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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 25, 2000
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, 49508
GRAND RAPIDS, 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:
Title of each Name of each exchange
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 1, 2000, the registrant had outstanding 30,256,620 shares of Class
A Common Stock and 120,730,205 shares of Class B Common Stock. The aggregate
market value of the Class A Common Stock held by non-affiliates of the
registrant was $272,315,225 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 1, 2000, 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 $617,256,397.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the registrant's definitive proxy statement for its 2000 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
designer and manufacturer of products used to create high-performance work
environments. Founded in Grand Rapids, Michigan in 1912, Steelcase helps
individuals, and the organizations that employ them, around the world to work
more effectively. The Company has led the office furniture industry in sales
every year since 1974. Its product portfolio includes furniture systems,
seating, storage, desks, casegoods, interior architectural products,
technology products and related products and services. Fiscal 2000 worldwide
net sales, including unconsolidated joint ventures, were $3.46 billion.
Steelcase, including its subsidiaries and joint ventures, has dealers in
approximately 800 locations, manufacturing operations in over 35 locations and
approximately 20,900 employees around the world.
Previously, the Company reported two geographic furniture segments--the
United States and International/ Canada; along with Services and Other
Businesses, which will continue to be reported separately. Due to the
acquisition of the remaining 50% equity interest in Steelcase Strafor S.A.
("Steelcase Strafor"), the Company has realigned under two different
geographic furniture segments--North America and International. For
comparative purposes, prior year information shown has been restated to
reflect the new geographic segmentation of the Company.
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" and Note 18 to the
Consolidated Financial Statements. See Note 19 to the Consolidated Financial
Statements regarding the April 22, 1999 acquisition by the Company of the
remaining 50% equity interest in the joint venture from Strafor Facom S.A.
Products and Services
Steelcase provides a broad range of office furniture, related workplace
products and comprehensive support services to its customers on a project
basis and through ongoing contractual relationships. The Company distributes
its products through a worldwide network of independent dealers in
approximately 800 locations, including approximately 400 in North America, 340
in Europe and 60 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, in
conjunction with the Company's sales representatives, maintain close
relationships with architects, contract interior designers and corporate
facility managers, who typically influence purchasing decisions. The Company
has experienced minimal turnover in its dealership network and is not
dependent on any one of its dealers.
North American Office Furniture Segment
The North American office furniture segment consists of operations in the
United States and Canada. The Company offers products under the Steelcase
brand, which includes office furniture systems, seating, storage solutions,
desks and casegoods; the Revest brand, which provides remanufactured solutions
for clients; and the Steelcase Design Partnership ("SDP") brands, which focus
on specialty markets.
Office Furniture Systems
Since the mid-1980's, furniture systems have been the largest product
category in the United States office furniture market, representing
approximately one-third of all office furniture sold in calendar 1999.
Steelcase is the market leader in this category, based on sales, offering a
broad range of aesthetic options, performance features, applications and price
points. Office furniture systems consist of movable and reconfigurable
components, which may be used to create work areas of variable sizes and
configurations. Furniture systems
2
generally use movable panels for space division, acoustic and visual privacy,
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.
The Company introduced Pathways in June 1998. Pathways is a unique portfolio
of integrated architectural products which includes walls, doors, floors,
lighting, furniture and technology products designed to coordinate with
existing Steelcase products as well as competitors' products. Pathways
products are designed to provide integrated interiors, from wall to ceiling,
particularly in buildings that can no longer accommodate the wiring and
cabling needs of today's technology-driven workplaces.
Seating
Seating represented approximately one-quarter of all the office furniture
sold in the United States in calendar 1999. Steelcase believes it is the
world's largest office seating manufacturer and a proven market leader in
seating innovation. The Company believes its focus and research on materials,
ergonomics, technology and work processes, along with its broad platform of
product styles and price points, will maintain and enhance the Company's share
of the seating market. The Company believes it offers the widest selection of
chair types and chairs in the office furniture industry, providing chairs and
other types of seating for virtually every office need. The Company's primary
seating products are high-performance chairs; other seating products include
guest, executive, lounge, stackable and collaborative or team-based offerings
in both wood and non-wood materials.
Storage Solutions
The Company believes 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 of 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 and
color.
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,
providing a broad scope of style and performance options. In addition, the
Turnstone brand desks and casegoods are targeted to more cost-conscious
customers.
Refurbished and Remanufactured Furniture
The Revest brand offers remanufactured and refurbished, high quality used
office furniture, including systems products. Revest creates "like new"
furniture by rebuilding Steelcase office furniture, which includes the
replacement of parts and electrical components with new products and finishes
to meet a full range of functional, image, and budget needs.
Steelcase Design Partnership
The SDP brands offer complementary product lines that focus 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, videoconferencing facilities and
healthcare environments. SDP also provides surfacing materials for
hospitality, healthcare and contract markets, architectural millwork and
ergonomic tools for the workplace. The Steelcase Design Partnership includes:
Brayton International Inc.;
3
Metropolitan Furniture Corporation; Office Details Inc.; Wigand Corporation
and Vecta, a division of the Company. SDP also includes the Steelcase Surfaces
Partnership which began in January 1999 with the combined operations of
DesignTex Fabrics, Inc. and J.M. Lynne Co., Inc. DesignTex provides and
designs textiles for seating upholstery, wallcovering and office panel
systems, and serves contract, hospitality and healthcare markets. J.M. Lynne
is a leading designer and distributor of vinyl wallcoverings for commercial
environments.
International Office Furniture Segment
The International office furniture segment consists of Steelcase Strafor
S.A. ("Steelcase Strafor") and Steelcase International. The Company's European
business is conducted almost entirely through Steelcase Strafor, while
Steelcase International includes all of the Company's non-European
international operations.
Steelcase Strafor
Steelcase Strafor is a leading office furniture company in Europe with net
sales of approximately $611 million for the year ended December 31, 1999.
Steelcase Strafor has the leading market share in France, with approximately
20% market share in calendar year 1999; its share of the entire office
furniture market in Europe is approximately 6%. Steelcase Strafor acquired
Werndl BuroMobeL AG ("Werndl") in December 1998. Munich-based Werndl is the
second largest wood office furniture company in Germany with net sales of
approximately $117 million for the year ended December 31, 1999.
Steelcase Strafor serves the European market with 15 manufacturing
facilities located in six countries, approximately 4,100 employees and a
network of independent dealers in approximately 340 locations. Steelcase
Strafor develops and manufactures its own office furniture products 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.
Workstations
The workstation segment includes operative desking and executive furniture.
Operative desking accounts for nearly half of all office furniture sold in the
European market. Operative desking consists of various types of desks, tables
and work surfaces that can be used in many variable, freestanding
arrangements. Steelcase Strafor is the European market leader in operative
desking, placing a priority on the balance between aesthetics and efficiency.
Executive furniture is a smaller portion of the total European office
furniture market. Steelcase Strafor is a European market leader in this area,
providing a range of top-quality, high-performance executive furniture
products.
Seating
As in the United States, the seating segment makes up about one-quarter of
the total European office furniture market. Steelcase Strafor is a European
market leader offering a wide range of functional, ergonomic and aesthetic
choices. High-performance and general use chairs, as well as guest and lounge
seating are offered under several product names. The Company believes its
focus and research on materials, ergonomics, technology and work processes,
along with its broad platform of product styles and price points, will
maintain and enhance the Company's share of the European seating market.
Filing and Storage
Steelcase Strafor is also a leader in the filing and storage segment of the
European market. The Company's office furniture workstation offerings are
complemented by a full range of storage solutions, including modular and
personal filing and storage products, some of which are fixed and others of
which are portable. The Company also markets other filing and storage products
including specialized records and library storage along with shelving
products.
4
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, Singapore, Thailand, United Arab Emirates,
and Venezuela.
The Company exports its products to non-European markets. The Company
supplements this business with two manufacturing facilities in Brazil and
Saudi Arabia and with licensees in Japan and Colombia. In addition, the
Company owns 26% of its Thailand licensee, Modernform Group Public Company
Limited. Sales of the Company's products to non-European international markets
were approximately $110 million for the year ended February 25, 2000; these
sales are made almost exclusively through the Company's dealer network.
Services and Other Businesses Segment
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, 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 Services and Other Businesses Segment is
comprised of Steelcase Financial Services Inc. ("SFSI"), IDEO Product
Development, Inc. and the Attwood Corporation. SFSI provides financing to
dealerships and lease financing to customers for products in connection with
the acquisition of office furniture. SFSI's net investment in leased assets
was $342.8 million as of February 25, 2000.
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 continues to pursue several
initiatives, 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. It is the Company's strategic plan to
integrate the best practices of all its facilities worldwide, maximize
efficiencies globally and provide unparalleled service. The Company believes
adequate sources are available for all of its raw materials.
Working Capital
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. The Company does not
believe that it or the industry in general has any special practices or
conditions related to working capital items that are significant to
understanding the Company's business.
Backlog
The Company's products are manufactured and shipped a few weeks following
receipt of order. The amount of the order backlog at any particular time is
not indicative of the level of net sales for any particular fiscal period.
Intellectual Property
The Company and its subsidiaries have approximately 270 active U.S. utility
patents and approximately 170 active U.S. design patents relating to current
and anticipated products. The Company and its subsidiaries also
5
own approximately 545 designs and 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. During
fiscal 2000, the Company formed Steelcase Development Inc., a wholly owned
subsidiary of the Company, for the purpose of acquiring, managing, licensing,
and enforcing intellectual property rights for the Company. The average
remaining life of the utility patents in its U.S. portfolio is approximately
12 years.
The Company and its subsidiaries have registered various trademarks and
service marks in the United States and certain foreign countries. 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.
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.
Competition
North American Office Furniture Segment
The North American 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 the North
American market are Herman Miller, Inc. ("Herman Miller"), Haworth, Inc.
("Haworth"), Knoll, Inc. ("Knoll"), Kimball International, Inc. ("Kimball")
and 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, such as Teknion
Inc. and Office Specialty, Inc.
International Office Furniture Segment
The European office furniture market is highly competitive and extremely
fragmented. Steelcase Strafor generally competes with a number of other
European-based enterprises. Although most competitors have a moderate share in
each of the market segments, some have an emphasis in one or two segments. Few
companies have a significant pan-European presence in all of the office
furniture segments; the Samas-Groep N.V. and the Haworth Europe Group compete
with Steelcase Strafor on this level. Similar to the North American market,
companies compete primarily on price, delivery and service, product design and
features, quality and the relationships developed between dealers and
customers. The Company believes Steelcase Strafor has an unmatched ability to
meet pan-European customer needs as well as specific customer needs which are
unique to the various regions.
The non-European international markets are grouped together to form the
remainder of the International market. 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 market share in any of the countries in
which it offers its products outside the United States, Canada and Europe.
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.
6
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 Environmental Laws. 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.
The Company received a Letter of Violation regarding alleged malfunctions of
a single piece of equipment at its Systems I plant in Grand Rapids, Michigan.
At approximately the same time, the Company also engaged in negotiations with
the Michigan Department of Environmental Quality ("MDEQ") regarding MDEQ's
interpretation of Volatile Organic Compound ("VOC") emission limits for
adhesives operations at the Company's Systems I plant. These matters were
resolved in a single consent decree with a penalty of $50,000.
The Company has been engaged in negotiations regarding operational and
record keeping requirements for one piece of pollution control equipment and
associated coating lines at the Company's Kentwood, Michigan, Context Plant.
At the time the Company discovered and self reported the issues at the Context
plant, it also discovered and self reported deficiencies in reporting VOC
emissions from its Grand Rapids and Kentwood, Michigan facilities. The Company
also received a Letter of Violation regarding alleged deficiencies in its
compliance with record keeping requirements documenting compliance with the
cleaning wash-off solvent usage and leak inspection and maintenance
requirements of the NESHAPs for Wood furniture. The Company believes, 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 material penalty. However, the penalty likely will
exceed $100,000.
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 Letters 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 25, 2000, the Company had approximately 20,900 employees,
including approximately 13,400 hourly and approximately 7,500 salaried
employees. Approximately 16,300 of the total employees are located in North
America, less than 10% of which are covered by collective bargaining
agreements. Management believes that the Company's relations with its
employees are good.
7
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 Brazil, Canada, France, Germany, Mexico, Morocco, Portugal, Saudi Arabia,
Spain, Thailand and the United Kingdom. These office, showroom, manufacturing
and distribution facilities total approximately 24 million square feet, of
which approximately 7 million square feet are leased.
The Company's principal office, manufacturing and distribution facilities
(300,000 square feet or larger) as of February 25, 2000 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.. 1,207,000 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 Owned Miscellaneous (1)
Gaines Township,
Michigan............... 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...... 441,000 Leased Wood Furniture Manufacturing
Lowell, Michigan........ 480,000 Owned Attwood Manufacturing
Athens, Alabama......... 777,000 Owned Manufacturing
Tustin, California...... 1,044,000 Owned Manufacturing
New Paris, Indiana...... 314,000 Owned Manufacturing
Fletcher, North
Carolina............... 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 Manufacturing
Durlangen, Germany...... 415,000 Owned Manufacturing
Madrid, Spain........... 358,000 Owned Manufacturing
Rosenheim, Germany...... 368,700 Owned Manufacturing and Offices
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(1) Approximately 175,000 square feet is currently utilized for distribution,
150,000 square feet for showroom, 58,000 square feet for manufacturing,
64,000 square feet for the Company's Corporate Learning and Development
Center and the balance for commercial leasing.
