-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DEtWWQABm5sIMK4e/SPU24Xv3qiVm5ejAOQrHsZ5FGc8MRqqbJ0roC6m3cXzmg2H f/YqwnixORRUOX3Rz9/z8g== 0000950131-98-003574.txt : 19980529 0000950131-98-003574.hdr.sgml : 19980529 ACCESSION NUMBER: 0000950131-98-003574 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19980227 FILED AS OF DATE: 19980528 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: STEELCASE INC CENTRAL INDEX KEY: 0001050825 STANDARD INDUSTRIAL CLASSIFICATION: OFFICE FURNITURE (NO WOOD) [2522] IRS NUMBER: 380819050 STATE OF INCORPORATION: MI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-13873 FILM NUMBER: 98633012 BUSINESS ADDRESS: STREET 1: 901 44TH ST CITY: GRAND RAPIDS STATE: MI ZIP: 49508 BUSINESS PHONE: 6162472710 MAIL ADDRESS: STREET 1: 901 44TH ST CITY: GRAND RAPIDS STATE: MI ZIP: 49508 10-K 1 FORM 10-K - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended February 27, 1998 COMMISSION FILE NUMBER 1-13873 STEELCASE INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) MICHIGAN 38-0819050 (STATE OF INCORPORATION) (IRS EMPLOYER IDENTIFICATION NUMBER) 901 44TH STREET, GRAND RAPIDS, 49508 MICHIGAN (ZIP CODE) (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (616) 247-2710 (REGISTRANT'S TELEPHONE NUMBER) SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED ------------------- ----------------------- Class A Common Stock.............................. New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO 12(G) OF THE ACT: NONE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [_] As of May 15, 1998, the registrant had outstanding 19,250,109 shares of Class A Common Stock and 135,161,550 shares of Class B Common Stock. The aggregate market value of the Class A Common Stock held by non-affiliates of the registrant was $613,590,212 computed by reference to the closing price of the Class A Common Stock on that date as reported by the New York Stock Exchange. Although there is no quoted market for registrant's Class B Common Stock, shares of Class B Common Stock may be converted at any time into an equal number of shares of Class A Common Stock. Using the closing price of the Class A Common Stock on May 15, 1998, as reported by the New York Stock Exchange as the basis of computation, the aggregate market value of the Class B Common Stock held by non-affiliates on that date was $1,965,249,077. DOCUMENTS INCORPORATED BY REFERENCE: Portions of the registrant's definitive proxy statement for its 1998 Annual Meeting of Shareholders are incorporated by reference in Part III of this Form 10-K. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- PART I ITEM 1. BUSINESS: GENERAL Steelcase Inc. (the "Company" or "Steelcase") is the world's largest manufacturer and provider of office furniture, office furniture systems and related products and services. The Company has led the U.S. office furniture industry in sales for 24 consecutive years and believes it has the industry's largest base of installed products. In the fiscal year ended February 27, 1998 ("1998"), the Company's consolidated net sales were $2.76 billion and in the year ended December 31, 1997, unconsolidated joint ventures in which the Company generally holds 50% interests generated approximately $0.5 billion in net sales. The Company offers its extensive range of products and services to commercial and non-commercial organizations worldwide through a network of independent dealers in approximately 680 locations. These dealers provide local expertise and ongoing customer support services and remain in close contact with customers during and after the completion of a project to help ensure customer satisfaction and to encourage repeat business. Steelcase has strong brand recognition and a reputation for quality among architects, contract interior designers and corporate facility managers who typically influence purchasing decisions. The Company's dealer network and sales organization utilize Workplace Performance, a consultative process supported by proprietary software-based tools, to help demonstrate early in the planning process the impact of office space and the work environment on productivity and occupancy costs. Steelcase's comprehensive portfolio of furniture products and related products and services, together with its extensive knowledge of work environments, enables the Company to satisfy virtually all of its customers' furniture-related needs. These needs include not only furniture and related products but also initial workspace planning, rapid delivery and installation, ongoing support services, furniture asset management, leasing and, if desired, refurbishing or remanufacturing. The Company's primary product categories include: (i) office furniture systems; (ii) seating products; (iii) group and individual storage products, including filing units and cabinets; and (iv) desk and casegood products, such as bookcases and credenzas. The Company sells and markets primarily steel and wood products under the Steelcase and Turnstone brands as well as various other brand name products manufactured through joint ventures such as Steelcase Strafor, licensing arrangements and the Steelcase Design Partnership. The Company also offers complementary product lines through the Steelcase Design Partnership focusing on specialty markets, including product lines for lobby and reception areas, cafeteria and informal gathering areas, private offices, learning environments, executive conference areas, group work environments, video conferencing facilities and healthcare environments. The Steelcase Design Partnership also provides surfacing materials for hospitality, healthcare and contract markets, architectural millwork and ergonomic tools for the workplace. In addition to its product offerings, the Company provides services such as (i) furniture asset management through Furniture Management Coalition ("FMC"), (ii) refurbishing and remanufacturing through Revest Inc. ("Revest") and (iii) lease financing through Steelcase Financial Services Inc. ("SFSI"). The Company operates in one business segment and four geographic markets. Certain information with regard to the Company's operations in geographic markets is contained elsewhere herein in "Management's Discussion and Analysis of Financial Condition and Results of Operations." INITIAL PUBLIC OFFERING In February 1998, certain shareholders of the Company sold 13,972,500 shares of its Class A Common Stock in an initial public offering (the "IPO") in the United States and in a concurrent international offering outside the United States. Following the IPO and related recapitalization of the Company, the Company has two classes of authorized common stock, Class A Common Stock ("Class A Common Stock") and Class B Common Stock ("Class B Common Stock"). 2 PRODUCTS AND SERVICES Steelcase provides a broad range of office furniture and related products and comprehensive support services to its customers as part of specific projects and ongoing contractual relationships. Products The Company offers an extensive range of office furniture and related products at a variety of price points, allowing customers to satisfy virtually all of their office furniture-related work environment needs through the Company and its dealers. The Company's primary product lines include: (i) office furniture systems; (ii) seating; (iii) storage solutions; and (iv) desks and casegoods. Office Furniture Systems Since the mid-1980's, furniture systems have been the largest product category in the office furniture industry, representing approximately one- third of all office furniture sold in calendar 1997. Office furniture systems consist of movable and reconfigurable components which may be used to create work areas of variable sizes and configurations. Furniture systems generally use movable panels for space division, for acoustic and visual privacy, for structural support and as conduits for power, telephone and data cabling. Furniture systems also include panel-supported and freestanding components such as work surfaces, desks, returns, pedestals, drawers, binder bins, filing, lighting fixtures and keyboard support shelves. Furniture systems offer customers more flexibility and greater space efficiency than traditional dry-wall-based private offices and undivided desk areas. Steelcase is the market leader in this category, based on sales, offering a broad range of aesthetic options, performance features, applications and price points. Each Steelcase system also offers technology management options to help ensure that phone, power and data lines are effectively managed and available to the user. The Company's continued enhancement of Series 9000, a panel-based system, and introduction of new furniture systems lines over the years has allowed it to present a significantly wider selection of furniture systems lines and componentry than any one competitor. Seating Steelcase believes it is the world's largest office seating manufacturer and a proven market leader in seating innovation. In 1973, the Company introduced the first office chair to utilize a double plastic shell, a concept now utilized in most office chairs. In the 1970's and 1980's, the Company was among the first to develop ergonomic office chairs utilizing chair shapes, materials and mechanisms designed to enhance worker productivity. The Company believes its focus and research on materials, ergonomics, technology and work processes and its broad platform of product styles and price points will maintain and enhance the Company's share of the seating market. The Company also believes that Sensor, which has sold more than 4 million units since its introduction in 1986, has sold more units than any other office chair in the history of the office furniture industry, and that Criterion, introduced in 1989, is currently the largest selling office chair in the world on an annual basis. The Company believes it offers the widest assortment of chair types and chairs in the office furniture industry, providing chairs and other types of seating for virtually every office need. The Company views most office seating (excluding specialized uses such as stacking chairs or lounge seating) as either high-performance or general use. The Company's primary seating products are: Sensor, a high-performance chair with several models to meet the needs of virtually everyone throughout an organization, and Criterion, a high- performance chair with a wide variety of easy-to-use back, seat and arm adjustments. The Company's other seating lines include: (i) general use chairs such as Rally and Protege; (ii) Rapport, an office chair with a unique high-tech aesthetic; (iii) Drive, a high-performance, value-priced chair; (iv) Springboard, a high-performance, value-priced chair; and (v) Player, a side chair. In addition to these chairs, the Company offers a number of other seating products including guest, executive, lounge, stackable and collaborative or team-based offerings in both wood and non-wood materials. 3 Storage Solutions The Company believes that it has been a leader in office storage products and systems since the 1940's. Current product offerings include a broad variety of vertical and lateral filing cabinets, bookcases and other types of storage components. All product offerings are available in a wide range of color and price options. The most popular lines, Series 800 and Series 900 lateral files, have a very large installed base and are repeatedly cited in independent surveys as the highest quality storage product among certain segments. All the Company's office furniture systems offerings are complemented by a full range of integrated storage solutions, including binder bins, storage cabinets, personal storage towers, mobile and fixed pedestals and numerous choices of lateral and vertical files coordinated in design, as well as offering the same full range of color options. These products are available fully assembled or as component parts for maximum customization. Recent introductions include moderately-priced storage solutions through its FirstFile series and the Activity Products line, introduced in 1995 to address the increasing need to transport work items within and between individual and team settings. Certain new products scheduled for introduction in calendar 1998 are designed to coordinate with Turnstone and Pathways products. Desks and Casegoods The Company offers a wide variety of traditional, transitional and contemporary desk and casegood products. These products offer a range of solutions for private offices, team rooms and open plan environments. Desks and casegoods are offered across many brands and in a variety of materials. Steelcase offers these products in its wood collections CaneCreek, Broadmoor and Stow Davis, providing a broad scope of style and performance options. In addition, the Turnstone brand casegoods and desks are targeted to more cost- conscious customers and are offered in laminate, wood, metal and home office versions. Steelcase Design Partnership The Steelcase Design Partnership entities design, manufacture and market a variety of award-winning office products for specialty markets that complement other Steelcase products, providing the customer with a more comprehensive portfolio of product choices. The Steelcase Design Partnership includes: Brayton International. Brayton International Inc. offers a broad collection of lounge, executive, guest and healthcare seating, along with occasional tables. Brayton products span traditional, transitional and contemporary styling, featuring a wide range of finish options. Metro. Metropolitan Furniture Corporation offers a variety of products known for their contemporary style and designed to support and integrate technology in groupwork environments, video conferencing facilities and private offices. Vecta. Vecta, a division of the Company, provides seating and table products designed for a variety of learning environments and conference, team and cafeteria areas. It offers a number of folding tables that support the flexibility requirements of training rooms. DesignTex. DesignTex Fabrics, Inc. provides and designs textiles for seating upholstery, wallcovering and office panel systems. It serves contract, hospitality and healthcare markets. Details. Office Details Inc. offers innovative work tools, including keyboard support and desktop or wall-mounted organizational products and personal lighting designed to help improve the productivity and efficiency of people in the workplace. Wigand. Wigand Corporation engineers and produces architectural woodwork for corporate headquarters, luxury hotels and professional workspaces. Pathways Pathways is a unique portfolio of integrated architectural elements including wall, floor and lighting systems, furniture and power and communications elements designed to coordinate with existing Steelcase products as well as competitors' products. The Company believes that Pathways will be attractive to its existing customer base as well as to real estate developers designing or retrofitting buildings. The Company has successfully tested prototype Pathways in a customer location and began shipping Pathways products in the first quarter of calendar 1998. 4 Pathways is designed to provide total interior space solutions, from wall to wall and floor to ceiling, particularly in buildings that can no longer accommodate the wiring and cabling needs of today's technology-driven workplaces. Pathways interior architectural elements accept all wiring and cabling network components and are designed to integrate with building infrastructures for improved distribution of power and communications cabling. Services The Company utilizes its extensive knowledge of work processes and the local expertise of its dealers to provide a range of services to customers, including workplace planning, remanufacturing and refurbishing, furniture management and lease financing. The Company believes services provided to its customers during and after the furniture procurement process are becoming increasingly important to customers and are key points of differentiation in the marketplace. Many of the Company's dealers offer design and support services, including project management and ongoing repair and maintenance, to enhance long-term customer satisfaction and loyalty. The Company also offers services on a nationwide basis to assist customers in addressing a range of procurement-related issues. Revest remanufactures and refurbishes high quality used office furniture, including systems products. The Company estimates that shipments of remanufactured office furniture would have added approximately 8- 10% to U.S. office furniture industry shipments in calendar 1997, which totaled $11.5 billion as reported by the Business and Institutional Furniture Manufacturers' Association ("BIFMA"). The FMC division provides coordinated furniture management services, such as warehousing, inventory control and internal relocations, to customers with nationwide facilities. Each customer is provided with a national representative who coordinates and directs the various management services that are generally provided on a local basis by Steelcase dealers. In addition to providing financing to dealerships, SFSI provides customers with lease financing for products in connection with the acquisition of office furniture. SFSI's net investment in leased assets approximated $165.8 million as of February 27, 1998. PRODUCT DESIGN AND DEVELOPMENT Steelcase has a long history of award-winning product designs. Since 1994, the Company has won 24 design awards for new products and enhancements across its products lines, including the Industrial Designers Society of America ("IDSA") Gold Industrial Design Excellence Award for its Personal Harbor workspace in 1995, the Facilities Design and Management Magazine Gold Award for Table Cable wire management systems in 1996, and the IDSA Silver Industrial Design Excellence Award for its Stella adjustable keyboard shelf in 1997. In response to rapidly changing work environments, the Company has increased research and development efforts in recent years and intends to introduce more than 75 new products and product enhancements in calendar 1998. The Company leverages the expertise of its research and design staff and its subsidiary, IDEO Product Development, Inc., ("IDEO"), to enhance existing products and design new products to address evolving customer needs and industry trends. In recent years, the Company's design efforts have focused on the Pathways interior architectural elements as well as more traditional furniture and related products. The Company's research efforts include on-site user observation, behavioral science studies and anthropologic research, human factors research and technology trends studies. In addition to its own research, the Company commissions research by academics and industry consultants. The Corporate Development Center houses 10 laboratories which the Company's personnel use to conduct over 14,000 product tests annually in such areas as sound, lighting, ergonomics, flammability and product durability. SALES AND MARKETING The Company distributes its products through a worldwide network of independent dealers in approximately 680 locations, including approximately 450 in the United States and Canada and approximately 230 throughout the rest of the world. Each dealership has its own sales force which is supported by the Company's sales representatives, who work closely with dealers throughout the sales process. The dealers, together with the Company's sales representatives, maintain close relationships with architects, contract interior designers and corporate facility managers, who typically influence purchasing decisions. 5 Many customers conduct an extensive evaluation of available product options prior to making an initial furniture purchase for a facility and the Company's sales force and its dealers are increasingly becoming involved in the initial stages of the planning process. Workplace Performance software-based tools are employed to help the customer focus on specific business goals and to provide possible configurations and product packages that will help customers achieve those goals. Workplace Performance tools are also utilized to help the customer and its architects and designers visualize and map potential work environments. The sales process often involves a customer visit to the Company's headquarters in Grand Rapids, Michigan during which the Company's sales staff and executive management, together with the dealers, demonstrate the Company's latest product offerings in an active office environment. The Company's dealer network was started over 75 years ago, in 1922, as a strategic way of growing the Company's product and service sales throughout the United States with local, entrepreneurial representation. The Company conducts dealer programs and training that expand the service and operations capabilities of the dealers as well as promote Company products. The Company also conducts specific training seminars for significant product introductions such as Pathways. SFSI provides lines of credit, term notes and project financing to the Company's dealers. SFSI's notes receivable from the Company's dealers, the majority of which are secured, approximated $144.7 million as of February 27, 1998. The Company has experienced minimal turnover in its dealership network and is not dependent on any one of its dealers. MANUFACTURING The Company manufactures its products at 31 facilities in the United States, Canada and Mexico and, through international subsidiaries, joint ventures and licensing arrangements, at 20 facilities throughout the rest of the world. In 1987, the Company adopted world class manufacturing principles which utilize a variety of production techniques, including cell or team manufacturing, focused factories and rapid continuous improvement. In 1994, 14 manufacturing facilities and seven administrative and shipping facilities in the United States and Canada were awarded registration to ISO 9001, an internationally developed set of facility quality criteria. The Company continually examines new opportunities to consolidate its manufacturing and distribution operations to improve efficiency. Substantially all plants "build to order" rather than to "forecast", which directly reduces finished goods inventory levels and emphasizes continuous improvement in set-up and delivery time to customers. As a result of these and other order processing and customer service improvements, the Company's average lead time, i.e., the time from order to delivery, has been reduced to four to six weeks in the United States and Canada. The Company has an extensive distribution system in the United States and Canada and utilizes commercial transport and delivery services in both the United States and abroad. INTERNATIONAL OPERATIONS Steelcase Canada Ltd. Steelcase Canada Ltd. ("Steelcase Canada") operates in Canada, sourcing its products through its manufacturing facility in Markham, Ontario and through imports from Steelcase and the Steelcase Design Partnership entities. Steelcase Canada has approximately 630 employees and dealers in approximately 40 locations. Steelcase Canada had more than an 18% market share of the Canadian office furniture industry in calendar 1997 and generated $112.1 million in net sales for the year ended February 27, 1998. Steelcase International The Company conducts its non-European international operations primarily through its Steelcase International operating group. The Company's products are generally available throughout the world and are currently sold to international customers in various countries, including Australia, Brazil, China, Japan, Mexico, Saudi Arabia and Thailand. In 1998, net sales derived from sales to international customers outside of Europe and Canada were $138.5 million, or 5.0%, of the Company's consolidated net sales. The Company's share of the office furniture market in such markets is not material. Steelcase International has approximately 450 employees. 