-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QFbZ+xZrOJKjXaToJUnRD8Bt6lVBAs+a6Y8OMjjAogzFhE+wbKymat8UJ6A7uhXj cZ2DsHjB5T1mxmk62Wz+Yw== 0000950136-00-000448.txt : 20000331 0000950136-00-000448.hdr.sgml : 20000331 ACCESSION NUMBER: 0000950136-00-000448 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20000101 FILED AS OF DATE: 20000330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: STANLEY WORKS CENTRAL INDEX KEY: 0000093556 STANDARD INDUSTRIAL CLASSIFICATION: CUTLERY, HANDTOOLS & GENERAL HARDWARE [3420] IRS NUMBER: 060548860 STATE OF INCORPORATION: CT FISCAL YEAR END: 0102 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-05224 FILM NUMBER: 587215 BUSINESS ADDRESS: STREET 1: 1000 STANLEY DR STREET 2: P O BOX 7000 CITY: NEW BRITAIN STATE: CT ZIP: 06053 BUSINESS PHONE: 8062255111 MAIL ADDRESS: STREET 1: 1000 STANLEY DR CITY: NEW BRITAIN STATE: CT ZIP: 06053 10-K405 1 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------------- FORM 10-K ANNUAL REPORT ------------- (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 -------------- ---------------- 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 ------------------- ------------------- 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 -------- ---------- 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. FORM 10-K --------- Part I Item 1. Business ------------------ 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 - 1 - 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 - 2 - 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 - 3 - 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. - 4 - 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 - 5 - 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 - 6 - 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 - 7 - 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. ------------------ 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 ----- 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 ----- 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 ----- 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, - 8 - Australia and Izraelim, Israel. Doors ----- Tupelo, Mississippi; Charlotte and Kannapolis, North Carolina; Winchester, Virginia; and Langley and Oakville, Canada. Item 3. Legal Proceedings. -------------------------- 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. - 9 - 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. ------------------------------------------------------------ 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:
Elected Name, Age, Birth date Office to Office - --------------------- ------ --------- 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 - 10 - (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 - 11 - 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.
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 - --------------------------------------- (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: - 12 - 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 - 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 - 14(b) The following reports on Form 8-K were filed during the last quarter of the period covered by this report:
Date of Report Items Reported -------------- --------------- October 20, 1999 Press Release dated October 20, 1999 announcing third quarter earnings and fourth quarter dividend.
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- 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.
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
* By: Stephen S. Weddle ------------------------ Stephen S. Weddle (As Attorney-in-Fact) -16- 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 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 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 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)
- ----------------------------------------------------------------------------------------------------------------------------------- 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 - ----------------------------------------------------------------------------------------------------------------------------------- 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
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. 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- 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- (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- (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- (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- EX-10.6 2 SUPPLEMENTAL RETIREMENT AND ACCOUNT VALUE PLAN 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 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 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 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. 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. 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. EX-10.22 3 AGREEMENT 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. 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. 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 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 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 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 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 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 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 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 EX-12 4 STATEMENT - RATIO OF EARNINGS TO FIXED CHARGES Exhibit 12 THE STANLEY WORKS AND SUBSIDIARIES COMPUTATION OF EARNINGS TO FIXED CHARGES (in Millions of Dollars)
Fiscal Year Ended ------------------------------------------------------------------------------- January 1 January 2 January 3 December 28 December 30 January 1 2000 1999 1998 1996 1995 1994 --------- --------- -------- --------- --------- --------- 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 ========= ========= ======== ========= ========= =========
EX-13 5 ANNUAL REPORT TO SHAREOWNERS SUMMARY OF SELECTED FINANCIAL INFORMATION
(Millions of Dollars, except per share amounts) 1999A 1998B 1997C 1996D 1995E 1994 - ----------------------------------------------------------------------------------------------------------- CONTINUING OPERATIONS F 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) (Millions of Dollars, except per share amounts) 1993 1992 1991 1990 1989 - -------------------------------------------------------------------------------------------------- CONTINUING OPERATIONS F 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 ==================================================================================================
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 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 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 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 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 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 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 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 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. 35 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 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 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 CONSOLIDATED STATEMENTS OF CASH FLOWS Fiscal years ended January 1, 2000, January 2, 1999 and January 3, 1998
(Millions of Dollars) 1999 1998 1997 ==================================================================================================================== 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.