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:
None.
8
Item 4(a). Executive Officers of Registrant:
Set forth below is certain information regarding the executive officers of
the Company.
Name Age Position
---- --- --------
Robert A. Ballard..... 64 President, Steelcase North America
Robert W. Black....... 40 Senior Vice President, Steelcase International
Jon D. Botsford....... 45 Senior Vice President, General Counsel and
Corporate Secretary
Mark T. Greiner....... 48 Senior Vice President, Global E-Business and
Chief Information Officer
James P. Hackett...... 45 President and Chief Executive Officer
Nancy W. Hickey....... 48 Senior Vice President, Global Human Resources
James P. Keane........ 40 Senior Vice President, Corporate Strategy,
Research and Development
Michael I. Love....... 52 President and Chief Executive Officer, Steelcase
Design Partnership
Alwyn Rougier-Chapman. 61 Senior Vice President-Finance and Chief Financial
Officer
Robert A. Ballard has been President, Steelcase North America since 1999.
Mr. Ballard served as Executive Vice President, Business Operations from 1996
to 1999. From 1994 to 1996, Mr. Ballard held the position of Senior Vice
President, Manufacturing Operations.
Robert W. Black has been Senior Vice President, Steelcase International
since 1999. Mr. Black served as Vice President, European Ventures from 1998 to
1999. From 1996 to 1998, Mr. Black served as Vice President, Marketing. From
1995 to 1996, Mr. Black served as Vice President, Corporate Strategy and
Development.
Jon D. Botsford has been Senior Vice President, General Counsel and
Corporate Secretary of the Company since 1999. Mr. Botsford served as Vice
President, General Counsel and Corporate Secretary from 1998 to 1999, and
General Counsel and Corporate Secretary from 1997 to 1998. From 1992 to 1997,
Mr. Botsford held the position of Assistant General Counsel.
Mark T. Greiner has been Senior Vice President, Global E-Business and Chief
Information Officer since 1999. Mr. Greiner served as Vice President and Chief
Information Officer from 1996 to 1999. From 1994 to 1996, Mr. Greiner served
as Vice President, Corporate Marketing, Communications and Media Technology.
James P. Hackett has been President and Chief Executive Officer of the
Company since 1994. 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.
Nancy W. Hickey has been Senior Vice President, Global Human Resources since
1999. Ms. Hickey served as Vice President, Corporate Human Resources from May
to November 1999. From 1994 to 1999, Ms. Hickey served as Vice President,
Dealer and Customer Alliances.
James P. Keane has been Senior Vice President, Corporate Strategy, Research
and Development of the Company since 1999. Mr. Keane served as Vice President,
Corporate Strategy, Research and Development from 1998 to 1999. From 1997 to
1998, Mr. Keane held the position of Vice President, Corporate Strategy and
Development. From 1992 until 1997, Mr. Keane was Vice President and Chief
Financial Officer of Cloud Corporation, a packaging company.
Michael I. Love has been President and Chief Executive Officer, Steelcase
Design Partnership since March 2000. Mr. Love was president of Vecta, a
division of Steelcase, from 1994 through March 2000.
Alwyn Rougier-Chapman has been Senior Vice President-Finance and Chief
Financial Officer since 1994. Mr. Rougier-Chapman also served as Treasurer
from 1994 to 2000.
9
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.
As of May 1, 2000, the Company had outstanding 30,256,620 shares of Class A
Common Stock with 14,221 shareholders of record thereof and 120,730,205 shares
of Class B Common Stock with 243 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 years ended February 25, 2000
and February 26, 1999.
Class A
Common Stock
Price Range
---------------
High Low
------- -------
Fiscal 2000
1st Quarter............................................... $20.750 $13.625
2nd Quarter............................................... $20.000 $14.500
3rd Quarter............................................... $15.500 $12.250
4th Quarter............................................... $13.750 $10.250
Fiscal 1999
1st Quarter............................................... $38.375 $28.000
2nd Quarter............................................... $29.875 $18.125
3rd Quarter............................................... $19.750 $12.750
4th Quarter............................................... $18.438 $13.313
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 2 thereto.
The aggregate dividends paid in the years ended February 25, 2000 and February
26, 1999 are set forth below (in millions):
Year Ending Total
----------- -----
2000.............................................................. $67.3
1999.............................................................. $63.1
10
Item 6. Selected Financial Data
FINANCIAL HIGHLIGHTS
(in millions, except per share data)
February 25, February 26, February 27, February 28, February 23,
2000(3) 1999 1998 1997(1) 1996
------------ ------------ ------------ ------------ ------------
Statement of Income Data
Net sales............... $3,316.1 $2,742.5 $2,760.0 $2,408.4 $2,155.9
Net sales increase
(decrease)............. 20.9% (0.6)% 14.6% 11.7% 5.2%
Gross profit............ $1,102.7 $ 989.4 $1,003.4 $ 856.8 $ 687.7
Gross profit--% of net
sales.................. 33.3% 36.1% 36.4% 35.6% 31.9%
Operating income........ $ 271.8 $ 317.2 $ 317.4 $ 141.6 $ 163.6
Operating income--% of
net sales.............. 8.2% 11.6% 11.5% 5.9% 7.6%
Net income.............. $ 184.2 $ 221.4 $ 217.0 $ 27.7 $ 123.5
Net income--% of net
sales.................. 5.6% 8.1% 7.9% 1.2% 5.7%
Earnings Per Share
(basic and diluted)
Net income.............. $ 1.21 $ 1.44 $ 1.40 $ 0.18 $ 0.80
Weighted average shares
outstanding............ 152.8 153.8 154.8 154.7 154.6
Dividends per share of
common stock(2)........ $ 0.44 $ 0.41 $ 1.36 $ 0.27 $ 0.26
Balance Sheet Data
Working Capital......... $ 200.1 $ 290.6 $ 355.1 $ 474.6 $ 475.6
Assets.................. $3,037.6 $2,182.5 $2,007.2 $1,922.1 $1,884.5
Long-term debt.......... $ 257.8 -- -- -- --
Liabilities............. $1,475.4 $ 682.5 $ 674.8 $ 542.1 $ 490.9
Shareholder's Equity.... $1,562.2 $1,500.0 $1,332.4 $1,380.0 $1,393.6
Statement of Cash Flow
Data
Net cash provided by
operating activities... $ 305.7 $ 359.9 $ 402.7 $ 126.7 $ 264.1
Depreciation and
amortization expense... $ 141.8 $ 107.0 $ 95.3 $ 93.4 $ 92.5
Capital expenditures.... $ 188.8 $ 170.4 $ 126.4 $ 122.0 $ 104.6
Dividends paid(2)....... $ 67.3 $ 63.1 $ 210.9 $ 41.8 $ 39.8
- --------
(1) During 1997, the Company concluded a 17-year patent litigation which, net
of reserves, reduced net income by $123.5 million.
(2) 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 4 to the Consolidated Financial Statements.
(3) Includes Steelcase Strafor. See Note 19 to the Consolidated Financial
Statements.
11
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations:
Overview
The Company recorded net sales of $3,316.1 million for fiscal 2000 ("2000")
an increase of 20.9% over fiscal 1999 ("1999") net sales of $2,742.5 million,
primarily attributable to the acquisition of Steelcase Strafor S.A. and
subsidiaries ("Steelcase Strafor") and other domestic acquisitions. The
Company consolidated the results of Steelcase Strafor for the final three
quarters of 2000 after completing the acquisition of the remaining 50% equity
interest in Steelcase Strafor on April 22, 1999. The acquisition was effective
as of March 31, 1999 and has been accounted for under the purchase method of
accounting in the accompanying consolidated financial statements as of
February 25, 2000. The Company accounts for the results of operations of
Steelcase Strafor on a two month lag. Excluding the impact of all
acquisitions, the Company recorded net sales of $2,739.5 million for 2000, a
decrease of 0.1% over 1999 net sales.
The Company recorded consolidated net income for 2000 of $184.2 million, or
$1.21 per share (basic and diluted), which included a $15.0 million after-tax
charge for material and installation costs associated with Pathways product
line improvements. The earnings for 2000 decreased 16.8% from the $221.4
million, or $1.44 per share (basic and diluted), earned in 1999. In addition
to the Pathways charge discussed above, the decrease in profitability was
attributable to several factors which occurred during 2000 including:
. An unfavorable industry-pricing environment.
. The impact of new products--which typically have lower initial margins--
in the sales mix.
. Major new product introduction and ramp up costs.
. The expected dilutive effect of the acquisition of Steelcase Strafor
(approximately $.04 per share) due to the amortization of intangibles
that resulted from the acquisition, as well as financing and interest
costs arising from credit facilities used to fund the acquisition.
12
Results of Operations
The following table sets forth consolidated statement of income data as a
percentage of net sales for 2000, 1999, and 1998.
Year Ended Increase (Decrease)
-------------------------------------- -------------------------
February 25, February 26, February 27,
2000 1999 1998 2000 vs 1999 1999 vs 1998
------------ ------------ ------------ ------------ ------------
Net sales............... 100.0% 100.0% 100.0% 20.9% (0.6)%
Cost of sales........... 66.7 63.9 63.6 26.3% (0.2)%
----- ----- ----- ----- -----
Gross profit............ 33.3 36.1 36.4 11.5% (1.4)%
Selling, general and
administrative
expenses............... 25.1 24.5 24.9 23.6% (2.0)%
----- ----- ----- ----- -----
Operating income........ 8.2 11.6 11.5 (14.3)% (0.1)%
Interest expense........ (0.5) -- -- n/m n/m
Other income, net....... 1.2 0.7 0.8 100.5% (10.6)%
----- ----- ----- ----- -----
Income before provision
for income taxes and
equity in net income of
joint ventures and
dealer transitions..... 8.9 12.3 12.3 (12.2)% (0.8)%
Provision for income
taxes.................. 3.4 4.5 4.7 (7.5)% (4.6)%
----- ----- ----- ----- -----
Income before equity in
net income of joint
ventures and dealer
transitions............ 5.5 7.8 7.6 (14.9)% 1.6%
Equity in net income of
joint ventures and
dealer transitions..... 0.1 0.3 0.3 (62.9)% 12.7%
----- ----- ----- ----- -----
Net income.............. 5.6% 8.1% 7.9% (16.8)% 2.0%
===== ===== ===== ===== =====
- --------
n/m = not meaningful
Net sales
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
131, Disclosure about Segments of an Enterprise and Related Information, the
Company operates on a worldwide basis within three reportable segments, two of
which are geographic furniture segments, and services and other businesses. In
prior years, the Company has reported the two geographic furniture segments as
being the U.S. and International/Canada combined. Due to the acquisition of
the remaining 50% equity interest in Steelcase Strafor and the significant
impact of this acquisition on the Company's consolidated financial statements,
the Company has implemented a new reporting structure which focuses separately
on North American and International furniture operations. North America
includes the U.S., Canada and the Steelcase Design Partnership ("SDP").
International includes the rest of the world, with the major portion of the
operations located in Europe. The services and other businesses segment
remains largely unchanged, with only insignificant reclassifications (see Note
18).
13
The following table sets forth consolidated and pro forma worldwide net
sales by segment for 2000, 1999 and 1998. The segment disclosures for 1999 and
1998 have been restated to reflect the Company's new reporting structure noted
above (in millions).
Year Ended Increase (Decrease)
-------------------------------------- -------------------------
February 25, February 26, February 27,
2000 1999 1998 2000 vs 1999 1999 vs 1998
------------ ------------ ------------ ------------ ------------
North America........... $2,606.4 $2,511.3 $2,495.7 3.8% 0.6%
International(1)........ 573.2 115.3 138.4 n/m (16.7)%
Services and other
businesses............. 136.5 115.9 125.9 17.8% (7.9)%
-------- -------- -------- ---- -----
Consolidated net sales.. $3,316.1 $2,742.5 $2,760.0 20.9% (0.6)%
-------- -------- -------- ---- -----
Steelcase Strafor(1)(2). 148.3 506.9 468.6 n/m 8.2%
-------- -------- -------- ---- -----
Worldwide net sales(1).. $3,464.4 $3,249.4 $3,228.6 6.6% 0.6%
======== ======== ======== ==== =====
- --------
(1) Worldwide net sales include, on a pro forma basis, the Company's
consolidated net sales plus those of its unconsolidated operations in
Steelcase Strafor. Because of the acquisition date, Steelcase Strafor's
sales for 2000 have been consolidated (and are included in International)
for the last nine months, with only the first quarter of 2000 being
unconsolidated. Full year sales for 1999 and 1998 were unconsolidated and
included in the Steelcase Strafor line item above. Net sales of all other
unconsolidated joint ventures and dealer transitions are not material.
See Notes 8 and 19 to the Consolidated Financial Statements.
(2) In local currency, Steelcase Strafor net sales increased 6.1% in 2000,
9.8% in 1999 and 19.1% in 1998.
