<PAGE> 1
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the registrant [X]
Filed by a party other than the registrant [ ]
Check the appropriate box:
[ ] Preliminary proxy statement [ ] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive proxy statement
[ ] Definitive additional materials
[ ] Soliciting material pursuant to Rule 14a-11(c) or Rule 14a-12
FEDERAL SIGNAL CORPORATION
- - --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
- - --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of filing fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and
0-11.
(1) Title of each class of securities to which transaction applies:
- - --------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
- - --------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee
is calculated and state how it was determined):
- - --------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
- - --------------------------------------------------------------------------------
(5) Total fee paid:
- - --------------------------------------------------------------------------------
[ ] Fee paid previously with preliminary materials.
- - --------------------------------------------------------------------------------
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the form or schedule and the date of its filing.
(1) Amount previously paid:
- - --------------------------------------------------------------------------------
(2) Form, schedule or registration statement no.:
- - --------------------------------------------------------------------------------
(3) Filing party:
- - --------------------------------------------------------------------------------
(4) Date filed:
- - --------------------------------------------------------------------------------
<PAGE> 2
[FEDERAL SIGNAL LOGO]
1415 West 22nd Street
Oak Brook, Illinois 60521
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON APRIL 15, 1998
To the Stockholders of
Federal Signal Corporation
The Annual Meeting of Shareholders of Federal Signal Corporation
("Federal") for the year 1998 will be held at the Chicago Marriott Hotel-Oak
Brook, 1401 West 22nd Street, Oak Brook, Illinois, on Wednesday, April 15, 1998,
at 10:00 a.m., local time, for the following purposes:
1. To elect two directors of Federal; and
2. To consider and act on a proposal to amend the Federal Signal
Corporation Stock Benefit Plan to expand the eligibility provision.
3. 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 19, 1998,
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, 1997 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 9, 1998
<PAGE> 3
[FEDERAL SIGNAL LOGO]
1415 West 22nd Street
Oak Brook, Illinois 60521
MAILING DATE
ON OR ABOUT
MARCH 9, 1998
------------------
PROXY STATEMENT FOR ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON APRIL 15, 1998
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 15,
1998, 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, but 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 19, 1998, will be entitled to vote at the meeting. At such
record date, there were outstanding 45,988,557 shares of Common Stock. A
majority of the outstanding shares will constitute a quorum at the meeting.
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> 4
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS
The following table sets forth information as of December 31, 1997 (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) .57%
James A. Lovell, Jr., Director......................... 31,126(3) .07%
Thomas N. McGowen, Jr., Director....................... 34,666 .08%
Walter R. Peirson, Director............................ 29,991(3) .07%
Joseph J. Ross, Director and Executive Officer......... 837,255(3) 1.82%
Richard R. Thomas, Director............................ 132,848(3) .29%
Henry L. Dykema, Executive Officer..................... 37,093(3) .08%
Kim A. Wehrenberg, Executive Officer................... 211,964(3) .46%
Richard L. Ritz, Executive Officer..................... 72,738(3) .16%
Robert W. Racic, Executive Officer..................... 46,289(3) .10%
All Directors and Executive Officers as a group (12
persons).............................................. 1,755,698 3.83%
</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, 17,016; Mr. Peirson, 8,226; Mr. Ross, 306,033; Mr. Dykema,
10,750; Mr. Wehrenberg, 85,425; Mr. Ritz, 42,387; and Mr. Racic, 12,266.
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, 13,375; Mr. Dykema, 14,125; Mr. Wehrenberg, 5,375; Mr.
Ritz, 3,125 and Mr. Racic, 1,363.
2
<PAGE> 5
ELECTION OF DIRECTORS
Federal's Board of Directors consists of six directors divided into three
classes with one class term expiring each year. Mr. Thomas N. McGowen, Jr. and
Mr. Richard R. Thomas are nominated as a Class II directors for election at this
Annual Meeting for a term to expire at the 2001 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:
Thomas N. McGowen, Jr. ........... 72 1974 1998 Mr. McGowen is an attorney. He is
also a director of Energy West
Corporation and Ribi Immunochem
Research, Inc.
Richard R. Thomas................. 64 1994 1998 Mr. Thomas retired in 1994 as
President of the Tool Group of
Federal Signal Corporation and is a
director of TE-CO Tooling Components,
Inc., a tool manufacturer.
Continuing Directors:
J. Patrick Lannan, Jr. ........... 59 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. ............. 69 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). He is a director of AASI
Aircraft Company, a manufacturer of
aircraft, and Power Spectra, Inc., a
manufacturer of high speed
semi-conductor devices.
Joseph J. Ross.................... 52 1986 2000 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................. 71 1987 2000 Mr. Peirson retired in 1989 as
Executive Vice President and as a
director of Amoco Corporation (a
petroleum company).
</TABLE>
- - ---------------
(1) The information contained in this table is based upon information furnished
to Federal by the individuals named above.
3
<PAGE> 6
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, J. 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 Committee are J.
Patrick Lannan, Jr., Chairman, and Walter R. Peirson.
During 1997, 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. McGowen, Jr.,
Chairman, Joseph J. Ross and James A. Lovell, Jr. During 1997, 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 $23,000.
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 $3,000 for consulting for the Tool Group in 1997. 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. This Director retirement plan was terminated
for anyone who becomes a Federal director after October 9, 1997. The maximum
benefit is $15,000 per year for ten years if the director retires after age 70.
4
<PAGE> 7
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 1997 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.................. 1997 $405,000 $294,500 $228,375 55,000 $45,197
Chairman, President 1996 375,000 300,000 222,750 65,000 33,378
and Chief Executive Officer 1995 348,000 334,080 0 0 68,208
Henry L. Dykema................. 1997 197,000 132,975 88,812 12,000 4,719
Vice President and 1996 190,000 113,288 74,250 14,500 5,274
Chief Financial Officer 1995 182,500 95,813 258,750(2) 20,000 3,670
Kim A. Wehrenberg............... 1997 165,000 111,375 88,812 12,000 14,291
Vice President, General 1996 158,000 99,540 86,625 14,500 13,726
Counsel and Secretary 1995 152,000 109,440 0 0 14,646
Richard L. Ritz................. 1997 115,000 67,922 50,750 10,000 12,353
Vice President, Controller 1996 108,000 56,700 49,500 19,500 12,268
1995 101,000 61,358 0 0 12,098
Robert W. Racic................. 1997 107,000 57,178 21,568 5,000 4,800
Vice President, Treasurer 1996 103,000 54,075 22,275 2,000 4,500
1995 99,000 57,544 0 0 4,500
</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, 1997 were: for Mr. Ross 13,375 shares ($289,234), for Mr.
Dykema 14,125 shares ($305,453), for Mr. Wehrenberg 5,375 shares ($116,243),
for Mr. Ritz 3,125 shares ($67,578) and for Mr. Racic 1,363 shares
($29,474). 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 $4,800, $16,337, $24,060, $0; Mr. Dykema
$3,120, $1,599, $0, $0; Mr. Wehrenberg $4,800, $3,491, $0, $6,000; Mr. Ritz
$4,800, $353, $0, $7,200; Mr. Racic $4,800, $0, $0, $0. Of these officers
who put part of their bonus into the Company's supplemental savings plan,
Mr. Wehrenberg invested $111,375, and Mr. Dykema invested $45,000 of their
bonuses in Federal Signal stock.
5
<PAGE> 8
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, 1998,
termination salary under this agreement was $405,000 for Mr. Ross 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 following 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 calculated 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
SECURITIES
UNDERLYING
OPTIONS GRANTED
12/11/97 AT % OF TOTAL GRANT DATE
$20.4375 OPTIONS PRESENT VALUE
PER SHARE EXERCISE GRANTED TO $ BASED ON
OR BASE PRICE AND EMPLOYEES IN BLACK-SCHOLES
NAME EXPIRE 12/11/07 FISCAL YEAR METHOD(2)
---- ------------------ ------------ -------------
<S> <C> <C> <C>
Joseph J. Ross....................................... 55,000 13.4% $269,775
Henry L. Dykema...................................... 12,000 2.9% 58,860
Kim A. Wehrenberg.................................... 12,000 2.9% 58,860
Richard L. Ritz...................................... 10,000 2.5% 49,050
Robert W. Racic...................................... 5,000 1.2% 24,525
</TABLE>
- - ---------------
(1) No SARs were granted. These options become 100% exercisable on the third
anniversary date.