6 The Company competes in non-European markets by exporting its products abroad. The Company supplements this business with two manufacturing ventures in Brazil and Saudi Arabia and with licensees in Japan, Thailand, India and Colombia. Sales of the Company's products to non-European international markets are made almost exclusively through the Company's dealer network. As of February 27, 1998, the Company's international dealer network outside of Europe and Canada was comprised of approximately 60 locations in the Pacific Rim, the Middle East, Latin America and Australia. Steelcase Strafor S.A. The Company's European business is conducted almost entirely through Steelcase Strafor S.A. ("Steelcase Strafor"). Steelcase Strafor is a leading office furniture company in Europe with net sales of approximately $487.0 million in the year ended December 31, 1997. Steelcase Strafor has the leading market share in France, with approximately 18.0% market share in calendar year 1997, but its share is below 10% of the office furniture market in all other countries in which it operates. Steelcase Strafor serves the European market with 14 manufacturing facilities located in six countries, approximately 3,760 employees and a network of independent dealers in more than 170 locations. Steelcase Strafor develops and manufactures its own office furniture products, under such brand names as Steelcase Strafor, Strafor, Gordon Russell, Pohlschroder, Waiko and Airborne, and complements its product offerings with Steelcase brand and Steelcase Design Partnership products. Steelcase Strafor's products, although in large part purchased by European customers, are generally available throughout the world. Steelcase Strafor generally does not enter into formal agreements with its independent dealers. RAW MATERIALS AND SUPPLIERS The Company has focused on achieving purchasing economies by forming close relationships with its major suppliers. The Company utilizes steel, lumber, paper, paint, plastics, laminates, particleboard, veneers, glass, fabrics, leathers and upholstery filling material. In an effort to promote close relationships with its supply base, the Company has pursued several initiatives over the past three years, including (i) supply base integration through closer collaboration, (ii) supplier certification in accordance with Company-issued standards and (iii) the maintenance of open lines of communication with the total supply base. In addition, the Company strives to include key suppliers in the product development cycle so as to utilize their expertise and share research and development costs. The Company believes adequate sources are available for all of its raw materials. INTELLECTUAL PROPERTY The Company has approximately 160 active U.S. utility patents and approximately 80 active U.S. design patents relating to its current and anticipated products. The Company also owns approximately 220 patents in a number of foreign countries. The Company has been active in obtaining patents since its inception and has filed an increasing number of patent applications in recent years. The average remaining life for the patents in its U.S. portfolio is approximately 10 years. Although the Company considers securing and protecting its intellectual property rights to be important to its business, the loss of any individual patent, or group of patents related to a particular product, would not result in a material adverse effect on the Company's financial condition or results of operations. The Company and its subsidiaries have registered various trademarks and service marks in the United States and certain foreign countries. The U.S. marks include Steelcase, Activity, Avenir, Ballet, Brayton International Collection, Broadmoor, CaneCreek, Context, Criterion, DesignTex, Details, Elective Elements, Ellipse, FirstFile, Metro, Migrations, Montage, Pathways, Personal Harbor, Player, Protege, Rally, Rapport, Sensor, Series 9000, Springboard, Stow Davis, Teamwork, Turnstone and Vecta. Steelcase Strafor has various U.S. trademarks, including Strafor, Airborne and Gordon Russell. The Company has established a global network of intellectual property licenses with its affiliates. It also occasionally licenses its intellectual property to selected third parties and occasionally enters into license agreements under which it pays a royalty to third parties for the use of patented products or process technology. 7 COMPETITION The office furniture market is highly competitive, with a number of competitors offering similar products. In the contract segment of the market, companies compete primarily on price, delivery and service, product design and features, quality and the relationships developed between dealers and customers. The Company's most significant competitors in its primary markets are Herman Miller, Inc. ("Herman Miller"), Haworth, Inc. ("Haworth"), Knoll, Inc. ("Knoll"), Kimball International, Inc. ("Kimball") and, in certain market segments, Hon Industries Inc. ("Hon"). Together, these companies represent a substantial portion of the market share of the overall office furniture market. The Company also competes with many other companies in specific product categories. In Europe, which is a highly competitive, fragmented market, Steelcase Strafor generally competes with other European-based enterprises with a significant European presence, including the Samas-Groep N.V. The Company also manufactures and sells office furniture in other parts of the world through wholly owned operations, joint ventures, licensing arrangements and independent dealerships. The Company does not have a significant share of the market in any of the countries in which it offers its products outside the United States, Canada and Europe. The office furniture market in most of these countries is highly competitive, price sensitive, fragmented and served primarily by local companies. The Company's major competitors in the non- European international markets generally are other North American office furniture companies such as Herman Miller, Haworth and Teknion Inc., although the Company does encounter local competition in most markets. ENVIRONMENTAL MATTERS The Company is subject to a variety of federal, state, local and foreign laws and regulations relating to the use, storage, handling, generation, transportation, treatment, emission, discharge, disposal and remediation of, and exposure to, hazardous and non-hazardous substances, materials and wastes ("Environmental Laws"). The Company believes that its operations are in substantial compliance with all Environmental Laws. The Company's costs and expenses relating to Environmental Laws are included in the Company's general operating budget or in the operating budgets of certain subsidiaries or divisions and are typically incurred as part of projects that involve adding production capacity and output or implementing new production processes. Although liabilities, claims and pollution control requirements relating to Environmental Laws have not materially affected the Company to date, there can be no assurance that they will not have a material adverse effect on the Company's business, financial condition or results of operations in the future. Under the Clean Air Act Amendments of 1990, the United States Environmental Protection Agency ("EPA") is required to promulgate various emission standards, including the National Emission Standards for Hazardous Air Pollutants ("NESHAPs"), for certain sources of hazardous air pollutants, including the wood and metal furniture manufacturing industries. NESHAPs for the wood furniture manufacturing industry required reduction by November 1997 of emissions of certain volatile organic compounds found in the coatings, stains and adhesives used by the Company. Compliance with the wood furniture NESHAP has not materially affected the Company. The EPA is expected to promulgate NESHAPs for the metal furniture industry by November 2000. The Company intends to continue to participate actively in negotiations relating to these regulations because of their potential significance to the Company's operations. The Company cannot estimate the effects of compliance with the metal furniture NESHAPs or other future Clean Air Act Requirements. Under certain Environmental Laws, the Company could be held liable, without regard to fault, for the costs of remediation associated with its existing or historical operations. The Company could also be held responsible for third- party property and personal injury claims or for violations of Environmental Laws relating to such contamination. The Company is a party to, or otherwise involved in, legal proceedings relating to several contaminated properties being investigated and remediated under state or Federal law. Based on its present information regarding the nature and volume of its wastes allegedly disposed or released at these properties, the number of other financially viable potentially responsible parties, and the total estimated cleanup costs, the Company does not believe that the costs associated with these properties will be material, either individually or in the aggregate. 8 To resolve allegations made by the Michigan Department of Environmental Quality ("MDEQ") (formerly known as the Michigan Department of Natural Resources) concerning the hazardous waste management program at the Company's Grand Rapids, Michigan facilities, the Company entered into a Consent Order with the MDEQ in 1995 pursuant to which the Company agreed, among other things, to pay a $150,000 stipulated penalty. In lieu of this penalty, the MDEQ approved the Company's proposal to conduct a Supplemental Environmental Project ("SEP"), which involved implementing an improved cleaning process for ancillary production equipment. The Company evaluated the SEP, and determined that it no longer met the Company's objectives. Accordingly, the Company elected to use an outside source to clean the ancillary production equipment and negotiated with the MDEQ regarding the payment of the stipulated penalty and termination of the Consent Order. As a result of those negotiations, the Consent Order was terminated without payment of the stipulated penalty. The Company has received a Letter of Violation from the MDEQ regarding operational, notice and record-keeping requirements for one piece of pollution control equipment and associated coating lines at the Company's Grand Rapids, Michigan Systems I plant. Because it is currently in negotiations with the MDEQ, the Company cannot estimate the costs of resolving this matter, which is potentially subject to substantial state and federal penalties. The Company believes, however, based upon the nature of the alleged violations negotiations to date, its compliance history and its continuing good faith efforts to comply with all applicable environmental requirements, that it will be able to resolve this matter without incurring a significant fine or being required to expend significant amounts on replacing or upgrading equipment. The above forward-looking statements concerning the materiality of the cost associated with contaminated properties and the Company's ability to resolve the above described MDEQ Letter of Violation involve certain risks that could cause actual results to vary from the stated expectations. Factors affecting such risks include future governmental regulations and/or cleanup standards or requirements, undiscovered information regarding the nature and volume of wastes allegedly disposed of or released at these properties or other factors increasing the cost of remediation or the loss of other financially viable potentially responsible parties to contribute towards cleanup costs. EMPLOYEES As of February 27, 1998, the Company had approximately 16,400 employees, including approximately 11,200 hourly and approximately 5,200 salaried employees. Employees covered by collective bargaining agreements constitute less than 10% of the Company's employees. Management believes that the Company's relations with its employees are good. In addition, the Company's joint ventures have approximately 4,000 employees. ITEM 2. PROPERTIES: The Company maintains its corporate headquarters in Grand Rapids, Michigan, and conducts operations at locations throughout the United States and, through its wholly owned subsidiaries and joint ventures, has manufacturing facilities in Canada, Mexico, Saudi Arabia, Brazil, France, Germany, Portugal, Spain, the United Kingdom and Morocco. These office, manufacturing and distribution facilities total approximately 23 million square feet, of which approximately 7 million square feet are leased. 9 The Company's principal office, manufacturing and distribution facilities (300,000 square feet or larger) as of May 1, 1998 are as follows:
APPROXIMATE OWNED SQUARE OR LOCATION FOOTAGE LEASED DESCRIPTION OF USE -------- ----------- ------ ------------------ Grand Rapids, Michigan.. 383,000 Owned Corporate Headquarters Grand Rapids, Michigan.. 896,000 Owned Chair Manufacturing Grand Rapids, Michigan.. 445,000 Owned Chair Manufacturing Grand Rapids, Michigan.. 824,000 Owned Desk Manufacturing Grand Rapids, Michigan.. 786,000 Owned Distribution Center Grand Rapids, Michigan.. 867,000 Owned File Manufacturing Grand Rapids, Michigan.. 950,000 Owned Systems Manufacturing Grand Rapids, Michigan.. 748,000(1) Owned Systems Manufacturing Gaines Township, Michi- gan.................... 599,000 Owned Corporate Development Center Kentwood, Michigan...... 666,000 Owned Computer Furniture Manufacturing Kentwood, Michigan...... 789,000 Owned Context Manufacturing Kentwood, Michigan...... 886,000 Owned Panel Manufacturing Kentwood, Michigan...... 1,118,000 Owned Distribution Center Kentwood, Michigan...... 433,000 Leased Wood Furniture Manufacturing Lowell, Michigan........ 480,000 Owned Attwood Manufacturing Athens, Alabama......... 777,000 Leased Manufacturing Tustin, California...... 1,044,000 Owned Manufacturing Fletcher, North Caroli- na..................... 895,000 Owned Wood Furniture Manufacturing Grand Prairie, Texas.... 320,000 Owned Vecta Manufacturing Markham,Ontario......... 725,000 Owned Steelcase Canada Manufacturing Strasbourg, France...... 386,000 Owned(2) Manufacturing Dortmund, Germany....... 300,000 Owned(2) Manufacturing Durlangen, Germany...... 415,000 Owned(2) Manufacturing Madrid, Spain........... 358,000 Owned(2) Manufacturing
- -------- (1) Approximately 175,000 square feet is currently utilized for distribution, 150,000 square feet for showroom, 58,000 square feet for manufacturing and the balance for commercial leasing. (2) Through Steelcase Strafor. ITEM 3. LEGAL PROCEEDINGS: The Company is involved in litigation from time to time in the ordinary course of its business. The Company is not a party to any lawsuit or proceeding which, in the opinion of management based on known information, is likely to have a material adverse effect on the Company. For a description of matters relating to the Company's compliance with applicable environmental laws, rules and regulations, see "Environmental Matters" in Item 1 of this report. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS: On December 2, 1997, a Special Meeting of Shareholders was held for the purpose of adopting a proposal (the "Proposal") consisting of (1) the proposed second restatement of the Restated Articles of Incorporation of the Company (the "Proposed Articles") and (2) the proposed Employee Stock Purchase Plan, Nonqualified Stock Purchase Plan and Incentive Compensation Plan (the "Proposed Benefit Plans"). Prior to the Special Meeting, on September 17, 1997, the Board of Directors of the Company (the "Board") authorized management to begin the process necessary for registration of the Company's common stock under the Securities Act of 1933, as amended (the "Securities Act"), in order to permit the Company's shareholders 10 to make a public offering of some of their shares. In general, the Proposal and related Board actions were designed to (i) effect a recapitalization of the Company's capital stock to (A) increase the authorized shares of capital stock, (B) create two classes of common stock, with the existing shareholders holding high voting Class B Common Stock, (C) effect a stock split which was designed to cause the shares to trade within the customary range upon completion of the IPO, (D) convert the then outstanding Class A Preferred Stock and Class B Preferred Stock into Class B Common Stock and (E) provide for "blank check" preferred stock, issuable in series, (ii) make certain other changes to the Restated Articles of Incorporation and By-laws which are typical of public companies and (iii) provide for the adoption of equity-based incentive and investment plans for the employees of the Company to allow the Company to use its common stock as a tool in its incentive compensation packages and, thus, encourage equity ownership among employees generally. The changes to the Restated Articles of Incorporation and By-laws were intended to provide greater flexibility to the Board to effect and respond to significant transactions or proposals and to manage the day-to-day operation of the business, while maintaining the control position of the pre-IPO shareholders. The table below sets forth the votes cast for and against the Proposal.
FOR AGAINST ---------- --------- Common Stock......................................... 187,624 13,526 Class A Preferred Stock.............................. 6,747.25 925.25 Class B Preferred Stock.............................. 189,085 7,405
ITEM 4(A). EXECUTIVE OFFICERS OF REGISTRANT: Set forth below is certain information regarding the executive officers of the Company.
NAME AGE POSITION ---- --- -------- James P. Hackett 43 President and Chief Executive Officer Robert A. Ballard 62 Executive Vice President, Business Operations Alwyn Rougier- 59 Senior Vice President--Finance, Chief Financial Chapman Officer and Treasurer William P. Craw- 55 President and Chief Executive Officer, ford Steelcase Design Partnership James R. Stelter 43 Senior Vice President, Sales, Marketing and Dealer Alliances James G. Mitchell 49 President, Steelcase Canada Ltd. Jon D. Botsford 43 General Counsel and Secretary Robert W. Black 38 Vice President, Marketing Ann C. Jarvis 52 Vice President, Advanced Concepts and Design James P. Keane 38 Vice President, Corporate Strategy and Development Richard P. Yeates 38 Vice President and General Sales Manager John L. Stasiw 44 Vice President and General Manager, Steelcase International Nancy W. Hickey 46 Vice President, Dealer and Customer Alliances
James P. Hackett has been President and Chief Executive Officer of the Company since 1994. From 1993 through 1994, Mr. Hackett held the positions of President, Turnstone Inc., Executive Vice President, Steelcase Ventures and Executive Vice President and Chief Operating Officer. Mr. Hackett also serves on the Board of Directors of Old Kent Financial Corporation, a bank holding company that serves as trustee for the Company's retirement and 401(k) funds. 11 Robert A. Ballard has been Executive Vice President, Business Operations of the Company since 1996. From 1994 until 1996, Mr. Ballard held the position of Senior Vice President, Manufacturing Operations, and, from 1991 until 1994, Mr. Ballard held the position of Senior Vice President, Steelcase Systems Business Unit. Alwyn Rougier-Chapman has been Senior Vice President--Finance of the Company since 1983 and Chief Financial Officer and Treasurer of the Company since 1994. William P. Crawford has been President and Chief Executive Officer, Steelcase Design Partnership since 1991. Mr. Crawford also serves on the Board of Directors of Old Kent Financial Corporation. James R. Stelter has been Senior Vice President, Sales, Marketing and Dealer Alliances of the Company since March 1998 and Senior Vice President, Turnstone since 1996. From 1993 until 1998, Mr. Stelter held the position of Senior Vice President, Wood Furniture. James G. Mitchell has been President, Steelcase Canada Ltd. since March 1998. Previously, Mr. Mitchell had been Senior Vice President, Sales, Marketing and Dealer Alliances of the Company since 1995. Mr. Mitchell joined the Company in 1993 as President of Steelcase Canada. Jon D. Botsford has been General Counsel and Secretary of the Company since December 1997. From 1985 until December 1997, Mr. Botsford held the position of Assistant General Counsel and Assistant Secretary from 1992 until December 1997. Robert W. Black has been Vice President, Marketing of the Company since 1996. Since joining the Company in 1994, Mr. Black has also served as Vice President, Corporate Strategy and Development and Vice President, Corporate and Service Marketing. From 1988 until 1994, Mr. Black was a Senior Engagement Manager at the consulting firm of McKinsey & Company, Inc. Ann C. Jarvis has been Vice President, Advanced Concepts and Design of the Company since 1996. Previously, Ms. Jarvis held the positions of Senior Marketing Manager from 1986 until 1994 and Vice President, Product Marketing and Design from 1994 until 1996. James P. Keane has been Vice President, Corporate Strategy and Development of the Company since January 1997. From 1992 until January 1997, Mr. Keane was Vice President and Chief Financial Officer of Cloud Corporation, a packaging company. Richard B. Yeates has been Vice President and General Sales Manager of the Company since January 1997. From 1994 until 1997, Mr. Yeates held the position of Vice President and General Manager of Steelcase International. Mr. Yeates served as Director of Steelcase Export and World Wide Services from 1992 until 1994. John L. Stasiw has been Vice President and General Manager, Steelcase International since March 1997. From 1995 to March 1997, Mr. Stasiw served as Vice President, Strategic Supply Chain Management of the Company and from 1994 to 1995 as President of the Company's lighting group. From 1987 until 1994, Mr. Stasiw held various positions at Phillips Lighting Co., including Vice President and General Manager and Director of Business Groups. Nancy W. Hickey has been Vice President, Dealer and Customer Alliances for the Company since 1994. Ms. Hickey served as Regional Manager and Area Sales Manager from 1990 through 1994. 12 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS: The Class A Common Stock of the Company is listed on the New York Stock Exchange under the symbol "SCS". The Class B Common Stock of the Company is neither registered under the Securities Exchange Act of 1934 nor publicly traded. On February 17, 1998, the Company's registration statement on Form S-1, as amended (File No. 333-41647) (the "Registration Statement"), filed in connection with the IPO, was declared effective by the Securities and Exchange Commission (the "Commission"). The IPO commenced on February 17, 1998 and was completed on February 23, 1998. In the IPO, only certain shareholders offered shares of stock for sale. Accordingly, the Company did not receive any of the proceeds from the IPO. From the effective date of the Registration Statement through February 27, 1998, the Company incurred approximately $4,300,000 of expenses in connection with the IPO. As of May 15, 1998, the Company had outstanding 19,250,109 shares of Class A Common Stock with approximately 15,700 shareholders of record thereof and 135,161,550 shares of Class B Common Stock with approximately 300 shareholders of record thereof, in each case not including persons or entities holding stock in nominee or street name through brokers or banks. The following table shows the price range of the Class A Common Stock, as reported by the New York Stock Exchange, for the fourth quarter ended February 27, 1998 (the only period during which the Company's Class A Common Stock was publicly traded), following the IPO. The price at which shares were offered and sold in the IPO was $28.00 per share.
