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 2, 1999.
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 89,424,663
as of November 12, 1999.
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
1999 1998 1999 1998
------- ------- --------- ---------
Net Sales $ 692.0 $ 689.6 $ 2,061.2 $ 2,053.3
Costs and Expenses
Cost of sales 446.9 453.2 1,353.4 1,337.1
Selling, general and
administrative 166.9 172.7 522.2 509.9
Interest - net 7.0 7.4 21.9 17.4
Other - net (6.2) 2.7 0.8 9.6
------- ------- --------- ---------
614.6 636.0 1,898.3 1,874.0
------- ------- --------- ---------
Earnings before
income taxes 77.4 53.6 162.9 179.3
Income Taxes 27.1 20.2 57.0 67.3
------- ------- --------- ---------
Net Earnings $ 50.3 $ 33.4 $ 105.9 $ 112.0
======= ======= ========= =========
Net Earnings Per
Share of Common Stock
Basic $ 0.56 $ 0.37 $ 1.18 $ 1.25
======= ======= ========= =========
Diluted $ 0.56 $ 0.37 $ 1.18 $ 1.24
======= ======= ========= =========
Dividends per share $ 0.22 $ 0.215 $ 0.65 $ 0.615
======= ======= ========= =========
Average shares outstanding
(in thousands)
Basic 89,687 89,367 89,532 89,413
======= ======= ========= =========
Diluted 89,949 90,102 89,805 90,338
======= ======= ========= =========
See notes to consolidated financial statements.
-1-
THE STANLEY WORKS AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited, Millions of Dollars)
October 2 January 2
1999 1999
-------- --------
ASSETS
Current Assets
Cash and cash equivalents $ 131.5 $ 110.1
Accounts and notes receivable 576.0 517.0
Inventories 367.1 380.9
Other current assets 74.8 78.4
-------- --------
Total Current Assets 1,149.4 1,086.4
Property, Plant and Equipment 1,186.9 1,198.5
Less: Accumulated Depreciation (691.0) (687.1)
-------- --------
495.9 511.4
Goodwill and Other Intangibles 187.6 196.9
Other Assets 129.0 138.2
-------- --------
$ 1,961.9 $ 1,932.9
======== ========
LIABILITIES AND SHAREOWNERS' EQUITY
Current Liabilities
Short-term borrowings $ 210.7 $ 207.8
Current maturities of long-term debt 12.2 14.2
Accounts payable 203.7 172.1
Accrued expenses 309.0 308.0
-------- --------
Total Current Liabilities 735.6 702.1
Long-Term Debt 299.2 344.8
Other Liabilities 213.5 216.6
Shareowners' Equity
Common stock 230.9 230.9
Retained earnings 892.4 867.2
Accumulated other comprehensive loss (97.6) (84.6)
ESOP debt (205.0) (213.2)
-------- --------
820.7 800.3
Less: cost of common stock in treasury 107.1 130.9
-------- --------
Total Shareowners' Equity 713.6 669.4
-------- --------
$ 1,961.9 $ 1,932.9
======== ========
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
1999 1998 1999 1998
------ ------ ------ ------
Operating Activities
Net earnings $ 50.3 $ 33.4 $ 105.9 $ 112.0
Depreciation and amortization 20.9 20.0 66.2 58.1
Other non-cash items (4.0) 1.1 9.8 11.7
Changes in operating assets
and liabilities 25.2 (58.5) (29.3) (196.0)
------ ------ ------ ------
Net cash provided (used) by
operating activities 92.4 (4.0) 152.6 (14.2)
Investing Activities
Capital expenditures (17.9) (14.4) (58.4) (35.3)
Capitalized software (13.2) (4.3) (23.4) (6.1)
Proceeds from sales of assets 22.1 3.4 37.0 12.2
Business acquisitions - (99.9) - (99.9)
Other 2.5 (5.4) (1.6) (5.5)
------ ------ ------ ------
Net cash used by
investing activities (6.5) (120.6) (46.4) (134.6)
Financing Activities
Payments on long-term borrowings - (1.9) (156.0) (40.0)
Proceeds from long-term borrowings 0.4 60.7 121.3 60.7
Net short-term borrowings (30.7) 76.6 4.0 113.1
Proceeds from issuance of common stock 2.3 5.0 7.3 19.5
Proceeds from swap termination 13.9 - 13.9 -
Purchase of common stock for treasury (4.8) (8.7) (13.7) (38.3)
Cash dividends on common stock (19.6) (19.1) (57.9) (54.7)
------ ------ ------ ------
Net cash provided (used) by
financing activities (38.5) 112.6 (81.1) 60.3
Effect of Exchange Rate Changes on Cash (0.7) (0.2) (3.7) 1.5
------ ------ ------ ------
Increase (Decrease) in Cash and
Cash Equivalents 46.7 (12.2) 21.4 (87.0)
Cash and Cash Equivalents,
Beginning of Period 84.8 77.4 110.1 152.2
------ ------ ------ ------
Cash and Cash Equivalents,
End of Third Quarter $ 131.5 $ 65.2 $ 131.5 $ 65.2
====== ====== ====== ======
See notes to consolidated financial statements.
-3-
THE STANLEY WORKS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREOWNERS' EQUITY
(Unaudited, Millions of Dollars)
Accumulated
Other Compre-
hensive Total
Common Retained Income ESOP Treasury Shareowners'
Stock Earnings (Loss) Debt Stock Equity
---------------------------------------------------------
Balance Jan. 2, 1999 $230.9 $867.2 $(84.6) $(213.2) $(130.9) $669.4
Comprehensive income:
Net earnings 105.9
Foreign currency
translation (13.0)
Total comprehensive
income 92.9
Cash dividends
declared (57.8) (57.8)
Net common stock
activity (25.5) 23.8 (1.7)
Tax benefit related
to stock options 0.6 0.6
ESOP debt 8.2 8.2
ESOP tax benefit 2.0 2.0
---------------------------------------------------------
Balance Oct 2, 1999 $230.9 $892.4 $(97.6) $(205.0) $(107.1) $713.6
=========================================================
Accumulated
Other Compre-
hensive Total
Common Retained Income ESOP Treasury Shareowners'
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
=========================================================
See notes to consolidated financial statements.
