AUDITED FINANCIAL STATEMENTS
AND SUPPLEMENTAL SCHEDULES
THE STANLEY ACCOUNT VALUE PLAN
(FORMERLY THE STANLEY WORKS 401(K) SAVINGS PLAN)
Years ended December 31, 1998 and 1997
The Stanley Account Value Plan
(formerly The Stanley Works 401(k) Savings Plan)
Audited Financial Statements
and Supplemental Schedules
Years ended December 31, 1998 and 1997
CONTENTS
Report of Independent Auditors.................................................1
Audited Financial Statements
Statement of Financial Condition at December 31, 1998..........................2
Statement of Financial Condition at December 31, 1997..........................3
Statement of Income and Changes in Plan Equity for the Year Ended
December 31, 1998..........................................................4
Statement of Income and Changes in Plan Equity for the Year Ended
December 31, 1997..........................................................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, formerly The Stanley Works 401(k) Savings Plan, as
of December 31, 1998 and 1997, 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, 1998
and 1997, 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, 1998, 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 1998 financial statements and,
in our opinion, are fairly stated in all material respects in relation to the
1998 financial statements taken as a whole.
/s/Ernst & Young LLP
Hartford, Connecticut
March 19, 1999
The Stanley Account Value Plan
Statement of Financial Condition
December 31, 1998
INVESCO
BT PYRAMID RETIREMENT
UNALLOCATED EQUITY TRUST
STANLEY STOCK CORNERSTONE STANLEY STOCK INDEX FUND STABLE
FUND LOAN FUND FUND FUND VALUE 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
BT Pyramid Equity Index Fund $ 1,633,055
Invesco Retirement Trust Stable Value $ 972,618
Fund
American Funds Euro Pacific Growth Fund
Fidelity Management Trust Company Select
Small CAP Fund
--------------- ----------------------------------------
237,105,806 257,006,205 1,633,055 972,618
Contributions receivable 1,970,567 $ 5,020,000
Dividends and interest receivable 11,687 900 3 20
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 $ 1,633,058 $ 972,638
===================================================================================
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 $ 1,633,058 $ 972,638
===================================================================================
$ 234,608,060 $ 12,562,808 $ 9,500,000 $ 259,791,293 $ 1,633,058 $ 972,638
===================================================================================
See accompanying notes.
FIDELITY
AMERICAN FUNDS MANAGEMENT
EURO PACIFIC TRUST COMPANY
GROWTH FUND SELECT SMALL
CAP FUND TOTAL
- ------------------------------------------------
$ 233,577,772
257,003,434
3,530,805
1,633,055
972,618
$ 525,429 525,429
$ 589,990 589,990
- ------------------------------------------------
525,429 589,990 497,833,103
6,990,567
1 1 12,612
2,784,188
12,562,808
================================================
$ 525,430 $ 589,991 $ 520,183,278
================================================
$213,236,612
---------------
213,236,612
$ 525,430 $ 589,991 306,946,666
================================================
$ 525,430 $ 589,991 $ 520,183,278
================================================
2
The Stanley Account Value Plan
Statement of Financial Condition
December 31, 1997
UNALLOCATED
STANLEY STOCK FUND LOAN FUND STANLEY STOCK FUND TOTAL
--------------------------------------------------------------------------------
ASSETS
Investments, at current market value:
The Stanley Works Common Stock:
8,997,264 shares (cost
$132,445,673) $ 424,558,395 $ 424,558,395
10,007,568 shares (cost
$181,101,634) $ 472,232,116 472,232,116
Short-term investments 2,515,153 2,515,153
--------------------- ----------------------------------------
427,073,548 472,232,116 899,305,664
Contributions receivable 3,062,065 3,062,065
Dividends and interest receivable 45,195 1,594,244 1,639,439
Loans to participants $ 12,323,967 12,323,967
================================================================================
$ 430,180,808 $ 12,323,967 $ 473,826,360 $ 916,331,135
================================================================================
LIABILITIES AND PLAN EQUITY
Liabilities:
Due to Retirement Plan for Salaried
Employees of The Stanley Works
$ 262,146 $ 262,146
Debt $ 224,647,020 224,647,020
--------------------- ----------------------------------------
262,146 224,647,020 224,909,166
Plan equity 429,918,662 $ 12,323,967 249,179,340 691,421,969
================================================================================
$ 430,180,808 $ 12,323,967 $ 473,826,360 $ 916,331,135
================================================================================
See accompanying notes.