CLASS A COMMON STOCK PRICE RANGE ---------- HIGH LOW ------ --- FISCAL 1998 4th Quarter.................................................... $36.25 $33
The Company intends to continue to pay regular quarterly dividends. However, the declaration and payment of dividends by the Company are subject to the discretion of the Board and to compliance with applicable law. The determination of the timing and amount of future dividends, if any, will depend upon, among other things, the Company's results of operations, financial condition, cash requirements, future business prospects, general business conditions and other factors that the Board may deem relevant at the time. See Item 6 of this report, "Selected Financial Data" and Note 1 thereto. The aggregate dividends paid in the years ended February 27, 1998 and February 28, 1997 are set forth below (in millions):
YEAR ENDING TOTAL ------ ----- 1998............................... 210.9 1997............................... 41.8
13 ITEM 6. SELECTED FINANCIAL DATA FINANCIAL HIGHLIGHTS
YEAR ENDED ---------------------------------------------------------------- FEBRUARY 27, FEBRUARY 28, FEBRUARY 23, FEBRUARY 28, FEBRUARY 28, 1998 1997 1996 1995 1994 ------------ ------------ ------------ ------------ ------------ (IN MILLIONS, EXCEPT PER SHARE DATA) Net sales............... $2,760.0 $2,408.4 $2,155.9 $2,048.7 $1,813.7 Total assets............ $2,007.2 $1,922.1 $1,884.5 $1,761.8 $1,703.8 - -------- Income (loss) before cumulative effect of accounting changes..... $ 217.0 $ 27.7 $ 123.5 $ 64.2 $ (2.0) Cumulative effect of accounting changes(4).. -- -- -- -- (68.1) -------- -------- -------- -------- -------- Net income (loss)(2, 3). $ 217.0 $ 27.7 $ 123.5 $ 64.2 $ (70.1) ======== ======== ======== ======== ======== BASIC AND DILUTED EARNINGS PER SHARE: Income (loss) before cumulative effect of accounting changes..... $ 1.40 $ 0.18 $ 0.80 $ 0.42 $ (0.01) Cumulative effect of accounting changes..... -- -- -- -- (0.44) -------- -------- -------- -------- -------- Net income (loss)....... $ 1.40 $ 0.18 $ 0.80 $ 0.42 $ (0.45) ======== ======== ======== ======== ======== Weighted average shares outstanding............ 154.8 154.7 154.6 154.6 154.7 -------- -------- -------- -------- -------- Dividends per share of common stock(1)........ $ 1.36 $ 0.27 $ 0.26 $ 0.21 $ 0.19 ======== ======== ======== ======== ========
- -------- (1) During 1998, the Company paid a special dividend in the aggregate amount of $150.9 million, or approximately $0.97 per share of common stock. See Note 2 to the Consolidated Financial Statements. (2) During 1997, the Company concluded a 17-year patent litigation which, net of reserves, reduced net income by $123.5 million. See Note 11 to the Consolidated Financial Statements. (3) During 1994, the Company and Steelcase Strafor recorded restructuring and unusual charges related to plant closings and consolidations, severance payments, fixed asset write-downs, intangible asset write-offs, reorganization related costs and certain environmental matters. These charges decreased net income by approximately $54.6 million. (4) Effective March 1, 1993, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions, for its domestic unfunded postretirement health care and life insurance programs, and SFAS No. 109, Accounting for Income Taxes. The cumulative effects of adopting SFAS No. 106 and SFAS No. 109 were to decrease and increase net income during 1994 by $70.0 million and $1.9 million, respectively. 14 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of the Company's financial condition and results of operations should be read in conjunction with the Consolidated Financial Statements of the Company. OVERVIEW For operating purposes, the Company's business includes four geographic markets: the U.S. market, the Canadian market, the European market and all other international markets. The Company's net sales primarily represent sales to its independent dealers, which it builds to order with relatively short lead times. U.S. net sales include office furniture sold within the country through Steelcase U.S., as well as revenues generated from the Company's service-oriented and non-furniture related businesses. Non-domestic net sales include office furniture sold through Steelcase Canada and Steelcase International. The European market is served through Steelcase Strafor, the Company's 50% owned joint venture. The Company reflects Steelcase Strafor in its consolidated financial statements pursuant to the equity method of accounting and, therefore, does not consolidate the joint venture's results of operations with that of its own. See Note 6 to Consolidated Financial Statements of the Company. Steelcase Strafor has not had a material impact on net income during the periods discussed herein due primarily to a weak European economy. According to The Business and Institutional Furniture Manufacturers' Association ("BIFMA"), U.S. office furniture industry shipments increased $1.5 billion, or 14.5%, to $11.5 billion for calendar 1997, from $10.0 billion for calendar 1996. Over the three-year period ended December 31, 1997, BIFMA reported that U.S. office furniture industry shipments grew at a compound annual growth rate ("CAGR") of approximately 9.1%. Management believes this growth has been a function of increased white-collar employment, increased commercial construction and increased capital spending and recent changes in the workplace, including the growing use and integration of technology, changes in organizational structures and work processes, greater awareness of health and safety issues and continued focus on cost efficiency. The Company has outperformed the U.S. industry average with U.S. office furniture net sales growth of 15.8% in 1998 (18.2% after adjusting 1997 for the 53rd week). Over the three-year period ended February 27, 1998, consolidated net sales grew at a CAGR of 10.4%. The double-digit growth occurred both in U.S. net sales, with a CAGR of 10.0%, and in non-domestic net sales, with a CAGR of 14.9%. Gross margins have improved to 36.4% for 1998 from 31.9% for 1996. This improvement reflects increased overhead absorption through increased sales and the impact of a cost reduction program, initiated in 1996, designed primarily to improve raw materials sourcing, contain costs and rationalize facilities. The gross margin improvement has been slightly offset by selling, general and administrative expenses which increased to 24.9% of net sales for 1998 from 24.3% of net sales for 1996 reflecting strategic investments in new product developments, such as Pathways, and in information systems, such as SAP, a comprehensive information management system ("SAP"). As a result of the improvements in gross margin net of the increases in selling, general and administrative expenses, operating margins have improved significantly to 11.5% for 1998 from 7.6% for 1996. 15 RESULTS OF OPERATIONS The following table sets forth consolidated statement of income data as a percentage of net sales for 1998, 1997 and 1996.
YEAR ENDED -------------------------------------- FEBRUARY 27, FEBRUARY 28, FEBRUARY 23, 1998 1997 1996 ------------ ------------ ------------ Net sales............................... 100.0% 100.0% 100.0% Cost of sales........................... 63.6 64.4 68.1 ----- ----- ----- Gross profit............................ 36.4 35.6 31.9 Selling, general and administrative expenses............................... 24.9 26.2 24.3 Patent litigation expense............... -- 3.5 -- ----- ----- ----- Operating income........................ 11.5 5.9 7.6 Patent litigation interest expense...... -- (4.6) -- Other income, net....................... 0.8 0.9 1.1 ----- ----- ----- Income before provision for income taxes and equity in net income of joint ventures and dealer transitions........ 12.3 2.2 8.7 Provision for income taxes.............. 4.7 1.0 3.2 ----- ----- ----- Income before equity in net income of joint ventures and dealer transitions.. 7.6 1.2 5.5 Equity in net income of joint ventures and dealer transitions................. 0.3 -- 0.2 ----- ----- ----- Net income.............................. 7.9% 1.2% 5.7% ===== ===== =====
YEAR ENDED FEBRUARY 27, 1998 COMPARED TO YEAR ENDED FEBRUARY 28, 1997 NET SALES. Net sales increased $351.6 million, or 14.6% (16.7% after adjusting 1997 for the 53rd week), to $2,760.0 million for 1998, from $2,408.4 million for 1997. The Company's U.S. net sales increased $325.5 million, or 14.9% (17.2% after adjusting 1997 for the 53rd week), to $2,509.4 million from $2,183.9 million and non-domestic net sales increased $26.1 million, or 11.6%, to $250.6 million from $224.5 million, respectively, from 1997 to 1998. The growth in the U.S. business has been driven primarily by increases in unit sales across most product lines reflecting strong industry fundamentals. The non-domestic net sales growth resulted from industry growth in Canada and strong export sales to both Latin America and the Middle East. GROSS PROFIT. The Company's gross profit increased $146.6 million, or 17.1%, to $1,003.4 million for 1998, from $856.8 million for 1997. As a percentage of net sales, gross profit increased to 36.4% for 1998 from 35.6% for 1997. The improvement resulted primarily from the increased unit sales volume in the period without a comparable increase in overhead, as well as continued success of the 1996 cost reduction program. In addition, this improvement in gross profit absorbed incremental costs related to furniture distribution process changes, the restructuring and disposition of a non-furniture related manufacturing facility, a portion of the Employee Stock Grant, as defined in Note 10 to the Consolidated Financial Statements, and certain manufacturing equipment write-offs, which aggregated $18.3 million for 1998. Similar incremental costs aggregated $4.5 million for 1997. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased $55.6 million, or 8.8%, to $686.0 million for 1998, from $630.4 million for 1997. As a percentage of net sales, the Company's selling, general and administrative expenses decreased to 24.9% for 1998 from 26.2% for 1997, reflecting management's cost containment efforts. The decrease was partially offset by investments in new product development and information systems. In addition, selling, general and administrative expenses for 1998 include aggregate costs of $11.0 million relating to the restructuring of a foreign subsidiary, the relocation of a showroom facility and the initial public offering and receipt by the Company of a net litigation settlement in the 16 amount of $9.8 million. Selling, general and administrative expenses for 1997 include a subsidiary restructuring charge and an intangible asset write-off aggregating approximately $8.6 million. PATENT LITIGATION EXPENSES. In December 1996, the Company concluded a 17- year patent litigation, which, net of reserves, reduced net income by $123.5 million for 1997. See Note 11 to the Consolidated Financial Statements of the Company. OTHER INCOME, NET. Other income, net increased $1.2 million, or 5.6%, to $22.6 million for 1998 from $21.4 million for 1997 primarily as a result of increased interest income. PROVISION FOR INCOME TAXES. Income tax expense for 1998 was 38.5% of income before taxes as compared to 46.0% for 1997. The decrease in the effective tax rate was primarily attributable to the impact of recurring non-deductible expenses relative to the level of income for each of the respective periods. NET INCOME. For the reasons set forth above, primarily patent litigation expense incurred in 1997, net income increased $189.3 million to $217.0 million for 1998 from $27.7 million for 1997. Excluding patent litigation expenses, net income would have increased $65.8 million, or 43.5%, to $217.0 million for 1998 from $151.2 million for 1997. YEAR ENDED FEBRUARY 28, 1997 COMPARED TO YEAR ENDED FEBRUARY 23, 1996 NET SALES. Net sales increased $252.5 million, or 11.7%, to $2,408.4 million for 1997 from $2,155.9 million for 1996. The Company's U.S. net sales increased $216.7 million, or 11.0%, to $2,183.9 million from $1,967.2 million and non-domestic net sales increased $35.8 million, or 19.0%, to $224.5 million from $188.7 million, respectively, from 1996 to 1997. The U.S. net sales growth resulted from increases in unit sales across most product categories reflecting strong industry fundamentals and, in part, from acquisitions. The non-domestic net sales growth resulted from acquisitions and strong export sales to both Latin America and the Middle East. GROSS PROFIT. The Company's gross profit increased $169.1 million, or 24.6%, to $856.8 million for 1997 from $687.7 million for 1996. As a percentage of net sales, gross profit increased to 35.6% for 1997 from 31.9% for 1996. The improvement during 1997 primarily resulted from increased unit sales volume growth while overhead costs remained relatively fixed due to a full year's impact of the 1996 cost reduction program. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased $106.3 million, or 20.3%, to $630.4 million for 1997 from $524.1 million for 1996. As a percentage of net sales, selling, general and administrative expenses increased to 26.2% for 1997 from 24.3% for 1996. This planned increase was attributable primarily to increased investments in new product development and information systems, as well as acquisitions and international expansion. The Company also absorbed $8.6 million of charges related to a subsidiary restructuring and an intangible asset write-off in 1997 and $6.6 million of charges relating to the restructuring of a foreign subsidiary and termination of a management incentive compensation program in 1996. PATENT LITIGATION EXPENSES. In December 1996, the Company concluded a 17- year patent litigation, which, net of reserves, reduced net income by $123.5 million for 1997. See Note 11 to the Consolidated Financial Statements of the Company. OTHER INCOME, NET. Other income, net decreased $2.6 million, or 10.8%, to $21.4 million for 1997 from $24.0 million for 1996 primarily as a result of losses incurred on dealer transitions and decreased interest income. PROVISION FOR INCOME TAXES. Income tax expense for 1997 was 46.0% of income before taxes as compared to 36.3% for 1996. The increase in the effective tax rate was primarily attributable to the impact of recurring non-deductible expenses relative to the level of income for each of the respective periods. NET INCOME. For the reasons set forth above, primarily patent litigation expenses, net income decreased $95.8 million, or 77.6%, to $27.7 million for 1997 from $123.5 million for 1996. Excluding patent litigation expenses, net income would have increased $27.7 million, or 22.4%, to $151.2 million for 1997 from $123.5 million for 1996. 17 LIQUIDITY AND CAPITAL RESOURCES Historically, the Company's cash and capital requirements have been satisfied through cash generated from operating activities. The Company has no long-term debt. Cash, cash equivalents and short-term investments were $116.1 million at February 27, 1998. These funds, in addition to cash generated from future operations, are expected to be sufficient to finance the known or foreseeable future liquidity and capital needs of the Company. The Company's capital expenditures were $126.4 million in 1998 compared to $122.0 million in 1997 and $104.6 million in 1996. These capital expenditures include increased investments in manufacturing equipment expected to improve productivity and safety, increase capacity and facilitate the first shipment of Pathways-based products in the fourth quarter of 1998. In addition, capital expenditures for 1997 and 1996 reflect costs associated with replacing the Company's aircraft and investing in corporate and showroom facilities. The Company expects capital expenditures to continue to be significant due to the continued investment in new product development, SAP implementation and new manufacturing equipment intended to increase plant capacity. While the costs of purchasing and implementing SAP will be capitalized and amortized over the software's expected useful life, costs associated with certain modifications, year 2000 related matters, data preparation and training will be expensed as incurred. Since 1995, the Company has been reviewing potential issues associated with computer applications that could fail or generate erroneous results by or at the year 2000 ("Year 2000 Issues") and expects to conclude its review of all these issues during 1999. To date, the cost to the Company of analyzing these potential problems, identifying actual applications that need to be addressed and modifying its computer applications has not been material. Based upon its current estimates, management expects that the additional cost of concluding its review and addressing any identified problems will not be material and that any remaining Year 2000 Issues, including those that relate to interfacing with customers, dealers and suppliers, will be addressed and rectified in a timely manner and will not have any material adverse effect on the Company's financial condition or results of operations. CASH PROVIDED BY OPERATING ACTIVITIES. Cash provided by operating activities totaled $333.4 million for 1998, $80.8 million for 1997 and $200.7 million for 1996. Cash from operating activities resulted primarily from net income, excluding non-cash items, such as depreciation and amortization, net of increases in accounts and notes receivable and leased assets. In addition, cash provided by operating activities for 1998 reflects increases in accrued employee compensation, employee benefit plan obligations and other expenses. CASH USED IN INVESTING ACTIVITIES. Cash used in investing activities totaled $149.9 million for 1998 and was comprised primarily of capital expenditures and net increases in investments. Cash used in investing activities totaled $75.4 million for 1997 and was comprised primarily of capital expenditures, net of a repayment of a note receivable from Steelcase Strafor. Cash used in investing activities totaled $115.9 million for 1996 and was comprised primarily of capital expenditures and corporate acquisitions. CASH USED IN FINANCING ACTIVITIES. Cash used in financing activities totaled $254.4 million for 1998, $40.4 million for 1997 and $39.8 million for 1996. The cash was used primarily to fund quarterly dividends paid by the Company, along with a special dividend and a common stock repurchase in 1998 in the amounts of $150.9 million and $43.5 million, respectively. See Note 2 to the Consolidated Financial Statements of the Company. SAFE HARBOR PROVISION There are certain forward-looking statements under the Liquidity and Capital Resources section, particularly those with respect to the Company's future liquidity and capital needs and the expected ability of the Company and its key customers, dealers and suppliers to successfully manage Year 2000 Issues. Such statements involve certain risks and uncertainties that could cause actual results to vary from the stated expectations. RECENTLY ISSUED ACCOUNTING STANDARDS Statement of Financial Accounting Standards ("SFAS") No. 130, Reporting Comprehensive Income, establishes standards for reporting and display of comprehensive income, its components and accumulated 18 balances in a financial statement that is displayed with the same prominence as other financial statements. Comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners. This statement is effective for the Company for 1999 and requires comparative information for earlier years to be restated. SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, which supersedes SFAS No. 14, Financial Reporting for Segments of a Business Enterprise, establishes standards for reporting information about operating segments in annual and interim financial statements. It also establishes new standards for disclosures regarding products and services, geographic areas and major customers. This statement is effective for the Company for 1999. SFAS No. 132, Employers' Disclosures about Pensions and Other Postretirement Benefits, revises existing disclosure requirements for pension and other postretirement benefit plans thereby intending to improve the understandability of benefit disclosures, eliminate certain requirements that the Financial Accounting Standards Board believes are no longer necessary, and standardize footnote disclosures. This statement is effective for the Company for 1999 and requires comparative information for earlier years to be restated. The Company's consolidated balance sheets and the related consolidated statements of income, changes in shareholders' equity and cash flows will not be materially affected by implementation of SFAS No. 130, SFAS No. 131 and SFAS No. 132. No other recently issued accounting pronouncements are expected to have a material impact on the Company. 19 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK: No information is required to be disclosed by the Registrant under this item. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA: The financial statements and supplementary data required by the Item are included in the Consolidated Financial Statements set forth on pages F-1 through F-22, attached hereto and found immediately following the signature page of this Report. PART III ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE: None. ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT: The information required by Item 10 which is not included in Part I hereof, is contained in the Company's Proxy Statement for the 1998 Annual Meeting of Shareholders to be held June 17, 1998 (the "Proxy Statement"), under the captions "Election of Directors" and "Other Matters--Section 16a Beneficial Ownership Compliance", and is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION: The information required by Item 11 is contained in the Proxy Statement, under the captions "Information Concerning Meetings of the Board of Directors, Board Committees and Directors Compensation", "Compensation of Executive Officers" and "Compensation Committee Interlocks and Insider Participation", and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT: The information required by Item 12 is contained in the Proxy Statement, under the caption "Beneficial Security Ownership" and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS: None. 20 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K: (a) FINANCIAL STATEMENTS AND SCHEDULES 1. FINANCIAL STATEMENTS (F-1 TO F-22) The following consolidated financial statements of the Company are filed as part of this Report: --Report of Independent Certified Public Accountants --Consolidated Statements of Income for the Years Ended February 27, 1998, February 28, 1997 and February 23, 1996 --Consolidated Balance Sheets as of February 27, 1998 and February 28, 1997 --Consolidated Statements of Changes in Shareholders' Equity for the Years Ended February 27, 1998, February 28, 1997 and February 23, 1996 --Consolidated Statements of Cash Flows for the Years Ended February 27, 1998, February 28, 1997 and February 23, 1996 --Notes to Consolidated Financial Statements 2. FINANCIAL STATEMENT SCHEDULES (S-1) Schedule II--Valuation and Qualifying Accounts All other schedules have been omitted because they are not applicable or the required information is shown in the Consolidated Financial Statements or notes thereto. (b) REPORTS ON FORM 8-K FILED DURING THE QUARTER ENDING FEBRUARY 27, 1998 None. (c) EXHIBITS REQUIRED BY SECURITIES AND EXCHANGE COMMISSION REGULATION S-K
