UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended October 3, 1998.
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the transition period from [ ] to [ ]
Commission file number 1-5224
The Stanley Works
(Exact name of registrant as specified in its charter)
CONNECTICUT 06-0548860
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1000 Stanley Drive
New Britain, Connecticut 06053
(Address of principal executive offices) (Zip Code)
(860) 225-5111
(Registrant's telephone number)
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, and (2) has been subject to such
filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: shares of the
company's Common Stock ($2.50 par value) were outstanding 88,805,497
as of November 13, 1998.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE STANLEY WORKS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, Millions of Dollars Except Per Share Amounts)
Third Quarter Nine Months
1998 1997 1998 1997
------ ------ -------- --------
Net Sales $ 689.6 $ 650.5 $ 2,053.3 $ 1,970.7
Costs and Expenses
Cost of sales 453.2 436.6 1,337.1 1,314.1
Selling, general and
administrative 172.7 148.2 509.9 455.2
Interest - net 7.4 4.2 17.4 12.9
Other - net 2.7 2.0 9.6 19.2
Restructuring and
asset write-offs - 105.9 - 238.5
------ ------ -------- --------
636.0 696.9 1,874.0 2,039.9
------ ------ -------- --------
Earnings (Loss) before
income taxes 53.6 (46.4) 179.3 (69.2)
Income Taxes 20.2 (5.8) 67.3 (0.8)
------ ------ -------- --------
Net Earnings (Loss) $ 33.4 $ (40.6) $ 112.0 $ (68.4)
====== ====== ======== ========
Net Earnings (Loss) Per
Share of Common Stock
Basic $ 0.37 $ (0.46) $ 1.25 $ (0.77)
====== ====== ======== ========
Diluted $ 0.37 $ (0.46) $ 1.24 $ (0.77)
====== ====== ======== ========
Dividends per share $ 0.215 $ 0.20 $ 0.615 $ 0.57
====== ====== ======== ========
Average shares outstanding
(in thousands)
Basic 89,367 89,571 89,413 89,468
====== ====== ======== ========
Diluted 90,102 89,571 90,338 89,468
====== ====== ======== ========
See notes to consolidated financial statements.
-1-
THE STANLEY WORKS AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited, Millions of Dollars)
October 3 January 3
1998 1998
-------- --------
ASSETS
Current Assets
Cash and cash equivalents $ 65.2 $ 152.2
Accounts and notes receivable 546.7 472.5
Inventories 388.9 301.2
Other current assets 83.9 79.4
-------- --------
Total Current Assets 1,084.7 1,005.3
Property, plant and equipment 1,190.0 1,166.1
Less: accumulated depreciation (680.6) (652.9)
-------- --------
509.4 513.2
Goodwill and other intangibles 202.9 104.1
Other assets 144.7 136.1
-------- --------
$ 1,941.7 $ 1,758.7
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Short-term borrowings $ 194.3 $ 80.8
Current maturities of long-term debt 17.0 50.0
Accounts payable 160.7 155.5
Accrued expenses 310.3 336.4
-------- --------
Total Current Liabilities 682.3 622.7
Long-term debt 343.7 283.7
Other liabilities 257.9 244.5
Shareholders' Equity
Common stock 230.9 230.9
Retained earnings 862.3 806.6
Accumulated other comprehensive income (loss) (85.2) (85.3)
ESOP debt (218.4) (223.8)
-------- --------
789.6 728.4
Less: cost of common stock in treasury 131.8 120.6
-------- --------
Total Shareholders' Equity 657.8 607.8
-------- --------
$ 1,941.7 $ 1,758.7
======== ========
See notes to consolidated financial statements.
-2-
THE STANLEY WORKS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, Millions of Dollars)
Third Quarter Nine Months
1998 1997 1998 1997
------ ------ ------ ------
Operating Activities
Net earnings (loss) $ 33.4 $ (40.6) $ 112.0 $ (68.4)
Depreciation and amortization 20.0 18.5 58.1 55.9
Restructuring and asset write-offs - 105.9 - 238.5
Other non-cash items 1.1 (31.7) 11.7 (45.8)
Changes in operating assets
and liabilities (58.5) 22.4 (196.0) (54.4)
------ ------ ------ -------
Net cash provided (used) by (4.0) 74.5 (14.2) 125.8
operating activities
Investing Activities
Capital expenditures (14.4) (18.8) (35.3) (55.3)
Capitalized software (4.3) (1.7) (6.1) (8.3)
Business acquisitions (99.9) (7.5) (99.9) (7.5)
Proceeds from sales of businesses - - 3.0 34.8
Investment in affiliated company - (0.9) - (23.1)
Other (2.0) 4.5 3.7 7.8
------ ------ ------- -------
Net cash used by
investing activities (120.6) (24.4) (134.6) (51.6)
Financing Activities
Payments on long-term borrowings (1.9) (1.2) (40.0) (4.6)
Proceeds from long-term borrowings 60.7 0.5 60.7 2.8
Net short-term borrowings 76.6 20.4 113.1 41.8
Proceeds from issuance of common stock 5.0 9.8 19.5 25.2
Purchase of common stock for treasury (8.7) (24.3) (38.3) (42.1)
Cash dividends on common stock (19.1) (16.5) (54.7) (33.0)
------ ------ ------- -------
Net cash provided (used) by
financing activities 112.6 (11.3) 60.3 (9.9)
Effect of Exchange Rate Changes on Cash (0.2) 0.3 1.5 (1.6)
------ ------ ------- -------
Increase (decrease) in Cash and
Cash Equivalents (12.2) 39.1 (87.0) 62.7
Cash and Cash Equivalents,
Beginning of Period 77.4 107.6 152.2 84.0
------ ------ ------- -------
Cash and Cash Equivalents,
End of Third Quarter $ 65.2 $ 146.7 $ 65.2 $ 146.7
====== ====== ======= =======
See notes to consolidated financial statements.
-3-
THE STANLEY WORKS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY
(Unaudited, Millions of Dollars)
Accumulated
Other Compre-
hensive Total
Common Retained Income ESOP Treasury Shareholders'
Stock Earnings (Loss) Debt Stock Equity
---------------------------------------------------------
Balance Jan 3,1998 $230.9 $806.6 $(85.3) $(223.8) $(120.6) $607.8
Comprehensive income:
Net earnings 112.0
Foreign currency
translation 0.1
Total comprehensive
income 112.1
Cash dividends
declared (54.7) (54.7)
Net common stock
activity (7.4) (11.2) (18.6)
Tax benefit related
to stock options 3.7 3.7
ESOP debt 5.4 5.4
ESOP tax benefit 2.1 2.1
---------------------------------------------------------
Balance Oct 3,1998 $230.9 $862.3 $(85.2) $(218.4) $(131.8) $657.8
=========================================================
Accumulated
Other Compre-
hensive Total
Common Retained Income ESOP Treasury Shareholders'
Stock Earnings (Loss) Debt Stock Equity
---------------------------------------------------------
Balance Dec 28,1996 $230.9 $919.0 $(45.5) $(234.8) $(89.5) $780.1
Comprehensive loss:
Net loss (68.4)
Foreign currency
translation (19.8)
Total comprehensive
income (loss) (88.2)
Cash dividends
declared (50.8) (50.8)
Net common stock
activity (8.2) (7.7) (15.9)
Tax benefit related
to stock options 5.2 5.2
ESOP debt 7.5 7.5
ESOP tax benefit 2.2 2.2
---------------------------------------------------------
Balance Sept 27,1997 $230.9 $799.0 $(65.3) $(227.3) $(97.2) $640.1
=========================================================
See notes to consolidated financial statements.
