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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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
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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.
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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