LIQUIDITY AND CAPITAL RESOURCES

Historically, the Company's cash and capital requirements have been satisfied through cash generated from operating activities. Through February 1999, the Company had no long-term debt. However, due to the payment of the special dividend in the fourth quarter of 1998 and the level of capital expenditures and acquisitions in 1999, cash, cash equivalents and short-term investments were less than $80.0 million as of February 26, 1999. Further, on April 22, 1999, the Company acquired the remaining 50% equity interest of Steelcase Strafor held by Strafor Facom S.A. The purchase price approximated $225.2 million and was funded by approximately $75.1 million from existing cash balances and approximately $150.1 million of short-term borrowings that the Company expects to refinance in the first half of fiscal 2000 as it finalizes its borrowing structure. See Note 20 to the Consolidated Financial Statements. These borrowings, in addition to cash generated from future operations, are expected to be sufficient to finance the known or foreseeable future liquidity and capital needs of the Company.

Cash provided by operating activities

Cash provided by operating activities totaled $307.7 million for 1999, $333.4 million for 1998 and $80.8 million for 1997. These funds resulted primarily from net income excluding non-cash charges such as depreciation and amortization, net of increases in accounts receivable and notes receivable and leased assets. The Company continues to invest in its leasing portfolio, which includes both direct financing and operating leases of office furniture products. The Company's net investment in leased assets increased from $165.8 million as of February 27, 1998 to $233.1 million as of February 26, 1999. Operationally, management continues to closely monitor its accounts receivable and inventories, attempting to maximize the number of inventory turns per year and minimize the impact of increasing international receivables, which typically have longer payment terms than domestic dealers. The number of days that the accounts receivable arising from sales to domestic dealers remain outstanding continues to approximate 30 days.

Cash used in investing activities

Cash used in investing activities totaled $290.0 million in 1999, $149.9 million in 1998 and $75.4 million in 1997. The increases have resulted from increases in capital expenditures, joint venture transactions and corporate acquisitions.

The Company's capital expenditures were $170.4 million in 1999, $126.4 million in 1998 and $122.0 million in 1997, reflecting investments in excess of depreciation for each of the last three years. Capital expenditures continue to include increased investments in manufacturing equipment expected to improve productivity and safety, increase capacity, decrease the impact on the surrounding environments in which the Company operates and facilitate the launch of new products. In addition, 1999 reflects the purchase of two facilities in the San Francisco Bay area for approximately $26.0 million. These facilities will be used to relieve local production constraints and relocate the west coast Work Life Center to Palo Alto, California. Further, 1999 reflects initial investments in the Company's Corporate Learning and Development Center, the space for which is being constructed using vacant manufacturing space and Pathways-based products. The Company expects capital expenditures in fiscal 2000 to equal or exceed 1999 levels due to the planned construction of a new wood facility, which is expected to approximate $34.0 million, and the continued investment in new product development, information systems and corporate and showroom facilities.

Joint venture transactions in the three-year period include repayment of a note receivable from Steelcase Strafor in 1997 in the amount of $43.0 million and issuance of a note receivable to the joint venture in 1999 in the amount of $66.4 million to equalize lending levels between the Company and Strafor Facom S.A. and fund in part the acquisition of Werndl BüroMöbeL AG by Steelcase Strafor.

Corporate acquisitions, aggregating $57.2 million in 1999, reflect the complete ownership of J.M. Lynne and the partial ownership of Microfield Graphics, Clestra Hauserman and the Modernform Group Public Company Limited.

Cash used in financing activities

Cash used in financing activities totaled $53.3 million in 1999, $254.4 million in 1998 and $40.4 million in 1997, reflecting dividends paid and certain common stock transactions.

Quarterly dividends per share of common stock were $0.41 in 1999, $0.39 in 1998 and $0.27 in 1997. In addition, the Company paid a special dividend in 1998 in the aggregate amount of $150.9 million, or approximately $0.97 per share of common stock.

During 1999, eligible employees purchased shares of Class A Common Stock pursuant to the terms of the Employee Discount Option Grant, resulting in proceeds to the Company of $24.8 million. The shares for this grant, along with the shares for the Employee Stock Grant issued in 1998, were purchased by the Company from the selling shareholders in the initial public offering for $43.5 million. In addition, the Company repurchased 794,300 shares of Class A Common Stock for $15.0 million in 1999 under a three million share repurchase program authorized by the Board of Directors on June 17, 1998. Management anticipates that the stock repurchase program will not reduce the Company's tradable share float in the long run as it expects that Class B Common Stock will continue to convert to Class A Common Stock over time. Since the initial public offering in February 1998, approximately 9.3 million shares of common stock have converted from Class B to Class A.