ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
For the fiscal year ended February 28, 2003
Securities registered pursuant to Section
12(b) of the Act:
(State of incorporation)
38-0819050
(IRS employer identification number)
Grand Rapids, Michigan
(Address of principal executive offices)
49508
(Zip Code)
Title of each class
Name of each exchange on which registered
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 o
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. x
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes x No o
As of May 1, 2003, the registrant had outstanding 43,181,532 shares of Class A Common Stock and 104,431,465 shares of Class B Common Stock. The aggregate market value of the Class A Common Stock held by non-affiliates of the registrant was $553,217,071 computed by reference to the closing price of the Class A Common Stock on August 23, 2002 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 August 23, 2002, 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 was $1,066,021,052.
Portions of the registrant’s definitive proxy statement for its 2003 Annual Meeting of Shareholders are incorporated by reference in Part III of this Form 10-K.
Item 1. Business:
The following business overview is qualified in its entirety by the more detailed information included elsewhere or incorporated by reference in this Annual Report on Form 10-K (“Report”). As used in this Report, unless otherwise expressly stated or the context otherwise requires, all references to “Steelcase,” “we,” “our,” “the Company” and similar references are to Steelcase Inc. and its consolidated subsidiaries. Unless the context otherwise indicates, reference to a year relates to a fiscal year, ended in February of the year indicated, rather than a calendar year. Additionally, references to quarters are as follows: Q1 2003 references the first quarter of fiscal 2003.
OVERVIEW
Steelcase is a Fortune 500 company and the world’s leading designer and manufacturer of office furniture, with 2003 revenue of approximately $2.6 billion. Founded in 1912, we are a global company headquartered in Grand Rapids, Michigan. We employ approximately 16,000 employees, have manufacturing facilities in over 50 locations and distribute products through a network of independent dealers in more than 900 locations around the world.
Our mission is about transforming the ways people work by:
| • | helping people work more effectively | |
| • | helping customers use their facilities more flexibly | |
| • | helping companies use space to attract, retain and inspire workers |
We fulfill our mission by implementing our strategy, which is built around two central ideas:
| • | become a work effectiveness company | |
| • | achieve enterprise perfection |
Becoming a work effectiveness company starts with understanding current and emerging patterns of user behavior. We identify these patterns by observing individuals, groups and teams working in their offices through our own research and development efforts, third party human factor research and by collaborating with research partners doing similar work. We use the insights from our research to identify unmet needs, new market opportunities and to develop new user-centered products, solutions and services. For example, several years ago we observed group and team spaces becoming more important. This led to a product offering beyond furniture to include interior architecture and technology products, which can be used to create effective group and teamwork environments. The insights from our research are also used to help customers, architects and designers conceive new and better kinds of office environments, which reflect emerging patterns of work. Because we are helping define these new work environments, we believe we are well positioned to provide the products our customers need to help their employees work more effectively.
1
Operational excellence has long been an important part of our heritage. Our products are known for their innovation, quality and value. We take pride in our on-time delivery record and our global network of independent dealers who provide reliable service to our customers. We have set our sights even higher than simply operational excellence and now use the term “enterprise perfection”, which means achieving the right level of cost, quality and speed throughout manufacturing and distribution and across our supply chain and office operations. In the 2003 Contract Magazine subscriber survey, interior designers, architects, and furniture dealers were asked to name the top manufacturers they considered when purchasing or recommending products in a variety of categories. The manufacturers were judged on the aesthetics, dependability, value, and customer service associated with their product lines for each category. Steelcase was rated the top brand in the categories of casegoods (desks and office suites), computer support furniture, conference tables, desks and credenzas, furniture systems, filing and storage and guest/ occasional seating. We also ranked among the top three manufacturers in the ergonomic seating, accessories, moveable walls and training tables categories.
In addition to the two central ideas described above, our strategy includes:
| • | our core values | |
| • | our financial goals |
Our core values reflect the principles of our founders and are at the heart of what guides our business today. At Steelcase, we:
| • | Act with integrity | |
| • | Tell the truth | |
| • | Keep commitments | |
| • | Treat people with dignity and respect | |
| • | Promote positive relationships | |
| • | Protect the environment | |
| • | Excel |
We believe we will achieve our financial goals by implementing our central ideas and living our core values. To reinforce our financial goals, our management team and most of the employees of Steelcase receive a bonus based on economic value added (“EVA”) performance.
NARRATIVE DESCRIPTION OF BUSINESS
Our Products
We are a global work effectiveness company. We focus on providing knowledge, products and services that enable our customers to create work environments that help people in offices work more effectively. Because of this focus, we have an evolving portfolio of architecture, furniture and technology products and solutions.
2
We have a broad offering of products with a variety of aesthetic options and performance features, and at various price points that address the three core elements of an office environment: architecture, furniture and technology. Our North America, Steelcase Design Partnership and International segments, as well as PolyVision (included in our Other category), generally offer similar products under some or all of the categories listed below:
| Furniture |
Panel-based and freestanding furniture systems. Moveable and reconfigurable furniture components used to create individual workstations and complete work environments. Systems furniture provides visual and acoustical privacy; accommodates power and data cabling; and supports technology and other worktools.
Storage. Lateral and vertical files, cabinets, bins and shelves, carts, file pedestals, and towers.
Seating. High-performance, ergonomic, executive, guest, lounge, team, health care, stackable and general use chairs.
Tables. Meeting, personal, learning and café tables.
Textiles and surface materials. Seating upholstery, panel fabric and wall coverings.
Desks and Suites. Wood and non-wood desks, credenzas and casegoods.
Worktools. Computer support, technology management, organizers, information management products and portable whiteboards.
| Architecture |
Interior architecture. Full and partial height walls with fabric; whiteboard surface materials; raised floors; doors and modular post and beam products.
Lighting. Task, ambient and accent lighting with energy efficient and user control features.
| Technology |
Infrastructure. Infrastructure products, such as modular communications, data and power cabling.
Appliances. Group communication tools, such as interactive whiteboards, image capturing devices and web based interactive signs and space scheduling systems.
Business Segments
During Q3 2003, we changed our external segment reporting to provide a more detailed view of our business, and restated our quarterly segment data at that time. We went from three segments, North America, International and Financial Services, with a separate column for corporate eliminations, to four segments plus an “Other” category. See a description of these segments below. Additional information about our reportable
3
| North America Segment |
Our North America segment consists of manufacturing and sales operations in the United States and Canada. This segment includes 16 manufacturing locations, represents approximately 8,500 employees and serves customers through a network of over 350 independent dealer locations. Our offerings in North America include architecture, furniture and technology products, as described above, under the Steelcase and Turnstone brands. For example, Pathways is an evolving portfolio of integrated architecture, furniture and technology products that enable customers to create flexible, user-centered work environments. In 2003, the North America segment accounted for $1,497.9 million, or 57.9% of our total revenue. We have led the North America market in revenue since 1974.
| Steelcase Design Partnership Segment |
The Steelcase Design Partnership (“SDP”) includes: Brayton International, The Designtex Group, Office Details Inc., Metropolitan Furniture Corporation and Vecta and their brands. These companies operate autonomously, and report to the president of the SDP. They focus on higher-end design furniture products and niche applications for lobby and reception areas, conference rooms, private offices, health care and learning environments, as well as the design and distribution of surface materials and ergonomic tools for the workplace. The SDP segment has approximately 1,300 employees and an independent dealer network made up of many of the same dealers as the North America segment. In 2003, SDP accounted for $291.2 million, or 11.3% of our total revenue.
| International Segment |
Our International segment includes all sales and manufacturing operations of the Steelcase and Werndl brands outside the United States and Canada. It develops and manufactures most of the products it sells. The International segment includes 17 manufacturing facilities located in 11 countries, approximately 4,000 employees and a network of approximately 550 independent dealer locations. In 2003, our International segment accounted for $485.9 million, or 18.8% of our total revenue. We hold the market leadership position in Europe and leading positions in several individual countries.
| Financial Services Segment |
Our Financial Services segment provides leasing services to customers primarily in North America and, more recently, in Europe to facilitate the purchase of our products. This segment also provides selected financing services to our dealers. In 2003, the Financial Services segment accounted for $32.3 million, or 1.2% of our total revenue.
4
Starting in 2004, we will continue to originate leases for customers and will earn an origination fee for that service, but a third party will provide lease funding. As a result, we will no longer have credit or residual risk related to those leases.
In the future, Financial Services will no longer be reported as a separate segment since its results and asset base are below the threshold requirements. Instead, Financial Services will be included with the “Other” category.
| Other |
The Other category includes PolyVision, IDEO and Attwood subsidiaries, ventures and unallocated corporate expenses. PolyVision designs and manufactures visual communications products, such as static and electronic whiteboards. IDEO is a design and innovation services subsidiary. Attwood manufactures hardware and accessories for the marine industry. In 2003, the Other category accounted for $279.6 million or 10.8% of our total revenue.
New Product and Industry Segment Information
During the past 12 months, we have not announced any new industry segments or products that would require the investment of a material amount of the Company’s assets, or which would otherwise result in a material cost.
Raw Materials and Suppliers
The Company’s manufacturing materials are available from a significant number of sources within the United States, Canada, Europe and Asia. Through collaboration, our goal is for both our suppliers and Steelcase to prosper by continuously improving our products and manufacturing processes. To date, we have not experienced difficulties obtaining raw materials, which include steel, lumber, paper, paint, plastics, laminates, particleboard, veneers, glass, fabrics, leathers and upholstery filling material. These raw materials are not unique to the industry nor are they rare.
Product Research, Design and Development
Our product development process begins with research aimed at identifying emerging patterns of user behavior in the workplace and changes in the ways people work. Our research methods include on-site observation of people working in their offices, human factor studies, and often include collaboration with universities and other companies. Our research activity is a corporate function and occurs primarily in North America and Europe.
Understanding patterns of work enables us to identify and anticipate user needs. Our design teams develop prototypical solutions to address these needs. These solutions are sometimes single products and/or enhancements to existing products, and are sometimes integrated architecture, furniture and technology solutions. Design work is organizationally distributed across our major businesses and can involve outside design
5
Our marketing team evaluates product concepts using several criteria, including financial return metrics, and chooses which products will be developed and launched. Next, designers work closely with our engineers and outside suppliers to co-develop products and processes that lead to more efficient manufacturing without compromising key user benefits. Products are tested for performance, quality and compliance with regulations.
Exclusive of royalty payments, we have invested approximately $179 million in research, design and development activities over the past three years. Royalties are sometimes paid to outside designers of our products as the products are sold and are not included in the research, design and development costs since they are variable based on product sales.
Manufacturing
We manufacture our products in more than 50 locations throughout the world, with facilities predominantly in North America and Europe. Substantially all of our manufacturing facilities “assemble to order” rather than to “forecast,” which minimizes finished goods inventory levels and emphasizes continuous improvement and delivery time to customers. We have an extensive physical distribution system in North America and Europe and utilize both our company-owned trucking fleet and commercial transport and delivery services.
We are implementing lean manufacturing principles in many of our plants. Lean manufacturing involves smaller batch sizes, cellular or team-based manufacturing, flow and pull methods of managing work in process, and other world-class production techniques. We are also implementing enhanced planning and scheduling systems to help coordinate production of a given order across multiple plants and multiple delivery times. We explore opportunities to outsource certain manufacturing processes when suppliers can offer additional efficiencies or other performance benefits. These strategies along with other initiatives are helping us create the new “Steelcase Production System.” As we continue with implementation, we expect to improve our productivity, increase the effective capacity of each plant, improve inventory turns, and create a less capital-intensive industrial model. For example, during 2003 reduced sales volume and implementation of lean manufacturing principles led to excess capacity. We consolidated plants and distribution centers, moved into smaller and more efficient facilities with better product flow (including the closing or relocation of 3 plants in the United States, representing approximately 2.2 million square feet of space). We will continue to examine opportunities to consolidate manufacturing and distribution operations and dispose of assets that represent excess capacity.
Working Capital
Our receivables are primarily from our dealers. Payment terms vary by country and region. The terms of our North America and SDP segments, and certain markets within the International segment, encourage prompt payment. Other International markets have, by market convention, longer payment terms. We are not aware of any special practices or conditions related to working capital items that are significant to understanding our business or the industry at large.
6
Backlog
Our products are generally manufactured and shipped within a few weeks following receipt of order, and therefore, we do not view the amount of backlog at any particular time as a meaningful indicator of longer-term shipments.
Intellectual Property
Our wholly owned subsidiary, Steelcase Development Corporation, acquires, manages, licenses, and enforces our intellectual property rights.
We own approximately 1,400 designs and patents throughout the world. Of these, we have over 650 active utility and design patents for current and anticipated products in the United States. We own the remaining designs and patents in a number of other countries. The average remaining life of the utility patents in our United States portfolio is approximately 13 years. We occasionally enter into license agreements under which we pay a royalty to third parties for the use of patented products, designs or process technology.
We have also registered various trademarks and service marks in the United States and other countries. Collectively, we hold registrations for approximately 150 United States and 1,330 foreign trademarks. We have established a global network of intellectual property licenses with our affiliates. We also selectively license our intellectual property to third parties as a revenue source. For example, our Leap® seating technology has been licensed for use in automotive seating, and we are pursuing other licensing for this technology.
We do not believe that any material part of our business is dependent on the continued availability of any one or all of our patents or trademarks, or that our business would be materially adversely affected by the loss of any, except the “Brayton”, “Designtex”, “Details”, “Leap”, “Metro”, “Pathways”, “PolyVision”, “Steelcase”, “Vecta” and “Werndl” trademarks.
Distribution and Customer Base
We primarily sell our products through a network of independent dealers. Each dealership has its own sales force, supported by our sales representatives, who work closely with dealers throughout the sales process. We have historically experienced minimal turnover in our dealer network. No single dealer accounted for more than 2.7% of our consolidated revenue for 2003. The five largest dealers collectively accounted for approximately 11.4% of our consolidated revenue. We do not believe our business is dependent on any single dealer, the loss of which would have a material effect upon our business. However, temporary disruption of dealer coverage within a specific local market due to financial failure or the inability to smoothly transition ownership could temporarily have an adverse impact on our business within the affected market. See Notes 7 and 16 to the consolidated financial statements for further discussion.
Our largest customer accounted for approximately 0.9% of our consolidated revenue and our five largest customers accounted for approximately 4.0% of consolidated revenue. However, the percentages referenced in the previous sentence do not include revenue from, various government agencies and other entities purchasing under the General Services Administration (“GSA”) contract, which in the aggregate accounted for
7
Historically, our business experiences slight seasonality with the second and third quarter revenue levels higher than first and fourth quarter revenue levels. This seasonal trend was not as evident during the office furniture industry recession of the past two years.
Competition
| United States and Canada |
The United States and Canadian office furniture markets are highly competitive, with a number of competitors offering similar product categories. We have held the position as the revenue leader in our industry for over 25 years. In this market, companies compete on price, delivery and service, product design and features, product quality, strength of dealers and other distributors, and relationships with customers. Our most significant competitors are Haworth, Inc., Herman Miller, Inc., Hon Industries Inc., and Knoll, Inc. Together with Steelcase, these companies represent approximately 55% of the market share of the United States office furniture market.
| International |
The international office furniture market is highly competitive and fragmented. We compete with many different local or regional manufacturers in many different markets. In most cases, these competitors focus their strengths on selected product categories. We also compete with certain North American based competitors. No single company competes with us in all markets.
Environmental Matters
We are subject to a variety of federal, state, local and foreign laws and regulations relating to the discharge of materials into the environment, or otherwise relating to the protection of the environment (“Environmental Laws”). Subject to the matters noted below and under Item 3, Legal Proceedings, we believe our operations are in substantial compliance with all Environmental Laws. Additionally, we do not believe that existing Environmental Laws and regulations have had or will have any material effects upon the capital expenditures, earnings or competitive position of the Company.
On June 18 and 19, 2002, the United States Environmental Protection Act (“EPA”) and Michigan Department of Environmental Quality (“MDEQ”) conducted an inspection of the energy centers and certain other air emission sources at the Steelcase facilities in Kentwood and Grand Rapids, Michigan. Following the inspection, the EPA requested stack testing of emissions from the two energy centers. Those tests were conducted in January and February 2003. Based on the results of those tests, MDEQ requested additional stack testing at the Grand Rapids energy center, which was completed during the week of April 28, 2003. MDEQ requested the additional testing to confirm compliance with air emission permit requirements because of
8
Steelcase’s Metropolitan Furniture subsidiary located in Oakland, CA recently identified an air permit emission exceedence and reported it to the Bay Area Air Quality Management District (“BAAQMD”). We have not yet received a response from the BAAQMD. It is possible that it will issue a notice of violation and that penalties or other costs could be associated with that notice. Any potential penalties or costs cannot be estimated at this time.
Under certain Environmental Laws, Steelcase could be held liable, without regard to fault, for the costs of remediation associated with our existing or historical operations. We could also be held responsible for third-party property and personal injury claims or for violations of Environmental Laws relating to contamination. Steelcase is a party to, or otherwise involved in, legal proceedings relating to several contaminated properties being investigated and remediated under Environmental Laws. Based on our information regarding the nature and volume of wastes allegedly disposed or released at these properties, the number of other financially viable potentially responsible parties and the total estimated cleanup costs, we do not believe that the costs to us associated with these properties will be material, either individually or in the aggregate. The Company has established reserves we believe are adequate to cover our anticipated remediation costs at these sites. However, certain events could occur that would cause actual costs or losses to vary from the established reserves. These events include, but are not limited to: a change in 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; and other factors increasing the cost of remediation or the loss of other potentially responsible parties that are financially capable of contributing towards cleanup costs.
Employees
As of February 28, 2003, Steelcase employed more than 16,000 employees, including approximately 9,300 hourly, 6,000 salaried and 650 temporary employees. About 11,900 employees are located in the United States, Canada and Mexico, approximately 5.0% of which are covered by collective bargaining agreements in the United States.
Available Information
Information regarding our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to these reports, will be made available, free of charge, at our Internet website at www.steelcase.com , as soon as reasonably practicable after we electronically file such reports with or furnish them to the Securities and Exchange Commission. We are not including the information contained on our website as a part of, or incorporating it by reference into, this Report.
9
Item 2. Properties:
The Company, including joint ventures, has
operations at locations throughout the United States and around
the world, including manufacturing facilities in Belgium,
Brazil, Canada, Denmark, France, Germany, Italy, Japan,
Malaysia, Mexico, Morocco, Portugal, Saudi Arabia, Spain and the
United Kingdom. Our office, showroom, manufacturing and
distribution facilities total approximately 25 million
square feet, of which approximately 5.5 million square feet
are leased. We believe our facilities are in good operating
condition and sufficient to meet current volume needs and future
volume increases. Due to restructuring and plant
rationalizations over the past several years, we are currently
holding for sale several facilities that are no longer in use.
These facilities are reported as
Real Estate Held for
Sale
on our Consolidated Balance Sheets. Our principal
office, manufacturing and distribution facilities (300,000
square feet or larger) are listed below:
10
(1)
Includes four facilities ranging from 867,000
square feet to 1,269,000 square feet.
(2)
Includes three facilities ranging from 666,000
square feet to 886,000 square feet.
(3)
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 our
Corporate Learning and Development Center and the balance for
commercial leasing.
Table of Contents
Item 3. Legal
Proceedings:
We are involved in litigation from time to time
in the ordinary course of our business. Based on known
information, we believe we are not a party to any lawsuit or
proceeding that is likely to have a material adverse effect on
the Company.
Notwithstanding the above, in addition to the
energy center issues noted under
Environmental Matters,
an additional issue was identified during the February stack
tests at the Grand Rapids energy center, when the diameter of
the exhaust stack was questioned. The interior diameter of the
stack was measured on April 10, 2003 and was found to be
wider than the diameter specified in the permit. In 1984, the
stack height was increased when another boiler was added to the
energy center. At that time, a larger diameter-reducing cone
replaced the existing cone. On April 24, 2003, MDEQ issued
a letter of violation based on the non-compliant stack diameter.
Steelcase is conducting emission modeling work to determine
whether the difference in stack diameter has any effect on
compliance with permit emission limits. No penalties, costs or
assessments have been sought and cannot be estimated at this
time. The modeling may show that the larger diameter-reducing
cone does not effect emissions, however, penalties and other
costs still could result from the notice of violation regardless
of the emission modeling results.
For a description of other matters relating to
our 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.
Item 4(a). Executive
Officers of the Registrant:
Mark A. Baker
has
been Senior Vice President, Operations since November 2001.
Mr. Baker served as Vice President, Manufacturing
Operations from March to November 2001. From 1999 to 2001,
Mr. Baker served as Vice President, Marketing. From 1998 to
1999 Mr. Baker served as Vice President and General
Manager, Turnstone. From 1995 to 1998, Mr. Baker served as
Vice President, Product Marketing.
11
Robert W. Black
has
been President, International since October 2000.
Mr. Black was Senior Vice President, Steelcase
International from 1999 to 2000. From 1998 to 1999,
Mr. Black served as Vice President, European Ventures. From
1996 to 1998, Mr. Black served as Vice President, Marketing.
Jon D. Botsford
has
been Senior Vice President, Secretary and Chief Legal Officer
since June 2000. Mr. Botsford served as Senior Vice
President, General Counsel and Secretary from 1999 to 2000. From
1998 to 1999 Mr. Botsford served as Vice President, General
Counsel and Secretary. Mr. Botsford was General Counsel and
Secretary from 1997 to 1998.
Mark T. Greiner
has
been Senior Vice President, WorkSpace Futures since
November 2002. Mr. Greiner was Senior Vice President,
Research & Development, Concepts and Ventures from 2001
to 2002. From 1999 to 2001, Mr. Greiner held the position
of Senior Vice President, Global E-Business and Chief
Information Officer. Mr. Greiner served as Vice President,
Chief Information Officer from 1996 to 1999.
James P. Hackett
has
been President, Chief Executive Officer and Director of the
Company since December 1994. Mr. Hackett also serves
as a Board Member to Northwestern Mutual Life Insurance Company
and Fifth Third Bancorp.
Nancy W. Hickey
has
been Senior Vice President, Global Strategic Resources and Chief
Administrative Officer since November 2001. Ms. Hickey
served as Senior Vice President, Global Human Resources from
March to November 2001. From 1999 to 2001, Ms. Hickey
served as Vice President, Human Resources. 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, Chief Financial Officer since
April 2001. Mr. Keane served as Senior Vice President,
Finance and Corporate Strategy from February to April 2001.
From 1999 to 2001, Mr. Keane served as Senior Vice
President, Corporate Strategy, Research and Development.