The Company's consolidated net sales in 2000 posted a 20.9% increase over
1999 net sales, primarily from the acquisition of Steelcase Strafor and other
domestic acquisitions. Excluding the impact of all acquisitions, the Company's
net sales in 2000 decreased 0.1% compared to 1999 net sales. During 1999 and
1998, the Company's consolidated net sales did not include those of Steelcase
Strafor and therefore, more closely resembled those of the U.S. office
furniture industry. In 1999, the Company, along with the U.S. office furniture
industry overall, experienced a slowdown in its growth. The Company posted
flat sales for the year, lagging U.S. industry growth as reported by The
Business and Institutional Furniture Manufacturers' Association ("BIFMA"). For
1998, the Company's consolidated net sales outpaced the industry, increasing
by 14.6%.
North America. North American sales grew at 3.8%, 0.6% and 16.2% for 2000,
1999 and 1998, respectively. Domestic acquisitions, along with strong SDP
sales and an increased momentum in new product sales, provided the bulk of the
sales increase across North America in 2000. New product sales doubled their
run rates in 2000 over 1999. The sales of the Company's core Steelcase branded
products in North America followed the industry trends in 2000, as sales for
the full year declined. Excluding the impact of acquisitions, North American
net sales for 2000 increased 0.2%, which is comparable to fiscal 1999 levels,
despite an overall decline in the industry of 1%.
North American net sales growth in 1998 resulted primarily from increases in
unit sales across most product categories reflecting strong industry
fundamentals. In 1999, the industry began to soften due to financial
volatility in Asian and Latin American markets, which, along with a high level
of merger and acquisition activity within the U.S. Fortune 500 companies,
contributed to the lack of sales growth. As the industry softened in 1999, the
Company's core Steelcase branded products in North America were impacted by
the deferred spending actions within the Company's large corporate account
business, resulting in declines across the same product categories that
benefited from a strong industry in 1998.
International. In 2000, due to the effective date of Company's acquisition
of the remaining 50% interest in Steelcase Strafor, the International segment
includes nine months of Steelcase Strafor net sales. Steelcase Strafor
realized local currency growth of 6.1% in 2000 primarily driven by Werndl
BuroMobeL AG ("Werndl"). However, the devaluation of the euro throughout 2000
offset most of the local currency growth, resulting in 1% growth in U.S.
dollars. Net sales outside of Europe declined by 4.0% during 2000, primarily
due to a decline in the Company's export business coupled with the adverse
impact of currency devaluation in Brazil, offset by
14
growth in Mexican operations. In 1999, the International segment decreased by
16.7% due to several factors including a reduction in export projects to Latin
America and flat sales in Asia, as well as the reorganization of the Company's
Japanese subsidiary. In 1998, the International segment experienced growth of
9.3% due to strong export sales to both Latin America and the Middle East.
Services and other businesses. Services and other businesses rose by 17.8%
in 2000 after experiencing a decline of 7.9% in 1999. The 2000 sales were
positively impacted by growth in IDEO, the Company's subsidiary that provides
product development and innovation services. The decline in 1999 was due to
the disposal of a product line and distributor within the Company's marine
business at the end of the third quarter of 1998. Net sales for 1998 were
virtually flat.
Gross profit
The Company's gross profit as a percentage of sales decreased in 2000 from
36.1% to 33.3% after a slight decrease in 1999 from the 1998 level of 36.4%.
The Company's warranty policy 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. In accordance with
this policy, the Company recorded a $24.5 million pre-tax charge for expenses
related to the field retrofit of beltways and insulation materials within
installed Pathways products. Excluding this charge, the Company's gross margin
was 34.0% which was a decrease of 2.1 percentage points from the prior year.
This margin decline during 2000 was primarily the result of the unfavorable
industry-pricing environment, the impact of new products--which typically have
lower initial margins--in the sales mix and major new product introduction and
ramp up costs. Additionally, the Company experienced the expected margin
decrease of approximately 0.5 percentage points with the consolidation of
Steelcase Strafor, which has historically had lower margins. The overall
decrease in gross margin for 2000 was partially offset by lower variable
compensation.
In 1998 and 1999, margins remained relatively flat as the Company's
continued efforts to reduce costs and to improve efficiencies were tempered by
upfront investments required to fund cost-reduction efforts to be realized in
future periods, as well as the expected disruptions and inefficiencies
associated with the Company being in the midst of launching the largest
product portfolio in its history.
Selling, general and administrative expenses
Selling, general and administrative ("SG&A") expenses as a percentage of net
sales increased to 25.1% in 2000 from 24.5% in 1999 after decreasing from
24.9% in 1998. Overall SG&A ratios were impacted by Steelcase Strafor,
including increased intangible amortization, write-off of bad debts in the
United Kingdom and costs associated with the consolidation of German
operations. Excluding Steelcase Strafor, SG&A expense held flat at 24.5%
reflecting management's cost containment and resource redeployment efforts.
During the three-year period, investments in information systems and new
product research, development and launch costs have been significant. However,
the Company has been focused on the redeployment of resources in support of
its strategic initiatives. In addition, a reduction in variable compensation
contributed to the achievement of the current year's 24.5% operating expense
ratio, excluding the impact of Steelcase Strafor.
In 1998, the Company reported that selling, general and administrative costs
included aggregate costs of $11.0 million relating to the restructuring of a
foreign subsidiary, the relocation of a showroom facility, the initial public
offering and receipt by the Company of a net litigation settlement in the
amount of $9.8 million. There were no similar costs or litigation settlements
of a material nature in 1999.
Interest expense; Other income, net and Income taxes
2000 was impacted significantly by the acquisition of Steelcase Strafor,
which was partially financed through short and long-term borrowings. Interest
expense increased to $15.9 million from zero in 1999 and $1.7 million in 1998
as a result of the acquisition of Steelcase Strafor. Overall, other income,
net did not vary significantly during 1998 and 1999. However, other income,
net increased significantly in 2000 due to several
15
gains. First, the Company recognized a gain of $7.5 million in connection with
the transition of its customers to new dealers in the United Kingdom, with
respect to which the Company had previously written off bad debts. Second, the
Company recorded a gain of $10.0 million from the sale of certain non-income
producing facilities. Finally, the Company recorded investment income of $7.0
million from the sale of investments in common stock. The above mentioned
gains were offset by decreased interest income of $6.6 million in 2000 due to
lower cash balances. Also, 1999 included $5.8 million of interest income
recorded in connection with the favorable resolution of income tax litigation
discussed below.
Income tax expense as a percentage of income before taxes ("the effective
tax rate") approximated 39.0% in 2000, 37.0% in 1999 and 38.5% in 1998. During
2000, the effective tax rate increased because of the consolidation of
Steelcase Strafor and the recording of non-deductible goodwill. Steelcase
Strafor operations are located in Europe, whose countries typically have
higher effective tax rates than the U.S. During 1999, the provision for income
taxes benefited from the favorable resolution of income tax litigation dating
back to 1989, primarily related to investment tax credits and accelerated
depreciation on the Company's Corporate Development Center. The resolution of
these matters contributed to a reduced effective tax rate for 1999 and
resulted in the recognition of interest income of $5.8 million in 1999. These
tax matters increased 1999 consolidated net income by $6.2 million, or $0.04
per share (basic and diluted).
Net income
For the reasons set forth above, net income decreased from $221.4 million in
1999 to $184.2 million in 2000 after increasing from $217.0 million in 1998.
Net income decreased 16.8% in 2000 after increasing by 2.0% in 1999 and 43.5%
in 1998.
Liquidity and Capital Resources
Historically, the Company's cash and capital requirements have been
satisfied through cash generated from operating activities. The Company's
financial position at February 25, 2000 included cash, cash equivalents and
short-term investments of $88.6 million, which is slightly higher than the
$76.1 million which existed on February 26, 1999. These funds, in addition to
cash generated from future operations and available credit facilities, are
expected to be sufficient to finance the known or forseeable future liquidity
and capital needs of the Company.
Through February 1999, the Company had no long-term debt. However, with the
acquisition of Steelcase Strafor and management's intent to leverage the
significant financial resources available to the Company to meet its growth
objectives, the Company has obtained long-term debt financing from bank
syndicates in Europe and the United States. The Company is currently in the
process of obtaining a debt rating to further utilize its available financial
resources. Total debt at February 25, 2000 aggregated $466.8 million, which
was approximately 23% of total capitalization of the Company. The Company also
holds $483.1 million of interest bearing assets predominantly through its
finance subsidiary, Steelcase Financial Services Inc.
Cash provided by operating activities
Cash provided by operating activities totaled $305.7 million in 2000, $359.9
million in 1999, and $402.7 million in 1998. The operating cash flows have
been impacted by a reclassification within the cash flow statement. The
Company has reclassified the change in leased assets to the investing portion
of the cash flow statement, which is consistent with the Company's allocation
of resources to its captive finance operation and industry practice for
finance subsidiaries. The cash provided by operations resulted primarily from
net income excluding non-cash charges such as depreciation and amortization,
net of increases in accounts receivable and inventories and prepaids. The
consolidation of Steelcase Strafor increased working capital in 2000. However,
management continues to closely monitor the Company's inventories and accounts
receivable, attempting to maximize the number of inventory turns per year and
minimize the impact of increasing international receivables, which typically
have longer payment terms than domestic dealers.
16
Cash used in investing activities
Cash used in investing activities totaled $514.6 million in 2000, $342.2
million in 1999 and $219.2 million in 1998. The increases have resulted from
increases in capital expenditures and leased assets, joint venture
transactions and corporate acquisitions.
The Company's capital expenditures were $188.8 million in 2000, $170.4
million in 1999 and $126.4 million in 1998, reflecting investments in excess
of depreciation for each of the last three years. Capital expenditures
continue to include increased investments in manufacturing equipment,
information systems and facilities. Collectively, these investments are
expected to improve productivity and safety, increase capacity, decrease the
impact on the surrounding environments in which the Company operates and
facilitate the launch of new products. The Company expects capital
expenditures in fiscal 2001 to equal or exceed 2000 levels due to the planned
construction of a new wood manufacturing facility and the continued investment
in new product development, information systems and corporate and showroom
facilities. The Company expects to fund these capital expenditures primarily
through cash generated from operations.
The Company continues to invest in its leasing portfolio, which includes
both direct financing and operating leases of office furniture products. The
Company's net investment in leased assets increased from $228.9 million as of
February 26, 1999 to $349.1 million as of February 25, 2000. The Company
expects to fund future investments in leased assets primarily through its
lease receivables transfer facility and through cash generated from
operations.
Joint venture transactions in the three-year period include the issuance of
a note receivable to Steelcase Strafor in 1999 in the amount of $66.4 million
to equalize lending levels between the Company and its partner, Strafor Facom
S.A., and to fund in part the acquisition of Werndl by Steelcase Strafor.
Corporate acquisitions in 2000, aggregating $209.6 million, reflect the
complete ownership of Steelcase Strafor, Clestra Hauserman and a significant
dealer. Corporate acquisitions in 1999, aggregating $57.2 million, reflect the
complete ownership of J.M. Lynne and the partial ownership of Microfield
Graphics, Clestra Hauserman and the Modernform Group Public Company Limited.
See Note 19 to the Consolidated Financial Statements.
Cash provided by (used in) financing activities
Cash provided by (used in) financing activities totaled $219.4 million in
2000, ($53.3) million in 1999 and ($254.4) million in 1998, reflecting
dividends paid, certain common stock transactions and proceeds from the
issuance of debt, net of repayments.
Management continues to evaluate the optimal capital structure for the
Company in light of its long-term growth strategies. At the time of the above
mentioned acquisition of Steelcase Strafor, the Company established a 364-day
unsecured committed $200 million revolving credit facility. Subject to certain
conditions, the facility is renewable annually for additional 364-day periods.
The Company also established a $200 million lease receivables transfer
facility. Subject to certain conditions, the facility is renewable annually,
with borrowings on the facility scheduled to mature in accordance with the
terms of the underlying leases.
Additionally, the Company has an unsecured, committed credit facility of EUR
200 million from bank syndicates in Europe to provide liquidity and finance
capital expenditures for its European operations. The agreement is comprised
of two tranches: Tranche A is a EUR 75.0 million, 364-day revolving facility,
and Tranche B is a EUR 125.0 million, five-year term facility.
Annual dividends per share of common stock were $0.44 in 2000, $0.41 in 1999
and $0.39 in 1998. In addition, the Company paid a special dividend in 1998 in
the aggregate amount of $150.9 million, or approximately $0.97 per share of
common stock.
17
During 1999, eligible employees purchased shares of Class A Common Stock
pursuant to the terms of the Employee Discount Option Grant, resulting in
proceeds to the Company of $24.8 million. The shares for this grant, along
with the shares for the Employee Stock Grant issued in 1998, were purchased by
the Company from the selling shareholders in the initial public offering for
$43.5 million. Under a three million share repurchase program authorized by
the Board of Directors on June 17, 1998 and amended on September 22, 1999 for
an additional three million shares, the Company repurchased 1,373,870 and
794,300 shares of Class A Common Stock for $18.4 million and $15.0 million in
2000 and 1999, respectively, and 1,086,400 Class B shares for $18.3 million in
2000. Management anticipates that the stock repurchase program will not reduce
the Company's tradable share float in the long run as it expects that Class B
Common Stock will continue to convert to Class A Common Stock over time.