-4-
THE STANLEY WORKS AND SUBSIDIARIES
NOTES TO (Unaudited) CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
October 3, 1998
NOTE A - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles
for interim financial statements and with the instructions to Form 10-Q and
Article 10 of Regulation S-X and do not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all adjustments
considered necessary for a fair presentation of the results of operations for
the interim periods have been included. For further information, refer to the
consolidated financial statements and footnotes included in the company's
Annual Report on Form 10-K for the year ended January 3, 1998.
NOTE B - Earnings Per Share Computation
The following table reconciles the weighted average shares outstanding used to
calculate basic and diluted earnings per share.
Third Quarter Nine Months
1998 1997 1998 1997
---------- ---------- ---------- ----------
Net earnings (loss) -
basic and diluted $ 33.4 $(40.6) $ 112.0 $(68.4)
========== ========== ========== ==========
Basic earnings per share -
weighted average shares 89,367,471 89,571,016 89,412,986 89,468,292
Dilutive effect of
employee stock options 734,349 - 925,461 -
---------- ---------- ========== ==========
Diluted earnings per share -
weighted average shares 90,101,820 89,571,016 90,338,447 89,468,292
========== ========== ========== ==========
The effect of employee stock options for the third quarter and first nine
months of 1997 was 1,104,519 and 997,745 shares respectively. These
are not included in the calculations since they are antidilutive.
NOTE C - Inventories
The components of inventories at the end of the third quarter of 1998
and at year-end 1997, in millions of dollars, are as follows:
October 3 January 3
1998 1998
------ ------
Finished products $ 275.2 $ 203.7
Work in process 59.9 51.9
Raw materials 53.8 45.6
------ ------
$ 388.9 $ 301.2
====== ======
-5-
NOTE D - Cash Flow Information
Interest paid during the third quarters of 1998 and 1997 amounted to $4.2
million and $3.9 million, respectively. Interest paid for the nine months of
1998 and 1997 amounted to $18.6 million and $16.6 million, respectively.
Income taxes paid during the third quarters of 1998 and 1997 were $17.7
million and $13.9 million, respectively. Income taxes paid for the nine months
of 1998 and 1997 were $64.3 million and $70.6 million, respectively.
Note E - Comprehensive Income
In June of 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 130 "Reporting Comprehensive
Income". The Statement, which the company adopted in the first quarter of
1998, establishes standards for reporting and displaying comprehensive income
and its components in financial statements. Where applicable, earlier
periods have been restated to conform to the standards set forth in SFAS No.
130. The company's comprehensive income consists of net earnings (loss) and
foreign currency translation adjustments which are presented before tax. The
company does not provide for U.S. income taxes on foreign currency translation
adjustments because it does not provide for such taxes on undistributed
earnings of foreign subsidiaries. Accumulated other comprehensive income
(loss) consists of foreign currency translation adjustments. Comprehensive
income (loss) for the third quarters of 1998 and 1997 were $33.5 million and
($48.7) million, respectively.
Note F - New Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." Essentially, the new statement requires
all derivatives to be recorded on the balance sheet at fair value and
establishes new accounting practices for hedge instruments. The statement is
effective for fiscal years beginning after June 15, 1999. The company is
currently assessing the impact this statement will have on its consolidated
financial statements.
Note G - Acquisition
On August 5, 1998 , the company acquired Zag Industries Ltd. (Zag), an
innovator of plastic storage products, for $130 million. The acquisition has
been accounted for as a purchase and, accordingly, the operating results of
Zag have been included in the company's consolidated financial statements
since the date of acquisition. Pro forma results for the periods prior to the
acquisition have not been presented as they would not have been significantly
different. The purchase price included a cash payment of $114 million,
contingent payments based on Zag's estimated earnings over a five year period
and acquisition related costs. Excess purchase price over the fair market
value of the assets acquired was allocated to goodwill based on preliminary
estimates of fair values.
-6-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
The attached table, "Price/Volume Information" provides detail of the changes
in net sales by business segment and geographic region. In addition, the
attached table, "Business Segment Information", provides clarification of
reported operating results for the third quarter and first nine months of 1998
and 1997, reconciling them with pro-forma or "core" results. Core results
exclude restructuring charges, restructuring-related transition costs
associated with the company's restructuring plans and other costs.
Restructuring charges include the severance associated with employment
reductions, write-downs of assets either disposed of or impaired as a result
of the initiatives or other business factors, environmental costs of
remediating facilities to be closed or vacated and other similar exit costs.
The restructuring-related transition costs are additional costs resulting from
these major initiatives that are classified as period operating expenses
within cost of sales or selling, general and administrative expense
categories. These include the costs of moving production equipment, operating
duplicative facilities while transferring production or distribution,
consulting costs incurred in planning and implementing changes and other types
of costs that have been incurred to facilitate the changes encompassed by the
restructuring initiatives. Management uses its judgment to determine which
costs should be classified as transition costs based on the criteria of
whether the costs are unusual in nature and are expected to cease when the
transition activities related to these initiatives end. Because the presence
of restructuring charges and transition costs makes it difficult to see the
underlying trends within the company's businesses, the company also presents
its results on a pro forma or core basis, which excludes these as well as
other non-recurring charges incurred in the period.
Net sales for the third quarter were $690 million, up 6% from net sales of
$651 million in the same quarter of last year. Unit sales volume from ongoing
businesses increased 5% led by U.S. mechanics tools, U.S. and European hand
tools and North American fastening systems products. Revenue also increased
by 2% from the net contribution of acquisitions. The net effect of pricing
was negligible and the effects of foreign currency translation decreased sales
by 1%. Net sales for the nine months were $2,053 million, or 4% higher than
net sales of $1,971 million in the same period of last year. Unit volume
growth, principally in U.S. mechanics tools, contributed to the sales gains.
Gross profit of $236 million increased 11% from $214 million reported in the
third quarter 1997. Gross profit as a percent of sales increased from 32.9%
to 34.3%. Included in the third quarter cost of sales for 1998 was $5 million
of restructuring-related transition costs, primarily for plant rationalization
activities, as compared with $8 million recorded in the prior year. Excluding
these transition costs which related to start up inefficiencies, consulting
and moving production to new facilities, core gross profit margin as a percent
of sales increased to 35.0% from 34.2%. Contributing to higher margins were
the growth in the MacDirect (TM) venture, increased production volumes and the
savings from restructuring and other productivity initiatives.
For the first nine months of 1998, gross profits as a percent of sales
improved to 34.9% from 33.3% in the same period of 1997. On a core basis,
gross profit margins improved from 34.4% to 35.5% driven by the same factors
impacting third quarter results.
-7-
Selling, general and administrative expenses increased to $173 million, or
25.0% of sales in the third quarter 1998, as compared with $148 million, or
22.8% of sales in the prior year. Approximately $10 million of the $25
million increase in spending represented higher restructuring-related
transition and other non-recurring costs, which increased from $10 million in
1997 to $20 million in 1998. Substantially all of that increase is
attributable to incremental spending on systems conversions for the Year 2000
("Y2K") remediation. To the greatest extent possible, the Y2K systems solutions
are being designed to provide a common computer platform for the company which
directly facilitates the centralization of functions envisioned by the
restructuring initiatives. Such costs were $13 million in the third quarter
and, to date, are $25 million. In 1997, transition costs represented
duplicative distribution facility costs, consulting and the costs to move
inventory and equipment. Transition costs in 1998 include consulting for
legal and structural reorganization, recruiting and relocation of employees
and the cost of transition employees involved in reorganizing the functions.
On a core basis, selling, general and administrative expenses increased $14
million, or 10% over the third quarter of 1997 due to the growth in the
MacDirect (TM) venture and additional spending in product and brand
development.