3
The Stanley Account Value Plan
Statement of Income and Changes in Plan Equity
Year ended December 31, 1998
INVESCO
UNALLOCATED BT PYRAMID RETIREMENT
STANLEY STOCK CORNERSTONE STANLEY STOCK EQUITY INDEX TRUST STABLE
FUND LOAN FUND FUND FUND FUND VALUE FUND
------------------------------------------------------------------------------------------
Investment income:
Dividends $ 7,187,776 $ 7,968,259 $ 28,356
Interest 115,232 $ 740,986 41,790 $ 84 20
------------------------------------------------------------------------------------------
7,303,008 740,986 8,010,049 84 28,376
Net realized and unrealized
appreciation (depreciation) (172,047,896) (194,385,843) 158,390
Employee contributions 20,470,845 644,988 255,043
Employer contribution $ 5,020,000
Withdrawals:
Cash (40,629,708) (4,468) (118,962)
The Stanley Works Common
Stock (2,519,143)
---------------- -----------------------------
(43,148,851) (4,468) (118,962)
Administrative expenses (588,725) (254) (1,581)
Amortization expense (47,190)
Interest expense (17,222,398)
Interfund transfers - net (7,298,983) (502,145) 4,480,000 1,020,723 834,318 809,762
------------------------------------------------------------------------------------------
Net increase (decrease) (195,310,602) 238,841 9,500,000 (202,624,659) 1,633,058 972,638
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 $ 1,633,058 $ 972,638
==========================================================================================
See accompanying notes.
FIDELITY
MANAGEMENT
AMERICAN FUNDS TRUST COMPANY
EURO PACIFIC SELECT SMALL
GROWTH FUND CAP FUND TOTAL
- --------------------------------------------------
$ 11,847 $ 15,196,238
2,413 $ 10 900,535
- --------------------------------------------------
14,260 10 16,096,773
(6,859) 20,618 (366,261,590)
190,447 241,869 21,803,192
5,020,000
(531) (718) (40,754,387)
(2,519,143)
- --------------------------------------------------
(531) (718) (43,273,530)
(590,560)
(47,190)
(17,222,398)
328,113 328,212
- --------------------------------------------------
525,430 589,991 (384,475,303)
691,421,969
- --------------------------------------------------
$ 525,430 $ 589,991 $ 306,946,666
==================================================
4
The Stanley Account Value Plan
Statement of Income and Changes in Plan Equity
Year ended December 31, 1997
UNALLOCATED
STANLEY STOCK FUND LOAN FUND STANLEY STOCK FUND TOTAL
--------------------------------------------------------------------------------
Investment income:
Dividends $ 7,197,351 $ 7,993,754 $ 15,191,105
Interest 91,621 $ 881,528 15,600 988,749
--------------------------------------------------------------------------------
7,288,972 881,528 8,009,354 16,179,854
Net realized and unrealized appreciation
in The Stanley Works Common Stock
194,715,441 194,046,566 388,762,007
Employee contributions 20,080,006 20,080,006
Withdrawals:
Cash (36,544,886) (36,544,886)
The Stanley Works Common Stock
(5,316,015) (5,316,015)
--------------------- --------------------
(41,860,901) (41,860,901)
Administrative expenses (537,601) (845) (538,446)
Interest expense (18,796,633) (18,796,633)
Interfund transfers - net (8,747,461) (53,199) 8,800,660
--------------------------------------------------------------------------------
Net increase 170,938,456 828,329 192,059,102 363,825,887
Plan equity at beginning of year 258,980,206 11,495,638 57,120,238 327,596,082
--------------------------------------------------------------------------------
Plan equity at end of year $ 429,918,662 $ 12,323,967 $ 249,179,340 $ 691,421,969
================================================================================
See accompanying notes.
