<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT
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(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- ---- ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended January 1, 2000
---------------
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ---- EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
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COMMISSION FILE 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)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Common Stock--Par Value $2.50 Per Share New York Stock Exchange
Pacific Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: None
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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [x].
The aggregate market value of Common Stock, par value $2.50 per share, held by
non-affiliates (based upon the closing sale price on the New York Stock
Exchange) on March 28, 2000 was approximately $2.2 billion. As of March 28,
2000, there were 87,488,834 shares of Common Stock, par value $2.50 per share,
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Shareowners for the year ended January 1,2000
are incorporated by reference into Parts I and II.
Portions of the definitive Proxy Statement dated March 14, 2000, filed with the
Commission pursuant to Regulation 14A, are incorporated by reference into Part
III.
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FORM 10-K
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Part I
Item 1. Business
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1(a) General Development of Business. (i) General. The Stanley Works
("Stanley" or the "Company") was founded in 1843 by Frederick T. Stanley and
incorporated in 1852. Stanley is a worldwide producer of tools and door products
for professional, industrial and consumer use. Stanley (Registered Trademark)
is a brand recognized around the world for quality and value.
In 1999, Stanley had net sales of $2.8 billion and employed
approximately 16,300 people worldwide. The Company's principal executive office
is located at 1000 Stanley Drive, New Britain, Connecticut 06053 and its
telephone number is (860) 225-5111.
(ii) Restructuring Activities/PlayBook 2000. In 1999, the Company
completed most of the restructuring initiatives announced in 1997. The 1997 plan
called for spending $340 million (approximately $240 million of restructuring
charges recorded in 1997 and $101 million of transition costs from 1997 to 1999)
to generate annual savings of $145 million, all of which was to be reinvested in
growth initiatives. To date the Company has closed 50 facilities and reduced net
employment by approximately 2,700 people to deliver annual benefits as
anticipated, however, these were largely offset by operational problems.
Reserves for restructuring activities as of the beginning of 1999 were
$154 million, of which $73 million related to severance, $44 million related to
asset write-downs, and $37 million related to environmental remediation and
other exit costs. In 1999, severance of $44 million, asset write-downs of $13
million, and payments for other exit costs of $17 million reduced these reserves
to $80 million. In the fourth quarter of 1999, the Company completed an
evaluation of these remaining reserves and determined that certain projects
would be cancelled. Accordingly, the Company reversed $62 million of reserves
established for such actions. Net reserves of $18 million, $12 million for
severance, $2 million for asset write-downs and $4 million for environmental and
other exit costs, will be utilized for costs generated from projects initiated,
however, not completed as of the end of 1999.
Also in the fourth quarter, new projects were approved as part of the
PlayBook 2000 initiative, including eight facility closures and the related
relocation of production, a reduction in workforce in administrative and sales
functions and the outsourcing of non-core activities as well as the asset
impairments related to those initiatives. These actions are expected to result
in a net employment reduction of approximately
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1,000 people.
The Company recorded restructuring charges related to these new
initiatives of $40 million ($32 million related to severance and other exit
costs, and $8 million related to asset write-downs).
1(b) Financial Information About Segments. Financial information
regarding the Company's business segments is incorporated herein by reference
from pages 32 and 36 of the Company's Annual Report to Shareowners for the year
ended January 1, 2000.
1(c) Narrative Description of Business. The Company's operations are
classified into two business segments: Tools and Doors.
Tools. The Tools segment manufactures and markets carpenters, mechanics,
pneumatic and hydraulic tools as well as tool sets. These products are
distributed directly to retailers (including, home centers, mass merchants and
retail lumber yards) and end users as well as through third party distributors.
Carpenters tools include hand tools such as measuring instruments, planes,
hammers, knives and blades, screwdrivers, saws, garden tools, chisels, boring
tools, masonry, tile and drywall tools, as well as electronic stud sensors,
levels, alignment tools and elevation measuring systems. The Company markets its
carpenters tools under the Stanley (Registered Trademark), FatMax (Trademark),
MaxGrip (Trademark), Powerlock (Registered Trademark), IntelliTools (Trademark),
Contractor Grade (Trademark), Dynagrip (Registered Trademark) and Goldblatt
(Registered Trademark) brands.
Mechanics tools include consumer, industrial and professional mechanics
hand tools, including, wrenches, sockets, electronic diagnostic tools, tool
boxes and high-density industrial storage and retrieval systems. Mechanics
tools are marketed under the Stanley (Registered Trademark), Proto (Registered
Trademark), Mac Tools (Registered Trademark), Husky (Registered Trademark),
Jensen (Registered Trademark), Vidmar (Registered Trademark), ZAG (Registered
Trademark) and Blackhawk (Trademark) brands.
Pneumatic tools include BOSTITCH (Registered Trademark) fastening tools
and fasteners (nails and staples) used for construction, remodeling, furniture
making, pallet manufacturing and consumer use and pneumatic air tools (these
are high performance, precision assembly tools, controllers and systems for
tightening threaded fasteners used chiefly by vehicle manufacturers).
Hydraulic tools include Stanley (Registered Trademark) hand-held hydraulic
tools used by contractors, utilities, railroads and public works as well as
LaBounty (Registered Trademark) mounted demolition hammers and compactors
designed to work on skid steer loaders, mini-excavators, backhoes and large
excavators.
Doors. The Doors segment manufactures and markets
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commercial and residential doors, both automatic and manual, as well as closet
doors and systems, home decor and door and consumer hardware. Products in the
Doors segment include, residential insulated steel, reinforced fiberglass and
wood entrance door systems, vinyl patio doors, mirrored closet doors and closet
organizing systems, automatic doors as well as related door hardware products
ranging from hinges, hasps, bolts and latches to shelf brackets. Door products
are marketed under the Stanley (Registered Trademark), Magic-Door (Registered
Trademark), Welcome Watch (Trademark), Stanley-Acmetrack (Trademark), Monarch
(Registered Trademark) and Acme (Registered Trademark) brands and are sold
directly to end users and retailers as well as through third party
distributors.
Competition. The Company competes on the basis of its reputation for
product quality, its well-known brands, its commitment to customer service and
strong customer relationships, the breadth of its product lines and its
emphasis on product innovation.
The Company encounters active competition in all of its businesses from
both larger and smaller companies that offer the same or similar products and
services or that produce different products appropriate for the same uses. The
Company has a large number of competitors, however, aside from a small number
of competitors in the consumer hand tool and consumer hardware business who
produce a range of products somewhat comparable to the Company's, the majority
of its competitors compete only with respect to one or more individual products
within a particular line. The Company believes that it is the largest
manufacturer of hand tools in the world featuring a broader line than any other
toolmaker. The Company also believes that it is the leader in the manufacture
and sale of pneumatic fastening tools and related fasteners to the
construction, furniture and pallet industries as well as the leading
manufacturer of hand-held hydraulic tools used for heavy construction,
railroads, utilities and public works. In the Doors segment, the Company
believes that it is a U.S. leader in the manufacture and sale of insulated
steel residential entrance doors, commercial hardware products, mirrored closet
doors and hardware for sliding, folding and pocket doors and the U.S. leader in
the manufacture, sale and installation of power operated sliding doors.
Customers. A substantial portion of the Company's products are sold
through home centers and mass merchant distribution channels in the U.S. In
1999, approximately 15% of the Company's consolidated sales in both the Tools
and Doors segments were to Home Depot. Because a consolidation of retailers
in the home center and mass merchant distribution channel is occurring, these
customers constitute a growing percent of the Company's sales and are important
to the Company's operating results. While this consolidation and the domestic
and international expansion of these large retailers provide the Company with
opportunities for growth, the increasing size and importance of individual
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customers creates a certain degree of exposure to potential volume loss. The
loss of Home Depot as well as certain of the other larger home centers as
customers would have a material adverse effect on each of the Company's business
segments until either such customers are replaced or the Company makes the
necessary adjustments to compensate for the loss of business.
Despite the trend toward customer consolidation, the Company has a
diversified customer base and is seeking to broaden its customer base further in
each business segment by identifying and seeking new channels and customers that
it does not currently serve.
Raw Materials. The Company's products are manufactured of steel and
other metals, wood and plastic. The raw materials required are available from a
number of sources at competitive prices and the Company has multi-year contracts
with many of its key suppliers. The Company has experienced no difficulties in
obtaining supplies in recent periods.
Backlog. At February 5, 2000, the Company had $149 million in unfilled
orders compared with approximately $141 million in unfilled orders at February
6, 1999. All these orders are reasonably expected to be filled within the
current fiscal year. Most customers place orders for immediate shipment and as
a result, the Company produces primarily for inventory, rather than to fill
specific orders.
Patents and Trademarks. Neither business segment is dependent, to any
significant degree, on patents, licenses, franchises or concessions and the loss
of these patents, licenses, franchises or concessions would not have a material
adverse effect on either business segment. The Company owns numerous patents,
none of which are material to the Company's operations as a whole. These patents
expire from time to time over the next 17 years. The Company holds licenses,
franchises and concessions, none of which individually or in the aggregate is
material to the Company's operations as a whole. These licenses, franchises and
concessions vary in duration from one to 17 years.
The Company has numerous trademarks that are utilized in its businesses
worldwide. The STANLEY (Registered Trademark) and STANLEY (in a notched
rectangle) (Registered Trademark) trademarks are material to both business
segments.
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These well-known trademarks enjoy a reputation for quality and value
and are among the world's most trusted brand names. The Company's tagline,
"Make Something Great(Trademark)" is the centerpiece of the Company's brand
strategy for both segments. In the Tools segment, the Bostitch (Registered
Trademark), Powerlock (Registered Trademark), Tape Rule Case Design
(Powerlock) (Registered Trademark), LaBounty (Registered Trademark), Mac
Tools (Registered Trademark), Proto (Registered Trademark), Jensen (Registered
Trademark), Goldblatt (Registered Trademark) and Vidmar (Registered Trademark)
trademarks are also material to the business.
Environmental Regulations. The Company is subject to various
environmental laws and regulations in the U.S. and foreign countries where it
has operations. Future laws and regulations are expected to be increasingly
stringent and will likely increase the Company's expenditures related to
environmental matters.
The Company is a party to a number of proceedings before federal and
state regulatory agencies relating to environmental remediation. Additionally,
the Company, along with many other parties, has been named as a potentially
responsible party ("PRP") in a number of administrative or judicial proceedings
for the remediation of various waste sites, including 11 Superfund sites.
Current laws potentially impose joint and several liability upon each PRP. In
assessing its potential liability at these sites, the Company has considered the
following: the solvency of the other PRP's, whether responsibility is being
disputed, the terms of existing agreements, experience at similar sites, and the
fact that its volumetric contribution at these sites is relatively small.
The Company's policy is to accrue environmental investigatory and
remediation costs for identified sites when it is probable that a liability has
been incurred and the amount of loss can be reasonably estimated. The amount of
liability recorded is based on an evaluation of currently available facts with
respect to each individual site and includes such factors as existing
technology, presently enacted laws and regulations, and prior experience in
remediation of contaminated sites. The liabilities recorded do not take into
account any claims for recoveries from insurance or third parties. As
assessments and remediation progress at individual sites, the amounts recorded
are reviewed periodically and adjusted to reflect additional technical and legal
information that becomes available. As of January 1, 2000, the Company had
reserves of approximately $18.3 million, primarily for remediation activities
associated with company-owned properties as well as for Superfund sites.
The amount recorded for identified contingent liabilities is based on
estimates. Amounts recorded are reviewed periodically and adjusted to reflect
additional technical and legal information that becomes available. Actual costs
to be incurred in future periods may vary from the estimates, given the inherent
uncertainties in evaluating environmental exposures. Subject to
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the imprecision in estimating future environmental costs, the Company does
not expect that any sum it may have to pay in connection with environmental
matters in excess of the amounts recorded will have a materially adverse effect
on its financial position, results of operations or liquidity.
Power-generating Subsidiary. Under the General Statutes of Connecticut,
the Company is deemed to be a "holding company" that controls an electric
company as a result of its being the sole shareholder of Farmington River Power
Co., a power-generating subsidiary of the Company since 1916. Under such
statute, no organization or person may take any action to acquire control of
such a holding company without the prior approval of the Connecticut Department
of Public Utility Control.
Employees. At January 1, 2000, the Company had approximately 16,300
employees, approximately 9,950 of whom were employed in the U.S. Of these U.S.
employees, approximately 12.6% are covered by collective bargaining agreements
with approximately 7 labor unions. The majority of the Company's hourly- and
weekly-paid employees outside the U.S. are covered by collective bargaining
agreements. The Company's labor agreements in the U.S. expire in 2000, 2001 and
2002. There have been no significant interruptions or curtailments of the
Company's operations in recent years due to labor disputes. The Company believes
that its relationship with its employees is good.
Cautionary Statements. The statements contained in the Annual Report to
Shareowners (incorporated by reference in this document) regarding the Company's
ability (i) to become a Great Brand and deliver sustained, profitable growth
(e.g., sales growth at twice the industry rate, earnings growth in the low- to
mid- teens, operating cash flow approximately equal to net earnings and
dividends increasing by at least one-half the Company's earnings growth), (ii)
to lower the overall cost structure to become more competitive (including
sourcing 26% of product cost from low-cost countries in 2000), (iii) to obtain
sales growth from the implementation of sales and marketing programs, (iv) to
drive working capital efficiency and continue to generate cash and (v) to avoid
future special charges at the level incurred in 1999 in the Mechanics Tools
business are forward looking and inherently subject to risk and uncertainty.
The Company's ability to lower its overall cost structure is dependent on the
success of various initiatives to improve manufacturing operations, to implement
related cost control systems and to source from and manufacture a higher
proportion of the Company's products in low-cost countries. The success of these
initiatives is dependent on the Company's ability to increase the efficiency of
its routine business processes, to develop and implement process control
systems, to develop and
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execute comprehensive plans for facility consolidations, the availability and
effectiveness of vendors to perform outsourced functions, the availability of
low cost raw materials of suitable quality from foreign countries, the
successful recruitment and training of new employees, the resolution of any
labor issues related to closing facilities, the need to respond to significant
changes in product demand while any facility consolidation is in process and
other unforeseen events. In addition, the Company's ability to leverage the
benefits of gross margin improvements is dependent upon maintaining selling,
general and administrative expense at 1999 levels (excluding fourth quarter
1999 special charges). The Company's ability to maintain the level of selling,
general and administrative expenses is dependent upon various process
improvement activities, the successful implementation of changes to the sales
organization and the reduction of transaction costs.
The Company's ability to achieve sales growth is dependent upon a number of
factors, including: (i) the ability to recruit and retain a sales force
comprised of employees and manufacturers reps, (ii) the success of the Company's
sales and marketing programs to increase retail sell through and stimulate
demand for the Company's products, (iii) the ability of the sales force to adapt
to changes made in the sales organization and achieve adequate customer
coverage, (iv) the ability of the company to fulfill increased demand for its
products, (v) the absence of pricing pressures from customers and competitors
and the ability to defend market share in the face of price competition, (vi)
the ability to improve the cost structure in order to fund new product and brand
development and (vii) the acceptance of the Company's new products in the
marketplace as well as the ability to satisfy demand for these products.
The Company's ability to drive working capital efficiency and continue to
generate cash is dependent on the continued success of improvements in processes
to manage inventory and receivable levels.
The Company's ability to avoid future special charges related to its Mechanics
Tools business at the level incurred in 1999 is dependent upon the success of
the operating mechanisms and systems being implemented to provide the necessary
controls over and visibility to the business.
The Company's ability to achieve the objectives discussed above will also be
affected 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
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recessionary or expansive trends in the economies of the world in which the
company operates.
1(d) Financial Information About Geographic Areas. Geographic area
information on page 36 of the Annual Report to Shareowners for the year ended
January 1, 2000 is incorporated herein by reference.
In addition, approximately 17% of the Company's long-lived assets are related to
its Israeli operations.
Item 2. Properties.
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As of January 1, 2000, Registrant and its subsidiaries owned or leased
facilities for manufacturing, distribution and sales offices in 30 states and 31
foreign countries. The Registrant believes that its facilities are suitable and
adequate for its business.
A summary of material locations (over 50,000 square feet) that are
owned by the Registrant and its subsidiaries are:
Tools
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Phoenix, Arizona; Visalia, California; Clinton and New Britain,
Connecticut; Shelbyville, Indiana; Two Harbors, Minnesota; Hamlet, North
Carolina; Columbus, Georgetown and Sabina, Ohio; Allentown, Pennsylvania; East
Greenwich, Rhode Island; Cheraw, South Carolina; Shelbyville, Tennessee; Dallas
and Wichita Falls, Texas; Pittsfield and Shaftsbury, Vermont; Ingleburn,
Australia; Smiths Falls, Canada; Pecky, Czech Republic; Ecclesfield, Hellaby,
Manchester and Sheffield, England; Besancon Cedex, France; Wieseth, Germany;
Chihuahua and Puebla, Mexico; Wroclaw, Poland; Taichung Hsien, Taiwan; and
Amphur Bangpakong, Thailand.
Doors
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Chatsworth and San Dimas, California; Farmington and New Britain,
Connecticut; Richmond, Virginia; Brampton, Canada; Sheffield, England;
Marquette, France and Zhongshan City, Peoples Republic of China.
A summary of material locations (over 50,000 square feet) that are
leased by the Registrant and its subsidiaries are:
Tools
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Miami, Florida; Covington, Georgia; Kannapolis, North Carolina;
Cleveland and Columbus, Ohio; Milwaukie, Oregon; Carrollton, Texas; Burlington
and Smith Falls Canada; and Worsley and Northampton, England; Biassono, Italy;
Heidelberg West,
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Australia and Izraelim, Israel.
Doors
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Tupelo, Mississippi; Charlotte and Kannapolis, North Carolina;
Winchester, Virginia; and Langley and Oakville, Canada.
Item 3. Legal Proceedings.
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In the normal course of business, the Company is involved in various
lawsuits, claims, including product liability and distributor claims, and
administrative proceedings. The Company does not expect that the resolution of
these matters will have a materially adverse effect on the Company's
consolidated financial position, results of operations or liquidity.
The Company has recently discovered potential violations of the East
Greenwich, Rhode Island facility's air emissions permit. In the past, the
facility by-passed air emissions control equipment when such equipment
periodically malfunctioned. This practice may constitute a violation of the air
permit. On November 23, 1999, the Company voluntarily reported the potential
violations to the Rhode Island Department of Environmental Management ("RIDEM")
pursuant to the Rhode Island Environmental Compliance Incentive Act (the "Act").
Under circumstances specified in the Act, a party that voluntarily reports
violations may receive immunity from penalties (except for economic gain) for
violations discovered during voluntary audits or during environmental compliance
programs. RIDEM has not responded to the Company's disclosure. The Company
cannot predict at this time whether RIDEM will find that the voluntary
disclosure meets the requirements for immunity under the Act. If the Company
does not receive immunity under the Act, significant penalties could be imposed.
The Company cannot predict at this time the amount of such penalties. In either
case, the Company could be subject to penalties to off-set any economic gain
realized by the Company from the non-compliance.
The Company's New Britain, Connecticut Hardware facility is the subject
of the ongoing threatened enforcement action by the United States Environmental
Protection Agency (the "US EPA") in connection with waste materials sent to a
disposal site in Canada. The waste materials were analyzed at the disposal site
and apparently contain PCBs. The Company was not aware the waste materials
contained PCBs. The export of PCB-containing wastes to Canada is prohibited by
the federal Toxic Substances Control Act ("TSCA"). TSCA also prohibits the
import of PCB-containing wastes to the United States from Canada. The waste
materials are being held at the disposal site in Canada pending a review by the
US EPA and the Canadian environmental authorities.
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The Company expects that the authorities will allow the Company to
retrieve the waste materials for proper disposal in the United States. The
Company also expects that the US EPA will impose a penalty on the Company. TSCA
provides for civil penalties of up to $25,000 per day for violations. The
Company does not expect that it will receive the maximum penalty for the
unintentional violations but it cannot at this time, predict with certainty the
amount of the penalty that will be imposed. Any penalty that is imposed is not
expected to have a materially adverse effect on the Company's consolidated
financial position, results of operations or liquidity.
Item 4. Submission of Matters to a Vote of Security Holders.
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No matter was submitted during the fourth quarter of the Registrant's
last fiscal year to a vote of security holders.
Executive Officers. The following is a list of the executive officers
of the Registrant as of January 1, 2000:
<TABLE>
<CAPTION>
Elected
Name, Age, Birth date Office to Office
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<S> <C> <C>
J.M. Trani (55) Chairman and Chief Executive Officer. 12/31/96
(3/15/45) Joined Stanley December 31, 1996;
1986 President and Chief Executive
Officer of GE Medical Systems.
W.D. Hill (50) Vice President, Engineering. Joined 9/17/97
(9/18/49) Stanley August 1997; 1996 Director
Product Management-Tool Group,
Danaher Tool; 1994 Vice President,
Product Development Global Accessories,
The Black & Decker Corporation; 1992
Vice President Product Development-N.A.
Power Tools, The Black & Decker
Corporation.
S.G.H. Kranendijk (48) President, Europe. Joined Stanley 12/16/98
(12/29/51) August 1998; 1997 Chief Executive
Officer Poland, Baltics and Belarus,
Procter & Gamble, Poland; 1994 Vice
President and General Manager
laundry, cleaning and paper, Procter &
Gamble, Germany.
K.O. Lewis (46) Vice President, Marketing and Brand 11/3/97
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(5/28/53) Management. Joined Stanley
November 1997; 1996 Executive Vice
President Strategic Alliances,
Marvel Entertainment Group; 1986
Director Participant Marketing,
Walt Disney Attractions.
J.M. Loree (41) Vice President, Finance and Chief 7/14/99
(6/14/58) Financial Officer. Joined Stanley
July 1999;1997 Vice President,
Finance & Strategic Planning, GE
Capital Auto Financial Services;
1995 President & Chief
Executive Officer, GE Capital
Modular Space; 1993 Vice
President, Corporate Sourcing
and Business Services, GE
Capital Corporation.
M.J. Mathieu (48) Vice President, Human Resources. 9/17/97
(2/20/52) Joined Stanley September 1997;
1996 Manager-Human Resources,
GE Motors & Industrial Systems;
1994 Consultant-Executive Staffing,
General Electric Company; 1989
Consultant-Union Relations,
General Electric Company.
D.R. McIlnay (49) President, Consumer Sales Americas 9/29/99
(6/11/50) Joined Stanley October 1999; 1997
President & Chief Executive
Officer, The Gibson-Homans
Company; 1993 President,
Levolor Home Fashions, a
Newell Company.
R.L. Newcomb (56) Vice President-Operations. Joined 5/19/99
(8/1/43) Stanley June 1999; May 1998
Consultant, Huffy Corporation;
January 1998 Vice President
Operations Kaiser Aluminum
Engineered Products; 1996 Vice
President Manufacturing,
Sunbeam Corporation; 1994 Vice
President Operations, Black &
Decker Worldwide Household
Products.
P.W. Russo (46) Vice President, Strategy and 9/18/95
(5/23/53) Development. Joined Stanley in
1995; 1991 Co-Chairman and
Co-Chief Executive Officer, SV
Corp. (formerly Smith Valve Corp.);
1988 Co-founder and Managing
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Director, Cornerstone Partners
Limited.
J.E. Turpin (53) Vice President, Operational Excellence. 4/23/97
(6/9/46) Joined Stanley in 1970; 1995 Vice
President Operations, The Stanley
Works; 1992 President & General
Manager, Stanley Air Tools.
S.S. Weddle (61) Vice President, General Counsel 1/1/88
(11/9/38) and Secretary. Joined Stanley
in 1978.
T.F. Yerkes (44) Vice President and Controller. Joined 7/1/93
(9/9/55) Stanley in 1989.
</TABLE>
Executive officers serve at the pleasure of the Board of Directors. Unless
otherwise indicated, each officer has had the same position with the Registrant
for five years.
Part II
Item 5. Market for the Registrant's Common Stock and Related
Stockholder Matters. Registrant incorporates by reference the line item
"Shareowners of record at end of year" from pages 26 and 27 and the material
captioned "Investor and Shareowner Information" on page 53 of its Annual Report
to Shareowners for the year ended January 1, 2000.