(2) The following assumptions were used under the Black-Scholes method:
volatility .184; risk free rate of return 5.64%; dividend yield 2.3%;
expected life, 6.7 years.
6
<PAGE> 9
OPTION EXERCISES AND YEAR-END VALUE TABLE
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION VALUE
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
FY-END(#) FY-END($)
------------- ----------------
SHARES ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE(#) REALIZED($)(1) UNEXERCISABLE UNEXERCISABLE(2)
---- --------------- -------------- ------------- ----------------
<S> <C> <C> <C> <C>
Joseph J. Ross......................... 351,448(3) $6,973,042 291,033 $2,027,526
92,300 72,362
Henry L. Dykema........................ 0 0 7,250 0
39,250 39,250
Kim A. Wehrenberg...................... 27,224 581,471 81,925 693,404
19,250 14,250
Richard L. Ritz........................ 8,168 148,614 42,387 258,380
24,750 11,875
Robert W. Racic........................ 0 0 11,766 98,176
6,000 5,937
</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 $21.625 on December 31, 1997.
(3) Mr. Ross has a stock option exercise loan totaling $1,962,369, including
$21,826 of interest in 1997 at 6.01%. 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 contribution,
the Internal Revenue Service's full funding limitation prohibits a contribution
to the plan for 1997. 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 paid 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> 10
Security benefits. Estimated credited years of service are as follows: Mr. Ross,
13.5, Mr. Dykema, 2; Mr. Wehrenberg, 10; Mr. Ritz, 12.5 and Mr. Racic, 23.75.
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
- - --------------------------- ---------- ---------- ---------- ---------- ----------
<S> <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, 1997 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 major
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 an average of about 9%
per year for the last five years. The Company's performance in 1997 compared to
1996 was essentially flat; therefore, the Committee determined that there would
be no salary increases for Mr. Ross and the other four officers for 1998.
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 debt 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, except
that the Committee used its discretion to reduce the 1997 bonus of Mr. Ross by
$70,000 because of the Company's stock price decline and flat earnings in 1997.
The officers' bonus targets remain the same for 1998. Therefore, if the
Company's return on capital is the same as it was in 1997, the officers' bonuses
will also be about the same for 1998. The 1997 bonus target achievement was 83%.
The other officers' bonuses generally constitute about 40% of their cash
compensation.
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 ten years the total market value of the
Company has
8
<PAGE> 11
increased about five-fold from about $200 million to approximately $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 three of the last five years, but under performed them in the last
two years. To give the officers an incentive to increase shareholder value and
to compensate them in accordance with such increases in shareholder value, the
Compensation Committee intends to grant the officers additional stock options
and restricted stock awards in 1998. The Committee 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> 12
[GRAPH]
<TABLE>
<CAPTION>
Measurement Period
(Fiscal Year Covered) FSC S&P IND. DJIDI
<S> <C> <C> <C>
1992 100 100 100
1993 134 109 120
1994 133 113 107
1995 172 153 137
1996 175 187 175
1997 151 245 225
</TABLE>
Assumes $100 invested on December 31, 1992 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.
PROPOSED AMENDMENT TO STOCK BENEFIT PLAN
On April 17, 1996 Federal's shareholders approved the Federal Signal Stock
Benefit Plan (the "Plan") to provide stock options, awards and units to "key"
employees of Federal, and below market stock options to Federal directors in
lieu of director fees (the amount below market is equal to the amount of waived
director fees). On December 11, 1997 the Board of Directors of Federal approved
an amendment of the Plan, subject to shareholder approval, to expand
participation in the Plan by deleting the definition of "key" employee. The
purpose of this is to allow a greater number of employees to participate in the
Plan therefore increasing their identification with shareholders and giving them
an incentive to further increase the Company's shareholder value in the future
similar to the almost five fold increase in value achieved over the last nine
years. The amendment would also make directors eligible for full market priced
options and benefits instead of just the below market stock options they can
currently elect in lieu of directors fees. This will allow Federal, at a lower
cost to the Company, to grant benefits to directors in lieu of the director
retirement plan which the directors voted to phase out.
For more information about the Plan, see the Executive Compensation section
of this Proxy Statement and Note I, Stock Based Compensation of the attached
Financial Statements.
The following is the proposed amendment of the Plan showing the current
Plan language being deleted by line outs and the language added by italics.
10
<PAGE> 13
4. ELIGIBILITY
Benefits may be granted to key employees (which term shall be deemed
to include officers) who on the Granting Date (or, with respect to Benefits
that are not incentive stock options, within 30 days thereafter in the
instance of newly hired employees) (i) are in the employ of the corporation
or one of its then subsidiary corporations (the "subsidiaries"), as defined
in Section 425 of the Internal Revenue Code of 1954, as amended (the
"Code"), and Directors (ii) have administrative, managerial, supervisory,
professional, scientific, engineering or similar responsibilities. Below
market stock options may also be granted to any Director of the Corporation
in lieu of part or all of their Directors' fees in accordance with Section
8 of this Plan.
The Amendment will be effective upon the approval of a majority of the
outstanding shares of Common stock voting at the meeting. THE BOARD OF DIRECTORS
RECOMMENDS THAT THE SHAREHOLDERS VOTE FOR THE ADOPTION OF THE AMENDMENT TO THE
PLAN.
INDEPENDENT PUBLIC ACCOUNTANTS
Ernst & Young has been selected by Federal to serve as its independent
public accountants for the fiscal year ending December 31, 1998. 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
questions 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 1999
Annual Meeting of Shareholders, stockholder proposals must be received by
Federal on or before November 20, 1998.
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 and 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> 14
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Operating Results (dollars
in millions):
Net sales................. $924.9 $896.4 $816.1 $677.2 $565.2 $518.2 $466.9 $439.4 $398.4 $361.4 $305.8
Income before income taxes
(a,b)................... $ 84.8 $ 93.4 $ 77.3 $ 70.2 $ 58.8 $ 49.9 $ 45.6 $ 42.5 $ 34.6 $ 28.4 $ 23.8
Income from continuing
operations (a,b)........ $ 59.0 $ 62.0 $ 51.6 $ 46.8 $ 39.8 $ 34.5 $ 31.0 $ 28.1 $ 22.1 $ 18.2 $ 14.5
Operating margin.......... 10.8% 11.5% 11.8% 11.6% 11.3% 10.6% 10.8% 10.8% 10.6% 9.6% 8.6%
Return on average common
shareholders' equity
(a,b)................... 20.6% 23.8% 22.0% 22.3% 21.0% 20.0% 20.0% 20.4% 18.7% 17.0% 14.5%
Common Stock Data (per
share) (c):
Income from continuing
operations--diluted
(d)..................... $ 1.29 $ 1.35 $ 1.13 $ 1.02 $ 0.86 $ 0.75 $ 0.67 $ 0.61 $ 0.48 $ 0.40 $ 0.31
Cash dividends............ $ 0.67 $ 0.58 $ 0.50 $ 0.42 $ 0.36 $ 0.31 $ 0.27 $ 0.22 $ 0.19 $ 0.16 $ 0.15
Market price range:
High.................... $26 3/4 $28 1/4 $25 7/8 $21 3/8 $ 21 $17 5/8 $15 3/16 $10 3/4 $7 1/8 $4 13/16 $4 15/16
Low..................... $19 7/8 $20 7/8 $19 5/8 $16 7/8 $15 3/4 $12 3/8 $9 1/4 $6 3/16 $4 1/4 $3 1/2 $2 7/8
Average common shares
outstanding (in
thousands) (d).......... 45,840 45,885 45,776 45,948 46,155 46,157 46,126 46,038 46,103 45,639 47,137
Financial Position at
Year-End (dollars in
millions):
Working capital (e)....... $ 41.6 $ 40.6 $ 48.8 $ 53.9 $ 52.8 $ 49.5 $ 44.9 $ 42.7 $ 63.8 $ 59.5 $ 53.9
Current ratio (e)......... 1.2 1.2 1.3 1.4 1.5 1.6 1.5 1.5 2.1 2.0 1.9
Total assets.............. $727.9 $703.9 $620.0 $521.6 $405.7 $363.7 $341.2 $295.8 $271.3 $251.1 $233.3
Long-term debt, net of
current portion......... $ 32.1 $ 34.3 $ 39.7 $ 34.9 $ 21.1 $ 16.2 $ 15.6 $ 15.8 $ 16.8 $ 18.6 $ 24.8
Shareholders' equity...... $299.8 $272.8 $248.1 $220.3 $199.2 $179.0 $164.8 $146.4 $130.4 $115.5 $103.2
Debt to capitalization
ratio (e)............... 28% 28% 29% 22% 1% 2% 1% 2% 10% 18% 22%
Other (dollars in millions)
(f):
New business.............. $956.2 $924.6 $780.5 $700.3 $584.2 $510.3 $462.7 $467.6 $429.9 $382.4 $328.3
Backlog................... $308.2 $280.0 $251.4 $261.0 $221.8 $198.0 $203.2 $199.9 $171.7 $140.2 $119.2
Net cash provided by
operating activities.... $ 64.2 $ 61.4 $ 62.9 $ 53.8 $ 48.8 $ 40.2 $ 43.9 $ 48.3 $ 34.6 $ 22.5 $ 20.1