Year 2000
Beginning in 1994, the Company actively engaged in replacing or modifying
all business software applications as well as manufacturing and other
equipment with embedded technology that could fail or generate erroneous
results as a result of Year 2000 date processing ("Year 2000 issues") issues
affecting Steelcase Inc. and most other companies. Prior to December 31, 1999,
the Company completed the modification or replacement of all critical business
applications, technical infrastructure components and manufacturing equipment,
as well as contingency and business continuity planning activities for
critical business processes within the Company.
As of this filing, there have been no Year 2000 issues reported or
discovered that would be expected to have a material impact on the Company's
operations or future results of operations.
Costs incurred through the date of this filing specifically to address Year
2000 issues approximated $18 million. Management views the process of
assessing and remediating Year 2000 issues as an on-going effort which will
require continued focus, testing and verification throughout calendar year
2000. However, no material future expenditures are anticipated.
Euro Conversion
On January 1, 1999, eleven of the fifteen member countries of the European
Union established fixed conversion rates between their existing sovereign
currencies and the euro. There will be a transition period from January 1,
1999 through January 1, 2002, at which time all legal tender will convert to
the euro. The transition period is anticipated to resolve difficulties in
handling local currencies and the euro simultaneously, while remaining
flexible to the market. The Company's primary exposure to the euro conversion
is concentrated in Steelcase Strafor. Steelcase Strafor has created an
internal Euro Committee, a pan-European multifunctional team whose goal is to
determine the impact of this currency change on products, markets and
information systems. Based on the Euro Committee's work to date, the Company
does not expect the euro conversion to have a material impact on Steelcase
Strafor's financial position, or on the Company as a whole.
Safe Harbor Provision
There are certain forward-looking statements under the Liquidity and Capital
Resources, Year 2000, and Euro Conversion sections, particularly those with
respect to the Company's future liquidity and capital needs, future capital
expenditures, conversion of Class B common shares to Class A common shares,
the expected ability of and costs to the Company and its key customers,
dealers and suppliers to successfully manage Year 2000 issues, and the impact
of the euro conversion on the financial position of Steelcase Strafor and the
Company. Such statements involve certain risks and uncertainties that could
cause actual results to vary from stated expectations. The Company's
performance may differ materially from that contemplated by such statements
for a variety of reasons, including, but not limited to, competitive and
general economic conditions domestically and internationally; currency
fluctuations; changes in customer order patterns; the success of new products
and their continuing impact on the Company's manufacturing processes; the
Company's ability to
18
improve margins on new products, to successfully integrate acquired
businesses, to reduce costs, including ramp up costs associated with new
products, and to successfully implement technology initiatives; the impact on
the Company's business due to internal systems or systems of suppliers, key
customers, dealers and other third parties adversely affected by Year 2000
issues; costs, including claims, due to Year 2000 issues and remediation
efforts; the impact of the euro conversion, the sufficiency of the reserve
established with regard to material and installation costs associated with
Pathways product line improvements and other risks detailed in the Company's
10-K Report for the year ended February 25, 2000, and its other filings with
the Securities and Exchange Commission.
Recently Issued Accounting Standards
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities,
establishes accounting and reporting standards for derivative instruments,
requiring recognition of the fair value of all derivatives as assets or
liabilities on the balance sheet. Gains and losses resulting from changes in
fair value would be included in income, or in comprehensive income, depending
on whether the instrument qualifies for hedge accounting and the type of
hedging instrument involved. SFAS No. 137 Accounting for Derivative
Instruments and Hedging Activities-Deferral of the Effective Date of FASB
Statement No. 133 makes this statement effective for fiscal years beginning
after June 15, 2000. Management intends to adopt the provisions of SFAS No.
133 during the Company's fiscal year 2002. The impact of this pronouncement on
the Company's financial results is currently being evaluated.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk:
The principal market risks (i.e., the risk of loss arising from adverse
changes in market rates and prices) to which the Company is exposed are:
. Foreign exchange risks
. Interest rates on debt
Foreign Exchange Risks
International operations constituted approximately 10% and 7% of the
Company's 2000 and 1999 consolidated operating income, respectively. Operating
in international markets involves exposure to the possibility of volatile
movements in foreign exchange rates. The economic impact of foreign exchange
rate movements on the Company is complex because such changes are often linked
to variability in real growth, inflation, interest rates, governmental actions
and other factors. These changes, if material, could cause the Company to
adjust its financing and operating strategies. Therefore, to solely isolate
the effect of changes in currency does not accurately portray the effect on
these other important economic factors. As foreign exchange rates change,
translation of the income statements of the Company's international
subsidiaries into U.S. dollars affects year-over-year comparability of
operating results. The Company generally does not hedge translation risks
because cash flows from international operations are generally reinvested
locally and the cost/benefit of hedging reported earnings is not justifiable.
Changes in foreign exchange rates that would have the largest impact on
translating the Company's international operating profit for 2000 relate to
the euro and the Canadian dollar. The Company estimates that a 10% adverse
change in foreign exchange rates would have reduced operating profit by
approximately $3 million in 2000 and $2 million in 1999, assuming no changes
other than the exchange rate itself. For 2000 and 1999, this represents
approximately 11% and 9%, respectively, of the Company's non-U.S. operating
profit and 1% of consolidated operating profit. As discussed above, this
quantitative measure has inherent limitations. Further, the sensitivity
analysis disregards the possibility that rates can move in opposite directions
and that gains from one country may or may not be offset by losses from
another country.
19
Foreign exchange gains and losses reflect transaction gains and losses.
Transaction gains and losses arise from monetary assets and liabilities
denominated in currencies other than a business unit's functional currency.
Transaction gains and losses are not material for the Company.
Interest Rates
The Company is exposed to interest rate risk primarily on its notes
receivable and leased assets, its short-term borrowings and long-term debt.
The Company manages its interest rate risk through the use of interest rate
swaps and caps and through balancing the notional amount of fixed and variable
rate liabilities with fixed and variable rate assets where appropriate.
Management estimates that a 1% change in interest rates would not have a
material impact on the Company's results of operations for 2000 or 1999, based
upon the year end levels of exposed assets and liabilities.
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-30, attached hereto and found immediately following the signature
page of this Report.
20
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 2000 Annual Meeting of
Shareholders to be held June 15, 2000 (the "Proxy Statement"), under the
captions "Election of Directors" and "Other Matters--Section 16(a) Beneficial
Ownership Reporting 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", "Executive Compensation" 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:
The information required by Item 13 is contained in the Proxy Statement,
under the caption "Compensation Committee Interlocks and Insider
Participation", and is incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K:
(a) Financial Statements and Schedules (F-1 to F-30)
1. Financial Statements
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 25,
2000, February 26, 1999 and February 27, 1998
--Consolidated Balance Sheets as of February 25, 2000 and February 26,
1999
--Consolidated Statements of Changes in Shareholders' Equity for the
Years Ended February 25, 2000, February 26, 1999 and February 27, 1998
--Consolidated Statements of Cash Flows for the Years Ended February
25, 2000, February 26, 1999 and February 27, 1998
--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 25, 2000
None
(c) Exhibits Required by Securities and Exchange Commission Regulation S-K
See Index of Exhibits (page E-1)
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
and Chief Financial Officer
Date: May 25, 2000
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 this 25th day of May, 2000:
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 (Principal Financial Officer and
Alwyn Rougier-Chapman Principal Accounting Officer)
/s/ David Bing Director
- ------------------------------------
David Bing
/s/ William P. Crawford Director
- -------------------------------------
William P. Crawford
/s/ Earl D. Holton Chairman of the Board of Directors and Director
- -------------------------------------
Earl D. Holton
/s/ David D. Hunting, Jr. Director
- -------------------------------------
David D. Hunting, Jr.
/s/ Frank H. Merlotti Director
- -------------------------------------
Frank H. Merlotti
/s/ Robert C. Pew II Director, Chairman Emeritus
- -------------------------------------
Robert C. Pew II
/s/ Robert C. Pew III Director
- -------------------------------------
Robert C. Pew III
/s/ Peter M. Wege Vice Chairman of the Board of Directors and
- ------------------------------------ Director
Peter M. Wege
/s/ Peter M. Wege II Director
- ------------------------------------
Peter M. Wege II
/s/ P. Craig Welch, Jr. Director
- ------------------------------------
P. Craig Welch, Jr.
22
STEELCASE INC.
CONSOLIDATED STATEMENTS OF INCOME
(in millions, except per share data)
Year Ended
--------------------------------------
February 25, February 26, February 27,
2000 1999 1998
------------ ------------ ------------
Net sales............................... $3,316.1 $2,742.5 $2,760.0
Cost of sales........................... 2,213.4 1,753.1 1,756.6
-------- -------- --------
Gross profit............................ 1,102.7 989.4 1,003.4
Selling, general and administrative
expenses............................... 830.9 672.2 686.0
-------- -------- --------
Operating income........................ 271.8 317.2 317.4
Interest expense........................ (15.9) -- (1.7)
Other income, net....................... 40.5 20.2 24.3
-------- -------- --------
Income before provision for income taxes
and equity in net income of joint
ventures and dealer transitions........ 296.4 337.4 340.0
Provision for income taxes.............. 115.5 124.9 130.9
-------- -------- --------
Income before equity in net income of
joint ventures and dealer transitions.. 180.9 212.5 209.1
Equity in net income of joint ventures
and dealer transitions................. 3.3 8.9 7.9
-------- -------- --------
Net income.............................. $ 184.2 $ 221.4 $ 217.0
======== ======== ========
Earnings per share (basic and diluted).. $ 1.21 $ 1.44 $ 1.40
======== ======== ========
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 25, February 26,
2000 1999
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents.......................... $ 73.7 $ 67.5
Short-term investments............................. 14.9 8.6
Accounts receivable, less allowances of $45.5 and
$27.6............................................. 592.6 348.9
Notes receivable and leased assets................. 189.0 140.4
Inventories........................................ 166.5 96.5
Prepaid expenses................................... 12.5 6.8
Deferred income taxes.............................. 78.1 68.7
-------- --------
Total current assets................................. 1,127.3 737.4
-------- --------
Property and equipment, net.......................... 939.1 739.0
Notes receivable and leased assets................... 294.1 209.1
Joint ventures and dealer transitions................ 37.0 210.4
Deferred income taxes................................ 43.7 40.5
Goodwill and other intangible assets, net of
accumulated amortization of $38.6
and $25.6........................................... 422.6 99.6
Other assets......................................... 173.8 146.5
-------- --------
Total assets......................................... $3,037.6 $2,182.5
======== ========
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 25, February 26,
2000 1999
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts and notes payable.......................... $ 219.8 $ 102.1
Short-term borrowings and current portion of long-
term debt.......................................... 209.0 --
Accrued expenses:
Employee compensation.............................. 121.1 92.8
Employee benefit plan obligations.................. 90.0 51.8
Other.............................................. 287.3 200.1
-------- --------
Total current liabilities............................ 927.2 446.8
-------- --------
Long-term liabilities:
Long-term debt..................................... 257.8 --
Employee benefit plan obligations.................. 243.7 222.8
Deferred income taxes.............................. 29.5 --
Other long-term liabilities........................ 17.2 12.9
-------- --------
Total long-term liabilities.......................... 548.2 235.7
-------- --------
Total liabilities.................................... 1,475.4 682.5
-------- --------
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,
30,168,585 and 23,676,407 issued and outstanding... 82.4 78.0
Class B Common Stock-no par value; 475,000,000
shares authorized,
120,989,840 and 129,942,288 issued and outstanding. 260.3 301.4
Accumulated other comprehensive income (loss)....... (33.0) (15.0)
Retained earnings................................... 1,252.5 1,135.6
-------- --------
Total shareholders' equity........................... 1,562.2 1,500.0
-------- --------
Total liabilities and shareholders' equity........... $3,037.6 $2,182.5
======== ========
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 Accumulated Other Total Total
---------------- Comprehensive Retained Shareholders' Comprehensive
Class A Class B Income (Loss) Earnings Equity Income
------- ------- ----------------- -------- ------------- -------------
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
Other comprehensive
income................. (14.4) (14.4) $(14.4)
Dividends paid.......... (210.9) (210.9)
Net income.............. 217.0 217.0 217.0
------ ------ ------ -------- -------- ------
February 27, 1998....... 41.1 328.5 (14.5) 977.3 1,332.4 $202.6
======
Common stock conversion. 27.1 (27.1) --
Common stock repurchase. (15.0) (15.0)
Common stock issuance... 24.8 24.8
Other comprehensive
income................. (0.5) (0.5) $ (0.5)
Dividends paid.......... (63.1) (63.1)
Net income.............. 221.4 221.4 221.4
------ ------ ------ -------- -------- ------
February 26, 1999....... 78.0 301.4 (15.0) 1,135.6 1,500.0 $220.9
======
Common stock conversion. 22.8 (22.8) --
Common stock repurchase. (18.4) (18.3) (36.7)
Other comprehensive
income................. (18.0) (18.0) $(18.0)
Dividends paid.......... (67.3) (67.3)
Net income.............. 184.2 184.2 184.2
------ ------ ------ -------- -------- ------
February 25, 2000....... $ 82.4 $260.3 $(33.0) $1,252.5 $1,562.2 $166.2
====== ====== ====== ======== ======== ======
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 25, February 26, February 27,
2000 1999 1998
------------ ------------ ------------
OPERATING ACTIVITIES
Net income............................. $ 184.2 $ 221.4 $ 217.0
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization........ 141.8 107.0 95.3
Pension and postretirement benefit
cost................................ 26.3 22.7 17.9
(Gain) loss on disposal of assets.... (17.0) -- 4.3
Employee stock grant................. -- -- 4.2
Deferred income taxes................ (4.5) (2.7) (4.7)
Equity in net income of joint
ventures and dealer transitions..... (3.3) (8.9) (7.9)
Changes in operating assets and
liabilities, net of corporate
acquisitions:
Accounts receivable................ (9.4) 15.4 (36.7)
Inventories........................ (21.2) 9.3 2.2
Prepaids expenses and other assets. (14.7) (20.6) 3.7
Accounts and notes payable......... 7.9 (15.7) 12.7
Accrued expenses and other
liabilities....................... 15.6 32.0 94.7
------- ------- -------
Net cash provided by operating
activities............................ 305.7 359.9 402.7
------- ------- -------
INVESTING ACTIVITIES
Capital expenditures................... (188.8) (170.4) (126.4)
Proceeds from the disposal of assets... 39.6 -- 1.2
Net increase in notes receivable and
leased assets......................... (140.2) (52.2) (69.3)
Net change in investments.............. (5.9) 4.4 (20.7)
Joint ventures and dealer transitions.. (9.7) (66.8) 0.8
Corporate acquisitions, net of cash
acquired.............................. (209.6) (57.2) (4.8)
------- ------- -------
Net cash used in investing activities.. (514.6) (342.2) (219.2)
------- ------- -------
FINANCING ACTIVITIES
Proceeds from issuance of debt......... 326.3 -- --
Repayments of debt..................... (93.4) -- --
Short-term borrowings, net............. 90.5 -- --
Common stock issuance.................. -- 24.8 --
Common stock repurchase................ (36.7) (15.0) (43.5)
Dividends paid......................... (67.3) (63.1) (210.9)
------- ------- -------
Net cash provided by (used in)
financing activities.................. 219.4 (53.3) (254.4)
------- ------- -------
Effect of exchange rate changes on cash
and cash equivalents.................. (4.3) -- --
------- ------- -------
Net increase (decrease) in cash and
cash equivalents...................... 6.2 (35.6) (70.9)
Cash and cash equivalents, beginning of
year.................................. 67.5 103.1 174.0
------- ------- -------
Cash and cash equivalents, end of year. $ 73.7 $ 67.5 $ 103.1
======= ======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
STEELCASE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS
Steelcase Inc. and its majority-owned subsidiaries (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 more than 35 locations throughout the world, including the United States,
Canada, Mexico and Europe. The Company distributes its products through a
worldwide network of independent dealers in approximately 800 locations
including approximately 400 in North America, 340 in Europe and 60 throughout
the rest of the world. The Company operates under two geographical furniture
segments, North America and International, and a services and other businesses
segment.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Steelcase Inc.