EXHIBIT NO. DESCRIPTION ----------- ----------- 3.1 --Second Restated Articles of Incorporation of the Com- pany(1) 3.2 --Amended By-laws of the Company, as amended 10.1 --Deferred Compensation Agreement dated January 12, 1998, between Steelcase Inc. and James Hackett(3) 10.2 --Deferred Compensation Agreement dated January 12, 1998, between Steelcase Inc. and Robert Ballard(3) 10.3 --Deferred Compensation Agreement dated January 12, 1998, between Steelcase Inc. and Alwyn Rougier-Chap- man(2) 10.4 --Deferred Compensation Agreement dated January 13, 1998, between Steelcase Inc. and James Mitchell(3) 10.5 --Steelcase Inc. Incentive Compensation Plan(1) 10.6 --Amended and Restated Steelcase Inc. Management Incen- tive Plan(2) 10.7 --Steelcase Inc. 1994 Executive Supplemental Retirement Plan(2) 10.8 --Deferred Compensation Agreement dated May 4, 1998, be- tween Steelcase Inc. and William P. Crawford 21.1 --Subsidiaries of the Company(2) 23.1 --Consent of BDO Seidman, LLP 27.1 --Financial Data Schedule(4)
- -------- (1) Incorporated by reference to the like numbered exhibit to the Company's Registration Statement on Form S-1 (#333-41647) as filed with the Securities and Exchange Commission ("Commission") on December 5, 1997. (2) Incorporated by reference to the like numbered exhibit to Amendment 1 to the Company's Registration Statement on Form S-1 (#333-41647) as filed with the Commission on January 14, 1998. (3) Incorporated by reference to the like numbered exhibit to Amendment 2 to the Company's Registration Statement on Form S-1 (#333-41647) as filed with the Commission on January 20, 1998. (4) The Financial Data Schedules as of February 23, 1996 and February 28, 1997 represent previously filed Financial Data Schedules restated to reflect the effects of SFAS No. 128, Earnings Per Share and the effect of the recapitalization discussed in Note 9 to the Consolidated Financial Statements. 21 SIGNATURES PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED. Steelcase Inc. /s/ Alwyn Rougier-Chapman By___________________________________ Alwyn Rougier-Chapman Senior Vice President--Finance Chief Financial Officer and Treasurer Date: May 27, 1998 PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT IN THE CAPACITIES AND ON THE DATES INDICATED:
SIGNATURE TITLE --------- ----- /s/ James P. Hackett President, Chief Executive Officer and ___________________________________________ Director (Principal Executive Officer) James P. Hackett /s/ Alwyn Rougier-Chapman Senior Vice President--Finance, Chief ___________________________________________ Financial Officer and Treasurer Alwyn Rougier-Chapman (Principal Financial Officer and Principal Accounting Officer) /s/ William P. Crawford President and Chief Executive Officer-- ___________________________________________ Steelcase Design Partnership and Director William P. Crawford /s/ Robert C. Pew II Chairman of the Board of Directors and ___________________________________________ Director Robert C. Pew II /s/ Peter M. Wege Vice Chairman of the Board of Directors and ___________________________________________ Director Peter M. Wege /s/ Robert C. Pew III Director ___________________________________________ Robert C. Pew III /s/ Peter M. Wege II Director ___________________________________________ Peter M. Wege II /s/ David D. Hunting, Jr. Director ___________________________________________ David D. Hunting, Jr. /s/ Frank H. Merlotti Director ___________________________________________ Frank H. Merlotti /s/ P. Craig Welch, Jr. Director ___________________________________________ P. Craig Welch, Jr.
Date: May 26, 1998 22 STEELCASE INC. CONSOLIDATED STATEMENTS OF INCOME (IN MILLIONS, EXCEPT PER SHARE DATA)
YEAR ENDED -------------------------------------- FEBRUARY 27, FEBRUARY 28, FEBRUARY 23, 1998 1997 1996 ------------ ------------ ------------ Net sales............................... $2,760.0 $2,408.4 $2,155.9 Cost of sales........................... 1,756.6 1,551.6 1,468.2 -------- -------- -------- Gross profit............................ 1,003.4 856.8 687.7 Selling, general and administrative expenses............................... 686.0 630.4 524.1 Patent litigation expense............... -- 84.8 -- -------- -------- -------- Operating income........................ 317.4 141.6 163.6 Patent litigation interest expense...... -- (111.7) -- Other income, net....................... 22.6 21.4 24.0 -------- -------- -------- Income before provision for income taxes and equity in net income of joint ventures and dealer transitions........ 340.0 51.3 187.6 Provision for income taxes.............. 130.9 23.6 68.1 -------- -------- -------- Income before equity in net income of joint ventures and dealer transitions.. 209.1 27.7 119.5 Equity in net income of joint ventures and dealer transitions................. 7.9 -- 4.0 -------- -------- -------- Net income.............................. $ 217.0 $ 27.7 $ 123.5 ======== ======== ======== Basic and Diluted earnings per share.... $ 1.40 $ 0.18 $ 0.80 ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. F-1 STEELCASE INC. CONSOLIDATED BALANCE SHEETS (IN MILLIONS, EXCEPT SHARE DATA)
FEBRUARY 27, FEBRUARY 28, 1998 1997 ------------ ------------ ASSETS Current assets: Cash and cash equivalents.......................... $ 103.1 $ 174.0 Short-term investments............................. 13.0 13.6 Accounts receivable, less allowances of $31.8 and $23.0............................................. 364.3 327.6 Notes receivable and leased assets................. 142.1 124.9 Income taxes receivable............................ 32.8 22.6 Inventories........................................ 105.8 108.0 Prepaid expenses................................... 7.5 5.8 Deferred income taxes.............................. 56.4 48.1 -------- -------- Total current assets................................. 825.0 824.6 -------- -------- Property and equipment, net.......................... 671.2 644.7 Notes receivable and leased assets................... 158.0 98.7 Joint ventures and dealer transitions................ 115.9 126.1 Deferred income taxes................................ 50.0 53.6 Goodwill and other intangible assets, net of accumulated amortization of $21.5 and $17.3......... 66.3 69.5 Other assets......................................... 120.8 104.9 -------- -------- Total assets......................................... $2,007.2 $1,922.1 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. F-2 STEELCASE INC. CONSOLIDATED BALANCE SHEETS (IN MILLIONS, EXCEPT SHARE DATA)
FEBRUARY 27, FEBRUARY 28, 1998 1997 ------------ ------------ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts and notes payable.......................... $ 117.8 $ 105.1 Accrued expenses: Employee compensation.............................. 103.9 76.5 Employee benefit plan obligations.................. 59.1 43.1 Other.............................................. 189.1 125.3 -------- -------- Total current liabilities............................ 469.9 350.0 -------- -------- Long-term liabilities: Employee benefit plan obligations................... 191.2 176.6 Other long-term liabilities......................... 13.7 15.5 -------- -------- Total long-term liabilities.......................... 204.9 192.1 -------- -------- Total liabilities.................................... 674.8 542.1 -------- -------- Commitments and contingencies........................ Shareholders' equity:................................ Preferred Stock--no par value; 50,000,000 shares authorized, none issued and outstanding............ -- -- Class A Common Stock--no par value; 475,000,000 shares authorized, 14,122,040 and none issued and outstanding........................................ 41.1 -- Class B Common Stock--no par value; 475,000,000 shares authorized, 139,245,676 and 154,868,176 issued and outstanding............................. 328.5 408.9 Cumulative translation adjustment................... (14.5) (0.1) Retained earnings................................... 977.3 971.2 -------- -------- Total shareholders' equity........................... 1,332.4 1,380.0 -------- -------- Total liabilities and shareholders' equity........... $2,007.2 $1,922.1 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. F-3 STEELCASE INC. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (IN MILLIONS)
COMMON STOCK --------------- CUMULATIVE TOTAL TRANSLATION RETAINED SHAREHOLDERS' CLASS A CLASS B ADJUSTMENT EARNINGS EQUITY ------- ------- ----------- --------- ------------- February 28, 1995.......... $ -- $408.9 $ (6.9) $900.2 $1,302.2 Foreign currency translation adjustment.... 7.7 7.7 Dividends paid............. (39.8) (39.8) Net income................. 123.5 123.5 ----- ------ ------ ------ -------- February 23, 1996.......... -- 408.9 0.8 983.9 1,393.6 Common stock issuance...... 1.4 1.4 Foreign currency translation adjustment.... (0.9) (0.9) Dividends paid............. (41.8) (41.8) Net income................. 27.7 27.7 ----- ------ ------ ------ -------- February 28, 1997.......... -- 408.9 (0.1) 971.2 1,380.0 Common stock conversion.... 36.9 (36.9) -- Common stock repurchase.... (43.5) (43.5) Employee stock grant....... 4.2 4.2 Foreign currency translation adjustment.... (14.4) (14.4) Dividends paid............. (210.9) (210.9) Net income................. 217.0 217.0 ----- ------ ------ ------ -------- February 27, 1998.......... $41.1 $328.5 $(14.5) $977.3 $1,332.4 ===== ====== ====== ====== ========
The accompanying notes are an integral part of these consolidated financial statements. F-4 STEELCASE INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN MILLIONS)
YEAR ENDED -------------------------------------- FEBRUARY 27, FEBRUARY 28, FEBRUARY 23, 1998 1997 1996 ------------ ------------ ------------ OPERATING ACTIVITIES Net income.............................. $ 217.0 $ 27.7 $ 123.5 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization......... 95.3 93.4 92.5 Postretirement benefit cost........... 15.9 14.2 13.9 Loss on disposal of assets............ 4.3 14.0 4.6 Employee stock grant.................. 4.2 -- -- Deferred income taxes................. (4.7) 1.8 (12.2) Equity in net income of joint ventures and dealer transitions................... (7.9) -- (4.0) Changes in operating assets and liabilities, net of corporate acquisitions: Accounts receivable................. (36.7) (59.9) 25.9 Notes receivable and leased assets.. (69.3) (45.9) (63.4) Inventories......................... 2.2 31.5 15.5 Prepaids and other assets........... 3.7 (3.5) 3.8 Accounts and notes payable.......... 12.7 12.3 0.1 Accrued expenses and other liabilities........................ 96.7 (4.8) 0.5 ------- ------- ------- Net cash provided by operating activities............................. 333.4 80.8 200.7 ------- ------- ------- INVESTING ACTIVITIES Capital expenditures.................... (126.4) (122.0) (104.6) Proceeds from the sale of facilities.... 1.2 7.5 -- Net change in investments............... (20.7) 6.6 5.3 Joint ventures and dealer transitions... 0.8 36.5 (2.6) Corporate acquisitions, net of cash acquired............................... (4.8) (4.0) (14.0) ------- ------- ------- Net cash used in investing activities... (149.9) (75.4) (115.9) ------- ------- ------- FINANCING ACTIVITIES Common stock issuance (repurchase)...... (43.5) 1.4 -- Dividends paid.......................... (210.9) (41.8) (39.8) ------- ------- ------- Net cash used in financing activities... (254.4) (40.4) (39.8) ------- ------- ------- Net increase (decrease) in cash and cash equivalents............................ (70.9) (35.0) 45.0 Cash and cash equivalents, beginning of period................................. 174.0 209.0 164.0 ------- ------- ------- Cash and cash equivalents, end of period................................. $ 103.1 $ 174.0 $ 209.0 ======= ======= =======
The accompanying notes are an integral part of these consolidated financial statements. F-5 STEELCASE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Operations Steelcase Inc. (the "Company") is the world's largest manufacturer and provider of office furniture, office furniture systems and related products and services. The Company manufactures at 31 facilities in the United States, Canada and Mexico and, through international subsidiaries, joint ventures and licensing arrangements, at 20 facilities throughout the rest of the world. The Company distributes its products through a worldwide network of independent dealers in approximately 680 locations including approximately 450 in the United States and Canada and approximately 230 throughout the rest of the world. The Company operates on a worldwide basis within a single industry segment. Steelcase Strafor, a 50% owned joint venture with Strafor Facom S.A., is a leading office furniture company in Europe with 14 manufacturing facilities and dealers in more than 170 locations. Principles of Consolidation The consolidated financial statements include the accounts of Steelcase Inc. and its majority-owned subsidiaries, except for dealers which the Company has acquired with the intention of reselling as soon as practicable ("dealer transitions"). During the three years in the period ended February 27, 1998, the Company closed a series of non-dealer acquisitions, none of which were material individually, or in the aggregate, to the financial position or results of operations of the Company. All significant intercompany accounts, transactions and profits have been eliminated in consolidation. Foreign currency-denominated assets and liabilities are translated into U.S. dollars at the exchange rates existing at the balance sheet date. Income and expense items are translated at the average exchange rates during the respective periods. Translation adjustments resulting from fluctuations in the exchange rates are recorded as a component of shareholders' equity. Gains and losses resulting from exchange rate fluctuations on transactions denominated in currencies other than the functional currency are not material. The Company's investments in joint ventures and dealer transitions are carried at its equity in the net assets of those entities primarily based on audited financial statements for each applicable year. Year End Effective March 1, 1995, the Company changed its fiscal year-end from February 28 to the last Friday of February. In addition, the Company standardized its fiscal quarters to include 13 weeks, except for the quarter ended February 28, 1997 which included 14 weeks. Accordingly, 1998 and 1996 included 52 weeks, while 1997 included 53 weeks. Revenue Recognition Net sales include product sales, service revenues and leasing revenues. Product sales and service revenues are recognized as products are shipped and services are rendered. Leasing revenue includes interest earned on the net investments in leased assets, which is recognized over the lease term as a constant percentage return. Service and leasing revenues are not material. F-6 STEELCASE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Cash Equivalents Cash equivalents consist of highly liquid investments, primarily interest- earning deposits, treasury notes and commercial paper, with an original maturity of three months or less. Cash equivalents are reported at amortized cost and approximated $119.1 million and $191.5 million as of February 27, 1998 and February 28, 1997, respectively. Investments Investments typically include treasury notes, tax-exempt municipal bonds and other debt securities which the Company has the positive intent and ability to hold until maturity. These investments are reported at amortized cost. Gross unrealized gains and losses are insignificant. Investments classified as long- term mature over the next three years. Inventories Substantially all inventories are valued based upon last-in, first-out ("LIFO") cost, not in excess of market. Property and Equipment Property and equipment are stated at cost and depreciated using the straight-line method over the estimated useful lives of the assets, which average 26 years for buildings and improvements and eight years for all other property and equipment. In addition, internal-use software applications and related development efforts are capitalized and amortized over the estimated useful lives of the applications. Software maintenance, year 2000 related matters and training costs are expensed as incurred. Goodwill and Other Intangible Assets Goodwill and other intangible assets resulting from business acquisitions are stated at cost and amortized on a straight-line basis over a period of 15 years if acquired subsequent to February 28, 1995, or 40 years if acquired prior thereto. Amortization expense approximated $4.2 million, $4.0 million and $2.6 million for 1998, 1997 and 1996, respectively. The Company reviews long-lived assets, including goodwill and other intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. If it is determined that an impairment loss has occurred based on expected future cash flows, a current charge to income is recognized. Product Related Expenses Research and development expenses, which are expensed as incurred, approximated $70.0 million, $65.0 million and $50.0 million for 1998, 1997 and 1996, respectively. Self-Insurance The Company is self-insured for certain losses relating to workers' compensation claims, employee medical benefits and product liability claims. The Company has purchased stop-loss coverage in order to limit its exposure to any significant levels of workers' compensation and product liability claims. Self-insured losses are accrued based upon the Company's estimates of the aggregate liability for uninsured claims incurred using certain actuarial assumptions followed in the insurance industry and the Company's historical experience. F-7 STEELCASE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The accrued liabilities for self-insured losses included in other accrued expenses in the accompanying consolidated balance sheets are as follows (in millions):
FEBRUARY 27, FEBRUARY 28, 1998 1997 ------------ ------------ Workers' compensation claims....................... $16.8 $16.1 Product liability claims........................... 11.5 9.6 ----- ----- $28.3 $25.7 ===== =====
