--$3,500, other
members--$2,500; and Nominating Committee members--$2,500. Directors are also
reimbursed for their expenses relating to attendance at meetings. Mr. Thomas
also received $9,000 for consulting for the Tool Group in 1996. Directors may
receive options in lieu of director's fees, as described in the stock option
section of this proxy statement . Directors who retire as a director of Federal
after attaining age 68 and meeting years of service requirements are eligible
for a director retirement benefit. The maximum benefit is $15,000 per year for
ten years if the director retires after age 70.
4
<PAGE>
EXECUTIVE COMPENSATION
The following is the Summary Compensation Table for the Chief Executive
Officer and four other top executive officers of Federal for compensation earned
during the 1996 fiscal year:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Compensation
AWARDS
-----------------------
Annual Compensation Restricted Number
Name and ---------------------------- Stock of All Other
Principal Position Year Salary Bonus Awards(1) Options Compensation(3)
------------------ ---- -------- -------- ---------- ------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Joseph J. Ross.................. 1996 $375,000 $300,000 $222,750 65,000 $33,378
Chairman, President 1995 348,000 334,080 0 0 68,208
and Chief Executive Officer 1994 325,000 338,000 159,375 30,000 72,104
Henry L. Dykema................. 1996 190,000 113,288 74,250 14,500 5,274
Vice President and 1995 182,500 95,813 258,750(2) 20,000 3,670
Chief Financial Officer 1994 0 0 0 0 0
Kim A. Wehrenberg............... 1996 158,000 99,540 86,625 14,500 13,726
Vice President, General 1995 152,000 109,440 0 0 14,646
Counsel and Secretary 1994 145,000 113,100 75,000 7,000 13,743
Richard L. Ritz................. 1996 108,000 56,700 49,500 19,500 12,268
Vice President, Controller 1995 101,000 61,358 0 0 12,098
1994 96,000 62,275 46,875 4,000 10,365
Robert W. Racic................. 1996 103,000 54,075 22,275 2,000 4,500
Vice President, Treasurer 1995 99,000 57,544 0 0 4,500
1994 96,000 61,452 20,625 1,000 3,146
</TABLE>
- ---------------
(1) Stock awards generally vest 25% on each anniversary date after date of
grant. The number and aggregate value of unvested stock awards as of December
31, 1996 were: for Mr. Ross 13,334 shares ($345,017), for Mr. Dykema 12,250
shares ($316,968), for Mr. Wehrenberg 5,493 shares ($142,131), for Mr. Ritz
3,251 shares ($84,119) and for Mr. Racic 1,493 shares ($38,631). Dividends are
paid at the regular rate to these people on the unvested shares.
(2) Stock awards vest 25% on each anniversary date between the third and seventh
year after date of grant.
(3) This compensation consists of the Company matching contribution under
Federal's 401(k) savings plan in which most employees participate and
supplemental savings and retirement plans and auto allowance which break out as
follows, respectively, Mr. Ross $4,500, $16,778, $12,100, $0; Mr. Dykema $2
,745, $2,529, $0, $0; Mr. Wehrenberg $4,500, $3,226, $0, $6,000; Mr. Ritz
$4,500, $568, $0, $7,200; Mr. Racic $4,500, $0, $0, $0. Of these officers who
put part of their bonus into the Company's supplemental savings plan,
Mr. Wehrenberg invested $99,540, and Mr. Dykema invested $113,288 of their
bonuses in Federal Signal stock.
5
<PAGE>
EMPLOYMENT AGREEMENTS
Federal has an employment agreement with Joseph J. Ross. The agreement
continues until the December 31 following the employee's 65th birthday subject
to earlier termination by either Federal or the employee. As of January 1, 1997,
termination salary under this agreement was $405,000 for Mr. Ro ss and the
annual salary of Mr. Ross, which is approved by the Compensation Committee, is
not set by this employment agreement. In the discretion of the Board of
Directors, annual compensation may be increased during the term of the
agreement. If terminated by Federal under circumstances not involving cause,
Federal would be obligated to pay in monthly installments an amount equal to the
then applicable salary for one year (or, if less, the amount of minimum salary
payable through the December 31 followi ng such employee's 65th birthday). In
the event of death prior to termination of employment, the employee's estate is
entitled to receive in monthly installments an amount equal to one year's
minimum compensation. Mr. Ross and Mr. Wehrenberg have change of control
agreements. In the event Federal is subject to a "change of control" (as
specifically defined), the agreements permit the employee to elect to terminate
employment during a specified period and to receive termination payments
calculat ed as if Federal had terminated employment without cause, except that
such payment shall be based on three years' W-2 compensation rather than one.
Upon termination of employment for any reason, each employee is obligated not to
engage in specified competitive activities for a period of three years.
Option Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Grant Date
Individual Grants Value
- ----------------------------------------------------------------------------------------------------- -------------
Number of Number of Number of
Securities Securities Securities
Underlying Underlying Underlying
Options Granted Options Granted Options Granted
1/29/96 at 7/11/96 at 12/12/96 at % of Total Grant Date
$24.75 $22.125 $24.00 Options Present Value
per share exercise per share exercise per share
exercise Granted to $ Based on or base price and or
base price and or base price and Employees in
Black-Scholes
Name expire 1/29/06 expire 7/11/06 expire 12/12/06 Fiscal Year Method(2)
---- ------------------ ------------------ ------------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
Joseph J. Ross.......... 30,000 0 35,000 12% $395,625
Henry L. Dykema......... 7,000 0 7,500 3% 88,312
Kim A. Wehrenberg....... 7,000 0 7,500 3% 88,312
Richard L. Ritz......... 4,500 10,000(1) 5,000 4% 113,155
Robert W. Racic......... 1,000 0 1,000 .4% 12,187
</TABLE>
- ---------------
(1) No SARs were granted. These options become 50% and 100% exercisable on the
first and second anniversary date, respectively, except these 10,000 shares
become 100% exercisable on the fourth anniversary date.
(2) The following assumptions were used under the Black-Scholes method:
volatility .18; risk free rate of return 6.2%; dividend yield 2.3%; exercise
period, 6.7 years.
6
<PAGE>
Option Exercises and Year-End Value Table
Aggregated Option Exercises in Last Fiscal Year and FY-End Option Value
<TABLE>
<CAPTION>
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options at Options at
FY-End(#) FY-End($)
------------- ----------------
Shares Acquired Value Exercisable/ Exercisable/
Name on Exercise(#) Realized($)(1) Unexercisable Unexercisable(2)
---- --------------- -------------- ------------- ----------------
<S> <C> <C> <C> <C>
Joseph J. Ross......................... 0(3) $0 605,181 $10,798,756
74,600 154,275
Henry L. Dykema........................ 0 0 0 0
34,500 130,938
Kim A. Wehrenberg...................... 0 0 101,899 1,624,573
14,500 21,938
Richard L. Ritz........................ 0 0 32,472 523,373
32,833 128,185
Robert W. Racic........................ 0 0 10,766 143,392
2,000 3,000
</TABLE>
- ---------------
(1) Market value of underlying securities at exercise, minus the exercise or
base price.
(2) "Spread" calculated by subtracting the exercise or base price from the
closing stock price of $25.875 on December 31, 1996.
(3) Mr. Ross has a stock option exercise loan totaling $65,991, including $4,317
of interest in 1996 at 7.61%. Such loans are available to all employees
participating in the Plan.
Retirement Plans
Federal's Retirement Plan provides retirement benefits for salaried and
hourly employees including officers. Contributions are made on an actuarial
group basis, and no specific amount of contributions is set aside for any
individual participant. Under the method of computing the annual contrib ution,
the Internal Revenue Service's full funding limitation prohibits a contribution
to the plan for 1996. The following table sets forth the approximate annual
pension benefit based on years of service and compensation, but does not reflect
dollar limitations under the Internal Revenue Code, as amended, which limits the
annual benefits which may be paid from a tax qualified retirement plan. For
employees covered by Federal's supplemental pension plan, amounts in excess of
such limitations will be pai d from the general funds of Federal, pursuant to
the terms of such plan. The amount of pension benefits is reduced by one-half of
the amount of available individual Social
7
<PAGE>
Security benefits. Estimated credited years of service are as follows: Mr. Ross,
12.5, Mr. Dykema, 1; Mr. Wehrenberg, 9; Mr. Ritz, 11.5 and Mr. Racic, 22.75.
Pension Plan Table
<TABLE>
<CAPTION>
Average Annual Compensation Approximate Annual Straight-Life Annuity
for the Five Consecutive Pension Upon Retirement at 65
Calendar Years of the Last --------------------------------------------------------------
Ten for Which Compensation 10 years 15 years 20 years 25 years 30 years
is Highest of Service of Service of Service of Service of Service
- --------------------------- ---------- ---------- ---------- ---------- ----------
<C> <C> <C> <C> <C> <C>
300,000..................... $ 50,000 $ 75,000 $100,000 $125,000 $150,000
400,000..................... 66,667 100,000 133,334 166,167 200,000
500,000..................... 83,334 125,000 166,667 208,334 250,000
600,000..................... 100,000 150,000 200,000 250,000 300,000
700,000..................... 116,667 175,000 233,333 291,667 350,000
800,000..................... 133,333 200,000 266,667 333,334 400,000
</TABLE>
For purposes of the Retirement Plan, an employee's compensation is his
Annual Compensation as set forth in the Summary Compensation Table.
Pursuant to Federal's supplemental pension plan, various officers of
Federal are entitled to pension supplements which have the effect of assuring
that, regardless of their actual years of service, if they remain in the
employment of Federal until age 65, they will receive benefits as if they had
been continuously employed by Federal since their thirty-fourth birthday. Giving
effect to such pension supplements, the additional years of service credited
under Federal's Supplemental Retirement Plan as of December 31, 1996 to Mr. Ross
is 3 1/4 years. The supplemental pension benefit for Mr. Ross makes up the
difference between his actual pension benefit and what it would have been with
30 years of service under the 1976 plan.