-4-
THE STANLEY WORKS AND SUBSIDIARIES
BUSINESS SEGMENT INFORMATION
(Unaudited, Millions of Dollars)
Third Quarter Nine Months
1999 1998 1999 1998
------- ------- --------- ---------
INDUSTRY SEGMENTS
Net Sales
Tools $ 525.5 $ 535.1 $ 1,584.1 $ 1,580.3
Doors 166.5 154.5 477.1 473.0
------- ------- --------- ---------
Consolidated $ 692.0 $ 689.6 $ 2,061.2 $ 2,053.3
======= ======= ========= =========
Operating Profit
Tools $ 67.3 $ 72.0 $ 207.9 $ 218.3
Doors 10.9 17.2 32.6 46.1
------- ------- --------- ---------
78.2 89.2 240.5 264.4
Restructuring-related
transition and other
non-recurring costs - (25.5) (54.9) (58.1)
Interest-net (7.0) (7.4) (21.9) (17.4)
Other-net 6.2 (2.7) (0.8) (9.6)
------- ------- --------- ----------
Earnings Before
Income Taxes $ 77.4 $ 53.6 $ 162.9 $ 179.3
======= ======= ========= ==========
GEOGRAPHIC NET SALES
United States $ 496.4 $ 493.8 $ 1,466.5 $ 1,471.2
Other Americas 51.3 51.1 150.5 163.6
Europe 119.0 118.9 372.7 348.4
Asia 25.3 25.8 71.5 70.1
------- ------- --------- ----------
Consolidated $ 692.0 $ 689.6 $ 2,061.2 $ 2,053.3
======= ======= ========= ==========
See notes to consolidated financial statements.
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THE STANLEY WORKS AND SUBSIDIARIES
NOTES TO (Unaudited) CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
October 2, 1999
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 2, 1999.
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
1999 1998 1999 1998
---------- ---------- ---------- ----------
Net earnings -
basic and diluted $ 50.3 $ 33.4 $ 105.9 $ 112.0
========== ========== ========== ==========
Basic earnings per share -
weighted average shares 89,686,916 89,367,471 89,531,833 89,412,986
Dilutive effect of
employee stock options 262,205 734,349 273,108 925,461
---------- ---------- ----------- ----------
Diluted earnings per share -
weighted average shares 89,949,121 90,101,820 89,804,941 90,338,447
========== ========== =========== ==========
NOTE C - Inventories
The components of inventories at the end of the third quarter of 1999
and at year-end 1998, in millions of dollars, are as follows:
October 2 January 2
1999 1999
------ ------
Finished products $ 263.1 $ 273.3
Work in process 51.3 52.5
Raw materials 52.7 55.1
------ ------
$ 367.1 $ 380.9
====== ======
-6-
NOTE D - Cash Flow Information
Interest paid during the third quarters of 1999 and 1998 amounted to $7.1
million and $4.2 million, respectively. Interest paid for the nine months of
1999 and 1998 amounted to $24.5 million and $18.6 million, respectively.
Income taxes refunded net of payments made for the third quarter of 1999 were
$4.7 million. Income taxes paid during the third quarter of 1998 were $17.7
million. Income taxes paid (net of refund received in 1999) for the nine
months of 1999 and 1998 were $16.3 million and $64.3 million, respectively.
NOTE E - 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," which was originally to be effective in
fiscal year 2000. In May 1999, the Financial Accounting Standards Board
deferred the effective date for one year and the standard now will be
effective in fiscal year 2001. The adoption of this standard is not expected
to have a material impact on the company's balance sheet, operating results or
cash flows.
NOTE F - Long-Term Debt
In the first quarter 1999, the company issued $120 million of 5 year debt to
capitalize on the current rate environment and reduce its reliance on short-
term sources of funds.
Note G - Other-net
Other income in the third quarter of 1999 included non-recurring currency
related gains of $9.2 million, $.06 per share, comprised of a gain of $11.4
million realized upon the termination of a cross-currency financial instrument
partially offset by other currency related items of $2.2 million. In connection
with the termination, an additional $7.8 million was deferred from current
income and will be recognized as an interest yield adjustment over the remaining
life of the underlying debt.
-7-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The company's goal is to become one of the world's Great Brands,
delivering sustained, profitable growth. To achieve this goal the company
undertook a major restructuring to consolidate manufacturing and
distribution operations, simplify the organizational structure and make
other changes to position itself as a low cost producer. The savings
associated with those changes were targeted for reinvestment in growth
initiatives such as new product and brand development. As of September
1999, most of the benefits originally anticipated from those initiatives
have been realized. The company believes it has made substantial
progress toward becoming a great brand and remains committed to its
objective of delivering sustained, profitable growth. The company is in
the process of developing new sales and marketing programs to stimulate
sales growth and developing new cost reduction and restructuring
initiatives to lower the company's cost structure, improve customer
service, and generate earnings growth.
Net sales were $692 million, a slight increase from $690 million in the
same quarter last year. ZAG Industries Ltd. ("ZAG"), which was acquired
in August 1998, contributed 2% to the sales growth. This growth was
offset by a 1% reduction in sales from the net effect of pricing and
foreign currency translation and a 1% decline due to unit volume
declines. Only a nominal volume decline was experienced despite
bankruptcy proceedings for a major U.S. retail customer and a work
stoppage, since resolved, in the French hand tools business. In addition,
the weaker Latin American market continued to negatively impact the
company's sales volume. These declines in sales volume were offset,
though not completely, by a double-digit volume increase in the U.S.
residential doors business and volume improvements in the U.S. industrial
mechanics tools and fastening systems businesses.
Net sales were $2,061 million for the first nine months of 1999, a slight
increase from the same period last year. ZAG contributed 3% to this
sales growth, which was partially offset by reduced sales volume from
ongoing businesses. Lingering effects of poor 1998 fill rates in hardware
and tools continue to depress sales even though many of those operational
problems have been corrected. European sales volume was negatively
affected earlier in 1999 by inefficiencies stemming from the closure of a
European distribution center and pricing competition in the European
fastening system business. Additionally, a weak economy in Latin America
and difficulties associated with the implementation of SAP software
during the second quarter of 1999 in a portion of the company's doors
business contributed to the lower sales volumes. These declines in sales
volume were offset by a double-digit volume increase in the U.S.
residential doors business and volume improvement in the U.S. fastening
systems businesses.