The Company maintains a Voluntary Employees' Beneficiary Association ("VEBA") to fund employee medical claims covered under self-insurance. The estimates for incurred but not reported medical claims have been fully funded by the Company as of February 27, 1998 and February 28, 1997. Product Warranty The Company offers a lifetime warranty on Steelcase brand products, subject to certain exceptions, which provides for the free repair or replacement of any covered product or component that fails during normal use because of a defect in design, materials or workmanship. Accordingly, the Company provides, by a current charge to sales returns and allowances, an amount it estimates will be needed to cover future warranty obligations for products sold. The accrued liability for warranty costs included in other accrued expenses in the accompanying consolidated balance sheets approximated $21.3 million and $15.7 million as of February 27, 1998 and February 28, 1997, respectively. Environmental Matters Environmental expenditures that relate to current operations are expensed or capitalized as appropriate. Expenditures that relate to an existing condition allegedly caused by past operations, that do not contribute to current or future revenue generation, are expensed. Liabilities are recorded when material environmental assessments and remedial efforts are probable, and the costs can be reasonably estimated. Generally, the timing of these accruals coincides with completion of a feasibility study or the Company's commitment to a formal plan of action. The accrued liability for environmental contingencies included in other accrued expenses in the accompanying consolidated balance sheets approximated $11.7 million and $11.2 million as of February 27, 1998 and February 28, 1997, respectively. Based on the Company's ongoing oversight of these matters, the Company believes that it has accrued sufficient reserves to absorb the remediation costs of all known sites. Advertising Advertising costs, which are expensed as incurred, approximated $7.9 million, $6.0 million and $9.0 million for 1998, 1997 and 1996, respectively. Income Taxes Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and are measured using enacted tax rates expected to apply to taxable income in the years in which the temporary differences are expected to reverse. Earnings Per Share Statement of Financial Accounting Standards ("SFAS") No. 128, Earnings per Share, replaces the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes the dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings F-8 STEELCASE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) per share. In accordance with SFAS No. 128, earnings per share amounts for all periods presented in the accompanying consolidated statements of income have been adjusted to give retroactive effect to the Recapitalization discussed in Note 9. The weighted average number of shares outstanding for basic and diluted calculations were 154.8 million, 154.7 million and 154.6 million for 1998, 1997 and 1996, respectively. Stock-Based Compensation SFAS No. 123, Accounting for Stock-Based Compensation, encourages entities to record compensation expense for stock-based employee compensation plans at fair value, but provides the option of measuring compensation expense using the intrinsic value method prescribed in Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees. The Company has elected to account for its Stock Incentive Plans in accordance with APB Opinion No. 25. Pro forma results of operations for the Company, as if the fair value method prescribed by SFAS No. 123 had been used to account for its Stock Incentive Plans, are presented in Note 10. Fair Value of Financial Instruments The carrying amount of the Company's financial instruments, consisting of cash equivalents, investments, accounts and notes receivable, accounts and notes payable and certain other liabilities, approximate their fair value due to their relatively short maturities. 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 amounts reported in the consolidated financial statements and accompanying notes. Although these estimates are based on management's knowledge of current events and actions it may undertake in the future, they may ultimately differ from actual results. 2. INITIAL PUBLIC OFFERING On September 17, 1997, the Board of Directors of the Company (the "Board") authorized management to begin the process necessary for registration of the Company's Common Stock under the Securities Act of 1933, as amended, in order to permit the Company's shareholders to make a U.S. and international public offering (the "Offerings") of a portion of their shares (the "Selling Shareholders"). On October 27, 1997, the Board (i) declared a special dividend in the aggregate amount of $150.9 million, which was paid on January 9, 1998 to Common Stock holders of record as of December 2, 1997 (the "Special Dividend") and (ii) approved a proposal which was presented to the shareholders by proxy and subsequently approved on December 2, 1997 at a special meeting. In general, the approved proposal (a) effected a recapitalization of the Company's capital stock (the "Recapitalization"), (b) made certain other changes to the Restated Articles of Incorporation and By- laws which are typical of public companies and (c) provided for the adoption of equity-based incentive and investment plans for employees of the Company (collectively, the "Stock Incentive Plans"). While the Stock Incentive Plans became effective upon approval by the Company's shareholders on December 2, 1997, the Recapitalization and other changes to the Restated Articles of Incorporation and By-laws became effective upon their filing with the State of Michigan which occurred on February 20, 1998. The Offerings, which occurred on February 18, 1998 and closed on February 25, 1998, included 13,972,500 shares of Class A Common Stock at an initial public offering price per share of $28.00. In addition, the Company purchased 1,650,000 shares of Class B Common Stock from the Selling Shareholders at the same price at which the shares of Class A Common Stock were sold to the Underwriters in the Offerings to fulfill the Employee Stock Grant and the Employee Discount Option Grant (the "Stock Repurchase") discussed in Note 10. This Stock Repurchase aggregated $43.5 million. F-9 STEELCASE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 3. INVENTORIES Inventories consist of (in millions):
FEBRUARY 27, FEBRUARY 28, 1998 1997 ------------ ------------ Finished goods..................................... $ 42.9 $ 44.3 Work in process.................................... 30.8 30.8 Raw materials...................................... 83.7 84.1 ------ ------ 157.4 159.2 LIFO reserve....................................... (51.6) (51.2) ------ ------ $105.8 $108.0 ====== ======
The effect of LIFO liquidations on net income was $0.6 million, $5.4 million and $2.9 million for 1998, 1997 and 1996, respectively. 4. PROPERTY AND EQUIPMENT, NET Property and equipment, net consist of (in millions):
FEBRUARY 27, FEBRUARY 28, 1998 1997 ------------ ------------ Land............................................... $ 35.5 $ 35.5 Buildings and improvements......................... 626.0 610.7 Machinery and equipment............................ 927.4 918.4 Furniture and fixtures............................. 69.9 70.4 Leasehold improvements............................. 36.2 39.0 Software........................................... 37.4 26.9 Construction in progress........................... 77.2 45.6 -------- -------- 1,809.6 1,746.5 Accumulated depreciation and amortization.......... 1,138.4 1,101.8 -------- -------- $ 671.2 $ 644.7 ======== ========
Depreciation and amortization expense approximated $91.1 million, $89.4 million and $89.9 million for 1998, 1997 and 1996, respectively. Construction in progress consists of numerous equipment and facility projects, none of which are material individually or in the aggregate. F-10 STEELCASE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 5. NOTES RECEIVABLE AND LEASED ASSETS Notes receivable and leased assets consist of (in millions):
FEBRUARY 27, FEBRUARY 28, 1998 1997 ------------ ------------ Notes receivable: Project financing................................ $ 38.6 $ 30.4 Asset-based lending.............................. 51.5 57.3 Ownership transition financing................... 54.6 55.9 Net investment in leased assets.................... 165.8 89.2 Allowance for losses............................... (10.4) (9.2) ------ ------ 300.1 223.6 Current portion.................................... 142.1 124.9 ------ ------ Long-term portion.................................. $158.0 $ 98.7 ====== ======
Notes receivable include three distinct programs of dealer financing: project financing; asset-based lending; and ownership transition financing. Through these programs, the Company helps dealers secure interim financing, establish working capital lines of credit, finance ownership changes and restructure debt. The terms of notes receivable range from a few months for project financing to 10 years for certain ownership transition financing. Interest rates are both floating and fixed, reaching up to 12% as of February 27, 1998. The loans are generally secured by certain dealer assets and, in some cases, the common stock of the dealership. Unused asset-based lending credit lines approximated $40.9 million as of February 27, 1998, subject to available collateral. These commitments generally expire in one year and are reviewed periodically for renewal. The Company's net investment in leased assets includes both direct financing and operating leases. Direct financing leases consist of the present value of the future minimum lease payments receivable (typically over three to five years) plus the present value of the estimated residual value (collectively referred to as the net investment). Residual value is an estimate of the fair value of the leased equipment at the end of the lease term. The Company records residual values based on market studies conducted by independent third parties. Operating leases as of February 27, 1998 and February 28, 1997 were not material. 6. JOINT VENTURES AND DEALER TRANSITIONS The Company's investments in and advances to its unconsolidated joint ventures and dealer transitions are summarized as follows (in millions):
FEBRUARY 27, FEBRUARY 28, 1998 1997 ------------ ------------ Investment in Steelcase Strafor.................... $101.8 $107.3 Investments in dealer transitions.................. 9.6 16.3 Other joint ventures and alliances................. 4.5 2.5 ------ ------ $115.9 $126.1 ====== ======
During 1998 and 1997, translation adjustments of $(11.1) million and $(0.2) million, respectively, resulting from foreign currency denominated assets and liabilities of Steelcase Strafor and related fluctuations in exchange rates, were charged directly to a component of shareholders' equity in the accompanying consolidated balance sheets. F-11 STEELCASE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Investments in dealer transitions represent dealers which the Company has acquired with the intention of reselling as soon as practicable. Accordingly, the Company recognizes its share of earnings and losses from dealer transitions pursuant to the equity method of accounting. Accounts and notes receivable from these dealers approximated $23.6 million and $57.0 million as of February 27, 1998 and February 28, 1997, respectively. The Company's equity in net income of joint ventures and dealer transitions consists of (in millions):
YEAR ENDED -------------------------------------- FEBRUARY 27, FEBRUARY 28, FEBRUARY 23, 1998 1997 1996 ------------ ------------ ------------ 50% share of Steelcase Strafor net income............................. $5.6 $ 2.0 $3.9 Net income (loss) of dealer transitions........................ 2.0 (1.7) -- Other joint ventures, net........... 0.3 (0.3) 0.1 ---- ----- ---- $7.9 $-- $4.0 ==== ===== ====
Summarized financial information for Steelcase Strafor, as of December 31, 1997 and 1996 and the three years ended December 31, 1997, is as follows (in millions):
DECEMBER 31, ------------- 1997 1996 ------ ------ Balance Sheet: Current assets............................................... $268.7 $278.9 Property and equipment....................................... 126.5 148.7 Other assets................................................. 99.4 103.0 ------ ------ Total assets............................................... 494.6 530.6 ------ ------ Current liabilities.......................................... 197.9 229.3 Long-term liabilities........................................ 93.2 85.0 ------ ------ Total liabilities.......................................... 291.1 314.3 ------ ------ Net assets................................................. $203.5 $216.3 ====== ======
YEAR ENDED DECEMBER 31, ----------------------- 1997 1996 1995 ------- ------- ------- Results of Operations: Revenues........................................... $487.0 $494.9 $471.1 Operating income................................... 27.7 27.6 25.0 Net income......................................... 11.2 4.0 7.8
7. OTHER ASSETS Other assets consist of (in millions):
FEBRUARY 27, FEBRUARY 28, 1998 1997 ------------ ------------ Cash surrender value of life insurance............. $ 95.0 $ 79.0 Long-term investments.............................. 16.9 11.6 Other.............................................. 8.9 14.3 ------ ------ $120.8 $104.9 ====== ======
F-12 STEELCASE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 8. EMPLOYEE BENEFIT PLAN OBLIGATIONS Employee benefit plan obligations consist of (in millions):
FEBRUARY 27, FEBRUARY 28, 1998 1997 ------------ ------------ Profit-sharing and pension plans.................. $ 44.3 $ 32.5 Postretirement insurance benefits................. 150.4 143.1 Management incentive, executive supplemental retirement and deferred compensation plans....... 55.6 44.1 ------ ------ 250.3 219.7 Current portion................................... 59.1 43.1 ------ ------ Long-term portion................................. $191.2 $176.6 ====== ======
PROFIT-SHARING AND PENSION PLANS Substantially all employees are covered under the Steelcase Inc. Employees' Profit-Sharing Retirement Plan and the Steelcase Inc. Employees' Money Purchase Plan or under similar subsidiary plans. Annual discretionary Company contributions under the Steelcase Inc. Employees' Profit-Sharing Retirement Plan and similar subsidiary plans are declared by the Board at the end of each year. Under the Steelcase Inc. Employees' Money Purchase Plan, annual Company contributions are required in the amount of 5% of eligible annual compensation. Total expense under these plans approximated $79.4 million, $67.2 million and $58.9 million for 1998, 1997 and 1996, respectively. POSTRETIREMENT INSURANCE BENEFITS The Company and certain of its subsidiaries have postretirement benefit plans that provide medical and life insurance benefits to retirees and eligible dependents. The Company accrues the cost of postretirement insurance benefits during the service lives of employees based on actuarial calculations for each plan. The following table sets forth the plans' combined accumulated postretirement benefit obligation (in millions):
FEBRUARY 27, FEBRUARY 28, 1998 1997 ------------ ------------ Accumulated postretirement benefit obligation: Retirees and dependents........................ $ 77.6 $ 72.4 Employees fully eligible....................... 28.4 26.0 Employees not yet fully eligible............... 74.2 53.1 ------ ------ 180.2 151.5 Prior service cost............................... (9.2) -- Unrecognized loss................................ (20.6) (8.4) ------ ------ Accrued postretirement benefit obligation........ $150.4 $143.1 ====== ======
F-13 STEELCASE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Net postretirement benefit cost charged to income includes the following components (in millions):
YEAR ENDED -------------------------------------- FEBRUARY 27, FEBRUARY 28, FEBRUARY 23, 1998 1997 1996 ------------ ------------ ------------ Service cost for benefits earned during the period................... $ 3.8 $ 3.0 $ 3.2 Interest cost on the accumulated postretirement benefit obligation... 11.8 11.2 10.7 Amortization of unrecognized loss.... 0.3 -- -- ----- ----- ----- Net postretirement benefit cost...... $15.9 $14.2 $13.9 ===== ===== =====
The significant assumptions used in determining the accumulated postretirement benefit obligation were as follows:
FEBRUARY 27, FEBRUARY 28, 1998 1997 ------------ ------------ Discount rate...................................... 7.00% 7.75% Rate of salary progression......................... 4.50% 5.00%
The weighted average annual assumed rate of increase in the per capita cost of covered benefits for retirees below the age of 65 (estimate of medical inflation rate) is 8.0% for 1999, gradually declining to 5.5% in 2004 and thereafter. For retirees above the age of 65, the rate of increase is 6.5% for 1999, gradually declining to 5.5% in 2003 and thereafter. The health care cost trend rate assumption has a significant effect on the amounts reported. For example, a 1.0% increase in the assumed medical inflation rate would increase the accumulated postretirement benefit obligation as of February 27, 1998 by approximately $22.6 million and the annual net postretirement benefit cost by approximately $1.7 million. MANAGEMENT INCENTIVE, EXECUTIVE SUPPLEMENTAL RETIREMENT AND DEFERRED COMPENSATION PLANS Management Incentive Plan The Amended and Restated Steelcase Inc. Management Incentive Plan is an annual and long-term incentive compensation program that provides eligible key employees of the Company with cash payments based upon the achievement by the Company of specified financial performance goals as measured by Economic Value Added ("EVA"), as defined in the plan. Annual bonuses are payable after the end of the year and, therefore, are included in accrued compensation in the accompanying consolidated balance sheets, whereas long-term bonus amounts are paid out over a three-year period commencing after the end of the year following the year in which the incentive amount is earned. The long-term amounts are paid in substantially equal installments over the three-year payment period and unpaid long-term amounts are adjusted based on the Company's return on equity as determined each year. Executive Supplemental Retirement Plan The Steelcase Inc. 1994 Executive Supplemental Retirement Plan (the "Supplemental Plan") is a non-qualified deferred compensation and supplemental retirement plan that is limited to a select group of management or highly compensated employees. The Supplemental Plan is intended to attract and retain highly F-14 STEELCASE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) qualified corporate executives and to enable such executives to devote their full-time efforts to the Company by providing, in consideration of these efforts, supplemental retirement income. In general, upon satisfying the requirements of the Supplemental Plan executives are entitled to receive five annual payments each equal to 70% of the participant's average base salary for the three consecutive years prior to retirement or death and 15 annual payments each equal to $50,000 multiplied by the participant's vested percentage. A participant's vested percentage begins at 20% after three completed years of service following such participant's eligibility under the Supplemental Plan and increases by 20% increments annually until it becomes fully vested upon seven completed years of service following such eligibility. Deferred Compensation Agreements The Company has future retirement obligations to certain employees in return for agreeing not to receive part of their compensation for a period of three to five years. Compensation withheld has been invested in corporate-owned life insurance, which is expected to be sufficient to cover such future obligations. Long-term management incentive and total executive supplemental retirement and deferred compensation expense approximated $23.2 million, $9.7 million and $13.5 million for 1998, 1997 and 1996, respectively. 9. CAPITAL STRUCTURE In connection with the Offerings discussed in Note 2, the Company effected a Recapitalization of its capital stock. The accompanying consolidated financial statements give retroactive effect to the Recapitalization. Pursuant to the Recapitalization, the following occurred: (i) to facilitate the Stock Split described below and future issuances of capital stock, the total number of authorized shares of capital stock of the Company was increased to one billion, consisting of 475,000,000 shares of Class A Common Stock, 475,000,000 shares of Class B Common Stock and 50,000,000 shares of Preferred Stock, issuable in series; (ii) each of the existing shares of Common Stock was converted into one share of Class B Common Stock, and the Class B Common Stock resulting from that conversion was split on a 700-for-1 basis (the "Stock Split"), effected as a stock dividend of 699 additional shares of Class B Common Stock for each outstanding share; and (iii) immediately following the Stock Split, each of the existing shares of Class A Preferred Stock and Class B Preferred Stock (collectively, the "Existing Preferred Stock") was converted into that number of shares of Class B Common Stock determined by dividing their redemption values ($103 and $2,000, respectively) by the initial public offering price of $28 per share of Class A Common Stock. The conversion of the Existing Preferred Stock increased Common Stock by $393.8 million, decreased Class A Preferred Stock and Class B Preferred Stock by $0.8 million and $9.8 million, respectively, and resulted in a reduction of retained earnings in the amount of $383.2 million. Terms of Class A Common Stock and Class B Common Stock Each share of Class A Common Stock sold in the Offerings resulted from the conversion of one share of Class B Common Stock concurrently with the consummation of such sale. The holders of Common Stock are generally entitled to vote as a single class on all matters upon which shareholders have a right to vote, subject to F-15 STEELCASE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) the requirements of the applicable laws and the rights of any series of Preferred Stock to a separate class vote. Each share of Class A Common Stock entitles its holder to one vote, and each share of Class B Common Stock entitles its holder to 10 votes. The Class B Common Stock is convertible into Class A Common Stock on a share-for-share basis (i) at the option of the holder thereof at any time, (ii) upon transfer to a person or entity which is not a Permitted Transferee (as defined in the Second Restated Articles of Incorporation), (iii) with respect to shares of Class B Common Stock acquired after the Recapitalization, at such time as a corporation, partnership, limited liability company, trust or charitable organization ceases to be 100% controlled by Permitted Transferees and (iv) on the date which the number of shares of Class B Common Stock outstanding is less than 15% of the then outstanding shares of Common Stock (without regard to voting rights). Except for the voting and conversion features, the terms of Class A Common Stock and Class B Common Stock are generally similar. That is, the holders are entitled to equal dividends when declared by the Board and generally will receive the same per share consideration in the event of a merger, and be treated on an equal per share basis in the event of a liquidation or winding up of the Company. In addition, the Company is not entitled to issue additional shares of Class B Common Stock, or issue options, rights or warrants to subscribe for additional shares of Class B Common Stock, except that the Company may make a pro rata offer to all holders of Common Stock of rights to purchase additional shares of the class of Common Stock held by them. Preferred Stock The Second Restated Articles of Incorporation authorize the Board, without any vote or action by the shareholders, to create one or more series of Preferred Stock up to the limit of the Company's authorized but unissued shares of Preferred Stock and to fix the designations, preferences, rights, qualifications, limitations and restrictions thereof, including the voting rights, dividend rights, dividend rate, conversion rights, terms of redemption (including sinking fund provisions), redemption price or prices, liquidation preferences and the number of shares constituting any series. 