Mr. Keane served as Vice President, Corporate Strategy,
Research and Development from 1997 to 1999.
Michael Love
has
been President and Chief Executive Officer, Steelcase Design
Partnership since May 2000. Mr. Love was president of
Vecta, a division of Steelcase, from 1994 to 2000.
Frank H. Merlotti,
Jr.
has been President, Steelcase
North America since September 2002. From 1999 to 2002,
Mr. Merlotti was President and Chief Executive Officer of
G&T Industries, a manufacturer and distributor of fabricated
foam and soft-surface materials. Mr. Merlotti was President
and Chief Executive Officer of Metropolitan Furniture
Corporation, a subsidiary of Steelcase, from 1991 to 1999.
12
Name
Age
Position
43
Senior Vice President, Operations
43
President, International
48
Senior Vice President, Secretary and Chief Legal
Officer
51
Senior Vice President, WorkSpace Futures
48
President and Chief Executive Officer
51
Senior Vice President, Global Strategic Resources
and Chief Administrative Officer
43
Senior Vice President, Chief Financial Officer
54
President and Chief Executive Officer, Steelcase
Design Partnership
52
President, Steelcase North America
Table of Contents
Table of Contents
| Item 5. | Market for Registrant’s Common Equity and Related Stockholder Matters: |
The Class A Common Stock of Steelcase Inc. is listed on the New York Stock Exchange under the symbol “SCS”. Our Class B Common Stock is neither registered under the Securities Act of 1933 nor publicly traded. See Note 12 to the consolidated financial statements for further discussion of our common stock. As of May 1, 2003, we had outstanding 43,181,532 shares of Class A Common Stock with 11,926 shareholders of record and 104,431,465 shares of Class B Common Stock with 188 shareholders of record.
The declaration and payment of dividends are subject to the discretion of the Board and to compliance with applicable law. The amount and timing of future dividends depends upon our 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.
|
|
||||||
| Total Dividends Paid | ||||||
| (in millions) | ||||||
|
|
||||||
|
Fiscal 2003
|
$ | 35.4 | ||||
|
Fiscal 2002
|
$ | 57.5 | ||||
13
Item 6. Selected
Financial Data:
14
(1)
The fiscal year ended February 28, 2003
contained 53 weeks. All other years shown contained
52 weeks.
(2)
As of March 31, 1999 Steelcase S.A. became a
wholly owned subsidiary, the results of which are included in
our consolidated statements.
(3)
Cumulative effect of accounting change relates to
our adoption of Statement of Financial Accounting Standards
(“SFAS”) No. 142. See Note 8 to the
consolidated financial statements for more information.
Table of Contents
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations: |
The following review of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and notes to the consolidated financial statements included within this Form 10-K.
Current Business Overview
The office furniture industry has experienced about a 35% decline in shipments over the past two years in the United States, as reported by the Business and Institutional Furniture Manufacturer’s Association International (“BIFMA”), primarily caused by reduced business capital spending. We implemented specific financial strategies to manage through the industry downturn aimed at reducing our breakeven point, improving our cash flow and strengthening our balance sheet. We implemented several operational, organizational and financial restructuring activities in 2003 including:
| • | Lowered fixed and variable costs through actions which included reducing our global workforce approximately 22% for the year (and approximately 40% since 2001). | |
| • | Sold $289.4 million of leased assets for proceeds of $302.0 million. | |
| • | Reduced capital expenditures by focusing on shorter payback projects. | |
| • | Consolidated manufacturing operations to reduce excess capacity. | |
| • | Outsourced certain non-core manufacturing operations and other activities. | |
| • | Closed or divested certain non-strategic operations not meeting financial return targets. | |
| • | Sold certain non-strategic and redundant fixed assets. | |
| • | Continued implementation of lean principles in our manufacturing operations. | |
| • | Leveraged investments in enterprise resource planning (ERP) software systems to integrate order fulfillment processes. | |
| • | Launched new user-centered products. |
Because sales volume fell faster than we could capture the benefits from the actions listed above, we reported a loss for 2003. However, because of these actions our quarterly breakeven revenue is approximately 25% lower than it was almost two years ago at a level of approximately $590 million, and we earned a profit in Q4 2003.
Cash flow from operating and investing activities improved as we sold leased assets and controlled capital expenditures. We used our improved cash flow to strengthen our balance sheet. We increased our cash balance while reducing debt to its lowest level in nearly four years.
15
Financial Summary
Results of Operations
Overview
Despite an additional shipping week during the
fourth quarter, revenue declined 16.3% in 2003 compared to 2002
following a decline of 23.7% from 2001 to 2002. Our PolyVision
Corporation and Custom Cable Industries acquisitions, both
completed in the second half of fiscal 2002, contributed
$132.8 million to our total revenue in 2003. The dealer
acquisition completed during 2003 contributed $24.3 million
to our total revenue. Fiscal 2001 revenue was a record
$4,049.0 million and reflected the impact of acquisitions
and growth across most business segments, product categories and
geographies.
We took aggressive steps to reduce costs, which
helped to limit our losses in 2003. Including non-recurring
items, we lowered total costs 14.0% from 2002 levels and 18%
from 2001 to 2002. The actions we took to reduce costs in 2003
included a 22% reduction in workforce (or approximately 4,100
temporary, part-time and full-time hourly and salaried
positions); reduced spending on items such as capital, travel
and outside services; and facility rationalizations and process
reengineering. Lower profits led to lower variable compensation,
including reduced bonuses and retirement contributions.
We recorded a net operating charge for
non-recurring items, including charges for workforce reductions
and restructuring, totaling $50.6 million pre-tax in 2003
compared to $50.3 million in 2002 and $23.9 million in
2001.
16
Despite significant cost reduction actions
undertaken in 2003, the impact of lower revenue on fixed cost
absorption and non-recurring items caused operating margins to
decline and resulted in us reporting a net loss of
$36.2 million before the cumulative effect of accounting
change.
Beginning in 2003, we adopted Statement of
Financial Accounting Standards (“SFAS”) No. 142,
Goodwill and Other Intangible Assets,
which requires
companies to discontinue amortizing goodwill and test goodwill
annually to determine whether it is impaired. At the beginning
of the first quarter, we recorded a non-cash charge of
$170.6 million related to impairment of goodwill in the
International segment. At year-end, we recorded a correction of
the original calculation resulting in a revised first quarter
charge of $229.9 million. See further discussion in Notes 8 and
20 to the consolidated financial statements. The SFAS
No. 142 adoption charge had no effect on revenue, operating
income, cash flow or income tax expense, thus the pre-tax and
after-tax effect of the cumulative effect of the accounting
change was the same.
Interest Expense; Other Income (Expense), Net;
and Income Taxes
A portion of our debt is attributed to our
Financial Services segment and the balance relates to the
manufacturing portion of our business. Interest expense related
to the Financial Services debt is recorded as an operating
expense. Interest expense related to the debt attributed to the
manufacturing portion of our business is recorded as a
non-operating expense and is shown above. Accordingly,
non-operating interest expense was not affected by the
significant decrease in Financial Services debt in 2003. Debt
related to the manufacturing portion of our business remained
fairly stable during 2003; thus, non-operating interest expense
was comparable
17
Interest income declined in 2003 due to lower
average investments outstanding and lower average interest rates.
Losses on dealer transitions relate to
uncollectible funds loaned to dealers to finance ownership
changes. During 2003, we recognized losses on dealer transitions
primarily related to two International dealers that have been
significantly affected by the office furniture recession in
their markets. We are working with these dealers to restructure
their business and improve their performance. These losses do
not include write-offs of receivables that have arisen as a
result of product sales. Charges for write-offs associated with
trade receivables from these affiliates are recorded as
operating expenses.
During 2002 and 2001, we recognized losses on
dealer transitions primarily related to two North America
dealers whose operating results deteriorated due to a
significant decline in business activity in their local market
and several other performance issues. As a result, these dealers
were restructured and ownership was transitioned to new dealer
principals.
We carefully monitor the financial condition of
dealers in ownership transition. Most of the dealers that have
transition financing from Steelcase have successfully reduced
costs and taken other steps to manage through the downturn. Some
individual dealers are facing difficult financial challenges. We
believe our reserves adequately reflect these credit risks.
However, if these dealers experience prolonged or deepening
reduction in revenues, the likelihood of losses would increase
and we would record additional charges or reserves, as necessary.
The non-recurring gain on the disposal of
property and equipment primarily related to the sale of our
Tustin, California manufacturing facility following the
relocation of the operations to a smaller, more efficient
facility. We received net proceeds of $35.7 million and
recorded a gain of $15.1 million. In 2001, we generated a
gain of $26.9 million on disposal of property and
equipment, which was primarily related to the sale of two
non-income producing real estate assets.
Our income tax expense is a function of actual
taxable income earned by the Company in different countries, the
tax rates in various countries and tax planning strategies we
implement. We expect these strategies to result in a long-term
effective tax rate of between 36.0% and 38.0%. Because of our
reduced tax liability, resulting from our lower pre-tax income
and consistent level of permanent tax items, our effective tax
rate in 2002 was not meaningful.
Segment Disclosure
See more information regarding segments in
Part I Item 1 and Note 17 of the consolidated
financial statements included with this Report.
Certain tables included in this section contain
various non-GAAP (Generally Accepted Accounting Principles)
financial measures. A “non-GAAP financial measure” is
defined as a numerical measure of a
18
Despite an additional shipping week during the
fourth quarter, revenue in 2003 declined more than 22% in the
North America segment following about a 27% decline from 2001 to
2002, and reflecting a sharper decline than in any of our other
manufacturing segments. North America’s largest customers
dramatically reduced business capital spending during the past
two years, resulting in a decline in revenue in seven of
the last eight quarters, reaching its lowest level in Q4 2003.
The decline in gross margins was primarily due to
the following factors:
As volume declined during the year, North America
took additional steps to reduce cost of goods sold. North
America reduced hourly and salaried manufacturing workforce,
rationalized and consolidated facilities, continued to implement
lean manufacturing and captured savings from strategic sourcing
initiatives. However, the benefits
19
Operating expenses decreased almost 30% since
2001. This decrease is a result of salaried workforce
reductions, restructuring activities and reductions in
discretionary and external spending, including elimination of
all bonuses and reduction of retirement contributions.
Non-recurring items included within 2003 operating expenses
totaled a net charge of $20.7 million. This amount
primarily consisted of severance and workforce reduction costs
of $24.9 million offset by a gain of $4.2 million for
post-retirement medical and pension benefits curtailment.
We maintain loss reserves related to dealer trade
receivables, and we carefully monitor the financial condition of
these dealers. Generally, Steelcase dealers in North America
have successfully reduced costs and taken other steps to manage
through the downturn. We have processes that allow us to monitor
and react quickly to changes in credit quality of our dealers.
We believe our reserves adequately reflect these credit risks.
However, if these dealers experience a prolonged or deepening
reduction in revenues, the likelihood of losses would increase
and additional charges or reserves would be necessary.
Steelcase Design Partnership
20
Despite an additional shipping week during the
fourth quarter, revenue for our SDP segment declined almost 12%
in 2003 following a nearly 25% decline in 2002. The shutdown of
an under-performing business in this segment accounted for
$26.6 million of the revenue decline from 2001 to 2002. For
the two-year period, excluding the revenue of the shutdown
business, the decline for SDP was approximately 30% and was less
than our consolidated decline of nearly 36%. SDP revenue is
generally less dependent on large project orders and is less
affected by declines in business capital spending due to its
differentiated, design-oriented product portfolio and focus on
niche applications.
SDP margins are higher than our other
manufacturing segments’ margins. Margins were relatively
stable over the past two years because the cost structure of the
SDP companies adjusts more quickly to changes in demand given
their higher variable costs and lower fixed costs. Accordingly,
the significant decline in revenue had less impact on SDP’s
fixed cost absorption. Margins in 2001 were approximately 40%,
excluding the shutdown business’s negative gross margin of
$7.8 million.
Despite salaried workforce reductions of
approximately 30% in the past two years, as well as other cost
reduction efforts, operating expenses increased as a percentage
of revenue. Essentially, revenue declined faster than the
reduction in fixed costs. Operating expenses included
non-recurring charges of $1.4 million in 2003 and
$1.2 million in 2002 related to workforce reductions.
SDP initiatives completed during 2003 to reduce
costs included:
International
21
International revenue declined over 18% in each
of the past two years due to the global nature of the economic
recession. While the timing of the recession varied from market
to market, all of our major markets were affected. Revenue for
our International segment hit its lowest point in Q1 2003 with
sequential quarter improvements throughout subsequent quarters,
partially attributable to the translation effect of the
strengthening of the euro versus the U.S. dollar in the latter
half of 2003.
Following the initial volume-driven decline in
gross margins in 2002, International gross margins remained
relatively flat in 2003 for the following reasons:
The decline in gross margins from 2001 to 2002
was primarily related to underabsorption of overhead due to the
decrease in revenue.
Included in cost of sales were non-recurring
restructuring charges for workforce reductions and asset
impairments of $10.7 million in 2003 and $10.8 million
in 2002.
Compared to 2002, operating expenses decreased
both in absolute terms and as a percent of revenue during 2003.
The decrease can be attributed to a $13.0 million reduction in
charges related to dealer credit issues, a $7.7 million
reduction in amortization expense due to the change in
accounting for goodwill, and cost reductions related to
restructuring activities completed during 2002 and 2003,
including workforce reductions. Operating expenses included
non-recurring restructuring charges of $7.1 million in 2003
and $7.7 million in 2002 for workforce reductions and the
impairment of assets to be sold.
Economic conditions in certain countries continue
to put pressure on some of our dealers. We continue to carefully
monitor the financial condition of dealers for changes in credit
quality. We believe our reserves adequately reflect these credit
risks. However, if dealers experience a prolonged or deepening
reduction in revenues, the likelihood of losses would increase
and additional charges or reserves would be necessary.
22
Financial Services
Beginning in Q1 2004, we will adopt a new
strategy for Financial Services in which we continue to
originate leases for customers and will earn an origination fee
for that service, but use a third party to provide lease
funding. As a result, we will no longer have credit or residual
risk related to those leases.
As we were developing this new funding strategy
during 2003, we sold a substantial portion of our lease
portfolio with a book value of $289.4 million for proceeds
of $302.0 million. After settling interest rate hedges
related to these leases and transaction costs, we recorded a net
gain of $0.8 million. As a result of the sale of these
leased assets and a decline in leasing activity due to the
overall industry recession, revenue declined 59% in 2003. The
decline in revenue and increases in lease credit reserves
resulted in a $10.6 million decline in Financial Services
operating income in 2003, including non-recurring severance
charges of $0.5 million.
The remaining leases, with a gross receivable
value of $151.7 million, fall into four different
categories. The leases in each category are collateralized by
the related furniture. The first category includes leases that
may be sold in the coming year. The second category includes
leases with credit qualities that have fallen since they were
first originated. We do not believe we can sell the leases in
this category economically. These lease customers are current on
payments and we expect to work these balances down over time.
The third category includes leases that are less marketable
because they include service contracts and will likely be held
to the end of the lease term. Finally, the fourth category
includes leases with a net investment value of
$16.1 million which are not current because these customers
are experiencing financial difficulty. Reserves against the
lease portfolio totaled $12.0 million at February 28,
2003, $7.1 million at February 22, 2002 and
$9.1 million at February 23, 2001. We continue to
monitor all four categories of leases and we believe our
reserves adequately reflect the current credit risk.
Our ten largest lease customers make up
$72.4 million of gross lease receivables. If Financial
Services was to experience further defaults related to larger
leases, it is likely significant increases in reserves would be
necessary. See Notes 5 and 6 of the consolidated financial
statements for further discussion regarding Financial Services
activity. See Note 16 for discussion of concentration of credit
risk related to the Financial Services segment.
23
In the future, Financial Services will no longer
be reported as a separate segment since its results and asset
base are below the threshold requirements. In future filings,
Financial Services will be included with the “Other”
category.
Other
As mentioned in Part I Item 1, our
Other category includes the operating companies of PolyVision,
IDEO and Attwood and miscellaneous revenue and expenses from
unallocated corporate expenses and ventures. The operating
companies contributed revenue of $275.9 million in 2003,
$147.4 million in 2002 and $139.2 million in 2001. The
significant increase from 2002 to 2003 was largely due to the
acquisition of PolyVision in late 2002.
The operating companies generated operating
income totaling $14.3 in 2003, $1.0 in 2002 and
$8.4 million in 2001. The significant increase from 2002 to
2003 primarily related to improved results reported by IDEO. The
decrease in operating income of the companies from 2001 to 2002
was primarily related to decreased volume.
More than 85% of corporate expenses which
represent shared services are charged to the operating segments
as part of a corporate allocation. The unallocated portion of
these expenses is considered general corporate costs and is
reported within the Other category. Revenue and costs of
exploring new business opportunities within new market niches or
areas related to, but not part of, our core business activities
are considered ventures, and are reported in the Other category.
Net non-recurring items totaling
$10.5 million were included in 2003 results and primarily
consist of $8.0 million of business exit costs related to a
venture. In 2002, non-recurring charges were $0.9 million
for workforce reductions.
Liquidity and Capital Resources
We generated positive cash flow from both
operating and investing activities in 2003. As of
February 28, 2003, our financial position included cash,
cash equivalents and short-term investments of
$131.1 million. These funds, in addition to cash generated
from future operations, lease sales and available and future
credit facilities, are expected to be sufficient to finance our
known or foreseeable liquidity and capital needs.
Total consolidated debt as of February 28,
2003 was $324.2 million, consisting of $150.0 million
that related to our Financial Services segment and
$174.2 million that related to our other business segments.
Our consolidated debt to capital ratio was 20.5% at year-end.
Total debt as of February 28, 2003 was $269.5 million
24
Of the $30.0 million of debt payments due in
2004 (as presented in the contractual obligations table within
this section), $18.7 million relates to foreign currency
notes payable and revolving credit facility obligations with
interest rates ranging from 3.66% to 7.30%. The remaining
$11.3 million balance relates to United States dollar notes
payable obligations with interest rates ranging from 5.96% to
8.21%. Our long-term debt rating is BBB from Standard &
Poor’s and Baa3 from Moody’s Investor Service.
Our total liquidity facilities as of
February 28, 2003 were:
The global bank facility originally served as a
backstop to a multi-currency commercial paper program. We have
not accessed the commercial market since May 2002 and no
longer maintain a short-term rating. We allowed the 364-day
$200 million tranche of the bank facility to expire in
April 2003 and expect to replace the remaining 3-year
tranche with a new facility by June 2003. We expect the new
facility to be sized between $200-$300 million.
Certain of our financing and lease facilities
require us to satisfy financial covenants including a minimum
net worth covenant, a maximum debt ratio covenant, and a minimum
interest coverage ratio covenant. As a result of the correction
of the goodwill impairment charge, as discussed earlier, we were
not in compliance with the minimum net worth covenant as of
February 28, 2003. This affected our global bank facility,
our two term facilities and, through a cross-default provision,
our aircraft operating lease. There was $94.1 million in
obligations under the affected facilities, including $45.4 under
the two term facilities and $48.7 million under the
aircraft operating lease. There were no obligations outstanding
under the global bank facility. The global bank facility lenders
approved a waiver of that covenant through June 2003, at
which time we expect to have our new facility in place. This
waiver automatically remedied the non-compliance with the
aircraft lease. We secured a waiver and an amendment of the
affected covenant related to the two term facilities.
The Company has commitments related to certain
sales offices, showrooms, and equipment under non-cancelable
operating leases that expire at various dates through 2018.
Minimum payments for operating
25
The aircraft lease is a synthetic lease structure
that was put in place in May 2000. The synthetic lease
structure provides us with access to funding through a
commercial paper facility. For accounting purposes, we have
classified the lease as an operating lease and minimum future
payments of $9.6 million with respect to this lease are
included in the contractual obligations table below. The
remaining lease balance including residuals is
$48.7 million. Under FASB Interpretation (“FIN”)
No. 46,
Consolidation of Variable Interest Entities,
it is reasonably likely that the lessor will be consolidated in
our consolidated balance sheet at the end of Q3 2004. The
aircraft will be capitalized as part of our assets and related
lease balance will be recorded as our debt. See Note 16 to
the consolidated financial statements for further information.
Cash Flow
Our cash and cash equivalents increased by
$59.5 million in 2003 to a balance of $128.9 million
at February 28, 2003.
Cash provided by operating
activities
We generated net cash from operating activities
of $41.8 million in 2003, compared to $294.6 million
in 2002.
26
Although there was a year-to-year decline in net
income before the cumulative effect of the accounting change,
most of the year-to-year change in cash generated from operating
activities is reflected in changes in operating assets and
liabilities.
In 2002, operating assets less operating
liabilities decreased by $123.5 million. The dramatic reduction
in revenue from Q4 2001 to Q4 2002 drove a similar decline in
receivables, inventories and payables, which is reflected in
this line.
In 2003, the reduction in revenue was not as
dramatic, and we saw a relatively small decline in receivables
and inventories, net of payables, before translation
adjustments. However, there was a substantial net increase in
other operating assets, net of other operating liabilities. This
increase was caused by a curtailment of the post-retirement
medical and pension benefit plans and reductions in other
employee benefit liabilities related to reduction in force. We
also used cash during 2003 for restructuring costs that had been
accrued during 2002.
The 2003 reduction in cash reflected in
“Other, net” relates to an increase in deferred taxes
because of deferred taxable losses on leased asset sales and an
increase in foreign tax loss carryforwards. The 2002
“Other, net” reduction in cash was net of addbacks
related to non-cash losses and write-offs related to asset
dispositions included in net income in that year.
Cash provided by (used in) investing
activities
Proceeds from the sales of leased assets and
fixed assets were the primary contributors to our net cash
provided by investing activities in 2003. See more detail
regarding the sales of leased assets in the Financial Services
Segment Disclosure
section and in Note 6 to the
consolidated financial statements included within this Report.
We reduced capital expenditures approximately 38%
in 2003 following an approximate 53% reduction in 2002. The
significant reductions in capital spending over the past two
years reflect an emphasis on limiting new projects to those that
meet key EVA milestones and deliver short payback cost savings
or support critical
27
The primary use of cash in investing activities
during 2002 was for strategic acquisitions and capital
expenditures. Acquisitions included PolyVision Corporation,
Custom Cable Inc. and Steelcase Artwright Manufacturing. We
experienced a substantial decrease in dealer notes receivable
during 2002. Dealers required less working capital because of
the downturn in the furniture industry.
In 2001, we had significant proceeds from the
disposal and sale/leaseback of fixed assets, which were
partially offset by increased capital expenditures. During 2001,
we generated incremental cash by financing certain non-income
producing assets through the use of several sale/leaseback
arrangements. In addition, we sold other non-income producing
assets during the year.
