Steelcase Inc.
Notes to Consolidated Financial Statements

Note 10

Stock Incentive Plans

The Stock Incentive Plans for employees and affiliates of the Company include the Steelcase Inc. Employee Stock Purchase Plan (the “Purchase Plan”) and the Steelcase Inc. Incentive Compensation Plan (the “Incentive Compensation Plan”).

Employee Stock Purchase Plan

The Company has reserved a maximum of 1,500,000 shares of Class A Common Stock for use under the Purchase Plan, which is intended to qualify under Section 423 of the Internal Revenue Code of 1986, as amended (the “Code”). Pursuant to the Purchase Plan, each eligible employee, as of the start of any purchase period, will be granted an option to purchase a designated number of shares of Class A Common Stock. The purchase price of shares of Class A Common Stock to participating employees will be designated by the Compensation Committee but in no event shall be less than 85% of the lower of the fair market values of such shares on the first and last trading days of the relevant purchase period. However, no employee may purchase shares under the Purchase Plan in any calendar year with an aggregate fair market value (as determined on the first day of the relevant purchase period) in excess of $25,000. The Board may at any time amend or terminate the Purchase Plan.

The initial purchase period under the Purchase Plan began on the date of the pricing of the Offerings and ends on April 17, 1998. Eligible employees who wish to participate in the Purchase Plan may purchase by April 17, 1998 a maximum of 100 shares of Class A Common Stock at 85% of the initial public offering price (the “Employee Discount Option Grant”). The Company granted approximately 15,000 employees the option to participate in the Purchase Plan during the initial purchase period. Pursuant to APB Opinion No. 25, the Employee Discount Option Grant did not result in any compensation expense to be recognized by the Company.

Incentive Compensation Plan

The Company has reserved for issuance under the Incentive Compensation Plan a maximum of 150,000 shares of Class A Common Stock for a special one-time grant on the date of the pricing of the Offerings plus an additional 6,130,000 shares of Common Stock. The Compensation Committee will have full authority, subject to the provisions of the Incentive Compensation Plan, to determine, among other things, the persons to whom awards under the Incentive Compensation Plan (“Awards”) will be made, the exercise price, vesting, size and type of such Awards, and the specific performance goals, restrictions on transfer and circumstances for forfeiture applicable to Awards.

Awards may be made to employees and non-employee directors of the Company or its affiliates. A variety of Awards may be granted under the Incentive Compensation Plan including stock options, stock appreciation rights (“SARs”), restricted stock, performance shares, performance units, cash-based awards, phantom shares and other share-based awards as the Compensation Committee may determine. Stock options granted under the Incentive Compensation Plan may be either incentive stock options intended to qualify under Section 422 of the Code or non-qualified stock options not so intended. The Board may amend or terminate the Incentive Compensation Plan.

In the event of a “change of control,” as defined in the Incentive Compensation Plan, (i) all outstanding options and SARs granted under the Incentive Compensation Plan will become immediately exercisable and remain exercisable throughout their entire term, (ii) any performance-based conditions imposed with respect to outstanding Awards shall be deemed to be fully earned and a pro rata portion of each such outstanding Award granted for all outstanding performance periods shall become payable in shares of Class A Common Stock, in the case of Awards denominated in shares of Class A Common Stock, and in cash, in the case of Awards denominated in cash, with the remainder of such Award being canceled for no value and (iii) all restrictions imposed on restricted stock that are not performance-based shall lapse.

Concurrently with the Offerings, the Company issued 10 shares of Class A Common Stock each to certain employees of the Company and its subsidiaries as designated by the Compensation Committee (the “Employee Stock Grant”). The Employee Stock Grant included 149,540 shares of Class A Common Stock in the aggregate and resulted in $4.2 million of compensation expense which was recognized by the Company upon issuance.

In addition, the Company issued options to purchase 2,661,000 shares of Class A Common Stock to certain employees and non-employee directors of the Company in connection with the Offerings. These stock options have an exercise price equal to the initial public offering price per share of $28.00 and will primarily vest over a period of five years. Pursuant to APB Opinion No. 25, these stock options did not result in any material compensation expense recognized by the Company. At February 28, 1998 there were no options that were exercisable and there were 3,469,000 options available for future issuance. There has been no exercises or termination of options since their issuance.

SFAS No. 123 Pro Forma Data

As discussed in Note 1, the Company accounts for its Stock Incentive Plans in accordance with APB Opinion No. 25. Accordingly, no compensation expense has been recognized for the Employee Discount Option Grant or the Company’s stock options. If the Company had recognized compensation expense based upon the estimated fair value of the Employee Discount Option Grant and the Company’s stock options at the date of grant as prescribed by SFAS No. 123, the Company’s net income and earnings per share would have been as follows:

The estimated fair value of the Employee Discount Option Grant approximated the 15% discount discussed above. The weighted average fair value of the Company’s stock options at the date of grant approximated $10.60 per option and was estimated using a Black-Scholes option pricing model with the following assumptions: risk-free interest rate of 5.5%, dividend yield of 1.4%, expected volatility of the market price of the common stock of 30.0% and a weighted average expected life of the options of 6.8 years. The estimated fair value of these options was amortized to expense over the vesting period of the options for purposes of determining pro forma net income and pro forma earnings per share. Pro forma results of operations are not likely to be representative of the effects on reported or pro forma results of operations for future years.