Recent Sales of Unregistered Securities
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(A) During the fourth fiscal quarter of 1999, no shares were issued to certain
participants in the Company's German Savings Related Share Plan (the "German
Savings Plan") and 3,988 shares were issued under the Company's U.K. Savings
Related Share Plans (the "U.K. Savings Plan" and, collectively with the German
Savings Plan, the "Savings Plans"). Under the Saving Plans, 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 Plans are offered to all employees of the
Company's subsidiaries in the United Kingdom and Germany.
(C) The total dollar value of the shares issued during the quarter was
$73,682.63.
Under the U.K. Savings Plan:
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638 shares were issued at $15.5334 per share with an aggregate value of
$9,910.31
2,260 shares were issued at $15.8834 per share with an aggregate value
of $35,896.48
883 shares were issued at $24.15 per share with an aggregate value of
$21,324.45
171 shares were issued at $33.1333 per share with an aggregate value of
$5,665.79
36 shares were issued at $24.60 per share with an aggregate value of
$885.60
(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 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.
(E) 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.
Item 6. Selected Financial Data. Registrant incorporates by reference
pages 26 and 27 of its Annual Report to Shareowners for the year ended January
1, 2000.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations. Registrant incorporates by reference pages 30 through 35
of its Annual Report to Shareowners for the year ended January 1, 2000.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Registrant incorporates by reference the material captioned "Market Risk" on
pages 33-34 and Footnote I on page 44 of its Annual Report to Shareowners
for the year ended January 1, 2000.
- 13 -
<PAGE>
Item 8. Financial Statements and Supplementary Data. The consolidated
financial statements and report of independent auditors included on pages 37 to
51 and page 29, respectively, of the Annual Report to Shareowners for the year
ended January 1, 2000 are incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure. None.
Part III
Item 10. Directors and Executive Officers of the Registrant.
Information regarding the Company's Executive Officers appears in the "Executive
Officers" section at the end of Part I of this report. In addition, the
Registrant incorporates by reference pages 1 through 4 of its definitive Proxy
Statement, dated March 14, 2000.
Item 11. Executive Compensation. Registrant incorporates by reference
the paragraph "Board Information-Compensation" on page 4 and the material
captioned "Executive Compensation" on pages 6 through 12 of its definitive Proxy
Statement, dated March 14, 2000.
Item 12. Security Ownership of Certain Beneficial Owners and
Management. Registrant incorporates by reference the material captioned
"Security Ownership" on pages 5 and 6 of its definitive Proxy Statement, dated
March 14, 2000.
Item 13. Certain Relationships and Related Transactions. None.
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K.
14(a) Index to documents filed as part of this report:
1. and 2. Financial Statements and Financial Statement Schedules.
The response to this portion of Item 14 is submitted as a separate section of
this report (see page F-1).
3. Exhibits
See Exhibit Index on page E-1.
- 14 -
<PAGE>
14(b) The following reports on Form 8-K were filed during the last
quarter of the period covered by this report:
<TABLE>
<CAPTION>
Date of Report Items Reported
-------------- ---------------
<S> <C>
October 20, 1999 Press Release dated October 20, 1999
announcing third quarter earnings and fourth
quarter dividend.
</TABLE>
14(c) See Exhibit Index on page E-1.
14(d) The response to this portion of Item 14 is submitted as a
separate section of this report (see page F-1).
-15-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
By John M. Trani
---------------------------------
John M. Trani, Chairman
and Chief Executive Officer
March 30, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated.
<TABLE>
<CAPTION>
<S> <C>
John M. Trani James M. Loree
- ------------------------------ ---------------------------------
John M. Trani, Chairman, James M. Loree, Vice President,
Chief Executive Officer and Finance and Chief Financial
Director Officer
Theresa F. Yerkes *
- ------------------------------ ---------------------------------
Theresa F. Yerkes, Vice President Stillman B. Brown, Director
and Controller
*
- ------------------------------ ---------------------------------
Edgar R. Fiedler, Director Mannie L. Jackson, Director
* *
- ------------------------------ ---------------------------------
James G. Kaiser, Director Eileen S. Kraus, Director
* *
- ------------------------------ ---------------------------------
Hugo E. Uyterhoeven, Director Walter W. Williams, Director
*
- ------------------------------
Kathryn D. Wriston, Director
</TABLE>
* By: Stephen S. Weddle
------------------------
Stephen S. Weddle
(As Attorney-in-Fact)
-16-
<PAGE>
FORM 10-K--ITEM 14(a) (1) and (2)
THE STANLEY WORKS AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
The following consolidated financial statements and report of independent
auditors of The Stanley Works and subsidiaries, included in the Annual Report of
the Registrant to its Shareowners for the fiscal year ended January 1, 2000, are
incorporated by reference in Item 8:
Report of Independent Auditors
Consolidated Statements of Operations--fiscal years ended January 1, 2000,
January 2, 1999 and January 3, 1998.
Consolidated Balance Sheets--January 1, 2000, January 2, 1999 and January 3,
1998.
Consolidated Statements of Cash Flows--fiscal years ended January 1, 2000,
January 2, 1999 and January 3, 1998.
Consolidated Statements of Changes in Shareowners' Equity--fiscal years
ended January 1, 2000, January 2, 1999 and January 3, 1998.
Notes to Consolidated Financial Statements.
The following consolidated financial statement schedule of The Stanley Works
and subsidiaries is included in Item 14(d):
F-4 Schedule II--Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore have been omitted.
F-1
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of The Stanley Works of our report dated January 26, 2000.
Our audits also included the consolidated financial statement schedule of The
Stanley Works listed in Item 14(a). This schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits. In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
We also consent to the incorporation by reference in the following registration
statements of our report dated January 26, 2000 with respect to the consolidated
financial statements incorporated herein by reference, and our report included
in the preceding paragraph with respect to the consolidated financial statement
schedule included in this Annual Report (Form 10-K) of The Stanley Works.
Registration Statement (Form S-8 No. 2-93025)
Registration Statement (Form S-8 No. 2-96778)
Registration Statement (Form S-8 No. 2-97283)
Registration Statement (Form S-8 No. 33-16669)
Registration Statement (Form S-3 No. 33-12853)
Registration Statement (Form S-3 No. 33-19930)
Registration Statement (Form S-8 No. 33-39553)
Registration Statement (Form S-8 No. 33-41612)
Registration Statement (Form S-3 No. 33-46212)
Registration Statement (Form S-3 No. 33-47889)
Registration Statement (Form S-8 No. 33-55663)
Registration Statement (Form S-8 No. 33-62565)
Registration Statement (Form S-8 No. 33-62567)
Registration Statement (Form S-8 No. 33-62575)
ERNST & YOUNG LLP
Hartford, Connecticut
March 24, 2000
F-2
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the following registration
statements pertaining to The Stanley Works Account Value Plan of our report
dated March 13, 2000, with respect to the financial statements and schedules of
The Stanley Works Account Value Plan for the year ended December 31, 1999
included as Exhibit 99(i) to this Annual Report (Form 10-K) for the fiscal year
ended January 1, 2000.
Registration Statement (Form S-8 No. 2-97283)
Registration Statement (Form S-8 No. 33-41612)
Registration Statement (Form S-8 No. 33-55663)
ERNST & YOUNG LLP
Hartford, Connecticut
March 24, 2000
F-3
<PAGE>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
THE STANLEY WORKS AND SUBSIDIARIES
Fiscal years ended January 1, 2000, January 2, 1999 and January 3, 1998
(In Millions of Dollars)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E
- -----------------------------------------------------------------------------------------------------------------------------------
ADDITIONS
------------------------------------
(1) (2)
Description Balance at Beginning Charged to Costs Charged to Other Deductions-Describe Balance at End
of Period and Expenses Accounts-Describe of Period
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Fiscal year ended January 1, 2000
Reserves and allowances deducted from
asset accounts:
Allowance for doubtful accounts:
Current $26.7 $31.3 $3.1 (B) $17.7 (A) $43.4
Noncurrent 0.6 - 0.1 (B) - 0.7
Fiscal year ended January 2, 1999
Reserves and allowances deducted from
asset accounts:
Allowance for doubtful accounts:
Current $19.8 $16.1 $0.8 (B) $10.0 (A) $26.7
Noncurrent 0.7 - - 0.1 (A) 0.6
Fiscal year ended January 3, 1998
Reserves and allowances deducted from
asset accounts:
Allowance for doubtful accounts:
Current $22.5 $16.5 $(3.1)(B) $16.1 (A) $19.8
Noncurrent 0.8 (0.2) 0.1 (B) - 0.7
</TABLE>
Notes: (A) Represents doubtful accounts charged off, less recoveries of
accounts previously charged off.
(B) Represents net transfers to/from other accounts, foreign
currency translation adjustments and acquisitions/divestitures.
<PAGE>
EXHIBIT LIST
(3) (i) Restated Certificate of Incorporation (incorporated by reference to
Exhibit 3(i) to the Annual Report on Form 10-K for the year ended January 2,
1999)
(ii) By-laws (incorporated reference to Exhibit 3(i) to the Quarterly Report
on Form 10-Q for the quarter ended July 4, 1998)
(4)(i) Indenture, dated as of April 1, 1986 between the Company and State Street
Bank and Trust Company, as successor trustee, defining the rights of holders of
7-3/8% Notes Due December 15, 2002 and 5.75% Notes Due March 1, 2004
(incorporated by reference to Exhibit 4(a) to Registration Statement No. 33-4344
filed March 27, 1986)
(ii) First Supplemental Indenture, dated as of June 15, 1992 between the
Company and State Street Bank and Trust Company, as successor
trustee (incorporated by reference to Exhibit (4)(c) to Registration Statement
No. 33-46212 filed July 21, 1992)
(a) Certificate of Designated Officers establishing Terms of 7-3/8%
Notes Due December 15, 2002 (incorporated by reference to Exhibit (4)(ii) to
Current Report on Form 8-K dated December 7, 1992)
(b) Certificate of Designated Officers establishing Terms of 5.75% Notes
Due March 1, 2004 (incorporated by reference to Exhibit 4(ii)(a) to the Annual
Report on Form 10-K for the year ended January 2, 1999)
(iii) Rights Agreement, dated January 31, 1996 (incorporated by reference to
Exhibit (4)(i) to Current Report on Form 8-K dated January 31, 1996)
(iv) (a) Amended and Restated Facility A (364 Day) Credit Agreement, dated as
of October 23, 1996, with the banks named therein and Citibank, N.A. as agent
(incorporated reference to Exhibit 4(iv) to the Annual Report on Form 10-K for
the year ended December 28, 1996)
(b) Credit Agreement, dated as of October 21, 1998, among the Company,
the Lenders named therein and Citibank, N.A. as agent (incorporated by reference
to Exhibit 4(iv)(c) to the Quarterly Report on Form 10-Q for the quarter ended
October 3, 1998)
(c) Credit Agreement, dated as of October 21, 1998, as amended and
restated as of October 20, 1999, among the Company, each lender that is a
signatory thereto and Citibank, N.A. as Agent for the Lenders (incorporated
reference to Exhibit 4(i) to
E-1-
<PAGE>
the Quarterly Report on Form 10-Q for the quarter ended October 2, 1999)
(v) Amended and Restated Facility B (Five Year) Credit Agreement, dated as of
October 23, 1996, with the banks named therein and Citibank, N.A. as agent
(incorporated reference to Exhibit 4(v) to the Annual Report on Form 10-K for
the year ended December 28, 1996)
(10)(i) Executive Agreements (incorporated by reference to Exhibit 10(i) to the
Annual Report on Form 10-K for the year ended January 3, 1987)*
(ii) Deferred Compensation Plan for Non-Employee Directors as amended January
31, 1996 (incorporated by reference to Exhibit 10(i) to Current Report on Form
8-K dated January 31, 1996)*
(iii) 1988 Long-Term Stock Incentive Plan, as amended (incorporated by
reference to Exhibit 10(iii) to the Annual Report on Form 10-K for the year
ended January 3, 1998)*
(iv) Management Incentive Compensation Plan effective January 4, 1998
(incorporated by reference to Exhibit 10(iii) to the Quarterly Report on Form
10-Q for the quarter ended July 4, 1998)*
(v) Deferred Compensation Plan for Participants in Stanley's Management
Incentive Plan effective January 1, 1996 (incorporated by reference to Exhibit
10(v) to the Annual Report on Form 10-K for the year ended December 30, 1995)*
(vi) Supplemental Retirement and Account Value Plan for Salaried Employees
of The Stanley Works effective as of January 1, 2000*
(vii) Note Purchase Agreement, dated as of June 30, 1998, between the Stanley
Account Value Plan Trust, acting by and through Citibank, N.A. as trustee under
the trust agreement for the Stanley Account Value Plan, for $41,050,763
aggregate principal amount of 6.07% Senior ESOP Guaranteed Notes Due December
31, 2009 (incorporated by reference to Exhibit 10(i) to the Quarterly Report on
Form 10-Q for the quarter ended July 4, 1998)
* Management contract or compensation plan or arrangement
E-2-
<PAGE>
(viii) New 1991 Loan Agreement, dated June 30, 1998, between The Stanley
Works, as lender, and Citibank, N.A., as trustee under the trust agreement for
the Stanley Account Value Plan, to refinance the 1991 Salaried Employee ESOP
Loan and the 1991 Hourly ESOP Loan and their related promissory notes
(incorporated by reference to Exhibit 10(ii) to the Quarterly Report on Form
10-Q for the quarter ended July 4, 1998)
(ix) (a) Supplemental Executive Retirement Program effective May 20, 1997
(incorporated by reference to Exhibit 10(xi)(a) to the Annual Report on Form
10-K for the year ended January 3, 1998)*
(b) Amendment to John M. Trani's Supplemental Executive Retirement
Program, dated September 17, 1997 (incorporated by reference to Exhibit
10(xi)(b) to the Annual Report on Form 10-K for the year ended January 3, 1998)*
(x) (a) The Stanley Works Non-Employee Directors' Benefit Trust Agreement
dated December 27), 1989 and amended as of January 1, 1991 by and between The
Stanley Works and Fleet National Bank, as successor trustee (incorporated by
reference to Exhibit (10)(xvii)(a) to Annual Report on Form 10-K for year ended
December 29, 1990)
(b) Stanley Works Employees' Benefit Trust Agreement dated December 27,
1989 and amended as of January 1, 1991 by and between The Stanley Works and
Fleet National Bank, as successor trustee (incorporated by reference to Exhibit
(10)(xvii)(b) to Annual Report on Form 10-K for year ended December 29, 1990)
(xi) Restated and Amended 1990 Stock Option Plan (incorporated by reference
to Exhibit 10 (xiii) to Annual Report on Form 10-K for the year ended December
28, 1996)
(xii) Master Leasing Agreement, dated September 1, 1992 between BLC
Corporation and The Stanley Works (incorporated by reference to Exhibit (10)(i)
to Quarterly Report on Form 10-Q for quarter ended September 26, 1992)
(xiii) The Stanley Works Stock Option Plan for Non-Employee Directors, as
amended December 18, 1996 (incorporated by reference to Exhibit 10(xvii) to the
Annual Report on Form 10-K for the year ended January 3, 1998)
(xiv) Employment Agreement effective December 27, 1996 between The Stanley
Works and John M. Trani (incorporated by reference to Exhibit 10(i) to Current
Report on Form 8-K dated January 2, 1997)*
* Management contract or compensation plan or arrangement
E-3-
<PAGE>
(xv) Letter Agreement, dated April 30, 1996 between The Stanley Works and
Paul W. Russo (incorporated by reference to Exhibit 10(xx) to the Annual Report
on Form 10-K for the year ended January 3, 1998)*
(xvi) 1997 Long-Term Incentive Plan (incorporated by reference to Exhibit
10(xxi) to the Annual Report on Form 10-K for the year ended January 3, 1998)*
(xvii) Agreement, dated June 28, 1998 between The Stanley Works and Stef G.H.
Kranendijk (incorporated by reference to Exhibit 10(xvii) to the Annual Report
on Form 10-K for the year ended January 2, 1999)*
(xviii) Agreement, dated November 16, 1998 between The Stanley Works and John
A. Cosentino, Jr.(incorporated by reference to Exhibit 10(xviii) to the Annual
Report on Form 10-K for the year ended January 2, 1999)*
(xix) Agreement, dated May 7, 1999 between The Stanley Works and Ron Newcomb
(incorporated by reference to Exhibit 10(i) to the Quarterly Report on Form 10-Q
for the quarter ended July 3, 1999)*
(xx) Agreement, dated June 9, 1999 between The Stanley Works and James Loree
(incorporated by reference to Exhibit 10(ii) to the Quarterly Report on Form
10-Q for the quarter ended July 3, 1999)*
(xxi) Engagement Letter, dated August 26, 1999 between The Stanley Works and
Donald R. McIlnay (incorporated by reference to Exhibit 10(i) to the Quarterly
Report on Form 10-Q for the quarter ended October 2, 1999)*
(xxii) Agreement, dated November 16, 1998 between The Stanley Works and John
Turner*
(11) Statement re computation of per share earnings (the information required to
be presented in this exhibit appears in footnote J to the Company's Consolidated
Financial Statements set forth in the Annual Report to Shareholders for the year
ended January 1, 2000)
(12) Statement re computation of ratio of earnings to fixed charges
(13) Annual Report to Shareowners for the year ended January 1, 2000
(21) Subsidiaries of Registrant
* Management contract or compensation plan or arrangement
E-4-
<PAGE>
(23) Consents of Independent Auditors (at pages F-2 and F-3)
(27) Financial Data Schedule for 1999 Fiscal Year End
(99) (i) Financial Statements and report of independent auditors for the year
ended December 31, 1999 of The Stanley Works Account Value Plan
(ii) Policy on Confidential Proxy Voting and Independent Tabulation and
Inspection of Elections as adopted by The Board of Directors October 23, 1991
(incorporated by reference to Exhibit (28)(i) to the Quarterly Report on Form
10-Q for the quarter ended September 28, 1991)
E-5-
<PAGE>
AMENDED AND RESTATED DECEMBER 22, 1999
EFFECTIVE JANUARY 1, 2000
SUPPLEMENTAL RETIREMENT AND ACCOUNT VALUE PLAN
FOR SALARIED EMPLOYEES OF THE STANLEY WORKS
BACKGROUND. A. The Stanley Works (together with its wholly-owned U.S.
subsidiaries, "Stanley") maintains certain retirement plans for its salaried
employees that are designed to meet the requirements of Section 401(a) of the
Internal Revenue Code (the "Code").
B. The benefits and contributions that may be provided under such
retirement plans are limited on account of Sections 401 and 415 of the Code and
certain other provisions of the Code.
C. Stanley maintains the Supplemental Retirement and Savings Plan for
Salaried Employees of The Stanley Works (the "Supplemental Plan") to provide
certain employees with benefits that may not be provided under these retirement
plans.
D. Stanley now desires to restate the Supplemental Plan as the
Supplemental Retirement and Account Value Plan for Salaried Employees of The
Stanley Works (which shall continue to be known as the "Supplemental Plan").
TERMS OF THE SUPPLEMENTAL PLAN
------------------------------
1. EFFECTIVE DATE. This amendment and restatement shall be effective as
of January 1, 2000.
2. DEFINITIONS. The following terms have the meanings set forth below.
"ACCOUNT VALUE PLAN" means the Stanley Account Value Plan.
"APPLICABLE LIMITATION" means each of:
(a) the limitation under Sections 401(a)(30) and 402(g)(1) of the Code
on the amount of pre-tax elective contributions that may be made by an employee
under the Account Value Plan;
(b) the limitation in Section 401(a)(17) of the Code on the amount of
compensation of an employee that may be taken into account under the Retirement
Plan or Account Value Plan;
(c) the limitation under the Account Value Plan on the amount of an
employee's pre-tax elective contributions or Stanley matching contributions
imposed under the nondiscrimination rules of Section 401 of the Code;
(d) the exclusion of earnings deferred at the election of an employee
pursuant to the Deferred Compensation Plan for Participants in Stanley's
Management Incentive Plans from the "Compensation" utilized under the Retirement
Plan or for "Cornerstone Account" allocations under
<PAGE>
the Account Value Plan; and
(e) the limitations in Section 415 of the Code on the maximum
contributions that may be made under the Account Value Plan and the maximum
benefits that may be provided under the Retirement Plan.
"COMMITTEE" means the Finance and Pension Committee of the Board of
Directors of The Stanley Works.
"401(K) DOLLAR LIMITS" means the dollar limitation described in
paragraph (a) of the definition of Applicable Limitation.
"HIGHLY COMPENSATED EMPLOYEE" means:
(a) except as provided in (b), a salaried employee of Stanley who
during the applicable Plan Year is a highly compensated employee, as defined in
Section 414(q) of the Code (i.e., W-2 income, including elective contributions
to health and dental plans, to flexible spending plans, and to the Account Value
Plan, exceeding the indexed amount for the preceding Plan Year [e.g., earnings
during 1999 exceeding $80,000 results in Highly Compensated Employee status for
the 2000 Plan Year]).
(b) An individual who is not a highly compensated employee, as defined
in Section 414(q) of the Code, for the Plan Year in which he or she first
becomes a salaried employee of Stanley or for the subsequent Plan Year but whose
basic annual rate of compensation from Stanley during the applicable Plan Year
is at least $100,000 shall be a Highly Compensated Employee for the applicable
Plan Year.
"PLAN YEAR" means the plan year of a Qualified Plan.
"QUALIFIED PLAN" means each of the Account Value Plan and the
Retirement Plan.
"RETIREMENT PLAN" means The Stanley Works Retirement Plan.
"SUPPLEMENTAL COMPANY CONTRIBUTION ACCOUNT" means the bookkeeping
record that reflects amounts credited under Section 4.2.
"SUPPLEMENTAL EMPLOYEE CONTRIBUTION ACCOUNT" means the bookkeeping
record that reflects amounts credited under Section 4.1.
"UNRESTRICTED QUALIFIED PLAN BENEFIT" means the benefit amount that
would be payable to an individual under the Retirement Plan but for an
Applicable Limitation.
3. PARTICIPATION IN THE SUPPLEMENTAL PLAN. 3.1. PARTICIPATION. Each
Highly Compensated Employee shall become a participant in the Supplemental Plan
on the date as of which an amount
<PAGE>
is first credited on his or her behalf under Section 4.
3.2. REMAINING A PARTICIPANT. Subject to Section 7, a Highly
Compensated Employee shall remain a participant until all amounts to which he or
she is entitled have been distributed.
4. CREDITING OF BENEFITS; ELECTIONS TO DEFER. 4.1. SUPPLEMENTAL
EMPLOYEE CONTRIBUTIONS. (a) EMPLOYEE CONTRIBUTIONS EXCEEDING 401(K) DOLLAR
LIMITS. If a Highly Compensated Employee's pre-tax elective contributions under
the Account Value Plan for a Plan Year are limited by the 401(k) Dollar Limits,
the Highly Compensated Employee may elect to defer a portion of compensation.
The amount deferred for a Plan Year under this Section 4.1(a), when added to the
pre-tax elective contributions for the Plan Year under the Account Value Plan,
shall not exceed 15% of compensation.
(b) EMPLOYEE CONTRIBUTIONS EXCEEDING OTHER LIMITS. If a Highly
Compensated Employee may not make pre-tax elective contributions under the
Account Value Plan for a Plan Year as a result of an Applicable Limitation
(other than as described in Section 4.1(a)), the Highly Compensated Employee may
elect to defer a portion of compensation, up to the amount of such pre-tax
elective contributions that could not be made.
(c) CREDITING OF EMPLOYEE CONTRIBUTIONS. Any amount deferred under this
Section 4.1 shall be credited to a Supplemental Employee Contribution Account.
4.2. SUPPLEMENTAL COMPANY CONTRIBUTIONS. (a) MATCHING CONTRIBUTIONS FOR
EMPLOYEE CONTRIBUTIONS EXCEEDING DOLLAR LIMITS. If an amount is credited to a
Supplemental Employee Contribution Account under Section 4.1, there shall also
be an amount credited to a Supplemental Company Contribution Account. This
amount shall equal the contribution that would have been made by Stanley under
the Account Value Plan with respect to the amount credited under Section 4.1 if
such amount had been contributed to the Account Value Plan.