Compensation Committee Report on Executive Compensation
The Compensation Committee of the Board of Directors consists of three
independent outside directors. The Committee meets without the Chief Executive
Officer present to evaluate his performance and establish his compensation.
Compensation for Federal's executive officers consists of three majo r
components: salary, bonus and stock options/awards. The officers' compensation
is based on the individual's skill level, years of experience, job duties and
the individual's and Company's performance. The Committee uses its subjective
evaluation of these factors, without a mechanical weighting, to determine the
officers' salary and level of participation in the bonus plan; Mr. Ross
participates at 40% of his salary and the other officers participate at 25% to
30% of their salary.
The Company's total return to shareholders has been about 15% for the last
five years. Based on the performance of Mr. Ross and the entire management team
(among other items, this performance included maintaining cash flow above $60
million, increasing the return on equity to 23.8%, increasing net income by 20%
and improving the Sign Group's profitability) and the Company over the last
several years, the Committee granted Mr. Ross an 8% increase to $405,000 in his
base salary for 1997. The Committee
also approved an average 1997 salary increase for the other four officers of
4.6%.
The officers' bonuses are tied directly to company performance. Bonus
targets are established for the officers based on their level of responsibility.
The amount of bonus to which an officer is entitled is based on Federal's
pre-tax profits (before extraordinary items, interest on long-term de bt and
bonus payments) as a percentage of Federal's average stockholders' equity plus
average long-term debt, as well as on goals for growth of the Company. The
officers' bonus targets remain the same for 1997. Therefore, if the Company's
return on capital is the same as it was in 1996, the officers' bonuses will also
be about the same for 1997. The 1996 bonus target achievement was 91%. The other
officers' bonuses generally constitute about 40% of their cash compensation.
8
<PAGE>
The third major component of the officers' compensation consists of stock
options and awards. This is long-term compensation which provides value to the
officers based on the increased market value of the Company for all
stockholders. For example, over the last eight years the total market val ue of
the Company has increased well over five-fold from about $200 million to more
than $1.1 billion of stockholder value. The Performance Graph on page 10 shows
that Federal has out-performed the Standard & Poor Industrials and companies
comparable to Federal. In view of this performance, and to give the officers
even greater incentive to continue to increase shareholder value, the
Compensation Committee intends to grant the officers additional stock options
and restricted stock awards in 1997. The Co mmittee subjectively determines the
number of shares to be granted and there is no mechanical relationship between
the number of options and restricted share awards to be granted, nor is there a
mechanical relationship to prior grants.
WALTER R. PEIRSON J. PATRICK LANNAN, JR. THOMAS N. McGOWEN, JR.
9
<PAGE>
COMPARISON FOR FIVE YEAR CUMULATIVE TOTAL RETURN*
FOR FEDERAL SIGNAL CORPORATION
<TABLE>
<CAPTION>
91 92 93 94 95 96
<S> <C> <C> <C> <C> <C> <C>
FSC 100 113 151 149 193 198
S & P IND. 100 102 111 116 156 191
DJIDI 100 114 136 122 156 198
</TABLE>
Assumes $100 invested on December 31, 1991 in Federal Signal Corporation Common
Stock (FSC), S&P Industrials Index (S&P Ind.) and the Dow Jones
Industrial - Diversified Index (DJIDI).
* Total return assumes reinvestment of dividends and is based on fiscal years
ending December 31.
ACCOUNTING INFORMATION
Ernst & Young has been selected by Federal to serve as its independent
public accountants for the fiscal year ending December 31, 1997. A
representative of that firm will be present at the Annual Meeting with the
opportunity to make a statement if he desires to do so and to respond to
question s of stockholders. The appointment of the auditors is approved annually
by the Board of Directors based upon the recommendation of the Audit Committee.
FUTURE STOCKHOLDER PROPOSALS
In order to be considered for inclusion in the proxy statement for the 1998
Annual Meeting of Shareholders, stockholder proposals must be received by
Federal on or before November 21, 1997.
10
<PAGE>
OTHER BUSINESS
As of the date hereof, the foregoing is the only business which management
intends to present, or is aware that others will present, at the meeting. If any
other proper business should be presented to the meeting, the proxies will be
voted in respect thereof in accordance with the discretion a nd judgment of the
person or persons voting the proxies.
By order of the Board of Directors
Kim A. Wehrenberg
Secretary
Federal Signal Corporation
11
<PAGE>
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Operating Results (dollars in millions):
Net sales................... $896.4 $816.1 $677.2 $565.2 $518.2 $466.9 $439.4 $398.4 $361.4 $305.8 $273.3
Income before income taxes
(a,b)..................... $ 93.4 $ 77.3 $ 70.2 $ 58.8 $ 49.9 $ 45.6 $ 42.5 $ 34.6 $ 28.4 $ 23.8 $ 20.9
Income from continuing
operations (a,b).......... $ 62.0 $ 51.6 $ 46.8 $ 39.8 $ 34.5 $ 31.0 $ 28.1 $ 22.1 $ 18.2 $ 14.5 $ 12.3
Operating margin............ 11.5% 11.8% 11.6% 11.3% 10.6% 10.8% 10.8% 10.6% 9.6% 8.6% 8.5%
Return on average common
shareholders' equity
(a,b)..................... 23.8% 22.0% 22.3% 21.0% 20.0% 20.0% 20.4% 18.7% 17.0% 14.5% 12.2%
Common Stock Data
(per share) (c):
Income from continuing
operations................ $ 1.35 $ 1.13 $ 1.02 $ 0.86 $ 0.75 $ 0.67 $ 0.61 $ 0.48 $ 0.40 $ 0.31 $ 0.26
Cash dividends.............. $ 0.58 $ 0.50 $ 0.42 $ 0.36 $ 0.31 $ 0.27 $ 0.22 $ 0.19 $ 0.16 $ 0.15 $ 0.15
Market price range:
High...................... $28 1/4 $25 7/8 $21 3/8 $ 21 $17 5/8 $15 1/4 $10 3/4 $7 1/8 $4 7/8 $4 7/8 $4 1/2
Low....................... $20 7/8 $19 5/8 $16 7/8 $15 3/4 $12 3/8 $9 1/4 $6 1/4 $4 1/4 $3 1/2 $2 7/8 $3 1/8
Average common shares
outstanding (in
thousands)................ 45,952 45,859 45,957 46,293 46,128 46,126 46,038 46,103 45,639 47,137 46,767
Financial Position at Year-End
(dollars in millions):
Working capital (d)......... $ 40.6 $ 48.8 $ 53.9 $ 52.8 $ 49.5 $ 44.9 $ 42.7 $ 63.8 $ 59.5 $ 53.9 $ 52.8
Current ratio (d)........... 1.2 1.3 1.4 1.5 1.6 1.5 1.5 2.1 2.0 1.9 2.2
Total assets................ $703.9 $620.0 $521.6 $405.7 $363.7 $341.2 $295.8 $271.3 $251.1 $233.3 $191.4
Long-term debt, net of
current portion........... $ 34.3 $ 39.7 $ 34.9 $ 21.1 $ 16.2 $ 15.6 $ 15.8 $ 16.8 $ 18.6 $ 24.8 $ 21.9
Shareholders' equity........ $272.8 $248.1 $220.3 $199.2 $179.0 $164.8 $146.4 $130.4 $115.5 $103.2 $102.4
Debt to capitalization ratio
(d)....................... 28% 29% 22% 1% 2% 1% 2% 10% 18% 22% 4%
Other (dollars in millions)
(e):
New business................ $924.6 $780.5 $700.3 $584.2 $510.3 $462.7 $467.6 $429.9 $382.4 $328.3 $276.4
Backlog..................... $280.0 $251.4 $261.0 $221.8 $198.0 $203.2 $199.9 $171.7 $140.2 $119.2 $ 96.7
Net cash provided by
operating activities...... $ 61.4 $ 62.9 $ 53.8 $ 48.8 $ 40.2 $ 43.9 $ 48.3 $ 34.6 $ 22.5 $ 20.1 $ 22.7
Net cash (used for)
investing activities...... $(54.2) $(88.1) $(96.9) $(38.1) $(26.9) $(47.8) $(14.7) $(24.1) $(20.8) $(37.7) $(12.8)
Net cash provided by (used
for) financing
activities................ $ (4.1) $ 29.9 $ 45.1 $(10.3) $(11.2) $ 2.5 $(34.6) $ (8.9) $ (3.3) $ 17.8 $ (9.9)
Capital expenditures........ $ 16.9 $ 15.7 $ 11.1 $ 10.1 $ 8.8 $ 12.0 $ 8.3 $ 9.2 $ 7.3 $ 6.9 $ 6.3
Depreciation................ $ 13.2 $ 11.8 $ 10.3 $ 9.2 $ 8.7 $ 8.2 $ 7.8 $ 7.9 $ 7.1 $ 5.5 $ 5.2
Employees................... 6,233 6,015 5,243 4,426 4,268 4,212 4,158 4,142 3,880 3,653 3,183
</TABLE>
- ---------------
(a) in 1996, includes gain on sale of subsidiary of $4.7 million pre-tax,
$2.8 million after-tax or $.06 per share
(b) in 1995, includes the impact of a nonrecurring charge for a litigation
settlement of $6.7 million pre-tax, $4.2 million after-tax or $.09 per share
(c) reflects 10% stock dividends each paid in 1988 and 1989, 3-for-2 stock
splits in 1990, 1991 and 1992, and a 4-for-3 stock split in 1994
(d) manufacturing operations only
(e) continuing operations only
F-1
<PAGE>
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
---------------------------
1996 1995
---- ----
<S> <C> <C>
Assets
Manufacturing activities:
Current assets
Cash and cash equivalents............................ $ 12,431,000 $ 9,350,000
Accounts receivable, net of allowances for doubtful
accounts
of $2,602,000 and $3,058,000, respectively........ 141,203,000 122,913,000
Inventories--Note B.................................. 108,293,000 97,448,000
Prepaid expenses..................................... 5,079,000 5,763,000
------------ ------------
Total current assets.............................. 267,006,000 235,474,000
Properties and equipment--Note C....................... 82,825,000 78,454,000
Other assets
Intangible assets, net of accumulated amortization... 165,854,000 146,774,000
Other deferred charges and assets.................... 17,228,000 11,722,000
------------ ------------
Total manufacturing assets........................ 532,913,000 472,424,000
------------ ------------
Financial services activities
Lease financing and other receivables, net of
allowances for doubtful accounts of $1,348,000 and
$1,124,000, respectively, and net of unearned finance
revenue--Note D...................................... 170,988,000 147,535,000
------------ ------------
Total assets...................................... $703,901,000 $619,959,000
============ ============
Liabilities and Shareholders' Equity
Manufacturing activities:
Current liabilities
Short-term borrowings--Note E........................ $ 69,987,000 $ 58,760,000
Accounts payable..................................... 64,088,000 53,277,000
Accrued liabilities
Compensation and withholding taxes................ 20,293,000 20,949,000
Other............................................. 61,419,000 49,559,000
Income taxes--Note F................................. 10,626,000 4,115,000
------------ ------------
Total current liabilities......................... 226,413,000 186,660,000
Other liabilities
Long-term borrowings--Note E......................... 34,311,000 39,702,000
Deferred income taxes--Note F........................ 22,183,000 17,826,000
------------ ------------
Total manufacturing liabilities................... 282,907,000 244,188,000
------------ ------------
Financial services activities--Borrowings--Note E......... 148,205,000 127,690,000
------------ ------------
Total liabilities................................. 431,112,000 371,878,000
------------ ------------
Shareholders' equity--Notes I and J
Common stock, $1 par value, 90,000,000 shares
authorized, 45,986,000 and 45,832,000 shares issued,
respectively......................................... 45,986,000 45,832,000
Capital in excess of par value......................... 57,138,000 54,464,000
Retained earnings--Note E 190,181,000 162,095,000
Treasury stock, 668,000 and 542,000 shares,
respectively, at cost................................ (14,404,000) (10,949,000)
Deferred stock awards.................................. (1,508,000) (1,046,000)
Foreign currency translation adjustment................ (4,604,000) (2,315,000)
------------ ------------
Total shareholders' equity........................ 272,789,000 248,081,000
------------ ------------
Total liabilities and shareholders' equity........ $703,901,000 $619,959,000
============ ============
</TABLE>
See notes to consolidated financial statements.