Cash provided by (used in) financing
activities
Over the past two years, one of our focus points
was strengthening our balance sheet. One way we accomplished
this was by reducing debt through the cash generated from
operating and investing activities.
We paid common stock dividends of $0.24 per share
in 2003, $0.39 per share in 2002, and $0.44 per share in 2001.
The dividend rate declared by the Board of Directors was $0.06
per share in each quarter of 2003.
We issued common stock in 2003 for proceeds of
$3.8 million related to the exercise of employee stock
options.
28
The Board of Directors has authorized share
repurchases of up to 11 million shares. We did not
repurchase any common shares during 2003. Approximately
3.8 million shares remain available for repurchase under
the program and we have no outstanding share repurchase
commitments. Since the inception of our repurchase program,
7.2 million shares have been repurchased for
$112.7 million. The reduction in share repurchase activity
since 2001 is due in part to a shift towards using excess cash
to reduce debt, particularly during the economic downturn.
Currently, about 27% of our common shares are
Class A (tradable) compared to 9% at the time of our
initial public offering in February 1998. We do not expect
share repurchases to reduce our tradable share float in the long
run since we anticipate Class B Common Stock to gradually
convert to Class A Common Stock over time.
Critical accounting policies
Management’s Discussion and Analysis of
Results of Operations and Financial Condition
is based upon our consolidated
financial statements and accompanying notes. The Company’s
financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of
America. These principles require the use of estimates and
assumptions that affect amounts reported and disclosed in the
financial statements and related notes. Although these estimates
are based on historical data and management’s knowledge of
current events and actions it may undertake in the future,
actual results may differ from the estimates if different
conditions occur. The accounting policies that typically involve
a higher degree of judgments, estimates and complexity are
listed and explained below.
Revenue consists substantially of product sales
and related service revenues as well as finance revenue
associated with our Financial Services segment.
Product sales are recognized when the product
ships. Typically, this is when title and risks associated with
ownership have passed. Title passes on delivery, rather than
shipment, for less than 3% of product sales. This exception does
not have a significant effect on annual revenues or net income.
Service revenue is not material.
Finance revenue consists of interest income from
dealer financing and leasing revenue. Interest income is
recognized at established interest rates as earned over time.
Direct finance lease revenue includes interest earned on the net
investments in leased assets, which is recognized over the lease
term as a constant percentage return. Operating lease revenue is
recognized as income as payments are scheduled to be received
over the lease term.
The recognition of finance revenue is
discontinued when, in the opinion of management, the borrower
will be unable to meet their scheduled repayments.
29
The allowance for credit losses is maintained at
a level considered by management to be adequate to absorb an
estimate of probable future losses existing at the balance sheet
date. In estimating probable losses, we review accounts that are
past due, non-performing, or in bankruptcy. We also review
accounts that may have higher credit risk using information
available about the customer, such as financial statements, news
reports, and published credit ratings. We also use general
information regarding industry trends, the general economic
environment and information gathered through our network of
field based employees. Using an estimate of current fair market
value of the collateral and other credit enhancements, such as
third party guarantees, we arrive at an estimated loss for
specific accounts and estimate an additional amount for the
remainder of the portfolio based on historical trends. This
process is based on estimates, and ultimate losses may differ
from those estimates. Uncollectible receivable balances are
written off when we determine that the balance is uncollectible.
Subsequent recoveries, if any, are credited to the allowance
when received.
We periodically review the carrying value of our
long-lived assets held and used and assets to be disposed of.
This review is performed using estimates of future cash flows
and/or a market value approach. If the carrying value of a
long-lived asset is considered impaired, an impairment charge is
recorded for the amount by which the carrying value of the
long-lived asset exceeds its fair value.
Residual value is an estimate at the inception of
the lease term of what fair market value of the leased equipment
will be at the end of the lease term. We record and periodically
review and adjust residual values based on historical experience
and market studies conducted by independent third parties
primarily based on the economic life of products, type of
products and the availability of a secondary market.
Goodwill represents the difference between the
purchase price and the related underlying tangible net asset
values resulting from business acquisitions and is originally
stated at cost. Annually, or if conditions indicate an earlier
review is necessary, the carrying value of the reporting unit is
compared to an estimate of its fair value. As discussed in
Note 2 to the consolidated financial statements, if the
estimated fair value is less than the carrying value, goodwill
is impaired, and will be written down in accordance with SFAS
No. 142,
Goodwill and Other Intangible Assets
.
The accrued liability for warranty costs is based
on an estimated amount needed to cover future warranty
obligations incurred as of the balance sheet date for products
sold. This estimated amount is determined by historical product
data and management’s knowledge of current events and
actions. The reserve is adjusted periodically based on actual
claims experience and changes in anticipated claim rates.
30
The determination of the obligation and expense
for pension and other post-retirement benefits is dependent on
the selection of certain actuarial assumptions used in
calculating such amounts. These assumptions include, among
others, the discount rate, expected long-term rate of return on
plan assets and rates of increase in compensation and health
care costs. These assumptions are reviewed and updated annually
based on relevant external and internal factors and information.
Deferred income tax assets and liabilities are
recognized for the estimated future tax consequences
attributable to temporary differences between the financial
statement carrying amounts of existing assets and liabilities
and their respective tax bases. These assets and liabilities are
measured using enacted tax rates expected to apply to taxable
income in the years in which the temporary differences are
expected to reverse.
The Company has net operating loss carryforwards
available in certain jurisdictions to reduce future taxable
income. Future tax benefits for net operating loss carryforwards
are recognized to the extent that realization of these benefits
is considered more likely than not. This determination is based
on the expectation that related operations will be sufficiently
profitable or various tax, business and other planning
strategies available to us will enable us to utilize the
operating loss carryforwards. We cannot be assured that we will
be able to realize these future tax benefits or that future
valuation allowances will not be required. To the extent that
available evidence about the future raises doubt about the
realization of a deferred income tax asset, a valuation
allowance is established.
Forward-Looking Statements
From time to time, in written reports and oral
statements, the Company discusses its expectations regarding
future performance. For example, certain portions of this Annual
Report on Form 10-K contain various “forward-looking
statements.” Such statements involve certain risks and
uncertainties that could cause actual results to vary. The
Company’s performance may differ materially from that
contemplated by forward-looking statements for a variety of
reasons, including, but not limited to: competitive and general
economic conditions/ uncertainty domestically and
internationally; delayed or lost sales and other impacts related
to acts of terrorism, acts of war or governmental action;
changes in domestic or international laws, rules and
regulations, including the impact of changed environmental laws,
rules or regulations; major disruptions at our key facilities or
in the supply of any key raw materials; competitive pricing
pressure; pricing changes by the Company or its competitors;
currency fluctuations; changes in customer demand and order
patterns; changes in the financial stability of customers or
dealers (including changes in their ability to pay amounts owed
to the Company); changes in relationships with customers,
suppliers, employees and dealers; product (sales) mix; the
success (including product performance and customer acceptance)
of new products, current product innovations and platform
simplification, and their impact on the Company’s
manufacturing processes; the ability of the Company to
effectively cull older products; the ability of the Company to
successfully negotiate new credit facilities; possible
acquisitions or divestitures by the Company; the Company’s
ability to reduce costs, including ramp-up costs associated with
new products and
31
Recently Issued Accounting Standards
See Note 2 of the Consolidated Financial
Statements filed as part of this Report.
(1)
The fiscal year ended February 28, 2003
contained 53 weeks. All other years shown contained
52 weeks.
Table of Contents
Year Ended
Interest Expense; Other Income (Expense), net; and Income Taxes
February 28,
February 22,
February 23,
(in millions)
203
202
2001
$
20.9
$
20.5
$
18.0
$
3.8
$
8.3
$
8.3
(8.3
)
(11.0
)
(24.7
)
16.4
3.7
26.9
3.0
(1.5
)
4.8
$
14.9
$
(0.5
)
$
15.3
37.5
%
n/m
36.5
%
Table of Contents
Table of Contents
North America
Year Ended
Income Statement Data—North America
February 28,
February 22,
February 23,
(in millions)
2003
2002
2001
$
1,497.9
$
1,930.0
$
2,651.4
24.5
%
26.0
%
29.4
%
24.5
%
27.0
%
29.7
%
$
386.6
$
450.8
$
536.0
$
365.9
$
440.1
$
521.6
25.8
%
23.4
%
20.2
%
24.4
%
22.8
%
19.7
%
$
(19.1
)
$
51.6
$
242.3
$
1.3
$
81.3
$
266.2
(1.3
)%
2.7
%
9.1
%
0.1
%
4.2
%
10.0
%
•
Underabsorption of fixed overhead related to
excess plant capacity.
•
Inefficiencies resulting from operating
individual plants at less than 50% capacity.
Table of Contents
Year Ended
Income Statement Data—Steelcase Design Partnership
February 28,
February 22,
February 23,
(in millions)
2003
2002
2001
$
291.2
$
330.5
$
442.2
38.1
%
39.5
%
36.2
%
38.1
%
39.5
%
36.2
%
$
96.4
$
106.8
$
125.9
$
95.0
$
105.6
$
125.9
33.1
%
32.3
%
28.5
%
32.6
%
32.0
%
28.5
%
$
14.5
$
23.7
$
34.1
$
15.9
$
24.9
$
34.1
5.0
%
7.2
%
7.7
%
5.5
%
7.5
%
7.7
%
Table of Contents
•
The merging of DesignTex and J.M. Lynne into one
company now referred to as The Designtex Group. Duplicated
selling, administrative and distribution processes, as well as
excess facilities, were consolidated, streamlined and/or
eliminated.
•
The consolidation of Brayton’s manufacturing
operations from four facilities into one.
•
The relocation of Metropolitan Furniture’s
operations to a new, lower cost leased facility.
Year Ended
Income Statement Data—International
February 28,
February 22,
February 23,
(in millions)
2003
2002
2001
$
485.9
$
596.9
$
732.4
27.6
%
27.8
%
32.9
%
29.8
%
29.6
%
32.9
%
$
161.2
$
201.0
$
202.7
$
154.1
$
193.3
$
202.7
33.2
%
33.7
%
27.7
%
31.7
%
32.4
%
27.7
%
$
(27.1
)
$
(35.1
)
$
38.5
$
(9.3
)
$
(16.6
)
$
38.5
(5.6
)%
(5.9
)%
5.3
%
(1.9
)%
(2.8
)%
5.3
%
Table of Contents
•
International implemented social plans and
workforce reduction efforts launched in 2002, which resulted in
a 27% reduction of manufacturing related workers over the last
two years.
•
International completed the divestiture of two
under-performing businesses in Q1 2003, both of which generated
negative margins in 2002.
•
International implemented additional cost
reduction efforts and continued to pursue lean manufacturing
initiatives.
Table of Contents
Year Ended
Income Statement Data—Financial Services
February 28,
February 22,
February 23,
(in millions)
2003
2002
2001
$
32.3
$
79.6
$
78.2
9.5
17.3
16.7
9.1
6.8
8.7
0.5
—
—
(0.1
)
10.5
8.0
Table of Contents
Year Ended
Income Statement Data—Other
February 28,
February 22,
February 23,
(in millions)
2003
2002
2001
$
279.6
$
152.5
$
144.8
(21.4
)
(31.0
)
(16.5
)
(10.9
)
(30.1
)
(16.5
)
Table of Contents
Table of Contents
Table of Contents
Table of Contents
Table of Contents
Revenue recognition
Table of Contents
Allowance for credit losses
Long-lived assets
Residual values for lease
receivables
Goodwill
Product warranty
Table of Contents
Pension and other post-retirement
benefits
Income Taxes
Table of Contents
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 we are exposed include foreign exchange risks and interest rates on debt.
Foreign Exchange Risks
Operating in international markets involves exposure to the possibility of volatile movements in foreign exchange rates. These exposures may impact future earnings and/or cash flows. Revenue from foreign locations (primarily Europe and Canada) represented approximately 22% of our consolidated revenue in 2003 and 2002. The economic impact of foreign exchange rate movements 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 us to adjust our 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 our international subsidiaries into U.S. dollars affects year-over-year comparability of operating results. While we generally hedge specific transaction risks, we generally do not hedge translation risks because we believe there is no long-term economic benefit in doing so.
Changes in foreign exchange rates that had the largest impact on translating our international operating profit for 2003 related to the euro and the Canadian dollar versus the U.S. dollar. We estimate that a 10% adverse change in foreign exchange rates would have increased our operating loss by approximately $2 million in both 2003 and 2002, assuming no changes other than the exchange rate itself. For each year, this would have represented approximately 9% of our non-U.S. operating loss. 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 currency may or may not be offset by losses from another currency.
The translation of the assets and liabilities of our International subsidiaries is made using the foreign exchange rates as of the end of the year. Translation adjustments are not included in determining net income but are disclosed and accumulated in Other Comprehensive Income within shareholders’ equity until sale or substantially complete liquidation of the net investment in the International subsidiary takes place. In certain
32
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 our company.
Interest Rates
We are exposed to interest rate risk primarily on our notes receivable, investments in company owned life insurance, short-term borrowings and long-term debt. Substantially all of our interest rates on our term borrowings were fixed during 2003; thus our interest rate risk was minimized. A portion of our company owned life insurance is invested in fixed income securities. The valuation of these securities is sensitive to changes in market interest rates. We estimate that a 1% change in interest rates would not have had a material impact on our results of operations for 2003 or 2002.
See Notes 2 and 16 of the consolidated financial statements for further discussion of interest rate swaps and derivative instruments. See Note 9 in the consolidated financial statements for further discussion of our investments in company owned life insurance.
Item 8. Financial Statements and Supplementary Data:
The information required by Item 8 is included in the consolidated financial statements on pages F-1 through F-56 of this Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure:
None.
Item 10. Directors and Executive Officers of the Registrant:
The information required by Item 10 that is not included in Part I of this Report is contained in our 2003 Proxy Statement under the captions “Proposal Requiring Your Vote— Election of Directors,” “Our Board of Directors” and “Other Matters— Section 16(a) Beneficial Ownership Reporting Compliance” and is incorporated into this Report by reference.
Item 11. Executive Compensation:
The information required by Item 11 is contained in our 2003 Proxy Statement, under the captions “Directors’ Compensation,” “Executive Compensation: Report of the Compensation Committee and the Compensation Sub-Committee,” “Executive Compensation, Retirement Programs and Other Arrangements,” “Compensation Committee Interlocks and Insider Participation,” and “Stock Performance Graph” and is incorporated into this Report by reference.
33
Item 12. Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters:
The information required by Item 12 that is
not listed below is contained in our 2003 Proxy Statement, under
the caption “Stock Ownership of Management and More Than 5%
Shareholders” and is incorporated into this Report by
reference.
Securities authorized for issuance under equity
compensation plans as of February 28, 2003 are as follows:
All stock options were awarded under our
Incentive Compensation Plan, which was first approved by our
shareholders in December 1997.
Item 13. Certain
Relationships and Related Transactions:
The information required by Item 13 is
contained in our 2003 Proxy Statement, under the caption
“Compensation Committee Interlocks and Insider
Participation” and is incorporated into this Report by
reference.
Item 14. Controls
and Procedures:
An evaluation was performed under the supervision
and with the participation of the Company’s management,
including the Chief Executive Officer (“CEO”) and
Chief Financial Officer (“CFO”), of the effectiveness
of the design and operation of the Company’s disclosure
controls and procedures (as such term is defined in
Rules 13a-14(c) and 15d-14(c) under the Exchange Act) as of
a date within 90 days before the filing date of this
Report. Based on that evaluation, the Company’s management,
including the CEO and CFO, concluded that the Company’s
disclosure controls and procedures are effective in alerting
them on a timely basis to material information regarding the
Company required to be disclosed by the Company in reports that
it files or submits under the Exchange Act.
Subsequent to the date of this evaluation, there
have been no significant changes in the Company’s internal
controls or in other factors that could significantly affect
such controls.
34
Table of Contents
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K:
(a) Financial Statements and Schedules
| 1. Financial Statements (F-1 to F-56) |
The following consolidated financial statements of the Company are filed as part of this Report:
| • | Consolidated Statements of Income for the Years Ended February 28, 2003, February 22, 2002 and February 23, 2001 | |
| • | Consolidated Balance Sheets as of February 28, 2003 and February 22, 2002 | |
| • | Consolidated Statements of Changes in Shareholders’ Equity for the Years Ended February 28, 2003, February 22, 2002 and February 23, 2001 | |
| • | Consolidated Statements of Cash Flows for the Years Ended February 28, 2003, February 22, 2002 and February 23, 2001 | |
| • | Notes to Consolidated Financial Statements | |
| • | Report of Independent Certified Public Accountants | |
| • | Management’s Responsibility for Financial Reporting |
| 2. Financial Statement Schedules (S-1) |
Schedule II— Valuation and Qualifying Accounts
All other schedules required by Form 10-K have been omitted because they are not applicable or the required information is disclosed elsewhere in this Report.
| 3. Exhibits Required by Securities and Exchange Commission Regulation S-K |
See Index of Exhibits (page E-1 through E-6)
(b) Reports on Form 8-K Filed during the Quarter Ended February 28, 2003
A Current Report on Form 8-K was filed January 6, 2003 reporting under Item 7, Financial Statements and Exhibits, consent of independent accountants to include their report dated March 15, 2002 in the previously filed Registration Statements for our compensation and retirement plans.
35
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.
| By: | /s/ JAMES P. KEANE |
|
|
|
| James P. Keane | |
| Senior Vice President, | |
| Chief Financial Officer |
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 16th day of May, 2003:
|
|
||||
| Signature | Title | Date | ||
|
|
||||
|
/s/ JAMES P. HACKETT
James P. Hackett |
President, Chief Executive Officer and Director (Principal Executive Officer) | May 16, 2003 | ||
|
/s/ JAMES P. KEANE
James P. Keane |
Senior Vice President, Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) | May 16, 2003 | ||
|
/s/ DAVID BING
David Bing |
Director | May 16, 2003 | ||
|
/s/ WILLIAM P. CRAWFORD
William P. Crawford |
Director | May 16, 2003 | ||
|
/s/ EARL D. HOLTON
Earl D. Holton |
Chairman of the Board of Directors and Director | May 16, 2003 | ||
|
/s/ MICHAEL J. JANDERNOA
Michael J. Jandernoa |
Director | May 16, 2003 | ||
36
|
|
||||
| Signature | Title | Date | ||
|
|
||||
|
/s/ DAVID W. JOOS
David W. Joos |
Director | May 16, 2003 | ||
|
/s/ ELIZABETH VALK LONG
Elizabeth Valk Long |
Director | May 16, 2003 | ||
|
/s/ ROBERT C. PEW III
Robert C. Pew III |
Director | May 16, 2003 | ||
|
/s/ PETER M. WEGE II
Peter M. Wege II |
Director | May 16, 2003 | ||
|
/s/ P. CRAIG WELCH, JR.
P. Craig Welch, Jr. |
Director | May 16, 2003 | ||
|
/s/ KATE PEW WOLTERS
Kate Pew Wolters |
Director | May 16, 2003 | ||
37
STEELCASE INC.
Year Ended
February 28,
February 22,
February 23,
2003
2002
2001
$
2,586.9
$
3,089.5
$
4,049.0
1,824.0
2,126.3
2,740.3
16.5
29.8
—
746.4
933.4
1,308.7
754.9
893.2
1,002.3
44.7
20.5
—
(53.2
)
19.7
306.4
(20.9
)
(20.5
)
(18.0
)
14.9
(0.5
)
15.3
(59.2
)
(1.3
)
303.7
(22.2
)
(1.5
)
110.9
(37.0
)
0.2
192.8
0.8
0.8
0.9
(36.2
)
1.0
193.7
(229.9
)
—
—
$
(266.1
)
$
1.0
$
193.7
$
(0.24
)
$
0.01
$
1.30
(1.56
)
—
—
$
(1.80
)
$
0.01
$
1.30
$
(0.24
)
$
0.01
$
1.29
(1.56
)
—
—
$
(1.80
)
$
0.01
$
1.29
$
0.24
$
0.39
$
0.44
See accompanying notes to the consolidated financial statements.
F-1
STEELCASE INC.
February 28,
February 22,
2003
2002
$
128.9
$
69.4
2.2
1.8
345.7
348.8
21.5
18.4
37.7
53.6
9.4
31.8
37.8
109.1
129.8
147.1
11.3
—
18.1
28.7
71.7
73.3
814.1
882.0
774.0
896.8
18.1
11.4
5.9
0.3
101.9
324.1
21.2
27.9
101.7
66.2
209.8
431.6
96.2
108.6
199.3
218.6
$
2,342.2
$
2,967.5
See accompanying notes to the consolidated financial statements.
F-2
STEELCASE INC.
CONSOLIDATED BALANCE
SHEETS—(Continued)
February 28,
February 22,
2003
2002
$
145.4
$
163.5
30.0
160.1
90.9
84.6
39.6
51.0
26.0
26.0
25.8
20.2
144.8
167.7
502.5
673.1
294.2
433.6
237.8
248.3
5.5
7.1
47.1
49.9
584.6
738.9
1,087.1
1,412.0
—
—
93.6
75.1
192.5
207.2
(50.1
)
(47.4
)
1,019.1
1,320.6
1,255.1
1,555.5
$
2,342.2
$
2,967.5
See accompanying notes to the consolidated financial statements.
F-3
STEELCASE INC.
Accumulated Other Comprehensive
Common Stock
Income (Loss)
Foreign
Currency
Minimum
Derivative
Total
Total
Translation
Pension
Adjustments,
Retained
Shareholders’
Comprehensive
Class A
Class B
Adjustments
Liability
net of tax
Earnings
Equity
Income (Loss)
$
82.4
$
260.3
$
(33.4
)
$
0.4
$
—
$
1,252.5
$
1,562.2
11.7
(11.7
)
—
0.1
0.1
(24.7
)
(31.9
)
(56.6
)
3.2
(0.2
)
3.0
$
3.0
(65.9
)
(65.9
)
193.7
193.7
193.7
69.5
216.7
(30.2
)
0.2
—
1,380.3
1,636.5
$
196.7
7.7
(7.7
)
—
0.5
0.5
(2.6
)
(1.8
)
(4.4
)
(9.4
)
(8.0
)
(17.4
)
$
(17.4
)
(57.5
)
(57.5
)
(3.2
)
(3.2
)
1.0
1.0
1.0
75.1
207.2
(39.6
)
0.2
(8.0
)
1,320.6
1,555.5
$
(16.4
)
14.7
(14.7
)
—
3.8
3.8
(0.7
)
(6.7
)
4.7
(2.7
)
$
(2.7
)
(35.4
)
(35.4
)
(266.1
)
(266.1
)
(266.1
)
$
93.6
$
192.5
$
(40.3
)
$
(6.5
)
$
(3.3
)
$
1,019.1
$
1,255.1
$
(268.8
)
| (1) | Net loss for the two-month period ended February 23, 2001 was $3.2 million. Revenue for the same period was $102.0 million (see Note 2). |
See accompanying notes to the consolidated financial statements.