(b) STANLEY CONTRIBUTIONS AFFECTED BY OTHER LIMITS. If a Stanley
contribution could not be made under the Account Value Plan as a result of an
Applicable Limitation (other than as described in Section 4.2(a)), an amount
equal to such Stanley contribution that could not be made shall be credited to a
Supplemental Company Contribution Account.
4.3. SUPPLEMENTAL RETIREMENT PLAN BENEFITS. If a Highly Compensated
Employee's Unrestricted Qualified Plan Benefit exceeds the benefit payable under
the Retirement Plan, the excess amount, to the extent vested under Section 5.1,
shall be provided under this Supplemental Plan.
4.4. CREDITING OF EARNINGS. A participant's Supplemental Employee
Contribution Account and Supplemental Company Contribution Account shall be
credited with the rate of return such accounts would have earned if they had
been invested under the Account Value Plan. In addition, these accounts shall be
credited with any additional amount that would have been payable under the
Retirement Plan to reflect IPA benefits. For purposes of crediting the rate of
return, an amount shall
<PAGE>
be considered to be credited under Section 4.1 or 4.2 on the date on which it
would have been allocated under the Account Value Plan but for an Applicable
Limitation.
4.5. PROCEDURES FOR ELECTING EMPLOYEE CONTRIBUTIONS. An election to
defer compensation under Section 4.1 shall be made, and may be revoked, under
rules established by the Committee. Any election to defer compensation shall be
effective only as to compensation earned after the date of the election.
5. VESTING SCHEDULE. A participant's vested interest in a benefit
provided under this Plan shall be determined in accordance with the vesting
provisions of the particular Qualified Plan with respect to which the benefit is
determined.
6. DISTRIBUTIONS. 6.1. TIME FOR PAYING BENEFITS. Amounts credited to a
participant's Supplemental Employee Contribution Account or Supplemental Company
Contribution Account shall be distributed upon retirement, death, disability or
earlier separation from service with Stanley unless either the rules of Section
7.3 apply or the participant elects to have payments made on a later date
specified in an election made under Section 6.3. Amounts payable under Section
4.3 (relating to Supplemental Retirement Plan Benefits) shall be distributed
when benefit payments commence under the Retirement Plan.
6.2. FORM OF PAYMENT. Benefits attributable to an individual's
Supplemental Employee Contribution Account and Supplemental Company Contribution
Account shall be distributed in a lump sum. To the extent that the amount
credited to such accounts is deemed to be invested in shares of Stanley stock
pursuant to Section 4.4 at the time of distribution, the lump sum shall consist
of shares of Stanley stock. Any remaining portion of such lump sum shall be paid
in cash. The benefit determined under Section 4.3 (relating to Supplemental
Retirement Plan Benefits) shall be paid in a life annuity unless the participant
elects a lump sum payment under Section 6.3.
6.3. ELECTIONS BY PARTICIPANTS. An election to receive a lump sum
payment of the benefit payable under Section 4.3 (relating to Supplemental
Retirement Plan Benefits) or to defer distributions of the Supplemental Employee
Contribution and Supplemental Company Contribution Accounts may be made by a
participant in writing prior to the beginning of the one year period that ends
on the date on which the participant dies, becomes disabled, or otherwise
separates from service. An election may be made after the beginning of such one
year period only with the approval of the Committee.
6.4. ADJUSTMENTS TO DISTRIBUTIONS. Upon determining that a participant
is indebted to Stanley, the Committee shall be entitled to offset such
indebtedness, including any interest accruing thereon, against any payment that
would otherwise be made on behalf of the participant.
6.5. DEATH BENEFICIARY. Upon a participant's death, any benefit payment
shall be made to the beneficiary determined under the Qualified Plan to which
the benefit relates unless the participant designated in writing a different
beneficiary to receive such benefit. The benefit shall be paid in the manner
provided in Section 6.2.
<PAGE>
6.6. WITHHOLDING. To the extent required by law, Stanley shall withhold
taxes from any payment due under the Plan.
7. INELIGIBILITY FOR COVERAGE. 7.1. BECOMING INELIGIBLE. Amounts shall
not be credited under Section 4.1 or 4.2 upon either (a) a participant ceasing
to be a Highly Compensated Employee or (b) the Committee, in its sole
discretion, determining that a Highly Compensated Employee may no longer
actively participate in the Plan.
7.2. RESUMING PARTICIPATION. An individual described in Section 7.1(a)
shall resume active participation in the Supplemental Plan upon again becoming a
Highly Compensated Employee. An individual described in Section 7.1(b) may again
become an active participant at the discretion of the Committee. Once an
individual resumes participation in the Supplemental Plan, amounts shall again
be credited under Section 4.1 upon the filing of an election pursuant to Section
4.5, and amounts may also be credited under Section 4.2.
7.3. DISTRIBUTIONS TO INELIGIBLE INDIVIDUALS. An amount credited under
Section 4 on behalf of an individual for a Plan Year in which such individual
was not a Highly Compensated Employee shall be distributed in a lump sum
payment, in the manner described in Section 6.2, upon the earliest of the
following: (a) death, (b) disability, (c) other separation from service with
Stanley, or (d) the first day of the calendar year in which the individual
attains age 60. No additional amount shall be credited to an account established
in the name of an individual described in this subsection unless such individual
becomes a Highly Compensated Employee. If the individual becomes a Highly
Compensated Employee, amounts credited to an account established in the name of
the individual while a Highly Compensated Employee shall be distributed in
accordance with Section 6, and other amounts shall be distributed in the manner
described above in this subsection.
8. MISCELLANEOUS. 8.1. AMENDMENT OR TERMINATION. The Committee may at
any time amend or terminate the Supplemental Plan without the consent of any
participant or beneficiary.
8.2. ADMINISTRATION OF THE SUPPLEMENTAL PLAN. The Supplemental Plan
shall be administered by the Committee. The Committee shall have the
discretionary authority to interpret the Supplemental Plan and to make all
determinations regarding eligibility for coverage and the benefits to be paid.
Any denial by the Committee of a claim for benefits under the Supplemental Plan
shall be stated in writing by the Committee and delivered or mailed to the
appropriate individual. Such notice shall set forth the specific reasons for the
denial. The Committee shall afford to any participant or beneficiary whose claim
for benefits has been denied a reasonable opportunity for a review of the denial
of the claim.
8.3. GOVERNING TEXT. The Supplemental Plan, including any amendments,
shall constitute the entire agreement between Stanley and any employee,
participant or beneficiary regarding the subject matter of the Supplemental
Plan. The Supplemental Plan, including any amendments, shall be binding on
Stanley, employees, participants, beneficiaries, and their respective heirs,
administrators, trustees, successors and assigns.
<PAGE>
8.4. ENFORCEABILITY OF PLAN PROVISIONS. If any provision of the
Supplemental Plan shall, to any extent, be invalid or unenforceable, the
remainder of the Supplemental Plan shall not be affected, and each other
provision of the Supplemental Plan shall be valid and enforced to the fullest
extent permitted by law.
8.5. RIGHTS OF PARTICIPANT. Any person entitled to receive benefits
under the Supplemental Plan shall have the rights of an unsecured general
creditor of Stanley.
8.6. CLAIMS OF CREDITORS. The right of any participant or beneficiary
to a benefit under the Supplemental Plan shall not be subject to attachment or
other legal process for the debts of such participant or beneficiary. Except as
provided in Section 6.4, a benefit of a participant or beneficiary shall not be
subject to anticipation, alienation, sale, transfer, assignment or encumbrance.
8.7. SPECIAL DISTRIBUTIONS. Whenever, in the opinion of the Committee,
a person entitled to receive a benefit under the Plan is unable to manage his or
her financial affairs, the Committee may direct that payment be made to a legal
representative or relative of such person for his or her benefit. Alternatively,
the Committee may direct that any payment be applied for the benefit of such
person in such manner as the Committee considers advisable. Any payment made in
accordance with this Section shall be a complete discharge of any liability for
the making of such payment under the provisions of the Supplemental Plan.
8.8. TERMS OF EMPLOYMENT. Participation in the Supplemental Plan shall
not give an individual any right to remain in the service of Stanley, and an
individual shall remain subject to discharge to the same extent as if the
Supplemental Plan had not been adopted.
<PAGE>
December 1, 1999
John Turner
10 Jordan Lane
Farmington, CT 06085
RE: AGREEMENT AND GENERAL RELEASE
--------------------------------------
Dear John:
The Stanley Works and its subsidiaries and their respective employees,
officers, directors and agents (collectively, "Stanley"), and you, agree that:
1. Your last day of employment with Stanley was September 30, 1999
("last day worked").
2. Stanley agrees to pay and/or provide you with the following,
provided Stanley receives the letter from you in the form attached hereto as
Exhibits A and B.
a. Stanley will pay you the monthly amount of Eighteen
Thousand Seven Hundred Fifty dollars ($18,750.00), (hereafter "base salary"),
less lawful deductions, paid from October 1, 1999, through April 30, 2000, on
the regular payday beginning in October 1999, and ending in April 2000. In the
event you have not secured employment or become self-employed by May 1, 2000, or
earn less than the base salary in any of the six months subsequent to May 1,
2000, Stanley shall continue to pay you if you so request as severance the
difference between your base salary and your monthly earned income for each
month from May 1, 2000, through October 31, 2000. For any months after May 1,
2000, in which you are employed by another, your monthly income shall be defined
as your gross income. If you are self-employed, your monthly income shall be
defined as your earnings as determined on a cash-flow basis minus your expenses
(but not including expenses for tax withholding, tax payments, or health
insurance). To qualify for any such period(s) of extended severance, you must,
by the tenth calendar day of any month in which you seek to extend your
severance, notify the Manager, Employee Relations, or his designee, in writing
at 76 Batterson Park Road, Farmington, CT 06032, indicating the amount of your
income for the immediately preceding month. If you are employed by another, you
shall attach a copy of your pay stub to any claim for severance. If you are self
employed, you shall make available to Stanley within three working days of
receipt of your statement, a copy of a profit and loss statement for the month
supporting the claimed severance payment. Stanley shall keep all information
contained in such Profit and Loss statement confidential following the
provisions of Section 12 of this Agreement. Stanley shall make any severance
payments due covering the period of May 1, 2000, through October 31, 2000, on
the regular payday applicable to salaried employees. These payments include all
entitlements you may have under any Stanley policy, including those covering
payment of vacation and or severance pay.
<PAGE>
b. You will continue to participate in The Stanley Works
qualified and supplemental Retirement Plans, and the Stanley Account Value Plan
in which you are currently participating, through your last day worked, in
accordance with the terms of the plans, subject to any amendments that are made
to the plans including termination of the plans, or replacement of the plans
with another plan.
c. You will continue to receive your current level of
voluntary and dependent life insurance, and accidental death and dismemberment
coverage through the end of the month in which the payments outlined in section
2(a) are made, provided you continue to make the required contributions. You
will then be eligible to convert your voluntary and dependent life insurance
coverage on the same terms commonly provided terminating employees.
d. You will remain a participant in the Executive Life
Insurance Plan through March 31, 2000. The Executive Life Insurance Plan
underwriter requires full payment for the coverage year in advance. With regard
to, and limited only to, the period of April 1, 2000, through March 31, 2001, if
you wish to continue your coverage under this Plan during this period and have
Stanley subsidize the cost of your doing so, you must pay that portion (5/12th)
of the premium that is attributable to the time frame outside your possible
severance eligibility as identified in this Agreement (November 1, 2000 - March
31, 2001). As the relevant annual premium for you to continue under this Plan is
expected to be $8,000, you must submit payment to Stanley's Vice President,
Human Resources, in the amount of $3,334.00 no later than March 1, 2000. If you
fail to make this payment by March 1, 2000, Stanley will not contribute further
towards your continued coverage under this policy beyond March 31, 2000.
e. You will continue to receive medical and dental coverage
through the end of the month in which the payments outlined in section 2(a) are
made, provided you continue to make the required contributions. You will then
have the same COBRA rights commonly provided terminating employees.
f. Your short term and long term disability coverage will
cease on your last day worked.
g. You will be a participant in the Management Incentive
Compensation Plan ("MICP") through your last day worked, and will receive a
payment of $125,000 under the 1999 MICP, payable in February, 2000.
h. You will be a participant in the Stock Option Plan ("SOP")
through your last day worked, and will have until May 28, 2000, to exercise your
NQSO shares, under the terms of the Plan.
i. You will be immediately vested in the 4,000 restricted
stock units granted under the Long-Term Incentive Plan.
<PAGE>
j. You will be a participant in the Long Term Performance
Award Plan at the senior level through your last day worked, and will receive a
payment of $116,000 under such plan, payable in February, 2000.
k. You may purchase your company provided automobile by your
last day worked at the price of Forty-Seven Thousand Five Hundred Dollars
($47,500.00), or you may instead return such automobile to Stanley within ten
(10) days after full execution of this Agreement.
l. Stanley will provide you with outplacement assistance
through Lee Hecht Harrison for a period of up to twelve months from your last
day worked. In lieu of outplacement services, Stanley shall, at your discretion,
pay you the amount of ten thousand dollars ($10,000.00), less lawful deductions,
provided you notify Stanley of your decision no later than December 1, 1999.
Stanley shall issue such payment to you within 30 days of the date you notify
Stanley of your decision.
m. Stanley shall provide Mr. Turner with the same level of
assistance in completing his 1999 federal income tax return as he would have
received as an active employee.
n. Stanley will not contest your receipt of unemployment
compensation benefits.
3. You understand and agree that you would not receive all of the money
and benefits specified in sections 2(a) through (n) above except for your
execution of this Agreement and your fulfillment of the promises contained
herein.
4. You understand that you may revoke this Agreement for a period of
seven business days following the day you execute it and that this Agreement
will not become effective or enforceable until such revocation period has
expired. Any revocation within this period must be submitted, in writing, to the
Corporate Manager, Employee Relations, The Stanley Works, 76 Batterson Park
Road, Farmington, CT 06032, and state, "I hereby revoke my acceptance of our
Agreement." Such revocation must be personally delivered, or mailed by certified
mail, within seven business days of execution of this Agreement to the Corporate
Manager, Employee Relations.
5. Except with respect to a claim for any compensation or benefits
under the plans and programs in which you participate by virtue of your
employment and except with regard to this Agreement, you hereby release and
discharge Stanley of and from any and all debts, obligations, claims, demands,
judgments or causes of action of any kind whatsoever, known or unknown, in tort,
contract, by statute or on any other basis, for equitable relief, compensatory,
punitive or other damages, expenses (including attorneys' fees), reimbursements
of costs of any kind, including but not limited to, any and all claims, demands,
rights and/or causes of action, including those which might arise out of
allegations
3
<PAGE>
relating to a claimed breach of an alleged oral or written employment
contract, or relating to purported employment discrimination or civil rights
violations, such as, but not limited to, those arising under Title VII of the
Civil Rights Act of 1964 (42 U.S.C. ss.ss.2000e et seq.), the Civil Rights Acts
of 1866 and 1871 (42 U.S.C. ss.ss.1981 and 1983), Executive Order 11246, as
amended, the Age Discrimination in Employment Act (29 U.S.C. ss.621 et seq.),
the Employee Retirement Income Security Act of 1974, the Equal Pay Act of 1963
(29 U.S.C. ss.206(d)(1)), the Civil Rights Act of 1991, the Americans with
Disabilities Act, all statutory provisions of the Connecticut General Statutes
over which the Connecticut Commission on Human Rights and Opportunities is
authorized to exercise jurisdiction, or any other applicable federal, state, or
local employment discrimination statute or ordinance, which you, your executors,
administrators, successors, and assigns might have or assert against Stanley (a)
by reason of any event which occurred on or before the time of execution of this
Agreement, in connection your employment by Stanley, or the termination of such
employment, and all circumstances related thereto, or (b) by reason of any
matter, cause or thing whatsoever which may have occurred prior to the time of
execution of this Agreement. Nothing in this Agreement prevents you from
enforcing the terms and conditions of this Agreement.
6. You waive your right to file any charge or complaint, except as such
waiver is prohibited by law, and agree that you will not accept any relief or
recovery from any charge or complaint against Stanley before any federal, state,
or local administrative agency. You further waive all rights to file any action
before any federal, state, or local court against Stanley. You confirm that no
charge, complaint, or action exists in any forum or form. Except as prohibited
by law, in the event that any such claim is filed, it shall be dismissed with
prejudice upon presentation hereof and you shall reimburse Stanley for the
costs, including attorney's fees, of defending any such action.
7. You agree not only to release Stanley from any and all claims as
stated above which you could make on your own behalf, but also those which may
be made by any other person or organization on your behalf. You specifically
waive any right to become, and promise not to become, a member of any class in a
case in which a claim against Stanley is made involving any events up to and
including the date of this Agreement, except where such waiver is prohibited by
law. You further agree not to in any way voluntarily assist or cooperate with
any individual or entity in commencing or prosecuting any action or proceeding
against Stanley including, but not limited to, any charges, complaints, or
administrative agency claims, except as required by law.
7a. Stanley knowingly and voluntarily releases and forever discharges
you of and from any and all actions or causes of action, suits, claims, charges,
complaints, contracts (whether oral or written, express or implied from any
source), and promises, whatsoever, in law or equity, which, against you, Stanley
may now have or hereafter can, shall or may have, including all unknown,
undisclosed and unanticipated losses, wrongs, injuries, debts, claims, or
damages to Stanley, for upon, or by reason of any matter, cause or thing
whatsoever including, but not limited to, any and all matters arising from your
good faith performance of your duties as an employee of Stanley. Stanley does
not, however, herein release or discharge you of and from actions or causes of
action, suits, claims, charges, complaints, or
4
<PAGE>
contracts based on acts of intentional misconduct or any other such acts
performed outside of your good faith performance of your duties as an
employee of Stanley, including but not limited to illegal acts, provided further
that nothing contained herein is intended to prevent Stanley from enforcing the
terms and conditions of this Agreement.
8. With respect to any secret or confidential information obtained by
you during your employment at Stanley, you will not disclose or use for any
purpose any such secret or confidential information. For purposes hereof, secret
or confidential information includes any process, technique, formula, recipe,
drawing, apparatus, method for or result of cost calculation, result of any
investigation or experiment made by or on behalf of Stanley, and any sales,
production or other competitive information, acquired by you during the course
of your employment by Stanley and all other information that Stanley itself does
not disclose to the public.
You further agree that any work, design, discovery, invention or
improvement conceived, made, developed or received by you during the period of
your employment with Stanley, which relates to the actual or anticipated (as of
the date hereof) business, operations or research of Stanley, including but not
limited to any process, art, machine, manufacture, materials or composition of
matter, which could be manufacturing or used by Stanley, whether patentable or
not, is the sole property of Stanley. The terms invention and improvement as
used herein, in addition to their customary meaning, shall mean creative
concepts and ideas relating to advertising, marketing, promotional and sales
activities.
You further state that you have assigned or hereby do assign to
Stanley or its designee all right, title and interest in any or to any idea,
work, design, discovery, invention or improvement made or created during your
employment at Stanley and to any application for letters patent or for trademark
registration made thereon, and to any common law or statutory copyright therein,
and that you will cooperate with Stanley in order to enable it to secure any
patent, trademark, copyright, or other property right therefor in the United
States or any foreign country, and any division, renewal, continuation or
continuation-in-part thereof, or for any reissue of any patent issued thereon.
You also agree that Stanley has all rights to, possession of, and
all title in and to, all electronic files, papers, documents and drawings,
including copies thereof, which you may have originated or which came into your
possession during your employment with Stanley and which related to the business
of Stanley, regardless of whether such electronic files, papers, documents and
drawings are kept at your office, at your home or somewhere else, without
retaining any copies thereof, except for any personnel, benefit or compensation
information of a personal nature and any general business reference materials or
documents which do not contain any confidential or proprietary information.
You also agree that during the period you receive any payments
outlined in section 2(a) above you will not work in any capacity, including as a
consultant or independent contractor, for the following businesses: Danaher
Corp. except its Veeder Root entity, Cooper, Ingersoll-Rand, or Snap-On. This
prohibition shall not apply to divisions or entities
5
<PAGE>
that do not deal in products or services offered by Stanley. In addition, you
agree that you will not solicit any Stanley employee for any employment purpose
during such period.
8a. Stanley agrees to indemnify and hold you harmless from all acts
arising from your employment by Stanley on the same basis Stanley would have
prior to your last day worked.
9. You agree that you will not make any disparaging remarks or
demeaning comment, of any kind or nature, regarding Stanley or any of its
officers, directors, agents or employees. No officer or director of Stanley will
make any disparaging remarks or demeaning comment about you, and will favorably
comment upon and recommend you to all persons and entities who make any inquiry
about you or your performance or your abilities.
10. You agree not to disclose any information regarding the substance
of this Agreement. Notwithstanding this agreement of non-disclosure, you may
disclose the substance of this Agreement to members of your immediate family,
your financial advisor, and to any attorney with whom you choose to consult
concerning the execution or enforcement of this Agreement; provided that you
agree that any such person to whom disclosure is made will not disclose any
information regarding such disclosure to any third party.
An initial violation of this section will subject you to damages in
an amount which Stanley actually proves.
11. All disputes and controversies of every kind and nature between the
parties to this Agreement arising out of or in connection with this Agreement as
to the existence, construction, validity, interpretation or meaning,
performance, non-performance, enforcement, operation, breach, continuance, or
termination of this Agreement shall be submitted to and determined by
arbitration pursuant to the procedure set forth in this Agreement.
Either party may demand such arbitration by notice ("notice
procedure": if to Stanley, sent to the attention of the Corporate Manager,
Employee Relations, by fax (860-409-1287) and confirmed by UPS overnight express
or a comparable service sent to Corporate Manager, Employee Relations, 76
Batterson Park Road, Farmington, CT 06032; and if to you, sent to you at your
address set forth at the beginning of this Agreement by UPS overnight express or
a comparable service) in writing sent within 90 days after the time the
demanding party becomes aware, or should have become aware, that a controversy
exists. Within 30 days after such demand has been sent, the demanding party will
request in writing (with a copy to the other party sent in accordance with the
"notice procedure") the Arbitration Committee of the American Arbitration
Association to name an arbitrator to hear the dispute in the New Britain, CT
area.
An award rendered by the arbitrator appointed under this section
shall be final and binding on all parties to the proceeding, and judgment on
such award may be entered by
6
<PAGE>
either party in the highest court, state or federal, having jurisdiction.
Nothing contained in this Agreement shall be deemed to give the arbitrator any
authority, power, or right to alter, change, amend, modify, add to, or subtract
from any of the provisions of this Agreement.
Each party will pay its own arbitration costs and expenses
(including legal fees).
12. You will not apply in the future for any employment with Stanley.
13. This Agreement is made in the State of Connecticut and shall be
interpreted under the laws of such state. If any portion of this Agreement is
declared illegal or unenforceable and cannot be modified to be enforceable,
including the general release language, such portion shall immediately become
void, leaving the remainder of this Agreement in full force and effect. However,
if in any proceeding it is asserted by you or anyone else on your behalf and
with your approval that any portion of the general release language of
paragraphs 5, 6, or 7 is unenforceable and any portion of such language is, in
fact, ruled to be unenforceable in such proceeding for any reason, you will
return the consideration paid hereunder to Stanley.
14. You and Stanley agree that neither this Agreement nor the
furnishing of the consideration for this Release will be deemed or construed at
anytime for any purpose as an admission by you or by Stanley of any liability or
unlawful conduct of any kind.
7
<PAGE>
15. This Agreement may not be modified, altered or changed except by
you and Stanley in a writing that specifically references this Agreement. This
Agreement sets forth the entire agreement between you and Stanley, and fully
supersedes any prior agreements or understandings between us.