39 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREOWNERS' EQUITY Fiscal years ended January 1, 2000, January 2, 1999 and January 3, 1998
Accumulated Other Common Retained Comprehensive ESOP Treasury Shareowners' (Millions of Dollars, except per share amounts) Stock Earnings Income (Loss) Debt Stock Equity - ----------------------------------------------------------------------------------------------------------------------- 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 =======================================================================================================================
See notes to consolidated financial statements. 40 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 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 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 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 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:
1999 1998 1997 ============================================================================================================================= Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Options Price Options Price Options Price - ----------------------------------------------------------------------------------------------------------------------------- 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 =============================================================================================================================
45 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 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 The funded status of the company's pension and other benefit plans at the end of each fiscal year was as follows:
(Millions of Dollars) 1999 1998 1999 1998 ================================================================================================================== Pension Benefits Other Benefits ================================================================================================================== 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) ===================================================================================================================
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 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 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 QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) (Millions of Dollars, except per share amounts)
===================================================================================================================== Quarter Year ---------------------------------------------------- --------- 1999 First Second Third Fourth ===================================================================================================================== 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 =====================================================================================================================
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 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 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 EX-21 6 SUBSIDIARIES OF REGISTRANT 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 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 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 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 EX-27 7 FINANCIAL DATA SCHEDULE
5 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. 1,000 12-MOS JAN-01-2000 JAN-01-2000 88,000 0 589,500 43,400 381,200 1,091,000 1,208,000 687,400 1,890,600 693,000 290,000 0 0 230,900 504,500 1,890,600 2,751,800 2,751,800 1,813,900 1,813,900 0 0 27,900 230,800 80,800 150,000 0 0 0 150,000 1.67 1.67
EX-99.1 8 FINANCIAL STATEMENTS AUDITED FINANCIAL STATEMENTS AND SUPPLEMENTAL SCHEDULES THE STANLEY ACCOUNT VALUE PLAN Years ended December 31, 1999 and 1998 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 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 The Stanley Account Value Plan Statement of Financial Condition December 31, 1999
UNALLOCATED STANLEY STOCK CORNERSTONE STANLEY STOCK FUND LOAN FUND FUND FUND --------------------------------------------------------------------------------- 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 ================================================================================= MUTUAL FUNDS TOTAL ----------------------------------- 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 ===================================
See accompanying notes. 2 The Stanley Account Value Plan Statement of Financial Condition December 31, 1998
UNALLOCATED STANLEY STOCK CORNERSTONE STANLEY STOCK FUND LOAN FUND FUND FUND -------------------------------------------------------------------------- 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 ========================================================================== MUTUAL FUNDS TOTAL -------------------------------------- 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 ======================================
See accompanying notes. 3 The Stanley Account Value Plan Statement of Income and Changes in Plan Equity Year ended December 31, 1999
UNALLOCATED STANLEY STOCK CORNERSTONE FUND STANLEY STOCK FUND LOAN FUND FUND -------------------------------------------------------------------------- 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 ========================================================================== MUTUAL FUNDS TOTAL --------------------------------------- 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 =======================================
See accompanying notes. 4 The Stanley Account Value Plan Statement of Income and Changes in Plan Equity Year ended December 31, 1998
UNALLOCATED STANLEY STOCK CORNERSTONE STANLEY STOCK FUND LOAN FUND FUND FUND ------------------------------------------------------------------------------ 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 ============================================================================== MUTUAL FUNDS TOTAL ----------------------------------- 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 ===================================
See accompanying notes. 5 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 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 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 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 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 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 The Stanley Account Value Plan Assets Held for Investment December 31, 1999
DESCRIPTION OF INVESTMENT, INCLUDING MATURITY DATE, IDENTITY OF ISSUE, BORROWER, OR RATE OF INTEREST, PAR OR SIMILAR PARTY MATURITY VALUE COST CURRENT VALUE - ---------------------------------------------------------------------------------------------------------------------- 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 ========================================
* Indicates party-in-interest to the Plan. 12 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
CURRENT VALUE OF ASSET ON IDENTITY OF PARTY PURCHASE DESCRIPTION OF TRANSACTION NET GAIN INVOLVED ASSETS SELLING PRICE COST OF ASSET DATE (LOSS) - --------------------------------------------------------------------------------------------------------------------- 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
There were no category (i), (ii) or (iv) reportable transactions during 1999. * Indicates party-in-interest to the Plan. 13 -----END PRIVACY-ENHANCED MESSAGE-----