F-4
STEELCASE INC.
Year Ended
February 28,
February 22,
February 23,
2003
2002
2001
$
(266.1
)
$
1.0
$
193.7
157.0
172.4
162.5
229.9
—
—
—
8.5
—
9.2
30.6
24.7
(3.3
)
21.7
—
4.3
9.3
(12.2
)
(31.2
)
(19.3
)
(19.0
)
(0.8
)
(0.8
)
(0.9
)
(1.1
)
—
—
35.3
274.6
(33.3
)
24.8
46.9
(19.3
)
(14.6
)
(29.6
)
(26.5
)
(32.3
)
(81.8
)
44.3
(69.3
)
(138.9
)
(104.2
)
41.8
294.6
209.8
(76.5
)
(123.0
)
(260.5
)
302.0
—
—
55.6
18.7
179.3
(117.8
)
(146.0
)
(239.0
)
109.8
155.5
138.3
26.0
68.2
(30.2
)
4.0
(9.5
)
(1.6
)
16.3
0.3
(6.3
)
(2.9
)
(214.6
)
(0.1
)
316.5
(250.4
)
(220.1
)
1.0
523.2
191.8
(139.7
)
(403.8
)
(103.0
)
(131.2
)
(69.9
)
(6.9
)
3.8
0.5
0.1
—
(4.4
)
(56.6
)
(35.4
)
(57.5
)
(65.9
)
(301.5
)
(11.9
)
(40.5
)
2.7
(1.9
)
2.3
59.5
30.4
(48.5
)
69.4
39.0
87.5
$
128.9
$
69.4
$
39.0
See accompanying notes to the consolidated financial statements.
F-5
STEELCASE INC.
1. NATURE OF OPERATIONS
Steelcase is a Fortune 500 company and the world’s leading designer and manufacturer of office furniture. Founded in 1912, we are headquartered in Grand Rapids, Michigan, employ approximately 16,000 employees and operate manufacturing facilities in over 50 locations. We distribute products through a network of independent dealers in more than 900 locations throughout the world. We operate under four segments: North America, Steelcase Design Partnership (“SDP”), International and Financial Services, plus an “Other” category. Additional information about our reportable segments is contained in Note 17.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
| Principles of Consolidation |
The consolidated financial statements include the accounts of Steelcase Inc. and its majority-owned subsidiaries, except as noted below regarding Majority-owned Dealer Transitions. Prior to fiscal 2002, several of our International subsidiaries were accounted for on a two-month lag versus our fiscal year-end. Beginning in fiscal 2002, these subsidiaries were accounted for using the same fiscal year-end as Steelcase Inc. The impact of this change on year-end results was not material (see Consolidated Statements of Changes in Shareholders’ Equity). All significant transactions and balances among our businesses have been eliminated in consolidation.
Our fiscal year consists of 52 or 53 weeks, ending on the last Friday in February.
|
|
||||||||
| Fiscal Year | Year-end Date | Number of weeks | ||||||
|
|
||||||||
|
2003
|
February 28 | 53(1 | ) | |||||
|
2002
|
February 22 | 52(2 | ) | |||||
|
2001
|
February 23 | 52(2 | ) | |||||
| (1) | Quarters 1 through 3 contained 13 weeks while quarter 4 contained 14 weeks. |
| (2) | All quarters contained 13 weeks. |
Unless the context otherwise indicates, reference to a year relates to a fiscal year rather than a calendar year. Additionally, references to quarters are as follows: Q1 2003 references the first quarter of fiscal 2003.
Certain amounts in the prior years’ financial statements have been reclassified to conform to the current year presentation.
F-6
| Majority-owned Dealer Transitions |
From time to time, we obtain equity interests in dealers that we intend to resell as soon as practicable (“dealer transitions”). We use the equity method of accounting for majority-owned dealers with a transition plan in place and where the nature of the relationship is one in which we do not exercise participative control. These unconsolidated dealers are included in Equity Investment in Dealer Transitions in the accompanying Consolidated Balance Sheets, and their aggregate balance sheet data is shown in Note 7. These investments are carried at the lower of cost or estimated market value. We do not adjust our carrying value for profits and losses for certain of these dealers because the investments are structured such that we do not share in those profits and losses. In those situations where we share in the profits and losses, we recognize our appropriate share of earnings and losses in Equity in Net Income of Joint Ventures and Dealer Transitions .
As we make new equity investments or restructure existing investments in majority-owned dealers, we consolidate the dealer if there is no transition plan in place. Even where there is a transition plan in place, we may also consolidate based on the nature of the relationship, such as whether we exercise participative control.
| Foreign Currency Translation |
For most international operations, local currencies are considered their functional currencies. We translate assets and liabilities to United States dollar equivalents at exchange rates in effect at the balance sheet date. We translate Consolidated Statements of Income accounts at average rates for the period. Translation adjustments are not included in determining net income but are disclosed and accumulated in Other Comprehensive Income within the Consolidated Statements of Changes in Shareholders’ Equity until sale or substantially complete liquidation of the net investment in the International subsidiary takes place. Foreign currency transaction gains and losses are recorded in Other Income (Expense)— Net and are not material.
| Revenue Recognition |
Revenue consists substantially of product sales and related service revenues as well as finance revenue associated with our Financial Services segment.
Product sales are recognized when the product ships. Typically, this is when title and risks associated with ownership have passed. Title passes on delivery, rather than shipment, for less than 3% of product sales. This exception does not have a significant effect on annual revenues or net income. Service revenue is not material.
Finance revenue consists of interest income from dealer financing and leasing revenue. Interest income is recognized at established interest rates as earned over time. Direct finance lease revenue includes interest earned on the net investments in leased assets, which is recognized over the lease term as a constant
F-7
percentage return. Operating lease revenue is recognized as income as payments are scheduled to be received over the lease term.
The recognition of finance revenue is discontinued when, in the opinion of management, the borrower will be unable to meet their scheduled repayments. Notes receivable and net investment in leases on non-accrual status were $41.5 million and $9.0 million as of February 28, 2003 and February 22, 2002, respectively. Of these, $18.5 million are current with payments as of February 28, 2003. Accrual is resumed, and previously suspended income is recognized, when the receivable becomes contractually current and collection doubts are removed. Cash receipts on loans or leases on non-accrual status are recorded against the receivable and then any previously unrecognized income is recorded.
| Cash Equivalents |
Cash equivalents are highly liquid investments, primarily interest-earning bank deposits and commercial paper, with an original maturity of three months or less at the time of purchase. Cash equivalents are reported at amortized cost, which approximates fair value, and approximated $119.8 million as of February 28, 2003 and $38.5 million as of February 22, 2002.
| Accounts and Notes Receivable from Affiliates |
The Company has accounts receivable for products sold to various unconsolidated affiliates, including unconsolidated dealers discussed in Note 7, on terms generally similar to those prevailing with unrelated third parties. Notes receivable from affiliates include dealer financing to unconsolidated dealers, including project financing, asset-based lending and term financing as discussed in Note 5 and Note 7.
| Allowance for Credit Losses |
The allowance for credit losses is maintained at a level considered by management to be adequate to absorb an estimate of probable future losses existing at the balance sheet date. In estimating probable losses, we review accounts that are past due, non-performing, or in bankruptcy. We also review accounts that may have higher credit risk using information available about the customer, such as financial statements, news reports and published credit ratings. We also use general information regarding industry trends, the general economic environment and information gathered through our network of field based employees. Using an estimate of current fair market value of the collateral and other credit enhancements, such as third party guarantees, we arrive at an estimated loss for specific accounts and estimate an additional amount for the remainder of the portfolio based on historical trends. This process is based on estimates, and ultimate losses may differ from those estimates. Uncollectible receivable balances are written off when we determine that the balance is uncollectible. Subsequent recoveries, if any, are credited to the allowance when received. We consider a
F-8
receivable to be past due when any installment of the note is unpaid for more than 30 days. Accounts past due over 90 days and still accruing interest as of February 28, 2003 were $5.2 million.
| Inventories |
Inventories are stated at the lower of cost or market and are valued based upon the last-in, first-out (“LIFO”) method, the first-in, first-out (“FIFO”) method or the average cost method. The North America segment primarily uses the LIFO method to value its inventory. The companies in the SDP segment use the inventory valuation methods that were in place at the time we acquired them. The subsidiaries in the International segment value their inventory using the FIFO method.
| Property, Equipment and Other Long-lived Assets |
Property and equipment, including some internally-developed internal use software, is stated at cost. Major improvements that materially extend the useful life of the asset are capitalized. Expenditures for repairs, maintenance and software training are charged to expense as incurred. Depreciation is provided using the straight-line method over the estimated useful life of the assets.
We periodically review the carrying value of our long-lived assets held and used, and assets to be disposed of. This review is performed in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, using estimates of future cash flows and/or a market value approach. If the carrying value of a long-lived asset is considered impaired, an impairment charge is recorded for the amount by which the carrying value of the long-lived asset exceeds its fair value.
Due to the restructuring and plant consolidation activities over the past several years, we are currently holding for sale several facilities that are no longer in use. These assets are stated at the lower of cost or net realizable value in accordance with SFAS No. 144 and are reported as Real Estate Held for Sale under current assets on the Consolidated Balance Sheets since we expect them to be sold within one year.
| Net Investment in Leases |
Products are sold to our independent dealers who resell the products to the end-use customer. Our Financial Services segment originates lease financing with the customer.
Net investments in leases include both direct financing and operating leases.
The net investment in direct financing leases consists of the present value of the future minimum lease payments receivable (typically over three to seven years) plus the present value of the estimated residual value.
F-9
The net investment in operating lease assets consist of the equipment cost, less accumulated depreciation. Depreciation is included as part of operating expenses and 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 stated above.
Residual value for lease assets is an estimate at the inception of the lease term of what fair market value of the leased equipment will be at the end of the lease term. We record and periodically review and adjust residual values based on historical experience and market studies conducted by independent third parties primarily based on the economic life of the products, type of products and the availability of a secondary market.
| Long-Term Investments |
Long-term investments primarily include privately-held equity securities and are carried at the lower of cost or estimated fair value. For these non-quoted investments, our policy is to regularly review the assumptions underlying the performance of the privately-held companies in which the investments are maintained. If a determination is made that a decline in fair value below the cost basis is other than temporary, the related investment is written down to its estimated fair value.
| Goodwill and Other Intangible Assets |
Goodwill represents the difference between the purchase price and the related underlying tangible net asset values resulting from business acquisitions and is originally stated at cost. Annually, or if conditions indicate an earlier review is necessary, the carrying value of the goodwill of a reporting unit is compared to an estimate of its fair value. If the estimated fair value is less than the carrying value, goodwill is impaired, and is written down in accordance with SFAS No. 142. In 2003, we adopted SFAS No. 142 and recorded a one-time, non-cash charge of $229.9 million to reduce the carrying value of goodwill related to the International reporting unit. This charge was non-operational in nature and is reflected as a cumulative effect of an accounting change in the Consolidated Statements of Income. For additional discussion regarding the impact of SFAS No. 142, see Note 8 and Note 20.
Other intangible assets consist primarily of proprietary technology, trademarks and non-compete agreements and are amortized over their estimated useful economic life using the straight-line method and are carried at cost less accumulated amortization.
| Self-Insurance |
We are self-insured for certain losses relating to workers’ compensation claims, employee medical benefits and product liability costs. We have purchased insurance coverage in order to reduce our exposure to significant levels of workers’ compensation and product liability claims. Self-insured losses are accrued based upon
F-10
estimates of the aggregate liability for uninsured claims incurred at the balance sheet date using certain actuarial assumptions followed in the insurance industry and our historical experience.
Other accrued expenses in the accompanying Consolidated Balance Sheets include a reserve for estimated future product liability costs of $9.9 million incurred as of February 28, 2003 and $10.2 million incurred as of February 22, 2002.
We maintain 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 are fully funded in the VEBA, were $7.7 million as of February 28, 2003 and $8.6 million as of February 22, 2002.
| Product Warranty |
We offer a lifetime warranty on most Steelcase and Turnstone brand products, subject to certain exceptions, delivered in the United States and Canada. For products delivered in the rest of the world, we offer a 15-year warranty for most Steelcase and Werndl brand products and a 10-year warranty for most Turnstone brand products, subject to certain exceptions. These warranties provide for the free repair or replacement of any covered product, part or component that fails during normal use because of a defect in materials or workmanship. For all other brands, warranties range from one year to lifetime. The accrued liability for warranty costs is based on an estimated amount needed to cover future warranty obligations incurred as of the balance sheet date for products sold. This estimated amount is determined by historical product data and management’s knowledge of current events and actions. The reserve is adjusted periodically based on actual claims experience and changes in anticipated claim rates.
| Environmental Matters |
Environmental expenditures related to current operations are expensed or capitalized as appropriate. Expenditures related 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
F-11
of these accruals coincides with completion of a feasibility study or our 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 $7.4 million as of February 28, 2003 and $7.7 million as of February 22, 2002. Based on our ongoing evaluation of these matters, we believe we have 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, were $14.8 million for 2003, $18.8 million for 2002 and $23.1 million for 2001.
| Product Related Expenses |
Research and development expenses, which are expensed as incurred, were $45.5 million for 2003, $61.0 million for 2002 and $72.0 million for 2001.
| Income Taxes |
Deferred income tax assets and liabilities are recognized for the estimated future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. These assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the temporary differences are expected to reverse.
The Company has net operating loss carryforwards available in certain jurisdictions to reduce future taxable income. Future tax benefits for net operating loss carryforwards are recognized to the extent that realization of these benefits is considered more likely than not. This determination is based on the expectation that related operations will be sufficiently profitable or various tax, business and other planning strategies available to us will enable us to utilize the operating loss carryforwards. We cannot be assured that we will be able to realize these future tax benefits or that future valuation allowances will not be required. To the extent that available evidence about the future raises doubt about the realization of a deferred income tax asset, a valuation allowance is established.
| 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 our Stock Incentive Plans had been issued (see Note 13). Diluted earnings per share includes effects of the Stock Incentive Plans. Due to their anti-dilutive effect, we have not included the
F-12
effects of 10.9 million options for 2003 and 2.6 million options for both 2002 and 2001 in our calculation of diluted earnings per share.
|
|
||||||||||||
| Year Ended | ||||||||||||
| Weighted Average Number of Shares of Common Stock |
|
|||||||||||
| Outstanding | February 28, | February 22, | February 23, | |||||||||
| (in millions) | 2003 | 2002 | 2001 | |||||||||
|
|
||||||||||||
|
Basic
|
147.6 | 147.3 | 149.4 | |||||||||
|
Diluted
|
147.7 | 147.7 | 149.8 | |||||||||
| Stock-Based Compensation |
We account for our Stock Incentive Plans under the recognition and measurement principles of Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if we had applied the fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation. Further disclosure of our Stock Incentive Plans is presented in Note 13.
F-13
| Financial Instruments |
The carrying amount of our 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 our long-term debt approximates fair value since the stated rate of interest approximates a market rate of interest.
During 2002, we adopted SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS No. 137 and SFAS No. 138. We recognize all derivative instruments on our balance sheet in other long-term liabilities at fair value and establish criteria for designation and effectiveness of hedging relationships. A cash flow hedge requires that the effective portion of the change in the fair value of a derivative instrument be recognized in Other Comprehensive Income , net of tax, and reclassified into earnings in the period or periods during which the hedged transaction affects earnings. Any ineffective portion of a derivative instrument’s change in fair value is immediately recognized in earnings. These fair market values are updated on a quarterly basis. A fair value hedge requires that the effective portion of the change in the fair value of a derivative instrument be offset against the change in the fair value of the underlying asset, liability, or firm commitment being hedged through earnings.
We use derivative financial instruments principally to manage two types of risk:
| 1. | The risk that interest rate changes will affect either: |
| • | the fair value of our debt obligations, or | |
| • | the amount of our future interest payments. |
| 2. | The risk that unremitted or future cash flows owed to (by) us for the sale (purchase) or anticipated sale (purchase) of products abroad and other cash inflows (outflows) may be adversely affected by changes in the foreign currency rates. |
We formally document the relationship between hedging instruments and hedged items, as well as the risk management objective and strategy for undertaking various hedge transactions. This process includes linking all derivative instruments that are designated as fair value or cash flow hedges to specific assets and liabilities on the balance sheet or to specific forecasted transactions. We also formally assess, both at the inception of the hedge and on an ongoing basis, whether the derivative instruments used are highly effective in offsetting changes in fair values or cash flows of hedged items. If it is determined the derivative instrument is not highly effective as a hedge, hedge accounting is discontinued. We use the Change in Variable Cash Flows Method for testing the effectiveness of our hedges. This method compares the present value of the cash flow stream using the interest rate obtained at the inception of the agreements to the present value of the cash flow stream at
F-14
current market interest rates. As of February 28, 2003, our testing proved that our hedges remained effective. See Note 16 for further information on derivatives.
| Use of Estimates |
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 historical data and management’s knowledge of current events and actions it may undertake in the future, actual results may differ from these estimates under different assumptions or conditions.
| New Accounting Pronouncements |
In December 2002, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 148. The pronouncement provides two alternative transition methods for companies that voluntarily choose to expense the fair value of stock options. As discussed above under the Stock-Based Compensation policy, we intend to begin expensing the cost of employee stock options in Q1 2004 on a prospective basis as permitted by SFAS No. 148. We do not expect the impact of SFAS No. 148 to have a significant impact on our consolidated financial statements.
In accordance with FASB Interpretation (“FIN”) No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees and Indebtedness of Others, we adopted the disclosure requirements of the pronouncement related to our obligations under certain guarantees, (see Note 16), and product warranty liabilities (see the Product Warranty policy above). In addition, FIN No. 45 requires that guarantees which we issue or modify after December 31, 2002 be recognized, at the inception of the guarantee, as a liability for the fair value of the obligation undertaken in issuing the guarantee. We believe the adoption of the recognition/ measurement provisions does not have a material impact on our consolidated financial statements. However, we cannot estimate whether FIN No. 45 will have a significant impact on future business activities.
FIN No. 46, Consolidation of Variable Interest Entities, was issued in January 2003 and will apply to the Company beginning in Q3 2004. This interpretation requires that if a business enterprise has a controlling financial interest in a variable interest entity, the assets, liabilities and results of the activities of the variable interest entity should be included in the consolidated financial statements of the business enterprise. In May 2000, we began leasing aircraft through a synthetic lease structure that is currently accounted for as an operating lease. For additional discussion on the impact of adopting FIN No. 46, see Note 16.
F-15
3. INVENTORIES
Inventories
February 28,
February 22,
(in millions)
2003
2002
$
63.1
$
72.3
27.4
31.1
72.9
82.2
163.4
185.6
(33.6
)
(38.5
)
$
129.8
$
147.1
The portion of inventories determined by the LIFO
method aggregated $61.6 million and $77.6 million as of
February 28, 2003 and February 22, 2002, respectively.
The effect of LIFO liquidations on net income was not material.
4. PROPERTY AND
EQUIPMENT, NET
Estimated
Property and Equipment, net
Useful Lives
February 28,
February 22,
(in millions)
(Years)
2003
2002
—
$
66.2
$
71.0
10 – 50
737.2
772.4
3 – 15
1,222.0
1,289.4
5 – 8
96.4
94.7
3 – 10
62.9
58.4
3 – 10
119.8
124.9
—
22.9
43.5
2,327.4
2,454.3
(1,553.4
)
(1,557.5
)
$
774.0
$
896.8
The majority of capitalized software has an estimated useful life of 3 to 5 years. Approximately 25% of the gross value of capitalized software relates to the Company’s core enterprise resource planning system which has an estimated useful life of 10 years.
F-16
Depreciation and amortization expense on property and equipment approximated $145.1 million for 2003, $148.1 million for 2002 and $136.9 million for 2001.
The estimated cost to complete construction in
progress as of February 28, 2003 is $39.7 million and
consists of numerous equipment, facility and software projects.
5. NOTES
RECEIVABLE
Notes receivable includes three distinct programs
of dealer financing: project financing, asset-based lending and
term financing and are included in our Financial Services
segment. Through these programs, we provide dealers with interim
financing, working capital lines of credit, financing of
ownership changes and restructuring of debt.
Notes Receivable
February 28,
February 22,
(in millions)
2003
2002
$
8.2
$
12.2
26.9
56.8
45.6
51.5
10.7
4.9
(20.3
)
(28.3
)
71.1
97.1
47.1
85.4
$
24.0
$
11.7
Project financing is secured by the specific underlying dealer inventory and accounts receivable. Our asset-based lending (“ABL”) program to dealers includes total outstanding commitments of $112.2 million. The amount of the commitment is further limited to a percentage of available collateral at any point in time. The availability formula is based on a percentage of accounts receivable and inventory. At year-end, the maximum commitment as limited by available collateral was approximately $61.0 million. These ABL commitments generally expire in one year and are reviewed periodically for renewal. Term financing is generally secured by certain dealer assets and, in some cases, the common stock and personal guarantees of dealer principals.
The terms of notes receivable related to dealer financing range from a few months for project financing to 12 years for certain term financing. The most common terms are from three to five years. Interest rates are both floating and fixed; the average interest rate on term loans was 6.96% as of February 28, 2003.
F-17
Allowance for credit loss activity is as follows:
Allowance for Credit Losses of Notes Receivable
February 28,
February 22,
February 23,
(in millions)
2003
2002
2001
$
28.3
$
32.4
$
6.9
9.1
12.0
27.0
(17.1
)
(16.1
)
(1.5
)
$
20.3
$
28.3
$
32.4
Term financing related to dealer transitions is not considered an operating activity of Financial Services. A majority of the provision expense and the accounts written off in the past three years relate to restructuring of dealer transitions. Accordingly, these charges have been recorded in non-operating expense (see Note 14).
The contractual maturities of notes receivable are (in millions):
|
|
||||
| Year ending February | Amount | |||
|
|
||||
|
2004
|
$ | 58.9 | ||
|
2005
|
11.3 | |||
|
2006
|
9.6 | |||
|
2007
|
3.5 | |||
|
2008
|
7.0 | |||
|
Thereafter
|
1.1 | |||
|
|
||||
| $ | 91.4 | |||
|
|
||||
6. NET INVESTMENT IN LEASES
Our Financial Services segment provides furniture leasing services to customers primarily in North America, and more recently in Europe. Starting in 2004, we will implement a new strategy in which we continue to originate leases for customers and will earn an origination fee for that service, but will use a third party to provide lease funding. As a result, we will no longer have credit or residual risk related to those leases.