Net cash (used for)
investing activities.... $(38.4) $(54.2) $(88.1) $(96.9) $(38.1) $(26.9) $(47.8) $(14.7) $(24.1) $(20.8) $(37.7)
Net cash provided by (used
for) financing
activities.............. $(27.5) $ (4.1) $ 29.9 $ 45.1 $(10.3) $(11.2) $ 2.5 $(34.6) $ (8.9) $ (3.3) $ 17.8
Capital expenditures...... $ 19.6 $ 16.9 $ 15.7 $ 11.1 $ 10.1 $ 8.8 $ 12.0 $ 8.3 $ 9.2 $ 7.3 $ 6.9
Depreciation.............. $ 14.8 $ 13.2 $ 11.8 $ 10.3 $ 9.2 $ 8.7 $ 8.2 $ 7.8 $ 7.9 $ 7.1 $ 5.5
Employees................. 6,591 6,233 6,015 5,243 4,426 4,268 4,212 4,158 4,142 3,880 3,653
</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) income from continuing operations--diluted and average common shares
outstanding include the effects of shares issuable under the company's stock
option program in accordance with Statement of Financial Accounting
Standards No. 128, "Earnings Per Share", issued in February 1997
(e) manufacturing operations only
(f) continuing operations only
F-1
<PAGE> 15
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1997 1996
---- ----
<S> <C> <C>
ASSETS
Manufacturing activities:
Current assets
Cash and cash equivalents............................ $ 10,686,000 $ 12,431,000
Accounts receivable, net of allowances for doubtful
accounts of $2,527,000 and $2,602,000,
respectively...................................... 142,973,000 141,203,000
Inventories--Note B.................................. 109,383,000 108,293,000
Prepaid expenses..................................... 5,580,000 5,079,000
------------ ------------
Total current assets............................ 268,622,000 267,006,000
Properties and equipment--Note C....................... 84,709,000 82,825,000
Other assets
Intangible assets, net of accumulated amortization... 188,002,000 165,854,000
Other deferred charges and assets.................... 19,482,000 17,228,000
------------ ------------
Total manufacturing assets...................... 560,815,000 532,913,000
------------ ------------
Financial services activities
Lease financing and other receivables, net of
allowances for doubtful accounts of $1,772,000 and
$1,348,000, respectively, and net of unearned finance
revenue--Note D...................................... 167,090,000 170,988,000
------------ ------------
Total assets.................................... $727,905,000 $703,901,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Manufacturing activities:
Current liabilities
Short-term borrowings--Note E........................ $ 86,158,000 $ 69,987,000
Accounts payable..................................... 50,385,000 64,088,000
Accrued liabilities
Compensation and withholding taxes................ 16,278,000 20,293,000
Other............................................. 62,878,000 61,419,000
Income taxes--Note F................................. 11,330,000 10,626,000
------------ ------------
Total current liabilities....................... 227,029,000 226,413,000
Other liabilities
Long-term borrowings--Note E......................... 32,110,000 34,311,000
Deferred income taxes--Note F........................ 23,581,000 22,183,000
------------ ------------
Total manufacturing liabilities................. 282,720,000 282,907,000
------------ ------------
Financial services activities--Borrowings--Note E........... 145,413,000 148,205,000
------------ ------------
Total liabilities............................... 428,133,000 431,112,000
------------ ------------
Shareholders' equity--Notes I and J
Common stock, $1 par value, 90,000,000 shares authorized,
46,501,000 and 45,986,000 shares issued,
respectively........................................... 46,501,000 45,986,000
Capital in excess of par value............................ 61,029,000 57,138,000
Retained earnings--Note E................................. 226,432,000 190,181,000
Treasury stock, 895,000 and 668,000 shares, respectively,
at cost................................................ (19,695,000) (14,404,000)
Deferred stock awards..................................... (1,718,000) (1,508,000)
Foreign currency translation adjustment................... (12,777,000) (4,604,000)
------------ ------------
Total shareholders' equity...................... 299,772,000 272,789,000
------------ ------------
Total liabilities and shareholders' equity...... $727,905,000 $703,901,000
============ ============
</TABLE>
See notes to consolidated financial statements.
F-2
<PAGE> 16
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net sales.......................................... $924,912,000 $896,357,000 $816,127,000
Costs and expenses
Cost of sales................................. 634,068,000 619,951,000 567,772,000
Selling, general and administrative........... 191,170,000 173,514,000 152,456,000
------------ ------------ ------------
Operating income................................... 99,674,000 102,892,000 95,899,000
Interest expense................................... (17,163,000) (15,359,000) (13,359,000)
Other income (expense), net--Notes K and L......... 2,336,000 5,882,000 (5,261,000)
------------ ------------ ------------
Income before income taxes......................... 84,847,000 93,415,000 77,279,000
Income taxes--Note F............................... 25,878,000 31,382,000 25,669,000
------------ ------------ ------------
Net income......................................... $ 58,969,000 $ 62,033,000 $ 51,610,000
============ ============ ============
Basic net income per share......................... $ 1.30 $ 1.37 $ 1.14
============ ============ ============
Diluted net income per share....................... $ 1.29 $ 1.35 $ 1.13
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 17
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Operating activities
Net income.................................... $ 58,969,000 $ 62,033,000 $ 51,610,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Gain on sale of subsidiary................. (4,663,000)
Depreciation............................... 14,789,000 13,201,000 11,806,000
Amortization............................... 5,756,000 5,209,000 4,085,000
Provision for doubtful accounts............ 2,421,000 1,719,000 1,716,000
Deferred income taxes...................... 4,080,000 4,429,000 2,454,000
Other, net................................. (1,392,000) (5,490,000) (1,578,000)
Changes in operating assets and liabilities
net of effects from acquisitions of
companies
Accounts receivable...................... (8,688,000) (15,256,000) (6,368,000)
Inventories.............................. (833,000) (6,168,000) (6,837,000)
Prepaid expenses......................... (528,000) 699,000 (669,000)
Accounts payable......................... (10,839,000) 5,416,000 3,676,000
Accrued liabilities...................... 3,073,000 (6,748,000) 4,454,000
Income taxes............................. (2,611,000) 6,980,000 (1,402,000)
------------- ------------- -------------
Net cash provided by operating
activities.......................... 64,197,000 61,361,000 62,947,000
------------- ------------- -------------
Investing activities
Purchases of properties and equipment......... (19,611,000) (16,889,000) (15,701,000)
Principal extensions under lease financing
agreements................................. (113,148,000) (119,747,000) (119,833,000)
Principal collections under lease financing
agreements................................. 116,622,000 96,294,000 99,536,000
Payments for purchases of companies, net of
cash acquired.............................. (29,601,000) (27,615,000) (46,611,000)
Proceeds from sale of subsidiary.............. 13,500,000
Other, net.................................... 7,341,000 250,000 (5,478,000)
------------- ------------- -------------
Net cash used for investing
activities.......................... (38,397,000) (54,207,000) (88,087,000)
------------- ------------- -------------
Financing activities
Addition to short-term borrowings, net........ 13,601,000 28,892,000 50,970,000
Principal payments on long-term borrowings.... (2,164,000) (2,233,000) (3,595,000)
Principal extensions under long-term
borrowings................................. 8,018,000
Purchases of treasury stock................... (10,204,000) (6,275,000) (4,130,000)
Cash dividends paid to shareholders........... (29,307,000) (25,487,000) (21,767,000)
Other, net.................................... 529,000 1,030,000 389,000
------------- ------------- -------------
Net cash provided by (used for)
financing activities................ (27,545,000) (4,073,000) 29,885,000
------------- ------------- -------------
Increase (decrease) in cash and cash
equivalents................................... (1,745,000) 3,081,000 4,745,000
Cash and cash equivalents at beginning of
year.......................................... 12,431,000 9,350,000 4,605,000
------------- ------------- -------------
Cash and cash equivalents at end of year........ $ 10,686,000 $ 12,431,000 $ 9,350,000
============= ============= =============
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 18
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. All
significant intercompany balances and transactions have been eliminated.