Selling, general and administrative expenses for the nine-month period were
$510 million, or 24.8% of sales, as compared with $455 million, or 23.1% of
sales, in the same period of 1997. Transition and other non-recurrent
spending in the first nine months of 1998 of $46 million represented an
increase of $26 million, primarily related to the incremental spending on Y2K
remediation. Selling, general and administrative expenses excluding
restructuring-related transition and other non-recurring costs was $464 million,
up $29 million from the prior year period from essentially the same factors
which impacted the third quarter.
Net interest expense for the third quarter of $7 million was $3 million higher
than the third quarter of last year due to higher net borrowings, which were
used to fund the acquisition of Zag and higher working capital levels. For
the nine-month period, net interest expense was $17 million, or $4 million
higher than the prior year period due to higher borrowings, which funded
increased working capital.
Net earnings of $33 million, or $.37 per diluted share, were reported for the
third quarter 1998. In the third quarter of 1997, the company recorded a net
loss of $41 million, or $.46 per diluted share due to a significant
restructuring and asset write-off charge of $106 million. The charge related
to restructuring initiatives designed to reallocate the resources freed from
streamlining manufacturing, sales, distribution and administrative operations
to fund increased investment in brand and new product development. Net
earnings on a pro-forma or "core" basis excluding restructuring-related
transition and other non-recurring charges, would have been $49.4 million, or
$.55 per diluted share in the third quarter 1998, up slightly from $48.9
million, or $.54 per diluted share, in 1997.
The ultimate financial returns of the restructuring initiatives continue to be
assessed as originally estimated; however, the timing of some projects has
shifted. Progress on the plant rationalization component of the restructuring
has resulted in 24 facilities being closed to date. Projects related to the
reorganization of major functions are also progressing solidly; however, the
completion dates for several of these are delayed somewhat as the plan to
convert to a single common information system can not occur until after Y2K
-8-
systems conversions are complete. During the first nine months of 1998, the
company made payments of $18 million for severance and benefit costs and
payments of $8 million for other exit costs. As of October 3, 1998, the
reserve balance related to the restructuring was $171 million.
For the nine months ended October 3, 1998, net income of $112 million, or
$1.24 per diluted share, was reported as compared with a net loss of $68
million, or $.77 per diluted share, in the same period of 1997. The net
restructuring charge of $238 million in 1997 included a first quarter 1997 net
gain from the divestiture of several businesses. Net earnings for the nine
months on a core basis would have been $148 million, or $1.64 per diluted
share, as compared with $138 million, or $1.53 per diluted share, in 1997.
In the Tools segment, third quarter net sales increased 9%, primarily from
unit volume growth in consumer and industrial tools. As reflected in the
attached table, "Business Segment Information," third quarter 1998 core
operating profits for this segment, excluding restructuring charges,
restructuring-related transition costs and other non-recurring charges, were
$79 million, or 14.7% of sales, as compared with $81 million, or 16.5% of
sales in the third quarter 1997. The decline in margins reflects a shift in
mix to lower margin consumer products, costs associated with operational
problems in certain manufacturing facilities and costs incurred to improve
customer service. For the nine-month period core operating profits were $241
million, up 6% from the prior year. Operating margins as a percent of sales
were flat at 15.3%. The increased profitability in the first and second
quarters, primarily due to volume growth and restructuring and procurement
savings, was diluted by third quarter operational issues.
The Hardware segment reported net sales of $82 million, down 5% from the prior
year from continued pricing erosion and a shift in mix to lower-margin
consumer business. The effects of foreign currency translation and unit
volume both decreased sales 1% from the prior year. On a core basis operating
profits were flat with a year ago, although, as a percent of sales operating
profits were 12.1%, up from 11.6% in the third quarter 1997. For the nine-
month period, operating margins were $34 million, or 13.0% of sales, as
compared with $36 million, or 13.7% of sales in the prior year period.
Operating margins earlier in 1998 had been slightly lower as manufacturing
costs had not been reduced quickly enough in response to key customer
inventory corrections.
Net sales in the Specialty Hardware segment were $73 million, down 3% from the
prior year. The increase in unit volume was driven primarily by volume growth
in Access Technologies. Selected price increases contributed a 1% growth in
sales. These gains were offset by a 6% decline in sales related to the
divestiture of the European business of Access Technologies and a 1% decline
in sales as a result of the effect of foreign currency translation. Core
operating profits increased significantly to $8 million, or 11.0% of sales
from $4 million, or 5.6% of sales, in the prior year quarter. The increase
reflected favorable pricing, material cost savings and the disposition of the
lower margin European business. Core operating profit for the nine months
improved for the same reasons from 5.2% of sales to 7.7% of sales.
Geographically, U.S. core operating margins declined to 14.7% of sales in the
third quarter 1998 from 15.5% in the prior year quarter. The decline reflects
the shift to lower margin consumer product and the cost incurred at
manufacturing facilities to improve customer service. In Europe core
operating margins declined from 12.3% to 11.1% primarily due to the effect of
recent acquisitions. In Other areas core operating margins increased from
12.2% to 14.0% due to improvements in Latin American operations.
-9-
Liquidity and Sources of Capital
In the third quarter 1998, a net cash outflow of $4 million was generated due
to increases in working capital and payments of severance and other benefits
related to restructuring initiatives. Excluding the severance and other
restructuring payments, operating cash flow would have been $6 million.
Shipping during the third quarter was particularly skewed to the later weeks
of the quarter, which had a noticeable impact on receivable levels. In
addition, the timing of cash payments on accounts payables also contributed to
a short-term impact on cash flow. Despite higher levels of working capital,
primarily inventory reflecting a commitment to improve customer service, the
company continues to generate positive contributions to cash flow from
earnings. Cash flow is expected to return to more typical levels during the
fourth quarter of 1998, however, will likely be lower than the fourth quarter
of 1997 due to an additional week of business included in that fiscal year.
Capital expenditures were $14 million for the third quarter and $35 million
for the nine months, which is lower than spending in the comparable periods of
the prior year. Facility consolidation, continued outsourcing and the Stanley
Production System ("SPS") have combined to reduce capital spending. The total
spending for capital is likely to be approximately $50 to $60 million for the
full year.
The company acquired Zag Industries Ltd. on August 5, 1998 for a purchase
price of $130 million. Net cash used to purchase the business of $100 million
was funded by commercial paper classified as long-term debt due to the
company's intention and ability to continue to refinance this obligation on a
long-term basis.
Euro Conversion
On January 1, 1999, certain member countries of the European Union are
scheduled to establish fixed conversion rates between their existing
currencies ("legacy currencies") and one common currency, the euro. The euro
will then trade on currency exchanges and may be used in business
transactions. Beginning in January 2002, new euro-denominated bills and coins
will be issued, and legacy currencies will be withdrawn from circulation. The
company's operating subsidiaries affected by the euro conversion are
developing plans to address the systems and business issues raised by the euro
currency conversion. These issues include, among others, (1) the need to
adapt computer and other business systems and equipment to accommodate euro-
denominated transactions; and (2) the competitive impact of cross-border price
transparency. The company has not yet completed its estimate of the potential
impact likely to be caused by the euro conversion; however, it is not expected
to have a material impact on its results of operations, liquidity or financial
condition.
Year 2000 Update
Since many computer systems and other equipment with embedded chips or
processors use only two digits to represent the year, these business systems
may be unable to process accurately certain data before, during or after the
year 2000. As a result, business and governmental entities are at risk for
possible miscalculations or systems failures causing disruptions in their
business operations. This is commonly known as the Year 2000 issue. The Year
2000 issue can arise at any point in the company's supply, manufacturing,
distribution and financial chains.
-10-
A Y2K project office was established in September 1997 and is staffed with
internal managers who are responsible for oversight and implementation of the
comprehensive Y2K project. Approximately 80% of the internal information
technology resources were committed to Year 2000 remediation efforts in 1998.