The company's restructuring initiatives have required expenditures which
affect the financial statements. Restructuring-related transition costs
are costs resulting from these initiatives that are classified as period
operating expenses within cost of sales or selling, general and
administrative expense. These include the costs of moving production
equipment, operating duplicate 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
-8-
costs based on whether the costs are unusual in nature, incurred only
because of restructuring initiatives and are expected to cease when the
transition activities end. In addition, the company is incurring costs to
remediate its computer and related systems so that these systems will
function properly with regard to date issues related to Year 2000
("Y2K"). Because the presence of restructuring charges, restructuring-
related transition costs and non-recurring Y2K remediation costs obscure
the underlying trends within the company's business, the company also
provides information on its results excluding these identifiable costs.
These pro forma or "core" results are the basis of business segment
information. In addition, the narrative regarding results of operations
has been expanded to provide information as to the effects of these items
on each financial statement category. Effective in the third quarter
1999, these costs are no longer disclosed separately as they are
significantly lower than amounts previously incurred and are being phased
out completely. Prior period information continues to exclude these
costs for consistency with information previously disclosed.
The company reported gross profit of $245 million, or 35.4% of net sales
in the third quarter of 1999. This represented an increase from $236
million, or 34.3% of net sales, reported in the third quarter of 1998.
Core gross profits for the third quarter of 1998 excluding $5 million of
restructuring-related transition costs, primarily for plant
rationalization activities, were 35.0% of net sales. The improvement in
gross margins was principally due to improved cost management,
principally in Mechanics Tools and Hand Tools manufacturing operations.
The company reported gross profit of $708 million, or 34.3% of net sales
for the first nine months of 1999 compared to 34.9% of net sales in 1998.
Included in the cost of sales for 1999 was $20 million of restructuring-
related transition costs, primarily for plant rationalization activities,
as compared with $12 million recorded in the same period of 1998. Core
gross profits were 35.3% of net sales, compared with 35.5% for the first
nine months of 1998. During this period of 1999, the productivity savings
from restructuring and centralized procurement activities were almost
entirely offset by production and distribution inefficiencies.
Selling, general and administrative expenses were $167 million, or 24.1%
of net sales, in the third quarter of 1999, as compared with $173
million, or 25.0% of net sales in the third quarter of 1998. The decrease
in spending is attributed to lower spending on restructuring-related
transition and other non-recurring costs, which was $20 million in 1998.
Selling, general and administrative expenses on a core basis for the
third quarter last year were $152 million. The increase was the result
of Y2K costs, the Zag acquisition, higher selling and administrative
costs inherent in the Mac Direct program, implementation of new sales and
marketing initiatives designed to drive sales growth in retail channels,
increased information management infrastructure costs, and increased
reserves for uncollectible accounts receivable.
Selling, general and administrative expenses were $522 million, or 25.3%
of net sales, in the nine month period of 1999, as compared with $510
million, or 24.8% of net sales in 1998. Restructuring-related transition
and other non-recurring costs were $35 million in 1999 compared to $46
million in 1998. On a core basis, selling, general and administrative
expenses increased to $487 million in 1999 from $464 million in 1998.
This increase is primarily the result of the Zag acquisition and higher
selling and administrative costs inherent in the Mac Direct program.
-9-
Net interest expense was $7 million in the third quarter of 1999 and $22
million for the first nine months of 1999 compared to $7 million and $17
million, respectively, for the same periods in 1998. The increase in the
nine-month comparison is attributed to the increased level of debt
associated with the acquisition of ZAG and the funding of working capital
increases.
Other-net of $6 million income in the third quarter of 1999 and $1
million expense for the nine month period of 1999 compared to expense of
$3 million and $10 million, respectively, for the same periods in 1998.
This reduction in 1999 expense is primarily attributed to a gain
realized during the third quarter of 1999 upon the termination of a
cross-currency financial instrument.
The company's 1999 effective annual income tax rate was 35.0% for the
third quarter and first nine months versus 37.5% for the similar periods
last year. This reduction reflected the continued benefit of structural
changes implemented in late 1998, as well as an increase in the company's
ability to utilize foreign tax credits associated with a higher portion
of the company's taxable income being earned overseas.
Net earnings for the third quarter were $50 million, or $.56 per diluted
share, compared with the prior year's net income of $33 million, or $.37
per diluted share. Net earnings on a core basis for 1998, would have been
$49 million, or $.55 per diluted share.
Net earnings for the first nine months of 1999 were $106 million, or
$1.18 per diluted share, compared with the prior year's net income of
$112 million, or $1.24 per diluted share. Net earnings on a core basis,
would have been $142 million, or $1.58 per diluted share in the first
nine months of 1999 compared with $148 million, or $1.64 per diluted
share in 1998.
Business Segment Results
The Tools segment includes carpenters, mechanics, pneumatic and hydraulic
tools as well as tool sets. The Doors segment includes commercial and
residential doors, both automatic and manual, as well as closet doors and
systems, home decor and door and consumer hardware. The company assesses
the performance of its business segments using core operating profit,
which excludes restructuring charges, restructuring-related transition
and other non-recurring costs. As discussed previously, effective this
quarter, these costs are no longer analyzed separately from reported
results. Prior period information continues to exclude these costs for
consistency with information previously disclosed. Segment eliminations
are also excluded.
As reflected in the table, "Business Segment Information", Tools sales
in the third quarter of 1999 were $526 million, down 2% from the third
quarter last year. Sales were positively impacted by the ZAG
acquisition, which generated a 2% increase and by volume improvements in
the U.S. industrial mechanics tools and fastening systems businesses.
These increases were offset by lower unit volume in hand tools businesses
in Europe and Latin America, fastening systems business in Europe, and
hydraulic tools. The Tools segment core operating profit was 12.8% of net
sales for the third quarter of 1999, compared with 13.5% of net sales in
the same period last year. This decline in operating profit reflects the
effect of higher selling, general and administrative costs, including new
sales and marketing initiatives designed to drive retail sales growth and
increased provisions for uncollectible accounts receivable. These cost
increases combined with effects of customer service related cost
-10-
inefficiencies contributed to the decline in core operating profits for
the nine month period which were $208 million, or 13.1% of net sales,
compared to $218 million, or 13.8% of net sales in 1998.
Doors segment sales increased to $166 million, approximately 8% above
1998's third quarter. This segment was led by double-digit unit volume
sales of U.S. residential entry doors and U.S. home decor products. The
Doors segment core operating profit decreased to 6.5% of net sales in the
third quarter of 1999, compared with 11.1% of net sales in the same
period last year. This decline was largely due to the Hardware business
being burdened with costs of relocating production to low-cost locations,
meeting customer service delivery requirements, and increased provisions
for uncollectible accounts receivable due to a customer bankruptcy. These
issues combined with difficulties associated with a SAP software
implementation in the Access Technologies business resulted in decreased
core operating profits for the nine month period of $33 million, or 6.8%
of net sales, compared to $46 million, or 9.7% of net sales in 1998.
