AUDITED FINANCIAL STATEMENTS
AND SUPPLEMENTAL SCHEDULES
THE STANLEY WORKS 401 (K) SAVINGS PLAN
Years ended December 31, 1996 and 1995
The Stanley Works 401(k) Savings Plan
Audited Financial Statements
and Supplemental Schedules
Years ended December 31, 1996 and 1995
CONTENTS
Report of Independent Auditors............................................ 1
Audited Financial Statements
Statement of Financial Condition at December 31, 1996..................... 2
Statement of Financial Condition at December 31, 1995..................... 3
Statement of Income and Changes in Plan Equity for the Year Ended
December 31, 1996..................................................... 4
Statement of Income and Changes in Plan Equity for the Year Ended
December 31, 1995..................................................... 5
Notes to Financial Statements............................................. 6
Supplemental Schedules
Assets Held for Investment................................................11
Transactions or Series of Transactions in Excess of 5% of the Current
Value of Plan Assets..................................................12
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 Works 401(k) Savings Plan as of December 31, 1996 and 1995, 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 generally accepted auditing
standards. 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, 1996
and 1995, and its income and changes in plan equity for the years then ended,
in conformity with generally accepted accounting principles.
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, 1996, 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 1996 financial
statements and, in our opinion, are fairly stated in all material respects in
relation to the 1996 financial statements taken as a whole.
Ernst & Young LLP
Hartford, Connecticut
March 13, 1997
1
The Stanley Works 401(k) Savings Plan
Statement of Financial Condition
December 31, 1996
UNALLOCATED STANLEY
STANLEY STOCK FUND LOAN FUND STOCK FUND TOTAL
--------------------------------------------------------------------------------
ASSETS
Investments, at current market value:
The Stanley Works Common Stock:
9,449,808 shares (cost
$137,198,542) $ 255,144,816 $ 255,144,816
10,800,908 shares (cost
$194,540,603) $ 291,624,516 291,624,516
Short-term investments 4,089,979 284,230 4,374,209
-------------------- -----------------------------------------
259,234,795 291,908,746 551,143,541
Dividends receivable 7,557 1,240 8,797
Loans to participants $ 11,495,638 11,495,638
--------------------------------------------------------------------------------
$ 259,242,352 $ 11,495,638 $ 291,909,986 $ 562,647,976
================================================================================
LIABILITIES AND PLAN EQUITY
Liabilities:
Due to Retirement Plan for Salaried
Employees of The Stanley Works
$ 262,146 $ 262,146
Debt $ 234,789,748 234,789,748
-------------------- -----------------------------------------
262,146 234,789,748 235,051,894
Plan equity 258,980,206 $ 11,495,638 57,120,238 327,596,082
--------------------------------------------------------------------------------
$ 259,242,352 $ 11,495,638 $ 291,909,986 $ 562,647,976
================================================================================
See accompanying notes.
2
The Stanley Works 401(k) Savings Plan
Statement of Financial Condition
December 31, 1995
UNALLOCATED STANLEY
STANLEY STOCK FUND LOAN FUND STOCK FUND TOTAL
--------------------------------------------------------------------------------
ASSETS
Investments, at current market value:
The Stanley Works Common Stock:
9,728,616 shares (cost
$140,995,052) $ 250,511,862 $ 250,511,862
11,662,126 shares (cost
$208,984,854) $ 300,299,745 300,299,745
Short-term investments 1,092,286 1,535,453 2,627,739
-------------------- -----------------------------------------
251,604,148 301,835,198 553,439,346
Dividends and interest receivable 1,762,357 568,340 2,330,697
Loans to participants $ 11,671,739 11,671,739
--------------------------------------------------------------------------------
$ 253,366,505 $ 11,671,739 $ 302,403,538 $ 567,441,782
================================================================================
LIABILITIES AND PLAN EQUITY
Liabilities:
Due to Retirement Plan for Salaried
Employees of The Stanley Works
$ 262,146 $ 262,146
Debt $ 244,296,925 244,296,925
-------------------- -----------------------------------------
262,146 244,296,925 244,559,071
Plan equity 253,104,359 $ 11,671,739 58,106,613 322,882,711
--------------------------------------------------------------------------------
$ 253,366,505 $ 11,671,739 $ 302,403,538 $ 567,441,782
================================================================================
See accompanying notes.