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, 1997 and 1996, approximately 56% and 51%, 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 the 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
$21,505,000 and $16,995,000 at December 31, 1997 and 1996, respectively. 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 determine 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 and delivery
schedules exceed normal schedules.
INCOME PER SHARE: In February 1997, Statement of Financial Accounting
Standards (SFAS) No. 128, "Earnings per Share", modified the calculations of
income per share. This statement requires the calculation and disclosure of
basic and diluted income per share. (See Note N.) All income per share and
weighted average outstanding share amounts have been restated to conform to the
requirements of SFAS No. 128.
NOTE B--INVENTORIES
Inventories at December 31 are summarized as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Finished goods.................................... $ 28,816,000 $ 23,154,000
Work in process................................... 25,043,000 29,088,000
Raw materials..................................... 55,524,000 56,051,000
------------ ------------
Total inventories................................. $109,383,000 $108,293,000
============ ============
</TABLE>
F-5
<PAGE> 19
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
If the first-in, first-out cost method, which approximates replacement
cost, had been used by the company, inventories would have aggregated
$118,351,000 and $117,258,000 at December 31, 1997 and 1996, respectively.
NOTE C--PROPERTIES AND EQUIPMENT
A comparative summary of properties and equipment at December 31 is as
follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Land............................................. $ 5,134,000 $ 5,250,000
Buildings and improvements....................... 40,190,000 40,044,000
Machinery and equipment.......................... 142,043,000 132,099,000
Accumulated depreciation......................... (102,658,000) (94,568,000)
------------- ------------
Total properties and equipment................... $ 84,709,000 $ 82,825,000
============= ============
</TABLE>
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 is
due from municipalities. Financing is provided through sales-type lease
contracts with terms that range typically as follows:
<TABLE>
<S> <C>
Sign-related leases......................................... 3-5 years
Vehicle-related leases...................................... 2-10 years
</TABLE>
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:
$52,979,000 in 1998, $31,584,000 in 1999, $24,155,000 in 2000, $18,688,000 in
2001, $13,062,000 in 2002 and $28,394,000 thereafter. At December 31, 1997 and
1996, unearned finance revenue on these leases aggregated $29,219,000 and
$30,408,000, respectively.
NOTE E--DEBT
Short-term borrowings at December 31 consisted of the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Commercial paper.................................. $ 37,966,000 $ 13,987,000
Notes payable..................................... 191,581,000 198,807,000
Current maturities of long-term debt.............. 2,024,000 5,398,000
------------ ------------
Total short-term borrowings....................... $231,571,000 $218,192,000
============ ============
</TABLE>
F-6
<PAGE> 20
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Long-term borrowings at December 31 consisted of the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
4.25% unsecured note payable in quarterly installments
ending in 2001............................................ $ 3,527,000 $ 5,057,000
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................. 3,607,000 4,374,000
Other....................................................... -- 3,278,000
----------- -----------
34,134,000 39,709,000
Less current maturities..................................... 2,024,000 5,398,000
----------- -----------
Total long-term borrowings.................................. $32,110,000 $34,311,000
=========== ===========
</TABLE>
Aggregate maturities of long-term debt amount to approximately $2,024,000
in 1998, $2,014,000 in 1999, $1,991,000 in 2000, $5,105,000 in 2001, $8,000,000
in 2002 and $15,000,000 thereafter. 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. At
December 31, 1997, all of the company's retained earnings were free of any
restrictions and the company was in compliance with the financial covenants of
its debt agreements.
The company paid interest of $16,800,000 in 1997, $15,350,000 in 1996 and
$13,411,000 in 1995. Weighted average interest rates on short-term borrowings
were 5.8% and 5.5% at December 31, 1997 and 1996, respectively. See Note H
regarding the company's utilization of derivative financial instruments relating
to outstanding debt.
At December 31, 1997, 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>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
CURRENT:
Federal...................................... $17,034,000 $23,452,000 $20,582,000
Foreign...................................... 2,138,000 362,000 340,000
State and local.............................. 2,626,000 3,139,000 2,293,000
----------- ----------- -----------
21,798,000 26,953,000 23,215,000
DEFERRED:
Federal...................................... 1,712,000 3,254,000 1,293,000
Foreign...................................... 1,994,000 863,000 908,000
State and local.............................. 374,000 312,000 253,000
----------- ----------- -----------
4,080,000 4,429,000 2,454,000
----------- ----------- -----------
Total income taxes............................. $25,878,000 $31,382,000 $25,669,000
=========== =========== ===========
</TABLE>
F-7
<PAGE> 21
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>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Statutory federal income tax rate........................... 35.0% 35.0% 35.0%
State income taxes, net of federal tax benefit.............. 2.3 2.4 2.1
Tax-exempt interest......................................... (3.1) (2.5) (2.8)
Foreign sales corporation tax benefits...................... (1.7) (0.7) (0.8)
Other, net.................................................. (2.0) (0.6) (0.3)
---- ---- ----
Effective income tax rate................................... 30.5% 33.6% 33.2%
==== ==== ====
</TABLE>
The company had net current deferred income tax benefits of $201,000 and
$2,883,000 recorded in the balance sheet at December 31, 1997 and 1996,
respectively. The company paid income taxes of $23,354,000 in 1997, $20,509,000
in 1996 and $24,940,000 in 1995.
Net deferred tax liabilities (assets) comprised the following at December
31, 1997: Depreciation and amortization--$23,739,000; revenue recognized on
lease financing receivables and custom manufacturing contracts--$6,681,000;
accrued pension benefits--$2,001,000; accrued expenses deductible in future
periods--$(6,892,000); and other--$(2,149,000).
Net 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).
Income before income taxes consisted of the following:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
United States......................................... $72,165,000 $90,678,000 $73,932,000
Non-U.S............................................... 12,682,000 2,737,000 3,347,000
----------- ----------- -----------
$84,847,000 $93,415,000 $77,279,000
=========== =========== ===========
</TABLE>
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 years 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 that provide defined benefits to
employees under certain collective bargaining agreements.
F-8
<PAGE> 22
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
U.S. BENEFIT PLANS
Pension expense (credit) is summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Company-sponsored plans
Service cost........................................ $ 2,103,000 $ 2,208,000 $ 1,452,000
Interest cost....................................... 3,536,000 3,304,000 2,864,000
Return on plan assets............................... (6,537,000) (6,769,000) (9,054,000)
Other amortization and deferral..................... (303,000) 551,000 3,664,000
----------- ----------- -----------
(1,201,000) (706,000) (1,074,000)
Multiemployer plans................................... 618,000 550,000 465,000
----------- ----------- -----------
Total pension expense (credit)........................ $ (583,000) $ (156,000) $ (609,000)
=========== =========== ===========
</TABLE>
The following summarizes the funded status of the company-sponsored plans
at December 31, 1997 and 1996 and the major assumptions used to determine these
amounts.
<TABLE>
<CAPTION>
PLANS IN WHICH
--------------
PLAN ASSETS ABO EXCEEDS
EXCEED ABO PLAN ASSETS
----------- -----------
1997
-------------------------
<S> <C> <C>
Actuarial present value of:
Vested benefit obligation................................. $34,410,000 $5,819,000
Nonvested benefits........................................ 1,602,000 152,000
----------- ----------
Accumulated benefit obligation (ABO)........................ $36,012,000 $5,971,000
=========== ==========
Actuarial present value of projected benefit obligation..... $47,166,000 $5,971,000
Plan assets at market value................................. 55,403,000 5,487,000
----------- ----------
Plan assets in excess of (less than) projected benefit
obligation................................................ 8,237,000 (484,000)
Unrecognized net (asset) obligation at January 1, 1997...... (2,100,000) 253,000
Unrecognized net experience (gain) loss..................... (2,657,000) 640,000
----------- ----------
Net pension asset........................................... $ 3,480,000 $ 409,000
=========== ==========
</TABLE>
<TABLE>
<CAPTION>
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 (asset) 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>
Plan assets consist principally of a broadly diversified portfolio of
equity securities, corporate and U.S. government obligations and
guaranteed-return insurance contracts. Included in plan assets at December 31,
1997 and 1996 were 653,400 shares of the company's common stock valued at
$14,130,000 and $16,907,000, respectively. Dividends paid on the company's
common stock to the pension trusts aggregated $423,000 and $366,000,
respectively, for the years ended December 31, 1997 and 1996.