Restructuring
At January 2, 1999, reserve balances related to the company's
restructuring initiatives were $154 million, of which $44 million related
to the write-down of impaired assets. The remaining $110 million included
$73 million related to severance, and $37 million to environmental
remediation and other exit costs. For the nine months ended October 2,
1999, asset write-downs of $12 million, severance of $31 million and
payments for other exit costs of $14 million reduced these reserves. The
reserve balances at the end of the third quarter were $97 million, of
which $32 million related to the write-down of impaired assets, $42
million related to severance, and $23 million to environmental
remediation and other exit costs.
The company is currently re-evaluating the scope of initiatives
encompassed by the remaining restructuring reserves. The objective of
the review is to determine which restructuring initiatives should be
completed and also to identify new initiatives to further lower the
company's cost structure. The outcome of this effort, which will be
completed prior to year-end 1999, will be a reversal of reserves for
actions the company will not complete, offset to some extent by a charge
for reserves related to new initiatives. Until the detailed planning has
been completed the full effect will not be known, however, based on the
current stage of planning, management anticipates that the net impact
will not result in a charge to operations.
FINANCIAL CONDITION
Liquidity and Sources of Capital
In the third quarter of 1999, the company generated $92 million in
operating cash flow compared to $4 million operating cash flow used in
the third quarter of 1998. This significant increase was driven by better
working capital management and the elimination of restructuring-related
transition costs. For the nine months of 1999, the company's receivables
have increased by $59 million, inventory has declined by $14 million, and
accounts payable has increased by $32 million. The receivables increase
is primarily attributable to the Zag, U.S. residential entry doors and
Mac Tools growth. The inventory decrease is primarily attributed to SKU
reductions combined with improved order fill rates that have approached
customer-required levels in a number of the company's business units. The
accounts payable increase is attributed to paying vendors based on
estimated date of receipt of goods or services versus invoice date, which
was the past practice.
-11-
Capital expenditures were $18 million for the third quarter of 1999
representing an increase over the $14 million in third quarter of last
year. Investment in capital during 1998 was lower than traditional levels
and lower than depreciation and amortization. Facility consolidations,
continued outsourcing and the Stanley Production System (which focuses on
continuous improvement) collectively reduced the requirement for
operating capital. The level of spending has returned to more
traditional levels during 1999.
Strategic changes were made in the company's debt portfolio during early
1999. In 1998, funding for working capital and the acquisition of ZAG was
provided by increased short-term borrowings. Short-term sources of funds
were used at that time with the intent of subsequently securing medium
term financing for the acquisition component of the requirement. In the
first quarter 1999, the company issued $120 million of 5 year debt to
capitalize on the current rate environment and reduce its reliance on
short-term sources of funds.
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 or Y2K issue. The Y2K issue can arise at any point in the
company's supply, manufacturing, distribution and financial chains.
To address the potential impact of the Y2K problem on the company a Y2K
project office, was established in September 1997, and is staffed with
internal managers who are responsible for oversight and implementation of
the principal portions of the Y2K project. In addition, approximately 60%
of the internal information technology resources were committed to Y2K
remediation efforts. The scope of the project includes: (1) ensuring the
compliance of all applications, operating systems and hardware on
mainframe, PC and LAN platforms; (2) addressing issues related to
software and non-IT embedded systems used in plant and distribution
facilities; and (3) addressing the compliance of key suppliers and
customers. Each component of the project has four phases: inventory and
assessment of systems and equipment affected by the Y2K issue; definition
of strategies to address affected systems and equipment; remediation or
replacement of affected systems and equipment; and testing that each is
Y2K compliant.
(1) Application of Software and Hardware
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. Remediation or replacement and testing phases have been
completed for approximately 85% of information systems. Businesses not
yet completed with remediation and testing include Mac Tools, Proto,
Stanley-Vidmar, and Air Tools product lines. All remediation and testing
associated with those product lines is on track or ahead of schedule for
completion before the end of the year. In addition to the application
software and mainframe hardware, we have completed an inventory of all
PC's and related equipment and all planned remediation and testing is now
completed.
(2) Plant and Distribution Systems
With respect to addressing issues related to software and non-IT embedded
-12-
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, as well as such testing, as is
judged appropriate, has been completed.
(3) Suppliers and Vendors
The company relies on numerous third party suppliers in the operation of
its business. Interruption in the operations of any supplier due to Y2K
issues would affect company operations. The company has initiated
efforts to evaluate the status of its most critical suppliers' progress
and this process is almost complete. In addition, interruptions in
customers' operations due to Y2K issues would result in reduced sales,
increased inventory or receivable levels and cash flow reductions. While
these events are possible, the company's customer and supplier base is
broad enough to minimize the impact of the failure of any single
interface. The company continues to test its customer and vendor
interfaces and expects to be finished by year-end. The Company is in
compliance with all customer interfaces tested to date.
It is currently estimated that the aggregate cost of the company's Y2K
efforts, which include internal and incremental costs, will be
approximately $114 million. Approximately $106 million of
these costs have been spent to date. It is expected that no more than
25% of the total cost will be capitalized.
All of the company's major businesses have completed a general level of
contingency planning and those businesses whose remediation projects are
not yet completed are developing more detailed and comprehensive
contingency plans. These plans provide for process changes, alternative
methods of processing including manual, temporary inventory builds,
adjustments to staffing and other strategies to minimize disruption
caused by any potential Y2K failure.
Management expects that the company's Y2K project significantly reduces
the company's level of uncertainty about the Y2K problem, and reduces the
likelihood of risk of interruptions to routine business operations.
Additional discussion of the risks associated with potential Y2K failures
is provided in the last paragraph under Risk/Cautionary Statements.
Risk/Cautionary Statements
The statements contained in this Quarterly Report on Form 10-Q for the quarter
ended October 2, 1999 regarding the company's ability to achieve
operational excellence and deliver sustained, profitable growth (e.g., sales
growth at twice the industry rate, earnings growth in the low to mid teens and
dividend growth) are forward looking and inherently subject to risk and
uncertainty.