3
The Stanley Works 401(k) Savings Plan
Statement of Income and Changes in Plan Equity
Year ended December 31, 1996
UNALLOCATED STANLEY
STANLEY STOCK FUND LOAN FUND STOCK FUND TOTAL
--------------------------------------------------------------------------------
Investment income:
Dividends $ 6,909,565 $ 8,160,284 $ 15,069,849
Interest 93,635 $ 680,930 6,224 780,789
--------------------------------------------------------------------------------
7,003,200 680,930 8,166,508 15,850,638
Net realized and unrealized appreciation
in The Stanley Works Common Stock
16,422,570 5,764,892 22,187,462
Contributions:
Employee 19,968,699 19,968,699
Employer 6,232,568 6,232,568
-------------------- --------------------
26,201,267 26,201,267
Withdrawals:
Cash (34,756,301) (34,756,301)
The Stanley Works Common Stock
(4,783,322) (4,783,322)
-------------------- --------------------
(39,539,623) (39,539,623)
Administrative expenses (435,997) (435,997)
Interest expense (19,550,376) (19,550,376)
Interfund transfers - net (3,775,570) (857,031) 4,632,601
--------------------------------------------------------------------------------
Net increase (decrease) 5,875,847 (176,101) (986,375) 4,713,371
Plan equity at beginning of year 253,104,359 11,671,739 58,106,613 322,882,711
--------------------------------------------------------------------------------
Plan equity at end of year $ 258,980,206 $ 11,495,638 $ 57,120,238 $ 327,596,082
================================================================================
See accompanying notes.
4
The Stanley Works 401(k) Savings Plan
Statement of Income and Changes in Plan Equity
Year ended December 31, 1995
UNALLOCATED STANLEY
STANLEY STOCK FUND LOAN FUND STOCK FUND TOTAL
--------------------------------------------------------------------------------
Investment income:
Dividends $ 6,727,064 $ 8,521,529 $ 15,248,593
Interest 97,704 $ 379,698 38,082 515,484
--------------------------------------------------------------------------------
6,824,768 379,698 8,559,611 15,764,077
Net realized and unrealized appreciation
in The Stanley Works Common Stock
75,850,892 91,180,389 167,031,281
Contributions:
Employee 20,019,947 20,019,947
Employer 14,425,522 14,425,522
-------------------- --------------------
34,445,469 34,445,469
Withdrawals:
Cash (15,517,219) (15,517,219)
The Stanley Works Common Stock
(4,627,524) (4,627,524)
-------------------- --------------------
(20,144,743) (20,144,743)
Transfers to the Retirement Plan for
Salaried Employees of The Stanley Works
(102,594) (102,594)
Administrative expenses (51,639) (51,639)
Interest expense (18,535,301) (18,535,301)
Interfund transfers - net (8,498,016) 2,428,258 6,069,758 -
--------------------------------------------------------------------------------
Net increase 88,324,137 2,807,956 87,274,457 178,406,550
Plan equity/(deficit) at beginning of year
164,780,222 8,863,783 (29,167,844) 144,476,161
--------------------------------------------------------------------------------
Plan equity at end of year $ 253,104,359 $ 11,671,739 $ 58,106,613 $ 322,882,711
================================================================================
See accompanying notes.
5
The Stanley Works 401(k) Savings Plan
Notes to Financial Statements
December 31, 1996
1. DESCRIPTION OF THE PLAN
The Stanley Works 401(k) Savings Plan (the "Savings 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 Savings 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,
generally up to 15% of their compensation, as defined in the Savings 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
Participant and Company contributions are invested in the Stanley Stock Fund
with a guarantee, which, if necessary, is satisfied by the Retirement Plan for
Salaried Employees of The Stanley Works or by the Pension Plan for Hourly Paid
Employees of The Stanley Works, 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.
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.
The assets of the Savings Plan are held in trust by an independent corporate
trustee, State Street Bank and Trust Company (the "Trustee") pursuant to the
terms of a written Trust Agreement between the Trustee and the Company.
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.
6
The Stanley Works 401(k) Savings 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 Savings Plan with
respect to the participant's account value attributable to the outstanding loan
balance.
The Savings 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
Savings 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. As 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.