F-2
<PAGE>
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the years ended December 31,
------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net sales.......................................... $896,357,000 $816,127,000 $677,228,000
Costs and expenses
Cost of sales.................................... 619,951,000 567,772,000 467,494,000
Selling, general and administrative.............. 173,514,000 152,456,000 131,466,000
------------ ------------ ------------
Operating income................................... 102,892,000 95,899,000 78,268,000
Interest expense................................... (15,359,000) (13,359,000) (8,499,000)
Other income (expense), net--Notes K and L......... 5,882,000 (5,261,000) 412,000
------------ ------------ ------------
Income before income taxes......................... 93,415,000 77,279,000 70,181,000
Income taxes--Note F............................... 31,382,000 25,669,000 23,411,000
------------ ------------ ------------
Net income......................................... $ 62,033,000 $ 51,610,000 $ 46,770,000
============ ============ ============
Net income per share............................... $1.35 $1.13 $1.02
============ ============ ============
Average common shares outstanding.................. 45,952,000 45,859,000 45,957,000
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the years ended December 31,
--------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Operating activities
Net income..................................... $ 62,033,000 $ 51,610,000 $ 46,770,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Gain on sale of subsidiary................ (4,663,000)
Depreciation.............................. 13,201,000 11,806,000 10,302,000
Amortization.............................. 5,209,000 4,085,000 3,971,000
Provision for doubtful accounts........... 1,719,000 1,716,000 1,809,000
Deferred income taxes..................... 4,429,000 2,454,000 3,544,000
Other, net................................ (5,490,000) (1,578,000) 1,547,000
Changes in operating assets and
liabilities net of effects from
acquisitions of companies
Accounts receivable.................... (15,256,000) (6,368,000) (20,050,000)
Inventories............................ (6,168,000) (6,837,000) (4,458,000)
Prepaid expenses....................... 699,000 (669,000) (108,000)
Accounts payable....................... 5,416,000 3,676,000 5,217,000
Accrued liabilities.................... (6,748,000) 4,454,000 2,713,000
Income taxes........................... 6,980,000 (1,402,000) 2,505,000
------------- ------------- ------------
Net cash provided by operating
activities........................ 61,361,000 62,947,000 53,762,000
------------- ------------- ------------
Investing activities
Purchases of properties and equipment.......... (16,889,000) (15,701,000) (11,108,000)
Principal extensions under lease financing
agreements.................................. (119,747,000) (119,833,000) (97,988,000)
Principal collections under lease financing
agreements.................................. 96,294,000 99,536,000 81,182,000
Payments for purchases of companies, net of
cash acquired............................... (27,615,000) (46,611,000) (69,563,000)
Proceeds from sale of subsidiary............... 13,500,000
Other, net..................................... 250,000 (5,478,000) 613,000
------------- ------------- ------------
Net cash used for investing
activities........................ (54,207,000) (88,087,000) (96,864,000)
------------- ------------- ------------
Financing activities
Addition to short-term borrowings.............. 28,892,000 50,970,000 59,699,000
Principal payments on long-term borrowings..... (2,233,000) (3,595,000) (1,811,000)
Principal extensions under long-term
borrowings.................................. 8,018,000 15,000,000
Purchases of treasury stock.................... (6,275,000) (4,130,000) (9,736,000)
Cash dividends paid to shareholders............ (25,487,000) (21,767,000) (18,462,000)
Other, net..................................... 1,030,000 389,000 441,000
------------- ------------- ------------
Net cash provided by (used for)
financing activities.............. (4,073,000) 29,885,000 45,131,000
------------- ------------- ------------
Increase in cash and cash equivalents............ 3,081,000 4,745,000 2,029,000
Cash and cash equivalents at beginning of year... 9,350,000 4,605,000 2,576,000
------------- ------------- ------------
Cash and cash equivalents at end of year......... $ 12,431,000 $ 9,350,000 $ 4,605,000
============= ============= ============
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A--Significant Accounting Policies
Principles of consolidation: The consolidated financial statements include
the accounts of Federal Signal Corporation and all of its subsidiaries.
Cash equivalents: The company considers all highly liquid investments with
a maturity of three months or less, when purchased, to be cash equivalents.
Inventories: Inventories are stated at the lower of cost or market. At
December 31, 1996 and 1995, approximately 51% and 55%, respectively, of the
company's inventories are costed using the LIFO (last-in, first-out) method. The
remaining portion of the company's inventories are costed using th e FIFO
(first-in, first-out) method.
Properties and depreciation: Properties and equipment are stated at cost.
Depreciation, for financial reporting purposes, is computed principally on the
straight-line method over the estimated useful lives of the assets.
Intangible assets: Intangible assets principally consist of costs in excess
of fair values of net assets acquired in purchase transactions and are generally
being amortized over forty years. Accumulated amortization aggregated
$16,995,000 and $12,718,000 at December 31, 1996 and 1995, respecti vely. The
company makes regular periodic assessments to determine if factors are present
which indicate that an impairment of intangibles may exist. If factors indicate
that an impairment may exist, the company makes an estimate of the related
future cash flows. The undiscounted cash flows, excluding interest, are compared
to the related book value including the intangibles. If such cash flows are less
than the book value, the company makes an estimate of the fair value of the
related business to determin e the amount of impairment loss, if any, to be
recorded as a reduction of the recorded intangibles.
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 at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Revenue recognition: Substantially all of the company's sales are recorded
as products are shipped or services are rendered. The percentage-of-completion
method of accounting is used in certain instances for custom-manufactured
products where, due to the nature of specific orders, production a nd delivery
schedules exceed normal schedules.
Income per share: Income per share was computed on the basis of the
weighted average number of common and common equivalent shares (dilutive stock
options) outstanding during the year.
Note B--Inventories
Inventories at December 31 are summarized as follows:
1996 1995
---- ----
Finished goods..................................... $ 23,154,000 $24,675,000
Work in process.................................... 29,088,000 32,286,000
Raw materials...................................... 56,051,000 40,487,000
------------ -----------
Total inventories.................................. $108,293,000 $97,448,000
============ ===========
If the first-in, first-out cost method, which approximates replacement
cost, had been used by the company, inventories would have aggregated
$117,258,000 and $106,934,000 at December 31, 1996 and 1995, respectively.
F-5
<PAGE>
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note C--Properties and Equipment
A comparative summary of properties and equipment at December 31 is as
follows:
1996 1995
---- ----
Land..............................................$ 5,250,000 $ 5,703,000
Buildings and improvements........................ 40,044,000 38,493,000
Machinery and equipment........................... 132,099,000 120,554,000
Accumulated depreciation.......................... (94,568,000) (86,296,000)
------------ ------------
Total properties and equipment....................$ 82,825,000 $ 78,454,000
============ ============
Note D--Lease Financing and Other Receivables
As an added service to its customers, the company is engaged in financial
services activities. These activities primarily consist of providing long-term
financing for certain customers of the company's sign and vehicle operations. A
substantial portion of the lease financing receivables of the Vehicle Group are
due from municipalities. Financing is provided through sales-type lease
contracts with terms which range typically as follows:
Sign-related leases. 3-5 years
Vehicle-related leases...................................... 2-10 years
At the inception of the lease, the company records the product sales price
and related costs and expenses of the sale. Financing revenues are included in
income over the life of the lease. The amounts recorded as lease financing
receivables represent amounts equivalent to normal selling prices less
subsequent customer payments.
Lease financing and other receivables will become due as follows:
$56,242,000 in 1997, $31,994,000 in 1998, $25,963,000 in 1999, $18,624,000 in
2000, $12,400,000 in 2001 and $27,113,000 thereafter. At December 31, 1996 and
1995, unearned finance revenue on these leases aggregated $30,408,000 a nd
$27,378,000, respectively.