The Company's drive for operational excellence is focused on improving
manufacturing operations, implementing related control systems and
consolidating multiple manufacturing and distribution facilities. The success
of these initiatives is dependent on (1) the Company's ability to increase the
efficiency of its routine business processes, to implement process control
systems, and to develop and execute comprehensive plans for facility
consolidations, (2) the availability of vendors to perform outsourced
functions, (3) the successful recruitment and training of new employees,
(4) the resolution of any labor issues related to closing facilities, (5) the
need to respond to significant changes in product demand while any facility
consolidation is in process and (6) other unforeseen events.
-13-
The Company's ability to generate sustained, profitable growth is dependent on
successfully freeing up resources to fund new product and brand development
and new ventures to broaden its markets, and to defend market share in the
face of price and other competition. Success at developing new products will
depend on the ability of the new product development process to foster
creativity and identify viable new product ideas as well as the Company's
ability to attract new product engineers and to design and implement
strategies to effectively commercialize the new product ideas. The
achievement of growth through new ventures will depend upon the ability to
successfully identify, negotiate, consummate and integrate into operations
acquisitions, joint ventures and/or strategic alliances.
The Company's ability to achieve the objectives discussed above will be
affected by the installation and implementation of critical business
transaction systems associated with its Y2K compliance program prior to year-
end and by external factors. These external factors include pricing pressure
and other changes within competitive markets, the continued consolidation of
customers in consumer channels, increasing competition, changes in trade,
monetary and fiscal policies and laws, inflation, currency exchange
fluctuations, the impact of dollar/foreign currency exchange rates on the
competitiveness of products and recessionary or expansive trends in the
economies of the world in which the company operates.
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 are
based on management's best estimates. These estimates are based in part on
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 and the effectiveness of contingency
planning and execution). Due to the level of uncertainty inherent in Y2K
analysis and the complexity of the remediation activity, 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 completed project work is not effective, 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 failure
and/or resulting litigation will have a material adverse impact on the
company's results of operations, liquidity and financial condition.
-14-
PART II OTHER INFORMATION
Item 2. - Changes in Securities and Use of Proceeds
(c) Recent Sales of Unregistered Securities
(A) During the third fiscal quarter of 1999, 23,214 shares were issued to
certain participants under the Company's U.K. Savings Related Share Plan (the
"Savings Plan"). Under the Savings Plan, shares are issued to employees who
elect at the end of the five year savings period or upon termination of
employment to receive the accumulated savings in the form of shares of the
Company's stock rather than cash.
(B) Participation in the Savings Plan is offered to all employees of the
Company's subsidiaries in the United Kingdom.
(C) The total dollar value of the shares issued during the quarter was
$363,963.36.
Under the Savings Plan:
22,364 shares were issued at $15.5334 per share with an aggregate value
of $347,388.96.
574 shares were issued at $15.8834 per share with an aggregate value of
$9,117.07.
200 shares were issued at $24.15 per share with an aggregate value of
$4,830.00.
52 shares were issued at $33.1333 per share with an aggregate value of
$1,722.93.
24 shares were issued at $37.6833 per share with an aggregate value of
$904.40.
(D) 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 Plan 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.
(E) Under the Savings Plan, 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.
-15-
Item 6. - Exhibits and Reports on Form 8-K
(a) Exhibits
(1) See Exhibit Index on page 18.
(b) Reports on Form 8-K.
(1) Registrant filed a Current Report on Form 8-K, dated July
15, 1999, in respect of the Registrant's press release
announcing second quarter sales and discussing profit outlook.
(2) Registrant filed a Current Report on Form 8-K, dated July
21, 1999, in respect of the Registrant's press release
announcing second quarter results.
(3) Registrant filed a Current Report on Form 8-K, dated July 23,
1999, in respect of cautionary statements relating to certain
forward looking statements made at a presentation to analysts.
(4) Registrant filed a Current Report on Form 8-K, dated September
30, 1999, announcing the appointment of Donald R. McIlnay as
President, Consumer Sales Americas.
-16-
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 16, 1999 By: James M. Loree
James M. Loree
Vice President, Finance and
Chief Financial Officer
By: Theresa F. Yerkes
Theresa F. Yerkes
Vice President and
Controller (Chief Accounting
Officer)
-17-
EXHIBIT INDEX
EXHIBIT LIST
(4)(i) Amended and Restated Credit Agreement, dated October 21, 1998,
as amended and restated as of October 20, 1999, among The Stanley
Works, each lender that is a signatory thereto and Citibank, N.A.
as Agent for the Lenders.
(10)(i) Engagement Letter, dated August 26, 1999, between The Stanley Works
and Donald R. McIlnay.
(12) Computation of Ratio of Earnings to Fixed Charges
(27) Financial Data Schedule
-18-
CONFORMED COPY
___________________________________________________________________________
AMENDED AND RESTATED
CREDIT AGREEMENT
Dated as of October 21, 1998
Amended and Restated as of October 20, 1999
among
THE STANLEY WORKS
as Borrower
THE LENDERS REFERRED TO HEREIN,
as Lenders
and
CITIBANK, N.A.
as Agent
SALOMON SMITH BARNEY INC.
Arranger
___________________________________________________________________________
AMENDED AND RESTATED CREDIT AGREEMENT, dated as of October
21, 1998, amended and restated as of October 20, 1999, among THE STANLEY
WORKS (the "Borrower"); each of the lenders that is a signatory hereto
(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 a Credit Agreement
dated as of October 21, 1998 (as heretofore amended and modified, the "Existing
Credit Agreement"), providing, subject to the terms and conditions thereof, for
extensions of credit (by the making of loans) by the Lenders to the Borrower in
an aggregate principal amount not exceeding $250,000,000 at any one time
outstanding. The Borrower, the Lenders and the Agent wish to amend and restate
the Existing Credit Agreement; and accordingly, the parties hereto hereby agree
to amend the Existing Credit Agreement as set forth herein and to restate
the Existing Credit Agreement as so amended (as so amended and restated, the
"Amended and Restated Credit Agreement"):
Section 1. Definitions. Terms used but not otherwise defined herein have the
meanings given them in the Existing Credit Agreement.
Section 2. Amendments. Effective on the Effective Date (as defined below),
(i) the Existing Credit Agreement is hereby amended as set forth below, and
(ii) the Existing Credit Agreement is restated to read in its entirety as set
forth in the Existing Credit Agreement, which is hereby incorporated herein by
reference, with the amendments set forth below:
A. References in the Existing Credit Agreement to "this Agreement" and
words of similar import (including indirect references) shall be deemed to be
references to the Existing Credit Agreement as amended and restated hereby.