THE PARTIES HAVE READ AND FULLY CONSIDERED THIS AGREEMENT AND ARE
MUTUALLY DESIROUS OF ENTERING TO THIS AGREEMENT. THE TERMS OF THIS AGREEMENT ARE
THE PRODUCT OF MUTUAL NEGOTIATION AND COMPROMISE BETWEEN STANLEY AND YOU; YOU
UNDERSTAND THAT THIS AGREEMENT SETTLES, BARS, AND WAIVES ANY AND ALL CLAIMS THAT
YOU HAVE OR COULD POSSIBLY HAVE AGAINST STANLEY. YOU HAVE BEEN AFFORDED AT LEAST
21 DAYS TO CONSIDER THIS AGREEMENT AND HAVE BEEN ADVISED TO CONSULT WITH AN
ATTORNEY. HAVING SUBSEQUENTLY ELECTED TO EXECUTE THIS AGREEMENT, TO FULFILL THE
PROMISES SET FORTH HEREIN, AND TO RECEIVE THEREBY THE SUMS AND BENEFITS SET
FORTH IN PARAGRAPHS 2(A) THROUGH 2(N) ABOVE, YOU FREELY AND KNOWINGLY, AND AFTER
DUE CONSIDERATION, ENTER INTO THIS AGREEMENT INTENDING TO WAIVE, SETTLE AND
RELEASE ALL CLAIMS YOU HAVE OR MIGHT HAVE AGAINST STANLEY.
You and Stanley now voluntarily and knowingly execute this Agreement.
John Turner
-----------------------------
John Turner
Signed and sworn before me this 21st day of December, 1999.
Robert M. Meyer
- ------------------------------------------
(Notary Public/Commissioner of the Superior Court)
THE STANLEY WORKS:
By: Mark Mathieu
--------------------------------------
Mark Mathieu
Vice President, Human Resources
Signed and sworn before me this 30th day of December, 1999.
James J. Tallaksen
- ------------------------------------------
(Notary Public/Commissioner of the Superior Court)
8
<PAGE>
EXHIBIT A
--------------
Date
Mark Mathieu
Vice President, Human Resources
1000 Stanley Drive
New Britain, CT 06053
RE: Agreement
Dear Mark:
On ______________ 1999, I executed an Agreement and General Release
(the "Agreement") between The Stanley Works and me. Stanley advised me, in
writing, to consult with an attorney of my choosing prior to executing the
Agreement.
More than 7 days have elapsed since I executed the Agreement. I have
never revoked my acceptance or execution of the Agreement and hereby reaffirm my
acceptance of the Agreement. Therefore, in accordance with the terms of the
Agreement, I hereby request payment of the benefits described in paragraphs 2(a)
through 2(n) of the Agreement.
Very truly yours,
John Turner
<PAGE>
EXHIBIT B
--------------
Date
Mark Mathieu
Vice President, Human Resources
1000 Stanley Drive
New Britain, CT 06053
RE: Agreement
Dear Mark:
I hereby resign my office of President, Consumer Sales, effective
September 30, 1999.
Further, effective September 30, 1999, I resign all offices and
directorships that I hold with The Stanley Works, and any and all of its
subsidiaries and divisions.
Very truly yours,
John Turner
10
<PAGE>
Exhibit 12
THE STANLEY WORKS AND SUBSIDIARIES
COMPUTATION OF EARNINGS TO FIXED CHARGES
(in Millions of Dollars)
<TABLE>
<CAPTION>
Fiscal Year Ended
-------------------------------------------------------------------------------
January 1 January 2 January 3 December 28 December 30 January 1
2000 1999 1998 1996 1995 1994
--------- --------- -------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Earnings (loss) before income taxes and
cumulative adjustment for accounting change $ 230.8 $ 215.4 ($ 18.6) $ 174.2 $ 112.8 $ 148.0
Add:
Interest expense $ 32.9 $ 30.5 $ 24.2 $ 27.6 $ 35.2 31.4
Portion of rents representative of
interest factor 14.2 15.0 11.6 12.2 13.4 $ 11.7
Amortization of expense on
long-term debt 0.2 0.3 0.2 0.2 0.3 0.4
Amortization of capitalized interest 0.2 0.2 0.3 0.3 0.3 0.4
--------- --------- -------- --------- --------- ---------
Income as adjusted $ 278.3 $ 261.4 $ 17.7 $ 214.5 $ 162.0 $ 191.9
========= ========= ======== ========= ========= =========
Fixed charges:
Interest expense $ 32.9 $ 30.5 $ 24.2 $ 27.6 $ 35.2 $ 31.4
Portion of rents representative of
interest factor 14.2 15.0 11.6 12.2 13.4 11.7
Amortization of expense
on long-term debt 0.2 0.3 0.2 0.2 0.3 0.4
Capitalized interest -- -- -- 0.2 0.1 0.1
--------- --------- -------- --------- --------- ---------
Fixed charges $ 47.3 $ 45.8 $ 36.0 $ 40.2 $ 49.0 $ 43.6
========= ========= ======== ========= ========= =========
Ratio of earnings to fixed charges 5.88 5.71 0.49 5.34 3.31 4.40
========= ========= ======== ========= ========= =========
</TABLE>
<PAGE>
SUMMARY OF SELECTED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
(Millions of Dollars, except per share amounts) 1999A 1998B 1997C 1996D 1995E 1994
- -----------------------------------------------------------------------------------------------------------
CONTINUING OPERATIONS F
<S> <C> <C> <C> <C> <C> <C>
Net sales $2,752 $2,729 $2,670 $2,671 $2,624 $2,511
Earnings (loss) 150 138 (42) 97 59 125
Earnings (loss) per share
Basic $1.67 $1.54 ($0.47) $1.09 $0.66 $1.40
Diluted $1.67 $1.53 ($0.47) $1.08 $0.66 $1.38
Percent of Net Sales:
Cost of sales 65.9% 65.7% 66.8% 67.2% 68.2% 67.1%
Selling, general and administrative 25.5% 25.1% 23.5% 22.8% 22.5% 22.3%
Interest-net 1.0% 0.8% 0.6% 0.8% 1.2% 1.2%
Other-net (0.1%) 0.5% 0.8% 0.8% 0.5% 1.4%
Earnings (loss) before income taxes 8.4% 7.9% (0.7%) 6.5% 4.3% 8.0%
Earnings (loss) 5.5% 5.1% (1.6%) 3.6% 2.3% 5.0%
- -----------------------------------------------------------------------------------------------------------
OTHER KEY INFORMATION
Total assets $1,891 $1,933 $1,759 $1,660 $1,670 $1,701
Long-term debt 290 345 284 343 391 387
Shareowners' equity $735 $669 $608 $780 $735 $744
Ratios:
Current ratio 1.6 1.5 1.6 2.4 2.4 2.1
Total debt to total capital 37.80% 45.80% 40.50% 31.70% 39.60% 39.20%
Income tax rate 35.00% 36.00% (125.40%) 44.40% 47.60% 37.90%
Return on average equity F, G 21.40% 21.60% (6.00%) 12.80% 8.00% 17.60%
Common Stock Data:
Dividends per share $0.87 $0.83 $0.77 $0.73 $0.71 $0.69
Equity per share at year-end $8.27 $7.54 $6.85 $8.79 $8.28 $8.37
Market price-high 35 57 1/4 47 3/8 32 13/16 26 11/16 22 7/16
-low 22 23 1/2 28 23 5/8 17 13/16 17 7/16
Average shares outstanding (in thousands)
Basic 89,626 89,408 89,470 89,152 89,043 89,550
Diluted 89,887 90,193 89,470 89,804 89,839 90,656
Other Information:
Earnings (loss) from continuing operations $150 $138 ($42) $97 $59 $125
Cumulative effect of accounting change -- -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------
Net earnings (loss) $150 $138 ($42) $97 $59 $125
Net earnings (loss) per share F, G
Basic $1.67 $1.54 ($0.47) $1.09 $0.66 $1.40
Diluted $1.67 $1.53 ($0.47) $1.08 $0.66 $1.38
Average number of employees 16,890 18,319 18,377 18,903 19,784 19,445
Shareowners of record at end of year 16,947 17,963 18,503 17,823 16,919 17,599
===========================================================================================================
(TABLE CONTINUED FROM ABOVE)
<CAPTION>
(Millions of Dollars, except per share amounts) 1993 1992 1991 1990 1989
- --------------------------------------------------------------------------------------------------
CONTINUING OPERATIONS F
<S> <C> <C> <C> <C> <C>
Net sales $2,273 $2,196 $1,942 $1,956 $1,951
Earnings (loss) 93 98 97 106 117
Earnings (loss) per share
Basic $1.03 $1.07 $1.12 $1.26 $1.35
Diluted $1.01 $1.06 $1.11 $1.25 $1.34
Percent of Net Sales:
Cost of sales 68.3% 66.8% 66.0% 65.3% 64.8%
Selling, general and administrative 22.5% 24.0% 23.8% 23.7% 23.0%
Interest-net 1.1% 1.2% 1.3% 1.3% 1.3%
Other-net 1.6% 0.8% 0.8% 0.9% 1.0%
Earnings (loss) before income taxes 6.5% 7.2% 8.1% 8.8% 9.9%
Earnings (loss) 4.1% 4.5% 5.0% 5.4% 6.0%
- --------------------------------------------------------------------------------------------------
OTHER KEY INFORMATION
Total assets $1,577 $1,608 $1,548 $1,494 $1,491
Long-term debt 377 438 397 398 416
Shareowners' equity $681 $696 $689 $679 $659
Ratios:
Current ratio 2.1 2.4 2.4 2.6 2.6
Total debt to total capital 38.70% 40.10% 37.60% 38.70% 39.60%
Income tax rate 37.40% 37.90% 38.00% 38.40% 39.60%
Return on average equity F, G 13.50% 14.10% 14.10% 15.80% 17.30%
Common Stock Data:
Dividends per share $0.67 $0.64 $0.61 $0.57 $0.51
Equity per share at year-end $7.62 $7.66 $7.61 $8.25 $7.66
Market price-high 23 15/16 24 1/16 22 19 7/8 19 5/8
-low 18 15/16 16 1/4 13 13 5/16 13 3/4
Average shares outstanding (in thousands)
Basic 89,871 91,405 86,532 84,384 86,756
Diluted 91,296 92,842 87,552 84,770 87,194
Other Information:
Earnings (loss) from continuing operations $93 $98 $97 $106 $117
Cumulative effect of accounting change (9) -- (12) -- --
- --------------------------------------------------------------------------------------------------
Net earnings (loss) $84 $98 $85 $106 $117
Net earnings (loss) per share F, G
Basic $0.94 $1.07 $0.98 $1.26 $1.35
Diluted $0.92 $1.06 $0.97 $1.25 $1.34
Average number of employees 18,988 18,650 17,420 17,784 18,464
Shareowners of record at end of year 20,018 20,661 21,297 22,045 22,376
==================================================================================================
</TABLE>
A Includes restructuring-related transition and other non-recurring costs of
$54.9 million, or $.40 per share, a one-time net restructuring credit of
$21.3 million, or $.15 per share, a mechanics tools' special charge of
$20.1 million, or $.14 per share, and a gain realized upon the termination
of a cross-currency financial instrument of $11.4 million, or $.08 per
share.
B Includes restructuring-related transition and other non-recurring costs of
$85.9 million, or $.61 per share.
C Includes charges for restructuring and asset write-offs of $238.5 million,
or $2.00 per share, related transition costs of $71.0 million, or $.49 per
share, and a non-cash charge of $10.6 million, or $.07 per share, for a
stock option grant as specified in the company's employment contract with
its chief executive officer.
D Includes charges for restructuring and asset write-offs of $47.8 million,
or $.43 per share, related transition costs of $32.9 million, or $.23 per
share, and a non-cash charge of $7.6 million, or $.08 per share, for
elements of the company's employment contract with its chief executive
officer.
E Includes charges for restructuring and asset write-offs of $85.5 million,
or $.72 per share, and related transition costs of $9.5 million, or $.06
per share.
F Excluding the cumulative after-tax effect of accounting changes for
postemployment benefits of $8.5 million, or $.09 per share, in 1993 and
postretirement benefits of $12.5 million, or $.14 per share, in 1991.
G Earnings per share and return on average equity excluding restructuring
charges, asset write-offs, related transition costs and other non-recurring
charges would have been $2.06 per share and 16.2% in 1999, $2.14 per share
and 18.7% in 1998, $2.08 per share and 19.9% in 1997, $1.83 per share and
18.9% in 1996 and $1.45 per share and 16.6% in 1995.
26-27
<PAGE>
MANAGEMENT REPORT ON RESPONSIBILITY FOR FINANCIAL REPORTING
The management of The Stanley Works is responsible for the preparation,
integrity and objectivity of the accompanying financial statements. The
statements were prepared in accordance with generally accepted accounting
principles. Preparation of financial statements and related data involves our
best estimates and the use of judgment. Management also prepared the other
information in the Annual Report and is responsible for its accuracy and
consistency with the financial statements.
The company maintains a system of internal accounting controls which is designed
to provide reasonable assurance, at appropriate cost, as to the reliability of
financial records and the protection of assets. This system includes monitoring
by an internal audit function. It is further characterized by care in the
selection of competent financial managers, by organizational arrangements that
provide for delegation of authority and divisions of responsibility and by the
dissemination of policies and procedures throughout the company.
Management is also responsible for fostering a strong, ethical climate so that
the company's affairs are conducted according to the highest standards of
personal and business conduct. This responsibility is reflected in the company's
Business Conduct Guidelines which are publicized throughout the organization.
The company has a long-established reputation of integrity in business conduct
and maintains a systematic program to assess compliance with these policies.
The adequacy of Stanley's internal accounting controls, the accounting
principles employed in its financial reporting and the scope of independent and
internal audits are reviewed by the Audit Committee of the Board of Directors,
consisting solely of outside directors. Both the independent auditors and our
internal auditors have unrestricted access to the Audit Committee, and they meet
with it periodically, with and without management present.
January 26, 2000
/S/ JOHN M. TRANI
John M. Trani
Chairman and Chief Executive Officer
/S/ JAMES M. LOREE
James M. Loree
Chief Financial Officer
28
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Shareowners
The Stanley Works
We have audited the accompanying consolidated balance sheets of The Stanley
Works and subsidiaries as of January 1, 2000 and January 2, 1999, and the
related consolidated statements of operations, changes in shareowners' equity,
and cash flows for each of the three fiscal years in the period ended January 1,
2000. These financial statements are the responsibility of the company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of The Stanley Works
and subsidiaries at January 1, 2000 and January 2, 1999, and the consolidated
results of their operations and their cash flows for each of the three fiscal
years in the period ended January 1, 2000, in conformity with accounting
principles generally accepted in the United States.
/S/ ERNST & YOUNG LLP
Hartford, Connecticut
January 26, 2000
29
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
OVERVIEW
Stanley is a worldwide producer of tools and door products for professional,
industrial and consumer use. The company's strategic goal is to become one of
the world's Great Brands, delivering sustained, profitable growth. In order to
achieve that goal the company has established financial targets of sales growth
at two times the industry rate, earnings growth in the low- to mid-teens,
operating margin in the mid-teens, operating cash flow approximately equal to
earnings and return on capital in the low- to mid-twenties. In connection with
these goals, the company experienced mixed results in 1999. Consequently, all
uncompleted restructuring initiatives were re-evaluated in the fourth quarter of
1999 and certain initiatives were cancelled requiring the reversal of previously
established restructuring reserves. The company is now focused on the
operational improvements to drive targeted financial results. In October 1999
the company launched PlayBook 2000, a framework of initiatives to drive sales
growth, cost competitiveness and operational process efficiency. The company
recorded a charge in the fourth quarter to establish restructuring reserves and
related asset write-offs for certain of the competitiveness initiatives
encompassed by this program. A net credit of $21.3 million resulted from this
change in restructuring plans.
RESULTS OF OPERATIONS
Net sales in 1999 were $2,752 million, an increase of 1% over 1998. ZAG
Industries Ltd. ("ZAG"), acquired in August 1998, contributed 2% to this sales
growth which was partially offset by a 1% reduction in sales from the net effect
of pricing and foreign currency translation. The company experienced
double-digit sales growth in U.S. residential doors and solid volume gains in
U.S. hand tools and mechanics tools. These increases were offset by weak Latin
American sales, lower sales of hardware products and a decline in industrial
mechanics tools, where despite strong demand, difficulties in the fourth quarter
installation of a new distribution system temporarily interrupted shipments. In
addition, European sales volume was negatively affected earlier in 1999 by
inefficiencies stemming from the closure of a distribution center and strong
competition in the fastening systems business.
Net sales in 1998 were $2,729 million, an increase of 2% over 1997. The primary
contributors to the revenue gain were the MacDirect program, growth in consumer
mechanics tools, fastening tools and fasteners and acquisitions (ZAG and Atro).
These gains were partially offset by the negative effects of foreign currency
translation, primarily Asia and Canada.
Financial results for 1997, 1998 and the first six months of 1999 include
transition expenses related to the company's restructuring initiatives. These
costs are classified as period operating expenses within cost of sales or
selling, general and administrative expense. They 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 restructuring. Management's judgment was used to determine which
costs should be classified as transition costs based on whether the costs were
unusual in nature, were incurred only because of restructuring initiatives and
were expected to cease when the transition activities ended. The total program
transition costs from inception of the restructuring initiatives in 1997 were
$101 million. In addition, the company incurred costs to remediate its computer
and related systems so that these systems would function properly with regard to
date issues related to 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 for 1997, 1998 and the first six months of
1999 excluding these identifiable costs. These pro forma or "core" results are
the basis of business segment information. The narrative regarding results of
operations has also 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 were essentially eliminated.
30
<PAGE>
Results in 1999 also included a special charge in the fourth quarter as the
company re-evaluated and established higher estimates for loss provisions on
receivables, inventory and other assets related to its mechanics tools
businesses, principally MacDirect. The changes in estimates were based on the
company's evolving experience in managing a direct mobile sales force in the
automotive channel as well as inefficiencies in operating mechanisms and
systems. Of the total $20 million special charge to income, $3 million was
included in net sales, $11 million was included in cost of sales, $11 million
was included in selling, general and administrative expenses and a credit of $5
million was included in other income. The level of this charge is not expected
to recur as the company has developed certain operating mechanisms and systems
which should substantially enhance the operational management of the related
businesses.
In 1999, the company reported gross profit of $938 million or 34.1% of net sales
compared to 34.3% in 1998. Included in cost of sales for 1999 were $20 million
of restructuring-related transition costs, primarily for plant rationalization
activities, and the mechanics tools' special charges of $11 million. Cost of
sales in 1998 included $17 million of restructuring-related transition costs.
Gross profit in 1999 excluding these restructuring-related and special charges
was 35.3% of net sales compared with 34.9% for 1998. This improvement is
attributable to a combination of improved cost controls in operations,
accelerating in the second half of 1999, and the benefits of the company's 1997
restructuring.
Reported gross profit in 1998 was $936 million, or 34.3% of sales, and
represented an increase of $50 million, or 6%, over 1997 reported gross profit
of $886 million, or 33.2% of sales. The improvement resulted from productivity
gains from restructuring and centralized procurement activities, the MacDirect
program, and lower spending on transition costs in 1998 versus 1997. Included in
cost of sales were restructuring-related transition costs, primarily for plant
rationalization activities, of $17 million in 1998 and $31 million in 1997. The
higher costs in 1997 related to demand flow manufacturing implementation
activities in several facilities. Core gross profit, excluding transition costs,
was $953 million, or 34.9% of sales, up from $917 million or 34.4% of sales in
the prior year.
Selling, general and administrative expenses were $703 million, or 25.5% of net
sales, in 1999, as compared with $685 million, or 25.1% of net sales in 1998.
Included in 1999 were $35 million of restructuring-related transition and other
non-recurring costs and fourth quarter special charges related to mechanics
tools of $11 million. Included in 1998 were $69 million of restructuring-related
transition and other non-recurring costs. Restructuring-related costs includes
consulting for structural reorganization, recruiting and relocation of
employees, the cost of transition employees involved in reorganizing the
functions and the cost of moving and maintaining duplicative distribution
facilities. Excluding these costs and the fourth quarter special charges,
selling, general and administrative expenses increased to $657 million in 1999
from $616 million in 1998. This increase is primarily the result of the Zag
acquisition, and higher selling and administrative costs related to an increased
number of sales representatives in the MacDirect program.
Selling, general and administrative expenses in 1998 were $685 million, up $57
million from 1997 expenses of $628 million, or 23.5% of sales. Approximately $30
million of the increase represented higher restructuring-related transition and
other non-recurring costs, which increased from $40 million in 1997 to $69
million in 1998. Incremental spending on systems for Y2K remediation of $39
million contributed to the remaining increase. Excluding transition and
non-recurring costs, selling, general and administrative expenses would have
been $616 million, or 22.6% of sales, as compared with $588 million, or 22.0% of
sales, in 1997. The increase was primarily due to higher selling costs
associated with the MacDirect program.
Net interest expense increased to $28 million in 1999 from $23 million in 1998.
The increase, which occurred primarily in the first half of 1999, reflected
increased levels of debt associated with the ZAG acquisition and higher levels
of working capital. The company used cash flow from operations generated in the
third and fourth quarter to repay debt resulting in reduced interest expense in
the latter half of the year. Net interest expense increased 39% in 1998 from
1997, primarily due to higher levels of debt used for funding acquisitions and
increased working capital.
31
<PAGE>
Other net was $2 million of income in 1999 compared with $13 million in expense
for 1998. Included in 1999 results was a non-recurring gain of $11 million
realized upon the termination of a cross-currency financial instrument. Included
in 1997 was a non-cash charge of $11 million related to the value of stock
options granted to the company's chief executive officer.
The company's 1999 effective annual income tax rate was 35.0%, reflecting
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. The
company's effective tax rate was 36% in 1998. While 1997 was significantly
affected by non-deductible restructuring charges, the pro forma effective rate
on core earnings for 1997 was 37.5%.
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 information presented below excludes
restructuring charges, restructuring-related transition and other non-recurring
costs for 1997, 1998 and the first half of 1999. Segment eliminations are also
excluded. Special fourth quarter charges related to mechanics tools of $25
million are reflected in Tools segment results.
TOOLS 1999 1998 1997
(Millions of Dollars)
- ----------------------------------------------------------------
Net Sales $2,116 $2,108 $2,024
Operating Profit $ 248 $ 279 $ 277
% of Net Sales 11.7% 13.2% 13.7%
- ----------------------------------------------------------------
While tools sales overall were relatively flat in 1999, they included a 2%
increase from the acquisition of ZAG and volume improvements in the U.S. hand
and mechanics tools businesses. These increases were offset by lower sales in
Europe and Latin America and a decline in industrial mechanics tools. Core
operating profit for the tools segment excluding the special charges was 12.9%
of net sales, a slight decline from 1998 due to higher selling, general and
administrative expenses.
Net sales increased 4% in 1998 compared to 1997, due primarily
to the growth of the MacDirect program and acquisitions. Growth
in consumer mechanics tools and fastening tools and fasteners also contributed
to higher sales. Core operating profit increased, although as a percent of sales
it was slightly lower than the prior year. Productivity gains from procurement
and restructuring initiatives were offset by operating inefficiencies at several
plants.
DOORS 1999 1998 1997
(Millions of Dollars)
- --------------------------------------------------------------
Net Sales $636 $621 $646
Operating Profit $ 42 $ 59 $ 52
% of Net Sales 6.6% 9.5% 8.1%
- --------------------------------------------------------------
Net sales increased 2% in 1999, driven by strong unit volume increases in
residential entry doors and home decor products. This growth was substantially
offset by weakness in the hardware business. Core operating profit declined by
$17 million due to costs associated with relocating hardware production to
lower-cost locations and increased provisions for uncollectible accounts
receivables.
Net sales decreased 4% in 1998 versus 1997, due to the divestiture in 1998 of
the European automatic door business as well as the February 1997 divestiture of
the U.S. garage related products business. In addition, all remaining product
lines experienced a sales decline except for the automatic door business in the
U.S. Operating margin improved to 9.5%, primarily the result of the
divestitures, restructuring initiatives and reduction in material costs.
RESTRUCTURING ACTIVITIES
In 1999, the company completed most of the restructuring initiatives announced
in 1997. The 1997 plan called for spending $340 million (approximately $240
million of restructuring charges recorded in 1997 and $101 million of transition
costs from 1997 to 1999) to generate annual savings of $145 million, all of
which was to be reinvested in growth initiatives. To date the company has closed
50 facilities and reduced net employment by approximately 2,700 people to
deliver annual benefits as anticipated, however, these were largely offset by
operational problems.