10. STOCK INCENTIVE PLANS The Stock Incentive Plans for employees and affiliates of the Company include the Steelcase Inc. Employee Stock Purchase Plan (the "Purchase Plan") and the Steelcase Inc. Incentive Compensation Plan (the "Incentive Compensation Plan"). Employee Stock Purchase Plan The Company has reserved a maximum of 1,500,000 shares of Class A Common Stock for use under the Purchase Plan, which is intended to qualify under Section 423 of the Internal Revenue Code of 1986, as amended (the "Code"). Pursuant to the Purchase Plan, each eligible employee, as of the start of any purchase period, will be granted an option to purchase a designated number of shares of Class A Common Stock. The purchase price of shares of Class A Common Stock to participating employees will be designated by the Compensation Committee but in no event shall be less than 85% of the lower of the fair market values of such shares on the first and last trading days of the relevant purchase period. However, no employee may purchase shares under the Purchase Plan in any calendar year with an aggregate fair market value (as determined on the first day of the relevant purchase period) in excess of $25,000. The Board may at any time amend or terminate the Purchase Plan. The initial purchase period under the Purchase Plan began on the date of the pricing of the Offerings and ends on April 17, 1998. Eligible employees who wish to participate in the Purchase Plan may purchase by April 17, 1998 a maximum of 100 shares of Class A Common Stock at 85% of the initial public offering price (the "Employee Discount Option Grant"). The Company granted approximately 15,000 employees the option to F-16 STEELCASE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) participate in the Purchase Plan during the initial purchase period. Pursuant to APB Opinion No. 25, the Employee Discount Option Grant did not result in any compensation expense to be recognized by the Company. Incentive Compensation Plan The Company has reserved for issuance under the Incentive Compensation Plan a maximum of 150,000 shares of Class A Common Stock for a special one-time grant on the date of the pricing of the Offerings plus an additional 6,130,000 shares of Common Stock. The Compensation Committee will have full authority, subject to the provisions of the Incentive Compensation Plan, to determine, among other things, the persons to whom awards under the Incentive Compensation Plan ("Awards") will be made, the exercise price, vesting, size and type of such Awards, and the specific performance goals, restrictions on transfer and circumstances for forfeiture applicable to Awards. Awards may be made to employees and non-employee directors of the Company or its affiliates. A variety of Awards may be granted under the Incentive Compensation Plan including stock options, stock appreciation rights ("SARs"), restricted stock, performance shares, performance units, cash-based awards, phantom shares and other share-based awards as the Compensation Committee may determine. Stock options granted under the Incentive Compensation Plan may be either incentive stock options intended to qualify under Section 422 of the Code or non-qualified stock options not so intended. The Board may amend or terminate the Incentive Compensation Plan. In the event of a "change of control," as defined in the Incentive Compensation Plan, (i) all outstanding options and SARs granted under the Incentive Compensation Plan will become immediately exercisable and remain exercisable throughout their entire term, (ii) any performance-based conditions imposed with respect to outstanding Awards shall be deemed to be fully earned and a pro rata portion of each such outstanding Award granted for all outstanding performance periods shall become payable in shares of Class A Common Stock, in the case of Awards denominated in shares of Class A Common Stock, and in cash, in the case of Awards denominated in cash, with the remainder of such Award being canceled for no value and (iii) all restrictions imposed on restricted stock that are not performance-based shall lapse. Concurrently with the Offerings, the Company issued 10 shares of Class A Common Stock each to certain employees of the Company and its subsidiaries as designated by the Compensation Committee (the "Employee Stock Grant"). The Employee Stock Grant included 149,540 shares of Class A Common Stock in the aggregate and resulted in $4.2 million of compensation expense which was recognized by the Company upon issuance. In addition, the Company issued options to purchase 2,661,000 shares of Class A Common Stock to certain employees and non-employee directors of the Company in connection with the Offerings. These stock options have an exercise price equal to the initial public offering price per share of $28.00 and will primarily vest over a period of five years. Pursuant to APB Opinion No. 25, these stock options did not result in any material compensation expense recognized by the Company. At February 28, 1998 there were no options that were exercisable and there were 3,469,000 options available for future issuance. There has been no exercises or termination of options since their issuance. F-17 STEELCASE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) SFAS No. 123 Pro Forma Data As discussed in Note 1, the Company accounts for its Stock Incentive Plans in accordance with APB Opinion No. 25. Accordingly, no compensation expense has been recognized for the Employee Discount Option Grant or the Company's stock options. If the Company had recognized compensation expense based upon the fair value of the Employee Discount Option Grant and the Company's stock options at the date of grant as prescribed by SFAS No. 123, the Company's net income and earnings per share would have been as follows:
YEAR ENDED FEBRUARY 27, 1998 ----------------- Pro forma net income (in millions).......................... $212.8 Pro forma basic and diluted earnings per share.............. $ 1.37
The estimated fair value of the Employee Discount Option Grant approximated the 15% discount discussed above. The weighted average fair value of the Company's stock options at the date of grant approximated $10.60 per option and was estimated using a Black-Scholes option pricing model with the following assumptions: risk-free interest rate of 5.5%, dividend yield of 1.4%, expected volatility of the market price of the common stock of 30.0% and a weighted average expected life of the options of 6.8 years. The estimated fair value of these options was amortized to expense over the vesting period of the options for purposes of determining pro forma net income and pro forma earnings per share. Pro forma results of operations are not likely to be representative of the effects on reported or pro forma results of operations for future years. 11. PATENT LITIGATION EXPENSE In November 1985, a suit was filed against the Company alleging infringement of two patents covering powered panels used in furniture systems sold since 1978. The trial court ruled for the Company. The plaintiff subsequently appealed to the U.S. Court of Appeals for the Federal Circuit, which reversed the trial court's decision in January 1989, and held that the Company infringed. Upon remand for determination of damages, the parties consented to the appointment of a Special Master to oversee further proceedings, including the binding, non-appealable determination of damages for the established infringement and resolution of related issues. The proceedings concluded in December 1996 resulting in a lump sum payment by the Company to the plaintiff in the amount of $211.5 million, representing $96.8 million in damages and $114.7 million in interest which accrued over the 17 years covered by the litigation. The charges reflected in the accompanying consolidated statement of income for 1997 are net of reserve estimates provided during 1994, which represented management's best estimate of the outcome of the proceedings at that time. 12. OTHER INCOME, NET Other income, net consists of (in millions):
YEAR ENDED -------------------------------------- FEBRUARY 27, FEBRUARY 28, FEBRUARY 23, 1998 1997 1996 ------------ ------------ ------------ Interest income....................... $29.2 $26.6 $28.5 Loss on dealer transitions............ (1.8) (2.5) (0.3) Interest expense...................... (1.7) (2.1) (1.5) Miscellaneous--net.................... (3.1) (0.6) (2.7) ----- ----- ----- $22.6 $21.4 $24.0 ===== ===== =====
F-18 STEELCASE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 13. INCOME TAXES The provision for income taxes on income before equity in net income of joint ventures and dealer transitions consists of (in millions):
YEAR ENDED -------------------------------------- FEBRUARY 27, FEBRUARY 28, FEBRUARY 23, 1998 1997 1996 ------------ ------------ ------------ Current income taxes: Federal............................. $115.7 $17.6 $69.4 State and local..................... 9.5 4.2 8.5 Foreign............................. 10.4 -- 2.4 ------ ----- ----- 135.6 21.8 80.3 ------ ----- ----- Deferred income taxes: Federal............................. (0.8) (1.4) (11.7) State and local..................... (0.3) 0.5 0.2 Foreign............................. (3.6) 2.7 (0.7) ------ ----- ----- (4.7) 1.8 (12.2) ------ ----- ----- $130.9 $23.6 $68.1 ====== ===== =====
Undistributed earnings of foreign joint ventures and subsidiaries are not material. Temporary differences between the financial statement carrying amounts and tax bases of assets and liabilities that give rise to significant portions of deferred income taxes relate to the following (in millions):
FEBRUARY 27, FEBRUARY 28, 1998 1997 ------------ ------------ Deferred income tax assets: Employee benefit plan obligations............... $ 74.2 $ 71.6 Accrued compensation............................ 20.3 7.9 Reserves and allowances......................... 36.5 33.1 Foreign losses.................................. 9.0 8.2 Other........................................... 13.7 10.9 ------ ------ Total deferred income tax assets.................. 153.7 131.7 Deferred income tax liability--property and equipment........................................ (47.3) (30.0) ------ ------ Net deferred income tax assets.................... 106.4 101.7 Current portion................................... 56.4 48.1 ------ ------ Non-current portion............................... $ 50.0 $ 53.6 ====== ======
The Company has recorded a deferred tax asset as of February 27, 1998 of $9.0 million reflecting the benefit of foreign operating loss carry-forwards that expire over the next five years. Realization is dependent on future taxable income of the related foreign operations and tax planning strategies available to the Company. Although realization is not assured, management believes it is more likely than not that all of the deferred tax assets will be realized. Accordingly, no valuation allowance has been established for the deferred tax assets. F-19 STEELCASE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The effective income tax rate on income before equity in net income of joint ventures and dealer transitions varied from the statutory federal income tax rate as set forth in the following table:
YEAR ENDED -------------------------------------- FEBRUARY 27, FEBRUARY 28, FEBRUARY 23, 1998 1997 1996 ------------ ------------ ------------ Statutory federal income tax rate.... 35.0% 35.0% 35.0% State and local income taxes......... 2.7 4.3 2.6 Tax exempt interest.................. (0.2) (1.3) (0.2) Goodwill and intangible asset amortization and write-offs......... 0.2 5.0 0.3 Research and development credit...... (0.6) -- (1.6) Other................................ 1.4 3.0 0.2 ---- ---- ---- Effective income tax rate............ 38.5% 46.0% 36.3% ==== ==== ====
The Company made income tax payments of $116.0 million, $44.0 million and $78.1 million during 1998, 1997 and 1996, respectively. 14. FINANCIAL INSTRUMENTS, CONCENTRATIONS OF CREDIT RISK AND OFF-BALANCE-SHEET RISK Financial instruments, which potentially subject the Company to concentrations of investment and credit risk, primarily consist of cash equivalents, investments, accounts receivable and notes receivable and leased assets. The Company places its cash with high-quality financial institutions and invests in high-quality securities and commercial paper. The Company limits its exposure, by policy, to any one financial institution or debtor. The Company's customers consist primarily of independent dealers in the office environment industry. They are dispersed globally, but primarily across all North American geographic areas. All probable uncollectible accounts and notes receivable and leased assets have been appropriately considered in establishing the allowances for losses. In general, the Company obtains security interests in the assets of the customer. These security interests are generally secondary to the interest of the customer's primary lenders. Guarantees of debt obligations are conditional commitments issued by the Company to guarantee the performance of certain unconsolidated dealers and joint ventures to a third party. These guarantees are primarily issued to support private borrowing arrangements. The Company has guaranteed approximately $39.3 million and $34.0 million of debt obligations of unconsolidated dealers and joint ventures as of February 27, 1998 and February 28, 1997, respectively. Although this amount represents the maximum exposure to loss, management believes the actual risk of loss to be insignificant. The Company uses financial instruments, principally forward contracts and swaps, to manage foreign currency exposures related to purchases and sales. These contracts hedge transactions and balances for periods and amounts consistent with its committed exposures and do not constitute investments independent of these exposures. The Company does not use these financial instruments for speculative or trading purposes. Gains and losses on currency forward contracts and swaps that are designated and effective as hedges of anticipated transactions, for which a firm commitment has been attained, are deferred and recognized in income in the same period that the underlying transactions are settled, and generally offset. Forward contracts and swaps outstanding as of February 27, 1998 and February 28, 1997 were not material. F-20 STEELCASE INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 15. COMMITMENTS AND CONTINGENCIES The Company leases certain sales offices, showrooms and equipment under non- cancelable operating leases that expire at various dates through 2005. Minimum annual rental commitments under non-cancelable operating leases that have initial or remaining lease terms in excess of one year as of February 27, 1998, are as follows (in millions):
YEAR ENDING AMOUNT ----------- ------ 1999.................................................................. $17.1 2000.................................................................. 14.9 2001.................................................................. 11.8 2002.................................................................. 9.3 2003.................................................................. 8.8 Thereafter............................................................ 10.4 ----- $72.3 =====
Rent expense under all operating leases approximated $47.0 million, $45.3 million and $38.7 million for 1998, 1997 and 1996, respectively. The Company is involved in litigation from time to time in the ordinary course of its business. Based on known information, management believes that the Company is not currently party to any material litigation. 16. UNAUDITED QUARTERLY RESULTS The following sets forth summary unaudited information on a quarterly basis for the Company (in millions, except per share amounts):
FIRST SECOND THIRD FOURTH 1998 QUARTER QUARTER QUARTER QUARTER TOTAL ---- -------- -------- -------- -------- -------- Net sales...................... $663.2 $695.3 $702.0 $699.5 $2,760.0 Gross profit................... 241.5 259.9 242.6 259.4 1,003.4 Operating income............... 76.9 99.2 68.8 72.5 317.4 Net income..................... 47.2 66.3 49.8 53.7 217.0 Basic and diluted earnings per share......................... 0.30 0.43 0.32 0.35 1.40
FIRST SECOND THIRD FOURTH 1997 QUARTER QUARTER QUARTER QUARTER TOTAL ---- -------- -------- -------- -------- -------- Net sales...................... $572.2 $579.9 $623.0 $633.3 $2,408.4 Gross profit................... 197.6 205.5 221.3 232.4 856.8 Operating income (loss)........ 51.1 45.4 (21.8) 66.9 141.6 Net income (loss).............. 36.7 30.9 (76.4) 36.5 27.7 Basic and diluted earnings per share......................... 0.24 0.20 (0.50) 0.24 0.18
During the second quarter of 1998, the Company received a net litigation settlement in the amount of $9.8 million. In addition, during the third quarter of 1998, the Company incurred incremental costs in the aggregate amount of $15.8 million related to furniture distribution process changes, the restructuring and disposition of a non-furniture related manufacturing facility, the relocation of a showroom facility and certain manufacturing equipment write-offs. Finally, during the fourth quarter of 1998, the Company incurred incremental costs of $7.6 million related to the Employee Stock Grant and the initial public offering. During the second quarter of 1997, one of the Company's subsidiaries recorded a restructuring charge, including an intangible asset write-off, aggregating approximately $8.6 million. In addition, during the third quarter of 1997, certain patent litigation was resolved. See Note 11 to the Consolidated Financial Statements. F-21 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS STEELCASE INC. GRAND RAPIDS, MICHIGAN We have audited the accompanying consolidated balance sheets of Steelcase Inc. and subsidiaries as of February 27, 1998 and February 28, 1997, and the related consolidated statements of income, changes in shareholders' equity and cash flows for each of the three years in the period ended February 27, 1998. Our audits also included the financial statement schedule for the three years in the period ended February 27, 1998 as listed in Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Steelcase Inc. and subsidiaries as of February 27, 1998 and February 28, 1997, and the results of their operations and their cash flows for each of the three years in the period ended February 27, 1998, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements as a whole, presents fairly in all material respects the information set forth therein. BDO SEIDMAN, LLP Grand Rapids, Michigan March 20, 1998 MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING The consolidated financial statements and other financial information contained in this annual report were prepared by management in conformity with generally accepted accounting principles. In preparing these financial statements, reasonable estimates and judgments have been made when necessary. Management is responsible for establishing and maintaining a system of internal control designed to provide reasonable assurance as to the integrity and reliability of the financial records. The concept of reasonable assurance recognizes that there are inherent limitations in any control system and that the cost of maintaining a control system should not exceed the expected benefits to be derived therefrom. Management believes its system of internal control effectively meets its objective of reliable financial reporting. The Audit Committee of the Board of Directors meets periodically with management and the independent accountants to review and discuss audit findings and other financial and accounting matters. The independent accountants have free access to the Audit Committee, with and without management present, to discuss the results of their audit work. The Company's independent accountants are engaged to audit the Company's consolidated financial statements, in accordance with generally accepted auditing standards for the purpose of expressing an opinion on the financial statements. Alwyn Rougier-Chapman Senior Vice President--Finance, Chief Financial Officer and Treasurer F-22 SCHEDULE II STEELCASE INC. VALUATION AND QUALIFYING ACCOUNTS (IN MILLIONS)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E -------- ---------- --------------------- ---------- ------------- ADDITIONS --------------------- BALANCE AT CHARGED CHARGED BEGINNING TO COSTS AND TO OTHER BALANCE AT DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS END OF PERIOD - ----------- ---------- ------------ -------- ---------- ------------- Reserves deducted in the consolidated balance sheet from the assets to which they apply: Year ended February 27, 1998: Allowances for losses on Accounts Receivable......... $23.0 $6.7 $(2.1) $31.8 Allowances for losses on Notes Re- ceivable........... $ 9.2 $3.0 $ 1.8 (A) $10.4 Year ended February 28, 1997: Allowances for losses on Accounts Receivable......... $20.4 $4.8 $ 2.2 (A) $23.0 Allowances for losses on Notes Re- ceivable........... $ 9.1 $7.7 $ 7.6 (A) $ 9.2 Year ended February 23, 1996: Allowances for losses on Accounts Receivable......... $14.7 $8.7 $ 3.0 (A) $20.4 Allowances for losses on Notes Re- ceivable........... $ 9.1 $2.0 $ 2.0 (A) $ 9.1
- -------- Note (A)--Excess of accounts written off over recoveries. S-1 INDEX OF EXHIBITS
SEQUENTIAL EXHIBIT PAGE NO. DESCRIPTION NUMBER ------- ----------- ---------- 3.1 --Second Restated Articles of Incorporation of the Com- pany(1) 3.2 --Amended By-laws of the Company, as amended 10.1 --Deferred Compensation Agreement dated January 12, 1998, between Steelcase Inc. and James Hackett(3) 10.2 --Deferred Compensation Agreement dated January 12, 1998, between Steelcase Inc. and Robert Ballard(3) 10.3 --Deferred Compensation Agreement dated January 12, 1998, between Steelcase Inc. and Alwyn Rougier-Chap- man(2) 10.4 --Deferred Compensation Agreement dated January 13, 1998, between Steelcase Inc. and James Mitchell(3) 10.5 --Steelcase Inc. Incentive Compensation Plan(1) 10.6 --Amended and Restated Steelcase Inc. Management Incen- tive Plan(2) 10.7 --Steelcase Inc. 1994 Executive Supplemental Retirement Plan(2) 10.8 --Deferred Compensation Agreement dated May 4, 1998, between Steelcase Inc. and William P. Crawford 21.1 --Subsidiaries of the Company(2) 23.1 --Consent of BDO Seidman, LLP 27.1 --Financial Data Schedule