B. Section 1.01 of the Existing Credit Agreement is amended by inserting the
following definitions (or, in the case of any definition for a term that is
defined in the Existing Credit Agreement before giving effect to this Amendment
and Restatement, by amending and restating such definition to read in its
entirety as set forth below):
"Applicable Utilization Fee Rate" means, for each day on which the
Utilization Ratio exceeds 0.50 and (if the maturity of the Committed Advances
has been extended as provided in Section 2.07(c)) for each day after the
Termination Date regardless of the Utilization Ratio, a rate per annum equal to
(i) 0.1000% if on such date the Borrower's outstanding Long-Term Indebtedness
is rated A- or higher by Standard & Poor's Ratings Group, a division of McGraw-
Hill, Inc. ("Standard & Poor's") and A3 or higher by Moody's Investors
Service, Inc. ("Moody's"), (ii) 0.1250% if on such date clause (i) is
inapplicable (including if such Long-Term Indebtedness is no longer rated by
either agency); provided that if the respective levels of the Borrower's
outstanding Long-Term Indebtedness credit ratings differ, the "Applicable
Utilization Fee Rate" will be determined based on the level one above that level
applicable to the lower of said credit ratings.
"Applicable Eurodollar Margin" means, with respect to any Interest
Period for each Eurodollar Rate Advance, (i) 0.1500% if on the date such
Eurodollar Rate Advance is made the Borrower's outstanding Long-Term
Indebtedness is rated A+ or higher by Standard & Poor's and A1 or higher by
Moody's, (ii) 0.1900% if on such date clause (i) is inapplicable and the
Borrower's outstanding Long-Term Indebtedness is rated A or higher by
Standard & Poor's and A2 or higher by Moody's, (iii) 0.2300% if on such date
clauses (i) and (ii) are inapplicable and the Borrower's outstanding Long-Term
Indebtedness is rated A- or higher by Standard & Poor's and A3 or higher by
Moody's, (iv) 0.4500% if on such date clauses (i), (ii) and (iii) are
inapplicable and the Borrower's outstanding Long-Term Indebtedness is rated BBB+
or higher by Standard & Poor's and Baa1 or higher by Moody's, (v) 0.4750% if
on such date clauses (i), (ii), (iii) and (iv) are 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 (vi) 0.6750% if on such date
clauses (i), (ii), (iii), (iv) and (v) are inapplicable (including if such Long-
Term Indebtedness is no longer rated by either agency); provided 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, the sum of (x) the rate determined according to the foregoing provisions
plus (y) 0.2500%; provided further that if the respective levels of the
Borrower's outstanding Long-Term Indebtedness credit ratings differ, the
"Applicable Eurodollar Margin" will be determined based on the level one above
that level applicable to the lower of said credit ratings.
"Applicable Facility Fee Rate" means, as of any date of payment of the
fee required by Section 2.03, a rate per annum equal to (i) 0.0500% if on such
date the Borrower's outstanding Long-Term Indebtedness is rated A+ or higher
by Standard & Poor's and A1 or higher by Moody's, (ii) 0.0600% if on such
date clause (i) is inapplicable and the Borrower's outstanding Long-Term
Indebtedness is rated A or higher by Standard & Poor's and A2 or higher by
Moody's, (iii) 0.0700% if on such date clauses (i) and (ii) are inapplicable
and the Borrower's outstanding Long-Term Indebtedness is rated A- or higher by
Standard & Poor's and A3 or higher by Moody's, (iv) 0.1000% if on such date
clauses (i), (ii) and (iii) are inapplicable and the Borrower's outstanding
Long-Term Indebtedness is rated BBB+ or higher by Standard & Poor's and Baa1 or
higher by Moody's, (v) 0.1500% if on such date clauses (i), (ii), (iii) and
(iv) are 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
(vi) 0.2000% if on such date clauses (i), (ii), (iii), (iv) and (v) are
inapplicable (including if such Long-Term Indebtedness is no longer rated by
either agency); provided that if the respective levels of the Borrower's
outstanding Long-Term Indebtedness credit ratings differ, the "Applicable
Facility Fee Rate" will be determined based on the level one above that level
applicable to the lower of said credit ratings.
"Termination Date" means the earlier of (a) October 18, 2000 or (b) the
date of termination in whole of the Commitments pursuant to Section 2.01(b) or
6.01.
"Utilization Ratio" means, at any time, the ratio of (i) the aggregate
outstanding principal amount of the Advances at such time to (ii) the aggregate
amount of the Commitments at such time.
C. Section 2.03(a) of the Existing Credit Agreement is amended by (i)
inserting "or (if the maturity of the Committed Advances has been extended as
provided in Section 2.07(c)) the Term Date" after the first reference to
"Termination Date" thereof and (ii) inserting "and (if the maturity of the
Committed Advances has been extended as provided in Section 2.07(c)) the Term
Date" after the second reference to "Termination Date" thereof.
D. Section 2.03 of the Existing Credit Agreement is amended by adding
new clause (c) at the end thereof as follows:
"(c) Utilization Fee. The Borrower shall pay to the Agent for the pro rata
account of the Lenders a utilization fee on the outstanding principal amount of
the Advances, for each day on which the Utilization Ratio exceeds 0.50 and (if
the maturity of the Committed Advances has been extended as provided in Section
2.07(c)) for each day after the Termination Date regardless of the Utilization
Ratio, at a rate per annum equal to the Applicable Utilization Fee Rate,
payable on each day on which a payment of interest is due under Section 2.05."
E. Section 2.07(c) of the Existing Credit Agreement is amended by deleting
the "." at the end thereof and adding new language at the end thereof as
follows:
"; and provided further that the outstanding principal amount of any
Committed Advances whose maturity has been extended to the Term Date
pursuant to this Section 2.07(c) shall bear interest at a rate per annum equal
to the sum of 0.2500% plus the interest rate otherwise applicable hereunder to
such principal amount in effect from time to time, payable on each day on which
a payment of interest is otherwise due hereunder."