The scope of the project includes: ensuring the compliance of all
applications, operating systems and hardware on mainframe, PC and LAN
platforms; addressing issues related to software and non-IT embedded systems
used in plant and distribution facilities; and addressing the compliance of
key suppliers and customers. The project has four phases: inventory and
assessment of systems and equipment affected by the Year 2000 issue;
definition of strategies to address affected systems and equipment;
remediation or replacement of affected systems and equipment; and testing that
each is Year 2000 compliant.
With respect to ensuring the compliance of all applications, operating systems
and hardware (other than PCs) on the company's various computer platforms, the
assessment and definition of strategies phases have been completed. It is
estimated that 55% of the remediation or replacement and testing phases have
been completed with most of the major information systems expected to be
completed by mid 1999. The inventory of all PC's and related equipment is 80%
complete with assessment, remediation and testing 20% complete and expected to
be fully complete by October 1999.
With respect to addressing issues related to software and non-IT embedded
systems used in the company's manufacturing and distribution facilities, the
assessment and definition of strategies phases have been completed. The
remediation or replacement phase is expected to be completed by the end of
third quarter 1999. Testing is expected to be completed by the end of third
quarter 1999.
The company will develop contingency plans for remediation projects where the
risk of non-completion is identified to be greater than remote. The company
is in the process of developing a contingency plan for one project.
It is currently estimated that the aggregate cost of the company's Year 2000
efforts will be approximately $95 - $120 million, of which approximately $25
million has been spent to date. It is expected that no more than 25% of the
total cost will be capitalized.
Risk/Cautionary Statements
The company relies on numerous third party suppliers in the operation of its
business. Interruption in the operations of any material supplier due to Year
2000 issues could affect company operations. The company has initiated
efforts to evaluate the status of its most critical suppliers' progress and
this process is expected to be complete by mid 1999.
In addition, interruptions in customers' operations due to Y2K issues could
result in reduced sales, increased inventory or receivable levels and cash
flow reductions. While these events are possible, the company's customer base
is broad enough to minimize the impact of the failure of any single customer
interface. The company is currently assessing its customer interfaces and
expects to begin testing by mid 1999.
Many statements contained in the discussion of the state of the company's Y2K
readiness are forward looking and are inherently subject to risk and
uncertainty. The nature, scope and cost of the company's Y2K project is based
on management's best estimates. These estimates are based in part on
-11-
information obtained from third parties (including customers, suppliers and
consultants hired to assist in the Y2K compliance program) and in part on
numerous assumptions regarding future events (including the ability of
software vendors to implement new operating systems or deliver upgrades and
repairs as promised, the availability of new computer hardware and consultants
to meet the company's planned needs). Due to the general level of
uncertainty inherent in Y2K analysis, the company is unable to determine
conclusively whether the consequences of potential Y2K failures by either the
company or its customers and key suppliers will have a material impact on the
company's results of operations, liquidity or financial condition. It is
likely, however, that if the company is unable to complete its Y2K project as
planned or if the company's key suppliers and customers or a sizable number of
its smaller suppliers and customers fail to remediate their systems, this will
have a material adverse impact on the company's results of operations,
liquidity and financial condition. The company's Y2K project is expected to
significantly reduce the company's level of uncertainty about the Y2K problem,
and to reduce the likelihood of risk of interruptions to routine business
operations.
Update on Made in U.S.A.
The company has completed its review of its products in light of the December
1, 1997 announcement by the Federal Trade Commission of its enforcement policy
with respect to "Made in USA" labeling. The December 1st announcement
contained a new and more rigorous interpretation of the permissible level of
foreign content in products marked "Made in USA." While the company believes
that its historical interpretation of the "Made in USA" guidelines was
consistent with governing law and industry practice, the company began earlier
this year to take actions to ensure that products marked "Made in USA"
complied with the changed guidelines and may enter into an agreement with the
Federal Trade Commission formally committing itself to the guidelines.
Because the composition of only a small number of the company's products must
be altered to meet the guidelines, the impact on the company is not expected
to be material.
-12-
THE STANLEY WORKS AND SUBSIDIARIES
PRICE/VOLUME INFORMATION
(Unaudited, Millions of Dollars)
NET SALES
Third Quarter
-------------------------------------------------
Unit ACQ/
1998 Price Volume DVT Currency 1997
-------------------------------------------------
INDUSTRY SEGMENTS
Tools
Consumer $ 205.5 - 8% 6% (2)% $ 183.8
Industrial 147.2 1% 9% - - 134.1
Engineered 182.4 (1)% 3% 5% (1)% 172.0
------ ------
Total Tools 535.1 - 6% 4% (1)% 489.9
Hardware 81.6 (3)% (1)% - (1)% 85.5
Specialty Hardware 72.9 1% 3% (6)% (1)% 75.1
------ ------
Consolidated $ 689.6 - 5% 2% (1)% $ 650.5
====== ======
GEOGRAPHIC AREAS
United States $ 494.3 (1)% 7% - - $ 464.5
Europe 118.9 - 3% 16% 3% 97.8
Other Areas 76.4 2% (4)% - (11)% 88.2
------ ------
Consolidated $ 689.6 - 5% 2% (1)% $ 650.5
====== ======
Year to Date
--------------------------------------------------
Unit ACQ/
1998 Price Volume DVT Currency 1997
--------------------------------------------------
INDUSTRY SEGMENTS
Tools
Consumer $ 562.2 1% 4% 2% (3)% $ 542.7
Industrial 449.4 - 8% - - 415.6
Engineered 568.7 (2)% 5% 5% (1)% 530.5
------- -------
Total Tools 1,580.3 - 5% 3% (2)% 1,488.8
Hardware 264.2 (2)% 3% - (1)% 264.8
Specialty Hardware 208.8 2% 3% (8)% (1)% 217.1
------- -------
Consolidated $ 2,053.3 - 5% 1% (2)% $ 1,970.7
======= =======
GEOGRAPHIC AREAS
United States $ 1,472.7 (1)% 7% (1)% - $ 1,400.0
Europe 348.4 1% 3% 10% (2)% 311.9
Other Areas 232.2 2% (2)% (1)% (9)% 258.8
------- -------
Consolidated $ 2,053.3 - 5% 1% (2)% $ 1,970.7
======= =======
-13-
THE STANLEY WORKS AND SUBSIDIARIES
BUSINESS SEGMENT INFORMATION
(Unaudited, Millions of Dollars)
OPERATING PROFIT
Third Quarter 1998
----------------------------------------------------
Transition Core
Restrg & Other Profit
Reported Charges Costs Core Margin
----------------------------------------------------
INDUSTRY SEGMENTS
Tools $ 61.2 $ - $ 17.4 $ 78.6 14.7%
Hardware 6.5 - 3.4 9.9 12.1%
Specialty Hardware 3.3 - 4.7 8.0 11.0%
----- ----- ----- -----
Total 71.0 - 25.5 96.5 14.0%
Net corporate
expenses (8.7) - - (8.7)
Interest expense (8.7) - - (8.7)
----- ----- ----- -----
Earnings before
income taxes $ 53.6 $ - $ 25.5 $ 79.1
===== ===== ===== =====
GEOGRAPHIC AREAS
United States $ 51.1 $ - $ 21.5 $ 72.6 14.7%
Europe 11.3 - 1.9 13.2 11.1%