and its majority-owned subsidiaries, including the accounts of Steelcase
Strafor S.A. and subsidiaries ("Steelcase Strafor"), which became a wholly-
owned subsidiary of the Company effective March 31, 1999 (See Note 19). The
Company accounts for Steelcase Strafor on a two-month lag. During the normal
course of business, the Company may obtain equity interests in dealers which
the Company intends to resell as soon as practicable ("dealer transitions").
The financial statements for majority-owned dealer transitions for which no
specific transition plan has been adopted or is in the process of being
adopted at the acquisition date are consolidated with the Company's financial
statements. Majority-owned dealer transitions with a transition plan that has
been adopted or is in the process of being adopted at the acquisition date are
accounted for under the equity method of accounting and included in joint
ventures and dealer transitions in the accompanying consolidated balance sheet
in an amount equal to the Company's equity in the net assets of those
entities, principally based on audited financial statements for each
applicable year.
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 in accumulated
other comprehensive income, a separate component of shareholders' equity.
Gains and losses resulting from the exchange rate fluctuations on transactions
denominated in currencies other than the functional currency are not material.
Reclassifications
The Company has reclassified certain amounts from 1998 and 1999 to conform
to the 2000 presentation.
Year End
The Company's year end is the last Friday in February with each fiscal
quarter including 13 weeks. Fiscal years presented herein include the 52-week
periods ended February 25, 2000, February 26, 1999 and February 27, 1998.
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
F-6
STEELCASE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
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, which approximates market, and approximated $17.0 million and $72.9
million as of February 25, 2000 and February 26, 1999, respectively.
Long-Term Investments
The Company currently classifies its investments as available-for-sale or
held-to-maturity. Investments classified as available-for-sale approximated
$1.5 million and $5.5 million as of February 25, 2000 and February 26, 1999,
respectively. Gross unrealized gains and losses, net of taxes, are charged or
credited to comprehensive income, a separate component of shareholders'
equity. Investments classified as held-to-maturity typically include treasury
notes, tax-exempt municipal bonds and other debt securities which the Company
has the intent and ability to hold until maturity. These investments are
reported at amortized cost. Investments classified as long-term mature over
the next five years.
Investments in corporate-owned life insurance ("COLI") policies, which were
purchased to fund employee benefit plan obligations, are recorded at their net
cash surrender values as reported by the issuing insurance companies
associated with the COLI.
Inventories
Inventories are stated at the lower of cost or market and are valued based
upon the last-in, first-out ("LIFO") method and the average cost method.
Property and Equipment
Property and equipment are stated at the lower of cost or net realizable
value and depreciated using the straight line-method over the estimated useful
life of the assets. Internal-use software applications and related development
efforts are capitalized and amortized over the estimated useful lives of the
applications, which do not exceed five years except for certain business
application systems which approximate ten years. Software maintenance, Year
2000 related matters and training costs are expensed as incurred. Estimated
useful lives of property and equipment are as follows:
Buildings and improvements 10-50 years
Machinery and equipment 3-15 years
Furniture and fixtures 5-8 years
Leasehold improvements 3-10 years
Capitalized software 3-10 years
Leased Assets
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
F-7
STEELCASE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
investment). Residual value is an estimate of the fair value of the leased
equipment at the end of the lease term, which the Company records based on
market studies conducted by independent third parties.
Operating leased assets consist of the equipment cost, less accumulated
depreciation. Depreciation is recognized on a straight-line basis over the
lease term to the estimated residual value, which is determined on the same
basis as direct financing leases as set forth above.
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
to 40 years. The carrying value for goodwill totaled $352.4 million and $86.2
million at February 25, 2000 and February 26, 1999, respectively. Goodwill and
other intangible asset amortization expense approximated $16.9 million, $4.1
million and $4.2 million for 2000, 1999 and 1998, 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, $75.0 million and $70.0 million for 2000, 1999 and
1998, 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.
The accrued liabilities for self-insured losses included in other accrued
expenses in the accompanying consolidated balance sheets are as follows (in
millions):
February 25, February 26,
2000 1999
------------ ------------
Workers' compensation claims....................... $18.2 $18.6
Product liability claims........................... 10.4 11.5
----- -----
$28.6 $30.1
===== =====
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, which have been fully
funded by the Company in the VEBA, approximated $6.8 million and $7.9 million
as of February 25, 2000 and February 26, 1999, respectively.
F-8
STEELCASE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 operations, an amount it estimates will be needed to
cover future warranty obligations for products sold. In accordance with its
warranty policy, the Company reserved for known warranty issues regarding its
Pathways based products. See Note 20 regarding the one-time Pathways warranty
charge taken in the fourth quarter of fiscal 2000. The accrued liability for
warranty costs included in other accrued expenses in the accompanying
consolidated balance sheets approximated $54.5 million (including the Pathways
warranty reserve) and $20.6 million as of February 25, 2000 and February 26,
1999, 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 are not associated with 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 $10.0 million and $10.7 million as of
February 25, 2000 and February 26, 1999, respectively. Based on the Company's
ongoing oversight of these matters, the Company believes that it has accrued
sufficient reserves to absorb the costs of all known environmental assessments
and the remediation costs of all known sites.
Advertising
Advertising costs, which are expensed as incurred, approximated $18.8
million, $11.3 million and $7.9 million for 2000, 1999 and 1998, 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
Basic earnings per share is based on the weighted average number of shares
of common stock outstanding during each period. It excludes the dilutive
effects of additional common shares that would have been outstanding if the
shares, under the Company's Stock Incentive Plans, had been issued. Diluted
earnings per share includes effects of the Company's Stock Incentive Plans.
The weighted average number of shares outstanding for basic and diluted
calculations were 152.8 million, 153.8 million and 154.8 million for 2000,
1999 and 1998, respectively.
Stock-Based Compensation
Statement of Financial Accounting Standards ("SFAS") No. 123, Accounting for
Stock-Based Compensation, encourages entities to record compensation expense
for stock-based employee compensation
F-9
STEELCASE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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, 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 13.
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, short-term borrowings and certain other liabilities,
approximate their fair value due to their relatively short maturities.
The carrying amount of the Company's long-term debt approximates fair value
due to the variable interest rates applied to the debt.
See additional discussion regarding foreign currency contracts and interest
rate swaps and caps in Note 16.
Accounting for Derivative Instruments and Hedging Activities
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities,
establishes accounting and reporting standards for derivative instruments,
requiring recognition of the fair value of all derivatives as assets or
liabilities on the balance sheet. Gains and losses resulting from changes in
fair value would be included in income, or in comprehensive income, depending
on whether the instrument qualifies for hedge accounting and the type of
hedging instrument involved. This statement is effective for fiscal years
beginning after June 15, 2000. Management intends to adopt the provisions of
SFAS No. 133 in fiscal year 2002. The impact of this pronouncement on the
Company's financial results is currently being evaluated.
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 and disclosures 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.
3. COMPREHENSIVE INCOME
Total comprehensive income is comprised of net income and all changes to
shareholders' equity, except those due to investments by owners and
distributions to owners. For the Company, other comprehensive income consists
of foreign currency translation adjustments, which aggregated $33.4 million
and $13.8 million at February 25, 2000 and February 26, 1999, respectively,
unrealized gain (loss) on investments and minimum pension liabilities, as
follows (in millions):
Year Ended
--------------------------------------
February 25, February 26, February 27,
2000 1999 1998
------------ ------------ ------------
Other comprehensive income (loss),
net of tax:
Foreign currency translation
adjustments..................... $(19.6) $ 0.7 $(14.4)
Unrealized gain (loss) on
investments..................... 1.1 (0.7) --
Minimum pension liabilities...... 0.5 (0.5) --
------ ----- ------
Other comprehensive income (loss).. $(18.0) $(0.5) $(14.4)
====== ===== ======
F-10
STEELCASE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. 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 12. This Stock Repurchase aggregated $43.5 million.
5. INVENTORIES
Inventories consist of (in millions):
February 25, February 26,
2000 1999
------------ ------------
Finished goods..................................... $ 71.6 $40.9
Work in process.................................... 45.6 32.3
Raw materials...................................... 93.4 70.8
------- -----
210.6 144.0
LIFO reserve....................................... (44.1) (47.5)
------- -----
$ 166.5 $96.5
======= =====
Inventories determined by the LIFO method aggregated $121.3 million and
$112.4 million at February 25, 2000 and February 26, 1999, respectively. The
effect of LIFO liquidations is not material.
F-11
STEELCASE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. PROPERTY AND EQUIPMENT, NET
Property and equipment, net consist of (in millions):
February 25, February 26,
2000 1999
------------ ------------
Land............................................... $ 90.8 $ 43.3
Buildings and improvements......................... 759.1 650.8
Machinery and equipment............................ 1,189.3 984.7
Furniture and fixtures............................. 101.0 72.1
Leasehold improvements............................. 48.3 45.8
Capitalized software............................... 92.3 59.8
Construction in progress........................... 115.3 82.2
--------- ---------
2,396.1 1,938.7
Accumulated depreciation and amortization.......... (1,457.0) (1,199.7)
--------- ---------
$ 939.1 $ 739.0
========= =========
Depreciation and amortization expense approximated $124.9 million, $102.9
million and $91.1 million for 2000, 1999 and 1998, respectively. Construction
in progress consists of numerous equipment, facility and software projects,
none of which are material individually or in the aggregate.
7. NOTES RECEIVABLE AND LEASED ASSETS
Notes receivable and leased assets consist of (in millions):
February 25, February 26,
2000 1999
------------ ------------
Notes receivable:
Project financing................................. $ 14.8 $ 19.3
Asset-based lending............................... 85.2 63.4
Ownership transition financing.................... 43.7 41.2
Other............................................. 3.5 4.2
Net investment in leased assets:
Direct financing leases........................... 259.6 187.6
Net operating leases.............................. 89.5 41.3
Allowance for losses............................... (13.2) (7.5)
------ ------
483.1 349.5
Current portion.................................... 189.0 140.4
------ ------
Long-term portion.................................. $294.1 $209.1
====== ======
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 15 years for certain ownership transition financing. Interest rates are
both floating and fixed, reaching up to 11% as of February 25, 2000. 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
$37.2 million as of February 25, 2000, subject to available collateral. These
commitments generally expire in one year and are reviewed periodically for
renewal.