32
<PAGE>
Reserves for restructuring activities as of the beginning of 1999 were $154
million, of which $73 million related to severance, $44 million related to asset
write-downs, and $37 million related to environmental remediation and other exit
costs. In 1999, severance of $44 million, asset write-downs of $13 million, and
payments for other exit costs of $17 million reduced these reserves to $80
million. In the fourth quarter of 1999, the company completed an evaluation of
these remaining reserves and determined that certain projects would be
cancelled. Accordingly, the company reversed $62 million of reserves established
for such actions. Net reserves of $18 million, $12 million for severance, $2
million for asset write-downs and $4 million for environmental and other exit
costs, will be utilized for costs generated from projects initiated, however,
not completed as of the end of 1999. Also in the fourth quarter, new projects
were approved as part of the PlayBook 2000 initiative, including eight facility
closures and the related relocation of production, a reduction in workforce in
administrative and sales functions and the outsourcing of non-core activities as
well as the asset impairments related to those initiatives. These actions are
expected to result in a net employment reduction of approximately 1,000 people.
The company recorded restructuring charges related to these new initiatives of
$40 million ($32 million related to severance and other exit costs, and $8
million related to asset write-downs).
FINANCIAL CONDITION
LIQUIDITY, SOURCES AND USES OF CAPITAL
The company has historically generated strong cash flows from operations. During
1999 the company generated $222 million in operating cash flow, a significant
increase from $56 million in the prior year. This increase resulted primarily
from better working capital management and a significant reduction in
restructuring-related transition costs, both occurring in the second half of
1999. In 1999, the company's receivables increased by $29 million, inventory was
relatively flat, and accounts payable increased by $53 million. The company made
cash payments of $61 million for its restructuring activities, primarily
severance, and incurred $55 million in restructuring-related transition and Y2K
remediation costs. Cash outflows relating to the restructuring activities are
expected to continue, although at a significantly reduced level, throughout
2000.
Capital expenditures were $78 million in 1999 up from $57 million
last year. Investment in capital during 1998 was lower than traditional levels
and lower than depreciation and amortization as a result of facility
consolidations, continued outsourcing and the Stanley Production System (which
focuses on continuous improvement) all of which reduced the requirement for
operating capital. The level of spending should continue at the more traditional
level incurred in 1999.
In 1999 the company issued $120 million of 5 year debt to capitalize on
favorable interest rates and reduce its reliance on short-term sources of funds,
which had been opportunistically used to fund the ZAG acquisition. Strong second
half cash flows were used to repay over $100 million in borrowings bringing the
debt to capital ratio down to 37.8% at the end of 1999.
The company's objective is to increase dividends by at least one-half the
company's earnings growth rate, ultimately reaching a dividend payout ratio of
25%. Dividends increased 5% in 1999 and 8% in 1998.
The company repurchased 966,000 shares of its common stock in
1999 primarily to offset the dilutive impact of employee benefit programs (stock
awards, options, etc.). The net effect was a decrease in equity of $6 million in
1999. The company has indicated that it may continue to repurchase its shares
when they are deemed to be undervalued in the marketplace. As of January 1, 2000
the company had authorization to repurchase 2,952,000 shares and has purchased
755,000 shares through February 18, 2000.
MARKET RISK
Market risk is the potential economic loss that may result from adverse changes
in the fair value of financial instruments. The company is exposed to market
risk from changes in foreign currency exchange rates and interest rates.
Exposure to foreign currency risk results because the company, through its
global businesses, enters into transactions and makes investments denominated in
multiple currencies. The company's predominant exposures are in European,
Canadian and Asian currencies. All cross-currency trade flows arising from sales
and procurement activities are consolidated and netted prior to obtaining risk
protection, primarily purchased basket options. The company is thus able to
capitalize on its global positioning by taking advantage of naturally offsetting
exposures to reduce the cost
33
<PAGE>
of purchasing protection. From time to time, the company also enters into
forward exchange contracts to reduce the earnings and cash flow impact of
non-functional currency denominated receivables and payables, predominantly
intercompany transactions. Gains and losses from these hedging instruments
offset the gains or losses on the underlying net exposures, assets and
liabilities being hedged. The company has also entered into several
cross-currency interest rate swaps, primarily to reduce overall borrowing costs,
but also to provide a partial hedge of the net investments in certain
subsidiaries. Sensitivity to foreign currency exposure risk from these financial
instruments at the end of 1999 would have been immaterial based on the potential
loss in fair value from a hypothetical 10% adverse movement in all currencies.
The company's exposure to interest rate risk results from its outstanding debt
obligations, short term investments and derivative financial instruments
employed in the management of its debt portfolio. The debt portfolio is managed
to achieve capital structure targets and reduce the overall cost of borrowing by
using a combination of fixed and floating rate debt as well as interest rate
swaps, caps and cross-currency interest rate swaps. The company's primary
exposure to interest risk comes from its floating rate debt in the U.S., Canada
and Europe and is fairly represented by changes in LIBOR rates. At January 1,
2000, the result of a hypothetical one percentage point increase in short term
LIBOR rates would not have resulted in a material impact on the pretax profit of
the company.
The company has access to financial resources and borrowing
capabilities around the world. The company believes that its strong financial
position, operating cash flows and borrowing capacity provide the financial
flexibility necessary to continue its record of annual dividend payments, to
invest in the routine needs of its businesses, to make strategic acquisitions
and to fund the restructuring and other initiatives encompassed by its growth
strategy.
OTHER MATTERS
ENVIRONMENTAL
The company incurs costs related to environmental issues as a result of various
laws and regulations governing current operations as well as the remediation of
previously contaminated sites. Future laws and regulations are expected to be
increasingly stringent and will likely increase the company's expenditures
related to routine environmental matters.
The company accrues for anticipated costs associated with investigatory and
remediation efforts in accordance with appropriate accounting guidelines which
address probability and the ability to reasonably estimate future costs. The
liabilities are reassessed whenever circumstances become better defined or
remediation efforts and their costs can be better estimated. Subject to the
imprecision in estimating future environmental costs, the company believes that
any sum it may pay in connection with environmental matters in excess of the
amounts recorded will not have a materially adverse effect on its financial
position, results of operations or liquidity.
YEAR 2000 SYSTEMS ISSUES
The company had no significant Y2K-related system problems or
business disruptions. The aggregate cost of the company's Y2K efforts, which
included internal and incremental costs, was $113 million. Approximately 25% of
the total cost was capitalized.
NEW ACCOUNTING STANDARDS
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.
34
<PAGE>
CAUTIONARY STATEMENTS
The statements contained in this annual report to shareowners regarding the
company's ability (i) to become a Great Brand and deliver sustained, profitable
growth (e.g., sales growth at twice the industry rate, earnings growth in the
low- to mid-teens, operating cash flow approximately equal to earnings and
dividends increasing by at least one-half the company's earnings growth), (ii)
to lower the overall cost structure to become more competitive (including
sourcing 26% of product cost from low-cost countries in 2000), (iii) to obtain
sales growth from the implementation of sales and marketing programs, (iv) to
drive working capital efficiency and continue to generate cash and (v) to avoid
future special charges at the level incurred in 1999 in the mechanics tools
business are forward looking and inherently subject to risk and uncertainty.
The company's ability to lower its overall cost structure is dependent on the
success of various initiatives to improve manufacturing operations and to
implement related cost control systems and to source from and manufacture a
higher percentage of the company's products in low-cost countries. The success
of these initiatives is dependent on the company's ability to increase the
efficiency of its routine business processes, to develop and implement process
control systems, to develop and execute comprehensive plans for facility
consolidations, the availability and effectiveness of vendors to perform
outsourced functions, the availability of lower cost raw material of suitable
quality from foreign countries, the successful recruitment and training of new
employees, the resolution of any labor issues related to closing facilities, the
need to respond to significant changes in product demand while any facility
consolidation is in process and other unforeseen events. In addition, the
company's ability to leverage the benefits of gross margin improvements is
dependent upon maintaining selling, general and administrative expense at 1999
levels (excluding fourth quarter 1999 special charges). The company's ability to
maintain the level of selling, general and administrative expenses is dependent
upon various process improvement activities, the successful implementation of
changes to the sales organization and the reduction of transaction costs.
The company's ability to achieve sales growth is dependent upon a number of
factors, including: (i) the ability to recruit and retain a sales force
comprised of employees and manufacturers reps, (ii) the success of the company's
sales and marketing programs to increase retail sell through and stimulate
demand for the company's products, (iii) the ability of the sales force to adapt
to changes made in the sales organization and achieve adequate customer
coverage, (iv) the ability of the company to fulfill demand for its products,
(v) the absence of pricing pressures from customers and competitors and the
ability to defend market share in the face of price competition, (vi) the
ability to improve the cost structure in order to fund new product and brand
development and (vii) the acceptance of the company's new products in the
marketplace as well as the ability to satisfy demand for these products.
The company's ability to drive working capital efficiency and continue to
generate cash is dependent on the continued success of improvements in processes
to manage inventory and receivable levels.
The company's ability to avoid future special charges related to its mechanics
tools business at the level incurred in 1999 is dependent upon the success of
the operating mechanisms and systems being implemented to provide necessary
controls over and visibility to the business.
The company's ability to achieve the objectives discussed above
will also be affected 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.
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<PAGE>
BUSINESS SEGMENT INFORMATION
BUSINESS SEGMENTS
In 1998, the company adopted SFAS No. 131, "Disclosure about Segments of a
Business Enterprise and Related Information." Prior period amounts have been
restated for comparability.
The company operates worldwide in two reportable business segments: Tools and
Doors. 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.
Business Segments
(Millions of Dollars) 1999 1998 1997
=======================================================================
NET SALES
Tools $ 2,116.2 $ 2,107.8 $ 2,023.6
Doors 635.6 621.3 645.9
- -----------------------------------------------------------------------
Consolidated $ 2,751.8 $ 2,729.1 $ 2,669.5
=======================================================================
OPERATING PROFIT
Tools $ 248.1 $ 278.6 $ 276.8
Doors 41.7 58.9 52.6
- -----------------------------------------------------------------------
289.8 337.5 329.4
Restructuring, transition
and other costs (33.6) (85.9) (320.1)
Interest-net (27.9) (23.1) (16.6)
Other-net 2.5 (13.1) (11.3)
- -----------------------------------------------------------------------
Earnings (loss) before
income taxes $ 230.8 $ 215.4 $ (18.6)
=======================================================================
SEGMENT ASSETS
Tools $ 1,455.1 $ 1,462.9 $ 1,227.6
Doors 306.4 279.6 291.5
- -----------------------------------------------------------------------
1,761.5 1,742.5 1,519.1
Corporate assets 129.1 190.4 239.6
- -----------------------------------------------------------------------
Consolidated $ 1,890.6 $ 1,932.9 $ 1,758.7
=======================================================================
CAPITAL EXPENDITURES
Tools $ 90.2 $ 53.1 $ 70.2
Doors 12.7 11.6 13.9
DEPRECIATION AND
AMORTIZATION
Tools $ 70.1 $ 64.7 $ 59.9
Doors 15.5 15.0 12.5
=======================================================================
GENERAL INFORMATION
The company assesses the performance of its reportable business segments using
operating profit, which follows the same accounting policies as those described
in Note A to the Financial Statements. Operating profit excludes interest-net,
other-net, and income tax expense. In addition, operating profit excludes
restructuring and asset write-offs, restructuring-related transition costs
associated with the company's restructuring plans and other non-recurring costs.
Corporate and shared expenses are allocated to each segment. Sales between
segments are not material. Segment assets primarily include accounts receivable,
inventory, other current assets, property, plant and equipment, intangible
assets and other miscellaneous assets. Corporate assets and unallocated assets
are cash, deferred income taxes and certain other assets. Geographic net sales
and long-lived assets are attributed to the geographic regions based on the
geographic location of the Stanley subsidiary.
Sales to one customer in both the Tools and Doors segments were approximately
15%, 14% and 12% of consolidated net sales in 1999, 1998 and 1997, respectively.
GEOGRAPHIC AREAS
(Millions of Dollars) 1999 1998 1997
====================================================================
NET SALES
United States $ 1,962.5 $ 1,953.4 $ 1,900.6
Other Americas 199.0 211.9 227.1
Europe 493.2 467.5 423.6
Asia 97.1 96.3 118.2
- --------------------------------------------------------------------
Consolidated 2,751.8 $ 2,729.1 $ 2,669.5
====================================================================
LONG-LIVED ASSETS
United States $ 442.1 $ 461.1 $ 479.7
Other Americas 28.1 25.4 31.0
Europe 286.3 284.3 159.8
Asia 36.7 41.7 46.8
Other 6.4 34.0 36.1
- --------------------------------------------------------------------
Consolidated $ 799.6 $ 846.5 $ 753.4
====================================================================
36
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
Fiscal years ended January 1, 2000, January 2, 1999 and January 3, 1998
(Millions of Dollars, except per
share amounts) 1999 1998 1997
===========================================================================
Net Sales $ 2,751.8 $ 2,729.1 $ 2,669.5
Costs and Expenses
Cost of sales 1,813.9 1,792.8 1,783.4
Selling, general and administrative 703.0 684.7 627.7
Interest-net 27.9 23.1 16.6
Other-net (2.5) 13.1 21.9
Restructuring and asset write-offs (21.3) -- 238.5
- ---------------------------------------------------------------------------
2,521.0 2,513.7 2,688.1
- ---------------------------------------------------------------------------
Earnings (Loss) Before Income Taxes 230.8 215.4 (18.6)
- ---------------------------------------------------------------------------
Income Taxes 80.8 77.6 23.3
- ---------------------------------------------------------------------------
Net Earnings (Loss) $ 150.0 $ 137.8 $ (41.9)
- ---------------------------------------------------------------------------
Net Earnings (Loss) Per Share of
Common Stock
Basic $ 1.67 $ 1.54 $ (.47)
Diluted $ 1.67 $ 1.53 $ (.47)
============================================================================
See notes to consolidated financial statements.
37
<PAGE>
CONSOLIDATED BALANCE SHEETS
January 1, 2000 and January 2, 1999
(Millions of Dollars) 1999 1998
================================================================================
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 88.0 $ 110.1
Accounts and notes receivable 546.1 517.0
Inventories 381.2 380.9
Deferred taxes 34.2 43.6
Other current assets 41.5 34.8
- --------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 1,091.0 1,086.4
PROPERTY, PLANT AND EQUIPMENT 520.6 511.4
GOODWILL AND OTHER INTANGIBLES 185.2 196.9
OTHER ASSETS 93.8 138.2
- --------------------------------------------------------------------------------
TOTAL ASSETS $ 1,890.6 $ 1,932.9
================================================================================
LIABILITIES AND SHAREOWNERS' EQUITY
CURRENT LIABILITIES
Short-term borrowings $ 145.3 $ 207.8
Current maturities of long-term debt 11.7 14.2
Accounts payable 225.0 172.1
Accrued expenses 311.0 308.0
- --------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 693.0 702.1
LONG-TERM DEBT 290.0 344.8
RESTRUCTURING RESERVES 1.3 34.2
OTHER LIABILITIES 170.9 182.4
SHAREOWNERS' EQUITY
Preferred stock, without par value:
Authorized and unissued 10,000,000 shares
Common stock, par value $2.50 per share:
Authorized 200,000,000 shares;
issued 92,343,410 shares in 1999 and 1998 230.9 230.9
Retained earnings 926.9 867.2
Accumulated other comprehensive loss (99.2) (84.6)
ESOP debt (202.2) (213.2)
- --------------------------------------------------------------------------------
856.4 800.3
Less: cost of common stock in treasury
(3,398,235 shares in 1999 and 3,571,482
shares in 1998) 121.0 130.9
- --------------------------------------------------------------------------------
TOTAL SHAREOWNERS' EQUITY 735.4 669.4
================================================================================
TOTAL LIABILITIES AND SHAREOWNERS' EQUITY $ 1,890.6 $ 1,932.9
================================================================================
See notes to consolidated financial statements.
38
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal years ended January 1, 2000, January 2, 1999 and January 3, 1998
<TABLE>
<CAPTION>
(Millions of Dollars) 1999 1998 1997
====================================================================================================================
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net earnings (loss) $ 150.0 $ 137.8 $ (41.9)
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:
Depreciation and amortization 85.6 79.7 72.4
Provision for bad debts 31.3 16.1 16.5
Restructuring and asset write-offs (21.3) -- 238.5
Other non-cash items 26.4 16.4 (34.4)
Changes in operating assets and liabilities:
Accounts and notes receivable (66.9) (41.7) (38.7)
Inventories (12.5) (78.0) 8.6
Accounts payable and accrued expenses 18.1 (61.8) (.7)
Income taxes 19.8 (5.4) 21.8
Other (8.2) (6.9) (.9)
====================================================================================================================
Net cash provided by operating activities 222.3 56.2 241.2
====================================================================================================================
INVESTING ACTIVITIES:
Capital expenditures (77.9) (56.9) (73.3)
Capitalized software (25.0) (7.8) (10.8)
Proceeds from sales of assets 35.1 9.8 11.2
Proceeds from sales of businesses -- 3.0 34.8
Business acquisitions -- (99.9) (58.4)
Investment in affiliated company -- -- (23.1)
Other (.1) .7 (5.8)
- --------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (67.9) (151.1) (125.4)
====================================================================================================================
FINANCING ACTIVITIES:
Payments on long-term debt (156.7) (40.0) (7.4)
Proceeds from long-term borrowings 121.3 60.9 2.8
Net short-term financing (61.1) 126.7 75.3
Proceeds from swap terminations 13.9 -- --
Proceeds from issuance of common stock 10.0 21.9 40.5
Purchase of common stock for treasury (21.4) (42.0) (83.0)
Cash dividends on common stock (77.5) (73.9) (68.6)
====================================================================================================================
Net cash provided (used) by financing activities (171.5) 53.6 (40.4)
- --------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash (5.0) (.8) (7.2)
====================================================================================================================
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (22.1) (42.1) 68.2
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 110.1 152.2 84.0
====================================================================================================================
CASH AND CASH EQUIVALENTS, END OF YEAR $ 88.0 $ 110.1 $ 152.2
====================================================================================================================
See notes to consolidated financial statements.
</TABLE>
39
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREOWNERS' EQUITY
Fiscal years ended January 1, 2000, January 2, 1999 and January 3, 1998
<TABLE>
<CAPTION>
Accumulated
Other
Common Retained Comprehensive ESOP Treasury Shareowners'
(Millions of Dollars, except per share amounts) Stock Earnings Income (Loss) Debt Stock Equity
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE DECEMBER 28, 1996 $ 230.9 $ 919.0 $(45.5) $(234.8) $(89.5) $ 780.1
Comprehensive income (loss):
Net loss (41.9)
Currency translation adjustment (39.8)
Total comprehensive income (loss) (81.7)
Cash dividends declared-$.77 per share (68.6) (68.6)
Issuance of common stock (13.4) 61.1 47.7
Purchase of common stock (92.2) (92.2)
Tax benefit related to stock options 8.7 8.7
ESOP debt 11.0 11.0
ESOP tax benefit 2.8 2.8
=======================================================================================================================
Balance January 3, 1998 230.9 806.6 (85.3) (223.8) (120.6) 607.8
Comprehensive income (loss):
Net earnings 137.8
Currency translation adjustment 2.1
Minimum pension liability (1.4)
Total comprehensive income (loss) 138.5
Cash dividends declared-$.83 per share (73.9) (73.9)
Issuance of common stock (8.5) 33.8 25.3
Purchase of common stock (44.1) (44.1)
Tax benefit related to stock options 2.4 2.4
ESOP debt 10.6 10.6
ESOP tax benefit 2.8 2.8
=======================================================================================================================
Balance January 2, 1999 230.9 867.2 (84.6) (213.2) (130.9) 669.4
Comprehensive income (loss):
Net earnings 150.0
Currency translation adjustment (15.6)
Minimum pension liability 1.0
Total comprehensive income (loss) 135.4
Cash dividends declared-$.87 per share (77.5) (77.5)
Issuance of common stock (16.3) 29.4 13.1
Purchase of common stock (19.5) (19.5)
Tax benefit related to stock options 0.8 0.8
ESOP debt 11.0 11.0
ESOP tax benefit 2.7 2.7
- -----------------------------------------------------------------------------------------------------------------------
Balance January 1, 2000 $230.9 $926.9 $(99.2) $(202.2) $(121.0) $735.4
=======================================================================================================================
</TABLE>
See notes to consolidated financial statements.
40
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the company and
its majority-owned subsidiaries which require consolidation, after the
elimination of intercompany accounts and transactions. The company's fiscal year
ends on the Saturday nearest to December 31. There were 52 weeks in fiscal years
1999 and 1998 and 53 weeks in 1997.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues and expenses, as
well as certain financial statement disclosures. While management believes that
the estimates and assumptions used in the preparation of the financial
statements are appropriate, actual results could differ from these estimates.
FOREIGN CURRENCY TRANSLATION
For most foreign operations, asset and liability accounts are translated at
current exchange rates; income and expenses are translated using weighted
average exchange rates. Resulting translation adjustments, as well as gains and
losses from certain intercompany transactions, are reported in a separate
component of shareowners' equity. Translation adjustments for operations in
highly inflationary economies and exchange gains and losses on transactions are
included in earnings, and amounted to net losses for 1999, 1998 and 1997 of $4.8
million, $.9 million and $.4 million, respectively.
CASH EQUIVALENTS
Highly liquid investments with original maturities of three months or less are
considered cash equivalents.
INVENTORIES
U.S. inventories are valued at the lower of last-in, first-out (LIFO) cost or
market. Other inventories are valued generally at the lower of first-in,
first-out (FIFO) cost or market.
LONG-LIVED ASSETS
Property, plant and equipment are stated on the basis of historical cost less
accumulated depreciation. Depreciation is provided using a combination of
accelerated and straight-line methods over the estimated useful lives of the
assets.
Goodwill is amortized on a straight-line basis over periods not exceeding forty
years. The company periodically evaluates the existence of goodwill impairment
on the basis of whether amounts recorded are recoverable from projected
undiscounted cash flows of related businesses. Impairment losses are valued by
comparing the carrying value of the goodwill to its fair value, generally
determined by the discounted cash flow method.
Impairment losses are recorded on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash flows estimated
to be generated by those assets are less than the assets' carrying amount.
Impairment losses were charged to operations in 1999 and 1997 and were included
in Restructuring and asset write-offs on the statement of operations.
FINANCIAL INSTRUMENTS
To manage interest rate exposure, the company enters into interest rate swap
agreements. The net interest paid or received on the swaps is recognized as
interest expense. Gains resulting from the early termination of interest rate
swap agreements are deferred and amortized as adjustments to interest expense
over the remaining period originally covered by the terminated swap. The company
manages exposure to fluctuations in foreign exchange rates by creating
offsetting positions through the use of forward exchange contracts or currency
options. The company enters into forward exchange contracts to hedge
intercompany loans and enters into purchased foreign currency options to hedge
anticipated transactions. Gains and losses on forward exchange contracts are
deferred and recognized as part of the underlying transactions. Changes in the
fair value of options, representing a basket of foreign currencies purchased to
hedge anticipated cross-currency cash flows, are included in cost of sales. The
company does not use financial instruments for trading or speculative purposes.
41
<PAGE>
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 is 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.
REVENUE RECOGNITION
Revenue is recognized when the earning process is complete and
the risks and rewards of ownership have transferred to the customer, which is
generally considered to have occurred upon shipment of the finished product.
INCOME TAXES
Income tax expense is based on reported earnings (loss) before income taxes.
Deferred income taxes reflect the impact of temporary differences between assets
and liabilities recognized for financial reporting purposes and such amounts
recognized for tax purposes, and are measured by applying enacted tax rates in
effect in years in which the differences are expected to reverse.
EARNINGS PER SHARE
Basic earnings per share equals net earnings divided by weighted average shares
outstanding during the year. Diluted earnings per share includes the impact of
common stock equivalents using the treasury stock method when the effect is
dilutive.
STOCK-BASED COMPENSATION
The company accounts for its employee stock compensation plans under Accounting
Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to
Employees." Accordingly, no compensation cost is recognized for stock-based
compensation unless the quoted market price of the stock at the grant date is in
excess of the amount the employee must pay to acquire the stock. Pro forma
disclosures of net earnings and earnings per share, as if the fair value based
method of accounting had been applied, are presented in Note J.
RECLASSIFICATIONS
Certain prior years amounts have been reclassified to conform with the current
year presentation.