Other Areas 8.6 - 2.1 10.7 14.0%
----- ----- ----- -----
Total $ 71.0 $ - $ 25.5 $ 96.5 14.0%
===== ===== ===== =====
Third Quarter 1997
----------------------------------------------------
Transition Core
Restrg & Other Profit
Reported Charges Costs Core Margin
----------------------------------------------------
INDUSTRY SEGMENTS
Tools $(15.7) $ 83.0 $ 13.6 $ 80.9 16.5%
Hardware (3.3) 9.9 3.3 9.9 11.6%
Specialty Hardware (6.2) 9.2 1.2 4.2 5.6%
------ ------ ------ ------
Total (25.2) 102.1 18.1 95.0 14.6%
Net corporate
expenses (14.8) 3.8 0.6 (10.4)
Interest expense (6.4) - - (6.4)
------ ------ ------ ------
Earnings (loss) before
income taxes $(46.4) $ 105.9 $ 18.7 $ 78.2
====== ====== ====== ======
GEOGRAPHIC AREAS
United States $ 1.5 $ 56.8 $ 13.9 $ 72.2 15.5%
Europe (27.4) 37.3 2.1 12.0 12.3%
Other Areas 0.7 8.0 2.1 10.8 12.2%
------ ------ ------ ------
Total $(25.2) $ 102.1 $ 18.1 $ 95.0 14.6%
====== ====== ====== ======
-14-
THE STANLEY WORKS AND SUBSIDIARIES
BUSINESS SEGMENT INFORMATION
(Unaudited, Millions of Dollars)
OPERATING PROFIT
Year to Date 1998
----------------------------------------------------
Transition Core
Restrg & Other Profit
Reported Chgs Costs Core Margin
----------------------------------------------------
INDUSTRY SEGMENTS
Tools $ 200.6 $ - $ 40.5 $ 241.1 15.3%
Hardware 26.6 - 7.7 34.3 13.0%
Specialty Hardware 6.2 - 9.9 16.1 7.7%
----- ----- ----- -----
Total 233.4 - 58.1 291.5 14.2%
Net corporate
expenses (32.0) - - (32.0)
Interest expense (22.1) - - (22.1)
Earnings before ----- ----- ----- -----
income taxes $ 179.3 $ - $ 58.1 $ 237.4
===== ===== ===== =====
GEOGRAPHIC AREAS
United States $ 171.4 $ - $ 50.3 $ 221.7 15.1%
Europe 35.9 - 4.2 40.1 11.5%
Other Areas 26.1 - 3.6 29.7 12.8%
----- ----- ----- -----
Total $ 233.4 $ - $ 58.1 $ 291.5 14.2%
===== ===== ===== =====
Year to Date 1997
----------------------------------------------------
Transition Core
Restrg & Other Profit
Reported Chgs Costs* Core Margin
----------------------------------------------------
INDUSTRY SEGMENTS
Tools $ 2.0 $ 194.8 $ 31.6 $ 228.4 15.3%
Hardware 11.1 17.8 7.3 36.2 13.7%
Specialty Hardware (13.7) 23.5 1.4 11.2 5.2%
------ ----- ----- -----
Total (0.6) 236.1 40.3 275.8 14.0%
Net corporate
expenses (50.2) 2.4 11.7 (36.1)
Interest expense (18.4) - - (18.4)
------ ----- ----- -----
Earnings (loss) before
income taxes $(69.2) $ 238.5 $ 52.0 $ 221.3
====== ===== ===== =====
GEOGRAPHIC AREAS
United States $ 35.7 $ 145.6 $ 30.0 $ 211.3 15.1%
Europe (28.1) 61.8 5.6 39.3 12.6%
Other Areas (8.2) 28.7 4.7 25.2 9.7%
------ ----- ----- -----
Total $ (0.6) $ 236.1 $ 40.3 $ 275.8 14.0%
====== ===== ===== =====
* Includes stock option charge.
-15-
PART II OTHER INFORMATION
Item 2. - Changes in Securities and Use of Proceeds
(c) Recent Sales of Unregistered Securities
(1) During the third fiscal quarter of 1998, 14,928 shares were issued to
certain participants in the Company's U.K. Savings Related Share Plans (the
"Savings Plan").
(a) Participation in the Savings Plan is offered to all employees of
the Company's subsidiaries in the United Kingdom.
(b) The total dollar value of the shares issued during the quarter
was $270,341.36.
14,488 shares were issued at $18.15 per share with an aggregate
value of $262,957.20.
240 shares were issued at $15.5334 per share with an aggregate
value of $3,728.02.
142 shares were issued at $15.8834 per share with an aggregate
value of $2,255.44.
58 shares were issued at $24.15 per share with an aggregate
value of $1,400.70.
(c) Neither the options nor the underlying shares have been registered
in reliance on an exemption from registration found in several
no-action letters issued by the Division of Corporation Finance of
the Securities and Exchange Commission. Registration is not
required because the Company is a reporting company under
the Securities Exchange Act of 1934, its shares are actively
traded, the number of shares issuable under the Savings Plans is
small relative to the number of shares outstanding, all
eligible employees are entitled to participate, the shares are
being issued in connection with the employees' compensation, not
in lieu of it and there is no negotiation between the Company and
the employee regarding the grant.
(d) Under the Savings Plans, employees are given the right to buy
a specified number of shares with the proceeds of a "Save-as-You-Earn"
savings contract. Under the savings contract, the employee authorizes
60 monthly deductions from his or her paycheck At the end of the five
year period, the employee may elect to (i) use all or a part of the
accumulated savings to buy all or some of the shares under the
employee's options, (ii) leave the accumulated savings with
the financial institution that has custody of the funds for
an additional two years or (iii) take a cash distribution of
the accumulated savings. The option to purchase shares will lapse
at the end of the five year period if not exercised at that
time. Employees who are terminated and whose options have not
lapsed have six months from the date of termination to elect to
receive shares with the savings accumulated as of the termination
date.
-16-
(2) On July 15, 1998, the company issued two option grants to Stef Kranandijk
who serves as a director of one of the company's European subsidiaries. The
option grants were for 65,000 and 125,000 shares of the company's Common Stock
and each has an exercise price of $42.875 per share. Mr. Kranendijk purchased
these options for $1.00 per option.
Neither the options nor the underlying shares have been registered in reliance
on Section 4(2) of the Securities Act of 1933 as the issuance did not involve
a public offering.
Item 6. - Exhibits and Reports on Form 8-K
(a) Exhibits
(1) See Exhibit Index on page 19
(b) Reports on Form 8-K.
(1) Registrant filed a Current Report on Form 8-K, dated July 15,
1998, (as amended by Form 8-K/A filed on July 17, 1998) in
respect of the Registrant's press release announcing
second quarter earnings. Additionally, the repurchase of up to
four million shares of the Registrant's Common Stock over the
next few years was disclosed.
(2) Registrant filed a Current Report on Form 8-K, dated July 17,
1998, in respect of the Registrant's cautionary statements
under the Private Securities Litigation Reform Act of
1995 relating to certain forward looking statements made
at a presentation to analysts.
(3) Registrant filed a Current Report on Form 8-K, dated July 22,
1998, which contained Business Segment information for
the second quarters and first six months of 1998 and 1997
which supplemented its second quarter earnings release which
was issued on July 15, 1998.
(4) Registrant filed a Current Report on Form 8-K, dated August 5,
1998 discussing the completion of the acquisition of ZAG
Industries, Ltd.
(5) Registrant filed a Current Report on Form 8-K, dated September
17, 1998 announcing that it had accepted the resignation of John
A. Cosentino, Jr. as Vice President, Operations.
(6) Registrant filed a Current Report on Form 8-K, dated September
23, 1998 discussing the third quarter, near-term and long-term
business outlook and cautionary statements relating to forward
looking statements included in this discussion.
-17-
Signature
Pursuant to the requirements 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.
THE STANLEY WORKS
Date: November 17, 1998 By: Theresa F. Yerkes
Theresa F. Yerkes
Vice President and
Controller (Chief Financial
Officer, Chief Accounting
Officer and Authorized
Signatory of the Registrant)
-18-
EXHIBIT INDEX
EXHIBIT LIST
(4)(iv)(c) Credit Agreement, dated as of October 21, 1998, with the banks
named therein and Citibank, N.A., as agent.
