Selling, general and administrative expenses

Selling, general and administrative expenses as a percentage of net sales decreased to 24.5% in 1999 from 24.9% in 1998 and 26.2% in 1997, reflecting management's cost containment and resource redeployment efforts. During the three-year period, investments in information systems and new product research, development and launch have been significant and increasing. However, the Company has been focused on redeployment of resources in support of its strategic initiatives and therefore has been able to improve its operating expense leverage. In addition, the structure of the Company's management incentive plan, which is predominantly based on growth in the Company's performance, contributed to the current year's achievement of 24.5% through a reduction in management bonuses.

In 1998, the Company reported that selling, general and administrative costs included aggregate costs of $11.0 million relating to the restructuring of a foreign subsidiary, the relocation of a showroom facility and the initial public offering and receipt by the Company of a net litigation settlement in the amount of $9.8 million. In addition, the Company reported in prior years that 1997 included a subsidiary restructuring charge and an intangible asset write-off aggregating approximately $8.6 million. There were no similar costs or litigation settlements of a material nature in 1999.

Patent litigation expenses

In December 1996, the Company concluded a 17-year patent litigation, which, net of reserves, reduced 1997 net income by $123.5 million, or $0.80 per share (basic and diluted). See Note 13 to the Consolidated Financial Statements of the Company.

Other income, net and Income taxes

Overall, other income, net did not vary significantly during the three-year period. However, 1999 includes $5.8 million of interest income recorded in connection with the favorable resolution of income tax litigation discussed below. Other income, net is expected to be impacted in fiscal 2000 due to the acquisitions referenced above, including the remaining 50% of Steelcase Strafor, which was financed through cash and short-term borrowings that the Company expects to refinance in the first half of fiscal 2000 as it finalizes its borrowing structure.

Income tax expense as a percentage of income before taxes ("the effective tax rate") approximated 37.0% in 1999, 38.5% in 1998 and 46.0% in 1997. During 1999, the provision for income taxes benefited from the favorable resolution of income tax litigation dating back to 1989, primarily related to investment tax credits and accelerated depreciation on the Company's Corporate Development Center. The resolution of these matters contributed to a reduced effective tax rate for 1999 and resulted in interest income of $5.8 million. These tax matters increased 1999 consolidated net income by $6.2 million, or $0.04 per share (basic and diluted). The effective tax rate in 1997 was primarily attributable to the reduced level of income as a result of patent litigation expenses. The Company's effective income tax rate is expected to increase as a result of the acquisition and consolidation of Steelcase Strafor, due to higher tax rates throughout most of Europe and the recording of non-deductible goodwill.

Net Income

For the reasons set forth above, net income and earnings per share (basic and diluted) increased over the three-year period at a compound annual growth rate in excess of 20%. Excluding the impact of patent litigation expenses in 1997, which reduced net income by $123.5 million, net income growth by period approximated 2.0% in 1999, 43.5% in 1998 and 22.4% in 1997.