As we were developing this new funding strategy, we sold a substantial portion of our lease portfolio with a book value of $289.4 million for proceeds of $302.0 million during 2003. After settling interest rate hedges
F-18
related to these leases and transaction costs, we
recorded a net gain of $0.8 million. The proceeds from
these sales were primarily used to retire debt incurred to fund
the leases.
Net Investment in Leases
February 28,
February 22,
(in millions)
2003
2002
$
137.5
$
388.4
25.1
55.8
(24.6
)
(76.7
)
138.0
367.5
31.4
131.6
(17.7
)
(58.8
)
13.7
72.8
151.7
440.3
(12.0
)
(7.1
)
139.7
433.2
37.8
109.1
$
101.9
$
324.1
Approximately 44% 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 28, 2003 is $248.4 million for direct financing leases and $31.4 million for operating leases.
F-19
Approved but unfunded lease financing amounted to approximately $72.4 million at February 28, 2003, subject to final customer delivery and acceptance. As discussed above, we expect a third party to provide funding for the majority of these commitments.
| Credit Losses |
Credit loss reserves are monitored and regularly updated based on the quality of credits in the lease portfolio and our historical loss experience. During 2003, certain larger customers experienced defaults or declines in credit quality. As a result, higher loss provisions were recorded in 2003 to reflect the increased risk. See discussion of concentration of credit risk in Note 16.
| Residual Values |
Direct financing lease receivables include an estimated residual value, which represents an estimate of the fair market value of the leased equipment at the end of the lease term and requires estimation of the future value of the leased products at the inception of the lease. We record and periodically review residual values based on historical experience and market studies conducted by independent third parties that estimate future value primarily based on the following factors:
| • | Economic life of products | |
| • | Type of products | |
| • | Availability of a secondary market |
Most customers buy the furniture at the end of the lease term or extend their leases, although some customers return the furniture. On an overall basis, we have historically realized gains on booked residuals. However, there is some risk we could experience a decline in residual results if the rate at which leasing customers return furniture were to increase, and if the prices in the used furniture market were to decline.
F-20
Operating lease 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.
Direct
Estimated Residual Values by Year of Lease Termination
Financing
Operating
(in millions)
Leases
leases
$
4.8
$
1.9
4.0
1.2
5.8
1.3
4.4
—
2.7
0.3
3.4
0.4
$
25.1
$
5.1
7. EQUITY INVESTMENT IN DEALER TRANSITIONS
From time to time, we obtain equity interests in dealers that we intend to resell as soon as practicable (“dealer transitions”). We use the equity method of accounting for majority-owned dealers with a transition plan in place and where the nature of the relationship is one in which we do not exercise participative control. These unconsolidated dealers are included in Equity Investment in Dealer Transitions in the accompanying Consolidated Balance Sheets. These investments are carried at the lower of cost or estimated market value. We do not adjust our carrying value for profits and losses for certain of these dealers because the investments are structured such that we do not share in those profits and losses. In those situations where we share in the profits and losses, we recognize our appropriate share of earnings and losses in Equity in Net Income of Joint Ventures and Dealer Transitions.
As we make new equity investments or restructure existing investments in majority-owned dealers, we consolidate the dealer if there is no transition plan in place. Even where there is a transition plan in place, we may also consolidate based on the nature of the relationship, such as whether we exercise participative control.
We often act as primary lender for these dealerships during the transition period and we are exposed to increased credit risk during this period. Notes receivable (see Note 5) includes $14.0 million in dealer transition term note financing. Accounts and notes receivable from these affiliated dealers are presented separately on the face of the Consolidated Balance Sheets. See Note 14 for disclosures related to non-operating losses on dealer transition financing.
F-21
The following table outlines aggregated,
unaudited balance sheet data for unconsolidated dealers in
ownership transition as of February 28, 2003:
Aggregated Unaudited Balance Sheet Data—Unconsolidated Dealers
February 28,
(in millions)
2003
$
78.5
24.8
$
103.3
$
7.6
83.1
90.7
12.6
$
103.3
(1)
Other liabilities include $31.8 million owed
to Steelcase related to accounts and notes payable.
8. GOODWILL & OTHER INTANGIBLE ASSETS
As discussed in Note 2, we adopted SFAS No. 142 at the beginning of 2003. Under SFAS No. 142, goodwill impairment exists if the net book value of a reporting unit exceeds its estimated fair value. Goodwill is assigned to and the fair value is tested at the reporting unit level. We evaluated goodwill using six reporting units— North America, SDP, International, Financial Services, PolyVision and IDEO. The information for PolyVision and IDEO is included in the “Other” category for operating segment reporting purposes.
In Q1 2003, we recorded a non-cash charge of $170.6 million related to the impairment of goodwill in our International reporting unit. At year-end, an error in the original calculation was identified and corrected, resulting in a revised first quarter non-cash charge of $229.9 million. This charge related to the International reporting unit is reflected as a cumulative effect of an accounting change in the accompanying Consolidated Statements of Income in accordance with the requirements of SFAS No. 142. See Note 20 for further discussion.
In calculating the impairment charge, the fair value of the International reporting unit was determined by using a combined discounted cash flow and market value approach. The decline in the fair value of our International reporting unit was primarily attributable to the decline in revenue and profitability of the unit, which is primarily the result of the industry-wide decline in office furniture revenue. This decline led to a significant reduction in our three to five year projection of operating income for the International unit.
F-22
As required by SFAS No. 142, we evaluated goodwill as of the end of 2003 and no additional impairment was necessary for the International reporting unit or any other reporting unit.
A summary of changes in goodwill during 2003, by business segment, is as follows:
During 2003, the Company consolidated a dealer into its financial statements that resulted in an increase of goodwill amounting to $5.5 million (see Note 18). The remaining $2.3 million increase in North America goodwill is related to the acquisition of a portion of the minority interest in another consolidated dealer of the Company.
Had we not amortized goodwill in 2002 and 2001, our reported net income and basic and diluted net income per common share would have been the adjusted amounts indicated below:
F-23
As of February 28, 2003 and
February 22, 2002, our other intangible assets and related
accumulated amortization consisted of the following:
February 28, 2003
February 22, 2002
Other Intangible Assets
Accumulated
Accumulated
(in millions)
Gross
Amortization
Net
Gross
Amortization
Net
$
48.5
$
4.6
$
43.9
$
48.5
$
—
$
48.5
32.5
17.8
14.7
32.5
12.0
20.5
1.9
1.1
0.8
1.9
0.4
1.5
7.1
2.5
4.6
7.1
1.2
5.9
90.0
26.0
64.0
90.0
13.6
76.4
32.2
—
32.2
32.2
—
32.2
$
122.2
$
26.0
$
96.2
$
122.2
$
13.6
$
108.6
For 2003 we recorded amortization expense of
$12.3 million on intangible assets subject to amortization
compared to $10.3 million and $10.2 million on a pro
forma basis excluding the impact of goodwill amortization for
2002 and 2001, respectively. Based on the current amount of
intangible assets subject to amortization, the estimated
amortization expense for each of the following five fiscal
years is as follows: 2004: $8.5 million; 2005:
$7.2 million; 2006: $6.9 million; 2007:
$6.9 million; and 2008: $6.9 million. As acquisitions
and dispositions occur in the future, these amounts may vary.
9. OTHER
ASSETS
Other Assets
February 28,
February 22,
(in millions)
2003
2002
$
161.2
$
160.5
8.5
11.4
6.0
14.4
23.6
32.3
$
199.3
$
218.6
F-24
Investments in company owned life insurance policies were purchased with the intention of utilizing them as a future funding source for post-retirement medical benefits, deferred compensation and supplemental retirement plan obligations aggregating $241.3 million as of February 28, 2003 (see Note 11). However, the assets do not represent a committed funding source. They are subject to claims from creditors and can be redesignated by us to another purpose at any time. The policies are recorded at their net cash surrender values, as reported by the issuing insurance companies.
Investments in company owned life insurance consist of approximately $81.0 million in traditional whole life policies and approximately $80.0 million in variable life insurance policies. In the traditional whole life policies, the investments return a set dividend rate that is periodically adjusted by the insurance companies based on the performance of their long-term investment portfolio. While the amount of the dividend can vary, the investments are not at risk to market declines. In the variable life policies, we are able to allocate the investments across a set of choices provided by the insurance companies. The valuation of these investments is sensitive to changes in market interest rates and equity values. The annual net changes in market valuation, normal insurance expenses and any death benefit gains are reflected in the accompanying Consolidated Statements of Income. The net effect of these changes was immaterial in 2003, 2002 and 2001. As of February 28, 2003, the investments in the variable life policies were allocated 42% in fixed income securities, 34% in money market funds and 24% in equity securities.
Long-term investments primarily include privately held equity securities and are carried at the lower of cost or estimated fair value. During 2003, we recorded charges of $4.0 million to reflect a permanent decline in the fair value of the investment portfolio below its cost basis.
Equity investments in joint ventures are comprised of joint ventures in the United States, Saudi Arabia, Japan and Thailand. As of February 22, 2002, we owned 21.0 million shares of Modernform Group, a publicly-held company in Thailand. We accounted for this investment using the equity method of accounting. During 2003, we sold 17.7 million shares for $10.1 million, resulting in a $1.6 million gain. Since the remaining shares owned represent less than five percent in Modernform Group as of February 28, 2003, we have classified our remaining investment as a marketable security and included it in Short-term Investments in the accompanying Consolidated Balance Sheets. Net income from joint ventures was $2.7 million for 2003, $3.3 million for 2002 and $0.6 million for 2001.
Equity investments in joint ventures includes a minority interest in a joint venture involved in construction activities. In addition to our investment, we periodically are party to performance bonds related to the construction activities. See Note 16 for further information related to these guarantees.
F-25
10. SHORT-TERM
BORROWINGS AND LONG-TERM DEBT
Debt Obligations
Weighted Average
Fiscal Year
February 28,
February 22,
(in millions)
Interest Rates
Maturity
2003
2002
6.375%
2007
$
249.0
$
248.7
5.96%-8.21%
2005-2009
37.9
70.3
6.34%
2009
—
179.0
—
—
0.8
1.6
287.7
499.6
4.00%-7.30%
2004-2009
28.3
39.7
3.66%-5.00%
2004
8.2
19.5
3.52%
2004
—
34.9
36.5
94.1
324.2
593.7
30.0
160.1
$
294.2
$
433.6
| (1) | In 2002, we issued $250.0 million senior notes in a private placement. Subsequently, the entire amount issued was exchanged pursuant to a registration statement filed with the Securities and Exchange Commission for a like principal amount of registered 6.375% senior notes due in 2007. The registered notes are unsecured unsubordinated obligations and rank equally with all of our other unsecured unsubordinated indebtedness. We may redeem some or all of the notes at any time at the greater of the full principal amount of the notes being redeemed, or the present value of the remaining scheduled payments of principal and interest discounted to the redemption date on a semi-annual basis at the treasury rate plus 35 basis points, plus, in both cases, accrued and unpaid interest. The original notes were priced at 99.48% of par. |
| (2) | Notes payable represents amounts payable to various banks and other creditors, a portion of which is collateralized by the underlying assets. Certain agreements contain financial covenants that include, among others, a minimum net worth, a minimum interest coverage ratio and a minimum debt ratio. As a result of the correction of the goodwill impairment charge (See Notes 8 and 20), we were not in compliance with |
F-26
| the minimum net worth covenant set forth in these agreements as of February 28, 2003. We have secured a waiver and have amended these agreements so that we are now in compliance with all financial covenants contained within these financings. During Q3 2003, we also amended the minimum interest coverage covenant for these term facilities. The calculation is based on a 4-quarter rolling average, and therefore, still included interest expense on $161.7 million of debt retired shortly after related lease assets were sold during Q1 2003. The amended covenant allowed for a lower ratio in Q3 2003 and gradually steps back up to the original ratio over the following three quarters. | |
| Approximately $15.0 million of notes payable as of February 28, 2003 and $41.8 million as of February 22, 2002 are collateralized by lease receivables. | |
| (3) | After retiring $161.7 million of debt obligations in May 2002, we voluntarily chose not to renew the lease receivables transfer facility in October 2002. The conduit facility had been used to finance our lease portfolio, of which a significant portion was sold during 2003. See Note 6 for additional details regarding the sales of leased assets. In conjunction with retiring the lease receivables transfer facility debt, we unwound the interest rate swaps that were used to match interest rate exposures. For more information regarding interest rate swaps, see Note 16. |
| (4) | As of February 28, 2003, we had two global committed revolving credit facilities (a 364-day facility and a 3-year facility) with various financial institutions, under which we could borrow up to $200 million or its equivalent under each facility for a total of $400 million. Our obligations under these facilities are unsecured and unsubordinated. As of February 28, 2003, and February 22, 2002, the two facilities had no borrowings against them. We could use borrowings under these facilities for general corporate purposes, including commercial paper back-up and non-hostile acquisition financing. Maturities range from overnight to six months as determined by us, subject to certain limitations. Interest on borrowings of a term of one month or greater is based on LIBOR plus a margin or a base rate, as selected by us. Interest on borrowings of a term of less than one month is based on prime rate plus a margin or a base rate. The 364-day facility could have been renewed for additional periods of 364 days. However, we voluntarily chose not to renew this facility upon its normal expiration in April 2003. We have begun the process of replacing the 3-year $200 million facility, which expires April 2004. We anticipate sizing the facility between $200-$300 million and expect to have it completed by the end of June 2003. |
| Both facilities contain certain covenants that include, among others, requirements for a minimum level of net worth, a minimum interest coverage ratio and a maximum debt ratio. As a result of the correction of the goodwill impairment charge (see Notes 8 and 20), we were not in compliance with the minimum net worth covenant in these facilities as of February 28, 2003. As discussed above, we did not renew the 364-day facility. With respect to the 3-year facility, we have secured a waiver through June 30, 2003 from our credit facility lenders. By that date, we expect to replace the 3-year facility with our new facility and with updated covenants. |
F-27
| As described in Note 2, we have leased aircraft under a synthetic lease structure. The lease related to these aircraft has a cross-default provision specifying that default of our global bank facility would trigger default of this lease. In the event of such a default, the lessor could terminate the lease. As of February 28, 2003, we were in default; however, the waiver from the credit facility lenders remedied the non-compliance with the aircraft lease. If the lease had been terminated as of February 28, 2003, we would have been required to pay the lease balance of $48.7 million. Upon making such payment, we would own the aircraft free of any liens. See Note 16 for further details regarding the aircraft lease. | |
| During Q3 2003, we also amended the minimum interest coverage covenant for these facilities and the other structured financing arrangements. The calculation is based on a 4-quarter rolling average, and therefore, still included interest expense on $161.7 million of debt retired shortly after related lease assets were sold during Q1 2003. The amended covenant allowed for a lower ratio in Q3 2003 and gradually steps back up to the original ratio over the following three quarters. | |
| Additionally, we have entered into agreements with certain financial institutions which provide for borrowings on unsecured non-committed short-term credit facilities of up to $42.0 million of U.S. dollar obligations and $95.5 million of foreign currency obligations as of February 28, 2003. Interest rates are variable and determined by agreement at the time of borrowing. These agreements expire within one year, and subject to certain conditions may be renewed annually. Borrowings on these facilities as of February 28, 2003 were $8.2 million and as of February 22, 2002 were $19.5 million. | |
| (5) | We have in place a $400.0 million global commercial paper program. Notes may be in the form of euro commercial paper or U.S. commercial paper, and may be denominated in U.S. dollars, euro or Japanese yen with maturities ranging from one to 365 days. The notes may be issued at a discount or may bear fixed or floating rate interest or coupon calculated by reference to an index or formula. There were no borrowings outstanding on the facility as of February 28, 2003, and $34.9 million outstanding as of February 22, 2002. There have not been any commercial paper borrowings outstanding since May 2002. In May 2003, we informed our brokers that we intend to terminate the commercial paper program. |
| Annual Maturities on Short-Term Borrowings and Long-Term Debt | ||||
| (in millions) | ||||
|
|
||||
| Year ending February | Amount | |||
|
2004
|
$ | 30.0 | ||
|
2005
|
18.3 | |||
|
2006
|
16.1 | |||
|
2007
|
257.3 | |||
|
2008
|
2.5 | |||
|
|
||||
| $ | 324.2 | |||
|
|
||||
F-28
Total cash paid for interest on short-term
borrowings and long-term debt amounted to $26.2 million for
2003, $31.9 million for 2002 and $32.5 million for
2001.
11. EMPLOYEE
BENEFIT PLAN OBLIGATIONS
Employee Benefit Plan Obligations
February 28,
February 22,
(in millions)
2003
2002
$
17.5
$
27.7
190.9
205.4
36.1
25.2
32.9
41.0
277.4
299.3
39.6
51.0
$
237.8
$
248.3
| Defined Contribution Retirement Plans |
Substantially all United States employees are covered under defined contribution retirement plans, primarily the Steelcase Inc. Retirement Plan (the “Retirement Plan”). Company contributions and 401(k) pre-tax employee contributions fund the Retirement Plan. All contributions are made to a trust, which is held for the sole benefit of participants. The Retirement Plan requires minimum annual Company contributions of 5% of eligible annual compensation. Additional Company contributions for this plan are discretionary and declared by the Compensation Committee at the end of each fiscal year. As of February 28, 2003, the Company-funded portion of the trust had net assets of approximately $1.1 billion.
Contributions for similar subsidiary plans are discretionary and declared by management. Total expense under all defined contribution retirement plans was $19.1 million for 2003, $24.8 million for 2002 and $51.8 million for 2001.
| Post-retirement Medical Benefits |
Certain of our subsidiaries have unfunded post-retirement benefit plans that provide medical and life insurance benefits to retirees and eligible dependents. We accrue the cost of post-retirement insurance benefits during the service lives of employees based on actuarial calculations for each plan. These plans are unfunded, but we have purchased company owned life insurance policies with the intention of utilizing them as a future funding source for post-retirement medical benefits and other obligations (see Note 9).
During 2003, we adopted plan amendments limiting certain benefits. These plan amendments resulted in the establishment of a deferred actuarial gain that was to be amortized over the remaining service life of the affected
F-29
plan participants. Due to the significant workforce reductions in 2003, curtailment accounting rules were triggered and we recognized a plan curtailment gain of $16.4 million.
| Defined Benefit Pension Plans |
Our defined benefit pension plans include various qualified domestic and foreign retirement plans as well as a non-qualified supplemental retirement plan that is limited to a select group of management or highly compensated employees. The funded status of our defined benefit pension plans is as follows:
The following tables summarize the required disclosures related to our defined benefit pension and post-retirement plans.
F-30
F-31
[Additional columns below]
[Continued from above table, first column(s) repeated]
The Accumulated Benefit Obligation (“ABO”) for our qualified defined benefit pension plans was $50.5 million and plan assets were $36.6 million as of February 28, 2003. Our non-qualified supplemental retirement plan had an ABO of $15.3 million as of February 28, 2003 with no associated plan assets. Instead, we have purchased company owned life insurance policies with the intention of utilizing them as a future funding source for the supplemental retirement plan obligation and other obligations. See further discussion of company owned life insurance policies in Note 9.
F-32
The assumed health care cost trend was 10.0% for
2003, gradually declining to 5.0% in 2010 and thereafter. A one
percentage point change in assumed health care cost trend rates
would have the following effects:
One percentage
One percentage
(in millions)
point increase
point decrease
$
1.2
$
(1.1
)
$
13.4
$
(12.3
)
| Deferred Compensation Plans |
We also have deferred salaried obligations to certain employees in return for agreeing not to receive part of their compensation for a period of three to five years. This deferred compensation liability is unfunded, but we have purchased company owned life insurance policies, with the intention of utilizing them as a future funding source for the deferred compensation obligation and other obligations (see further discussion in Note 9). Deferred compensation expense approximated $4.7 million for 2003, $5.2 million for 2002 and $6.0 million for 2001.
12. CAPITAL STRUCTURE
| Terms of Class A Common Stock and Class B Common Stock |
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 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 of our Common Stock approved in 1998, at such time as a corporation, partnership, limited liability company, trust or charitable organization holding such shares 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
F-33
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
Our Stock Incentive Plans include the Steelcase Inc. Employee Stock Purchase Plan (the “Stock Purchase Plan”) and the Steelcase Inc. Incentive Compensation Plan (the “Stock Option Plan”).
| Stock Purchase Plan |
We reserved a maximum of 1,500,000 shares of Class A Common Stock for use under the Stock Purchase Plan, which is intended to qualify under Section 423 of the Internal Revenue Code of 1986, as amended (the “Code”). Pursuant to the Stock Purchase Plan, each eligible employee, as of the start of any purchase period, is 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 Stock 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. As of February 28, 2003, 454,721 shares remain available for purchase under the Stock Purchase Plan. The Board may at any time amend or terminate the Stock Purchase Plan.
| Stock Option Plan |
Since inception of the Stock Option Plan in 1998, we have reserved for issuance 21,000,000 shares of Class A Common Stock (further disclosure of our Stock Option Plan is presented in Note 2). We also issued an Employee Stock Grant in 1998, of 149,540 shares of Class A Common Stock, to certain of our employees. The
F-34
Compensation Committee or its designee has full authority, subject to the provisions of the Stock Option Plan, to determine:
| • | persons to whom awards under the Stock Option Plan will be made; | |
| • | exercise price; | |
| • | vesting; | |
| • | size and type of such awards; and | |
| • | specific performance goals, restrictions on transfer and circumstances for forfeiture applicable to Awards. |
Awards under the Plan vest over a period of three to five years.
Awards may be made to our employees and non-employee directors or others as designated by the Compensation Committee. A variety of awards may be granted under the Stock Option 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 Stock Option 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 Stock Option Plan.
In the event of a “change of control”, as defined in the Stock Option Plan,
| • | all outstanding options and SARs granted under the Stock Option Plan will become immediately exercisable and remain exercisable throughout their entire term; | |
| • | 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 | |
| • | all restrictions imposed on restricted stock that are not performance-based shall lapse. |
F-35
Information relating to our stock options, which
pursuant to APB Opinion No. 25 did not result in any
compensation expense recognized by us, is as follows:
Number of
Weighted Average Option
Stock Option Data
Shares
Price Per Share
4,077,600
$
22.80
2,106,026
$
10.61
(4,899
)
$
13.94
(210,410
)
$
18.37
5,968,317
$
18.66
2,798,803
$
12.90
(44,982
)
$
11.02
(206,163
)
$
15.74
8,515,975
$
16.87
3,754,576
$
16.12
(321,528
)
$
11.91
(1,001,390
)
$
16.91
10,947,633
$
16.76
1,529,009
$
23.59
3,315,401
$
20.64
5,389,038
$
18.95
F-36
The price per share of options outstanding ranged from $10.50 to $36.50 as of February 28, 2003, February 22, 2002 and February 23, 2001. As of February 28, 2003, there were 9,527,418 options available for future issuances.