(12) Computation of Ratio of Earnings to Fixed Charges
(27) Financial Data Schedule
-19-
CREDIT AGREEMENT
Dated as of October 21, 1998
among
THE STANLEY WORKS
as Borrower
THE LENDERS REFERRED TO HEREIN,
as Lenders
and
CITIBANK, N.A.
as Agent
CITICORP SECURITIES, INC.
Arranger
<PAGE>
CREDIT AGREEMENT, dated as of October 21, 1998, among THE STANLEY WORKS
(the "Borrower"); each of the lenders listed on the signature pages hereof under
the heading "LENDERS" (the "Lenders"); and CITIBANK, N.A., as Agent for the
Lenders (together with its successors in such capacity, the "Agent").
The Borrower, certain lenders and the Agent are parties to an Amended and
Restated Facility A (364-Day) Credit Agreement dated as of October 23, 1996 (as
in effect immediately prior to the Effective Date (as defined below), the
"Existing Credit Agreement"), providing, subject to the terms and conditions
thereof, for the making of advances by said lenders to the Borrower up to an
aggregate principal amount at any one time outstanding not exceeding
$150,000,000.
The Borrower proposes to terminate the Commitments under the Existing
Credit Agreement, and the Borrower, the Lenders and the Agent wish to enter into
this Agreement in order to provide for Commitments in an aggregate amount of
$250,000,000 and to incorporate by reference the terms and conditions of the
Existing Credit Agreement with the modifications set forth below; and
accordingly, the parties hereto hereby agree as follows:
Section 1. Definitions. Terms used but not otherwise defined herein have
the meanings given them in the Existing Credit Agreement.
Section 2. The Commitments. The parties hereto agree that effective on the
Effective Date (1) the Lenders agree to make Committed Advances on and subject
to the terms and conditions of the Existing Credit Agreement as modified hereby,
each Lender to have the Commitment set forth in Schedule I hereto opposite the
name of such Lender, (2) the terms and conditions of the Existing Credit
Agreement shall be modified as provided in Section 3 hereof (such terms and
conditions, as so modified, being herein called the "Amended Terms"), and (3)
the Amended Terms shall be deemed incorporated herein by reference and made a
part hereof and shall be deemed to continue in effect without regard to any
amendment or termination after the Effective Date; and without limiting the
foregoing, the Borrower agrees to perform, observe and comply with the Amended
Terms, and all of the terms, conditions, covenants, agreements, limitations,
schedules, exhibits and other provisions constituting the Amended Terms shall be
given effect as if the Existing Credit Agreement were amended and restated in
its entirety hereby with the modifications herein provided.
Section 3. Amendments. Effective on the Effective Date, (i) the Borrower
confirms that Commitments under the Existing Credit Agreement are terminated and
(ii) the parties agree that the terms and conditions of the Existing Credit
Agreement are hereby modified as set forth below:
<PAGE>
-2-
A. References in the Existing Credit Agreement to "this Agreement" and
"Facility A (364 Day) Credit Agreement dated as of October 23, 1996" and words
of similar import (including indirect references) shall be deemed to be
references to this Agreement.
B. Section 1.01 of the Existing Credit Agreement is hereby modified by
changing the following definitions to read in their entirety as follows:
"Applicable Eurodollar Margin" means, with respect to any Interest
Period for each Eurodollar Rate Advance, (i) .1900% if on the date such
Eurodollar Rate Advance is made the Borrower's outstanding Long-Term
Indebtedness is rated BBB+ or higher by Standard & Poor's Ratings Group, a
division of McGraw-Hill, Inc. ("Standard & Poor's") and Baa1 or higher by
Moody's Investors Service, Inc. ("Moody's"), (ii) .2300% if on such date
clause (i) is inapplicable and the Borrower's outstanding Long-Term
Indebtedness is rated BBB or higher by Standard & Poor's and Baa2 or higher
by Moody's, and (iii) .2500% if on such date clauses (i) and (ii) are
inapplicable (including if such Long-Term Indebtedness is no longer rated
by either agency); provided, however, that if the maturity of any
Eurodollar Rate Advance has been extended pursuant to Section 2.07(c), the
Applicable Eurodollar Margin shall mean, with respect to any Interest
Period for each Eurodollar Rate Advance from and after the Termination
Date, (i) .2500% if on the Termination Date or on the date such Eurodollar
Rate Advance is made the Borrower's outstanding Long-Term Indebtedness is
rated BBB+ or higher by Standard & Poor's and Baa1 or higher by Moody's,
(ii) .3000% if on such date clause (i) is inapplicable and the Borrower's
outstanding Long-Term Indebtedness is rated BBB or higher by Standard &
Poor's and Baa2 or higher by Moody's, and (iii) .3500% if on such date
clauses (i) and (ii) are inapplicable (including if such Long-Term
Indebtedness is no longer rated by either agency).
"Applicable Facility Fee Rate" means as of any date of payment of the
fee required by Section 2.03 (i) a rate per annum equal to .0600% if on
such date the Borrower's outstanding Long-Term Indebtedness is rated BBB+
or higher by Standard & Poor's and Baa1 or higher by Moody's, (ii) a rate
per annum equal to .0700% if on such date clause (i) is inapplicable and
the Borrower's outstanding Long-Term Indebtedness is rated BBB or higher by
Standard & Poor's and Baa2 or higher by Mood s, and (iii) .1000% if on such
date clauses (i) and (ii) are inapplicable (including if such Long-Term
Indebtedness is no longer rated by either agency).
"Commitment" means, with respect to any Lender, the amount specified
opposite such Lender's name on Schedule I hereto or, if such Lender has
<PAGE>
-3-
entered into any Assignment and Acceptance or New Commitment Acceptance,
set forth for such Lender in the Register maintained by the Agent pursuant
to Section 8.07(d), as such amount may be reduced pursuant to Section
2.01(b) or increased pursuant to Section 2.01(c).
"Termination Date" means the earlier of (a) October 20, 1999 or (b)
the date of termination in whole of the Commitments pursuant to Section
2.01(b) or 6.01.
C. Section 2.03(a) of the Existing Credit Agreement is hereby modified to
read in its entirety as follows:
"SECTION 2.03. Fees. (a) Facility Fee. The Borrower agrees to pay to
the Agent for the account of each Lender a facility fee on the aggregate
amount of such Lender's Commitment from the date hereof in the case of each
Lender and, in the case of each Person which becomes a Lender pursuant to
Section 8.07, from the effective date specified in the Assignment and
Acceptance pursuant to which it became a Lender until the Termination Date
at the Applicable Facility Fee Rate, payable quarterly in arrears on the
last day of each March, June, September and December during the term hereof
and on the Termination Date. All computations of the facility fee shall be
based on a year of 365 or 366 days, as the case may be."
D. Schedule I hereto shall be deemed attached to and made a part of the
Existing Credit Agreement as Schedule I thereto.
Section 4. Representations and Warranties. The Borrower represents and
warrants to the Lenders as of the Effective Date that (i) the representations
and warranties set forth in Section 4.01 of the Existing Credit Agreement are
true and correct on and as of the Effective Date as though made on and as of the
Effective Date (or, if any such representation or warranty is expressly stated
to have been made as of a specific date, as of such specific date) and as if
each reference in said Section 4.01 to "this Agreement" included reference to
this Agreement and as if each reference in said Section 4.01 to "December 30,
1995" were instead a reference to "January 3, 1998" and (ii) no event has
occurred and is continuing that constitutes a Default or Event of Default (and
the parties agree that breach of any of said representations and warranties
shall constitute an Event of Default under Section 6.01(b) of the Existing
Credit Agreement as incorporated herein).