F-12
STEELCASE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following summarizes future minimum lease payments receivable as of
February 25, 2000 (in millions):
Direct
financing Operating
Year ending February leases leases
-------------------- --------- ---------
2001..................................................... $ 80.0 $25.3
2002..................................................... 66.4 23.5
2003..................................................... 52.6 20.7
2004..................................................... 40.2 14.0
2005 and thereafter...................................... 47.6 4.3
------ -----
$286.8 $87.8
====== =====
Approximately 34% of direct financing leases call for transfer of ownership
to customers at lease-end. The original equipment cost at lease inception for
leases in effect as of February 25, 2000 is $375.2 million for direct
financing leases and $112.7 million for operating leases.
8. 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 25, February 26,
2000 1999
------------ ------------
Investment in and advances to Steelcase Strafor... $ -- $187.9
Investments in dealer transitions................. 25.3 7.1
Other joint ventures.............................. 11.7 15.4
----- ------
$37.0 $210.4
===== ======
As discussed in Note 19, the Company acquired the remaining 50% interest in
Steelcase Strafor effective March 31, 1999. In December 1998, the Company
issued a note receivable to Steelcase Strafor in the amount of $66.4 million
to fund in part the acquisition of Werndl BuroMobeL AG ("Werndl") by Steelcase
Strafor.
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 dealer transitions approximated $75.2 million and $25.0
million as of February 25, 2000 and February 26, 1999, respectively.
Other joint ventures are comprised of joint ventures in the United States,
Saudi Arabia, Japan and Thailand.
F-13
STEELCASE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company's equity in net income of joint ventures and dealer transitions
consists of (in millions):
Year Ended
--------------------------------------
February 25, February 26, February 27,
2000 1999 1998
------------ ------------ ------------
50% share of Steelcase Strafor net
income(1).......................... $ 2.6 $8.9 $5.6
Net income of dealer transitions.... 1.0 0.1 2.0
Other joint ventures, net........... (0.3) (0.1) 0.3
----- ---- ----
$ 3.3 $8.9 $7.9
===== ==== ====
- --------
(1) Due to the effective date of the Company's acquisition of Steelcase
Strafor (see Note 19), net income for the year ended February 25, 2000
represents Steelcase's share of Steelcase Strafor's net income for the
first quarter of fiscal 2000.
Summarized financial information for Steelcase Strafor, prior to the
acquisition indicated in Note 19, as of December 31, 1998 and the two years
ended December 31, 1998, is as follows (in millions):
December 31,
1998
------------
Balance Sheet:
Current assets................................................ $315.4
Property and equipment, net................................... 154.4
Other assets.................................................. 189.9
------
Total assets................................................ 659.7
------
Current liabilities........................................... 310.1
Long-term liabilities......................................... 118.6
------
Total liabilities........................................... 428.7
------
Net assets.................................................. $231.0
======
Year Ended
December 31,
-------------
1998 1997
------ ------
Results of Operations:
Net sales.................................................... $506.9 $468.6
Operating income............................................. 33.3 26.5
Net income................................................... 17.9 11.2
9. OTHER ASSETS
Other assets consist of (in millions):
February 25, February 26,
2000 1999
------------ ------------
Corporate-owned life insurance..................... $ 136.8 $113.5
Long-term investments.............................. 10.5 12.9
Other.............................................. 26.5 20.1
------- ------
$ 173.8 $146.5
======= ======
F-14
STEELCASE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
10. SHORT-TERM BORROWINGS AND LONG-TERM DEBT
Weighted
Average
Interest February 25, February 26,
Rates Maturity 2000 1999
------------- ------------ ------------ ------------
(in millions)
U.S. dollar obligations:
Revolving credit
facilities(1) ....... 6.09% 2001 $ 45.4 $--
Notes payable(2)...... 7.00% -- 7.83% 2001 -- 2007 60.0 --
Lease receivables
transfer facility(3). 7.09% 2001 -- 2007 170.3 --
Other................. 2.7 --
------ ----
278.4 --
------ ----
Foreign currency
obligations:
Revolving credit
facilities(4)........ 3.34% 2001 -- 2005 165.8 --
Notes payable(5)...... 3.45% -- 7.00% 2001 -- 2012 19.9 --
Other................. 2.7 --
------ ----
188.4 --
------ ----
Total short-term
borrowings and long-
term debt.............. 466.8 --
Short-term borrowings
and current portion of
long-term debt......... 209.0 --
------ ----
Long-term debt.......... $257.8 $--
====== ====
- --------
(1) In April 1999, the Company established a 364-day unsecured committed
revolving credit facility with various financial institutions under which
it may borrow up to $200.0 million. Borrowings under the facility mature
at various dates throughout the year depending on the borrowing terms,
which range from one to six months as selected by the Company, subject to
certain limitations. Interest on committed borrowings, which is due no
later than the maturity of such borrowings, is based on LIBOR or a
floating base rate, as selected by the Company, in each case plus a margin
for the applicable borrowing term. The agreement which, subject to certain
conditions, may be renewed annually for additional 364-day periods,
contains certain covenants which include, among others, minimum levels of
tangible net worth, interest coverage and debt ratio.
Additionally, the Company has entered into agreements with certain
financial institutions which provide for borrowings on unsecured non-
committed short-term credit facilities of up to $90.0 million at variable
interest rates determined by agreement at the time of borrowing. These
agreements expire within one year, and subject to certain conditions, may
be renewed annually.
(2) Notes payable represents various amounts payable to banks and others.
Certain agreements contain covenants which include, among others, minimum
levels of tangible net worth, interest coverage and debt ratio.
Approximately $12.1 million of notes payable are collateralized by lease
receivables, including certain leased assets.
(3) In October 1999, the Company established a $200.0 million committed lease
receivables transfer facility under which it has the right, subject to
certain conditions, to receive advances against the transfer of certain
lease receivables. The advances are funded either by a bank sponsored
conduit vehicle via the issuance of commercial paper or by committed
financial institutions. Borrowings under the facility are repaid from the
cash flow of specified lease receivables related to the Company's leasing
portfolio. The facility may be renewed annually, and advances on the
facility are due monthly over the next seven years with principal
F-15
STEELCASE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
payments determined based upon the related underlying leases. Interest on
the facility is based on the floating commercial paper rate or LIBOR plus a
margin (an effective rate of 6.13% at February 25, 2000). Lease payments on
the underlying lease receivables are based upon fixed interest rates.
Therefore, to hedge the exposure to changes in interest rates, the Company
entered into interest rate swaps in conjunction with each borrowing that
effectively provides a 7.09% fixed rate for borrowings on the facility at
February 25, 2000. For more information regarding interest rate swaps, see
Note 16.
(4) In August 1999, the Company established an unsecured committed multi-
currency revolving credit facility with various financial institutions
under which it may borrow up to euro ("EUR") 200.0 million or its
equivalent in optional currencies. The agreement is comprised of two
tranches; Tranche A is a EUR 75.0 million, 364-day revolving facility and
Tranche B is a EUR 125.0 million five-year term facility. Tranche A
facility borrowings amounted to $75.5 million (EUR 75.0 million) at
February 25, 2000. Subject to certain conditions, the Tranche A facility
may be renewed annually for additional 364-day periods. Tranche B facility
borrowings, which amounted to $76.5 million (EUR 76.0 million) at February
25, 2000, effectively mature at the end of the facility term. Interest on
each borrowing, which is due no later than the maturity of such borrowing,
is based on EURIBOR, LIBOR or a floating base rate as selected by the
Company, in each case, plus a margin for the applicable borrowing term (an
effective rate of 3.59% and 3.63% at February 25, 2000 for Tranche A and
Tranche B borrowings, respectively). The agreement contains certain
covenants, which include, among others, minimum levels of tangible net
worth, interest coverage and debt ratio. To reduce its exposure to adverse
changes in interest rates on long-term borrowings, the Company has entered
into interest rate swap and cap agreements in the amount of Tranche B
borrowings which effectively produce a 3.06% fixed interest rate as long
as the 12-month EURIBOR rate remains between 3.06% and 5.00%. When the 12-
month EURIBOR is less than 3.06% or greater than 5.00%, the Company pays a
floating rate based on the 12-month EURIBOR. The Company's effective
interest rate on Tranche B borrowings including the effect of swaps and
caps approximated 3.06% at February 25, 2000.
Additionally, the Company has entered into agreements with certain foreign
financial institutions which provide for foreign borrowings on unsecured
non-committed short-term credit facilities approximating $49.4 million,
with interest rates determined by agreement at the time of borrowing.
Borrowings on these agreements, which mature within one year and subject to
certain conditions may be renewed annually, amounted to $13.8 million at
February 25, 2000.
(5) Notes payable represents foreign capitalized lease obligations,
collateralized by the underlying leased assets, and various other foreign
third party notes payable.
Annual maturities on short-term borrowings and long-term debt are as follows
(in millions):
2001.................................................................. $209.0
2002.................................................................. 58.0
2003.................................................................. 47.3
2004.................................................................. 35.7
2005.................................................................. 97.1
Thereafter............................................................ 19.7
------
$466.8
======
Total cash paid for interest on short-term borrowings and long-term debt
amounted to $10.6 million and zero for the years ended February 25, 2000 and
February 26, 1999, respectively.
F-16
STEELCASE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
11. EMPLOYEE BENEFIT PLAN OBLIGATIONS
Employee benefit plan obligations consist of (in millions):
February 25, February 26,
2000 1999
------------ ------------
Profit-sharing plans.............................. $ 67.8 $ 38.4
Management incentive and deferred compensation
plans............................................ 58.4 56.1
Pension and postretirement plans:
Pension benefits.................................. 31.6 18.4
Postretirement benefits........................... 175.9 161.7
------ ------
333.7 274.6
Current portion................................... 90.0 51.8
------ ------
Long-term portion................................. $243.7 $222.8
====== ======
Profit-Sharing Plans
Substantially all North American 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
Company contributions under the Steelcase Inc. Employees' Profit-Sharing
Retirement Plan and similar subsidiary plans are discretionary and declared by
the Compensation Committee at the end of each fiscal 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 $65.9 million, $70.1 million and $79.4 million for 2000,
1999 and 1998, respectively.
Management Incentive and Deferred Compensation Plans
The Management Incentive Plan is an annual and long-term incentive
compensation program that provides eligible key employees with cash payments
and Company stock options based on the achievement by the Company of specified
financial performance goals measured by Economic Value Added ("EVA"), as
defined in the plan.
Annual bonuses are payable after the end of the fiscal year and therefore,
are included in accrued compensation in the accompanying consolidated balance
sheets. 75% of the long-term bonus amounts are paid out over a subsequent
three-year period and 25% are paid in Company stock options, which vest over 3
years. 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 primarily been invested in
corporate-owned life insurance, which is expected to be sufficient to cover
such future obligations.
Management incentive and deferred compensation expense approximated $23.9
million, $28.9 million and $21.2 million for 2000, 1999 and 1998,
respectively.
Pension and Postretirement Benefits
The Company's pension plans include a non-qualified supplemental retirement
plan that is limited to a select group of management or highly compensated
employees. The obligations under this plan and other defined benefit plans at
its subsidiaries are included in the pension disclosure.
F-17
STEELCASE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 sets forth the disclosure requirements of SFAS No. 132 (in
millions):
Pension Plans Postretirement Plans
------------------------- -------------------------
February 25, February 26, February 25, February 26,
2000 1999 2000 1999
------------ ------------ ------------ ------------
Change in benefit
obligations:
Benefit obligations at
beginning of year...... $ 38.0 $ 20.9 $ 192.2 $ 180.2
Service cost............ 3.6 2.0 5.7 5.5
Interest cost........... 4.6 2.5 13.2 12.5
Amendments.............. (1.3) 14.3 (6.0) 1.9
Net actuarial (gain)
loss for prior year.... (2.7) 0.6 7.9 --
Plan participant's
contributions.......... 0.2 -- 2.5 2.1
Acquisitions (see Note
19).................... 33.5 -- -- --
Currency changes........ 0.4 -- -- --
Benefits paid........... (4.5) (2.3) (10.2) (10.0)
------ ------ ------- -------
Benefit obligations, end
of year................ 71.8 38.0 205.3 192.2
------ ------ ------- -------
Change in plan assets:
Fair value of plan
assets, beginning of
year................... 14.8 3.8 -- --
Actual return on plan
assets................. 1.2 0.5 -- --
Employer contributions.. 2.5 4.2 7.6 7.9
Plan participant's
contributions.......... 1.0 0.3 2.4 2.1
Acquisitions (see Note
19).................... 21.1 -- -- --
Currency changes........ 1.3 -- -- --
Benefits paid........... (4.1) (2.3) (10.0) (10.0)
Other................... -- 8.3 -- --
------ ------ ------- -------
Fair value of plan
assets, end of year.... 37.8 14.8 -- --
------ ------ ------- -------
Funded status........... (34.0) (23.2) (205.3) (192.2)
Unrecognized prior
service cost........... 2.6 -- -- 10.1
Unrecognized transition
obligation............. 0.2 4.0 1.6 --
Unrecognized net
actuarial loss......... 0.7 1.5 27.8 20.4
------ ------ ------- -------
Net amount recognized... $(30.5) $(17.7) $(175.9) $(161.7)
====== ====== ======= =======
Amounts recognized in
the consolidated
balance sheets:
Accrued benefit plan
obligations............ $(31.6) $(18.4) $(175.9) $(161.7)
Prepaid pension costs... 0.9 0.2 -- --
Intangible assets....... 0.2 -- -- --
Accumulated other
comprehensive income... -- 0.5 -- --
------ ------ ------- -------
Net amount recognized... $(30.5) $(17.7) $(175.9) $(161.7)
====== ====== ======= =======
F-18
STEELCASE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Year Ended
-----------------------------------------------------------------------------
Pension Plans Postretirement Plans
-------------------------------------- --------------------------------------
February 25, February 26, February 27, February 25, February 26, February 27,
2000 1999 1998 2000 1999 1998
------------ ------------ ------------ ------------ ------------ ------------
Components of expense:
Service cost............ $3.6 $2.0 $0.9 $ 5.7 $ 5.5 $ 3.8
Interest cost........... 4.6 2.5 1.4 13.2 12.5 11.8
Amortization of prior
year service cost...... -- -- -- 0.6 0.8 0.3
Expected return on plan
assets................. (2.5) (0.9) (0.3) -- -- --
Amortization of
transition obligation.. 0.3 0.3 -- 0.5 -- --
Recognized net actuarial
(gain) loss............ 0.1 (0.2) -- 0.2 0.2 --
---- ---- ---- ----- ----- -----
Net expense............. $6.1 $3.7 $2.0 $20.2 $19.0 $15.9
==== ==== ==== ===== ===== =====
Weighted-average
assumptions:
Discount rate........... 7.00% 7.00% 7.00% 8.00% 7.00% 7.00%
Expected return on plan
assets................. 5.00% 7.50% 8.00% -- -- --
Rate of salary
progression............ 5.25% 4.50% 4.50% 4.50% 4.50% 4.50%
The assumed health care cost trend was 7.5% for 2000, gradually declining to
5.0% in 2005 and thereafter. A one percentage point change in assumed health
care cost trend rates would have the following effects (in millions):
One percentage One percentage
point increase point decrease
-------------- --------------
Effect on total of service and interest cost
components.................................. $ 2.1 $ (1.9)
Effect on postretirement benefit obligation.. $19.3 $(17.5)
12. CAPITAL STRUCTURE
In connection with the 1998 Offerings discussed in Note 4, the Company
effected a Recapitalization of its capital stock. Pursuant to the
Recapitalization, which has been given retroactive effect in the accompanying
consolidated financial statements, 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.