The fair value of each option grant was estimated using the Black-Scholes option-pricing model.
F-37
14. OTHER INCOME,
NET
Year Ended
Other Income, net
February 28,
February 22,
February 23,
(in millions)
2003
2002
2001
$
3.8
$
8.3
$
8.3
(8.3
)
(11.0
)
(24.7
)
16.4
3.7
26.9
3.0
(1.5
)
4.8
$
14.9
$
(0.5
)
$
15.3
Losses on dealer transitions relate to the uncollectibility of funds advanced to dealers to finance ownership changes and are classified as non-operating. These losses do not include write-offs of receivables that have arisen as a result of product sales. Charges for write-offs associated with trade receivables from these affiliates are recorded as operating expenses.
During 2003, we recognized losses on dealer transitions primarily related to two specific International dealers that have been significantly affected by the office furniture recession in their markets. During 2002 and 2001, we recognized losses on dealer transitions primarily related to two specific dealers in the United States. The dealers’ operating results deteriorated due to a significant decline of business activity in their local market and a variety of other performance issues. As a result, these dealers were restructured and ownership was transitioned to new dealer principals.
In 2003, the gain on disposal of property and equipment primarily related to the sale of our Tustin, California manufacturing facility and write-off of related equipment. We received net proceeds of $35.7 and recorded a gain of $15.1 million. In 2001, we generated a gain of $26.9 million on disposal of property and equipment, which was primarily related to the sale of two non-income producing real estate assets.
F-38
15. INCOME
TAXES
Year Ended
Provision for Income Taxes
February 28,
February 22,
February 23,
(in millions)
2003
2002
2001
$
0.6
$
2.8
$
93.1
0.4
1.4
6.3
12.3
10.8
30.7
13.3
15.0
130.1
(13.6
)
9.9
—
0.4
0.1
0.6
(22.3
)
(26.5
)
(19.8
)
(35.5
)
(16.5
)
(19.2
)
$
(22.2
)
$
(1.5
)
$
110.9
The total amount of undistributed earnings of foreign subsidiaries, which are deemed to be permanently invested, amounted to $55.2 million at February 28, 2003. No provision has been made for foreign withholding taxes or United States income taxes which may become payable if undistributed earnings of foreign subsidiaries were paid as dividends to us because it is not practicable to estimate the amount of those taxes. Subject to certain limitations, withholding taxes on foreign dividends would be available for use as credit against the United States tax liability.
F-39
The significant components of deferred income
taxes is as follows:
Deferred Income Taxes
February 28,
February 22,
(in millions)
2003
2002
$
111.4
$
114.1
57.8
54.2
46.0
32.8
(12.0
)
(13.2
)
20.0
—
1.9
9.0
225.1
196.9
(52.2
)
(50.6
)
(5.0
)
(8.0
)
0.0
(5.9
)
(57.2
)
(64.5
)
167.9
132.4
71.7
73.3
$
96.2
$
59.1
As of February 28, 2003, we have $133.5 million of foreign and domestic operating loss carryforwards. Future tax benefits for net operating loss carryforwards are recognized to the extent that realization of these benefits is considered more likely than not. It is considered more likely than not that a benefit of $34.0 million will be realized on these loss carryforwards. This determination is based on the expectation that related operations will be sufficiently profitable or various tax, business and other planning strategies available to us will enable us to utilize the operating loss carryforwards. We cannot be assured that we will be able to realize these future tax
F-40
benefits or that future valuation allowances will
not be required. The operating loss carryforwards expire as
follows:
Operating Loss Carryforwards
(in millions)
Year Ending
Amount
$
0.2
14.2
30.1
45.1
43.9
$
133.5
The total income tax provision (benefit) we have recognized is reconciled to that computed under the federal statutory tax rates as follows:
16. FINANCIAL INSTRUMENTS, CONCENTRATIONS OF CREDIT RISK, COMMITMENTS, GUARANTEES AND CONTINGENCIES
| Financial Instruments |
Financial instruments, which potentially subject us to concentrations of investment and credit risk, primarily consist of cash and equivalents, investments, accounts and notes receivable, direct finance lease receivables,
F-41
company owned life insurance policies, accounts payable and short-term borrowings and long-term debt. We place our cash and equivalents with high-quality financial institutions and invest in high-quality securities and commercial paper. We limit our exposure, by policy, to any one financial institution or debtor.
We use derivative financial instruments, principally forward contracts and swaps and interest rate swaps and caps, primarily to reduce our exposure to adverse fluctuations in foreign currency exchange rates and interest rates. We do not use derivative financial instruments for speculative or trading purposes.
Interest rate swap contracts are used to adjust the proportion of total debt that is subject to variable interest rates to the amount of underlying assets also subject to variable interest rates. Certain contracts are designated as hedges against possible changes in the amount of future cash flows associated with interest payments of the existing variable-rate obligations. Under these contracts, we agree to receive an amount equal to a specific variable interest rate, times the same principal amount. In return we will pay an amount equal to a specified fixed interest rate times the same principal amount. Fair value hedges reduce our exposure to changes in interest rates that could affect the fair value of either an asset or liability that derives its value from a fixed rate. The principal amounts are not exchanged. No other cash payments are made unless the contract is terminated prior to maturity, in which case the amount paid or received in settlement is established by agreement at the time of termination. See Notes 2 and 10 for more information regarding interest rate swaps and caps. The net effect on our operating results is that interest expense on the variable-rate debt being hedged is recorded based on fixed interest rates.
Information regarding our interest rate swaps is summarized below.
The notional amounts shown above do not necessarily represent amounts exchanged by the parties and, therefore, are not a direct measure of our exposure from our use of derivatives. The amounts exchanged are calculated by reference to the notional amounts and by other terms of the derivatives, such as interest rates, exchange rates or other financial indices.
Foreign exchange contracts are primarily used to hedge the risk that unremitted or future revenue owed to us for the sale or anticipated sale, and the risk that future payments by us for the purchase or anticipated purchase of products abroad, may be adversely affected by changes in foreign currency exchange rates. As part of our overall strategy to manage the level of exposure to the risk of foreign exchange rate fluctuations, we
F-42
hedge a portion of our foreign currency exposures anticipated over the ensuing twelve-month period. We hedge net estimated foreign currency exposures that principally relate to cash flows to be remitted to or paid by International segment operations over the ensuing twelve-month period. To hedge this exposure, we used foreign exchange contracts that have maturities ranging from one to twelve months, which are renewed or adjusted within the year to provide continuing coverage throughout the year. The fair value and notional amounts of foreign exchange contracts were immaterial as of February 28, 2003 and February 22, 2002.
We recognized a loss of $7.7 million related to the settlement of certain swap agreements in connection with the sale of leased assets in 2003 (see Note 6).
Other comprehensive income (loss) related to derivatives consisted of the following components:
Prior to the adoption of SFAS No. 133, gains and losses on foreign exchange contracts were generally included as a component of Other Income (Expense), net in our Consolidated Statements of Income.
| Concentrations of Credit Risk |
Our trade receivables are primarily due from independent dealers, who in turn carry receivables from their customers. We monitor and manage the credit risk associated with individual dealers. Dealers, rather than the Company, are responsible for assessing and assuming credit risk of their customers, and may require their customers to provide deposits, letters of credit or other credit enhancement measures. Occasionally, a sales contract may be structured such that the customer payment or obligation is direct to the Company. In those cases, the Company assumes the credit risk. Since we primarily “assemble-to-order”, trade receivables are, with few exceptions, related to specific customer orders which we believe reduces our credit risk. Whether from dealers or customers, our trade credit exposures are not concentrated with any particular entity.
We also have net investments in lease assets related to furniture leases originated and funded by the Financial Services segment. Because the underlying net investment in leases represents multiple orders from individual customers, there are some concentrations of credit risk with certain customers. Our 10 largest lease
F-43
customers make up $72.4 million of gross lease receivables at the end of 2003. Although we believe that reserves are adequate in total, a deterioration of one of these larger credit exposures would likely require additional charges and reserves.
| Lease Commitments |
We lease certain sales offices, showrooms and equipment under non-cancelable operating leases that expire at various dates through 2018. During the normal course of business, we have entered into several sale-leaseback arrangements for certain equipment and facilities. In accordance with GAAP, these leases are accounted for as operating leases and any gains from the sale of the original properties were recorded as deferred gains and are amortized over the lease term. The deferred gains are included as a component of Other Long-term Liabilities , and amounted to $29.8 million as of February 28, 2003 and $32.9 million as of February 22, 2002.
|
|
||||
| Minimum Annual Rental Commitments Under Non-cancelable Operating Leases | ||||
| (in millions) | ||||
|
|
||||
| Year Ending | Amount | |||
|
|
||||
|
2004
|
$ | 44.3 | ||
|
2005
|
37.7 | |||
|
2006
|
30.1 | |||
|
2007
|
23.3 | |||
|
2008
|
18.2 | |||
|
Thereafter
|
96.3 | |||
|
|
||||
| $ | 249.9 | |||
|
|
||||
Rent expense under all operating leases approximated $55.9 million for 2003, $55.4 million for 2002 and $46.1 million for 2001.
As described in Note 2, we have leased aircraft under a synthetic lease structure that was put in place in May 2000. The synthetic lease structure provides us with access to funding at commercial rates. Under the accounting rules prior to FIN No. 46, the structure is defined as an operating lease. Under FIN No. 46 it is likely that the aircraft will be capitalized on our balance sheet, and the related obligation will be recorded as debt. If this occurs, the impact of this accounting change on the Consolidated Statements of Income will be an increase in depreciation and interest expense offset by the fact that the recording of rent expense will no longer be required. As required, we plan to implement FIN No. 46 in Q3 2004.
F-44
| Guarantees |
We are contingently liable under loan guarantees for certain Steelcase dealers and joint ventures in the event of default or non-performance of the financial repayment of the liability. The guarantees generally have terms ranging from one to ten years. The guarantees arose out of our relationship with the dealers and joint ventures. No loss has been experienced nor is any anticipated under these agreements. Since these guarantees were all entered into prior to December 31, 2002, there is no carrying amount for our obligation under the guarantees. We are also party to performance bonds for certain installation or construction activities of certain Steelcase dealers and joint ventures. Under these agreements, we are liable to make financial payments if the installation or construction activities are not completed under their specified guidelines and the contractors file claims. No loss has been experienced nor is any anticipated under these agreements. Projects with bonds have completion dates ranging from one to three years. If there was a performance failure by the dealers, we have the ability to step in and cure the problem thereby mitigating potential loss. Where we have supported performance bonds for joint ventures, we require any significant contractors to also provide performance bonds to provide coverage if they cause a performance failure or delay. There is no carrying amounts for these performance bonds since they were all issued prior to December 31, 2002. Performance bonds issued subsequent to December 31, 2002 amounted to $1.4 million. We have not recorded a liability for these bonds since we believe the risk and amount to be immaterial.
The maximum amount of future payments (undiscounted and without reduction for any amounts that may possibly be recovered under recourse or collateralized provisions) we could be required to make under the guarantees are as follows:
|
|
||||||||
| February 28, | February 22, | |||||||
| (in millions) | 2003 | 2002 | ||||||
|
|
||||||||
|
Performance bonds
|
$ | 64.4 | $ | 26.1 | ||||
|
Guarantees with dealers and joint ventures
|
25.7 | 27.6 | ||||||
|
Guarantees—other
|
1.5 | 0.6 | ||||||
|
|
|
|||||||
|
Total Guarantees
|
$ | 91.6 | $ | 54.3 | ||||
|
|
|
|||||||
Of the guarantees with dealers and joint ventures listed above, the amount drawn related to our unconsolidated dealers and joint ventures was $7.8 million as of February 28, 2003 and $3.5 million as of February 22, 2002. These guarantees are primarily issued to support private borrowing arrangements. Management believes the actual risk of loss under these guarantees to be minimal.
F-45
| Contingencies |
We depend on our independent dealers to represent us to customers in individual geographic markets, which can be defined as a country, region, or major metropolitan area. We believe this network of independent dealers is a significant source of competitive advantage. There are some geographic markets where we are represented by a single dealer, or where business is highly concentrated in a single dealer. In those situations, the loss of the dealer could negatively affect our ability to maintain market share and compete for new business in that market while a new dealer is established. There are other situations where an individual dealer principal, partnership or corporation may own multiple dealerships in various markets. Therefore, we have, in the past, sometimes elected to make debt and equity investments or guarantees to facilitate ownership transitions to avoid a disruption in the operation of the dealership. We have also, in the past, sometimes elected to assume, provide or guarantee credit for dealerships and dealer owners experiencing economic difficulty. All such contractual obligations, guarantees and contingencies are disclosed in the related financial statements and notes. However, it is possible that we may have additional non-contractual contingent exposures related to our dependence on individual dealers in key markets and certain dealer owners, as described above. It is not practicable to estimate this exposure.
We are continuing actions to implement the Steelcase Production System, which involves consolidation of plants, relocation of products between plants, new processes, and adoption of new supply chain strategies. There is some risk that these actions could lead to temporary disruptions or increased costs. We have planned our implementation carefully to avoid those risks, and have successfully mitigated those risks in the past.
Many of our operations are relatively vertically integrated which has given us better control over the factors of production. However, this may also expose us to business interruption risk if a key operation is lost due to casualty. We have taken steps to reduce this risk through contingency planning, and through business interruption insurance.
We routinely launch new products and periodically remove older products from our offering. In general, we expect new products to help us gain market share, and we expect customers to move from older products to our newer offerings. There is some risk that new products will not be successful and related fixed asset investments could be impaired. There is also some risk that we lose customers, and therefore market share, when we cull a product from our line. We take steps, including phased implementations and migration strategies, to reduce these risks.
We have several discretionary incentive compensation plans that cover the majority of our employees. These plans are based on factors such as Economic Value Added and other financial profitability and performance measures. Annual bonuses are payable after the end of the fiscal year and therefore, are included in Employee Compensation in the accompanying Consolidated Balance Sheets.
F-46
| Litigation |
We are involved in litigation from time to time in the ordinary course of business. Based on known information, management believes we are not currently a party to any material litigation.
17. OPERATING SEGMENTS
We operate under four reportable segments: North America, SDP, International and Financial Services plus an “Other” category.
The North America segment consists of manufacturing and sales operations in the United States and Canada. This segment includes 16 manufacturing locations, represents approximately 8,500 employees and serves customers through a network of approximately 350 dealer locations.
The SDP includes: Brayton International, The Designtex Group, Office Details Inc., Metropolitan Furniture Corporation and Vecta. These companies operate autonomously, and together report to the president of the SDP. They focus on higher-end design furniture products and niche applications for lobby and reception areas, conference rooms, private offices, health care and learning environments, as well as the design and distribution of surface materials and ergonomic tools for the workplace. The SDP segment represents approximately 1,300 employees and serves customers through a dealer network, which includes many of the same dealers as the North America segment dealer network.
The International segment includes all sales and manufacturing operations of the Steelcase and Werndl brands outside the United States and Canada. Today, the International segment includes 17 manufacturing facilities located in 11 countries, represents about 4,000 employees and serves customers through a network of approximately 550 dealer locations.
The Financial Services segment provides leasing services to customers primarily in North America, and more recently in Europe, to facilitate the purchase of the Company’s products. This segment also provides selected financing services to our dealers. In 2003, the Financial Services segment accounted for $32.3 million, or 1.2% of our total revenue. Starting in 2004, we will continue to originate leases for customers and earn a fee for that service, but a third party will provide lease funding. As a result, we will no longer have credit or residual risk related to those leases. In the future, Financial Services will no longer be reported as a separate segment since its results and asset base are below the threshold requirements. Instead, Financial Services will be included with the “Other” category.
The Other category includes PolyVision, IDEO and Attwood subsidiaries, ventures and unallocated corporate expenses. PolyVision, acquired during 2002, is a manufacturer and installer of visual communications products for learning environments and office settings. IDEO is a design and innovation services subsidiary, while Attwood is a marine accessories subsidiary.
F-47
We evaluate performance and allocate 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 in
Note 2.
Operating Segment Data
North
Financial
(in millions)
America
SDP
International
Services
Other
Consolidated
$
1,497.9
$
291.2
$
485.9
$
32.3
$
279.6
$
2,586.9
(19.1
)
14.5
(27.1
)
(0.1
)
(21.4
)
(53.2
)
1,072.1
152.6
445.2
211.8
460.5
2,342.2
45.1
9.6
15.7
—
6.1
76.5
107.3
8.7
26.9
—
14.1
157.0
$
1,930.0
$
330.5
$
596.9
$
79.6
$
152.5
$
3,089.5
51.6
23.7
(35.1
)
10.5
(31.0
)
19.7
1,194.4
173.1
668.9
514.9
416.2
2,967.5
60.1
19.3
29.4
—
14.2
123.0
118.6
8.0
36.9
0.3
8.6
172.4
$
2,651.4
$
442.2
$
732.4
$
78.2
$
144.8
$
4,049.0
242.3
34.1
38.5
8.0
(16.5
)
306.4
1,353.2
220.2
800.3
587.0
196.3
3,157.0
202.3
11.2
33.8
—
13.2
260.5
109.3
9.0
36.5
0.4
7.3
162.5
Effective for the quarter ended November 22, 2002, we changed the classification of our reportable segments. Restated quarterly data prior to the third quarter of 2003 was provided in our Form 10-Q for the quarter ended November 22, 2002.
F-48
Reportable geographic information is as follows:
Year Ended
Reportable Geographic Data
February 28,
February 22,
February 23,
(in millions)
2003
2002
2001
$
2,030.0
$
2,395.8
$
3,181.1
556.9
693.7
867.9
$
2,586.9
$
3,089.5
$
4,049.0
$
1,043.5
$
1,165.1
$
1,041.1
227.2
466.6
467.1
$
1,270.7
$
1,631.7
$
1,508.2
Revenue is attributable to countries based on the location of the customer.
18. ACQUISITIONS
| PolyVision |
On November 14, 2001, we acquired 100% of PolyVision Corporation for approximately $182.3 million. The purchase price included approximately $72.9 million of cost of equity, $103.2 million in assumed debt and $6.2 million of transaction costs. PolyVision offers a variety of visual communication tools, ranging from standard white boards to fully interactive plasma displays, and we expect this acquisition to facilitate growth in the corporate learning and higher education markets and to provide increased access to the K-12 education market. The acquisition was accounted for under the purchase method of accounting. Accordingly, their results of operations after November 14, 2001 have been consolidated with ours. Goodwill and intangible assets acquired in the transaction amounted to $141.9 million.
| Custom Cable |
Effective July 31, 2001, we acquired 100% of Custom Cable Industries, a designer of data and voice cabling and fabricator of data and telecommunication network cable assemblies for $21.5 million. The transaction was accounted for under the purchase method of accounting. Accordingly, their results of operations after July 31, 2001 have been consolidated within our North America segment. Intangible assets acquired in the transaction amounted to $14.7 million.
F-49
| Steelcase Artwright Manufacturing |
Effective February 7, 2002, we acquired a 75% equity interest in Steelcase Artwright Manufacturing SDN BHD, a joint venture with Artwright Holdings Berhad, a leading office furniture company in Southeast Asia. The joint venture manufactures furniture for office environments primarily in Southeast Asia. The transaction was accounted for under the purchase method of accounting. Accordingly, their results of operations after February 7, 2002 have been consolidated with ours. The transaction was completed for $13.1 million in cash, and resulted in intangible assets of $6.3 million being recorded. Additionally, as part of our joint venture agreement, we loaned our joint venture partner $4.4 million for a term of five years at a 6.375% interest rate. The Note is secured by the underlying common stock of our joint venture partner.
| Other |
During 2003, we completed a transaction to help transition a dealer to new ownership. We own 100% of one class of stock, and control the Board of Directors of the dealer. As a result, the balance sheet and results of operations of the dealer were consolidated within our North America segment, which added $24.3 million of revenue and $1.1 million of operating income to our 2003 results. However, since earnings do not accrue to the class of stock we own, 100% of the operating profits were eliminated in the Equity in Net Income of Joint Ventures and Dealer Transitions line. As a result, there was no effect on net income.
F-50
19. RESTRUCTURING
CHARGES
During 2003, we continued to reduce costs by
restructuring certain areas of our business. Charges related to
workforce reductions and restructuring activities are summarized
in the following table:
Restructuring Charges
February 28,
February 22,
(in millions)
2003
2002
$
9.2
$
19.0
—
—
6.7
10.8
—
—
0.6
—
16.5
29.8
26.2
12.8
1.4
—
7.1
7.7
0.5
—
9.5
—
44.7
20.5
$
61.2
$
50.3
F-51
Below is a summary of the charges and payments
during 2002 and 2003 that have been applied against the reserve
as of February 28, 2003.
Restructuring Reserve
Workforce
Business Exit
(in millions)
Reductions
and Other Costs
Total
$
—
$
—
$
—
38.1
12.2
50.3
(19.3
)
(9.3
)
(28.6
)
18.8
2.9
21.7
48.3
12.9
61.2
(55.9
)
(8.6
)
(64.5
)
$
11.2
$
7.2
$
18.4
During 2002, we reserved for approximately 1,300 identified salaried workforce reductions— all of which have occurred as of February 28, 2003. During 2003, our restructuring for workforce reductions related to 1,425 positions, of which approximately 1,250 had occurred as of February 28, 2003. The remaining terminations are expected to take place in 2004.