Section 5. Conditions to Effectiveness. This Agreement shall become
effective on the date (the "Effective Date") on which the Agent shall notify the
Borrower that the following conditions precedent have been satisfied (and the
Agent shall promptly notify the Banks of the occurrence of the Effective Date):
<PAGE>
-4-
(a) Documents. The Agent shall have received the following documents (with,
except in the case of clause (2), sufficient copies for each Lender), each of
which shall be satisfactory to the Agent in form and substance:
(1) Execution by All Parties. Counterparts of this Agreement, duly
executed and delivered by each of the parties hereto.
(2) Notes. Committed Notes and Uncommitted Notes to the order of the
Lenders (and each of the Existing Lenders that is a party hereto agrees
that it will return to the Borrower such Lender's Notes (as defined in the
Existing Credit Agreement) issued to such Lender under the Existing Credit
Agreement on or as promptly as practical after the Effective Date).
(3) Authority and Approvals. Certified copies of the resolutions of
the Board of Directors of the Borrower (or equivalent documents)
authorizing and approving this Agreement and the Notes, authorizing
Borrowings under this Agreement in an aggregate principal amount up to but
not exceeding $250,000,000 at any one time outstanding, and certified
copies of all documents evidencing other necessary action (corporate,
partnership or otherwise) and governmental approvals, if any, with respect
to this Agreement and the Notes.
(4) Secretary's or Assistant Secretary's Certificate. A certificate of
the Secretary or an Assistant Secretary of the Borrower, dated the
Effective Date, certifying the names and true signatures of the officers of
the Borrower authorized to execute and deliver this Agreement and the Notes
and the other documents to be delivered hereunder.
(5) Opinion of Borrower's Counsel. A favorable opinion of counsel to
the Borrower, in substantially the form of Exhibit A hereto, and as to such
other matters as the Agent or any Lender acting through the Agent may
reasonably request.
(6) Closing Certificate. A certificate of a senior financial officer
of the Borrower, dated the Effective Date, certifying the representations
and warranties set forth in Section 4 hereof are true on such date as if
made on and as of such date.
(b) Approvals. The Agent shall have received evidence satisfactory to it of
receipt of all third party consents and approvals necessary in connection with
this Agreement (without the imposition of any conditions except those that are
acceptable to the Lenders) and that the same remain in effect.
<PAGE>
-5-
(c) Expenses. The Borrower shall have paid all accrued fees and expenses of
the Agent (including the reasonable fees and expenses of counsel to the Agent in
connection with this Agreement).
(d) Fees. The Agent shall have received evidence that the Borrower shall
have paid in full all facility fees payable to the Existing Lenders under the
Existing Credit Agreement accrued to the Effective Date.
(e) Other Items. The Agent shall have received such other approvals,
opinions and documents relating to this Agreement and the transactions
contemplated hereby as any Lender may, through the Agent, reasonably request.
Section 6. Miscellaneous. This Agreement may be executed in any number of
counterparts, all of which taken together shall constitute one and the same
agreement and any of the parties hereto may execute this Agreement by signing
any such counterpart. This Agreement shall be governed by, and construed in
accordance with, the law of the State of New York.
<PAGE>
-6-
IN WITNESS WHEREOF, the parties hereto have caused this Agreement be duly
executed and delivered as of the day and year first above written.
BORROWER
THE STANLEY WORKS
By CRAIG A. DOUGLAS
Name: Craig A. Douglas
Title: Treasurer
AGENT
CITIBANK, N.A.
By CAROLYN A. KEE
Name: Carolyn A. Kee
Title: Vice President
<PAGE>
-7-
LENDERS
CITIBANK, N.A.
By CAROLYN A. KEE
Name: Carolyn A. Kee
Title: Vice President
WACHOVIA BANK, N.A.
By TERENCE A. SNELLINGS
Name: Terence A. Snellings
Title: Senior Vice President
BANQUE NATIONALE DE PARIS
By RICHARD L. STED
Name: Richard L. Sted
Title: Senior Vice President
By GWEN ABBOTT
Name: Gwen Abbott
Title: Assistant Vice President
BARCLAYS BANK PLC
By TERANCE BULLOCK
Name: Terance Bullock
Title: Vice President
<PAGE>
-8-
FLEET NATIONAL BANK
By JEFF LYNCH
Name: Jeff Lynch
Title: SVP
ROYAL BANK OF CANADA
By MOLLY DRENNAN
Name: Molly Drennan
Title: Senior Manager
Corporate Banking
MORGAN GUARANTY TRUST COMPANY
OF NEW YORK
By ROBERT BOTTAMEDI
Name: Robert Bottamedi
Title: Vice President
MELLON BANK, N.A.
By ROBERT H. SUMMERSGILL
Name: Robert H. Summersgill
Title: First Vice President
BANKBOSTON, N.A.
By HARVEY H. THAYER, JR.
Name: Harvey H. Thayer, Jr.
Title: Managing Director
<PAGE>
-9-
THE NORTHERN TRUST COMPANY
By JAMES I. MONHART
Name: James I. Monhart
Title: Senior VP
BANKERS TRUST COMPANY
By ANTHONY LOGRIPPO
Name: Anthony LoGrippo
Title: Vice President
<PAGE>
SCHEDULE I
Lenders and Commitments
Lenders Commitment
CITIBANK, N.A. $30,000,000.00
BANQUE NATIONALE DE PARIS $27,500,000.00
FLEET NATIONAL BANK $27,500,000.00
MELLON BANK, N.A. $27,500,000.00
MORGAN GUARANTY TRUST COMPANY OF NEW YORK $27,500,000.00
WACHOVIA BANK, N.A. $27,500,000.00
BANKERS TRUST COMPANY $25,000,000.00
BARCLAYS BANK PLC $20,000,000.00
ROYAL BANK OF CANADA $17,500,000.00
BANKBOSTON, N.A. $10,000,000.00
THE NORTHERN TRUST COMPANY $10,000,000.00
<PAGE>
EXHIBIT A
[FORM OF OPINION OF GENERAL COUNSEL]
October 21, 1998
To each of the Lenders parties
to the Credit Agreement referred
to below and to Citibank, N.A.,
as Agent for said Lenders
Ladies and Gentlemen:
I am the General Counsel of The Stanley Works, a Connecticut corporation
(the "Borrower"), and have acted as counsel to the Borrower in connection with
the Credit Agreement, dated as of October 21, 1998 (the "Credit Agreement"),
among the Borrower, certain Lenders parties thereto (the "Lenders"), and
Citibank, N.A., as Agent for said Lenders.
This opinion is being delivered to you pursuant to Section 5(a)(5) of the
Credit Agreement. Capitalized terms used herein and not otherwise defined herein
shall have the meanings set forth in the Credit Agreement.
In rendering the opinions set forth herein, I have examined and relied on
originals or copies of the following:
(a) a counterpart executed by the Borrower of the Credit Agreement;
(b) each of the executed Notes;
(c) copies of the Certificate of Incorporation and Bylaws of the
Borrower;
(d) a certified copy of certain resolutions of the Board of Directors
of the Borrower;
<PAGE>
(e) certificates from public officials in the State of Connecticut as
to the good standing of the Borrower in the State of Connecticut; and
(f) such other documents as I have deemed necessary or appropriate as
a basis for the opinions set forth below.
In my examination, I have assumed the genuineness of all signatures, the
legal capacity of all natural persons, the authenticity of all documents
submitted to me as originals, the conformity to original documents of all
documents submitted to me as certified or photostatic copies, and the
authenticity of the originals of such copies. As to any facts material to this
opinion which I did not independently establish or verify, I have relied upon
written statements and certificates of the Borrower and its officers and other
representatives and of public officials.