F-9
<PAGE> 23
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following significant assumptions were used in determining pension
costs for the years ended December 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Discount rate............................................. 7.8% 7.2% 8.9%
Rate of increase in compensation levels................... 4% 4% 5%
Expected long-term rate of return on plan assets.......... 12% 12% 11%
</TABLE>
The weighted average discount rates used in determining the actuarial
present value of all pension obligations at December 31, 1997 and 1996 were 7.2%
and 7.8%, 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 acquired during the three-year period ended December 31,
1997, was $3,768,000 in 1997, $3,711,000 in 1996 and $2,975,000 in 1995.
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 provides 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 $2,975,000
and $2,688,000 at December 31, 1997 and 1996, respectively, were fully accrued.
The net periodic postretirement benefit costs have not been significant during
the three-year period ended December 31, 1997.
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, 1997 and
1996.
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Actuarial present value:
Vested benefit obligation......................... $30,934,000 $25,441,000
Nonvested benefits................................ -- --
----------- -----------
Accumulated benefit obligation (ABO)................ $30,934,000 $25,441,000
=========== ===========
Actuarial present value of projected benefit
obligation........................................ $32,026,000 $26,067,000
Plan assets at market value......................... 36,397,000 32,014,000
----------- -----------
Plan assets in excess of projected benefit
obligation........................................ 4,371,000 5,947,000
Unrecognized net experience loss (gain)............. 733,000 (1,579,000)
----------- -----------
Net pension asset................................... $ 5,104,000 $ 4,368,000
=========== ===========
</TABLE>
Plan assets consist principally of a broadly diversified portfolio of
equity securities, U.K. government obligations and fixed interest securities.
The discount rates used to determine the actuarial present value of the pension
obligation at September 30, 1997 and 1996 were 7.5% and 8.5%, respectively.
F-10
<PAGE> 24
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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, 1997, the company had three agreements with financial
institutions to swap interest rates.
The first agreement is based on a notional amount of $25,000,000. This
agreement commenced in 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 receive interest at
the three-month LIBOR rate.
The second agreement is also based on a notional amount of $25,000,000.
This agreement commenced in 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.
The third agreement is based on a notional amount of $50,000,000. This
agreement commenced in October 1997 and expires in October 1999. The company
pays interest at a fixed rate of 5.25% and receives interest at the three-month
LIBOR rate. The agreement allows the counterparty to extend the swap at the same
interest rate terms for successive three-month periods beginning in October 1999
and ending in October 2007. If at any three-month extension date the
counterparty decides not to extend the swap, it is terminated and no further
obligations are due by either party.
At December 31, 1996, the company had similar swap agreements on notional
amounts totalling $185 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 receivable from
the counterparties is included in accrued liabilities or other assets. The
estimated cost to terminate these agreements was $735,000 and $231,000 at
December 31, 1997 and 1996, respectively.
At December 31, 1997, the company had foreign currency forward exchange
contracts designated and effective as hedges which become due in various amounts
and at various dates through 1998 totaling $9,073,000. At December 31, 1996 such
contracts totalled $13,206,000. All such contracts at December 31, 1997 and 1996
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, 1997
and 1996.
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 that 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
F-11
<PAGE> 25
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
Stock option activity for the three-year period ended December 31, 1997
follows (number of shares in 000's, prices in dollars per share):
<TABLE>
<CAPTION>
OPTION SHARES WEIGHTED-AVERAGE PRICE
--------------------- ------------------------
1997 1996 1995 1997 1996 1995
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
year........................... 2,185 1,792 1,815 $14.49 $11.54 $11.22
Granted.......................... 411 519 41 $20.80 $24.13 $21.06
Canceled or expired.............. (36) (16) (9) $23.47 $21.24 $18.25
Exercised........................ (524) (110) (55) $ 5.27 $10.93 $ 7.32
----- ----- -----
Outstanding at end of year....... 2,036 2,185 1,792 $17.98 $14.49 $11.54
===== ===== =====
Exercisable at end of year....... 1,332 1,609 1,615 $16.09 $11.43 $10.81
===== ===== =====
</TABLE>
For options outstanding at December 31, 1997, 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
-----------------------------------------------------
97-96 95-94 93-92 91-90 89-88 AGGREGATE
----- ----- ----- ----- ----- ---------
<S> <C> <C> <C> <C> <C> <C>
Number......................... 889 220 348 452 127 2,036
Exercise price range:
High......................... $25.38 $24.38 $20.62 $13.69 $6.92 $25.38
Low.......................... $20.44 $16.00 $12.09 $ 6.61 $3.70 $ 3.70
Weighted-average:
Exercise price............... $22.61 $19.76 $17.80 $11.63 $5.62 $17.98
Remaining term (years)....... 9 7 5 3 2 7
</TABLE>
The weighted average fair value of options granted was $5.06 and $6.13 per
share during 1997 and 1996, respectively. The fair value of those options was
estimated at the grant date using a Black-Scholes option pricing model with the
following weighted average assumptions used for grants in 1997 and 1996; risk
free interest rates of 5.6% and 6.2%, respectively; dividend yield of 2.3%;
market volatility of the company's common stock of .18; and a weighted average
expected life of the options 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 would have been $57,930,000 or $1.26 per share for the year ended
December 31, 1997, and $61,569,000 or $1.34 per share for the year ended
December 31, 1996. The pro forma 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 1997, 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 that 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
F-12
<PAGE> 26
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 date of grant, is
being charged to expense over the four-year vesting period. The company granted
stock award shares of 45,000 in 1997, 56,000 in 1996 and 10,000 in 1995. The
fair values of these shares were $1,181,000, $1,385,000 and $202,000,
respectively. Compensation expense related to stock award shares recorded during
these periods was $971,000, $932,000 and $844,000, 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 and 1997. Under the 1996 plan, 697,000 benefit shares or units
were available for future grant at December 31, 1996 with 258,000 available for
future grant at December 31, 1997.
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> 27
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, 1997 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, 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)
Net income................................ 58,969,000
Cash dividends declared................... (22,718,000)
Exercise of stock options:
Cash proceeds........................... 294,000 1,571,000
Exchange of shares...................... 230,000 672,000 (902,000)
Stock awards granted...................... 45,000 1,136,000 (1,181,000)
Tax benefits related to stock compensation
plans................................... 1,805,000
Retirement of treasury stock.............. (54,000) (1,293,000) 1,347,000
Purchases of 227,000 shares of treasury
stock................................... (5,291,000)
Amortization of deferred stock awards..... 971,000
Foreign currency translation adjustment... (8,173,000)
Other..................................... (445,000)
----------- ----------- ------------ ------------ ----------- ------------
Balance at December 31, 1997--
46,501,000 shares issued................ $46,501,000 $61,029,000 $226,432,000 $(19,695,000) $(1,718,000) $(12,777,000)
=========== =========== ============ ============ =========== ============
</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 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 commencement 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
F-14
<PAGE> 28
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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, 1997, the company made the
following acquisitions, principally all for cash. In July 1997, the company
acquired the equity of Pauluhn Electric Mfg. Co. ("Pauluhn"). Pauluhn, based
near Houston, Texas, is a manufacturer and marketer of hazardous area and
explosion proof electrical products. In October 1997, the company also acquired
the equity of Akusta IFE, Ltd. ("Akusta"). Akusta, based in the United Kingdom,
is a supplier of microprocessor based public address, general alarm, paging and
intercom systems for use in hazardous environments. As a result of the 1997
acquisitions, the company recorded approximately $6.6 million of working
capital, $.8 million of fixed and other assets and $29.2 million of costs in
excess of fair value. The assigned values of these acquisitions are based on
preliminary estimates. In June 1996, the company acquired the equity of Victor
Industries Limited ("Victor Products"). Victor Products, headquartered in
Newcastle, England, is a manufacturer of 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. In August 1995, the company
acquired the net operating assets of Bronto Skylift Oy Ab ("Bronto"), a
Finland-based manufacturer of truck-mounted 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.