B. ACQUISITIONS
In August 1998, the company acquired Zag Industries Ltd. (Zag), an innovator and
producer of plastic storage products, for $129.3 million. The purchase price
included a cash payment of $114.4 million, contingent payments based on Zag's
estimated earnings over a five year period and acquisition related costs. The
purchase price was allocated to the fair market value of the assets acquired and
liabilities assumed and resulted in goodwill of $94.3 million, which is being
amortized over a 40 year period.
In November 1997, the company acquired the assets of Atro Industriale, a
manufacturer and distributor of pneumatic fastening tools, collated nails, and
staples for $46.3 million.
The aforementioned acquisitions were accounted for as purchase transactions and,
accordingly, the operating results have been included in the company's
consolidated financial statements since the dates of acquisition. The
acquisitions did not have a material pro forma impact on operations.
C. ACCOUNTS AND NOTES RECEIVABLE
Trade receivables are dispersed among a large number of retailers, distributors
and industrial accounts in many countries. Adequate provisions have been
established to cover anticipated credit losses. At January 1, 2000 and January
2, 1999, allowances for doubtful receivables of $43.4 million and $26.7 million,
respectively, were applied as a reduction of current accounts and notes
receivable. The company believes it has no significant concentrations of credit
risk as of January 1, 2000.
The company sells certain accounts receivable under revolving sales agreements.
The proceeds from these sales were $93.6 million in 1999, $68.8 million in 1998
and $61.9 million in 1997.
42
<PAGE>
D. INVENTORIES
(Millions of Dollars) 1999 1998
================================================================================
Finished products $ 269.0 $ 273.3
Work in process 48.3 52.5
Raw materials 63.9 55.1
- --------------------------------------------------------------------------------
$ 381.2 $ 380.9
================================================================================
Inventories in the amount of $231.6 million at January 1, 2000 and $218.6
million at January 2, 1999 were valued at the lower of LIFO cost or market. If
LIFO inventories had been valued at FIFO costs, they would have been $114.4
million and $113.9 million higher than reported at January 1, 2000 and January
2, 1999, respectively.
E. PROPERTY, PLANT AND EQUIPMENT
(Millions of Dollars) 1999 1998
================================================================================
Land $ 27.2 $ 36.5
Buildings 218.3 229.0
Machinery and equipment 886.0 873.3
Computer software 76.5 59.7
- --------------------------------------------------------------------------------
1,208.0 1,198.5
Less: accumulated depreciation
and amortization 687.4 687.1
- --------------------------------------------------------------------------------
$ 520.6 $ 511.4
================================================================================
The provisions for depreciation and amortization for 1999, 1998 and 1997 were
$75.6 million, $71.4 million and $65.2 million, respectively.
F. GOODWILL AND OTHER INTANGIBLES
Goodwill and other intangibles at the end of each fiscal year, net of
accumulated amortization of $86.0 million and $80.2 million, were as follows:
(Millions of Dollars) 1999 1998
================================================================================
Goodwill $ 168.2 $ 177.0
Other 17.0 19.9
- --------------------------------------------------------------------------------
$ 185.2 $ 196.9
================================================================================
G. ACCRUED EXPENSES
(Millions of Dollars) 1999 1998
================================================================================
Payroll and related taxes $ 53.1 $ 53.5
Insurance 32.2 30.6
Restructuring 46.7 90.3
Income taxes 45.7 26.3
Other 133.3 107.3
- --------------------------------------------------------------------------------
$ 311.0 $ 308.0
================================================================================
H. LONG-TERM DEBT AND FINANCING ARRANGEMENTS
(Millions of Dollars) 1999 1998
================================================================================
Notes payable in 2002 7.4% $ 100.0 $ 100.0
Notes payable in 2004 5.8% 120.0 --
Commercial paper -- 150.0
Notes payable due semiannually
to 2005 6.3% 27.5 31.3
Industrial Revenue Bonds due
in varying amounts to 2010 5.8-6.8% 19.6 19.6
ESOP loan guarantees,
payable in varying
monthly installments
through 2009 6.1% 33.6 39.6
Other 1.0 18.5
- --------------------------------------------------------------------------------
301.7 359.0
Less: current maturities 11.7 14.2
- --------------------------------------------------------------------------------
$ 290.0 $ 344.8
================================================================================
On February 24, 1999, the company issued $120.0 million of five year debt at a
coupon rate of 5.75%. The proceeds were used to refinance commercial paper,
classified as non-current at January 2, 1999.
The company has unused short and long-term credit arrangements with several
banks to borrow up to $400.0 million at the lower of prime or money market
rates. Of this amount, $150.0 million is long-term. Commitment fees range from
.06% to .07%. In addition, the company has short-term lines of credit with
numerous foreign banks aggregating $105.9 million, of which $105.6 million was
available at January 1, 2000. Short-term arrangements are reviewed annually for
renewal. Of the long-term and short-term lines, $400.0 million is available to
support the company's commercial paper program. The weighted average interest
rates on short-term borrowings at January 1, 2000 and January 2, 1999 were 5.1%
and 5.4%, respectively.
To manage interest costs and foreign exchange risk, the company maintains a
portfolio of interest rate swap agreements. The portfolio includes currency
swaps maturing in 2004 that convert $90.5 million of fixed rate United States
dollar debt into fixed rate Euro debt (4.4% weighted average rate). The company
also has a currency swap that converts $32.0 million of variable rate United
States dollar debt to variable rate Euro debt (3.5% weighted average rate). See
Note I for more information regarding the company's interest rate and currency
swap agreements.
43
<PAGE>
Aggregate annual maturities of long-term debt for the years 2001 to 2004 are
$11.6 million, $125.6 million, $12.7 million and $120.4 million, respectively.
Interest paid during 1999, 1998 and 1997 amounted to $30.8 million, $31.2
million and $22.7 million, respectively.
Commercial paper, utilized to support working capital requirements, was $145.2
million and $148.5 million, as of January 1, 2000 and January 2, 1999,
respectively.
I. FINANCIAL INSTRUMENTS
The company's objectives in using debt related financial instruments are to
obtain the lowest cost source of funds within an acceptable range of variable to
fixed rate debt proportions and to minimize the foreign exchange risk of
obligations. To meet these objectives the company enters into interest rate swap
and currency swap agreements. A summary of instruments and weighted average
interest rates follows. The weighted average variable pay and receive rates are
based on rates in effect at the balance sheet dates. Variable rates are
generally based on LIBOR or commercial paper rates with no leverage features.
(Millions of Dollars) 1999 1998
=========================================================================
INTEREST RATE SWAPS
Receive variable-pay fixed rates $ -- $ 167.8
pay rate -- 5.1%
receive rate -- 5.2%
maturity dates -- 1999-2003
CURRENCY SWAPS $ 112.8 $ 106.8
pay rate 4.1% 4.9%
receive rate 5.8% 5.7%
maturity dates 2004 1999-2005
========================================================================
The company uses purchased currency options to reduce exchange risks arising
from cross-border cash flows expected to occur over the next one year period. In
addition, the company enters into forward exchange contracts to hedge
intercompany loans. The objective of these practices is to minimize the impact
of foreign currency fluctuations on operating results. At January 1, 2000 and
January 2, 1999, the company had forward contracts hedging intercompany loans
totaling $8.8 million and $15.6 million, respectively. At January 1, 2000 and
January 2, 1999, currency options hedged anticipated transactions totaling
$200.1 million and $158.8 million, respectively. The forward contracts and
options are primarily denominated in Canadian dollars, Australian dollars,
Taiwanese dollars, Thai Baht and major European currencies and generally mature
within the next one year period.
The counterparties to these interest rate and currency financial instruments are
major international financial institutions.
The company is exposed to credit risk for net exchanges under these agreements,
but not for the notional amounts. The company considers the risk of default to
be remote.
A summary of the carrying values and fair values of the company's financial
instruments at January 1, 2000 and January 2, 1999 is as follows:
(Millions of Dollars) 1999 1998
=============================================================================
Carrying Fair Carrying Fair
Value Value Value Value
- -----------------------------------------------------------------------------
Long-term debt,
including current portion $ 311.2 $ 297.9 $ 356.2 $ 351.6
Currency and
interest rate swaps (9.5) (8.2) 2.8 2.9
- -----------------------------------------------------------------------------
$ 301.7 $ 289.7 $ 359.0 $ 354.5
=============================================================================
Generally, the carrying value of the debt related financial instruments is
included in the balance sheet in long-term debt. The fair values of long-term
debt are estimated using discounted cash flow analyses, based on the company's
marginal borrowing rates. The fair values of foreign currency and interest rate
swap agreements are based on current settlement values. The carrying amount of
cash equivalents and short-term borrowings approximates fair value.
J. CAPITAL STOCK
EARNINGS PER SHARE COMPUTATION
The following table reconciles the weighted average shares outstanding used to
calculate basic and diluted earnings per share.
(Millions of dollars,
except per share amounts) 1999 1998 1997
================================================================================
Net earnings (loss)-
basic and diluted $150.0 $137.8 $(41.9)
================================================================================
Basic earnings per share-
weighted average shares 89,626,424 89,407,980 89,469,849
Dilutive effect of
employee stock options 260,177 785,342 --
================================================================================
Diluted earnings per share-
weighted average shares 89,886,601 90,193,322 89,469,849
================================================================================
Earnings (loss) per share:
Basic $1.67 $1.54 $(.47)
Diluted $1.67 $1.53 $(.47)
================================================================================
The effect of employee stock options for 1997 was 1,002,456 shares. These shares
are not included in the calculations since they are antidilutive.
44
<PAGE>
COMMON STOCK SHARE ACTIVITY
The activity in common shares for each year, net of treasury stock, was as
follows:
1999 1998 1997
================================================================================
Outstanding, beginning of year 88,771,928 88,788,081 88,719,792
Issued 1,139,671 977,865 2,239,606
Purchased (966,424) (994,018) (2,171,317)
- --------------------------------------------------------------------------------
Outstanding, end of year 88,945,175 88,771,928 88,788,081
================================================================================
COMMON STOCK RESERVED
At January 1, 2000 and January 2, 1999, the number of shares of common stock
reserved for future issuance under various employee and director stock plans was
as follows:
1999 1998
===========================================================================
Employee Stock Purchase Plan 4,171,306 4,298,753
Stock Option Plans 6,817,346 7,175,538
Long-term incentive plans 6,718,596 6,765,342
- ---------------------------------------------------------------------------
17,707,248 18,239,633
===========================================================================
PREFERRED STOCK PURCHASE RIGHTS
Each outstanding share of common stock has one half of a share purchase right.
Each purchase right may be exercised to purchase one two-hundredth of a share of
Series A Junior Participating Preferred Stock at an exercise price of $220.00,
subject to adjustment. The rights, which do not have voting rights, expire on
March 10, 2006, and may be redeemed by the company at a price of $.01 per right
at any time prior to the 10th day following the public announcement that a
person has acquired beneficial ownership of 10% or more of the outstanding
shares of common stock.
In the event that the company is acquired in a merger or other business
combination transaction, provision shall be made so that each holder of a right
(other than a holder who is a 10%-or-more shareowner) shall have the right to
receive, upon exercise thereof, that number of shares of common stock of the
surviving company having a market value equal to two times the exercise price of
the right. Similarly, if anyone becomes the beneficial owner of more than 10% of
the then outstanding shares of common stock (except pursuant to an offer for all
outstanding shares of common stock which the independent directors have deemed
to be fair and in the best interest of the company), provision will be made so
that each holder of a right (other than a holder who is a 10%-or-more
shareowner) shall thereafter have the right to receive, upon exercise thereof,
common stock (or, in certain circumstances, cash, property or other securities
of the company) having a market value equal to two times the exercise price of
the right. At January 1, 2000, there were 44,472,588 outstanding rights. There
are 250,000 shares of Series A Junior Participating Preferred Stock reserved for
issuance in connection with the rights.
STOCK OPTIONS AND AWARDS
The company has a stock option plan and a Long-Term Incentive Plan (LTIP) for
key executives. Each provides for the grant of stock options. The LTIP also
provides for the grant of restricted stock and other awards. The company also
has a stock option plan that provides for option grants to outside directors of
the company. Options are granted at the market price of the company's stock on
the date of grant and have a maximum term of 10 years.
In December 1996, the company recruited a new Chairman and Chief Executive
Officer pursuant to a three year employment agreement and granted him 200,000
common stock equivalent share units and an option to purchase 1,000,000 shares
at $27.562 (the market value on the date of issuance). Each share unit had a
market value of $27.75 on the date of the grant and represents the right to
receive one share of common stock. The share units will be distributed in three
equal annual installments beginning in 2000. The option grant, which was
approved by shareowners on April 23, 1997, has a ten year term. Fiscal year 1997
includes a charge to operations representing the difference between the exercise
price and the fair market value as of the shareowner approval date. (See Note
L.)
Information regarding the company's stock option plans is summarized below:
<TABLE>
<CAPTION>
1999 1998 1997
=============================================================================================================================
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year 4,824,891 $29.56 4,244,013 $28.49 3,784,738 $21.68
Granted 2,158,350 27.12 1,358,467 29.10 1,966,000 35.34
Exercised (341,263) 21.58 (498,339) 21.55 (1,365,235) 20.13
Forfeited (228,400) 37.15 (279,250) 43.20 (141,490) 22.21
- -----------------------------------------------------------------------------------------------------------------------------
Outstanding, end of year 6,413,578 $28.89 4,824,891 $29.56 4,244,013 $28.49
- -----------------------------------------------------------------------------------------------------------------------------
Options exercisable, end of year 3,608,261 $29.06 3,627,424 $29.02 3,285,513 $24.13
=============================================================================================================================
</TABLE>
45
<PAGE>
Options outstanding as of January 1, 2000 had exercise prices as
follows: 2,340,511 options ranging from $15.06 to $24.97, 3,137,617 options
ranging from $25.31 to $32.81 and 935,450 options ranging from $38.25 to $55.98.
The weighted average remaining contractual life of these options is 8.0 years.
EMPLOYEE STOCK PURCHASE PLAN
The Employee Stock Purchase Plan enables substantially all employees in the
United States, Canada and Belgium to subscribe at any time to purchase shares of
common stock on a monthly basis at the lower of 85% of the fair market value of
the shares on the first day of the plan year ($24.20 per share for fiscal year
1999 purchases) or 85% of the fair market value of the shares on the last
business day of each month. A maximum of 6,000,000 shares are authorized for
subscription. During 1999, 1998 and 1997 shares totaling 127,447, 367,498 and
734,037, respectively, were issued under the plan at average prices of $22.85,
$35.16 and $23.69 per share, respectively.
LONG-TERM STOCK INCENTIVE PLAN
The Long-Term Stock Incentive Plan provides for the granting of awards to senior
management employees for achieving company performance measures over five year
cycles. The Plan is administered by the Compensation and Organization Committee
of the Board of Directors consisting of non-employee directors. Awards are
payable in shares of common stock as directed by the Committee. No expense was
incurred in 1999. The amounts of $1.6 million and $3.5 million were charged to
expense in 1998 and 1997, respectively. Shares totaling 46,746, 67,993 and
61,731 were issued in 1999, 1998 and 1997, respectively. The Compensation and
Organization Committee determined in 1994 not to make any further awards under
this plan. Accordingly, there will be no further awards under this plan
subsequent to the 1994-1998 award cycle.
STOCK COMPENSATION PLANS
The company accounts for stock option grants under its two stock-based
compensation plans and stock purchases under the Employee Stock Purchase Plan in
accordance with APB No. 25. Accordingly, no compensation cost has been
recognized for the majority of stock option grants since the options have
exercise prices equal to the market value of the company's common stock at the
date of grant. If compensation cost for the company's stock-based compensation
plans had been determined based on the fair value at the grant dates consistent
with the method prescribed by SFAS No. 123, "Accounting for Stock-Based
Compensation", the company's net earnings (loss) and earnings (loss) per share
would have been adjusted to the pro forma amounts indicated below:
1999 1998 1997
==========================================================================
Pro forma net earnings (loss)
(in millions) $ 141.4 $ 128.9 $ (56.1)
Pro forma earnings (loss) per share:
Basic $ 1.58 $ 1.44 $ (.63)
Diluted $ 1.57 $ 1.43 $ (.63)
==========================================================================
Pro forma compensation cost relating to the stock options is recognized over the
six month vesting period, while Employee Stock Purchase Plan compensation cost
is recognized on the first day of the plan year. The fair value of each stock
option grant was estimated on the date of grant using the Black-Scholes option
pricing model with the following weighted average assumptions used for grants in
1999, 1998 and 1997, respectively: dividend yield of 3.5%, 3.1% and 1.8%
expected volatility of 40% for 1999, 35% for 1998 and 25% for 1997; risk-free
interest rates of 7.0%, 5.4% and 6.0%; and expected lives of 7 years. The
weighted average fair value of stock options granted in 1999, 1998 and 1997 was
$9.92, $10.90 and $15.39, respectively. The fair value of the employees'
purchase rights under the Employee Stock Purchase Plan was estimated using the
following assumptions for 1999, 1998 and 1997, respectively: dividend yield of
3.5%, 3.1% and 1.8%; expected volatility of 40% for 1999, 35% for 1998 and 25%
for 1997; risk-free interest rates of 6.4%, 4.8% and 6.0%; and expected lives of
1.2 years. The weighted average fair value of those purchase rights granted in
1999, 1998 and 1997 was $10.09, $7.21 and $8.53, respectively.
K. EMPLOYEE BENEFIT PLANS
EMPLOYEE STOCK OWNERSHIP PLAN (ESOP)
The Account Value Plan provides opportunities for tax-deferred savings, enabling
eligible U.S. employees to acquire a proprietary interest in the company. Such
employees may contribute from 1% to 15% of their salary to the plan. The company
contributes an amount equal to one-half of the first 7% of employee
contributions, all of which is invested in the company's common stock. The
amounts in 1999, 1998 and 1997 under this matching arrangement were $7.1
million, $7.9 million and $8.2 million, respectively. In 1998, the investment
options for plan participant contributions were enhanced to include a variety of
investment funds in addition to the company's common stock.
46
<PAGE>
In 1998, the ESOP was expanded to include an additional non-contributory benefit
for U.S. salaried and non-union hourly employees to replace the pre-existing
defined benefit plan. Under the new benefit arrangement, the company contributes
amounts ranging from 2% to 9% of employee compensation based on age, ($13.9
million in 1999 and $9.5 million in 1998). Assets of the new benefit are
invested in equity securities and bonds.
Shares of the company's common stock held by the ESOP were purchased with the
proceeds of external borrowings in 1989 and borrowings from the company in 1991,
both of which were refinanced in 1998. The external ESOP borrowings are
guaranteed by the company and are included in long-term debt. Shareowners'
equity reflects both the internal and the external borrowing arrangements.
Shares are released to participant accounts based on principal and interest
payments of the underlying debt. These shares along with allocated dividends and
shares purchased on the open market are assigned to fund share requirements of
the employee contributions, employer contributions and the dividends earned on
participant account balances.
Net ESOP activity recognized is based on total debt service and share purchase
requirements less employee contributions and dividends on ESOP shares. The
company's net ESOP activity resulted in expense of $10.7 million in 1999, and
income of $5.1 million and $15.2 million in 1998 and 1997, respectively.
Dividends on ESOP shares, which are charged to shareowners' equity as declared,
were $14.7 million in 1999 and $15.2 million in 1998 and 1997. Interest costs
incurred by the ESOP on external debt for 1999, 1998 and 1997, were $2.2
million, $2.9 million and $4.0 million, respectively. ESOP shares not yet
allocated to participants are treated as outstanding for purposes of computing
earnings per share. As of January 1, 2000, the number of ESOP shares allocated
to participant accounts was 11,047,336 and the number of unallocated shares was
8,651,054.
PENSION AND OTHER BENEFIT PLANS
The company sponsors non-contributory pension plans covering substantially all
employees. Benefits for salaried and non-union hourly employees are generally
based on salary and years of service, while those for collective bargaining
employees are based on a stated amount for each year of service. In 1998, the
company replaced the defined benefit plan for U.S. salaried and non-union hourly
employees with a defined contribution plan, which was incorporated into the
ESOP. The new plan was actuarially designed to replace the benefits of the
pre-existing defined benefit plan. Additional service benefits under the
pre-existing plan were frozen as of January 31, 1998, resulting in a net $3.1
million curtailment loss. Contributions under the new plan began in February
1998.
The company's funding policy for its defined benefit plans is to contribute
amounts determined annually on an actuarial basis to provide for current and
future benefits in accordance with federal law and other regulations. Plan
assets are invested in equity securities, bonds, real estate and money market
instruments. If the plans are terminated or merged with another plan within
three years following a change in control of the company, any excess plan assets
are to be applied to increase the benefits of all participants.
The components of net periodic pension cost are as follows:
(Millions of Dollars) 1999 1998 1997
================================================================================
Service cost $ 8.4 $ 11.1 $ 22.5
Interest cost 29.4 31.6 31.2
Expected return on plan assets (45.8) (43.4) (37.2)
Amortization of transition
asset (.7) (1.2) (1.7)
Amortization of prior service cost 1.1 1.4 1.5
Other 1.7 2.0 2.7
Curtailment loss (.5) 3.1 5.7
- --------------------------------------------------------------------------------
Net periodic pension cost (income) $ (6.4) $ 4.6 $ 24.7
================================================================================
The projected benefit obligation, accumulated benefit obligation and fair value
of plan assets for the pension plans with accumulated benefit obligations in
excess of plan assets were $22.1 million, $16.6 million and $2.0 million as of
January 1, 2000, and $31.9 million, $22.0 million and $6.8 million, respectively
as of January 2, 1999.
The company provides medical and dental benefits for certain retired employees
in the United States. In addition, domestic employees who retire from active
service are eligible for life insurance benefits. Net periodic postretirement
benefit expense was $2.3 million in 1999 and $1.9 million in 1998 and 1997.
47
<PAGE>
The funded status of the company's pension and other benefit plans at the end of
each fiscal year was as follows:
<TABLE>
<CAPTION>
(Millions of Dollars) 1999 1998 1999 1998
==================================================================================================================
Pension Benefits Other Benefits
==================================================================================================================
<S> <C> <C> <C> <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at end of prior year $512.6 $464.8 $ 17.4 $ 17.5
Service cost 8.4 11.1 1.1 0.6
Interest cost 29.4 31.6 1.1 1.2
Actuarial (gains) losses (72.6) 38.8 (1.6) (4.1)
Plan amendments 1.5 -- -- --
Foreign currency exchange rates (1.0) (0.8) -- --
Benefits paid (52.0) (32.9) (1.7) 2.2
- -------------------------------------------------------------------------------------------------------------------
Benefit obligation at end of year 426.3 512.6 16.3 17.4
- -------------------------------------------------------------------------------------------------------------------
CHANGE IN PLAN ASSETS
Fair value of plan assets at end of prior year 534.1 525.6 -- --
Actual return on plan assets 98.3 35.1 -- --
Foreign currency exchange rate changes (1.1) 1.3 -- --
Employer contribution 3.9 5.0 -- --
Benefits paid (52.0) (32.9) -- --
- -------------------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year 583.2 534.1 -- --
- -------------------------------------------------------------------------------------------------------------------
Funded status-assets in excess
(less than) benefit obligation 156.9 21.5 (16.3) (17.4)
Unrecognized prior service cost 10.1 9.7 .2 --
Unrecognized net actuarial (gain) loss (141.7) (15.5) .3 2.2
Unrecognized net asset at transition (2.7) (3.5) -- --
- -------------------------------------------------------------------------------------------------------------------
Net amount recognized $ 22.6 $ 12.2 $(15.8) $(15.2)
- -------------------------------------------------------------------------------------------------------------------
AMOUNTS RECOGNIZED IN THE
CONSOLIDATED BALANCE SHEET
Prepaid benefit cost $ 37.4 $ 31.4 $ -- $ --
Accrued benefit liability (16.6) (21.8) (15.8) (15.2)
Intangible asset 1.4 1.2 -- --
Accumulated other comprehensive income .4 1.4 -- --
- -------------------------------------------------------------------------------------------------------------------
Net amount recognized $ 22.6 $ 12.2 $(15.8) $(15.2)
===================================================================================================================
</TABLE>
Assumptions used for significant pension benefit plans were as follows:
1999 1998
================================================================================
Discount rate 7.5% 6.5%
Average wage increase 4.0% 4.5%
Expected return on plan assets 10.0% 10.0%
================================================================================
Changing the discount rate used for measuring the benefit obligation resulted in
an actuarial gain of approximately $73 million in 1999 and an actuarial loss of
approximately $40 million in 1998, included in the change in benefit obligation.