7
The Stanley Works 401(k) Savings 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 Savings Plan at any time,
subject to its provisions. Upon such termination of the Savings 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 Savings Plan sponsor has engaged William Mercer, Inc., 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.
There were 10,805 and 11,358 participants (10,131 and 10,648 of whom were
active employees) in the plan as of December 31, 1996 and 1995, respectively,
of whom 2,537 and 2,616, respectively, had loans outstanding.
At December 31, 1996 and 1995, benefits payable to terminated vested
participants amounted to $1,800,388 and $6,801,190, respectively.
8
The Stanley Works 401(k) Savings Plan
Notes to Financial Statements (continued)
2. SIGNIFICANT ACCOUNTING POLICIES
INVESTMENTS
The Savings 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. On April 17,
1996, the Board of Directors of the Company declared a two-for-one common stock
split. All share amounts have been restated to reflect the stock split.
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.
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 Savings Plan.
3. DEBT
Debt consisted of the following at December 31:
1996 1995
-------------------- --------------------
Notes payable in monthly installments to 2001 with interest
at 7.71% $ 57,488,780 $ 66,841,290
Notes payable to the Company in monthly installments to 2026
with interest at 8.3% 177,300,968 177,455,635
-------------------- --------------------
$ 234,789,748 $ 244,296,925
==================== ====================
The scheduled maturities of debt for the next five years are as follows:
1997--$10,211,000; 1998--$11,067,000; 1999--$11,994,000; 2000--$13,000,000;
and 2001--$10,433,000.
9
The Stanley Works 401(k) Savings 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, 255,398 shares were released and at December 31, 1995,
8,226,410 shares are pledged as security.
Payment of the Savings 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 1996 and 1995 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 Company. Fees incurred and
paid by the Savings Plan during 1996 and 1995 were $435,997 and $51,639,
respectively.
In 1991, the Savings Plan borrowed $180,000,000 from the Company, the proceeds
of which were used to purchase 9,696,968 shares of stock from the Company. The
Savings Plan made $14,875,901 and $14,297,365 of principal and interest
payments related to such debt in 1996 and 1995, respectively; at December 31,
1996, $177,300,968 was outstanding on such debt.
5. INCOME TAX STATUS
The Internal Revenue Service has ruled that the Savings 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 Savings 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 Savings
Plan's qualified status.
10
The Stanley Works 401(k) Savings Plan
Assets Held for Investment
December 31, 1996
DESCRIPTION OF INVESTMENT, INCLUDING
IDENTITY OF ISSUE, BORROWER, OR MATURITY DATE, RATE OF INTEREST, PAR
SIMILAR PARTY OR MATURITY VALUE COST CURRENT VALUE
- ----------------------------------------------------------------------------------------------------------------------
Common Stock:
The Stanley Works* 20,250,716 shares of Common Stock;
par value $2.50 per share
$331,739,145 $546,769,332
Trust Funds:
State Street Bank and Trust Short-Term Investment Fund--
Company* (GSTIF) United States Government securities
4,087,967 4,087,967
State Street Bank and Trust Short-Term Investment Fund--
Company* (STIF) Pooled Bank Fund 286,242 286,242
Loans to participants Promissory notes at prime rate with
maturities of five years or ten
years 11,495,638 11,495,638
-----------------------------------------
Total investments $347,608,992 $562,639,179
=========================================
* Indicates party-in-interest to the Plan.
11
The Stanley Works 401(k) Savings Plan
Transactions or Series of Transactions in Excess of
5% of the Current Value of Plan Assets
Year Ended December 31, 1996
CURRENT VALUE OF
IDENTITY OF PARTY PURCHASE DESCRIPTION OF ASSET ON NET GAIN
INVOLVED ASSETS SELLING PRICE COST OF ASSET TRANSACTION DATE (LOSS)
- --------------------------------------------------------------------------------------------------------------------
Category (iii) - Series of transactions in excess of 5 percent of plan assets
State Street Bank Short-Term Investment Fund-
and Trust United States
Company* Government Securities $37,320,772 $37,320,772
State Street Bank Short-Term Investment Fund-
and Trust United States
Company* Government Securities $34,323,078 34,323,078
There were no category (i), (ii) or (iv) reportable transactions during 1996.
* Indicates party-in-interest to the Plan.
12