F-19
STEELCASE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 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 on 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.
13. 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 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 is 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.
F-20
STEELCASE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The initial purchase period under the Purchase Plan began on the date of the
pricing of the Offerings in 1998 and ended on April 17, 1998. Eligible
employees who wished to participate in the Purchase Plan were allowed to
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
participate in the Purchase Plan during the initial purchase period, which
resulted in the issuance of 1,045,279 shares of Class A Common Stock and the
receipt by the Company of related proceeds approximating $24.8 million.
Incentive Compensation Plan
The Company 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 6,134,727
shares of Common Stock. The Compensation Committee or its designee 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
others as designated by the Compensation Committee. 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.
Concurrent with the Offerings in 1998, 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 in 1998 upon issuance.
F-21
STEELCASE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In addition, the Company issued options to purchase shares of Class A Common
Stock to certain employees and non-employee directors of the Company, both in
connection with and subsequent to the Offerings in 1998. Information relating
to the Company's stock options, which pursuant to APB Opinion No. 25 did not
result in any material compensation expense recognized by the Company, is as
follows:
Number of Weighted Average Option
Shares Price Per Share
--------- -----------------------
Unexercised options outstanding -
February 28, 1997........................ -- --
Options granted......................... 2,661,000 $28.00
Options exercised....................... -- --
Options forfeited....................... -- --
--------- ------
Unexercised options outstanding-
February 27, 1998........................ 2,661,000 $28.00
Options granted......................... 9,350 $36.50
Options exercised....................... -- --
Options forfeited....................... -- --
--------- ------
Unexercised options outstanding -
February 26, 1999........................ 2,670,350 $28.03
Options granted......................... 1,609,500 $14.35
Options exercised....................... -- --
Options forfeited....................... (202,250) $24.68
--------- ------
Unexercised options outstanding -
February 25, 2000........................ 4,077,600 $22.80
========= ======
Exercisable options:
February 27, 1998........................ -- --
February 26, 1999........................ 289,100 $28.00
February 25, 2000........................ 579,135 $28.01
========= ======
The price per share of options outstanding ranged from $13.94 to $36.50 at
February 25, 2000, $28.00 to $36.50 at February 26, 1999 and $28.00 at
February 27, 1998. As of February 25, 2000, there were 2,057,587 options
available for future issuances.
SFAS No. 123 Pro Forma Data
As discussed in Note 2, 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
employee stock option grants. If the Company had recognized compensation
expense based upon the fair value of the Employee Discount Option Grant and
the Company's employee stock option grants at the date of grant and their
respective vesting periods, as prescribed by SFAS No. 123, the Company's net
income and earnings per share would have been as follows (in millions, except
per share amounts):
February 25, February 26, February 27,
2000 1999 1998
------------ ------------ ------------
Pro forma net income................. $181.5 $219.6 $212.8
Pro forma earnings per share (basic
and diluted)........................ $ 1.19 $ 1.43 $ 1.37
F-22
STEELCASE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The estimated fair value of the Employee Discount Option Grant approximated
the 15% discount discussed above. The fair value of each option grant was
estimated at the date of the grant using the Black-Scholes option pricing
model with the following weighted average assumptions:
February 25, February 26, February 27,
2000 1999 1998
------------ ------------ ------------
Risk-free interest rate............... 5.2% 5.6% 5.5%
Dividend yield........................ 3.1% 1.4% 1.4%
Volatility............................ 31.6% 32.4% 30.0%
Average expected term (years)......... 4.0 6.8 6.8
Fair value of options granted......... $3.59 $14.16 $10.60
14. OTHER INCOME, NET
Other income, net consists of (in millions):
Year Ended
--------------------------------------
February 25, February 26, February 27,
2000 1999 1998
------------ ------------ ------------
Interest income...................... $ 16.6 $23.2 $29.2
Interest income from tax litigation.. -- 5.8 --
Gain (loss) on dealer transitions.... 8.3 (2.2) (1.8)
Gain on disposal of property and
equipment........................... 10.0 -- --
Gain on sale of investments.......... 7.0 -- --
Miscellaneous-net.................... (1.4) (6.6) (3.1)
------ ----- -----
$ 40.5 $20.2 $24.3
====== ===== =====
15. 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 25, February 26, February 27,
2000 1999 1998
------------ ------------ ------------
Current income taxes:
Federal............................. $ 98.9 $115.7 $115.7
State and local..................... 4.5 9.0 9.5
Foreign............................. 19.2 2.9 10.4
------- ------ ------
122.6 127.6 135.6
------- ------ ------
Deferred income taxes:
Federal............................. (4.6) (3.1) (0.8)
State and local..................... (0.1) (0.3) (0.3)
Foreign............................. (2.4) 0.7 (3.6)
------- ------ ------
(7.1) (2.7) (4.7)
------- ------ ------
$ 115.5 $124.9 $130.9
======= ====== ======
The company has not provided for U.S. income taxes on undistributed earnings
of foreign subsidiaries totaling $130.8 million at February 25, 2000, as
foreign subsidiary undistributed earnings are considered permanently invested
in those businesses. These amounts would be subject to possible U.S. taxation
only if remitted as dividends. Foreign withholding taxes could be payable upon
remittance of these earnings. Subject to
F-23
STEELCASE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
certain limitations, the withholding taxes would then be available for use as
credit against the U.S. tax liability. However, the determination of the
hypothetical amount of unrecognized deferred U.S. taxes on undistributed
earnings of foreign entities is not practicable.
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 25, February 26,
2000 1999
------------ ------------
Deferred income tax assets:
Employee benefit plan obligations................ $112.2 $107.9
Reserves and allowances.......................... 50.9 29.2
Foreign losses................................... 3.6 5.8
Other............................................ 7.1 12.3
------ ------
Total deferred income tax assets................... 173.8 155.2
Deferred income tax liabilities:
Property and equipment........................... (45.4) (39.6)
Intangible assets................................ (24.0) --
Net leased assets................................ (12.1) (6.4)
------ ------
Net deferred income tax assets..................... 92.3 109.2
Current portion.................................... 78.1 68.7
------ ------
Non-current portion................................ $ 14.2 $ 40.5
====== ======
The Company has recorded a deferred tax asset as of February 25, 2000 of
$3.6 million reflecting the benefit of foreign operating loss carry-forwards
that expire at various dates through 2007. 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 deferred tax assets will be realized.
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 25, February 26, February 27,
2000 1999 1998
------------ ------------ ------------
Statutory federal income tax rate.... 35.0% 35.0% 35.0%
State and local income taxes......... 1.6 2.5 2.7
Tax exempt interest.................. -- -- (0.2)
Goodwill and intangible asset
amortization and write-offs......... 1.0 0.3 0.2
Research and development credit...... (0.3) (0.4) (0.6)
Other................................ 1.7 (0.4) 1.4
---- ---- ----
Effective income tax rate............ 39.0% 37.0% 38.5%
==== ==== ====
During 1999, the provision for income taxes benefited from the favorable
resolution of income tax litigation dating back to 1989, primarily related to
investment tax credits and accelerated depreciation on the Company's Corporate
Development Center. The resolution of these tax matters contributed to a
reduced effective tax rate for 1999 and resulted in interest income of $5.8
million.
The Company made income tax payments of $123.2 million, $59.3 million and
$116.0 million during 2000, 1999 and 1998, respectively.
F-24
STEELCASE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
16. 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, corporate-owned life insurance policies, accounts payable and short-
term borrowings and long-term debt. 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 and several European 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 $49.7 million and $30.6 million of debt obligations of
unconsolidated dealers and joint ventures as of February 25, 2000 and February
26, 1999, 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 and interest rate swaps and caps, primarily to reduce its exposure to
adverse fluctuations in foreign currency exchange rates and interest rates.
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. Gains and losses on interest
rate swaps and caps are recognized as an adjustment to interest expense over
the life of the contract. See Note 10 for more information regarding interest
rate swaps and caps. The fair market value of forward contracts and swaps and
interest rate swaps and caps was not material at February 25, 2000 or February
26, 1999.
17. COMMITMENTS AND CONTINGENCIES
The Company leases certain sales offices, showrooms and equipment under non-
cancelable operating leases that expire at various dates through 2013. Minimum
annual rental commitments under non-cancelable operating leases that have
initial or remaining lease terms in excess of one year as of February 25,
2000, are as follows (in millions):
Year Ending Amount
----------- ------
2001.................................................................. $ 29.5
2002.................................................................. 22.6
2003.................................................................. 19.4
2004.................................................................. 16.6
2005.................................................................. 14.2
Thereafter............................................................ 24.7
------
$127.0
======
F-25
STEELCASE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Rent expense under all operating leases approximated $39.8 million, $42.5
million and $47.0 million for 2000, 1999 and 1998, 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.
18. OPERATING SEGMENTS
The Company's principal business is the manufacture of an extensive range of
steel and wood office furniture products. Primary product lines include office
furniture systems, seating, storage solutions, desk and casegoods, and
interior architectural products. In addition, the Company also provides
services and is engaged in non-furniture businesses, which include marine
accessories and design, financial services and consulting services. The
Company operates on a worldwide basis within three reportable segments, two of
which are geographic furniture segments, and services and other businesses. In
prior years, the Company has reported those two geographic furniture segments
as being the U.S. and International/Canada combined. Due to the acquisition of
the remaining 50% equity interest in Steelcase Strafor and the significant
impact of this acquisition on the Company's consolidated financial statements,
the Company has implemented a new reporting structure which focuses separately
on North American and International furniture operations. North America
includes the U.S., Canada and the Steelcase Design Partnership. International
includes the rest of the world, with the major portion of the operations in
Europe. Accordingly, prior year segment information presented below has been
restated to reflect the new reporting structure.
The Company evaluates performance and allocates resources based on operating
income. The accounting policies of the reportable segments are the same as
those described in the summary of significant accounting policies included
elsewhere herein.
The following sets forth reportable segment data reconciled to the
consolidated financial statements for the three years ended February 25, 2000,
February 26, 1999 and February 27, 1998 (in millions):
Office Furniture Services &
--------------------------- Other
2000 North America International Businesses Eliminations Consolidated
- ---- ------------- ------------- ---------- ------------ ------------ --- ---
Net sales............... $2,606.4 $721.5 $136.5 $(148.3) $3,316.1
Operating income........ 239.8 31.4 11.0 (10.4) 271.8
Total assets............ 1,678.2 679.2 680.2 -- 3,037.6
Capital expenditures.... 169.9 14.5 8.4 (4.0) 188.8
Depreciation &
amortization........... 103.4 35.1 8.3 (5.0) 141.8
Office Furniture Services &
--------------------------- Other
1999 North America International Businesses Eliminations Consolidated
- ---- ------------- ------------- ---------- ------------ ------------ --- ---
Net sales............... $2,511.3 $622.2 $115.9 $(506.9) $2,742.5
Operating income........ 302.5 39.1 8.8 (33.3) 317.2
Total assets............ 1,559.2 694.4 588.7 (659.7) 2,182.5
Capital expenditures.... 162.3 31.1 5.5 (28.5) 170.4
Depreciation &
amortization........... 98.9 23.8 6.9 (22.5) 107.0
Office Furniture Services &
--------------------------- Other
1998 North America International Businesses Eliminations Consolidated
- ---- ------------- ------------- ---------- ------------ ------------ --- ---
Net sales............... $2,495.7 $607.0 $125.9 $(468.6) $2,760.0
Operating income........ 301.1 38.5 4.3 (26.5) 317.4
Total assets............ 1,444.5 528.8 528.5 (494.6) 2,007.2
Capital expenditures.... 117.3 13.9 9.1 (13.9) 126.4
Depreciation &
amortization........... 85.8 25.9 7.9 (24.3) 95.3
F-26
STEELCASE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the first quarter of 2000 and for full year 1999 and 1998, International
office furniture reflects the accounts of Steelcase Strafor, the Company's 50%
owned joint venture in Europe, as if the joint venture had been consolidated.