The weighted average annual assumed rate of increase in the per-capita cost of
covered benefits (i.e., health care cost trend rate) is assumed to be 8.2% for
1999 reducing gradually to 6% by 2010 and remaining at that level thereafter. A
one percentage point increase in the assumed health care cost trend rate would
have increased the accumulated benefit obligation by $1.0 million at January 1,
2000 and net periodic postretirement benefit expense for fiscal year 1999 by $.1
million. A one percentage point decrease in the assumed health care cost trend
rate would have an immaterial effect on the accumulated postretirement benefit
obligation and net periodic postretirement benefit cost for fiscal 1999. A
weighted average discount rate of 7.5% and 6.5% was used in measuring the
accumulated benefit obligations for 1999 and 1998, respectively.
L. OTHER COSTS AND EXPENSES
Interest-net for 1999, 1998 and 1997 included interest income of $5.4 million,
$7.9 million and $8.1 million, respectively.
Other-net in 1999 includes a gain on the termination of a cross-currency
financial instrument of $11.4 million ($.08 per share). Other-net in 1997
includes a non-cash charge of $10.6 million ($.07 per share), representing the
difference between the exercise price and the fair market value of a 1,000,000
share option grant under terms of the company's employment contract with its
chief executive officer. (See Note J.)
Advertising costs are expensed as incurred and amounted to $50.2 million in
1999, $46.2 million in 1998 and $48.2 million in 1997. Marketing costs for 1999,
1998 and 1997 amounted to $59.7 million, $61.4 million and $25.0 million,
respectively.
48
<PAGE>
M. RESTRUCTURING AND ASSET WRITE-OFFS
In the fourth quarter of 1999, the company completed an evaluation
of remaining reserves established in 1997 for restructuring initiatives designed
to streamline its manufacturing, sales, distribution and administration
operations. The company has determined that certain actions contemplated at the
time of the original restructuring will not occur. Accordingly, the company
recorded one-time special credits to income of $61.8 million, reversing excess
reserves remaining from 1997. It is expected that some residual costs will
continue to be incurred throughout 2000. Reserves of $17.8 million have been set
aside for this purpose, consisting of $12.2 million for severance, $4.1 million
for other exit costs and $1.5 million for the write-down of impaired assets.
As of January 1, 2000, 50 manufacturing and distribution facilities have been
closed. In 1999, 1998 and 1997, approximately 2,300, 2,100 and 900 employees
have been terminated as a result of restructuring initiatives, respectively.
Severance payments of $44.4 million, $26.1 million and $9.2 million and other
exit payments of $17.0 million, $6.2 million and $5.0 million were made in 1999,
1998 and 1997, respectively. Write-offs of impaired assets were $13.2 million
and $19.7 million in 1999 and 1998, respectively.
In the fourth quarter of 1999, plans were approved for new restructuring
initiatives designed to achieve productivity gains. These include the closing of
eight facilities and the related relocation of production, reductions in
administrative and sales force personnel, outsourcing of non-core activities and
related asset impairments. These actions are expected to require severance
benefits for approximately 1,900 people. The cost of these initiatives is
expected to be $40.5 million, of which $31.7 million relates to severance and
other exit costs and $8.8 million is for the write-down of impaired assets.
At January 1, 2000 and January 2, 1999, reserve balances for
restructuring were $58.3 million and $154.3 million, of which $10.3 million and
$44.0 million relate to the write-down of impaired assets, respectively.
N. BUSINESS SEGMENT AND GEOGRAPHIC AREA
Business Segment and Geographic Area information included on page 36 of this
report is an integral part of the financial statements.
O. INCOME TAXES
Significant components of the Company's deferred tax liabilities and assets as
of the end of each fiscal year were as follows:
(Millions of Dollars) 1999 1998
=====================================================================
Deferred tax liabilities:
Depreciation $ 70.6 $ 71.7
Other 7.6 5.5
- ---------------------------------------------------------------------
Total deferred tax liabilities 78.2 77.2
- ---------------------------------------------------------------------
Deferred tax assets:
Employee benefit plans 36.2 36.6
Doubtful accounts 15.7 14.0
Inventories 6.5 7.6
Amortization of intangibles 18.7 17.1
Accruals 13.6 16.7
Restructuring charges 30.3 62.0
Other 13.0 9.9
- ---------------------------------------------------------------------
134.0 163.9
Valuation allowance (15.2) (9.1)
- ---------------------------------------------------------------------
Total deferred tax assets 118.8 154.8
- ---------------------------------------------------------------------
Net deferred tax assets $ 40.6 $ 77.6
=====================================================================
Valuation allowances reduced the deferred tax asset attributable to foreign and
state loss carryforwards to the amount that, based upon all available evidence,
is more likely than not to be realized. Reversal of the valuation allowance is
contingent upon the recognition of future taxable income and capital gains in
specific foreign countries and specific states, or changes in circumstances
which cause the recognition of the benefits to become more likely than not.
Income tax expense consisted of the following:
(Millions of Dollars) 1999 1998 1997
================================================================================
Current:
Federal $ 25.3 $ 55.5 $ 48.5
Foreign 13.7 13.9 28.7
State 5.6 7.6 8.8
- --------------------------------------------------------------------------------
Total current 44.6 77.0 86.0
- --------------------------------------------------------------------------------
Deferred (benefit):
Federal 32.1 (.9) (36.9)
Foreign .8 1.4 (21.6)
State 3.3 .1 (4.2)
- --------------------------------------------------------------------------------
Total deferred (benefit) 36.2 .6 (62.7)
- --------------------------------------------------------------------------------
Total $ 80.8 $ 77.6 $ 23.3
================================================================================
Income taxes paid during 1999, 1998 and 1997 were $22.4 million, $71.0 million
and $69.1 million, respectively.
49
<PAGE>
The reconciliation of the federal income tax at the statutory federal rate to
the income tax at the effective rate was as follows:
(Millions of Dollars) 1999 1998 1997
================================================================================
Tax at statutory rate $ 80.8 $ 75.4 $ (6.5)
State income taxes,
net of federal benefits 5.8 5.0 3.8
Difference between foreign
and federal income tax (4.5) (.4) 1.9
Restructuring reserves -- -- 24.3
Other-net (1.3) (2.4) (.2)
- --------------------------------------------------------------------------------
Income taxes $ 80.8 $ 77.6 $ 23.3
================================================================================
The components of earnings (loss) before income taxes consisted of the
following:
(Millions of Dollars) 1999 1998 1997
================================================================================
United States $ 201.0 $ 148.6 $ 11.1
Foreign 29.8 66.8 (29.7)
- --------------------------------------------------------------------------------
Total pretax earnings (loss) $ 230.8 $ 215.4 $ (18.6)
================================================================================
Undistributed foreign earnings of $154.2 million at January 1, 2000 are
considered to be invested indefinitely or will be remitted substantially free of
additional tax. Accordingly, no provision has been made for taxes that might be
payable upon remittance of such earnings, nor is it practicable to determine the
amount of this liability.
P. COMMITMENTS
The company leases certain facilities, vehicles, machinery and equipment under
long-term operating leases with varying terms and expiration dates.
Future minimum lease payments under noncancelable operating leases, in millions
of dollars, as of January 1, 2000 were $20.2 in 2000, $15.5 in 2001, $10.4 in
2002, $6.9 in 2003, $5.0 in 2004 and $24.2 thereafter. Minimum payments have not
been reduced by minimum sublease rentals of $8.9 million due in the future under
noncancelable subleases. Rental expense for operating leases amounted to $42.7
million in 1999, $45.1 million in 1998 and $34.9 million in 1997.
The company has entered into certain outsourcing arrangements,
principally related to information systems, telecommunications and freight,
which expire at various dates through 2009. The future estimated minimum
payments under these commitments, in millions of dollars, as of January 1, 2000
were $30.2 in 2000, $29.8 in 2001, $28.1 in 2002, $20.0 in 2003, $18.7 in 2004,
and $74.8 thereafter.
Q. CONTINGENCIES
In the normal course of business, the company is involved in various lawsuits
and claims. In addition, the company is a party to a number of proceedings
before federal and state regulatory agencies relating to environmental
remediation. Also, the company, along with many other companies, has been named
as a potentially responsible party (PRP) in a number of administrative
proceedings for the remediation of various waste sites, including 11 Superfund
sites. Current laws potentially impose joint and several liability upon each
PRP. In assessing its potential liability at these sites, the company has
considered the following: the solvency of the other PRPs, whether responsibility
is being disputed, the terms of existing agreements, experience at similar
sites, and the fact that the company's volumetric contribution at these sites is
relatively small.
The company's policy is to accrue environmental investigatory and remediation
costs for identified sites when it is probable that a liability has been
incurred and the amount of loss can be reasonably estimated. The amount of
liability recorded is based on an evaluation of currently available facts with
respect to each individual site and includes such factors as existing
technology, presently enacted laws and regulations, and prior experience in
remediation of contaminated sites. The liabilities recorded do not take into
account any claims for recoveries from insurance or third parties. As
assessments and remediation progress at individual sites, the amounts recorded
are reviewed periodically and adjusted to reflect additional technical and legal
information that becomes available. As of January 1, 2000, the company had
reserves of $18.3 million, primarily for remediation activities associated with
company-owned properties as well as for Superfund sites.
The amount recorded for identified contingent liabilities is based on estimates.
Amounts recorded are reviewed periodically and adjusted to reflect additional
technical and legal information that becomes available. Actual costs to be
incurred in future periods may vary from the estimates, given the inherent
uncertainties in evaluating certain exposures. Subject to the imprecision in
estimating future contingent liability costs, the company does not expect that
any sum it may have to pay in connection with these matters in excess of the
amounts recorded will have a materially adverse effect on its financial
position, results of operations or liquidity.
50
<PAGE>
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
(Millions of Dollars, except per share amounts)
<TABLE>
<CAPTION>
=====================================================================================================================
Quarter Year
---------------------------------------------------- ---------
1999 First Second Third Fourth
=====================================================================================================================
<S> <C> <C> <C> <C> <C>
Net sales $ 683.7 $ 685.5 $ 692.0 $ 690.6 $ 2,751.8
Gross profit 232.3 230.4 245.1 230.1 937.9
Selling, general and administrative expenses 173.1 182.2 166.9 180.8 703.0
Restructuring and asset write-offs -- -- -- (21.3) (21.3)
Net earnings $ 30.3 $ 25.3 $ 50.3 $ 44.1 $ 150.0
Net earnings per share:
Basic $ .34 $ .28 $ .56 $ .49 $ 1.67
Diluted $ .34 $ .28 $ .56 $ .49 $ 1.67
=====================================================================================================================
1998
=====================================================================================================================
Net sales $ 671.9 $ 691.8 $ 689.6 $ 675.8 $ 2,729.1
Gross profit 236.9 242.9 236.4 220.1 936.3
Selling, general and administrative expenses 171.1 166.1 172.7 174.8 684.7
Net earnings $ 36.4 $ 42.2 $ 33.4 $ 25.8 $ 137.8
Net earnings per share:
Basic $ .41 $ .47 $ .37 $ .29 $ 1.54
Diluted $ .40 $ .47 $ .37 $ .29 $ 1.53
=====================================================================================================================
</TABLE>
Note: The third quarter of 1999 includes a gain realized upon the termination of
a cross-currency financial instrument of $11.4 million, or $.08 per share.
The fourth quarter of 1999 includes a mechanics tools' special charge of
$20.1 million, or $.14 share.
51
<PAGE>
CORPORATE INFORMATION
BOARD OF DIRECTORS
[DIRECTOR'S PHOTO] [DIRECTOR'S PHOTO] [DIRECTOR'S PHOTO]
John M. Trani 1 Stillman B. Brown 1, 4, 5 Edgar R. Fiedler 2, 4
Chairman and Managing General Partner Retired; former Vice
Chief Executive Officer Harcott Associates President and Economic
The Stanley Works Investments Counselor
The Conference Board
[DIRECTOR'S PHOTO] [DIRECTOR'S PHOTO] [DIRECTOR'S PHOTO]
Mannie L. Jackson 4, 5 James G. Kaiser 2, 3 Eileen S. Kraus 1, 4, 5
Chairman Chairman, Avenir Partners Chairman, Connecticut
Harlem Globetrotters automotive retailing; Fleet National Bank
International, a former President and
division of MJA, Inc. Chief Executive Officer
Quanterra Incorporated, a
subsidiary of Corning
Incorporated and
International Technology,
Inc.
[DIRECTOR'S PHOTO] [DIRECTOR'S PHOTO] [DIRECTOR'S PHOTO]
Hugo E. Uyterhoeven 3, 5 Walter W. Williams 2, 3, 5 Kathryn D. Wriston 1,
Professor emeritus, Retired; former Chairman 2, 3
Graduate School of and Chief Executive Officer Director of various
Business Administration Rubbermaid, Incorporated organizations
Harvard University
1 Member of the Executive Committee
2 Member of the Audit Committee
3 Member of the Board Affairs and Public Policy Committee
4 Member of the Finance and Pension Committee
5 Member of the Compensation and Organization Committee
CORPORATE OFFICERS
William D. Hill
Vice President, Engineering & Technology
(1997)
Stef G. H. Kranendijk
President, Europe
(1998)
Kenneth O. Lewis
Vice President, Marketing & Brand Development
(1997)
James M. Loree
Vice President, Finance & Chief Financial Officer
(1999)
Mark J. Mathieu
Vice President, Human Resources
(1997)
Donald R. McIlnay
President, Consumer Sales Americas
(1999)
Ronald L. Newcomb
Vice President, Operations
(1999)
Paul W. Russo
Vice President, Strategy & Development
(1995)
John M. Trani
Chairman & Chief Executive Officer
(1997)
Stephen S. Weddle
Vice President, General Counsel & Secretary
(1978)
Theresa F. Yerkes
Vice President & Controller
(1989)
(Joined Stanley)
[PHOTO OF OPENING BELL RINGING]
On February 11, 2000 Stanley management rang the opening bell for trading at the
NYSE. Pictured left to right, Richard Grasso, NYSE Chairman, John Trani,
Chairman & CEO, James Loree, CFO, William Johnston, NYSE President and Ronald
Newcomb, Vice President - Operations.
52
<PAGE>
INVESTOR AND SHAREOWNER INFORMATION
COMMON STOCK
The Stanley Works common stock is listed on the New York and Pacific Stock
Exchanges under the abbreviated ticker symbol "SWK"; and is a component of the
S&P 500 Composite Stock Price Index.
Common Stock (Dollars per Share)
=====================================================================
Price Dividends
- ---------------------------------------------------------------------
1999 1998 1999 1998
- ---------------------------------------------------------------------
High Low High Low
- ---------------------------------------------------------------------
First Quarter 28 3/4 23 1/4 56 1/16 42 1/4 $ .215 $ .20
Second Quarter 35 25 3/4 57 1/4 40 1/2 .215 .20
Third Quarter 32 5/16 24 3/16 47 3/4 27 1/8 .22 .215
Fourth Quarter 33 5/8 22 32 9/16 23 1/2 .22 .215
- ---------------------------------------------------------------------
$ .87 $ .83
=====================================================================
DIVIDENDS
The Stanley Works has an impressive and truly unique dividend record over the
long haul:
> Our record of annual dividend payments is unmatched by any industrial
company listed on the New York Stock Exchange - 123 CONSECUTIVE YEARS.
> Our quarterly dividend record is the longest of any industrial company
listed on the New York Stock Exchange - 419 CONSECUTIVE QUARTERS.
> We have increased dividends in each of the past 32 YEARS, and in that same
period, an investment in Stanley stock grew at a compound annual rate of
13.1%.
> INCREASED DIVIDENDS EVERY YEAR SINCE 1968
Dividend per share in Dollars $.87 per share
=================================================================
[LINE GRAPH PLOTTED FROM DATA IN TABLE BELOW]
Dividend Per
Year Share In Dollars
---- ----------------
1979 $.193
1987 $.41
1996 $.73
1997 $.77
1998 $.83
1999 $.87
TRANSFER AGENT AND REGISTRAR
All shareowner inquiries, including transfer-related matters, should be directed
to:
EquiServe Limited Partnership, Servicing Agent for State Street Bank and Trust
Company P.O. Box 8200, Boston, MA 02266-8200 - (800) 543-6757.
http://www.equiserve.com
CORPORATE OFFICES
The company's principal corporate offices are located at:
1000 Stanley Drive, New Britain, CT 06053 - (860) 225-5111
ANNUAL MEETING
The annual shareowners' meeting of The Stanley Works will be held at 9:30 a.m.
on Wednesday, April 19, 2000, in New Britain, Connecticut at the New Britain
High School, 110 Mill Street, in the school auditorium. A formal notice of the
meeting together with a proxy statement has been mailed to shareowners with this
annual report.
INDEPENDENT AUDITORS
Ernst & Young LLP, 225 Asylum Street, Hartford, Connecticut 06103
FINANCIAL & INVESTOR COMMUNICATIONS
The Stanley Works investor relations department provides information to
shareowners and the financial community. We encourage inquiries and will provide
services which include:
> Fulfilling requests for annual reports, proxy statements, Form 10-Q, Form
10-K, copies of press releases and other company information.
> Meetings with securities analysts and fund managers.
Contact The Stanley Works investor relations department at our corporate offices
by calling Gerard J. Gould, Director, Investor Relations at (860) 827-3833. We
make quarterly news releases available on-line on the Internet on the day that
results are released to the news media. The Stanley Works releases and a variety
of shareowner information can be found at the following address on the World
Wide Web: http://www.stanleyworks.com. Stanley shareowners are also able to call
toll-free (800) 499-9202 to request a copy of the most recent quarterly release.
DIVIDEND REINVESTMENT PLAN AND DIRECT STOCK PURCHASE
Shareowners may have dividends automatically reinvested in Stanley common stock
and/or make optional cash payments to increase their common stock investment.
Inquiries regarding this service should be directed to:
EquiServe Limited Partnership, Servicing Agent for State Street Bank and Trust
Company P.O. Box 8200, Boston, MA 02266-8200 - (800) 543-6757.
http://www.equiserve.com
<PAGE>
Page 1 of 4 Pages
EXHIBIT 21
(All subsidiaries are included in the Consolidated Financial
Statements of The Stanley Works)
Jurisdiction of
Incorporation/
Corporate Name Organization
- -------------- ------------
The Stanley Works Connecticut
The Farmington River Power Company Connecticut
Stanley Germany, Inc. Delaware
Stanley Foreign Sales Corporation Virgin Islands
Jensen Tools, Inc. Delaware
Stanley-Bostitch Holding Corporation Delaware
Stanley Logistics, Inc. Delaware
Stanley Fastening Systems, L.P. Delaware
Stanley Receivables Corporation Delaware
Stanley European Holdings, L.L.C. Delaware
Stanley Europe B.V.B.A. Belgium
Stanley Funding Corporation Delaware
The Stanley Works C.V. Netherlands
Stanley Canada, Inc. Ontario, Canada
Stanley Tools (N.Z.) Ltd. New Zealand
Ferramentas Stanley Ltda. Brazil
Herramientas Stanley S.A. de C.V. Mexico
Stanley-Bostitch, S.A. de C.V. Mexico
<PAGE>
Page 2 of 4 Pages
Jurisdiction of
Incorporation/
Corporate Name Organization
- -------------- ------------
(The Stanley Works)
Stanley Atlantic, Inc. Delaware
Stanley Israel Investments, Inc. Delaware
Stanley Israel Investments B.V. Netherlands
T.S.W.Israel Investments Ltd. Israel
ZAG Industries Ltd. (90%) Israel
Stanley Works (Nederland) B.V. Netherlands
Stanley Doors France, S.A.S. France
Stanley Tools France, S.A.S. France
Stanley France, S.A.S. France
Societe De Fabrications
Bostitch S.A. (Simax) France
Societe Civile Immobiliere WAT France
Stanley Iberia S.A. Spain
Stanley Vaerktoj ApS Denmark
Stanley Svenska A.B. Sweden
Suomen Stanley OY Finland
Bostitch G.m.b.H. Germany
Friess G.m.b.H. Germany
Bostitch AG Switzerland
<PAGE>
Page 3 of 4 Pages
Jurisdiction of
Incorporation/
Corporate Name Organization
- -------------- ------------
(The Stanley Works)
Stanley Italia S.r.l. Italy
FIDADUE S.r.l. Italy
Stanley Tools S.r.l. Italy
S.A. Stanley Works Belgium N.V. Belgium
International Staple &
Machine Co. N.V. Belgium
Stanley International Holdings, Inc. Delaware
Stanley Pacific Inc. Delaware
Stanley U.K. Holding Limited U.K.
ATRO Ltd. U.K.
The Stanley Works Ltd. U.K.
The Stanley Works Pty. Ltd. Australia
Stanley Works Asia Pacific Pte. Ltd. Singapore
The Stanley Works (Hong Kong) Ltd. Hong Kong
The Stanley Works Sales
(Philippines), Inc. Philippines
The Stanley Works (Bermuda) Ltd. Bermuda
The Stanley Works Japan K.K. Japan
Stanley Works (Thailand) Ltd. Thailand
<PAGE>
Page 4 of 4 Pages
Jurisdiction of
Incorporation/
Corporate Name Organization
- -------------- ------------
(The Stanley Works)
Stanley Tools Poland Ltd. Poland
TONA a.s. (LTD) (82.62%) Czech Republic
P.T. Stanley Works Indonesia
(in liquidation) Indonesia
Stanley Works Malaysia Sdn. Bhd. Malaysia
Stanley Fastening Systems
Poland Sp.zo.o. Poland
Stanley de Chihuahua,
S. de R.L. de C.V. Mexico
Stanley Works China Investments Ltd.
(80%) Virgin Islands
Stanley (Zhongshan) Hardware
Co. Ltd. (65%) China
Stanley Chiro International Ltd. Taiwan
Beijing Daxing Stanley-Bostitch Metal
Industries Company Limited (98%) China
Stanley (Tianjin) International
Trading Company, Ltd. China
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
The Stanley Works and Subsidiaries
Financial Data Schedule
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> 12-MOS
<FISCAL-YEAR-END> JAN-01-2000
<PERIOD-END> JAN-01-2000
<CASH> 88,000
<SECURITIES> 0
<RECEIVABLES> 589,500
<ALLOWANCES> 43,400
<INVENTORY> 381,200
<CURRENT-ASSETS> 1,091,000
<PP&E> 1,208,000
<DEPRECIATION> 687,400
<TOTAL-ASSETS> 1,890,600
<CURRENT-LIABILITIES> 693,000
<BONDS> 290,000
0
0
<COMMON> 230,900
<OTHER-SE> 504,500
<TOTAL-LIABILITY-AND-EQUITY> 1,890,600
<SALES> 2,751,800
<TOTAL-REVENUES> 2,751,800
<CGS> 1,813,900
<TOTAL-COSTS> 1,813,900
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 27,900
<INCOME-PRETAX> 230,800
<INCOME-TAX> 80,800
<INCOME-CONTINUING> 150,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 150,000
<EPS-BASIC> 1.67
<EPS-DILUTED> 1.67
</TABLE>
<PAGE>
AUDITED FINANCIAL STATEMENTS
AND SUPPLEMENTAL SCHEDULES
THE STANLEY ACCOUNT VALUE PLAN
Years ended December 31, 1999 and 1998
<PAGE>
The Stanley Account Value Plan
Audited Financial Statements
and Supplemental Schedules
Years ended December 31, 1999 and 1998
CONTENTS
Report of Independent Auditors.................................................1
Audited Financial Statements
Statement of Financial Condition at December 31, 1999..........................2
Statement of Financial Condition at December 31, 1998..........................3
Statement of Income and Changes in Plan Equity for the Year Ended
December 31, 1999..........................................................4
Statement of Income and Changes in Plan Equity for the Year Ended
December 31, 1998..........................................................5
Notes to Financial Statements..................................................6
Supplemental Schedules
Assets Held for Investment....................................................12
Transactions or Series of Transactions in Excess of 5% of the Current
Value of Plan Assets......................................................13
<PAGE>
Report of Independent Auditors
Pension Committee of The Board of Directors
The Stanley Works
We have audited the accompanying statements of financial condition of The
Stanley Account Value Plan as of December 31, 1999 and 1998, and the related
statements of income and changes in plan equity for the years then ended. These
financial statements are the responsibility of the Plan's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial condition of the Plan at December 31, 1999
and 1998, and its income and changes in plan equity for the years then ended in
conformity with accounting principles generally accepted in the United States.