All of the acquisitions in the three-year period ended December 31, 1997
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 1997 and 1996
acquisitions occurred January 1, 1996, the company estimates that consolidated
net sales would have increased 2% and 4% in 1997 and 1996, respectively, while
net income would have increased 1% in 1997 and 2% in 1996.
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 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--LEGAL PROCEEDINGS
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 pre-tax charge
included in other income and expense, the after-tax effect of which was $4.2
million, or
F-15
<PAGE> 29
FEDERAL SIGNAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
$0.09 per share. 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.
The company is subject to various claims, other pending and possible legal
actions for product liability and other damages and other matters arising out of
the conduct of the company's business. The company believes, based on current
knowledge and after consultation with counsel, that the outcome of such claims
and actions will not have a material adverse effect on the company's
consolidated financial position or the results of operations.
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; hazardous area lighting;
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
manufactured 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 predominately 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 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, 1997.
Non-U.S. sales, including export and non-U.S. operations, aggregated
$261,218,000 in 1997, $223,870,000 in 1996 and $188,094,000 in 1995. Export
sales aggregated $89,163,000 in 1997, $95,488,000 in 1996 and $85,241,000 in
1995.
F-16
<PAGE> 30
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, 1997 is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net sales
Safety Products.................................. $221,624,000 $196,567,000 $160,669,000
Sign............................................. 66,349,000 82,342,000 71,170,000
Tool............................................. 139,431,000 140,911,000 131,776,000
Vehicle.......................................... 497,508,000 476,537,000 452,512,000
------------ ------------ ------------
Total net sales............................... $924,912,000 $896,357,000 $816,127,000
============ ============ ============
Operating income
Safety Products.................................. $ 29,779,000 $ 30,467,000 $ 28,931,000
Sign............................................. 3,306,000 6,743,000 6,131,000
Tool............................................. 30,841,000 31,693,000 28,454,000
Vehicle.......................................... 42,771,000 40,681,000 39,191,000
Corporate expense................................ (7,023,000) (6,692,000) (6,808,000)
------------ ------------ ------------
Total operating income........................ 99,674,000 102,892,000 95,899,000
Interest expense................................... (17,163,000) (15,359,000) (13,359,000)
Other income (expense)............................. 2,336,000 5,882,000 (5,261,000)
------------ ------------ ------------
Income before income taxes......................... $ 84,847,000 $ 93,415,000 $ 77,279,000
============ ============ ============
Depreciation
Safety Products.................................. $ 5,123,000 $ 3,983,000 $ 3,348,000
Sign............................................. 1,468,000 1,368,000 1,341,000
Tool............................................. 3,272,000 3,068,000 2,740,000
Vehicle.......................................... 4,889,000 4,711,000 4,336,000
Corporate........................................ 37,000 71,000 41,000
------------ ------------ ------------
Total depreciation............................ $ 14,789,000 $ 13,201,000 $ 11,806,000
============ ============ ============
Identifiable assets
Manufacturing activities
Safety Products............................... $199,113,000 $164,296,000 $124,765,000
Sign.......................................... 21,485,000 25,510,000 22,303,000
Tool.......................................... 80,554,000 81,368,000 71,312,000
Vehicle....................................... 248,470,000 251,949,000 244,581,000
Corporate..................................... 11,193,000 9,790,000 9,463,000
------------ ------------ ------------
Total manufacturing activities.............. 560,815,000 532,913,000 472,424,000
------------ ------------ ------------
Financial services activities
Sign.......................................... 10,547,000 18,790,000 18,715,000
Vehicle....................................... 156,543,000 152,198,000 128,820,000
------------ ------------ ------------
Total financial services activities........... 167,090,000 170,988,000 147,535,000
------------ ------------ ------------
Total identifiable assets........................ $727,905,000 $703,901,000 $619,959,000
============ ============ ============
Capital expenditures
Safety Products.................................. $ 8,232,000 $ 5,445,000 $ 3,173,000
Sign............................................. 1,430,000 1,696,000 1,454,000
Tool............................................. 5,127,000 4,423,000 7,104,000
Vehicle.......................................... 4,739,000 5,249,000 3,958,000
Corporate........................................ 83,000 76,000 12,000
------------ ------------ ------------
Total capital expenditures.................... $ 19,611,000 $ 16,889,000 $ 15,701,000
============ ============ ============
</TABLE>
F-17
<PAGE> 31
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, 1997 is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
UNITED STATES
Net sales........................................ $752,857,000 $767,975,000 $713,274,000
Operating income................................. 85,849,000 99,547,000 92,929,000
Identifiable assets.............................. 576,972,000 562,595,000 515,725,000
ALL NON-U.S. (principally Europe)
Net sales........................................ $172,055,000 $128,382,000 $102,853,000
Operating income................................. 13,825,000 3,345,000 2,970,000
Identifiable assets.............................. 150,933,000 141,306,000 104,234,000
</TABLE>
NOTE N--EARNINGS PER SHARE
The following table summarizes the information used in computing basic and
diluted income per share:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
---------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Numerator for both basic and diluted income per share
computations--net income............................ $58,969,000 $62,033,000 $51,610,000
=========== =========== ===========
Denominator for basic income per share--weighted
average shares outstanding.......................... 45,332,000 45,362,000 45,313,000
Effect of employee stock options (dilutive potential
common shares)...................................... 508,000 523,000 463,000
----------- ----------- -----------
Denominator for diluted income per share--adjusted
shares.............................................. 45,840,000 45,885,000 45,776,000
=========== =========== ===========
</TABLE>
NOTE O--COMMITMENTS
The company leases certain facilities and equipment under operating leases,
some of which contain options to renew. Total rental expense on all operating
leases was $7,613,000 in 1997, $7,671,000 in 1996 and $6,717,000 in 1995.
Sublease income and contingent rentals relating to operating leases were
insignificant. At December 31, 1997, minimum future rental commitments under
operating leases having noncancelable lease terms in excess of one year
aggregated $31,873,000 payable as follows: $6,779,000 in 1998, $5,460,000 in
1999, $3,862,000 in 2000, $2,677,000 in 2001, $1,873,000 in 2002 and $11,222,000
thereafter.
NOTE P--SELECTED QUARTERLY DATA (UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE-MONTH PERIOD ENDED
---------------------------------------------------------------------------------------
1997 1996
------------------------------------------ ------------------------------------------
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............... $224,485 $236,156 $229,318 $234,953 $210,793 $232,272 $230,348 $222,944
Gross margin............ 70,424 77,263 71,764 71,393 63,130 70,421 70,676 72,179
Net income.............. 13,616 16,059 15,970 13,324 11,851 15,978 15,887 18,317(a)
Per share data:
Net income--diluted... .30 .35 .35 .29 .26 .35 .35 .40(a)
Dividends paid........ .1675 .1675 .1675 .1675 .145 .145 .145 .145
Market price range
High................ 26 3/4 26 3/8 26 7/16 25 1/2 27 5/8 27 1/4 24 5/8 28 1/4
Low................. 23 1/4 23 5/8 24 3/16 19 7/8 23 3/4 22 1/2 20 7/8 23 1/8
</TABLE>
- - ---------------
(a) includes after-tax gain on sale of subsidiary of $2.8 million or $.06 per
share (see Note K)
F-18
<PAGE> 32
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, 1997 and 1996 and the
related consolidated statements of income and cash flows for each of the three
years in the period ended December 31, 1997. These financial statements 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, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, 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, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997 in conformity with generally
accepted accounting principles.