5
The Stanley Account Value Plan
Notes to Financial Statements
December 31, 1998
1. DESCRIPTION OF THE PLAN
The Stanley Account Value Plan, formerly The Stanley Works 401(k) Savings 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 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.
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.
6
The Stanley Account Value Plan
Notes to Financial Statements (continued)
1. DESCRIPTION OF THE PLAN (CONTINUED)
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.
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.
7
The Stanley Account Value Plan
Notes to Financial Statements (continued)
1. DESCRIPTION OF THE PLAN (CONTINUED)
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. 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. During 1998, these excess funds fully offset the
Company's matching contribution.
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.
8
The Stanley Account Value Plan
Notes to Financial Statements (continued)
1. DESCRIPTION OF THE PLAN (CONTINUED)
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. During 1998, the Plan experienced a partial plan
termination resulting in the immediate vesting of certain participants'accounts.
The 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.
At December 31, 1998 and 1997, benefits payable to terminated vested
participants amounted to $1,093,501and $6,864,864, 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.
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.
9
The Stanley Account Value Plan
Notes to Financial Statements (continued)
3. DEBT
Debt consisted of the following at December 31:
1998 1997
-------------------- --------------------
Notes payable in monthly installments to 2009 with interest
at 6.07% $ 39,610,763 $ 47,352,052
Notes payable to the Company in monthly installments to 2028
with interest at 6.09% 173,625,849 177,294,968
==================== ====================
$ 213,236,612 $ 224,647,020
==================== ====================
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:
1999--$11,000,000; 2000--$7,400,000; 2001--$7,100,000; 2002--$6,900,000 and
2003--$7,000,000.
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, 385,747 shares were released and at December 31, 1998,
7,972,316 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 1998 and 1997 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 1998 and 1997 were $590,560 and $538,446, respectively.
10
The Stanley Account Value Plan
Notes to Financial Statements (continued)
4. TRANSACTIONS WITH PARTIES-IN-INTEREST (CONTINUED)
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 from 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
$31,464,184 and $14,721,703 of principal and interest payments related to such
debt in 1998 and 1997, respectively. At December 31, 1998, $173,625,849 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, 1998
DESCRIPTION OF INVESTMENT, INCLUDING
MATURITY DATE, RATE OF INTEREST, PAR
IDENTITY OF ISSUE, BORROWER, OR OR MATURITY VALUE
SIMILAR PARTY COST CURRENT VALUE
- ----------------------------------------------------------------------------------------------------------------------
Common Stock:
The Stanley Works* 17,678,602 shares of Common Stock;
par value $2.50 per share
$ 305,270,968 $ 490,581,206
Citibank, N.A. * Short-Term Investment Fund- Pooled
Bank Fund 3,527,904 3,527,904
Trust Funds:
State Street Bank and Trust United States Government securities
Company* 2,901 2,901
BT Pyramid Equity Index Fund
Pyramid Equity Index Fund 1,474,666 1,633,055
Invesco Retirement Trust Stable
Value Fund Invesco Retirement Trust 972,618 972,618
American Funds Euro Pacific Growth
Fund Euro Pacific Growth Fund 532,287 525,429
Fidelity Management Trust Company
Select Small Cap Fund Fidelity Select Small Capitalization 569,372 589,990
Pool
Loans to participants Promissory notes at prime rate with
maturities of five years or ten
years 12,562,808 12,562,808
----------------------------------------
Total investments $ 324,913,524 $ 510,395,911
========================================
* Indicates party-in-interest to the Plan.
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, 1998
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
Citibank, N.A.* Short-Term Investment Fund-
United States
Government Securities $ 37,662,287 $ 37,662,287
Citibank, N.A.* Short-Term Investment Fund-
United States
Government Securities $ 34,136,396 34,136,396
There were no category (i), (ii) or (iv) reportable transactions during 1998.
* Indicates party-in-interest to the Plan.