F. Sections 4.01 of the Existing Credit Agreement is amended by adding new
clause (m) at the end thereof as follows:
"(m) Year 2000. The Borrower has (i) initiated a review and assessment
of all areas within its and each of its Subsidiaries' business and operations
(including those materially affected by suppliers and vendors) that could be
adversely affected by the risk that computer applications used by the Borrower
or any of its Subsidiaries (or suppliers and vendors) may be unable to recognize
and perform properly date-sensitive functions involving certain dates prior to
and any date after December 31, 1999 (the "Year 2000 Problem"), (ii) developed
plans and timetables for addressing the Year 2000 Problem on a timely basis and
(iii) to date, implemented those plans in accordance with such timetables as
amended to date. Based on the foregoing (x) each material supplier and vendor
contacted for such purpose by the Borrower or a Subsidiary of the Borrower has
represented to the Borrower or such Subsidiary, as the case may be, that the
computer applications of such supplier or vendor, as the case may be, that are
material to the Borrower's or any of its Subsidiaries' business or operations
are reasonably expected on a timely basis to be able to perform properly date-
sensitive functions for all dates before, on and after January 1, 2000 and (y)
the Borrower believes that except as set forth in the Borrower's report on Form
10-Q for the period ending July 3, 1999, all of the Borrower's and each of its
Subsidiaries' computer applications that are material to its or any of its
Subsidiaries' business and operations are reasonably expected on a timely basis
to be able to perform properly date-sensitive functions for all dates before, on
and after January 1, 2000, except to the extent that a failure to do so could
not reasonably be expected to have a Material Adverse Effect."
G. Schedule I of the Existing Credit Agreement is amended to read in its
entirety as set forth in Schedule I hereto.
Section 3. 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 the Amended and Restated Credit Agreement and as if each reference
in said Section 4.01 to "December 30, 1995" were instead a reference to "January
3, 1999" 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 the
representations and warranties in this Section 3 shall constitute an
Event of Default under Section 6.01(b) of the Amended and Restated Credit
Agreement).
Section 4. Conditions to Effectiveness. The amendment and restatement set
forth in Section 2 hereof 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 Lenders of the occurrence of the Effective Date):
(a) Documents. The Agent shall have received the following documents
(with 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 Amendment and
Restatement, duly executed and delivered by the Borrower, the Agent and the
Lenders.
(2) Authority and Approvals. Certified copies of the resolutions of
the Board of Directors of the Borrower (or equivalent documents) authorizing
and approving this Amendment and Restatement and the Notes, authorizing
Borrowings under the Amended and Restated Credit 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 Amendment and Restatement and the Notes.
(3) 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 Amendment and Restatement and the
Notes and the other documents to be delivered hereunder.
(4) 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.
(5) 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 3 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 Amendment and Restatement (without the imposition of any conditions
except those that are acceptable to the Lenders) and that the same remain in
effect.
(c) Fees and Expenses. The Agent shall have received evidence satisfactory
to it that (i) the Borrower shall have paid in full all accrued fees, expenses
and interest due and payable to the Agent and the Lenders under the Existing
Credit Agreement, (ii) 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 Amendment and Restatement and (iii) the
Borrower shall have paid to the Agent for account of the Lenders such up-front
fees in connection with the execution of this Amendment and Restatement as the
Borrower and the Agent shall have agreed upon.
Section 5. Pro Rata Adjustments. The Borrower shall, on the Effective Date
(but only if any Advances are outstanding on said date), borrow Advances from
certain of the Lenders and/or (notwithstanding (i) the second sentence of
Section 2.07(a) of the Amended and Restated Credit Agreement requiring that
prepayments be made in accordance with said Section 2.07(a) and (ii) Section
2.09(a) of the Amended and Restated Credit Agreement requiring that payments
be made ratably in accordance with the principal amounts of the Advances held by
the Lenders) prepay Advances (together with all accrued and unpaid interest
thereon) such that, after giving effect thereto, the Advances (including,
without limitation, the principal amounts and Interest Periods thereof) shall be
held by the Lenders ratably in accordance with their respective
Commitments (after giving effect to this Amendment and Restatement).
Section 6. Miscellaneous. Except as herein provided, the Existing Credit
Agreement shall remain unchanged and in full force and effect. This Amendment
and Restatement 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 Amendment and Restatement by signing any such
counterpart. This Amendment and Restatement shall be governed by, and construed
in accordance with, the law of the State of New York.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment and
Restatement be duly executed and delivered as of the day and year first above
written.
BORROWER
THE STANLEY WORKS
By ___ /s/ C.A. Douglas_____________________
Name: C.A. Douglas
Title: Treasurer
AGENT
CITIBANK, N.A.
By __/s/ Carolyn A. Kee
Name: Carolyn A. Kee
Title: Vice President
LENDERS
CITIBANK, N.A.
By __/s/ Carolyn A. Kee
Name: Carolyn A. Kee
Title: Vice President
WACHOVIA BANK, N.A.
By __/s/ Terence A. Snellings____________
Name: Terence A. Snellings
Title: Senior Vice President
BANQUE NATIONALE DE PARIS
By __/s/ Sophie Revillard Kaufman_____
Name: Sophie Revillard Kaufman
Title: Vice President
By __/s/ Gwen Abbott_______________________
Name: Gwen Abbott
Title: Assistant Vice President
BARCLAYS BANK PLC
By __/s/ Terance Bullock_____________________
Name: Terance Bullock
Title: Vice President
FLEET NATIONAL BANK
By __/s/ Jeff Lynch______________
Name: Jeff Lynch
Title: Senior Vice President
ROYAL BANK OF CANADA
By __/s/ Lynne M. Litterini___________________
Name: Lynne M. Litterini
Title: Manager
MORGAN GUARANTY TRUST COMPANY
OF NEW YORK
By __/s/ Robert Bottamedi____________________
Name: Robert Bottamedi
Title: Vice President
MELLON BANK, N.A.
By __/s/ R. Jane Westrich___________
Name: R. Jane Westrich
Title: Vice President
THE NORTHERN TRUST COMPANY
By __/s/ James F.T. Monhart__________________
Name: James F.T. Monhart
Title: Senior Vice President
BANKERS TRUST COMPANY
By __/s/ Mary Kay Coyle_____________________
Name: Mary Kay Coyle
Title: Managing Director
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 $37,500,000.00
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
THE NORTHERN TRUST COMPANY $10,000,000.00
EXHIBIT A
[FORM OF OPINION OF GENERAL COUNSEL]
October 20, 1998
To each of the Lenders parties to the
Amended and Restated 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
Amendment and Restatement dated as of October 20, 1999 (the "Amendment and
Restatement") to the Credit Agreement dated as of October 21, 1998 (the
"Existing Credit Agreement and, as amended by the Amendment and Restatement,
the "Amended and Restated 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 4(a)(4) of the
Amendment and Restatement. Capitalized terms used herein and not otherwise
defined herein shall have the meanings set forth in the Amendment and
Restatement.