Ernst & Young LLP
Chicago, Illinois
January 26, 1998
F-19
<PAGE> 33
FEDERAL SIGNAL CORPORATION
FINANCIAL REVIEW
CONSOLIDATED RESULTS OF OPERATIONS
In 1997, Federal Signal Corporation's net sales increased to $924.9
million, 3% higher than 1996's $896.4 million. Net income in 1997 was $59.0
million, or $1.29 per share on a diluted basis. This compares to 1996's net
income of $62.0 million, or $1.35 per share, which included a $2.8 million, or
$.06 per share, after-tax gain on the sale of a small tool business. Excluding
this item in 1996, income and diluted income per share were essentially even
with 1996's results. Sales in 1996 increased 10% above the $816.1 million
recorded in 1995 while net income increased 20% in 1996 over the $51.6 million
achieved in 1995. Net income in 1995 included a nonrecurring after-tax charge of
$4.2 million, or $.09 per share, related to a litigation settlement. Excluding
this charge in 1995 and the after-tax gain in 1996 from the sale of the small
tool subsidiary, 1996 earnings increased 6% to $59.2 million, or $1.29 per
share, in 1996 from $55.8 million, or $1.22 per share, in 1995.
The 1997 sales increase of 3% resulted from price increases of 2%, a 2%
increase resulting from acquisitions of businesses and a 1% decline in volume.
Sales to customers in the United States declined 1% in 1997 while sales to
non-U.S. customers increased 17%.
Sales increased 10% in 1996 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%. Sales to U.S. customers increased 7% in
1996 while non-U.S. sales increased 19%. Excluding Bronto and Victor Products,
non-U.S. sales increased 10% in 1996.
Over the last ten years, the company has seen operating margins generally
increase from 8.6% in 1987 to 10.8% in 1997. Operating margins continued to
generally increase in 1993 through 1995 but declined in 1996 and 1997 as the
following table illustrates. During the same ten-year period, gross profit
margins have generally declined as a result of increasing growth in the Vehicle
Group sales outpacing the growth in sales of the other groups. The Vehicle Group
normally experiences higher cost of sales percentages but lower operating
expense percentages than the other groups.
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(PERCENT OF SALES)
<S> <C> <C> <C> <C> <C>
Net sales............................................. 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales......................................... 68.6 69.2 69.6 69.0 67.8
----- ----- ----- ----- -----
Gross profit margin................................... 31.4 30.8 30.4 31.0 32.2
Selling, general and administrative (SG&A)expenses.... 20.6 19.3 18.6 19.4 20.9
----- ----- ----- ----- -----
Operating margin...................................... 10.8% 11.5% 11.8% 11.6% 11.3%
===== ===== ===== ===== =====
</TABLE>
The company emphasizes gross margin ratios and ratios of SG&A expenses to
sales in managing its respective businesses. The distinct differences in the
cost structures of the company's businesses and varying growth rates, including
those caused by acquisitions, can affect the comparisons between years in the
gross margin and SG&A ratios. Accordingly, the company will continue to focus
primarily on improving operating margins when reviewing its total company
performance. Gross margins and the percentage of SG&A expenses declined during
the period 1993-1995 largely as a result of the growth in Vehicle Group sales.
The company's operating margin improved during this three-year period as a
result of operational improvements made, particularly in the Sign Group, as well
as the effect of higher total company sales volumes. Gross margins improved in
1996 as the Vehicle and Tool groups experienced much improved productivity.
Though gross margins improved, the increase in new product development expenses
combined with the acquisition of Victor Products increased the percentage of
SG&A expenses and reduced the company's overall operating margin in 1996. In
1997, gross margins and the ratio of SG&A expenses both increased again largely
as a result of: 1) the effects of the acquisitions of Victor Products and
Pauluhn and 2) the additive effect on gross margin and SG&A expenses from
significant commissions relating to certain large fire rescue vehicle sales. New
product development expenses in 1997 continued at a level similar to that
incurred in 1996. In 1997,
F-20
<PAGE> 34
FEDERAL SIGNAL CORPORATION
FINANCIAL REVIEW--(CONTINUED)
significant operational issues in the Vehicle Group adversely affected the
company's gross margins and operating margins. These issues are discussed in the
"Group Operations" section of this report. In 1997, operating margins of the
company's non-U.S. operations improved significantly while those of the U.S.
operations declined (see "Group Operations" section). In looking at total
profitability of the company's U.S. and non-U.S. operations, the company
recognizes that some of its U.S. operations have benefited from selling their
products through distribution channels of non-U.S. operations.
Interest expense increased $1.8 million in 1997 following an increase of
$2.0 million in 1996. These increases were largely the result of increased
borrowings caused by: 1) approximately $30 million incurred in 1997 and $28
million incurred in 1996 for the acquisition of companies for cash and 2) a
$23.5 million increase in financial services assets during 1996. Weighted
average interest rates on short-term borrowings were 5.8% in 1997 and 5.5% in
1996.
The company's effective tax rate of 30.5% in 1997 declined from the 33.6%
in 1996 and 33.2% in 1995. The 1997 effective rate declined for several reasons.
Chief among them were the following: 1) 1997 foreign sales and profits and
certain of its tax-exempt revenues increased at rates much higher than its other
taxable income; and 2) in 1997, the company recorded benefits relating to its
amendment of certain previously filed federal income tax returns based upon a
refined method of determining income on its export sales. The increase in the
effective tax rate 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.
At the end of 1997, 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. The company
reduced the discount rate to 7.2% from the 7.8% used at the end of 1996 because
of the lower interest rate environment experienced at the end of 1997. The
company expects that the change in assumptions will not have a significant
impact on 1998 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,
municipal emergency signal products, parking systems and fire rescue products.
GROUP OPERATIONS
Safety Products and Vehicle group sales increased in 1997 while Sign and
Tool group sales declined. Vehicle Group earnings increased with the other
groups experiencing lower income in 1997. Earnings and operating margins of the
company's non-U.S. operations increased significantly in 1997 largely on the
strength of the Vehicle Group's improved sales and productivity. Sales and
operating income of the company's U.S. operations declined 3% and 14% in 1997,
due in large part to the effects of supplier- and labor-related problems
experienced by the company's U.S. manufacturer of fire rescue products
(discussed below).
Safety Products
Safety Products Group sales increased 13% while operating income declined
2%. About half of the sales increase was attributable to the acquisitions of
Pauluhn Electric Mfg. Co. and Akusta IFE, Ltd. made in the second half of 1997.
The group's earnings declined as a result of: 1) lower profitability of
hazardous material container unit sales which experienced heavy price pressure
and 2) substantial one-time costs incurred by Victor Products, the group's
United Kingdom-based industrial lighting products unit, which consolidated its
two manufacturing operations during the year. While hazardous material container
prices are not expected to rebound in the near term, the group has taken actions
to moderate the impact of reduced prices on its profitability by aggressively
reducing its costs, broadening its product line and offering new services to its
customers. In 1996, the group significantly increased its investment in the
development of new products and
F-21
<PAGE> 35
FEDERAL SIGNAL CORPORATION
FINANCIAL REVIEW--(CONTINUED)
continued with a similarly high level of investment in 1997. Police warning
light bar sales, which were weak in 1996, rebounded in 1997. The group's sales
to U.S. customers increased 11% in 1997 and 14% in 1996; about half of the 1997
increase resulted from the acquisition of Pauluhn. Sales to non-U.S. customers
increased 17% in 1997 and 55% in 1996; both of these results were largely driven
by the group's acquisition of Victor Products.
Sign
In 1997, the Sign Group's sales declined 19% and earnings fell 51%. The
group's margins declined largely because of the lower sales volume. These
results followed the group's record 1996 results, which saw sales increase 16%
and operating income increase 10% over 1995. While the group's markets generally
remained active, the Sign Group's 1996 success in obtaining significant orders
was followed in 1997 by order cancellations and order deferrals into 1998. The
group's strategic focus on large projects is expected to cause higher
variability in its sales and earnings levels from year to year and quarter to
quarter.
Tool
Tool Group sales declined 1% and earnings declined 3% in 1997. Sales and
earnings comparisons to 1996 were affected by the reduction caused by the
disposition of a small tool business at the end of 1996 and the addition of two
smaller businesses during the latter half of 1996. Excluding the effects of the
acquisitions and disposal, the group's sales and earnings both increased
modestly in 1997. These results follow the 7% increase in sales and 11% increase
in income achieved by the group in 1996, which were driven by strong growth in
international markets and moderate sales gains in domestic catalog products.
Vehicle
Vehicle Group sales increased 4% in 1997 and operating income increased 5%.