As described in Note 19, the remaining 50% equity interest of Steelcase
Strafor was purchased effective March 31, 1999. Accordingly, Steelcase
Strafor's results of operations have been consolidated with the Company's
results of operations from the acquisition date. Eliminations include the
removal of Steelcase Strafor unconsolidated financial results in order to
reconcile with the Company's consolidated totals.
Total assets within services and other businesses include notes receivable
and leased assets as described in Note 7.
Reportable geographic information is as follows (in millions):
Year Ended
--------------------------------------
February 25, February 26, February 27,
2000 1999 1998
------------ ------------ ------------
Net Sales:
United States....................... $2,641.5 $2,516.5 $2,509.4
Foreign locations(1)................ 674.6 226.0 250.6
-------- -------- --------
Total............................. $3,316.1 $2,742.5 $2,760.0
======== ======== ========
Long-lived Assets:
United States....................... $1,070.7 $ 953.2 $ 819.9
Foreign locations(1)................ 464.8 31.9 38.4
-------- -------- --------
Total............................. $1,535.5 $ 985.1 $ 858.3
======== ======== ========
- --------
(1) Information for Steelcase Strafor prior to the Company's March 31, 1999
acquisition of the remaining 50% equity interest in Steelcase Strafor has
been excluded (see Note 19).
Net sales are attributable to countries based on the location of the
customer.
19. ACQUISITIONS
On April 22, 1999, Steelcase Inc., through its wholly-owned French
subsidiary, Steelcase SAS, acquired the 50% equity interest in Steelcase
Strafor held by its joint venture partner, Strafor Facom S.A. The purchase was
effective as of March 31, 1999. As a part of this transaction, the Company
also acquired Strafor Facom S.A.'s 5% equity interest in Werndl, 3% equity
interest in Pohlschroder GmbH and 50% equity interest in Details S.A. The
purchase price paid to Strafor Facom S.A. for these equity interests
approximated $230 million, including transaction costs of approximately $5
million, and was funded by approximately $78 million of existing cash
balances, $111 million of short-term borrowings and $41 million of long-term
debt.
As a result of this acquisition, which was accounted for under the purchase
method of accounting, Steelcase Strafor is now wholly-owned by the Company.
Accordingly, the February 25, 2000 consolidated balance sheet includes the
accounts and balances of Steelcase Strafor, including a $25.7 million
contingent liability recorded in accrued other expenses for additional
purchase price to be paid resulting from Steelcase Strafor's acquisition of
Werndl in calendar year 1998. Additionally, the results of operations of
Steelcase Strafor, which is accounted for on a two month lag, from April 1,
1999 through December 31, 1999 have been consolidated with the Company's
results of operations.
F-27
STEELCASE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company recorded intangible assets as follows resulting from the
consolidation of Steelcase Strafor (in millions):
Amortization Annual
Period Amount Amortization
------------- ------ ------------
Goodwill................................... 40 years $259.2 $6.5
Trademarks................................. 2 to 25 years 52.7 3.3
Non-compete agreement...................... 3.5 years 10.8 3.1
The following unaudited pro forma data summarizes the combined results of
operations of the Company and Steelcase Strafor as if the acquisition had
occurred at the beginning of the twelve month period ended February 27, 1998,
and includes the effect of purchase accounting adjustments. In addition, the
Steelcase Strafor results of operations include the pro forma effects of the
acquisition of Werndl, a business acquired by Steelcase Strafor on December
16, 1998. No adjustment has been included in the pro forma amounts for any
anticipated cost savings or other synergies (in millions).
February 25, February 26,
2000 1999
------------ ------------
Results of Operations:
Revenues......................................... $3,464.4 $3,344.4
Gross profit..................................... 1,150.5 1,176.6
Operating income................................. 280.7 355.0
Net income....................................... 182.2 215.6
-------- --------
Earnings per share (basic and diluted)........... $ 1.19 $ 1.40
======== ========
Effective August 31, 1999, the Company acquired an 89% equity interest in a
significant dealer located in the Northeast United States, for $33.7 million.
Because no transition plan had been adopted or was in the process of being
adopted on the acquisition date, the transaction was accounted for under the
purchase method of accounting. Accordingly, this dealer's results of
operations subsequent to August 31, 1999 have been consolidated with the
Company's results of operations. The transaction was completed for $24.0
million in cash and $9.7 million in a note payable, and resulted in the
Company recording an intangible asset of $28.0 million for the excess of the
purchase price over the estimated fair value of the net assets acquired, which
is being amortized over 15 years.
Effective September 4, 1999, the Company purchased the remaining 50% equity
interest of Clestra Hauserman, Inc. ("Clestra") for $6.4 million. Clestra,
based in Solon, Ohio, designs, manufactures, installs and services moveable
and demountable steel walls for office interiors. The transaction, which was
completed for $5.2 million in cash and $1.2 million in settlement of a note
receivable, was accounted for under the purchase method of accounting. As a
result, the Company reduced long term assets by $8.1 million for the excess of
the estimated fair value of the net assets acquired over the purchase price,
and the results of operations of Clestra subsequent to September 4, 1999 have
been consolidated with the Company's results of operations. The Company's 50%
equity interest in the net loss of Clestra through September 4, 1999 is
included in equity in net income of joint ventures and dealer transitions in
the accompanying condensed consolidated statements of income.
Effective January 4, 1999, the Company acquired certain assets and
liabilities of J.M. Lynne Company, a New York Corporation, which designs and
distributes vinyl wall coverings for commercial environments. The acquisition
of J.M. Lynne Company was completed for $36.0 million in cash and was
accounted for under the purchase method of accounting. As a result of this
acquisition, the Company recorded an intangible asset of $29.4 million for the
excess purchase price over the estimated fair value of net assets acquired,
which is being amortized over 15 years.
F-28
STEELCASE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
20. 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
2000 Quarter Quarter Quarter Quarter Total
---- ------- ------- ------- ------- --------
Net sales.......................... $691.8 $831.9 $881.0 $911.4 $3,316.1
Gross profit....................... 253.4 281.6 294.3 273.4 1,102.7
Operating income................... 82.7 66.7 78.3 44.1 271.8
Net income......................... 56.7 38.2 45.3 44.0 184.2
Earnings per share (basic and
diluted).......................... 0.37 0.25 0.30 0.29 1.21
First Second Third Fourth
1999 Quarter Quarter Quarter Quarter Total
---- ------- ------- ------- ------- --------
Net sales.......................... $672.3 $704.0 $687.6 $678.6 $2,742.5
Gross profit....................... 253.2 265.2 240.7 230.3 989.4
Operating income................... 78.3 91.8 76.8 70.3 317.2
Net income......................... 54.0 62.7 57.4 47.3 221.4
Earnings per share (basic and
diluted).......................... 0.35 0.41 0.37 0.31 1.44
Effective March 31, 1999, Steelcase Inc. acquired the remaining 50% equity
interest in Steelcase Strafor. Accordingly, the results of operations of
Steelcase Strafor, which is accounted for on a two month lag, from April 1,
1999 through December 31, 1999 have been consolidated with the Company's
results of operations. See Note 19.
During the fourth quarter of 2000, the Company recorded a one-time charge of
$24.5 million ($15.0 million net of tax) to cost of sales for expenses related
to the field retrofit of beltways and insulation materials within installed
Pathways products. Additionally, the Company sold certain non-operating assets
and had investment gains resulting in one-time non-operating gains of $15.2
million ($9.3 million after tax).
During the third quarter of 1999, the Company benefited from the successful
resolution of income tax litigation, which contributed to a reduction in the
overall effective income tax rate expected for 1999 and resulted in interest
income, resulting in an increase in net income of $6.2 million.
F-29
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 25, 2000 and February 26, 1999, 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 25, 2000.
Our audits also included the financial statement schedule for the three years
in the period ended February 25, 2000 as listed in Item 14(a). These financial
statements 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 and
schedule are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and schedule. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall presentation of the financial statements and schedule.
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 25, 2000 and February 26, 1999, and the
results of their operations and their cash flows for each of the three years
in the period ended February 25, 2000, in conformity with generally accepted
accounting principles. Also, in our opinion, the financial statement schedule
presents fairly, in all material respects, the information set forth therein.
BDO SEIDMAN, LLP
Grand Rapids, Michigan
March 20, 2000
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 and schedule, in accordance with generally
accepted auditing standards for the purpose of expressing an opinion on the
financial statements and schedule.
James P. Hackett Alwyn Rougier-Chapman
President and Senior Vice President--Finance,
Chief Executive Officer Chief Financial Officer
F-30
SCHEDULE II
STEELCASE INC.
VALUATION AND QUALIFYING ACCOUNTS
(in millions)
Column A Column B Column C Column D Column E
-------- ---------- --------------------- ---------- --------
Additions
---------------------
Balance
Balance at Charged Charged at end
beginning to costs and to other of
Description of period expenses accounts Deductions period
----------- ---------- ------------ -------- ---------- --------
Reserves deducted in the
consolidated balance
sheet from the assets
to which they apply:
Year ended February
25, 2000:
Allowances for
losses on Accounts
Receivable.......... $27.6 $11.2 $8.8(B) $ 2.1(A) $45.5
Allowances for
losses on Notes
Receivable.......... $ 7.5 $ 6.6 $ 0.9(A) $13.2
Year ended February
26, 1999:
Allowances for
losses on Accounts
Receivable.......... $31.8 $ 3.6 $ 7.8(A) $27.6
Allowances for
losses on Notes
Receivable.......... $10.4 $ 2.2 $ 5.1(A) $ 7.5
Year ended February
27, 1998:
Allowances for
losses on Accounts
Receivable.......... $23.0 $ 6.7 $(2.1) $31.8
Allowances for
losses on Notes
Receivable.......... $ 9.2 $ 3.0 $ 1.8(A) $10.4
--------
Note (A)--Excess of accounts written off over recoveries.
Note (B)--Addition of beginning balances of acquisitions.
S-1
Index of Exhibits
Exhibit
No. Description
------- -----------
3.1 --Second Restated Articles of Incorporation of the Company(1)
3.2 --Amended By-laws of the Company, as amended March 24, 1999(2)
4.1 --Instruments which define the rights of holders of long-term debt
represent debt of less than 10% of total assets. In accordance with
Item 601(b)(4)(iii) of Regulation S-K, the Company agrees to furnish
a copy of such instruments to the Securities and Exchange Commission
upon request.
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-Chapman(4)
10.4 --Steelcase Inc. Restoration Retirement Plan(2)
10.5 --Steelcase Inc. Incentive Compensation Plan(1)
10.6 --Amended and Restated Steelcase Inc. Management Incentive Plan(4)
10.7 --Steelcase Inc. 1994 Executive Supplemental Retirement Plan(4)
10.8 --Deferred Compensation Agreement dated May 4, 1998, between Steelcase
Inc. and William P. Crawford(5)
10.9 --Stock Purchase Agreement between Steelcase Inc. and Strafor Facom
S.A. dated as of April 21, 1999(8)
10.10 --Steelcase Inc. Non-Employee Director Deferred Compensation Plan(6)
10.11 --Steelcase Inc. Deferred Compensation Plan(7)
10.12 --First Amendment to the Steelcase Inc. Incentive Compensation Plan
10.13 --First Amendment to the Steelcase Inc. Management Incentive Plan
10.14 --Second Amendment to the Steelcase Inc. 1994 Executive Supplemental
Retirement Plan
10.15 --Aircraft Time Sharing Agreement between Steelcase Inc. and James P.
Hackett dated March 30, 2000
10.16 --Aircraft Time Sharing Agreements between Steelcase Inc. and Robert
C. Pew dated May 1, 2000
21.1 --Subsidiaries of the Registrant
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 the Company's
Annual Report on Form 10-K for the fiscal year ended February 26, 1999,
as filed with the Commission on May 27, 1999.
(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) 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.
(5) Incorporated by reference to the like numbered exhibit to the Company's
Annual Report on Form 10-K for the fiscal year ended February 27, 1998,
as filed with the Commission on May 28, 1998.
(6) Incorporated by reference to the like numbered exhibit to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended August 27,
1999, as filed with the Commission on October 12, 1999.
(7) Incorporated by reference to the like numbered exhibit to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended November 26,
1999, as filed with the Commission on January 10, 2000.
(8) Incorporated by reference to Exhibit 2.1 to the Company's Current Report
on Form 8-K dated April 22, 1999, as filed with the Commission on May 7,
1999.
E-1