F-52
20. UNAUDITED
QUARTERLY RESULTS
Unaudited Quarterly Results
First
Second
Third
Fourth
(in millions, except per share data)
Quarter
Quarter
Quarter
Quarter
Total
$
643.1
$
659.3
$
646.7
$
637.8
$
2,586.9
182.0
195.7
176.0
192.7
746.4
(14.6
)
(10.7
)
(35.1
)
7.2
(53.2
)
(15.4
)
(7.3
)
(31.1
)
17.6
(36.2
)
(229.9
)
—
—
—
(229.9
)
(245.3
)
(7.3
)
(31.1
)
17.6
(266.1
)
(0.10
)
(0.05
)
(0.21
)
0.12
(0.24
)
(1.56
)
—
—
—
(1.56
)
(1.66
)
(0.05
)
(0.21
)
0.12
(1.80
)
$
905.2
$
792.5
$
731.4
$
660.4
$
3,089.5
286.1
249.3
221.5
176.5
933.4
48.6
12.4
6.7
(48.0
)
19.7
23.9
6.5
4.9
(34.3
)
1.0
0.16
0.04
0.03
(0.23
)
—
Full year 2003 and first quarter results, as presented above, reflect a correction of the first quarter charge related to the adoption of SFAS No. 142 (refer to Note 8 for further information regarding SFAS No. 142). We originally recorded a non-cash charge of $170.6 million related to the impairment of goodwill in our International reporting unit. We retained a valuation consultant and worked together with them to perform the original calculation, which our auditors reviewed at that time. At year-end an error in the original calculation was identified and corrected, resulting in a revised first quarter non-cash charge of $229.9 million. The SFAS No. 142 adoption charge has no effect on revenue, operating income, or cash flow, and does not affect net income in any other quarter. However, our year-to-date Consolidated Statement of Income and Consolidated Statement of Cash Flows as originally reported in first through third quarters were restated to reflect the negative impact of the $59.3 million adjustment due to the correction of the first quarter charge. Additionally, our carrying value of goodwill and our stockholders’ equity in the first through third quarters has been restated on our Consolidated Balance Sheet and Consolidated Statement of Changes in Stockholders’ Equity as a result of this correction.
F-53
On November 14, 2001, we acquired PolyVision Inc. The results of their operations were consolidated with our results of operations beginning in Q4 2002. See Note 18.
Following is a summary of the restructuring and other non-recurring items included in our quarterly results above:
F-54
STEELCASE INC.
We have audited the accompanying consolidated balance sheets of Steelcase Inc. and subsidiaries as of February 28, 2003 and February 22, 2002, 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 28, 2003. Our audits also included the financial statement schedule for the three years in the period ended February 28, 2003 as listed in Item 15(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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 28, 2003 and February 22, 2002, and the results of their operations and their cash flows for each of the three years in the period ended February 28, 2003, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the financial statement schedule presents fairly, in all material respects, the information set forth therein.
As discussed in Note 2, the Company adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets. Accordingly, the Company ceased amortizing goodwill as of February 23, 2002.
BDO SEIDMAN, LLP
Grand Rapids, Michigan
F-55
The consolidated financial statements and other financial information contained in this annual report were prepared by management in conformity with accounting principals generally accepted in the United States of America. 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
F-56
STEELCASE INC.
VALUATION AND QUALIFYING ACCOUNTS
|
|
|||||||||||||
| Year Ended | |||||||||||||
|
|
|||||||||||||
| February 28, | February 22, | February 23, | |||||||||||
| Allowance for Losses on Accounts Receivable | 2003 | 2002 | 2001 | ||||||||||
|
|
|||||||||||||
|
Balance at beginning of year
|
$ | 65.4 | $ | 58.9 | $ | 45.5 | |||||||
|
Additions:
|
|||||||||||||
|
Charged to costs and expenses
|
21.2 | 12.4 | 17.5 | ||||||||||
|
Charged to other accounts
|
— | 2.0 | — | ||||||||||
|
Deductions (1)
|
(25.1 | ) | (7.9 | ) | (4.1 | ) | |||||||
|
|
|
|
|||||||||||
|
Balance at end of year
|
$ | 61.5 | $ | 65.4 | $ | 58.9 | |||||||
|
|
|
|
|||||||||||
| (1) | Excess of accounts written off over recoveries. |
S-1
E-1
E-2
E-3
E-4
| (1) | Incorporated by reference to the like numbered exhibit to the Company’s Registration Statement on Form S-1 (#333-41647) as filed with the Securities and Exchange Commission (“Commission”) on December 5, 1997. | |
| (2) | Filed as Exhibit No. 10.4 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, and incorporated herein by reference. | |
| (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) | Filed as Exhibit No. 10.8 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, and incorporated herein by reference. | |
| (6) | Filed as Exhibit No. 10.10 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, and incorporated herein by reference. | |
| (7) | Filed as Exhibit No. 10.11 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, and incorporated herein by reference. | |
| (8) | Filed as 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, and incorporated herein by reference. | |
| (9) | Incorporated by reference to the like numbered exhibit to the Company’s Annual Report on Form 10-K for the fiscal year ended February 25, 2000, as filed with the Commission on May 25, 2000. |
| (10) | Incorporated by reference to the like numbered exhibit to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended May 26, 2000, as filed with the Commission on July 10, 2000. |
| (11) | Incorporated by reference to the like numbered exhibit to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended November 22,2002, as filed with the Commission on January 6,2003. |
| (12) | Incorporated by reference to the like numbered exhibit to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended May 25, 2001, as filed with the Commission on July 9, 2001. |
E-5
| (13) | Incorporated by reference to the like numbered exhibit to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended August 24, 2001, as filed with the Commission on October 9, 2001. |
| (14) | Incorporated by reference to the like numbered exhibit to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended November 23, 2001, as filed with the Commission on January 7, 2002. |
| (15) | Incorporated by reference to the like numbered exhibit to the Company’s S-4 filing, as filed with the Commission on February 22, 2002. |
| (16) | Filed as Exhibit No. 10.27 in the Company’s Quarterly Report on Form 10-Q for the quarterly period ended May 24, 2002, as filed with the Commission on July 8, 2002, and incorporated herein by reference. |
| (17) | Filed as Exhibit No. 10.28 in the Company’s Quarterly Report on Form 10-Q for the quarterly period ended May 24, 2002, as filed with the Commission on July 8, 2002, and incorporated herein by reference. |
| (18) | Filed as Exhibit No. 10.29 in the Company’s Quarterly Report on Form 10-Q for the quarterly period ended May 24, 2002, as filed with the Commission on July 8, 2002, and incorporated herein by reference. |
| (19) | Filed as Exhibit No. 10.30 in the Company’s Quarterly Report on Form 10-Q for the quarterly period ended May 24, 2002, as filed with the Commission on July 8, 2002, and incorporated herein by reference. |
| (20) | Filed as Exhibit No. 10.31 in the Company’s Quarterly Report on Form 10-Q for the quarterly period ended May 24, 2002, as filed with the Commission on July 8, 2002, and incorporated herein by reference. |
| (21) | Filed as Exhibit No. 10.32 in the Company’s Quarterly Report on Form 10-Q for the quarterly period ended November 22, 2002, as filed with the Commission on January 6, 2003, and incorporated herein by reference. |
| (22) | Filed as Exhibit No. 10.26 in the Company’s S-4 filing, as filed with the Commission on February 22, 2002, and incorporated herein by reference. |
| (23) | Filed as Exhibit No. 99.1 in the Company’s Quarterly Report on Form 10-Q for the quarterly period ended May 24, 2002, as filed with the Commission on July 8, 2002, and incorporated herein by reference. |
| (24) | Filed as Exhibit No. 99.2 in the Company’s Quarterly Report on Form 10-Q for the quarterly period ended May 24, 2002, as filed with the Commission on July 8, 2002, and incorporated herein by reference. |
| (25) | Filed as Exhibit No. 10.7 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended May 26, 2000, as filed with the Commission on July 10, 2000, and incorporated herein by reference. |
| (26) | Filed as Exhibit No. 10.21 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended May 25, 2001, as filed with the Commission on July 9, 2001, and incorporated herein by reference. |
| (27) | Filed as Exhibit No. 10.22 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended May 25, 2001, as filed with the Commission on July 9, 2001, and incorporated herein by reference. |
| (28) | Filed as Exhibit No. 10.23 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended May 25, 2001, as filed with the Commission on July 9, 2001, and incorporated herein by reference. |
| (29) | Filed as Exhibit No. 10.24 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended May 25, 2001, as filed with the Commission on July 9, 2001, and incorporated herein by reference. |
E-6
EXHIBIT 10.19
STEELCASE INC.
EXECUTIVE SUPPLEMENTAL RETIREMENT PLAN
As amended and restated effective as of March 27, 2003.
STEELCASE INC. EXECUTIVE SUPPLEMENTAL RETIREMENT PLAN
TABLE OF CONTENTS
PREAMBLE..........................................................................................................1
SECTION 1 - ESTABLISHMENT OF PLAN.................................................................................2
1.1 Plan Document...................................................................................2
1.2 Effective Date..................................................................................2
1.3 Deferred Compensation Plan......................................................................2
SECTION 2 - DEFINITIONS...........................................................................................3
2.1 Active Participation............................................................................3
2.2 Beneficiary.....................................................................................3
2.3 Committee.......................................................................................3
2.4 Company.........................................................................................3
2.5 Compensation Committee..........................................................................3
2.6 Competition.....................................................................................3
2.7 Early Retirement................................................................................3
2.8 Employee........................................................................................3
2.9 15-Year Benefit.................................................................................3
2.10 Final Average Earnings..........................................................................4
2.11 5-Year Benefit..................................................................................4
2.12 Fiscal Year.....................................................................................4
2.13 Normal Retirement...............................................................................4
2.14 Normal Retirement Age...........................................................................4
2.15 Normal Retirement Date..........................................................................4
2.16 Participant.....................................................................................4
2.17 Payment Date....................................................................................4
2.18 Plan Year.......................................................................................4
2.19 Spouse or Surviving Spouse......................................................................4
2.20 Total Disability................................................................................4
SECTION 3 - ADMINISTRATION OF PLAN................................................................................5
3.1 Powers and Responsibilities of the Committee....................................................5
3.2 Delegation of Responsibility....................................................................5
3.3 Responsibility; Indemnification.................................................................5
|
SECTION 4 - ELIGIBILITY...........................................................................................6
4.1 Participation...................................................................................6
4.2 Termination of Active Participation.............................................................6
4.3 Final Termination of Participation..............................................................6
SECTION 5 - VESTING...............................................................................................7
5.1 Vesting Service.................................................................................7
5.2 Vested Percentage...............................................................................7
SECTION 6 - BENEFITS..............................................................................................8
6.1 Benefit Amounts.................................................................................8
(a) 5-Year Benefit.........................................................................8
(b) 15-Year Benefit........................................................................8
6.2 Payment of Benefits.............................................................................8
(a) Normal Retirement......................................................................8
(b) Early Retirement.......................................................................8
(c) Total Disability.......................................................................8
(d) Death..................................................................................8
6.3 Forfeiture of Benefits..........................................................................9
(a) Termination Before Retirement..........................................................9
(b) Termination for Cause..................................................................9
(c) No Surviving Spouse....................................................................9
(d) Competition............................................................................9
(e) Election to Receive Benefits Under Another Plan........................................9
SECTION 7 - AMENDMENT AND TERMINATION............................................................................10
7.1 Amendment......................................................................................10
7.2 Termination....................................................................................10
SECTION 8 - GENERAL PROVISIONS...................................................................................11
8.1 Unfunded Plan; Unsecured Creditor Status.......................................................11
8.2 No Right to Participate........................................................................11
8.3 No Employment Right............................................................................11
8.4 No Assignment or Transfer......................................................................11
8.5 Currency.......................................................................................11
8.6 Withholding and Payroll Taxes..................................................................11
8.7 Incompetent Payee..............................................................................11
8.8 Governing Law..................................................................................11
8.9 Construction...................................................................................12
|
PREAMBLE
Steelcase Inc. ("Company") has established and maintains the Steelcase Inc. 1994 Executive Supplemental Retirement Plan ("Plan"), a supplemental executive retirement plan for a select group of management personnel of the Company. Effective as of January 1, 1995, the Company amended and restated programs previously adopted by the Board of Directors on January 14, 1981, and July 19, 1982, as a single plan and gave the Plan its present name. Effective as of June 1, 2000, the Company again amended and restated the Plan. The Plan's purpose is to assist the Company in attracting and retaining highly qualified Company executives and to enable those executives to devote their full-time best efforts to the Company by providing to them supplemental retirement income in consideration of those efforts. This document renames the Plan as the "Steelcase Inc. Executive Supplemental Retirement Plan" and amends and restates the terms and conditions of the Plan, effective as of March 27, 2003.
SECTION 1
ESTABLISHMENT OF PLAN
1.1 Plan Document. This document, as amended from time to time, shall constitute the governing document of the Plan.
1.2 Effective Date. Except where otherwise provided in this Plan, the effective date of this amended and restated Plan is March 27, 2003.
1.3 Deferred Compensation Plan. This Plan is intended to be a plan which is unfunded and is maintained by the Company primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees as provided in Sections 201(2), 301(a)(3) and 402(a)(1) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). This Plan also is intended to be an unfunded supplemental program that is not subject to limitations applicable to benefits provided through a qualified, tax-exempt employee benefit plan established pursuant to Section 401(a) of the Internal Revenue Code of 1986, as amended.
SECTION 2
DEFINITIONS
2.1 "ACTIVE PARTICIPANT" means a Participant whose active Plan participation has not yet terminated pursuant to Section 4.2 (Termination of Participation).
2.2 "BENEFICIARY" means the individual, trust, or other entity designated by a Participant to receive any amounts payable with respect to the Participant under the Plan after the Participant's death. A Participant may designate or change a Beneficiary by filing a signed designation with the Committee on a form approved by the Committee. A Participant's Will, Trust or other estate planning document is not effective for this purpose. If a designation has not been completed properly and filed with the Committee prior to the Participant's death, or is ineffective for any other reason, the Beneficiary shall be the Participant's Surviving Spouse.
2.3 "COMMITTEE" means the committee established to administer the Plan, the members of which are the same individuals as the members of the administrative committee of the Steelcase Inc. Retirement Plan.
2.4 "COMPANY" means Steelcase Inc.
2.5 "COMPENSATION COMMITTEE" means the Compensation Committee of the Board of Directors of Steelcase Inc.
2.6 "COMPETITION" means direct or indirect participation in the manufacture, design or distribution of any products of the same type as those of the Company or any subdivision, subsidiary, or affiliate of the Company (collectively the "Company" for purposes of this Section 2.6), including, but not limited to, office furniture, office systems or architectural products, or the providing of any related services, for or on behalf of any person or entity other than the Company and its authorized dealers, at any location within or without the United States of America. It is intended that this definition shall be enforced to the fullest extent permitted by law. If any part of this definition shall be construed to be invalid or unenforceable, in whole or in part, then such definition shall be construed in a manner so as to permit its enforceability to the fullest extent permitted by law.
2.7 "EARLY RETIREMENT" means termination of employment, for any reason other than death, at any time on or after the first date on which the sum of the Participant's age and years of service equals or exceeds 80 (as determined for purposes of the Steelcase Inc. Retirement Plan) and before the Participant reaches his or her Normal Retirement Age.
2.8 "EMPLOYEE" means any employee of the Company, excluding independent contractors, leased employees, and self-employed individuals.
2.9 "15-YEAR BENEFIT" means the benefit described in Section 6.1(b) (15-Year Benefit).
2.10 "FINAL AVERAGE EARNINGS" means the average of the Participant's base salary for the three consecutive calendar years prior to his or her retirement or death. Base salary includes the gross amount payable to the Participant prior to any elective, pre-tax salary deferrals. If base salary is paid in any currency other than U.S. Dollars, the base salary shall be converted into an equivalent amount in U.S. Dollars on the basis of any reasonable method as may be determined by the Committee in its sole discretion.
2.11 "5-YEAR BENEFIT" means the benefit described in Section 6.1(a)(5-Year Benefit). 2.12 "FISCAL YEAR" means the financial reporting and taxable year of |
Steelcase Inc.
2.13 "NORMAL RETIREMENT" means termination of employment on or after the Participant attains Normal Retirement Age.
2.14 "NORMAL RETIREMENT AGE" means age 65.
2.15 "NORMAL RETIREMENT DATE" means the first Payment Date after the date the Participant reaches his or her Normal Retirement Age.
2.16 "PARTICIPANT" means an Employee who is a corporate officer of the Company elected by the Company's Board of Directors and designated by the Compensation Committee pursuant to Section 4.1 (Participation). The term also includes former corporate officers designated by the Compensation Committee pursuant to Section 4.1(Participation) for continuing participation in the Plan, and living former corporate officers with respect to whom benefits of the Plan remain payable.
2.17 "PAYMENT DATE" means the date following the last day of the Plan Year on which it is determined that payments are administratively feasible.
2.18 "PLAN YEAR" means the annual period coinciding with the Fiscal Year.
2.19 "SPOUSE OR SURVIVING SPOUSE" means the person to whom the Participant is legally married on the date benefit payments are scheduled to begin to the Participant. The legal existence of a spousal relationship shall be governed by the law of the State of Michigan. For purposes of determining benefit recipients upon the death of the Participant, the Surviving Spouse shall be the person to whom the Participant is legally married on the date of the Participant's death. If the Participant and Spouse die under circumstances that make the order of their deaths uncertain, it shall be presumed for purposes of this Plan that the Participant survived the Spouse.
2.20 "TOTAL DISABILITY" means a physical or mental condition that totally and permanently prevents an individual from performing the duties of his or her employment. The determination of Total Disability shall be made by the Committee through procedures established for that purpose and on the basis of reasonable medical examination. The cost of any medical examination shall be an expense of administration of the Plan.
SECTION 3
ADMINISTRATION OF PLAN
3.1 Powers and Responsibilities of the Committee. Except as otherwise provided herein, the Committee shall administer the Plan. The Committee has the full power and the full discretionary authority to administer the Plan in all its details, including, but not limited to, the interpretation of the Plan's provisions. The Committee shall act by vote or consent of a majority of its members. To the extent necessary or appropriate, the Committee may adopt rules, policies, and forms for the administration, interpretation, and implementation of the Plan. All of the Committee's decisions, determinations, and interpretations of the Plan shall be final and binding on all parties. A member of the Committee shall not participate in and shall not be counted as a member with respect to any action of the Committee directly affecting only that member.
3.2 Delegation of Responsibility. Notwithstanding Section 3.1 (Powers and Responsibilities of the Committee), the Committee may delegate to any employee or class of employees of the Company any of its powers or responsibilities under the Plan it deems appropriate, including, but not limited to, the duty to provide Plan communications to, and distribute to and receive Plan forms from, Participants, Surviving Spouses, and Beneficiaries.
3.3 Responsibility; Indemnification. Members of the Committee and the Compensation Committee shall not be personally responsible or liable for any act or omission in connection with performance of powers or duties or the exercise of discretion or judgment in the administration and implementation of the Plan. The Company shall hold harmless and indemnify each member of the Committee and Compensation Committee, and any other individual exercising delegated authority or responsibility with respect to the Plan pursuant to Section 3.2 (Delegation of Responsibility), from any and all liabilities and costs arising from any act or omission related to the performance of duties or the exercise of discretion and judgment with respect to the Plan.
SECTION 4
ELIGIBILITY
4.1 Participation. Participation in the Plan shall be limited to corporate officers elected by the Board of Directors of the Company and designated by the Compensation Committee for participation in the Plan and to former corporate officers of the Company designated by the Compensation Committee for continuing participation in the Plan. The Compensation Committee shall review each eligible candidate and designate each eligible individual to be enrolled as a Participant. A Participant shall commence participation in the Plan effective as of the date specified by the Compensation Committee for that Participant.
4.2 Termination of Active Participation. A Participant is considered to be
actively participating in the Plan from the date participation begins under
Section 4.1 (Participation) until the earliest of (a) the date his or her active
participation is terminated by the Compensation Committee for any reason, (b)
the date on which he or she ceases to be an elected officer of the Company
(unless the Compensation Committee designates the Participant for continued
active participation in the Plan pursuant to Section 4.1 (Participation)), or
(c) the date of his or her termination of employment from the Company for any
reason. A Participant's vested percentage shall be determined under Section 5
(Vesting) as of the date of his or her termination of active participation and
thereafter shall not increase.
4.3 Final Termination of Participation. A Participant shall cease all participation in the Plan when he/she is no longer entitled to any benefits under the Plan.
SECTION 5
VESTING
5.1 Vesting Service. For purposes of determining a Participant's vested percentage under Section 5.2 (Vested Percentage), a Participant shall be credited with one year of service for each twelve (12) months he or she is an Active Participant in the Plan. Fractional years shall not be credited.
5.2 Vested Percentage. A Participant's vested percentage shall be determined according to the following schedule:
Years of Vesting Service Vested Percentage Less than 3 years 0% 3 years, but less than 4 years 20% 4 years, but less than 5 years 40% 5 years, but less than 6 years 60% 6 years, but less than 7 years 80% 7 years or more 100% |
SECTION 6
BENEFITS
6.1 Benefit Amounts. Plan benefits shall consist of the following:
(a) 5-Year Benefit. The 5-Year Benefit shall be five annual payments, each equal to 70% of a Participant's Final Average Earnings multiplied by the Participant's vested percentage determined under Section 5.2 (Vested Percentage).
(b) 15-Year Benefit. The 15-Year Benefit shall be 15 annual payments, each equal to $50,000 multiplied by the Participant's vested percentage determined under Section 5.2 (Vested Percentage).
6.2 Payment of Benefits. Except as otherwise provided in Section 6.3 (Forfeiture of Benefits), both the 5-Year Benefit and the 15-Year Benefit shall be paid to a Participant as follows:
(a) Normal Retirement. Upon Normal Retirement, the Participant's 5-Year Benefit and 15-Year benefit payments shall both commence on the Participant's Normal Retirement Date.
(b) Early Retirement. Upon Early Retirement, the Participant's 5-Year Benefit and 15-Year Benefit shall both commence on his or her Normal Retirement Date; provided, however, that the Participant, with the consent of the Committee, may elect payment of either his or her 5-Year Benefit, 15-Year benefit, or both, to begin at any other Payment Date prior to his or her Normal Retirement Date that is at least 12 months subsequent to his or her election. If early payment is elected as to either or both benefits, the amount of each annual payment under each benefit elected shall be determined by dividing the total dollar amount of the benefit by the number of reduced equal annual installments that result in the last reduced annual installment of the benefit being paid on the date that the last annual installment would have been paid if benefit payments had commenced on the Participant's Normal Retirement Date. A Participant's election of early commencement of benefit payments must be made in writing on a form provided by the Committee.
(c) Total Disability. In the event of the Total Disability of a Participant before benefit payments commence under the Plan, the Participant's 5-Year Benefit and 15-Year Benefit shall both commence on the Payment Date following the date the Participant incurred the Total Disability. The amount and duration of payments will be determined in accordance with the early payment provision for Early Retirement under 6.2(b).