Note E--Debt
Short-term borrowings at December 31 consisted of the following:
1996 1995
---- ----
Commercial paper.................................. $ 13,987,000 $ 26,779,000
Notes payable..................................... 198,807,000 157,040,000
Current maturities of long-term debt.............. 5,398,000 2,631,000
------------ ------------
Total short-term borrowings....................... $218,192,000 $186,450,000
============ ============
F-6
<PAGE>
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Long-term borrowings at December 31 consisted of the following:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
4.25% unsecured note payable in quarterly installments
ending in 2001............................................ $ 5,057,000 $ 6,871,000
7.59% unsecured note payable in 2001 ($4,000,000) and 2002
($8,000,000).............................................. 12,000,000 12,000,000
7.99% unsecured note payable in 2004........................ 15,000,000 15,000,000
6.58% unsecured discounted notes payable in annual
installments of $1,000,000 ending in 2001................. 4,374,000 5,094,000
Other....................................................... 3,278,000 3,368,000
----------- -----------
39,709,000 42,333,000
Less current maturities..................................... 5,398,000 2,631,000
----------- -----------
Total long-term borrowings $34,311,000 $39,702,000
=========== ===========
</TABLE>
Aggregate maturities of long-term debt amount to approximately $5,398,000
in 1997, $2,058,000 in 1998, $2,081,000 in 1999, $2,080,000 in 2000 and
$5,092,000 in 2001. The company believes that the fair values of borrowings are
not substantially different from recorded amounts.
The 7.59% and 7.99% notes contain various restrictions relating to
maintenance of minimum working capital, payments of cash dividends, purchases
of the company's stock, and principal and interest of any subordinated debt.
All of the company's retained earnings at December 31, 1996 were free of any
restrictions.
The company paid interest of $15,350,000 in 1996, $13,411,000 in 1995 and
$6,943,000 in 1994. Weighted average interest rates on short-term borrowings
were 5.5% and 5.6% at December 31, 1996 and 1995, respectively. See Note H
regarding the company's utilization of derivative financial instrume nts
relating to outstanding debt.
At December 31, 1996, the company had unused credit lines of $100,000,000,
which expire on January 15, 2000. Commitment fees, paid in lieu of compensating
balances, were insignificant.
Note F--Income Taxes
The provisions for income taxes consisted of the following:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Current:
Federal and foreign....................... $23,814,000 $20,922,000 $17,775,000
State and local........................... 3,139,000 2,293,000 2,092,000
----------- ----------- -----------
26,953,000 23,215,000 19,867,000
Deferred (credit):
Federal and foreign....................... 4,117,000 2,201,000 3,333,000
State and local........................... 312,000 253,000 211,000
----------- ----------- -----------
4,429,000 2,454,000 3,544,000
----------- ----------- -----------
Total income taxes.......................... $31,382,000 $25,669,000 $23,411,000
=========== =========== ===========
</TABLE>
F-7
<PAGE>
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Differences between the statutory federal income tax rate and the effective
income tax rate are summarized below:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Statutory federal income tax rate........................... 35.0% 35.0% 35.0%
State income taxes, net of federal tax benefit.............. 2.4 2.1 2.1
Tax-exempt interest......................................... (2.5) (2.8) (2.6)
Other, net.................................................. (1.3) (1.1) (1.1)
---- ---- ----
Effective income tax rate................................... 33.6% 33.2% 33.4%
==== ==== ====
</TABLE>
The company had net current deferred income tax benefits of $2,883,000 and
$2,956,000 recorded in the balance sheet at December 31, 1996 and 1995,
respectively. The company paid income taxes of $20,509,000 in 1996, $24,940,000
in 1995 and $17,735,000 in 1994.
Deferred tax liabilities (assets) comprised the following at December 31,
1996: Depreciation and amortization--$20,205,000; revenue recognized on lease
financing receivables and custom manufacturing contracts--$4,750,000; accrued
expenses deductible in future periods--$(4,910,000); and other $ (745,000).
Deferred tax liabilities (assets) comprised the following at December 31, 1995:
Depreciation and amortization--$17,065,000; revenue recognized on lease
financing receivables and custom manufacturing contracts--$5,768,000; accrued
expenses deductible in future periods--$(8,844,000); and other $881,000.
Note G--Postretirement Benefits
The company and its subsidiaries sponsor a number of defined benefit
retirement plans covering certain of its salaried employees and hourly employees
not covered by plans under collective bargaining agreements. Benefits under
these plans are primarily based on final average compensation and ye ars of
service as defined within the provisions of the individual plans. The company's
policy is to contribute amounts sufficient to meet the minimum funding
requirements of applicable laws and regulations. The company also participates
in several multiemployer retirement plans which provide benefits to employees
under certain collective bargaining agreements.
U.S. Benefit Plans
Pension expense (credit) is summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Company-sponsored plans
Service cost.......................... $ 2,208,000 $ 1,452,000 $ 1,687,000
Interest cost......................... 3,304,000 2,864,000 2,437,000
Return on plan assets................. (6,769,000) (9,054,000) 581,000
Other amortization and deferral....... 551,000 3,664,000 (5,521,000)
----------- ----------- -----------
(706,000) (1,074,000) (816,000)
Multiemployer plans..................... 550,000 465,000 337,000
----------- ----------- -----------
Total pension expense (credit).......... $ (156,000) $ (609,000) $ (479,000)
=========== =========== ===========
</TABLE>
F-8
<PAGE>
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following summarizes the funded status of the company-sponsored plans
at December 31, 1996 and 1995 and the major assumptions used to determine these
amounts.
<TABLE>
<CAPTION>
Plans in which
--------------
Plan assets ABO exceeds
exceed ABO plan assets
----------- 1996 -----------
----------------------------
<S> <C> <C>
Actuarial present value of:
Vested benefit obligation................................. $27,873,000 $5,180,000
Nonvested benefits........................................ 1,446,000 136,000
----------- ----------
Accumulated benefit obligation (ABO)........................ $29,319,000 $5,316,000
=========== ==========
Actuarial present value of projected benefit obligation..... $38,645,000 $5,316,000
Plan assets at market value................................. 50,644,000 5,122,000
----------- ----------
Plan assets in excess of (less than) projected benefit
obligation................................................ 11,999,000 (194,000)
Unrecognized net obligation at January 1, 1996.............. (2,363,000) 316,000
Unrecognized net experience (gain) loss..................... (7,634,000) 112,000
----------- ----------
Net pension asset........................................... $ 2,002,000 $ 234,000
=========== ==========
</TABLE>
<TABLE>
<CAPTION>
1995
----------------------------
<S> <C> <C>
Actuarial present value of:
Vested benefit obligation................................. $27,427,000 $5,214,000
Nonvested benefits........................................ 1,565,000 120,000
----------- ----------
Accumulated benefit obligation (ABO)........................ $28,992,000 $5,334,000
=========== ==========
Actuarial present value of projected benefit obligation..... $38,803,000 $5,334,000
Plan assets at market value................................. 46,010,000 4,733,000
----------- ----------
Plan assets in excess of (less than) projected benefit
obligation................................................ 7,207,000 (601,000)
Unrecognized net obligation at January 1, 1995.............. (2,618,000) 379,000
Unrecognized net experience (gain) loss..................... (3,363,000) 387,000
----------- ----------
Net pension asset........................................... $ 1,226,000 $ 165,000
=========== ==========
</TABLE>
Plan assets consist principally of a broadly diversified portfolio of
equity securities, corporate and U.S. government obligations and
guaranteed-return insurance contracts.
The following significant assumptions were used in determining pension
costs for the years ended December 31, 1996, 1995 and 1994:
1996 1995 1994
---- ---- ----
Discount rate......................................... 7.2% 8.9% 7.6%
Rate of increase in compensation levels............... 4% 5% 4%
Expected long-term rate of return on plan assets...... 12% 11% 11%
The weighted average discount rates used in determining the actuarial
present value of all pension obligations at December 31, 1996 and 1995 were 7.8%
and 7.2%, respectively.
The company also sponsors a number of defined contribution pension plans
covering a majority of its employees. Participation in the plans is at each
employee's election. Company contributions to these plans are based on a
percentage of employee contributions. The cost of these plans, including the
plans of companies
F-9
<PAGE>
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
acquired during the three-year period ended December 31, 1996, was $3,711,000 in
1996, $2,975,000 in 1995 and $2,900,000 in 1994.
The company also provides certain medical, dental and life benefits to
certain eligible retired employees. These benefits are funded when the claims
are incurred. Participants generally become eligible for these benefits at age
60 after completing at least fifteen years of service. The plan pr ovides for
the payment of specified percentages of medical and dental expenses reduced by
any deductible and payments made by other primary group coverage and government
programs. The corporation will continue to reduce the percentage of the cost of
benefits that it will pay since the company's future costs are limited to 150%
of the 1992 cost. Accumulated postretirement benefit liabilities of $2,688,000
and $2,461,000 at December 31, 1996 and 1995, respectively, were fully accrued.
The net periodic postret irement benefit costs have not been significant during
the three-year period ended December 31, 1996.
Non-U.S. Benefit Plan
The company acquired Victor Products in June 1996. Victor Products sponsors
a defined benefit plan for substantially all of its employees in the United
Kingdom. Benefits under this plan are based on final compensation and years of
service as defined within the provisions of the plan.
Net periodic pension expense under the plan is not significant. The
following table presents the funded status of the plan at September 30, 1996.
Actuarial present value:
Vested benefit obligation................................. $25,441,000
Nonvested benefits........................................ --
-----------
Accumulated benefit obligation (ABO)........................ $25,441,000
===========
Actuarial present value of projected benefit obligation..... $26,067,000
Plan assets at market value................................. 32,014,000
-----------
Plan assets in excess of projected benefit obligation....... 5,947,000
Unrecognized net experience (gain).......................... (1,579,000)
-----------
Net pension asset........................................... $ 4,368,000
===========
Plan assets consist principally of a broadly diversified portfolio of
equity securities, U.K. government obligations and fixed interest securities.