Unless otherwise indicated, references in this opinion to the "Loan
Documents" shall mean the documents listed in clauses (a) and (b) above. In
addition, references to (i) "Applicable Laws" shall mean the laws and
regulations of the States of Connecticut and New York and the United States of
America (including, without limitation, Regulations U and X of the Board of
Governors of the Federal Reserve System) which are applicable to the
transactions contemplated by the Loan Documents; (ii) the term "Governmental
Authorities" means any Connecticut, New York and federal executive, legislative,
judicial, administrative or regulatory body; (iii) the term "Applicable
Contracts" shall mean the agreements and instruments set forth in the index of
exhibits to the Borrower's Annual Report on Form 10K for the year ended , 19
filed with the Securities and Exchange Commission and (iv) the term
"Governmental Approval" means any consent, approval, license, authorization or
validation of, or filing, recording or registration with, any Governmental
Authority pursuant to any Applicable Law.
I am admitted to the bar in the States of Connecticut and New York. This
opinion is limited to the laws of the State of Connecticut, the State of New
York and the United States of America to the extent specified herein.
In rendering this opinion, I have assumed, with your consent, that:
(a) the execution, delivery or performance by the Borrower of the Loan
Documents does not and will not conflict with, contravene, violate or
constitute a default under any rule, law or regulation to which the
Borrower is subject (other than applicable laws, orders and decrees as to
2
<PAGE>
which I express my opinion in paragraph 5 herein) or any agreement or
instrument to which the Borrower or the Borrower's property is subject
(except and to the extent that I express my opinion in paragrap 5 herein);
(b) and no authorization, consent or other approval of, notice to or filing
with any court, governmental authority or regulatory body (other than
Governmental Approvals as to which I express my opinion in paragraph 6
herein) is required to authorize or is required in connection with the
execution, delivery or performance by the Borrower of any Loan Document or
the transactions contemplated thereby.
My opinions are also subject to the following assumptions and
qualifications:
(a) the Credit Agreement constitutes the valid and binding obligation of
the Lenders and is enforceable against the Lenders in accordance with its
terms; and
(b) I express no opinion as to the effect on the opinions herein stated of
(i) the compliance or noncompliance of the Lenders with any state, federal
or other laws or regulations applicable to the Lenders or (ii) the legal or
regulatory status or the nature of the business of the Lenders.
Based upon the foregoing and such investigations that I have deemed
necessary, and subject to the limitations, qualifications, exceptions and
assumptions set forth herein, I am of the opinion that:
1. The Borrower has been duly incorporated, is validly existing and in good
standing under the laws of the State of Connecticut.
2. The Borrower has the corporate power and corporate authority to execute,
deliver and perform all of its obligations under the Loan Documents.
3. The execution and delivery of each Loan Document has been duly
authorized by all requisite corporate action on the part of the Borrower.
4. Each Loan Document has been duly executed and delivered by the Borrower,
constitutes a valid and binding obligation of the Borrower and
3
<PAGE>
is enforceable against the Borrower in accordance with its terms, subject
to the following qualifications:
(i) enforcement may be limited by applicable bankruptcy, insolvency,
fraudulent transfer, reorganization, moratorium or other similar laws affecting
creditors' rights generally and by general principles of equity (regardless of
whether enforcement is sought in equity or at law);
(ii) I express no opinion as to the enforceability of any rights to
indemnification provided for in the Loan Documents which may violate the public
policy underlying any law, rule or regulation (including any federal or state
securities law, rule or regulation); and
(iii) I express no opinion as to the enforceability of Section 8.05 of
the Existing Credit Agreement as incorporated in the Credit Agreement insofar as
this provision purports to authorize a Person who has purchased a participation
in Advances under the Credit Agreement to set off, appropriate or apply any
deposit or property or indebtedness of the Borrower against any obligation of
the Borrower.
5. Neither the execution, delivery or performance by the Borrower of the
Loan Documents nor the compliance by the Borrower with the terms and provisions
thereof will conflict with, contravene, violate or constitute a default under
(i) any provision of any Applicable Contract or, to the best of my knowledge,
after due investigation, any other agreement or instrument to which the Borrower
or the Borrower's property is subject, (ii) any provision of any Applicable Law,
(iii) to the best of my knowledge, after due investigation, any judicial or
administrative order or decree of any Governmental Authority or (iv) its
Certificate of Incorporation and By-laws. As used in this paragraph, "due
investigation" means solely that, as to agreements and instruments, I have
interviewed the officers of the Borrower responsible for its financing
activities, and, as to orders and decrees, I have interviewed the lawyers under
my supervision.
6. Based on my review of Applicable Laws, but without my having made any
special investigation concerning any other law, rule or regulation, no
Governmental Approval which has not been obtained or taken and is not in full
force and effect, is required to authorize or is required in connection with the
execution, delivery or performance of the Loan Documents by the Borrower.
4
<PAGE>
7. The Borrower is not required to be registered under the Investment
Company Act of 1940, as amended.
This opinion is being furnished only to you and is solely for your benefit
in connection with the transactions contemplated by the Loan Documents and is
not to be used, circulated, quoted, relied upon or otherwise referred to for any
other purpose without my prior written consent.
Very truly yours,
<PAGE>
THE STANLEY WORKS AND SUBSIDIAIRES
COMPUTATION OF EARNINGS TO FIXED CHARGES
(In Millions of Dollars)
THIRD QUARTER NINE MONTHS
1998 1997 1998 1997
----- ----- ----- -----
Earnings (loss) before income taxes $53.6 ($46.4) $179.3 ($69.2)
Add:
Portion of rents representative of
interest factor 2.9 3.1 8.7 9.3
Interest expense 8.7 6.4 22.0 18.1
Amortization of expense
on long-term debt - - 0.1 0.1
Amortization of capitalized interest - 0.1 - 0.2
----- ----- ----- -----
Income (loss) as adjusted $65.2 ($36.8) $210.1 ($41.5)
===== ===== ===== =====
Fixed charges:
Interest expense $8.7 $6.4 $22.0 $18.1
Amortization of expense
on long-term debt - 0.1 0.1 0.3
Portion of rents representative of
interest factor 2.9 3.1 8.7 9.3
----- ----- ----- -----
Fixed charges $11.6 $9.6 $30.8 $27.7
===== ===== ===== =====
Ratio of earnings to fixed charges (A) 5.62 N/A 6.82 N/A
===== ===== ===== =====
(A) Due to signficant restructuring charges and asset write-offs
recorded in fiscal 1997, income as computed above, was inadequate
to cover fixed charges. The deficiency was $46.4 for the third
quarter and $69.2 for the first nine months of 1997.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from The
Stanley Works and Subsidiaries Consolidated Balance Sheets and Statements
of Operations and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-02-1999
<PERIOD-END> OCT-03-1998
<CASH> 65,200
<SECURITIES> 0
<RECEIVABLES> 546,700
<ALLOWANCES> 0
<INVENTORY> 388,900
<CURRENT-ASSETS> 1,084,700
<PP&E> 1,190,000
<DEPRECIATION> 680,600
<TOTAL-ASSETS> 1,941,700
<CURRENT-LIABILITIES> 682,300
<BONDS> 343,700
0
0
<COMMON> 230,900
<OTHER-SE> 426,900
<TOTAL-LIABILITY-AND-EQUITY> 1,941,700
<SALES> 2,053,300
<TOTAL-REVENUES> 2,053,300
<CGS> 1,337,100
<TOTAL-COSTS> 1,337,100
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17,400
<INCOME-PRETAX> 179,300
<INCOME-TAX> 67,300
<INCOME-CONTINUING> 112,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 112,000
<EPS-PRIMARY> 1.25
<EPS-DILUTED> 1.24
</TABLE>