- -------- (1) Incorporated by reference to the like numbered exhibit to the Company's Registration Statement on Form S-1 (#333-41647) as filed with the Securities and Exchange Commission ("Commission") on December 5, 1997. (2) Incorporated by reference to the like numbered exhibit to Amendment 1 to the Company's Registration Statement on Form S-1 (#333-41647) as filed with the Commission on January 14, 1998. (3) Incorporated by reference to the like numbered exhibit to Amendment 2 to the Company's Registration Statement on Form S-1 (#333-41647) as filed with the Commission on January 20, 1998. E-1 EX-3.2 2 AMENDED BY-LAWS OF THE COMPANY Exhibit 3.2 AMENDED BY-LAWS of STEELCASE INC. As of March 25, 1998 ARTICLE I Offices SECTION 1.01. Offices. The corporation may have offices at such places both within and without the State of Michigan as the board of directors may from time to time determine or the business of the corporation may require. ARTICLE II Meetings of Shareholders SECTION 2.01. Times and Places of Meetings. Meetings of the shareholders shall be held at such times and places as may be fixed from time to time by the board of directors, within or without the State of Michigan. SECTION 2.02. Annual Meeting. An annual meeting of the shareholders for election of directors and for such other business as may come before the meeting shall be held each year at such time on such business day and in such month as may be designated by the board (provided that each successive annual meeting shall be held within 15 months of the preceding annual meeting). SECTION 2.03. Special Meetings. Special meetings of the shareholders may be called by the board of directors or by the Chief Executive Officer, and shall be held on such date as may be specified in the notice of the meeting. SECTION 2.04. Notice of Meetings. Written notice of all meetings of shareholders, stating the time, place and purposes thereof, shall be given to each shareholder of record entitled to vote thereat, at least 10 but not more than 60 days before the date fixed for the meeting, either personally or by mail (notice by mail shall be deemed given when mailed). SECTION 2.05. Quorum. The holders of a majority of the voting power of shares entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at all meetings of the shareholders for the transaction of business, except as otherwise provided by statute or by the Articles of Incorporation; provided, however, that when any specified action is required to be voted upon by a class or series of shares voting as a class or series, the holders of a majority of the shares of such class or series shall constitute a quorum for the transaction of such specified action. If there shall be no quorum, the shares present by majority vote may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present, when any business may be transacted which might have been transacted at the meeting as first convened had there been a quorum. However, if after the adjournment the board fixes a new record date for the adjourned meeting, notice of the time, place and purposes of such meeting shall be given to each shareholder of record on the new record date. Once a quorum shall have been determined to be present, the shareholders present in person or by proxy at any meeting may continue to do business until adjournment, notwithstanding the withdrawal of enough shareholders to leave less than a quorum. SECTION 2.06. Vote Required. When an action, other than the election of directors, is to be taken by vote of the shareholders, it shall be authorized by a majority of the votes cast by the holders of shares entitled to vote thereon, unless a greater plurality is required by the Articles of Incorporation or express provision of statute. Except as otherwise provided by the Articles of Incorporation, directors shall be elected by a plurality of the votes cast at an election. SECTION 2.07. Voting Rights. With respect to any matter for which shareholders are entitled to vote, each shareholder shall be entitled, in person or by proxy, to cast the number of votes specified for such matter in the Articles of Incorporation with respect to the number of shares of capital stock held by such person. SECTION 2.08. Order of Business. (a) At each meeting of the shareholders, the Chairman of the Board or, in the absence of the Chairman of the Board, the Chief Executive Officer, or in the absence of both the Chairman and the Chief Executive Officer, such person as shall be selected by the Board shall act as chairman of the meeting. The order of business at each such meeting shall be as determined by the chairman of the meeting. The chairman of the meeting shall have the right and authority to prescribe such rules, regulations and procedures and to do all such acts and things as are necessary or desirable for the proper conduct of the meeting, including, without limitation, the establishment of procedures for the maintenance of order and safety, limitations on the time allotted to questions or comments on the affairs of the Corporation, restrictions on entry to such meeting after the time prescribed for the commencement thereof, and the opening and closing of the voting polls. (b) At any annual meeting of shareholders, only such business shall be conducted as shall have been brought before the annual meeting (i) by or at the direction 2 of the chairman of the meeting or (ii) by any shareholder who is a holder of record at the time of the giving of the notice provided for in this Section 2.08, who is entitled to vote at the meeting and who complies with the procedures set forth in this Section 2.08. (c) For business to be properly brought before an annual meeting by a shareholder, the shareholder must have given written notice thereof, either by personal delivery or by United States mail, postage prepaid, to the Secretary of the Corporation (the "Secretary") at the principal executive offices of the Corporation, not less than 70 days nor more than 90 days prior to the anniversary date of the immediately preceding annual meeting; provided, however, that in the event that the date of the annual meeting is more than 30 days earlier or more than 60 days later than such anniversary date, notice by the shareholder must be so given not earlier than the 90th day prior to such annual meeting and not later than the close of business on the later of the 70th day prior to such annual meeting or the tenth day following the day on which public announcement of the date of such meeting is first made. Any such notice shall set forth as to each matter the shareholder proposes to bring before the annual meeting (a) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting; (b) the name and address, as they appear on the Corporation's books, of the shareholder proposing such business; (c) the class and number of shares of the Corporation which are beneficially owned by the shareholders; (d) any material interest of the shareholder in such business; and (e) if the shareholder intends to solicit proxies in support of such shareholder's proposal, a representation to that effect. The foregoing notice requirements shall be deemed satisfied by a shareholder if the shareholder has notified the Corporation of his or her intention to present a proposal at an annual meeting and such shareholder's proposal has been included in a proxy statement that has been prepared by management of the Corporation to solicit proxies for such annual meeting; provided, however, that if such shareholder does not appear or send a qualified representative, as determined by the chairman of the meeting, to present such proposal at such annual meeting, the Corporation need not present such proposal for a vote at such meeting, notwithstanding that proxies in respect of such vote may have been received by the Corporation. No business shall be conducted at an annual meeting of shareholders except in accordance with this Section 2.08, and the chairman of any annual meeting of shareholders may refuse to permit any business to be brought before an annual meeting without compliance with the foregoing procedures or if the shareholder solicits proxies in support of such shareholder's proposal without such shareholder having made the representation required by clause (e) of the preceding sentence. ARTICLE III Record Date SECTION 3.01. Fixing of Record Date by Board. For the purpose of determining shareholders entitled to notice of and to vote at a meeting of shareholders or an adjournment thereof, or to express consent or to dissent from a proposal without a 3 meeting, or for the purpose of determining shareholders entitled to receive payment of a dividend or allotment of a right, or for the purpose of any other action, the board of directors may fix, in advance, a date as the record date for any such determination of shareholders. The date shall not be more than 60 nor less than 10 days before the date of the meeting, nor more than 60 days before any other action. SECTION 3.02. Provision for Record Date in the Absence of Board Action. If a record date is not fixed by the board of directors (a) the record date for determination of shareholders entitled to notice of or to vote at a meeting of shareholders shall be the close of business on the day next preceding the day on which notice is given, or, if no notice is given, the day next preceding the day on which the meeting is held; and (b) the record date for determining shareholders for any purpose other than that specified in subsection (a) shall be the close of business on the day on which the resolution of the board relating thereto is adopted. SECTION 3.03. Adjournments. When a determination of shareholders of record entitled to notice of or to vote at a meeting of shareholders has been made as provided in this Article III, the determination applies to any adjournment of the meeting, unless the board fixes a new record date for the adjourned meeting. 4 ARTICLE IV Directors --------- SECTION 4.01. Number of Directors. The number of directors which shall constitute the whole board shall be determined from time to time by resolution of the board of directors in accordance with the provisions of Article VII of the Articles of Incorporation. SECTION 4.02. Vacancies. Vacancies shall be filled in accordance with the provisions of Section 2 of Article VII of the Articles of Incorporation. SECTION 4.03. Powers. The business of the corporation shall be managed by its board of directors which may exercise all such powers of the corporation and do all such lawful acts and things as are not by statute or by the Articles of Incorporation or by these By-laws directed or required to be exercised or done by the shareholders. SECTION 4.04. Fees and Expenses. The directors may be paid their expenses, if any, of attendance at each meeting of the board of directors and may be paid a fixed sum for attendance at each meeting of the board of directors or a stated salary or other compensation as a director. No such payment shall preclude any director from serving the corporation in any other capacity and receiving compensation therefor. Members of special or standing committees may be allowed like compensation for attending committee meetings. SECTION 4.05. Resignation. Any director may resign at any time and such resignation shall take effect upon receipt thereof by the corporation, or such subsequent time as set forth in the notice of resignation. SECTION 4.06. Qualifications. A director need not be a shareholder, a citizen of the United States or a resident of the State of Michigan. SECTION 4.07. Notification of Nominations. (a) Subject to the rights of the holders of any series of Preferred Stock, nominations for the election of directors may be made by the Board or by any shareholder who is a shareholder of record at the time of giving of the notice of nomination provided for in this Section 4.07 and who is entitled to vote for the election of directors. Any shareholder of record entitled to vote for the election of directors at a meeting may nominate persons for election as directors only if timely written notice of such shareholder's intent to make such nomination is given, either by personal delivery or by United States mail, postage prepaid, to the Secretary. To be timely, a shareholder's notice must be delivered to or mailed and received at the principal executive offices of the Corporation (i) with respect to an election to be held at an annual 5 meeting of shareholders, not less than 70 nor more than 90 days prior to the anniversary date of the immediately preceding annual meeting; provided, however, that in the event that the date of the annual meeting is more than 30 days earlier or more than 60 days later than such anniversary date, notice by the shareholder to be timely must be so given not earlier than the 90th day prior to such annual meeting and not later than the close of business on the later of the 70th day prior to such annual meeting or the 10th day following the day on which public announcement of the date of such meeting is first made and (ii) with respect to an election to be held at a special meeting of shareholders for the election of directors, not earlier than the 90th day prior to such special meeting and not later than the close of business on the later of the 60th day prior to such special meeting or the 10th day following the day on which public announcement is first made of the date of the special meeting and of the nominees to be elected at such meeting. Each such notice shall set forth: (a) the name and address of the shareholder who intends to make the nomination and of the person or persons to be nominated; (b) a representation that the shareholder is a holder of record of stock of the Corporation entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice; (c) a description of all arrangements or understandings between the shareholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the shareholder; (d) such other information regarding each nominee proposed by such shareholder as would have been required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission had each nominee been nominated, or intended to be nominated, by the Board; (c) the consent of each nominee to serve as a director of the Corporation if so elected and (f) if the shareholder intends to solicit proxies in support of such shareholder's nominee(s), a representation to that effect. The chairman of the meeting may refuse to acknowledge the nomination of any person not made in compliance with the foregoing procedure or if the shareholder solicits proxies in favor of such shareholder's nominee(s) without having made the representation required by the immediately preceding sentence. Only such persons who are nominated in accordance with the procedures set forth in this Section 4.07 shall be eligible to serve as directors of the Corporation. (b) Notwithstanding anything in the immediately preceding paragraph of this Section 4.07 to the contrary, in the event that the number of directors to be elected to the Board of Directors of the Corporation at an annual meeting of shareholders is increased and there is no public announcement naming all of the nominees for directors or specifying the size of the increased Board of Directors made by the Corporation at least 70 days prior to the first anniversary of the preceding year's annual meeting, a shareholder's notice required by this Section 4.07 shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it shall be delivered to or mailed to and received by the secretary at the principal executive offices of the Corporation not later than the close of business on the 10th day following the day on which such public announcement is first made by the Corporation. 6 ARTICLE V Meetings of Directors --------------------- SECTION 5.01. Places of Meetings. The board of directors of the corporation may hold meetings, both regular and special, either within or without the State of Michigan. SECTION 5.02. First Meeting of Newly Elected Board. The first meeting of each newly elected board of directors shall be held following the annual meeting of shareholders, and no notice of such meeting shall be necessary to the newly elected directors in order legally to constitute the meeting, provided a quorum shall be present. In the event such meeting is not held immediately following the annual meeting of shareholders, the meeting may be held at such time and place as shall be specified in a notice given as hereinafter provided for special meetings of the board of directors, or as shall be specified in a written waiver signed by all of the directors. SECTION 5.03. Regular Meetings. Regular meetings of the board of directors may be held without notice at such time and at such place as shall from time to time be determined by the board. SECTION 5.04. Special Meetings. Special meetings of the board may be called by the Chief Executive Officer or Secretary or by a majority of the directors then in office, on two days' notice to each director, either personally or by mail or by facsimile. SECTION 5.05. Purpose Need Not Be Stated. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the board of directors need be specified in the notice of such meeting. 7 SECTION 5.06. Quorum. At all meetings of the board a majority of the total number of directors then in office shall constitute a quorum for the transactions of business, and the acts of a majority of the directors present at any meeting at which there is a quorum shall be the acts of the board of directors, except as may be otherwise specifically provided by applicable law or by the Articles of Incorporation. If a quorum shall not be present at any meeting of the board of directors, the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present. SECTION 5.07. Action Without a Meeting. Unless otherwise restricted by the Articles of Incorporation or these By-laws, any action required or permitted to be taken at any meeting of the board of directors or of any committee thereof may be taken without a meeting, if, before or after the action, written consent thereto is signed by all members of the board or of such committee, as the case may be, and such written consent is filed with the minutes or proceedings of the board or committee. Such consent shall have the same effect as a vote of the board or committee for all purposes. SECTION 5.08. Meeting by Telephone or Similar Equipment. The board of directors or any committee designated by the board of directors may participate in a meeting of such board, or committee, by means of conference telephone or similiar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to this Section shall constitute presence in person at such meeting. SECTION 5.09. Waiver of Notice. Attendance of a director at a meeting of the board or any committee constitutes a waiver of notice of the meeting, except where a director attends a meeting for the express purpose of objecting to the transacting of any business because the meeting is not lawfully called or convened. Notice of any meeting of the board or a committee need not be given to any person entitled thereto who waives such notice in writing, either before or after the meeting. ARTICLE VI Committees of Directors SECTION 6.01. Executive Committee of the Board. The board of directors may appoint an Executive Committee of the Board whose membership shall consist of such members of the board of directors as it may deem advisable from time to time to serve during the pleasure of the board. The board of directors may also appoint directors to serve as alternates for members of the Executive Committee of the Board in the absence or disability of regular members. The board of directors may fill any vacancies in the Executive Committee of the Board as they occur. The Executive Committee of the Board, if there be one, shall have and may exercise the powers of the board of directors in 8 the management of the business affairs and property of the corporation during the intervals between meetings of the board of directors, subject to applicable law and to such limitations and control as the board of directors may impose from time to time. SECTION 6.02. Other Committees. The board of directors may designate such other committees as it may deem appropriate, and such committees shall exercise the authority delegated to them. SECTION 6.03. Meetings. Each committee provided for above shall meet as often as its business may require and may fix a day and time for regular meetings, notice of which shall not be required. Whenever the day fixed for a meeting shall fall on a holiday, the meeting shall be held on the business day following or on such other day as the committee may determine. Special meetings of committees may be called by any member, and notice thereof may be given to the members by mail, telephone or facsimile. A majority of its members shall constitute a quorum for the transaction of business of any of the committees. SECTION 6.04. Substitutes. In the absence or disqualification of a member of a committee, the members thereof present at a meeting and not disqualified from voting, whether or not they constitute a quorum, may unanimously appoint another member of the board to act at the meeting in place of such absent or disqualified member. ARTICLE VII Officers SECTION 7.01. Appointment. The board of directors at its first meeting after the annual meeting of shareholders, or as soon as practicable after the election of directors in each year, shall appoint a Chief Executive officer and may elect a Chairman of the Board and any number of Vice Chairmen of the Board. The board of directors may also appoint a President and one or more Vice Presidents and shall appoint a Secretary and a Treasurer. None of such officers, except the Chairman of the Board and any Vice Chairman of the Board, need be members of the board. The board from time to time may appoint such other officers as they may deem proper. The dismissal of an officer, the appointment of an officer to fill the place of one who has been dismissed or has ceased for any reason to be an officer, the appointment of any additional officers, and the change of an officer to a different or additional office, may be made by the board of directors at any later meeting. Any two or more offices may be filled by the same person. SECTION 7.02. Term of Office. Each officer shall hold office at the pleasure of the board. The board of directors may remove any officer for cause or without cause. Any officer may resign his office at any time, such resignation to take effect upon receipt of written notice thereof by the corporation unless otherwise specified in the 9 resignation. If any office becomes vacant for any reason, the vacancy may be filled by the board. SECTION 7.03. Chairman of the Board. The Chairman of the Board, if there be one, shall, when present, preside at all meetings of the directors and shareholders. He shall have such other duties and powers as may be imposed or given by the board. SECTION 7.04. Vice Chairmen of the Board. Each Vice Chairman of the Board shall have such powers and perform such duties as may be assigned to him from time to time by the Chairman of the Board or the board of directors. SECTION 7.05. The Chief Executive Officer. The Chief Executive Officer shall have final authority, subject to the control of the board of