(d) Death. In the event of a Participant's death before benefit payments commence under the Plan, benefit payments will be made to the Participant's Surviving
Spouse, or to any other Beneficiary designated by the Participant prior to death, commencing on the Payment Date following the date of the Participant's death. If a Participant dies after benefit payments begin under the Plan, remaining benefit payments will continue to be made at the times and in the amounts in effect at the Participant's death to the Participant's Surviving Spouse, or to any other Beneficiary designated by the Participant prior to death. Whether paid directly to the Surviving Spouse or to another Beneficiary designated by the Participant, benefit payments shall be made or shall continue, following death of the Participant, only if the Participant has a Surviving Spouse and only as long as the Surviving Spouse is living.
6.3 Forfeiture of Benefits. A Participant's right to any 5-Year Benefit and 15-Year Benefit amounts remaining unpaid under this Plan shall be forfeited upon occurrence of any of the following events:
(a) Termination Before Retirement -- termination of the Participant's employment with the Company before eligibility for Normal Retirement, Early Retirement or Total Disability benefits;
(b) Termination for Cause -- termination of the Participant's employment with the Company for cause;
(c) No Surviving Spouse -- death of the Participant without a Surviving Spouse or death of the Participant's Surviving Spouse following the Participant's death;
(d) Competition -- the Participant directly or indirectly engages in Competition at any time during his or her employment with the Company or during the three year period following his or her termination of employment with the Company, without prior approval of the Committee; or
(e) Election to Receive Benefits Under Another Plan -- election by the Participant to receive benefits under any non-qualified supplemental deferred compensation plan maintained by the Company or by any of its subsidiaries or affiliates (other than the Steelcase Inc. Restoration Retirement Plan and the Steelcase Inc. Deferred Compensation Plan), or under any other similar arrangement.
SECTION 7
AMENDMENT AND TERMINATION
7.1 Amendment. This Plan may be amended in any manner at any time by either the Compensation Committee or the Board of Directors of Steelcase Inc. An amendment changing the amount of benefits shall comply with the following:
(a) In the event that the Plan is amended to decrease the amount of benefit payments, the decrease shall not apply to any Participant who, prior to the amendment's effective date, is retired under the Normal Retirement, Early Retirement or Total Disability provisions of the Plan, or to any Surviving Spouse of a Participant who died prior to the amendment, and who is receiving benefit payments or is entitled to future benefit payments under the Plan. Except as otherwise provided in an amendment to the Plan, benefit reductions shall apply to all Participants remaining employed by the Company as of the amendment's effective date.
(b) In the event the Plan is amended to increase the amount of benefit payments, the increase, unless otherwise provided in the amendment, shall apply both to Participants employed on and after the amendment's effective date and to any Participant who, prior to the amendment's effective date, is retired under the Normal Retirement, Early Retirement or Total Disability provisions of the Plan, or to any Surviving Spouse of a Participant who died prior to the amendment, and who is receiving benefit payments or is entitled to future benefit payments under the Plan as of the amendment's effective date; provided, however, that any benefit increase shall be applied proportionately to reduced annual benefit payments elected pursuant Section 6.2(b) (Early Retirement) that remain payable to a Participant, or his or her Surviving Spouse.
7.2 Termination. Either the Compensation Committee or the Board of Directors of Steelcase Inc. may terminate the Plan at any time and for any reason. Upon termination of the Plan, the Compensation Committee or the Board of Directors of Steelcase Inc. shall specify the extent to which benefits of Active Participants shall be preserved or terminated. Upon termination of the Plan, all benefits that are being paid or that are payable at a future date to any Participant who died, or retired under the Normal Retirement, Early Retirement or Total Disability provisions of the Plan, prior to the Plan's termination, shall continue to be paid in accordance with the terms of the Plan in effect at the time of termination.
SECTION 8
GENERAL PROVISIONS
8.1 Unfunded Plan; Unsecured Creditor Status. This shall be an unfunded Plan within the meaning of ERISA. A Participant, or his or her Beneficiary, shall be a general, unsecured general creditor of the Company with respect to payment of any benefit under the Plan. The right of a Participant or Beneficiary to be paid a benefit under the terms of the Plan shall be no greater than the right of any other general, unsecured creditor of the Company.
8.2 No Right to Participate. Nothing in this Plan shall be deemed or interpreted to provide a Participant or any non-participating Employee with any contractual right to participate in or receive benefits of the Plan. The right to participate and the duration of Active Participant status shall be determined in the sole discretion of the Compensation Committee.
8.3 No Employment Right. Participation in this Plan shall not be construed as constituting a commitment, guarantee, agreement, or understanding of any kind that the Company or any subdivision of the Company will continue to employ any individual, and this Plan shall not be construed or applied as any type of employment contract or obligation. Nothing herein shall abridge or diminish the rights of the Company or the employing subdivision of the Company to determine the terms and conditions of employment of any Participant or other Employee or to terminate the employment of any Participant or other Employee with or without cause at any time.
8.4 No Assignment or Transfer. Neither a Participant nor Beneficiary or other representative of a Participant shall have any right to assign, transfer, attach, or hypothecate any amount or credit, potential payment, or right to future payments or any other benefit provided under this Plan. Payment of any amount due or to become due under this Plan shall not be subject to the claims of creditors of the Participant or to execution by attachment or garnishment or any other legal or equitable proceeding or process.
8.5 Currency. All Plan benefits shall be paid in U.S. Dollars.
8.6 Withholding and Payroll Taxes. The Company shall deduct from any payment made under this Plan all amounts required by federal, state, and local tax laws to be withheld and shall subject any payments made under the Plan to all applicable payroll taxes and assessments as may be in effect at the time of any payment of benefits under the Plan.
8.7 Incompetent Payee. If the Committee determines that a Participant or Beneficiary entitled to a payment of benefits under this Plan is incompetent, it may cause the benefits to be paid to another person for the use or benefit of the Participant or Beneficiary at the time or times otherwise payable hereunder, in total discharge of the Plan's obligations to the Participant or Beneficiary.
8.8 Governing Law. This Plan shall be governed in all respects, whether as to construction, capacity, validity, performance or otherwise, by the laws of the State of Michigan, without
regard to the State of Michigan's conflicts of laws principles, except to the extent preempted by the laws of the United States of America.
8.9 Construction. The Plan's Table of Contents and the headings to the Plan's Sections are included solely for convenience and shall in no event affect, or be used in connection with, the interpretation of the Plan. Each Plan provision shall be treated as severable and if any provision is declared illegal, invalid or unenforceable, the Plan shall be interpreted, and shall remain in full force and effect, as though that provision had never been contained in this Plan.
IN WITNESS WHEREOF, the Company has adopted and executed this amendment and restatement of the Plan pursuant to the authority of its Compensation Committee this 3rd day of April, 2003.
STEELCASE INC.
By: /s/ Nancy W. Hickey
-----------------------------------------------
Its: Sr. Vice President, Global Strategic Resources
& Chief Administrative Officer
ATTEST: /s/ Jon D. Botsford
----------------------
Its Secretary
|
EXHIBIT 10.20
2004-1 AMENDMENT
TO THE
STEELCASE BENEFIT PLAN FOR OUTSIDE DIRECTORS
(Effective as of March 1, 1999)
This 2004-1 Amendment to the STEELCASE BENEFIT PLAN FOR OUTSIDE DIRECTORS ("Plan") is adopted by Steelcase Inc. to be effective as of April 14, 2003, and is required by the privacy rules of the Health Insurance Portability and Accountability Act of 1996 ("HIPAA").
Pursuant to Section 1.3 of the Plan, Steelcase Inc. amends the Plan as follows:
A.
A new Article XIII shall be added to the Plan as follows:
ARTICLE XIII
HIPAA COMPLIANCE
13.1 PERMITTED AND REQUIRED USES AND DISCLOSURE OF PROTECTED HEALTH
INFORMATION ("PHI").
|
Subject to obtaining written certification pursuant to Section 13.3, the Plan may disclose PHI to Steelcase Inc., provided Steelcase Inc. does not use or disclose such PHI except for the following purposes:
(a) To perform Plan Administrative Functions which Steelcase Inc. performs for the Plan.
(b) Obtaining premium bids from insurance companies or other health plans for providing coverage under or on behalf of the Plan; or
(c) Modifying, amending or terminating the Plan.
Notwithstanding the provisions of the Plan to the contrary, in no event shall Steelcase Inc. be permitted to use or disclose PHI in a manner that is inconsistent with 45 CFR Section 164.504(f).
13.2 CONDITIONS OF DISCLOSURE.
Steelcase Inc. agrees that with respect to any PHI, it shall:
(a) Not use or further disclose the PHI other than as permitted or required by the Plan or as required by law.
(b) Ensure that any agents, including subcontractors, to whom it provides PHI received from the Plan, agree to the same restrictions and conditions that apply to Steelcase Inc. with respect to PHI.
(c) Not use or disclose the PHI for employment-related actions and decisions or in connection with any other benefit or employee benefit plan of Steelcase Inc..
(d) Report to the Plan any use or disclosure of the information that is inconsistent with the uses or disclosures provided for which it becomes aware.
(e) Make available to individual Plan participants who request access, the Plan participant's PHI in accordance with 45 CFR Section 164.524.
(f) Make available to individual Plan participants who request an amendment, the participant's PHI and incorporate any amendments to the participant's PHI in accordance with 45 CFR Section 164.526.
(g) Make available to individual Plan participants who request an accounting of disclosures of the participant's PHI, the information required to provide an accounting of disclosures in accordance with 45 CFR Section 164.528.
(h) Make its internal practices, books, and records, relating to the use and disclosures of PHI received from the Plan, available to the Secretary of the U.S. Department of Health and Human Services for purposes of determining compliance by the Plan with the HIPAA privacy rules.
(i) If feasible, return or destroy all PHI received from the Plan that Steelcase Inc. still maintains in any form, and retain no copies of such information when no longer needed for the purpose for which the disclosure was made, except that, if such return or destruction is not feasible, limit further uses and disclosures to those purposes that make the return or destruction of the information feasible.
(j) Ensure that the adequate separation between Plan and
Steelcase Inc., required in 45 CFR Section 164.504(f)
(2)(iii), is satisfied and that terms set forth in
Section 13.5 are followed.
13.3 CERTIFICATION.
The Plan shall disclose PHI to Steelcase Inc. only upon the receipt of a Certification by Steelcase Inc. that the Plan has been amended to incorporate the provisions of 45 CFR Section 164.504(f)(2)(ii), and that Steelcase Inc. agrees to the conditions of disclosure set forth in Section 13.2.
13.4 PERMITTED USES AND DISCLOSURE OF SUMMARY HEALTH INFORMATION.
The Plan may disclose Summary Health Information to Steelcase Inc., provided such Summary Health Information is only used by Steelcase Inc. for the purpose of:
(a) Obtaining premium bids from health plan providers for providing health coverage under the Plan; or
(b) Modifying, amending or terminating the Plan.
13.5 ADEQUATE SEPARATION BETWEEN PLAN AND STEELCASE INC..
(a) The following employees, or classes of employees, shall be given access to PHI:
Vice-President of Human Resources
Human Resources Director
Human Resources Manager
Human Resources staff, including employee relations
staff and employee services/HRIS staff
Director, Compensation and Benefits
Director, Benefits and Health Services
Benefits Manager
Benefits staff
Benefit Review Committee
Chief Financial Officer
Financial staff, including Risk manager and payroll
staff
Plan auditor
Director of Information Services
Information Services Manager
Information Services staff
Medical staff
In-house legal counsel
In-house legal staff
(b) The access to and use of PHI by the individuals described in subsection (a) above shall be restricted to the Plan Administrative Functions that Steelcase Inc. performs for the Plan.
(c) In the event any of the individuals described in subsection (a) do not comply with the provisions of the Plan relating to use and disclosure of PHI, the plan administrator shall impose reasonable sanctions as necessary, in its discretion, to ensure that no further non-compliance occurs. Such sanctions shall be imposed progressively (for example, an oral warning, a written warning, time off without pay and termination), if appropriate, and shall be imposed so that they are commensurate with the severity of the violation.
13.6 DISCLOSURE OF CERTAIN ENROLLMENT INFORMATION TO STEELCASE INC..
Pursuant to 45 CFR 164.504(f)(1)(iii), the Plan may disclose to Steelcase Inc. information on whether an individual is participating in the Plan or is enrolled in or has disenrolled from any health insurance issuer or health maintenance organization offered by the Plan.
13.7 DISCLOSURE OF PHI TO OBTAIN STOP-LOSS OR EXCESS LOSS COVERAGE.
Steelcase Inc. authorizes and directs the Plan, through the plan administrator, to disclose PHI to stop-loss carriers, excess loss carriers or managing general underwriters (MGUs) for underwriting and other purposes in order to obtain and maintain stop-loss or excess loss coverage related to benefit claims under the Plan. Such disclosures shall be made in accordance with the HIPAA privacy rules.
13.8 OTHER DISCLOSURES AND USES OF PHI.
With respect to all other uses and disclosures of PHI, the Plan shall comply with the HIPAA privacy rules.
13.9 DEFINITIONS.
For purposes of this Amendment, the following terms shall have the following meanings:
(a) "Business Associate" means a person or entity who:
(i) performs or assists in performing a Plan function or activity involving the use and disclosure of PHI (including claims processing or administration; data analysis, underwriting, etc.); or
(ii) provides legal, accounting, actuarial, consulting, data aggregation, management, accreditation, or financial services, where the per-
performance of such services involves giving the service provider access to PHI.
(b) "Plan Administrative Functions" mean activities that would meet the definition of payment or health care operations, but do not include functions to modify, amend, or terminate the Plan or solicit bids from prospective issuers. Plan administrative functions include quality assurance, employee assistance, claims processing, auditing, monitoring, and management of carve-out-plans--such as vision and dental. PHI for these purposes may not be used by or between the Plan or business associates of the Plan in a manner inconsistent with the HIPAA privacy rules, absent an authorization from the individual. Plan administrative functions specifically do not include any employment-related functions.
(c) "Protected Health Information" or "PHI" means information that is created or received by the Plan, or a business associate of the Plan and relates to the past, present, or future physical or mental health or condition of a participant; the provision of health care to a participant; or the past, present, or future payment for the provision of health care to a participant; and that identifies the participant or for which there is a reasonable basis to believe the information can be used to identify the participant (whether living or deceased). The following components of a participant's information are considered to enable identification:
(i) Names;
(ii) Street address, city, county, precinct, zip code;
(iii) Dates directly related to a participant's receipt of health care treatment, including birth date, health facility admission and discharge date, and date of death;
(iv) Telephone numbers, fax numbers and electronic mail addresses;
(v) Social Security numbers;
(vi) Medical record numbers;
(vii) Health plan beneficiary numbers;
(viii) Account numbers;
(ix) Certificate/license numbers;
(x) Vehicle identifiers and serial numbers, including license plate numbers;
(xi) Device identifiers and serial numbers;
(xii) Web Universal Resource Locators (URLs);
(xiii) Biometric identifiers, including finger and voice prints;
(xiv) Full face photographic images and any comparable images; and
(xv) Any other unique identifying number, characteristic or code.
(d) "Summary Health Information" means information that may be individually identifiable health information that:
(i) Summarizes the claims history, claims expenses or type of claims experienced by individuals for whom Steelcase Inc. has provided health benefits under a health plan; and
(ii) From which the information described at 42 CFR Section 164.514(b)(2)(i) has been deleted, except that the geographic information need only be aggregated to the level of a five-digit zip code.
13.10 HYBRID ENTITY.
This Section applies to the extent the Plan provides any non-health benefits such as (but not limited to), disability benefits or group term life insurance benefits. The Plan is a separate legal entity whose business activities include functions covered by the HIPAA privacy rules and non-covered functions. As a result, the Plan is a "Hybrid Entity," as that term is defined in the HIPAA privacy rules. The Plan's covered functions are its health benefits ("health care component"). All other benefits are non-covered functions. Therefore, the Plan hereby designates that it shall only be a covered entity under the HIPAA privacy rules with respect to the health care component (the health benefits) of the Plan.
13.11 PARTICIPANT NOTIFICATION.
Participants shall be notified of this Plan Amendment in the notice of privacy practices.
B.
In all other respects, the Plan shall be unchanged.
IN WITNESS OF WHICH, Steelcase Inc. has executed this 2004-1
Amendment to the Plan.
STEELCASE INC.
Dated: April 3, 2003 By /s/ Nancy W. Hickey
---------------- -------------------------------------------------
Its Sr. Vice President, Global Strategic Resources
& Chief Administrative Officer
|
EXHIBIT 10.21
2003-1 AMENDMENT TO THE
STEELCASE INC.
RESTORATION RETIREMENT PLAN
WHEREAS, Steelcase Inc. (the "Company") has established and maintains the Steelcase Inc. Restoration Retirement Plan, effective March 1, 1998, and as thereafter amended from time to time (the "Plan"); and
WHEREAS, pursuant to Section 7.1 of the Plan, the Company has reserved to its Board of Directors the right to amend the Plan at any time; and
WHEREAS, the Board of Directors of the Company has delegated to its Compensation Committee (the "Committee") the necessary authority to amend the Plan; and
WHEREAS, the Compensation Committee desires to amend the Plan in order to provide for automatic lump sum distributions of accounts having vested balances of less than $50,000 and to clarify that only the portion of the balance of a participant's account that is vested can be paid as benefits.
NOW, THEREFORE, IN CONSIDERATION OF THE PREMISES, the Plan is amended,
effective immediately, as follows:
1. Section 6.2 of the Plan is amended to read as follows:
"6.2 PAYMENT
i. DURING LIFE. The vested portion of the Participant's Account shall be paid or begin to be paid on or about the April 1 following the Fiscal Year in which termination of employment occurs. A Participant may elect, subject to the approval of the Committee, to have the payment made in either of the following ways or any combination thereof:
(a) In one lump sum, or
(b) In annual installments over four years using the 'declining digits' method (i.e., the first payment is 1/4 of the vested portion of the Account balance, the second 1/3 of the remaining vested balance, the third 1/2
of the remaining vested balance and the fourth the entire remaining vested balance).
The Participant's election under this Section shall be filed in writing with the Committee. The Participant's initial election shall be effective if filed with the Committee within 30 days of the date the Committee provides notice of the election to the Participant, but in any event prior to the date payment would otherwise be made. Elections filed after that time, and any change in an election, shall be effective only if the individual remains employed for the following 12-month period.
ii. DEATH. In the event of death of a Participant before payment of all benefits due, any amount remaining of the vested portion of the Participant's Account will be made to the Participant's Beneficiary in a single lump sum or in annual installments over a four year period, using the declining digits method, provided the Participant so elected prior to his or her death.
iii. CASH OUTS. Notwithstanding anything in this Section 6.2 to the contrary, the Committee may elect to distribute the entire vested balance of the Participant's Account in a single lump sum payment to the Participant or his or her Beneficiary if the vested balance of the Account is less than $50,000, or in the event of the Participant's Total Disability or death."
2. The first paragraph of Section 6.3 is amended to read as follows:
"The non-vested percentage of the Participant's Account shall be forfeited upon the commencement of payments to the Participant or his or her Beneficiary pursuant to Section 6.2. A Participant's right to any vested portion of his or her Account remaining under this Plan shall be forfeited upon occurrence of any of the following events:"
IN WITNESS WHEREOF, the Company has caused this 2003-1 Amendment to the Steelcase Inc. Restoration Retirement Plan to be executed by its duly authorized officer on the 22nd day of January, 2003.
STEELCASE INC.
By: /s/ Nancy W. Hickey
---------------------------------------------
Its: Sr. Vice President, Global Strategic
Resources & Chief Administrative Officer
|
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
1. Steelcase Canada, Ltd., a Canadian corporation
2. Steelcase Financial Services Inc., a Michigan corporation
3. Office Details Inc., a Michigan corporation
4. Brayton International Inc., a North Carolina corporation
5. PolyVision Corporation, a New York corporation
6. Steelcase SAS, a French "simplified" corporation
7. Steelcase S.A., a French corporation
8. Steelcase GmbH, a German limited liability company
9. Steelcase plc, a British limited liability company
10. AF Steelcase S.A., a Spanish corporation
CONSENT OF INDEPENDENT AUDITORS
EXHIBIT 23.1 -- CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements for the Company's Steelcase Inc. Deferred Compensation Plan (Registration No. 333-84689), Steelcase Inc. 401(k) Retirement Plan (Registration No. 333-84251), Steelcase Inc. Incentive Compensation Plan (Registration No. 333-46711), Steelcase Inc. Employee Stock Purchase Plan (Registration No. 333-46713) and Steelcase Inc. Public Debt Offering (Registration No. 333-83264) of our report dated March 26, 2003, except for Note 10, which is as of May 2, 2003 relating to the consolidated financial statements and schedule, which appears in this Form 10-K.
BDO SEIDMAN, LLP
GRAND RAPIDS, MICHIGAN
MAY 16, 2003
EXHIBIT 99.1
CERTIFICATION OF CEO AND CFO PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report on Form 10-K of Steelcase Inc. (the "Company") for the year ended February 28, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), James P. Hackett, as Chief Executive Officer of the Company, and James P. Keane, as Chief Financial Officer of the Company, each hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of his knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ JAMES P. HACKETT
---------------------------------------------
Name: James P. Hackett
Title: President and Chief Executive Officer
Date: May 16, 2003
/s/ JAMES P. KEANE
---------------------------------------------
Name: James P. Keane
Title: Senior Vice President, Chief Financial
Officer
Date: May 16, 2003
|
This certification accompanies the Report pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the
Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of
Section 18 of the Securities Exchange Act of 1934, as amended.
A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, James P. Hackett, President and Chief Executive Officer of Steelcase Inc., certify that:
| 1) | I have reviewed this annual report on Form 10-K of Steelcase Inc.; | |
| 2) | Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; | |
| 3) | Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; | |
| 4) | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: |
| a) | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; | |
| b) | evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and | |
| c) | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; |
| 5) | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions): |
| a) | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and | |
| b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and |
| 6) | The registrant’s other certifying officer and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. |
Date: May 16, 2003
| /s/ JAMES P. HACKETT |
|
|
|
| Name: James P. Hackett | |
| Title: President and Chief Executive Officer |
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, James P. Keane, Senior Vice President, Chief Financial Officer of Steelcase Inc., certify that:
| 1) | I have reviewed this annual report on Form 10-K of Steelcase Inc.; | |
| 2) | Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; | |
| 3) | Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; | |
| 4) | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: |
| a) | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; | |
| b) | evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and | |
| c) | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; |
| 5) | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions): |
| a) | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and | |
| b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and |
| 6) | The registrant’s other certifying officer and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. |
Date: May 16, 2003
| /s/ JAMES P. KEANE |
|
|
|
| Name: James P. Keane | |
| Title: Senior Vice President, Chief Financial Officer |