The discount rate used to determine the actuarial present value of the pension
obligation at September 30, 1996 was 8.5%.
Note H--Derivative Financial Instruments
The company enters into agreements (derivative financial instruments) to
manage the risks associated with certain aspects of its business. The company
does not actively trade such instruments nor enter into such agreements for
speculative purposes. The company principally utilizes two types of derivative
financial instruments: 1) interest rate swaps to manage its interest rate risk,
and 2) foreign currency forward exchange contracts to manage risks associated
with sales and purchase commitments
denominated in foreign currencies.
At December 31, 1996, the company had four agreements with financial
institutions to swap interest rates. One agreement, the purpose of which is to
convert variable rate short-term debt to a fixed rate, is based on a notional
amount of $125 million and expires in January 1997. The company pays a fixed
rate of interest of 5.47% and receives the three-month London Interbank Offered
Rate (LIBOR). The second agreement is based on a notional amount of $10 million
and expires in February 1997. The agreement
provides that the company will receive a fixed rate of interest at 5.08% and
will pay interest at the six-month LIBOR with a maximum floating rate of 7.50%
for the last twelve months of the agreement.
F-10
<PAGE>
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The third agreement is based on a notional amount of $25,000,000. This
agreement commences January, 1997 and expires in January 1999, at which time the
counterparty has the one-time right to extend the swap through January, 2001.
The company will pay interest at a fixed rate of 5.99% and recei ve interest at
the three-month LIBOR rate.
The fourth agreement is also based on a notional amount of $25,000,000.
This agreement commences January, 1997, and expires in January, 2000. The
company will pay interest at a fixed rate of interest of 5.92% and will receive
interest at the three-month LIBOR rate, with a cap on the LIBOR rate of 7.50%
throughout the entire term of the swap.
At December 31, 1995, the company had similar swap agreements on notional
amounts totalling $135 million. The differential between the amount received and
the amount paid is accrued as interest rates change and recognized as an
adjustment to interest expense; the related amount payable to or r eceivable
from the counterparties is included in accrued liabilities or other assets. The
estimated cost to terminate these agreements was $231,000 and $237,000 at
December 31, 1996 and 1995, respectively.
At December 31, 1996, the company had foreign currency forward exchange
contracts designated and effective as hedges which become due in various amounts
and at various dates through 1997 totalling $13,206,000. At December 31, 1995
such contracts totalled $17,800,000. All such contracts at Dece mber 31, 1996
and 1995 were for the purpose of hedging purchase or sales commitments.
Unrealized gains and losses on the forward exchange contracts are deferred and
will be recognized in income in the same period as the hedged transaction. The
differences between the contract values and the fair values were insignificant
at December 31, 1996 and 1995.
Note I--Stock-Based Compensation
The company's stock benefit plans, approved by the company's shareholders,
authorize the grant of benefit shares or units to key employees and directors.
The plan approved in 1988 authorizes, until May 1998, the grant of up to
2,737,500 benefit shares or units (as adjusted for subsequent stock splits and
dividends). The plan approved in 1996 authorizes the grant of up to 1,000,000
benefit shares or units until April 2006. These share or unit amounts exclude
amounts which were issued under predecessor
plans. Benefit shares or units include stock options, both incentive and
non-incentive, stock awards and other stock units.
Stock options are primarily granted at the fair market value of the shares
on the date of grant and become exercisable one year after grant at a rate of
one-half annually and are exercisable in full on the second anniversary date.
All options and rights must be exercised within ten years from date of grant. At
the company's discretion, vested stock option holders are permitted to elect an
alternative settlement method in lieu of purchasing common stock at the option
price. The alternative settlement method permits the employee to receive,
without payment to the company, cash, shares of common stock or a combination
thereof equal to the excess of market value of common stock over the option
purchase price.
The company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25). Under APB 25, no
compensation expense is recognized when the exercise price of stock options
equals the market price of the underlying stock on the date of grant.
F-11
<PAGE>
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Stock option activity for the three-year period ended December 31, 1996
follows (number of shares in 000's, prices in dollars per share):
<TABLE>
<CAPTION>
Option shares Weighted-average price
----------------------- -----------------------
1996 1995 1994 1996 1995 1994
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year.... 1,792 1,815 1,694 11.54 11.22 10.05
Granted............................. 519 41 211 24.13 21.06 19.49
Canceled or expired................. (16) (9) (17) 21.24 18.25 15.66
Exercised........................... (110) (55) (73) 10.93 7.32 6.78
----- ----- -----
Outstanding at end of year.......... 2,185 1,792 1,815 14.49 11.54 11.22
===== ===== =====
Exercisable at end of year.......... 1,609 1,615 1,303 11.43 10.81 9.38
</TABLE>
For options outstanding at December 31, 1996, the number (in thousands),
weighted-average exercise prices in dollars per share, and weighted-average
remaining terms were as follows:
<TABLE>
<CAPTION>
Period in which options were granted
------------------------------------------------------
96-95 94-93 92-91 90-89 88-87 Aggregate
----- ----- ----- ----- ----- ---------
<S> <C> <C> <C> <C> <C> <C>
Number............................. 553 380 511 282 459 2,185
Exercise price range:
High............................. 24.75 20.62 15.87 9.75 4.37 24.75
Low.............................. 20.12 16.00 11.17 4.85 3.33 3.33
Weighted-average:
Exercise price................... 23.91 19.70 13.74 7.67 3.87 14.49
Remaining term (years)........... 9 7 5 3 1 6
</TABLE>
For options granted during 1996, the weighted average fair value of options
was $6.13 per share. The fair value of these options was estimated at the grant
date using a Black-Scholes option pricing model with the following weighted
average assumptions: dividend yield of 2.3%, risk-free interes t rate of 6.2%,
market volatility of the company's common stock of .18, and weighted-average
expected life of the option of approximately 7 years. The aggregate number and
fair value of shares granted in 1995 were insignificant. For purposes of pro
forma disclosure, the estimated fair value of the options is amortized to
expense over the option's vesting period. On a pro forma basis, the company's
net income for the year ended December 31, 1996, would have been $61,569,000 or
$1.34 per share. The pro fo rma impact of options granted in 1995 on net income
and net income per share for the year ended December 31, 1995, was
insignificant. The calculated pro forma impact on 1996 and 1995 net income and
net income per share are not necessarily indicative of future amounts until
application of the disclosure rules are applied to all outstanding, nonvested
awards.
The intent of the Black-Scholes option valuation model is to provide
estimates of fair values of traded options which have no vesting restrictions
and are fully transferable. Option valuation models require the use of highly
subjective assumptions including expected stock price volatility. The company
has utilized the Black-Scholes method to produce the pro forma disclosures
required under Financial Accounting Standard No. 123, "Accounting and
Disclosure of Stock-Based Compensation". In management's
opinion, existing valuation models do not necessarily provide a reliable single
measure of the fair value of its employee stock options because the company's
employee stock options have significantly different characteristics from those
of traded options and the assumptions used in applying option valuation
methodologies, including the Black-Scholes model, are highly subjective.
Stock award shares are granted to employees at no cost. Awards primarily
vest at the rate of 25% annually commencing one year from the date of award,
provided the recipient is still employed by the company on the vesting date. The
cost of stock awards, based on the fair market value at the dat e of grant, is
being charged to expense over the four-year vesting period. The company granted
stock award shares of 56,000 in 1996, 10,000
F-12
<PAGE>
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
in 1995 and 43,000 in 1994. The fair values of these shares were $1,385,000,
$202,000, and $813,000, respectively. Compensation expense related to stock
award shares recorded during these periods was $932,000, $844,000, and $777,000,
respectively.
Under the 1988 plan, 383,000 benefit shares or units were available for
future grant at December 31, 1995 with none available for future grant at
December 31, 1996. Under the 1996 plan, 697,000 benefit shares or units were
available for future grant at December 31, 1996.
Note J--Shareholders' Equity
The company has 90,000,000 authorized shares of common stock, $1 par value
and 800,000 authorized and unissued shares of preference stock, $1 par value.