directors, over the general policy and business of the corporation and shall have the general control and management of the business and affairs of the corporation. Unless there shall be a Chairman of the Board, or if there be one, in the event of his death, resignation, absence or inability to act, the Chief Executive Officer shall preside at all meetings of the shareholders, and, if he shall be a director, at all meetings of the board of directors. The Chief Executive Officer shall have the power, subject to the control of the board of directors, to appoint or discharge and to prescribe the duties and to fix the compensation of such agents and employees of the corporation as he may deem necessary. He shall have the authority to appoint or suspend the duties of officers on an interim basis, and the authority to establish compensation for corporate officers subject to the control of the board. He shall make and sign bonds, mortgages and other contracts and agreements in the name and on behalf of the corporation, except when he or the board of directors by resolution instruct the same to be done by some other officer or agent. He shall see that all orders and resolutions of the board of directors are carried into effect and shall perform all other duties necessary or appropriate to his office, subject, however, to his right and the right of the directors to delegate any specific powers to any other officer or officers of the corporation. SECTION 7.06. The President. The President shall be the chief operating officer of the corporation and shall have general supervision of the day-to-day business of the corporation; and shall, in the absence of the Chief Executive Officer, perform the duties and exercise the powers of the Chief Executive Officer, and shall perform such other duties and have such other powers as the Chief Executive Officer or the board of directors may prescribe from time to time. SECTION 7.07. Vice Presidents. Each Vice President shall have such title and powers and perform such duties as may be assigned to him from time to time by the Chief Executive Officer or the board of directors. SECTION 7.08. Secretary. The Secretary shall cause to be maintained minutes of all meetings of the board and of the shareholders and shall keep a record of all votes at such meetings. The Secretary shall give, or see to the giving of notice of all 10 meetings of the shareholders and of the board of directors, and shall perform such other duties as may be prescribed by the board of directors or the President. SECTION 7.09. Treasurer. The Treasurer shall have the custody of the corporate funds and securities, except as otherwise provided by the board, and shall deposit all moneys and other valuable effects in the name and to the credit of the corporation in such depositories as may be designated by the board of directors. He shall disburse the funds of the corporation as may be ordered by the board. SECTION 7.10. Assistant Secretaries and Treasurers. There may be elected one or more Assistant Secretaries and Assistant Treasurers who may, in the absence, disability or nonfeasance of the Secretary or Treasurer, respectively perform the duties and exercise the powers of such persons. SECTION 7.11. Other Officers. All other officers, as may from time to time be appointed by the board of directors pursuant to this Article, shall perform such duties and exercise such authority as the board of directors or the Chief Executive Officer shall prescribe. SECTION 7.12. Absence of Officer. In the case of the absence of any officer, or for any other reason that the board may deem sufficient, the Chief Executive Officer or the board may delegate for the time being the powers or duties of such officer to any other officer or to any director. ARTICLE VIII Certificates of Stock SECTION 8.01. Form. Every holder of stock in the corporation shall be entitled to have a certificate, signed by, or in the name of the corporation by, the Chairman of the Board, the Chief Executive Officer, the President or a Vice President, and by the Treasurer, or an Assistant Treasurer, or the Secretary, or an Assistant Secretary, of the corporation, certifying the number of shares owned by such holder of the corporation. The certificate may, but need not, be sealed with the seal of the corporation, or a facsimile thereof. SECTION 8.02. Facsimile Signatures. Where a certificate is countersigned by a transfer agent or an assistant transfer agent, or registered by a registrar other than the corporation or its employee, the signatures of the officers may be facsimile. In case any officer who has signed, or whose facsimile signature has been placed upon a certificate, shall have ceased to be such officer before such certificate is issued, it may be issued by the corporation with the same effect as if he were such officer at the date of issue. 11 SECTION 8.03. Substituted Certificates. The officers may direct a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the corporation alleged to have been lost or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost or destroyed. When authorizing such issue of a new certificate or certificates, the board of directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost or destroyed certificate or certificates, or his legal representative, to advertise the same in such manner as it shall require and/or to give the corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the corporation on account of the certificate alleged to have been lost or destroyed, or the issuance of such new certificate. SECTION 8.04. Registered Owner. The corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, to vote as such owner and to have all of the other rights and responsibilities of the owner of such shares, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by statute. ARTICLE IX Indemnification --------------- The Corporation shall, to the fullest extent authorized or permitted by the Michigan Business Corporation Act, (a) indemnify any person, and his or her heirs, personal representatives, executors, administrators and legal representatives, who was, is, or is threatened to be made, a party to any threatened, pending or completed action, suit or proceeding (whether civil, criminal, administrative or investigative) by reason of the fact that such person is or was a director, officer or employee of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation (including a subsidiary corporation), limited liability company, partnership, joint venture, trust, employee benefit plan or other enterprise, whether or not for profit, or by reason of anything done by such person in such capacity (collectively, "Covered Matters") and (b) pay or reimburse the reasonable expenses incurred by such person and his or her heirs, executors, administrators and legal representatives in connection with any Covered Matter in advance of final disposition of such Covered Matter. The Corporation may provide such other indemnification to directors, officers, employees and agents by insurance, contract or otherwise as is permitted by law and authorized by the Board of Directors. ARTICLE X 12 Subsidiaries and Divisions -------------------------- SECTION 10.01. Divisional Officers. The board of directors or the Chief Executive Officer may, as they shall deem necessary, designate certain individuals as divisional officer. Any titles given to divisional officers may be withdrawn at any time, without cause, by the board of directors or the Chief Executive Officer. A divisional officer may, but need not be, a director or an executive officer of the corporation. All divisional officers shall perform such duties and exercise such authority as the board of directors or the Chief Executive Officer shall prescribe. SECTION 10.02. Subsidiaries. The Chief Executive Officer, or any other officer, agent or proxy appointed by the board of directors may vote the shares of stock owned by the corporation in any subsidiary, whether wholly or partly owned by the corporation, in such manner as they may deem in the best interests of the corporation, including, without limitation, for the election of directors of any such subsidiary corporation, or for any amendments to the charter or by-laws of any such subsidiary corporation, or for the liquidation, merger or sale of assets of any subsidiary corporation. The board of directors or the Chief Executive Officer may cause to be elected to the board of directors of any such subsidiary corporation such persons as they shall designate, any of whom may be, but need not be, directors, executive officers or other employees or agents of the corporation. The board of directors or the Chief Executive Officer may instruct the directors of any such subsidiary corporation as to the manner in which they are to vote upon any issue properly coming before them as the directors of such subsidiary corporation, and such directors shall have no liability to the corporation as the result of any action taken in accordance with such instructions. SECTION 10.03. Divisional and Subsidiary Officers Not Officers of the Corporation. Divisional officers, and the officers of any subsidiary corporation, shall not, by virtue of holding such title and position, be deemed to be officers of the corporation, nor shall any such divisional officer or officer of a subsidiary corporation, unless he shall also be a director or executive officer of the corporation, be entitled to have access to any files, records or other information relating or pertaining to the corporation, its business and finances. ARTICLE XI Control Share Acquisition Act The Corporation hereby elects not to be subject to the provisions of the Stacey, Bennet, and Randall Shareholder Equity Act under the Michigan Business Corporation Act. ARTICLE XII 13 General Provisions ------------------ SECTION 12.01. Checks. All checks, drafts or demands for money and notes of the Corporation must be signed by such officer or officers or such other person or persons as the board of directors from time to time designates. All funds of the Corporation not otherwise employed shall be deposited or used as the board of directors from time to time designates. SECTION 12.02. Fiscal Year. The fiscal year of the corporation shall end on the last day of February of each year or on such other date as may be fixed by resolution of the board of directors. SECTION 12.03. Seal. The corporate seal, if any, shall have inscribed thereon the name of the corporation. The seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise. SECTION 12.04. Dividends. Dividends upon the capital stock of the corporation, subject to the provisions of the Articles of Incorporation, if any, may be declared by the board of directors at any regular or special meeting, pursuant to law. Dividends may be paid in cash, in property or in shares of capital stock, subject to the provisions of the Articles of Incorporation. SECTION 12.05. Voting Shares of Another Corporation. Shares of any other corporation owned by this corporation shall be voted in the manner provided in Section 10.02 of Article X with respect to the voting of shares in subsidiaries. ARTICLE XIII Amendments Article XIII. Any By-law (other than this Article XIII) may be adopted, repealed, altered or amended by a majority of the entire Board at any meeting thereof. The shareholders of the Corporation shall have the power to amend, alter or repeal any provision of these By-laws only to the extent and in the manner provided in the Articles of Incorporation. 14 EX-10.5 3 DEFERRED COMPENSATION AGREEMENT/CRAWFORD Exhibit 10.5 DEFERRED COMPENSATION AGREEMENT THIS AGREEMENT is made and entered into this 4th day of May, 1998, by and between STEELCASE INC., a Michigan corporation ("Company") and WILLIAM P. CRAWFORD ("Executive"). WHEREAS, the Executive is presently an employee of the Company; WHEREAS, the Executive has elected to defer a portion of his future compensation until after his retirement or death and may do so again in the future; and WHEREAS, the Company has agreed to pay deferred compensation to the Executive in consideration of such deferral and may do so in the future; and WHEREAS, the parties wish to substitute the following agreement for any and all prior agreements relating to such deferrals and to provide hereby for future deferrals; NOW THEREFORE, the parties agree as follows: 1. Deferral Election and Amount. Attachment A sets forth amounts deferred by Executive under one or more prior agreements. Any future deferrals agreed to between Executive and Company will be evidenced by separate Attachments, executed by or on behalf of both parties. Any election to defer is irrevocable and the compensation which is deferred must be compensation payable for services to be performed on or after the date of execution of the election to defer. In consideration of such deferral, the Company agrees to pay benefits as set forth in the Attachment. 2. Source of Amounts Deferred. The Company shall deduct compensation deferred hereunder equally from the Executive's bi-weekly payroll, unless otherwise specified in the Attachment. 3. Account. The Company shall maintain a bookkeeping account indicating the cumulative amount of compensation deferred by the Executive. 4. Payments. a. General. Each Attachment will describe the amount of payments to be made by the Company in respect of the deferral, and any vesting requirements. In the event deferrals cease before completion for any reason other than Executive's death, the Company will only make those payments identified in the Appendix in the event of less than complete deferral. -1- b. Discharge for Cause. If the Executive is discharged for cause, an amount equal to the compensation actually deferred, if any, shall be paid to the Executive, without interest, in five equal annual payments commencing in the month of March following the discharge. Amounts payable under this subparagraph may be prepaid at the option of the Company. For purposes of this Agreement, discharge "for cause" shall mean discharge by reason of gross insubordination, proven dishonesty injurious to the Company, the commission of a felony or misdemeanor injurious to the Company, or the engagement in business or practice in competition with the Company without the Company's prior written consent. c. Competition. If the Executive enters into competition with the Company, without prior approval of the Board of Directors of the Company, and the benefits paid to the Executive hereunder exceed the amount of compensation actually deferred, no further payments shall be made to the Executive or a designated beneficiary. If the amount of compensation actually deferred exceeds the benefits paid to the Executive hereunder, the difference between such amounts shall be paid to the Executive, without interest, in five equal annual payments commencing in the month of March following the entry of the Executive into competition with the Company. Amounts payable under this subparagraph may be prepaid at the option of the Company. d. Suicide. If the Executive dies by suicide within one year of the onset of any deferral period, the amount of compensation actually deferred, if any, pursuant to that deferral election shall be paid to the beneficiary designated by the Executive, without interest, within 60 days of the date of death. e. Minimum Payments. The Executive, together with his designated beneficiary shall in no event receive an aggregate amount which is less than the total which has been deferred by the Executive. f. Payment by Company or Trust. If a trust is established as described in Section 7 below and funds have been set aside in the trust, amounts payable under this agreement may be paid by the Company or from the trust. The Company shall determine the source of the payments. Establishment of the trust shall not relieve the Company of its obligations under this agreement except to the extent that payments are actually made from the trust. 5. Beneficiary Designation. The Executive may designate a beneficiary to receive the benefits as set forth above, including the benefits provided under Paragraphs 4(d) and 4(e), following his death. Such designation shall be substantially in the form attached hereto. In the absence of a designation by the Executive, the Executive shall be deemed to have designated that any unpaid installments shall be payable to his surviving spouse, and that installments remaining unpaid upon the spouse's death shall be paid to the spouse's estate. If the Executive dies without a surviving spouse and has failed to make a designation, remaining unpaid installments shall be paid in equal shares to the Executive's living children. -2- 6. Limitations. a. No Withdrawal. Amounts which have been deferred under this agreement are not subject to withdrawal by the Executive and shall be paid only in accordance with the terms hereof. b. No Assignment. No amount payable under this agreement shall be subject to assignment, transfer, sale, pledge, encumbrance, alienation or charge by the Executive or any beneficiary. Any attempt to assign, transfer, sell, pledge, encumber, alienate or charge any amount hereunder shall be without effect. c. Unsecured. Neither the Executive nor any beneficiary, nor any other person shall be deemed to have, pursuant to this agreement, any property interest, legal or equitable, in any specific asset of the Company. The Executive is a general, unsecured creditor with respect to the promises of the Company made herein. 7. Investment. The Company may use the funds deferred hereunder in any manner desired by the Company. The Company may but is under no obligation to, invest the funds, at the Company's convenience, to assist in providing the benefits promised herein. Any investment, reserve or other funding arrangement shall belong solely to the Company, shall be subject to the Company's sole control, and shall be subject to the claims of creditors of the Company. Neither the Executive nor any beneficiary shall have any legal or equitable interest in any such investment, reserve or other funding arrangement. If the Company purchases life insurance in connection with this agreement, the Company shall be the owner and beneficiary of all such policies. The Company, in its sole discretion, may determine to establish a trust to assist in meeting its obligations under this agreement and other similar agreements. If established, the trust shall conform to the requirements of Revenue Procedure 92-64, as amended or superseded. 8. Interpretation. The Board of Directors of the Company shall have full power and authority to interpret, construe and administer this agreement, the Board's interpretations, constructions, and actions hereunder shall be binding and conclusive on all persons fore all purposes. No member of the Board shall be liable to any person for any action taken or omitted in connection with this agreement, unless attributable to his own willful misconduct or lack of good faith. In the event of the Executive disagrees with any determination of the Board of Directors hereunder the Executive shall have the right and obligation to make written request to the Board of Directors within 60 days of notice of their decision to review that decision. The Directors must issue their decision or review within 120 days after delivery of the request or the request is deemed denied. -3- 9. Amendment. The Board of Directors of the Company shall have the power to amend this agreement; provided, however, that no amendment shall have any material, adverse effect on the Executive unless he consents to such amendment in writing. No amendment may be made which would alter the irrevocable nature of the election to defer compensation. IN WITNESS WHEREOF, the parties have executed this agreement the 4th day of May, 1998. STEELCASE INC. By /s/ A. Rougier-Chapman --------------------------------------- Its Senior Vice President, Chief Financial Officer ---------------------------------------------- /s/ William P. Crawford ---------------------------------------------- Executive -4- ATTACHMENT A Executive: William P. Crawford Date of Deferral Agreement: February 25, 1988 Deferral Period: 5 Years (3/1/88 - 2/28/93) Deferred Amount: $25,000/year Annual Benefit Payments: $175,000, paid each March for 15 years beginning the March after Executive attains age 70, provided that he does attain age 70. Vesting Schedule: 100% Death Prior to Attaining Age 70: $80,000 per year for 15 years, starting March after death. Less than Complete Deferral:
Number of Years of Complete Deferral Payments ------------------ -------- 0 $0 1 $25,000 (lump sum) 2 $8,000/year for 10 years 3 $14,000/year for 10 years 4 $20,000/year for 10 years
(Plus refund of any partial year deferral) Payments will be made (or begin) in the March following cessation of deferrals. Acknowledged: Steelcase, Inc. By: /s/ A. Rougier-Chapman ------------------------------- /s/ William P. Crawford - ---------------------------------- William P. Crawford -5- EX-23.1 4 CONSENT OF BDO SEIDMAN, LLP Exhibit 23.1 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Steelcase Inc. Grand Rapids, Michigan We consent to the incorporation by reference and use of our report dated March 20, 1998, relating to the consolidated financial statements and schedule of Steelcase Inc. included in the Company's Annual Report on Form 10-K for the year ended February 27, 1998 in the previously filed Registration Statements for the Company's Steelcase Inc. Incentive Compensation Plan (Registration No. 333- 46711) and Steelcase Inc. Employee Stock Purchase Plan (Registration No. 333- 46713). By /S/ BDO SEIDMAN, LLP ------------------------- BDO Seidman, LLP Grand Rapids, Michigan May 28, 1998 EX-27 5 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM STEELCASE INC'S FINANCIAL STATEMENTS FOR THE YEAR ENDED FEBRUARY 27, 1998, FEBRUARY 28, 1997 AND FEBRUARY 23, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 YEAR YEAR YEAR FEB-27-1998 FEB-28-1997 FEB-23-1996 MAR-01-1997 FEB-24-1996 MAR-01-1995 FEB-27-1998 FEB-28-1997 FEB-23-1996 103 174 209 13 14 15 539 476 389 32 23 20 106 108 139 825 825 791 1,810 1,747 1,685 1,138 1,102 1,061 2,007 1,922 1,885 470 350 316 0 0 0 0 0 0 0 0 0 370 409 409 963 971 985 2,007 1,922 1,885 2,760 2,408 2,156 2,760 2,408 2,156 1,757 1,552 1,468 1,757 1,552 1,468 0 0 0 10 13 11 2 114 2 340 51 188 131 24 68 217 28 124 0 0 0 0 0 0 0 0 0 217 28 124 1.40 0.18 0.80 1.40 0.18 0.80
-----END PRIVACY-ENHANCED MESSAGE-----