These increases are comparable to the 1996 increase of 5% in sales and 4% in
income over 1995's results. The group's 1997 sales to U.S. customers were about
even with the prior year while sales outside the U.S. increased 17%. Fire Rescue
sales increased 4% in 1997 reflecting a 5% decline in sales to U.S. customers
and a 25% increase in sales to non-U.S. customers. The high percentage increase
in non-U.S. sales was a result of an unusually high mix of foreign orders in the
group's 1997 beginning backlog. Environmental Products sales increased 5% in
1997 with both U.S. and non-U.S. sales increasing at about the same rate over
1996. The group's U.S.-based fire rescue operations saw earnings decline sharply
as productivity suffered due to critical shortages of long-lead time components
and a union-organizing campaign. The issues surrounding critical component
shortages stemmed from supplier-based decisions affecting chassis and related
parts availability and are expected to abate considerably in the first half of
1998. No significant disruptions are expected from union-organizing activities
in 1998. Offsetting the decline in domestic fire rescue earnings in 1997 were
significantly improved results of the group's European fire rescue and street
sweeper operations. Each saw sales and earnings improve dramatically due to
improved market conditions and significantly improved productivity.
FINANCIAL SERVICES ACTIVITIES
The company maintains a large investment ($167.1 million and $171.0 million
at December 31, 1997 and 1996, respectively) 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 accordance with the company's stated financial
objectives for these assets for the five-year period ending December 31, 1997
(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 vehicle purchases.
F-22
<PAGE> 36
FEDERAL SIGNAL CORPORATION
FINANCIAL REVIEW--(CONTINUED)
FINANCIAL POSITION AND CASH FLOW
The company emphasizes generating strong cash flows from operations. During
1997, cash flow from operations reached a record $64.2 million compared to $61.4
million in 1996 and $62.9 million in 1995. As expected, the company's primary
working capital (accounts receivable and inventory less accounts payable) as a
percent of sales did not change significantly during the three-year period
ending 1997. 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.
During the 1993-1997 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, 1997 are summarized
as follows:
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Cash provided by (used for):
Operating activities................ $ 64.2 $ 61.4 $ 62.9 $ 53.8 $ 48.8
Investing activities................ (38.4) (54.2) (88.1) (96.9) (38.1)
Financing activities................ (27.5) (4.1) 29.9 45.1 (10.3)
</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 is supported by
different percentages of debt and equity.
One of the company's financial objectives is to maintain a strong financial
position. At both December 31, 1997 and 1996, the company's debt to
capitalization ratio of its manufacturing operations was 28%. The company also
believes that its financial assets, due to their overall quality, are capable of
sustaining a leverage ratio of 87%. At both December 31, 1997 and 1996, the
company's debt to capitalization ratio for its financial services activities was
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 capitalization 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 both December 31, 1997 and 1996. These
ratios are slightly lower than those in prior years as 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.
OTHER MATTERS
The company has observed that recent events in the financial markets
relating to the Asia/Pacific Rim region have generated interest in the potential
impact on the company's future sales and earnings. In 1997, sales made by the
company to customers in this region approximated 6% of total company sales. The
company believes that the effect on the company's 1998 sales and earnings
resulting from economic uncertainty in the Asia/Pacific Rim region will not be
significant.
F-23
<PAGE> 37
FEDERAL SIGNAL CORPORATION
FINANCIAL REVIEW--(CONTINUED)
In early January 1998, the company completed two acquisitions in its
Vehicle Group: Five Star Manufacturing and Saulsbury Manufacturing. The company
acquired both of these businesses for cash totaling approximately $23.5 million.
Preliminary asset values have not yet been determined. Combined sales of these
businesses for the year ended December 31, 1997 were approximately $40 million.
Five Star manufactures street sweepers. Saulsbury manufactures stainless steel
fire apparatus. Sales and earnings from these businesses will be included in the
company's results beginning in January 1998.
In the normal course of business, the company has made and will continue to
make investments to improve the effectiveness of computer software and hardware
utilized in operating its businesses. The company has determined that some of
the software and hardware utilized in its businesses are not capable of
supporting transactions requiring designation with the year 2000 in a date field
("Year-2000 problem"). The company is continuing its process of making
modifications to its systems, including replacement of certain hardware and
software. Nearly all completed and planned expenditures for replacement hardware
and software, while rectifying the Year-2000 problem, have been or will be made
to provide substantial operating benefits to the company. The company has also
made modifications to internally developed or maintained software to rectify the
Year-2000 problem, the costs of which have been insignificant. Based upon its
progress to date and planned actions yet to be taken, the company believes that
no significant disruption will occur in its businesses relating to the year
2000. The company expects that the aggregate of past and planned expenditures
incurred primarily to rectify year-2000 deficiencies will be insignificant.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" and No.
131, "Disclosures about Segments of an Enterprise and Related Information".
Comprehensive income is defined as "the change in equity (net assets) of a
business enterprise during a period from transactions and other events and
circumstances from nonowner sources. It includes all changes in equity during a
period except those resulting from investments by owners and distributions to
owners." The company is required to adopt the provisions of Statement No. 130 at
the beginning of 1998. At this time, the company anticipates that the items
included in comprehensive income will be those items included in net income and
foreign currency translation adjustments currently reported in the company's
changes in shareholders' equity.
The company has not fully evaluated the provisions of Statement No. 131
with regard to determining reportable segments under that statement. The company
is required to adopt the provisions of Statement No. 131 for the year ending
December 31, 1998 but has not yet determined if it will apply such provisions to
interim financial statements issued during the year then ending.
The Securities and Exchange Commission issued new regulations that require
public companies to expand disclosures regarding the market risk associated with
financial instruments, which include derivatives. The company makes limited use
of derivative financial instruments. These uses are intended to manage the
company's exposures to unfavorable changes in receivables or payables
denominated in non-functional currencies and to increases in rates of interest
paid on the company's variable-rate debt. The company does not actively trade
derivative financial instruments nor enter such instruments for speculative
purposes. The company will be required to expand its disclosures relating to
financial instruments in its 1998 annual report.
F-24
<PAGE> 38
<TABLE>
<S><C>
[ ]
SHARES
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 AND FOR PROPOSAL 2.
WITHHOLD
1. ELECTION OF DIRECTORS-- FOR ALL FOR ALL (Except Nominee(s) written below)
Nominees: Thomas N. McGowen, Jr. and [ ] [ ] [ ]
Richard R. Thomas
______________________________________________
2. APPROVAL OF AMENDMENT TO THE FEDERAL SIGNAL FOR AGAINST ABSTAIN
CORPORATION STOCK BENEFIT PLAN. [ ] [ ] [ ]
PLEASE VOTE, SIGN, DATE AND RETURN THIS PROXY
CARD PROMPTLY USING THE ENCLOSED ENVELOPE.
Dated: _______________________, 1998
Signature(s)___________________________________
_______________________________________________
Please sign exactly as name appears hereon,
joint owners should each sign. Where
applicable, indicate official position or
representative capacity.
</TABLE>
- FOLD AND DETACH HERE -
YOUR VOTE IS IMPORTANT!
PLEASE VOTE, SIGN, DATE AND RETURN THIS PROXY PROMPTLY
USING THE ENCLOSED ENVELOPE.
<PAGE> 39
PROXY FEDERAL SIGNAL CORPORATION PROXY
1415 W. 22ND STREET, OAK BROOK, ILLINOIS 60523
PROXY FOR ANNUAL MEETING OF STOCKHOLDERS ON APRIL 15, 1998
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
Joseph J. Ross 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 1998
Annual Meeting of Stockholders to be held at the Chicago Marriott Hotel--Oak
Brook, 1401 West 22nd Street on Wednesday, April 15, 1998 at 10:00 a.m., and
at all adjournments thereof as indicated on this card for the proposals
described in the Notice and Proxy Statement for such meeting and in their
discretion on other matters which may properly come before the meeting.
UNLESS OTHERWISE INSTRUCTED, THIS PROXY WILL BE VOTED FOR THE NOMINEES LISTED
IN PROPOSAL 1 AND FOR PROPOSAL 2.
<TABLE>
<S><C>
[ ] Check here for address change.
New Address: ______________________
___________________________________
(Continued and TO BE SIGNED on reverse side.) ___________________________________
</TABLE>
<PAGE> 40
[FEDERAL SIGNAL LOGO]
FEDERAL SIGNAL CORPORATION
AND SUBSIDIARIES
1997 Consolidated Financial Statements
Federal Signal Corporation
1415 West 22nd Street
Oak Brook, IL 60523-2004
Phone: 630-954-2000