F-13
<PAGE>
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The changes in shareholders' equity for each of the three years in the
period ended December 31, 1996 were as follows:
<TABLE>
<CAPTION>
Foreign
Common Capital in Deferred currency
stock excess of Retained Treasury stock translation
par value par value earnings stock awards adjustment
--------- ---------- -------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993--
45,738,000 shares issued............... $45,738,000 $54,045,000 $105,471,000 $ -- $(1,715,000) $(4,331,000)
Net income............................... 46,770,000
Cash dividends declared.................. (19,103,000)
Exercise of stock options:
Cash proceeds.......................... 67,000 393,000
Exchange of shares..................... 6,000 21,000 (27,000)
Stock awards granted..................... 43,000 770,000 (813,000)
Stock awards canceled.................... (4,000) (59,000) 63,000
Tax benefits related to stock
compensation plans..................... 206,000
Retirement of treasury stock............. (12,000) (213,000) 225,000
Purchases of 466,000 shares of treasury
stock.................................. (9,339,000)
Shares purchased subsequent to December
31, 1993 used to effect 4-for-3 stock
split.................................. (71,000) (1,387,000) 1,458,000
Amortization of deferred stock awards.... 777,000
Foreign currency translation
adjustment............................. 1,552,000
Other.................................... (20,000) (197,000)
----------- ----------- ------------ ------------ ----------- -----------
Balance at December 31, 1994--
45,767,000 shares issued............... 45,767,000 53,756,000 133,138,000 (7,880,000) (1,688,000) (2,779,000)
Net income............................... 51,610,000
Cash dividends declared.................. (22,653,000)
Exercise of stock options:
Cash proceeds.......................... 42,000 312,000
Exchange of shares..................... 14,000 38,000 (52,000)
Stock awards granted..................... 10,000 192,000 (202,000)
Tax benefits related to stock
compensation plans..................... 247,000
Retirement of treasury stock............. (19,000) (437,000) 456,000
Purchases of 147,000 shares of treasury
stock.................................. (3,068,000)
Amortization of deferred stock awards.... 844,000
Foreign currency translation
adjustment............................. 464,000
Other.................................... 18,000 356,000 (405,000)
----------- ----------- ------------ ------------ ----------- -----------
Balance at December 31, 1995--
45,832,000 shares issued 45,832,000 54,464,000 162,095,000 (10,949,000) (1,046,000) (2,315,000)
Net income............................... 62,033,000
Cash dividends declared.................. (33,947,000)
Exercise of stock options:
Cash proceeds.......................... 97,000 1,053,000
Exchange of shares..................... 13,000 39,000 (52,000)
Stock awards granted..................... 56,000 1,329,000 (1,385,000)
Tax benefits related to stock
compensation plans..................... 541,000
Retirement of treasury stock............. (12,000) (276,000) 288,000
Purchases of 126,000 shares of treasury
stock.................................. (3,455,000)
Amortization of deferred stock awards.... 932,000
Foreign currency translation
adjustment............................. (2,289,000)
Other.................................... (12,000) (236,000) (9,000)
----------- ----------- ------------ ------------ ----------- -----------
Balance at December 31, 1996--
45,986,000 shares issued............... $45,986,000 $57,138,000 $190,181,000 $(14,404,000) $(1,508,000) $(4,604,000)
=========== =========== ============ ============ =========== ===========
</TABLE>
In June 1988, the company declared a dividend distribution of one preferred
share purchase right on each share of common stock outstanding on and after July
5, 1988. The rights are not exercisable until the rights
F-14
<PAGE>
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
distribution date, defined as the earlier of: 1) the tenth day following a
public announcement that a person or group of affiliated or associated persons
acquired or obtained the right to acquire beneficial ownership of 20% or more of
the outstanding common stock or 2) the tenth day following the c ommencement or
announcement of an intention to make a tender offer or exchange offer, the
consummation of which would result in the beneficial ownership by a person or
group of 30% or more of such outstanding common shares. Each right, when
exercisable, entitles the holder to purchase from the company one one-hundredth
of a share of Series A Preferred stock of the company at a price of $90 per one
one-hundredth of a preferred share, subject to adjustment. The company is
entitled to redeem the rights at $.10 per right, payable in cash or common
shares, at any time prior to the expiration of twenty days following the public
announcement that a 20% position has been acquired. In the event that the
company is acquired in a merger or other business combination transaction or 50%
or more of its consolidated assets or earning power is sold, proper provision
will be made so that each holder of a right will thereafter have the right to
receive, upon the exercise thereof at the then current exercise price of a
right, that number of shares of common stock of the acquiring company which at
the time of such transaction would have a market value of two times the exercise
price of the right. The rights expire on July 5, 1998 unless earlier redeemed by
the company. Until exercised, the holder of a right, as such, will have no
rights as a shareholder, including, without limitation, the right to vote or to
receive dividends.
Note K--Acquisitions and Divestiture
During the three-year period ended December 31, 1996, the company made the
following acquisitions, principally all for cash. In June 1996, the company
acquired the equity of Victor Industries Limited ("Victor Products"). Victor
Products, headquartered in Newcastle, England, is a manufacturer o f hazardous
area industrial lighting products. The company also made two small Tool Group
acquisitions during the year. As a result of the 1996 acquisitions, the company
recorded approximately $3.6 million of working capital, $10.2 million of fixed
and other assets and $19.0 million of costs in excess of fair values. The
assigned values of these acquisitions are based on preliminary estimates. In
August 1995, the company acquired the net operating assets of Bronto Skylift Oy
Ab ("Bronto"), a Finland-bas ed manufacturer of truckmounted aerial access
platforms for the fire rescue and industrial markets. In December 1995, the
company acquired the assets of the Target Tech brand of warning lights from
Dominion Automotive Industries. Target Tech, now located in Illinois,
manufactures amber signaling products for construction and access vehicles. In
addition to Bronto and Target Tech, the company also made some small Safety
Products Group acquisitions during 1995. As a result of the 1995 acquisitions,
the company recorded approximately $12.7 million of working capital, $12.8
million of fixed and other assets and $36.6 million of costs in excess of fair
values. In June 1994, the company acquired the principal operating assets and
assumed the principal operating liabilities of Peabody Myers Corporation
("Vactor"). Vactor is an Illinois-based manufacturer of municipal combination
catch basin/sewer cleaning vacuum trucks. In May 1994, the company acquired the
principal operating assets and assumed the prin cipal operating liabilities of
Justrite Manufacturing Company, an Illinois-based manufacturer of safety
equipment for the storage, transfer, use and disposal of flammable and hazardous
materials. As a result of the 1994 acquisitions, the company recorded
approximately $9.9 million of working capital, $10.3 million of fixed and other
assets and $49.6 million of costs in excess of fair values.
All of the acquisitions in the three-year period ended December 31, 1996
have been accounted for as purchases. Accordingly, the results of operations of
the acquired companies have been included in the consolidated statements of
income from the effective dates of the acquisitions. Assuming the 1996 and 1995
acquisitions occurred on January 1, 1995, the company estimates that
consolidated net sales would have been increased 2% and 8% in 1996 and 1995,
respectively, while net income would have increased
1% in 1996 and decreased 3% in 1995.
In December 1996, the company sold Bassett Rotary Tool ("Bassett"), its
rotary carbide cutting tool subsidiary for cash. Sales and operating income of
the divested subsidiary in 1996 were $9.4 million and $1.6
F-15
<PAGE>
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
million, respectively. This transaction did not have a material effect on the
results of operations of any of the years presented and the consolidated
statements of income have not been restated.
Note L--Litigation Settlement
On December 29, 1995, the company settled a lawsuit with Duravision, Inc.
and Manufacturers Product Research Group of North America, Inc. for $6.7
million. As a result of the settlement, the company recorded a net after-tax
charge to income of $4.2 million, or $0.09 per share. The charge, incl uded in
other income and expense, was recorded in the fourth quarter of 1995. The
resolution of this case will have no effect on the company's future operating
performance as it involved a discontinued product line. The company is actively
seeking recoveries from its original trial counsel.
Note M--Segment Information
The principal activities of the company's primary industry segments are as
follows:
Safety Products Group: The Safety Products Group produces: a variety of
visual and audible warning and signal devices; paging, local signaling, and
building security, parking and access control systems; and equipment for
storage, transfer, use and disposal of flammable and hazardous materials.
The group's products are sold primarily to industrial, municipal and government
customers.
Sign Group: The Sign Group manufactures for sale or lease illuminated,
non-illuminated and electronic advertising sign displays primarily for
commercial and industrial markets. It also enters into contracts to provide
maintenance service for the signs it manufactures as well as for signs manuf
actured by others.
Tool Group: The Tool Group manufactures a variety of perishable tools which
include die components for the metal stamping industry, a large selection of
precision metal products for nonstamping needs and a line of precision cutting
and deep grooving tools. The group's products are sold predomi nately to
industrial markets.
Vehicle Group: The Vehicle Group manufactures: chassis; fire trucks
including Class A pumpers, mini-pumpers and tankers; airport and other rescue
vehicles, aerial access platforms, ambulances and aerial ladder trucks; a
variety of self-propelled street cleaning vehicles; vacuum loader vehicles and
municipal catch basin/sewer cleaning vacuum trucks. The Vehicle Group sells
primarily to municipal customers, volunteer fire departments and government
customers.
Total revenue by business segment reflects sales to unaffiliated customers,
as reported in the company's consolidated statements of income. Operating
income includes all costs and expenses directly related to the segment
involved. In determining operating income, neither corporate nor interest
expenses were included. Business segment depreciation expense, identifiable
assets and capital expenditures relate to those assets that are utilized by the
respective business segment. Corporate assets consist
principally of cash and cash equivalents, notes and other receivables and fixed
assets. See Note K for a discussion of the company's acquisition and divestiture
activity during the three-year period ended December 31, 1996.
Foreign sales, including export and foreign operations, aggregated
$223,870,000 in 1996, $188,094,000 in 1995 and $129,896,000 in 1994. Export
sales aggregated $95,488,000 in 1996, $85,241,000 in 1995 and $67,341,000 in
1994.