Our audits were performed for the purpose of forming an opinion on the financial
statements taken as a whole. The accompanying supplemental schedules of assets
held for investment as of December 31, 1999, and transactions or series of
transactions in excess of 5% of the current value of plan assets for the year
then ended, are presented for purposes of complying with the Department of
Labor's Rules and Regulations for Reporting and Disclosure under the Employee
Retirement Income Security Act of 1974, and are not a required part of the
financial statements. The supplemental schedules have been subjected to the
auditing procedures applied in our audit of the 1999 financial statements and,
in our opinion, are fairly stated in all material respects in relation to the
1999 financial statements taken as a whole.
Ernst & Young
Hartford, Connecticut
March 13, 2000
1
<PAGE>
The Stanley Account Value Plan
Statement of Financial Condition
December 31, 1999
<TABLE>
<CAPTION>
UNALLOCATED
STANLEY STOCK CORNERSTONE STANLEY STOCK
FUND LOAN FUND FUND FUND
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Investments, at current market value:
The Stanley Works Common Stock:
115,279 shares (cost $1,522,548) $ 3,472,780
7,792,914 shares (cost $155,425,879) $ 234,761,535
8,646,238 shares (cost $149,295,384) $ 260,467,920
Short-term investments 3,290,939 835,157 4,815
Mutual Funds 8,999,619
---------------------------------------------------------------------------------
238,052,474 13,307,556 260,472,735
Cash 998,363 $ 161,756
Contributions receivable 12,778,512
Dividends and interest receivable 6,881 7,588 13
Debt issuance costs, net of accumulated
amortization of $141,569 2,689,809
Loans to participants 9,569,989
---------------------------------------------------------------------------------
$ 239,057,718 $ 9,731,745 $ 26,093,656 $ 263,162,557
=================================================================================
LIABILITIES AND PLAN EQUITY
Liabilities:
Debt $ 202,236,608
Accounts payable
-------------------
202,236,608
Plan equity $ 239,057,718 $ 9,731,745 $ 26,093,656 60,925,949
---------------------------------------------------------------------------------
$ 239,057,718 $ 9,731,745 $ 26,093,656 $ 263,162,557
=================================================================================
<CAPTION>
MUTUAL FUNDS TOTAL
-----------------------------------
<S> <C> <C>
ASSETS
Investments, at current market value:
The Stanley Works Common Stock:
115,279 shares (cost $1,522,548) $ 3,472,780
7,792,914 shares (cost $155,425,879) 234,761,535
8,646,238 shares (cost $149,295,384) 260,467,920
Short-term investments $ 137 4,131,048
Mutual Funds 11,219,928 20,219,547
-----------------------------------
11,220,065 523,052,830
Cash 1,160,119
Contributions receivable 12,778,512
Dividends and interest receivable 1,083 15,565
Debt issuance costs, net of accumulated
amortization of $141,569 2,689,809
Loans to participants 9,569,989
-----------------------------------
$ 11,221,148 $ 549,266,824
===================================
LIABILITIES AND PLAN EQUITY
Liabilities:
Debt $ 202,236,608
Accounts payable $ 2,248 2,248
----------------------------------
2,248 202,238,856
Plan equity 11,218,900 347,027,968
-----------------------------------
$ 11,221,148 $ 549,266,824
===================================
</TABLE>
See accompanying notes.
2
<PAGE>
The Stanley Account Value Plan
Statement of Financial Condition
December 31, 1998
<TABLE>
<CAPTION>
UNALLOCATED
STANLEY STOCK CORNERSTONE STANLEY STOCK
FUND LOAN FUND FUND FUND
--------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Investments, at current market value:
The Stanley Works Common Stock:
8,417,217 shares (cost $145,012,172) $ 233,577,772
9,261,385 shares (cost $160,258,796) $ 257,003,434
Short-term investments 3,528,034 2,771
Mutual Funds
--------------------------------------------------------------------------
237,105,806 257,006,205
Contributions receivable 1,970,567 $ 5,020,000
Dividends and interest receivable 11,687 900
Due to (from) Cornerstone Fund (4,480,000) 4,480,000
Debt issuance costs, net of amortization of $47,190
2,784,188
Loans to participants $ 12,562,808
--------------------------------------------------------------------------
$ 234,608,060 $ 12,562,808 $ 9,500,000 $ 259,791,293
--------------------------------------------------------------------------
LIABILITIES AND PLAN EQUITY
Liabilities:
Debt $ 213,236,612
------------------
213,236,612
Plan equity $ 234,608,060 $ 12,562,808 $ 9,500,000 46,554,681
--------------------------------------------------------------------------
$ 234,608,060 $ 12,562,808 $ 9,500,000 $ 259,791,293
==========================================================================
<CAPTION>
MUTUAL FUNDS TOTAL
--------------------------------------
<S> <C> <C>
ASSETS
Investments, at current market value:
The Stanley Works Common Stock:
8,417,217 shares (cost $145,012,172) $ 233,577,772
9,261,385 shares (cost $160,258,796) 257,003,434
Short-term investments 3,530,805
Mutual Funds $ 3,721,092 3,721,092
--------------------------------------
3,721,092 497,833,103
Contributions receivable 6,990,567
Dividends and interest receivable 25 12,612
Due to (from) Cornerstone Fund
Debt issuance costs, net of amortization of $47,190
2,784,188
Loans to participants 12,562,808
--------------------------------------
$ 3,721,117 $ 520,183,278
--------------------------------------
LIABILITIES AND PLAN EQUITY
Liabilities:
Debt $ 213,236,612
-------------------
213,236,612
Plan equity $ 3,721,117 306,946,666
--------------------------------------
$ 3,721,117 $ 520,183,278
======================================
</TABLE>
See accompanying notes.
3
<PAGE>
<TABLE>
The Stanley Account Value Plan
Statement of Income and Changes in Plan Equity
Year ended December 31, 1999
<CAPTION>
UNALLOCATED
STANLEY STOCK CORNERSTONE FUND STANLEY STOCK
FUND LOAN FUND FUND
--------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investment income:
Dividends $ 6,969,975 $ 343,615 $ 7,467,322
Interest 162,473 $ 1,069,054 20,638 3,309
--------------------------------------------------------------------------
7,132,448 1,069,054 364,253 7,470,631
Net realized and unrealized appreciation 12,201,319 5,997,054 14,427,856
Employee contributions 14,726,094
Employer contribution 7,626,379 11,814,036
Withdrawals (33,614,516) (2,085,052)
Administrative expenses (368,689) (196,041)
Amortization expense (94,379)
Interest expense (12,671,027)
Interfund transfers - net (3,253,377) (3,900,117) 699,406 5,238,187
--------------------------------------------------------------------------
Net increase (decrease) 4,449,658 (2,831,063) 16,593,656 14,371,268
Plan equity at beginning of year 234,608,060 12,562,808 9,500,000 46,554,681
--------------------------------------------------------------------------
Plan equity at end of year $ 239,057,718 $ 9,731,745 $ 26,093,656 $ 60,925,949
==========================================================================
<CAPTION>
MUTUAL FUNDS TOTAL
---------------------------------------
<S> <C> <C>
Investment income:
Dividends $ 112,053 $ 14,892,965
Interest 357 1,255,831
---------------------------------------
112,410 16,148,796
Net realized and unrealized appreciation 1,495,767 34,121,996
Employee contributions 5,873,932 20,600,026
Employer contribution 19,440,415
Withdrawals (1,173,455) (36,873,023)
Administrative expenses (26,772) (591,502)
Amortization expense (94,379)
Interest expense (12,671,027)
Interfund transfers - net 1,215,901 -
---------------------------------------
Net increase (decrease) 7,497,783 40,081,302
Plan equity at beginning of year 3,721,117 306,946,666
---------------------------------------
Plan equity at end of year $ 11,218,900 $ 347,027,968
=======================================
</TABLE>
See accompanying notes.
4
<PAGE>
The Stanley Account Value Plan
Statement of Income and Changes in Plan Equity
Year ended December 31, 1998
<TABLE>
<CAPTION>
UNALLOCATED
STANLEY STOCK CORNERSTONE STANLEY STOCK
FUND LOAN FUND FUND FUND
------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investment income:
Dividends $ 7,187,776 $ 7,968,259
Interest 115,232 $ 740,986 41,790
------------------------------------------------------------------------------
7,303,008 740,986 8,010,049
Net realized and unrealized appreciation
(depreciation) (172,047,896) (194,385,843)
Employee contributions 20,470,845
Employer contribution $ 5,020,000
Withdrawals:
Cash (40,629,708)
The Stanley Works Common Stock (2,519,143)
-------------------
(43,148,851)
Administrative expenses (588,725)
Amortization expense (47,190)
Interest expense (17,222,398)
Interfund transfers - net (7,298,983) (502,145) 4,480,000 1,020,723
------------------------------------------------------------------------------
Net increase (decrease) (195,310,602) 238,841 9,500,000 (202,624,659)
Plan equity at beginning of year 429,918,662 12,323,967 249,179,340
------------------------------------------------------------------------------
Plan equity at end of year $ 234,608,060 $ 12,562,808 $ 9,500,000 $ 46,554,681
==============================================================================
<CAPTION>
MUTUAL FUNDS TOTAL
-----------------------------------
<S> <C> <C>
Investment income:
Dividends $ 40,203 $ 15,196,238
Interest 2,527 900,535
-----------------------------------
42,730 16,096,773
Net realized and unrealized appreciation
(depreciation) 172,149 (366,261,590)
Employee contributions 1,332,347 21,803,192
Employer contribution 5,020,000
Withdrawals:
Cash (124,679) (40,754,387)
The Stanley Works Common Stock (2,519,143)
-----------------------------------
(124,679) (43,273,530)
Administrative expenses (1,835) (590,560)
Amortization expense (47,190)
Interest expense (17,222,398)
Interfund transfers - net 2,300,405
-----------------------------------
Net increase (decrease) 3,721,117 (384,475,303)
Plan equity at beginning of year 691,421,969
-----------------------------------
Plan equity at end of year $ 3,721,117 $ 306,946,666
===================================
</TABLE>
See accompanying notes.
5
<PAGE>
The Stanley Account Value Plan
Notes to Financial Statements
December 31, 1999
1. DESCRIPTION OF THE PLAN
The Stanley Account Value Plan (the "Plan") operates as a leveraged employee
stock ownership plan, is designed to comply with the Internal Revenue Code of
1986, as amended, and is subject to the applicable provisions of the Employee
Retirement Income Security Act of 1974, as amended. The Plan is a defined
contribution plan for eligible United States salaried and hourly paid employees
of The Stanley Works (the "Company").
Each year, participants may contribute, through pre-tax payroll deductions up to
15% of their compensation, as defined in the Plan Agreement. Such contributions
are matched by the Company in an amount equal to 50% of the participant's
contribution up to a maximum matching contribution of 3 1/2% of the
participant's compensation.
Prior to 1998, participant and Company contributions were invested in the
Stanley Stock Fund. In 1998, the investment options for plan participant
contributions were enhanced to include four investment funds in addition to the
Company's common stock. Participants may invest in one fund, divide the account
value among the funds or choose one of three pre-mixed blended investment
options. Participant and Company contributions, prior to July 1, 1998, invested
in the Stanley Stock Fund are guaranteed, if necessary, by the Retirement Plan
for Salaried Employees of The Stanley Works or by the Pension Plan for Hourly
Paid Employees of The Stanley Works, providing that the investment return on
such stock acquired with employee contributions will not be less than an
investment return based on two-year U.S. Treasury notes. The following
investment funds are offered to participants:
STANLEY STOCK FUND--Consists of common stock of The Stanley Works. This stock is
traded on the New York and Pacific Stock Exchanges under the symbol SWK.
BT PYRAMID EQUITY INDEX FUND--Seeks long-term growth, subject to the short-term
fluctuations characteristic of the stock market. The fund invests in most of the
Standard & Poors 500 (S&P 500), as well as other investments whose value is
based on S&P 500 stocks.
INVESCO RETIREMENT TRUST STABLE VALUE FUND--Seeks liquidity and safety of
principal, while providing a higher return than is typically offered by money
market funds. The fund invests in a diversified portfolio of investment
contracts with insurance companies, banks and other financial institutions.
6
<PAGE>
The Stanley Account Value Plan
Notes to Financial Statements (continued)
1. DESCRIPTION OF THE PLAN (CONTINUED)
AMERICAN FUNDS EUROPACIFIC GROWTH FUND--Seeks long-term growth, subject to the
risks involved in investing outside of the United States, such as currency
fluctuations, political instability, differing securities regulations and
periods of liquidity.
FIDELITY MANAGEMENT TRUST COMPANY SELECT SMALL CAP FUND--Seeks long-term growth,
subject to the short-term fluctuations characteristic of the small stock market.
The fund invests in securities of small capitalization companies in various
industries.
In 1998, the Plan was amended to provide an additional non-contributory benefit
for U.S. salaried and non-union hourly employees ("Cornerstone Fund"). Under the
new benefit arrangement, the Company contributes amounts ranging from 3% to 9%
of employee compensation based on age (for 1998, percentages ranged from 2% to
7%). Assets of the new benefit feature are invested in equity securities and
bonds.
Employees are fully vested as to amounts in their savings accounts attributable
to their own contributions and earnings thereon and amounts transferred from the
other qualified plans on their behalf. All participants are vested in 100% of
the value of the Company matching contributions made on their behalf after five
years of service, with no vesting in the matching contributions during the first
through fifth years of service.
Effective in July 1998, the assets of the Plan are held in trust by an
independent corporate trustee, Citibank, N. A. (the "Trustee") pursuant to the
terms of a written Trust Agreement between the Trustee and the Company. Prior to
July, State Street Bank and Trust Company served as Trustee.
Benefits generally are distributed upon termination of employment. Normally, a
lump-sum distribution is made in cash or shares of the Company's Common Stock
(hereinafter referred to as Common Stock, Stanley Stock, or shares), at the
election of the participant, from the Stanley Stock Fund.
During active employment, subject to financial hardship rules, participants may
withdraw, in cash only, all or a portion of vested amounts in their accounts.
7
<PAGE>
The Stanley Account Value Plan
Notes to Financial Statements (continued)
1. DESCRIPTION OF THE PLAN (CONTINUED)
Participants may borrow from their savings account up to an aggregate amount
equal to the lesser of $50,000 or 50% of the value of their vested interest in
such accounts with a minimum loan of $1,000. The $50,000 loan amount limitation
is reduced by the participant's highest outstanding loan balance during the 12
months preceding the date the loan is made. Each loan is evidenced by a
negotiable promissory note bearing a rate of interest equal to the prime rate as
reported in The Wall Street Journal on the first business day of the month
immediately preceding the calendar quarter during which the loan was made, which
is payable, through payroll deductions, over a term of not more than five years.
Participants are allowed ten years to repay the loan if the proceeds are used to
purchase a principal residence. Only one loan per participant may be outstanding
at any time.
If a loan is outstanding at the time a distribution becomes payable to a
participant (or beneficiary), the distribution is made net of the loan
outstanding, and the distribution shall fully discharge the Plan with respect to
the participant's account value attributable to the outstanding loan balance.
The Plan borrowed $95,000,000 in 1989 from a group of financial institutions and
$180,000,000 in 1991 from the Company (see Notes 3 and 4) to acquire 5,868,088
and 9,696,968 shares, respectively, of Common Stock from the Company's treasury
and previously unissued shares. The shares purchased from the proceeds of the
loans were placed in the Unallocated Stanley Stock Fund (the "Unallocated
Fund"). Under the 1989 loan agreement, the Company guaranteed the loan and is
obligated to make annual contributions sufficient to enable the Plan to repay
the loan plus interest.
The Unallocated Fund makes monthly transfers of shares, in accordance with the
Plan provisions, to the Stanley Stock Fund in return for proceeds equivalent to
the average fair market value of the shares for the month subsequent to the last
transfer. These proceeds, along with dividends received on allocated and
unallocated shares and additional employee and Company contributions, if
necessary, are used to make monthly payments of principal and interest on the
debt. If dividends on the allocated shares are applied to the payment of debt
service, a number of shares having a fair market value at least equal to the
amount of the dividends so applied are allocated to the savings accounts of
participants who would otherwise have received cash dividends. The excess of
unallocated dividends over the amount necessary for principal and interest along
with forfeitures of nonvested employee accounts are used to reduce future
Company matching contributions. During 1998, these excess funds fully offset the
Company's matching contribution.
8
<PAGE>
The Stanley Account Value Plan
Notes to Financial Statements (continued)
1. DESCRIPTION OF THE PLAN (CONTINUED)
The fair market value of shares released from the Unallocated Fund pursuant to
loan repayments made during any year may exceed the total of employee
contributions and Company matching contributions for that year. If that occurs,
all participants who made contributions at any time during that year and who are
employed by the Company on the last day of that year receive, on a pro rata
basis, such excess value as an additional allocation of Stanley Stock for that
year.
Each participant is entitled to exercise voting rights attributable to the
shares allocated to their account. The Trustee is not permitted to vote
participant shares for which instructions have not been given by the
participant. Shares in the Unallocated Fund are voted by the Trustee in the same
proportion as allocated shares.
The Company reserves the right to terminate the Plan at any time, subject to its
provisions. Upon such termination of the Plan, the interest of each participant
in the trust fund will become vested and be distributed to such participant or
his or her beneficiary at the time prescribed by the Savings Plan terms and the
Internal Revenue Code.
The Plan sponsor has engaged Hewitt Associates, to maintain separate accounts
for each participant. Such accounts are credited with each participant's
contributions, the allocated portion of the Company's matching contributions,
related gains, losses and dividend income, and loan activity.
At December 31, 1999 and 1998, benefits payable to terminated vested
participants amounted to $236,282 and $1,093,501, respectively.
2. SIGNIFICANT ACCOUNTING POLICIES
INVESTMENTS
The Plan investments consist primarily of shares of Stanley Stock. Stanley Stock
is traded on a national exchange and is valued at the last reported sales price
on the last business day of the plan year. Short-term investments consist of
short-term bank-administered trust funds which earn interest daily at rates
approximating U.S. Government securities; cost approximates market value.
9
<PAGE>
The Stanley Account Value Plan
Notes to Financial Statements (continued)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DIVIDEND INCOME
Dividend income is accrued on the ex-dividend date.
GAINS OR LOSSES ON SALES OF INVESTMENTS
Gains or losses realized on the sales of investments are determined based on
average cost.
EXPENSES
Administrative expenses not paid by the Company are paid by the Plan.
RECLASSIFICATIONS
Certain 1998 amounts have been reclassified to conform to the current year
presentation.
3. DEBT
Debt consisted of the following at December 31:
1999 1998
------------------------------
Notes payable in monthly installments to 2009
with interest at 6.07% $ 33,610,763 $ 39,610,763
Notes payable to the Company in monthly
installments to 2028 with interest at 6.09% 168,625,845 173,625,849
------------------------------
$ 202,236,608 $ 213,236,612
==============================
During 1998, notes payable to financial institutions were refinanced, resulting
in a reduction in the interest rate, extension of the maturity and a prepayment
penalty of $2,831,378, which is being amortized over the remaining term of the
debt. Concurrently, notes payable to the Company were restructured, resulting in
a reduction in the interest rate and extension of the maturity. Additionally,
the Plan borrowed funds from the Company to pay the prepayment penalty.
The scheduled maturities of debt for the next five years are as follows:
2000--$7,400,000; 2001--$7,100,000; 2002--$6,900,000; 2003--$7,000,000 and
2004--$6,900,000.
10
<PAGE>
The Stanley Account Value Plan
Notes to Financial Statements (continued)
3. DEBT (CONTINUED)
The notes payable to the Company are secured by shares held in the Unallocated
Stock Fund. The number of shares held as security is reduced as shares are
released to Stanley Stock Fund pursuant to principal and interest payments.
During the year, 335,420 shares were released and at December 31, 1999,
7,636,896 shares are pledged as security.
Payment of the Plan's debt has been guaranteed by the Company. Should the
principal and interest due exceed the dividends paid on shares in the Stanley
Stock and Unallocated Stock Funds, and employee and Company matching
contributions, the Company is responsible for funding such shortfall.
4. TRANSACTIONS WITH PARTIES-IN-INTEREST
Fees paid during 1999 and 1998 for management and other services rendered by
parties-in-interest were based on customary and reasonable rates for such
services. The majority of such fees were paid by the Plan. Fees incurred and
paid by the Plan during 1999 and 1998 were $591,502 and $590,560, respectively.
In 1991, the Plan borrowed $180,000,000 from the Company, the proceeds of which
were used to purchase 9,696,968 shares of stock for the Plan. In 1998, the Plan
borrowed $2.8 million from the Company, the proceeds of which were used to pay a
prepayment penalty incurred in connection with debt refinancing. The Plan made
$23,671,031 and $31,464,184 of principal and interest payments related to such
debt in 1999 and 1998, respectively. At December 31, 1999, $202,236,608 was
outstanding on such debt.
5. INCOME TAX STATUS
The Internal Revenue Service has ruled that the Plan and the trust qualify under
Sections 401(a) and 401(k) of the Internal Revenue Code (IRC) and are therefore
not subject to tax under present income tax law. Once qualified, the Plan is
required to operate in accordance with the IRC to maintain its qualification.
The Pension Committee is not aware of any course of action or series of events
that have occurred that might adversely affect the Plan's qualified status.
11
<PAGE>
The Stanley Account Value Plan
Assets Held for Investment
December 31, 1999
<TABLE>
<CAPTION>
DESCRIPTION OF INVESTMENT,
INCLUDING MATURITY DATE,
IDENTITY OF ISSUE, BORROWER, OR RATE OF INTEREST, PAR OR
SIMILAR PARTY MATURITY VALUE COST CURRENT VALUE
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common Stock:
The Stanley Works* 16,554,431 shares of Common Stock;
par value $2.50 per
share $ 306,243,811 $ 498,702,235
Citibank, N.A. * Short-Term Investment Fund-
Pooled Bank Fund 3,295,753 4,131,048
Mutual Funds:
BT S&P Index Fund Pyramid Equity Index Fund 4,270,736 5,030,725
Invesco Retirement Trust
Stable Value Fund Invesco Retirement Trust 2,346,777 2,347,557
American Funds Euro
Pacific Growth Fund Euro Pacific Growth Fund 1,516,883 2,037,646
Fidelity Management Trust
Company Select Small Fidelity Select Small
Cap Fund Capitalization Pool 1,548,179 1,804,000
BT Pyramid Russell 3000
Fund Russell 300 Fund 5,630,370 6,576,736
BT Pyramid Broad Market
Fixed Income Fund Fixed Income Fund 2,430,114 2,422,883
Loans to participants Promissory notes at prime rate
with maturities of five
years or ten years 9,569,989 9,569,989
----------------------------------------
Total investments $ 336,852,612 $ 532,622,819
========================================
</TABLE>
* Indicates party-in-interest to the Plan.
12
<PAGE>
The Stanley Account Value Plan
Transactions or Series of Transactions in Excess
of 5% of the Current Value of Plan Assets
Year ended December 31, 1999
<TABLE>
<CAPTION>
CURRENT VALUE
OF ASSET ON
IDENTITY OF PARTY PURCHASE DESCRIPTION OF TRANSACTION NET GAIN
INVOLVED ASSETS SELLING PRICE COST OF ASSET DATE (LOSS)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Category (iii) - Series of transactions in excess of 5 percent of plan assets
Citibank, N.A.* Short-Term Investment Fund-
United States
Government Securities $ 31,975,163 $ 31,975,163
Citibank, N.A.* Short-Term Investment Fund-
United States
Government Securities $ 32,207,344 32,207,344
</TABLE>
There were no category (i), (ii) or (iv) reportable transactions during 1999.
* Indicates party-in-interest to the Plan.
13