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 Amendment and
Restatement;
(b) copies of the Certificate of Incorporation and Bylaws of the Borrower;
(c) a certified copy of certain resolutions of the Board of Directors of the
Borrower;
(d) certificates from public officials in the State of Connecticut as to the
good standing of the Borrower in the State of Connecticut; and
(e) 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 Amendment and Restatement and the Amended and Restated Credit
Agreement. 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 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 paragraph 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) each Loan Document 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 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
Amended and Restated Credit Agreement insofar as this provision purports to
authorize a Person who has purchased a participation in Advances under the
Amended and Restated 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.
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,
August 26, 1999
Mr. Donald R. McIlnay
150 James Way
Advance, NC 27006
Dear Don:
I am pleased to confirm our offer for the position of President Consumer Sales,
for The Stanley Works. The position is based in Charlotte, NC and will report
to me.
Your base salary will be $300,000 per year, paid monthly. You will also
participate in the Corporate Management Incentive Compensation Program with a
guaranteed incentive payout of $120,000 for the year 2000, which is payable in
February 2001. You will also receive a pro-rated incentive payment for 1999,
which is payable in February 2000. An additional payment of up to $70,000 may
be made in February 2000 if required, so that the sum of the pro-rated bonus,
this additional payment, and the value of the 100,000 share stock option grant
above the option purchase price equals $100,000. You will be eligible for four
weeks of vacation.
On joining the Company, you will receive a grant of a 100,000 share stock option
under the terms of the Special Stock Option Plan. The Option Purchase Price will
be the price of the stock on the date of grant, which will be within 60 days of
your first day of work. Fifty-percent of this grant will vest 36 months
following the grant date and 50% will vest 60 months following the grant date.
Starting in 2000, your stock options will be targeted at the 13,000 level
annually. In addition, you will participate in our Long -Term Incentive Plan
at the senior level. Payment of this plan will be made in February 2003.
As an Officer of The Stanley Works, you will participate in current and future
executive benefit programs including our Financial Planning Service, Executive
Life Insurance Program, and the Executive Physical Program. The Company will
also lease and insure a car for your use. You may select any make and model up
to a Fair Market Value of $60,000.00. Details of the executive benefit programs
are attached.
In addition, the Company's Employee Stock Purchase Program (ESPP) allows you to
purchase company stock up to 15% of your base pay annually (capped at $25,000),
at 15% below the market price. The Company's 401k Plan will match 50% of
employee contributions up to 7% of your pay and the Company Defined
Contribution Pension Plan contributes either 3%, 5% or 9% of pay each year
depending upon your age.
Enclosed is a copy of a Consent Order with the Federal Trade Commission
regarding "Made in USA". Please read and sign the attached and return it to
the address indicated.
Page 2
Should a future relocation be required, the Company will cover the standard
relocation costs associated with the sale of your current home and the purchase
of a home at the new location.
You should be aware that your employment with Stanley will continue as long as
mutually acceptable, and as such is terminable by either the Company, or by
yourself, at any time and for any reason. Commencing employment is contingent
upon our Medical Department determining that you are physically suited for the
duties of the position. This includes a drug-screening test. Please contact
Skip Proctor, at 860-827-3935 to make the necessary arrangements.
The Stanley Works Health Plans become effective on the first of the month
following your date of employment. They will be explained to you in detail on
your first day of employment. You can usually extend your existing medical
coverage for a limited period of time to cover any lapse between the plans.
Don, I am delighted that you will join our team. There's a lot of exciting work
to be done and I know that you will make a great contribution to our success. If
you have any questions, please give me a call at 860-827-3990 or Mark Mathieu at
860-827-3818.
Please indicate your acceptance by signing below and return a copy to me.
Sincerely,
__________________________ _____________________________
John M. Trani Donald McIlnay
Chairman & CEO
cc: Carol L'Heureux, Executive Compensation & Relocation
Skip Proctor, Director HR - Sales America
Enclosures: Deferred Compensation Plan (December 19, 1995)
1990 Stock Option Plan (April 23, 1997)
Executive Life Insurance Program
Financial Planning Service
Executive Physical Program
Employee Benefits Booklet
FTC Consent Order
Executive Car Program
THE STANLEY WORKS AND SUBSIDIAIRES
COMPUTATION OF EARNINGS TO FIXED CHARGES
(In Millions of Dollars)
THIRD QUARTER NINE MONTHS
1999 1998 1999 1998
------ ------ ------ ------
Earnings before income taxes $77.4 $53.6 $162.9 $179.3
Add:
Interest expense 8.2 8.7 25.5 22.0
Portion of rents representative of
interest factor 3.8 2.9 11.3 8.7
Amortization of expense on long-
term debt 0.1 - 0.2 0.1
------ ------ ------ ------
Income as adjusted $89.5 $65.2 $199.9 $210.1
====== ====== ====== ======
Fixed charges:
Interest expense $8.2 $8.7 $25.5 $22.0
Portion of rents representative of
interest factor 3.8 2.9 11.3 8.7
Amortization of expense on long-
term debt 0.1 - 0.2 0.1
------ ------ ------ ------
Fixed charges $12.1 $11.6 $37.0 $30.8
====== ====== ====== ======
Ratio of earnings to fixed charges 7.40 5.62 5.40 6.82
====== ====== ====== ======
<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-01-2000
<PERIOD-END> OCT-02-1999
<CASH> 131,500
<SECURITIES> 0
<RECEIVABLES> 576,000
<ALLOWANCES> 0
<INVENTORY> 367,100
<CURRENT-ASSETS> 1,149,400
<PP&E> 1,186,900
<DEPRECIATION> 691,000
<TOTAL-ASSETS> 1,961,900
<CURRENT-LIABILITIES> 735,600
<BONDS> 299,200
0
0
<COMMON> 230,900
<OTHER-SE> 482,700
<TOTAL-LIABILITY-AND-EQUITY> 1,961,900
<SALES> 2,061,200
<TOTAL-REVENUES> 2,061,200
<CGS> 1,353,400
<TOTAL-COSTS> 1,353,400
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 21,900
<INCOME-PRETAX> 162,900
<INCOME-TAX> 57,000
<INCOME-CONTINUING> 105,900
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 105,900
<EPS-BASIC> 1.18
<EPS-DILUTED> 1.18
</TABLE>