F-16
<PAGE>
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A summary of the company's operations by segment for the three-year period
ended December 31, 1996 is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net sales
Safety Products.................................. $196,567,000 $160,669,000 $135,424,000
Sign............................................. 82,342,000 71,170,000 66,090,000
Tool............................................. 140,911,000 131,776,000 121,657,000
Vehicle.......................................... 476,537,000 452,512,000 354,057,000
------------ ------------ ------------
Total net sales............................... $896,357,000 $816,127,000 $677,228,000
============ ============ ============
Operating income
Safety Products.................................. $ 30,467,000 $ 28,931,000 $ 23,313,000
Sign............................................. 6,743,000 6,131,000 3,988,000
Tool............................................. 31,693,000 28,454,000 23,475,000
Vehicle.......................................... 40,681,000 39,191,000 33,531,000
Corporate expense................................ (6,692,000) (6,808,000) (6,039,000)
------------ ------------ ------------
Total operating income........................ 102,892,000 95,899,000 78,268,000
Interest expense................................... (15,359,000) (13,359,000) (8,499,000)
Other income (expense)............................. 5,882,000 (5,261,000) 412,000
------------ ------------ ------------
Income before income taxes......................... $ 93,415,000 $ 77,279,000 $ 70,181,000
============ ============ ============
Depreciation
Safety Products.................................. $ 3,983,000 $ 3,348,000 $ 2,693,000
Sign............................................. 1,368,000 1,341,000 1,400,000
Tool............................................. 3,068,000 2,740,000 2,386,000
Vehicle.......................................... 4,711,000 4,336,000 3,772,000
Corporate........................................ 71,000 41,000 51,000
------------ ------------ ------------
Total depreciation............................ $ 13,201,000 $ 11,806,000 $ 10,302,000
============ ============ ============
Identifiable assets
Manufacturing activities
Safety Products............................... $164,296,000 $124,765,000 $ 98,438,000
Sign.......................................... 25,510,000 22,303,000 26,771,000
Tool.......................................... 81,368,000 71,312,000 66,729,000
Vehicle....................................... 251,949,000 244,581,000 192,436,000
Corporate..................................... 9,790,000 9,463,000 10,038,000
------------ ------------ ------------
Total manufacturing activities.............. 532,913,000 472,424,000 394,412,000
------------ ------------ ------------
Financial services activities
Sign.......................................... 18,790,000 18,715,000 13,836,000
Vehicle....................................... 152,198,000 128,820,000 113,352,000
------------ ------------ ------------
Total financial services activities......... 170,988,000 147,535,000 127,188,000
------------ ------------ ------------
Total identifiable assets $703,901,000 $619,959,000 $521,600,000
============ ============ ============
Capital expenditures
Safety Products.................................. $ 5,445,000 $ 3,173,000 $ 2,409,000
Sign............................................. 1,696,000 1,454,000 1,218,000
Tool............................................. 4,423,000 7,104,000 4,200,000
Vehicle.......................................... 5,249,000 3,958,000 3,245,000
Corporate........................................ 76,000 12,000 36,000
------------ ------------ ------------
Total capital expenditures.................... $ 16,889,000 $ 15,701,000 $ 11,108,000
============ ============ ============
</TABLE>
F-17
<PAGE>
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A summary of the company's operations by geographic area for the three-year
period ended December 31, 1996 is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
United States
Net sales........................................ $767,975,000 $713,274,000 $614,673,000
Operating income................................. 99,547,000 92,929,000 76,190,000
Identifiable assets.............................. 562,595,000 515,725,000 463,621,000
All foreign (principally Europe, Canada and Japan)
Net sales........................................ $128,382,000 $102,853,000 $ 62,555,000
Operating income................................. 3,345,000 2,970,000 2,078,000
Identifiable assets.............................. 141,306,000 104,234,000 57,979,000
</TABLE>
Note N--Selected Quarterly Data (Unaudited)
<TABLE>
<CAPTION>
For the three month period ended
------------------------------------------------------------------------------------------
1996 1995
------------------------------------------ ------------------------------------------
March June September December March June September December
31 30 30 31 31 30 30 31
----- ---- --------- -------- ----- ---- --------- --------
(in thousands of dollars except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales................ $210,793 $232,272 $230,348 $222,944 $187,132 $199,355 $207,880 $221,760
Gross margin............. 63,130 70,421 70,676 72,179 56,863 61,297 62,813 67,382
Net income............... 11,851 15,978 15,887 18,317(a) 10,793 14,479 14,629 11,709(b)
Per share data:
Net income............. .26 .35 .35 .40(a) .24 .32 .32 .26(b)
Dividends paid......... .145 .145 .145 .145 .125 .125 .125 .125
Market price range
High................. 27 5/8 27 1/4 24 5/8 28 1/4 21 7/8 23 24 1/8 25 7/8
Low.................. 23 3/4 22 1/2 20 7/8 23 1/8 19 5/8 20 3/8 21 1/8 21 3/8
</TABLE>
- ---------------
(a) includes after-tax gain on sale of subsidiary of $2.8 million or $.06 per
share (see Note K)
(b) includes after-tax charge for litigation settlement of $4.2 million or $.09
per share (see Note L)
F-18
<PAGE>
Report of Ernst & Young LLP, Independent Auditors
To the Shareholders and Board of Directors
of Federal Signal Corporation
We have audited the accompanying consolidated balance sheets of Federal
Signal Corporation and subsidiaries as of December 31, 1996 and 1995 and the
related consolidated statements of income and cash flows for each of the three
years in the period ended December 31, 1996. These financial state ments are the
responsibility of the company's management. Our responsibility is to express an
opinion on these 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, ev idence 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, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Federal Signal
Corporation and subsidiaries as of December 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for ea ch of the
three years in the period ended December 31, 1996 in conformity with generally
accepted accounting principles.
Ernst & Young LLP
Chicago, Illinois
January 24, 1997
F-19
<PAGE>
FEDERAL SIGNAL CORPORATION
FINANCIAL REVIEW
Consolidated Results of Operations
Federal Signal Corporation again achieved record levels of net sales, net
income and earnings per share in 1996. Net sales increased to $896.4 million,
10% higher than 1995's $816.1 million. Operating income increased 7% from $95.9
million in 1995 to $102.9 million in 1996. Net income in 1996 of $62.0 million
increased 20% from $51.6 million in 1995. Net income per share for 1996
increased 19% to $1.35 per share compared to $1.13 in 1995 and $1.02 per share
in 1994. Net income in 1996 included a $2.8 million after-tax gain on the sale
of a small tool business while net income in 1995 included a nonrecurring
after-tax charge of $4.2 million related to a litigation settlement. Excluding
these items, earnings increased 6% to $59.2 million, or $1.29 per share, in 1996
from $55.8 million, or $1.22 p er share, in 1995.
The 1996 sales increase of 10% resulted from volume increases of 8%
(including 4% resulting from the acquisition of Victor Products in June 1996 and
Bronto in August 1995) and price increases of 2%. Domestic sales increased 7% in
1996 while foreign sales increased 19%. Excluding Bronto and Vic tor Products,
foreign sales increased 10%. Foreign sales accounted for 25% of the company's
total sales in 1996 compared to 23% of total sales in 1995.
The 1996 sales increase follows a 21% increase in sales in 1995. The
increase in sales in 1995 was due to volume increases of 20% (including 4% from
the acquisition of Bronto) and price increases of 1%. Domestic sales increased
15% in 1995 while foreign sales increased 45%. Excluding Bronto, f oreign sales
increased 22%.
Operating margins have generally increased over the last five years from
10.6% in 1992 to 11.5% in 1996, despite generally declining gross profit margins
as the following table shows:
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(percent of sales)
<S> <C> <C> <C> <C> <C>
Net sales........................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales....................................... 69.2 69.6 69.0 67.8 68.2
----- ----- ----- ----- -----
Gross profit margin................................. 30.8 30.4 31.0 32.2 31.8
Selling, general and administrative expenses........ 19.3 18.6 19.4 20.9 21.2
----- ----- ----- ----- -----
Operating margin.................................... 11.5% 11.8% 11.6% 11.3% 10.6%
===== ===== ===== ===== =====
</TABLE>
Gross profit margins have generally declined principally due to sales of
the Vehicle Group increasing faster than sales of the other groups. The Vehicle
Group normally experiences higher cost of sales percentages but lower operating
expense percentages than the other groups. This trend tempora rily reversed in
1993 due to improving gross margins of three of the company's four groups, most
notably Safety Products and Sign. In 1993 through 1995 reductions in the
percentage of S,G&A expenses occurred as a result of: 1) higher sales with fixed
costs being spread over those higher sales, 2) the increasing percentage of
Vehicle Group sales to total sales, and 3) operational improvements made,
particularly in the Sign Group. In 1996, the Vehicle and Tool groups experienced
improved gross margins largely
as a result of improved productivity. In 1996, the percentage of S,G&A expenses
rose principally due to the increase in new product development expenses
combined with the acquisition of Victor Products.
Because of the varied nature of its operations, the company recognizes that
changes in operating income as a percentage of net sales on a consolidated basis
may sometimes distort its real operating performance. In order to monitor the
operating performance of its operations, the company utiliz es various methods,
one of which is return on net assets. Return on net assets is defined as
operating income divided by the identifiable net assets (total assets of a
business unit less its accounts payable and accrued liabilities).
The company acquires businesses which meet the company's growth and other
strategic objectives. In large part as a result of intangible assets arising
from acquisitions, it is anticipated that businesses acquired will not generate
the same levels of returns as the company's other businesses fo r some time
following their
F-20
<PAGE>
FEDERAL SIGNAL CORPORATION
FINANCIAL REVIEW--(Continued)
respective acquisition. However, the company's strategies include making
constant improvements in all of its businesses. In 1996, the company's
manufacturing operations achieved a 24% return on net assets compared to 28% in
1995. The decline in return was caused largely by recent acquisitions and a n
increase of more than 50% in new product development spending. Excluding these
items, the company's return for 1996 was essentially the same as achieved in
1995.
Interest expense increased $2.0 million in 1996 following an increase of
$4.9 million in 1995. The increase in 1996 was the result of increased
borrowings caused by: 1) approximately $28 million incurred in 1996 and
$15.5 million incurred late in the fourth quarter of 1995 for the acquisition of
companies for cash and 2) $23.5 million increase in financial services assets.
The increase of $4.9 million in 1995 was the result of substantially increased
borrowings caused largely by similar factors: 1)approximately $31 million
incurred due to acquisitions of companies for cash during the first nine months
of 1995, 2) a $20.3 million increase in financial services assets which occurred
during the year, and 3) additional repurchases of the company's common stock.
Weighted average interest rates on short-term borrowings experienced in 1996
were 5.5% compared to 6.0% in 1995.
The company's effective tax rate of 33.6% in 1996 increased from the 1995
and 1994 rates of 33.2% and 33.4%, respectively. The increase in 1996 was due to
an increase in state income taxes resulting from a change in earnings mix and a
lower percentage of tax-exempt interest income. The .2% dec rease in 1995
resulted from tax-exempt interest income becoming a higher percentage of the
company's total income.
At the end of 1996, the company changed its assumptions for discount rates
used in determining the actuarial present values of accumulated and projected
benefit obligations for its United States postretirement plans from 7.2% to
7.8%. This increase resulted from the increase in the interest ra te environment
experienced at the end of 1996. The company expects that the change in
assumptions will not have a significant impact on 1997 results of operations.
Certain of the company's businesses are susceptible to the influences of
seasonal buying or delivery patterns. The company's businesses which tend to
have lower sales in the first calendar quarter compared to other quarters as a
result of these influences are signage, street sweeping, outdoor warning, other
municipal emergency signal products, parking systems and aerial access platform
manufacturing operations.
Group Operations
Domestic markets were stronger in 1996 for all four of the company's
groups. As mentioned previously, foreign sales increased 19% (10% excluding
acquisitions) in 1996. The Safety Products and Tool groups achieved much
improved foreign sales in 1996. For the fourth consecutive year in a row, al l
four groups achieved increases in both sales and earnings.
Safety Products
Safety Products Group sales increased 22% in 1996 resulting from an
increase in sales at all Safety Products companies, plus the acquisition of
Victor Products in June 1996. Domestic sales were up 14% while foreign sales
increased 55%. Earnings increased 5% in 1996 reflecting investment in the
hazardous area lighting market, the start up of a new product development unit
and a temporary interruption in police warning light bar growth. The group's
return on net manufacturing assets was 22% in 1996
compared to 32% in 1995. As noted earlier, the company significantly increased
the total investment in new product development in 1996 and the company's
strategy includes the acquisition of companies which may not initially produce
returns at levels of its existing businesses. Excluding the dilutiv e impact of
Victor Products, which was acquired in mid-1996, and the additional product
development investment, the group's return on net manufacturing assets was 28%.
F-21
<PAGE>
FEDERAL SIGNAL CORPORATION
FINANCIAL REVIEW--(Continued)
Sign
The Sign Group achieved a sales increase of 16% in 1996 and operating
profits increased 10% from $6.1 million in 1995 to $6.7 million; higher costs
incurred on certain major projects reduced margins. As a result of the higher
costs, the group's return on net manufacturing assets decreased from 26% in
1995 to 23% in 1996.
Tool
The die component and precision tooling operations experienced strong
growth in international markets and moderate sales gains in domestic catalog
products. The cutting tool operations also achieved strong gains in earnings in
1996. Overall, the Tool Group achieved a 7% increase in sales and a 11%
increase in income. Domestic sales increased 3% in 1996 while foreign sales
increased 25%. In addition, the Tool Group acquired two strategically
significant companies during the year. As a result of the
group's strong performance, return on net manufacturing assets remained
comparable in 1996 to 1995 at 49% in spite of the acquisitions.
Vehicle
Earnings for the Vehicle Group increased 4% in 1996 on a sales increase of
5%. Domestic sales increased 4% in 1996 and foreign sales increased 9% (3%
excluding Bronto). Fire Rescue sales increased 8% over 1995 but due to unusually
high investment in new products, the initial investment in long -term cost
reduction programs, and a major reorganization at Bronto, earnings were down 8%.
Environmental sales increased 1% while earnings increased 26%. Aggressive
employee-led cost reduction efforts helped produce a strong increase in the
group's gross margin while improving product quality. The group's return on net
manufacturing assets declined from 18% in 1995 to 17% in 1996 as a result of the
Fire Rescue issues enumerated above. Excluding the additional product
development investment made in 1996 , the group's return increased to 19%.
Financial Services Activities
The company maintains a large investment ($171.0 million at December 31,
1996) in lease financing and other receivables which are generated principally
by its vehicle operations with the balance generated by its sign operations.
These assets continued to be conservatively leveraged in accordan ce with the
company's stated financial objectives for these assets for the five-year period
ending December 31, 1996 (see further discussion in Financial Position and Cash
Flow).
Financial services assets have repayment terms generally ranging from two
to ten years. The increases in these assets resulted from increasing sales of
the Vehicle Group as well as continuing greater acceptance by customers of the
benefits of using the company as their source of financing vehi cle purchases.
Financial Position and Cash Flow
The company emphasizes generating strong cash flows from operations. During
1996, cash flow from operations aggregated $61.4 million compared to $62.9
million in 1995 and $53.8 million in 1994. The decrease in cash flow from
operations in 1996 relative to 1995 is largely attributable to 1996 f ourth
quarter receivable collections which were below 1995's fourth quarter and
year-end inventories increased reflecting important purchases of chassis. The
increase in cash flow from operations in 1995 was largely attributed to
increases in sales as well as improvement in the company's operating margin. As
expected, the company's operating working capital (accounts receivable,
inventory and accounts payable) as a percent of sales did not change
significantly during the three-year period ending 1996.
Nevertheless, the company expects further improvement in its operating cash flow
as it continues to focus aggressively on its efficiencies and costs as well as
its working capital management.
F-22
<PAGE>
FEDERAL SIGNAL CORPORATION
FINANCIAL REVIEW--(Continued)
During the 1992-1996 period, the company has utilized its strong cash flows
from operations to: 1) fund in whole or in part strategic acquisitions of
companies operating in markets related to those already served by the company;
2) purchase increasing amounts of equipment principally to provide for further
cost reductions and increased productive capacity for the future as well as
tooling for new products; 3) increase its investment in financial services
activities; 4) pay increasing amounts in cash dividends to shareholders; and 5)
repurchase a small percentage of its outstanding common stock each year.
Cash flows for the five-year period ending December 31, 1996 are summarized
as follows:
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(in millions)
<S> <C> <C> <C> <C> <C>
Cash provided by (used for):
Operating activities......... $ 61.4 $ 62.9 $ 53.8 $ 48.8 $ 40.2
Investing activities......... (54.2) (88.1) (96.9) (38.1) (26.9)
Financing activities......... (4.1) 29.9 45.1 (10.3) (11.2)
</TABLE>
In order to show the distinct characteristics of the company's investment
in its manufacturing activities and its investment in its financial services
activities, the company has presented separately these investments and their
related liabilities. Each of these two types of activities are sup ported by
different percentages of debt and equity.
One of the company's financial objectives is to maintain a strong financial
position. The company defines its goal as normally having a debt to
capitalization ratio of 30% or less for its manufacturing operations. At
December 31, 1996 and 1995, the company's debt to capitalization ratios of it s
manufacturing operations were 28% and 29%, respectively. The company also
believes that its financial assets, due to their overall quality, are capable of
sustaining a leverage ratio of 87%. At December 31, 1996 and 1995, the company's
debt to capitalization ratios for its financial services activities were 87%.
The company intends to maintain this leverage for its financial activities in
the future and at the same time fulfill its financial objective with respect to
its manufacturing debt to capitali zation ratio. These intentions are consistent
with its investment grade credit rating obtained in connection with its
commercial paper program.
As indicated earlier, substantial effort is focused on improving the
utilization of the company's working capital. The company's current ratio for
its manufacturing operations was 1.2 at December 31, 1996 and 1.3 at December
31, 1995. These ratios are slightly lower than those in prior years a s a result
of increased short-term debt. The company anticipates that its financial
resources and major sources of liquidity, including cash flow from operations,
will continue to be adequate to meet its operating and capital needs in addition
to its financial commitments.
F-23
<PAGE>
PROXY FEDERAL SIGNAL CORPORATION PROXY
1415 W. 22ND STREET, OAK BROOK, ILLINOIS 60521
<PAGE>
PROXY FEDERAL SIGNAL CORPORATION PROXY
1415 W. 22ND STREET, OAK BROOK, ILLINOIS 60521
PROXY FOR ANNUAL MEETING OF STOCKHOLDERS ON APRIL 16, 1997
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
Thomas N. McGowen, Jr. and Kim A. Wehrenberg, or either of them, with full power
of substitution, are hereby authorized to vote the shares of Common Stock of
Federal Signal Corporation which the undersigned is entitled to vote at the 1997
Annual Meeting of Stockholders to be held at the Chicago Marriott Hotel -- Oak
Brook, 1401 West 22nd Street on Wednesday, April 16, 1997 at 11:00 a.m., and at
all adjournments thereof as indicated on this card for the proposal described in
the Notice and Proxy Statement for such meeting and in their discretion on other
matters which come before the meeting.
UNLESS OTHERWISE INSTRUCTED, THIS PROXY WILL BE VOTED FOR THE NOMINEES LISTED IN
PROPOSAL 1.
/ / Check here for address change
New Address: _________________
------------------------------
------------------------------
(Continued and TO BE SIGNED on the reverse side.)
<PAGE>
FEDERAL SIGNAL CORPORATION
PLEASE MARK VOTE IN OVAL IN THE FOLLOWING MANNER USING DARK INK ONLY. / /
THIS PROXY WILL BE VOTED IN ACCORDANCE
WITH SPECIFICATIONS MADE. IF NO CHOICES
ARE INDICATED, THIS PROXY WILL BE VOTED
FOR THE NOMINEES LISTED IN PROPOSAL 1.
<TABLE>
<S> <C> <C> <C>
1. ELECTION OF DIRECTORS FOR WITHHOLD FOR ALL (Except Nominee(s) written below)
Nominees: Walter R.
Peirson and / / / / / / _____________________________
Joseph J. Ross
PLEASE VOTE, SIGN, DATE
AND RETURN THIS PROXY CARD
PROMPTLY USING THE ENCLOSED
ENVELOPE.
Date: ___________________________, 1997
Signature(s) __________________________
---------------------------------------
Please sign exactly as name appears hereon.
Joint owners should each sign. Where
applicable, indicate official position or
representative capacity.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted
from the Registrant's consolidated condensed balance sheet as
of December 31, 1996 and consolidated condensed statement of income
for the twelve months ended December 31, 1996, and is qualified in its entirety
by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 12431
<SECURITIES> 0
<RECEIVABLES> 143805
<ALLOWANCES> 2602
<INVENTORY> 108293
<CURRENT-ASSETS> 267006 <F1>
<PP&E> 177393
<DEPRECIATION> 94568
<TOTAL-ASSETS> 703901
<CURRENT-LIABILITIES> 226413 <F1>
<BONDS> 34311
0
0
<COMMON> 45986
<OTHER-SE> 226803
<TOTAL-LIABILITY-AND-EQUITY> 703901
<SALES> 896357
<TOTAL-REVENUES> 896357
<CGS> 619951
<TOTAL-COSTS> 619951
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15359
<INCOME-PRETAX> 93415
<INCOME-TAX> 31382
<INCOME-CONTINUING> 62033
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 62033
<EPS-PRIMARY> 1.35
<EPS-DILUTED> 1.35
<FN>
<F1>MANUFACTURING OPERATIONS ONLY
</FN>
</TABLE>
