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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
---------------------------------------------
ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended Commission File No.
August 31, 1998 0-6936-3
WD-40 COMPANY
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(Exact Name of Registrant as specified in Charter)
California 95-1797918
---------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1061 Cudahy Place, San Diego, California 92110
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (619) 275-1400
--------------
Securities registered pursuant to Section 12(b) of the Act:
Title of Class: None
----
Securities registered pursuant to Section 12(g) of the Act:
Title of Class: Common Stock, no par value
--------------------------
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 (or for such shorter period that the
Registrant was required to file such reports), 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:____.
The aggregate market value (closing price) of the voting stock held by
non-affiliates of the Registrant as of October 19, 1998 was $337,464,000.
As of October 19, 1998 the Registrant had 15,579,688 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The Proxy Statement for the annual meeting of shareholders on December
15, 1998 is incorporated by reference into PART III, Items 10-13.
1
PART I
ITEM 1 - BUSINESS
(a) General Development of Business.
For more than four decades, WD-40 Company sold only one petroleum-based
product, known as "WD-40." WD-40 is a multi-purpose product which acts as a
lubricant, rust preventative, penetrant, cleaner and moisture displacer. In
December 1995 the Company acquired the 3-IN-ONE Oil brand from affiliates of
Reckitt & Colman, P.L.C. 3-IN-ONE Oil is a lower cost general purpose
lubricant. During the fiscal year ended August 31, 1996, the Company
developed a third product, T.A.L 5, which was introduced to the market in
fiscal year 1997. T.A.L 5 is an extra-strength synthetic lubricant for
heavy-duty applications.
The Company's objective is to dominate the entire category of
lubrication products by combining the smaller niche markets targeted by
3-IN-ONE Oil and T.A.L 5 with the broad-based market held by the WD-40 brand.
The three brands complement each other, providing the Company with a
complete line of lubricants that is intended to eliminate the need for
distributors to stock, and consumers to buy, other brands.
The acquisition of the 3-IN-ONE Oil brand and the introduction of T.A.L
5 has allowed the Company to pursue a comprehensive and targeted marketing
strategy. The acquisition of the 3-IN-ONE Oil brand provided the Company
with an existing network of distribution in 17 countries, including several
markets in which the WD-40 brand had not been sold. The Company has been
using this distribution network to introduce the WD-40 brand to these markets
and to add distribution channels to markets that have been previously
established. One effect of this trend has been a reduction in 3-IN-ONE sales
in certain markets as sales of those products are replaced by sales of WD-40.
During fiscal 1998, the first promotion related to T.A.L 5 was
conducted. As the promotion occurred late in the year, the full impact on
sales of T.A.L 5 is not yet known. Early consumer response to the T.A.L 5
product has been favorable, but the product is clearly still very undeveloped
in terms of broad market acceptance.
(b) Financial Information About Industry Segments.
The Company operates in one business segment - the manufacture and sale
of multi-purpose lubricants principally through retail chain stores,
automotive parts outlets, and industrial distributors and suppliers.
(c) Narrative Description of Business.
WD-40 Company manufactures and markets three multi-purpose lubricant
products known as "WD-40," "3-IN-ONE Oil," and "T.A.L 5." WD-40 is sold
primarily in aerosol cans through chain stores, hardware and sporting goods
stores, automotive parts outlets and industrial distributors and suppliers.
It has a wide variety of consumer uses in, for example, household, marine,
automotive, sporting goods, and gardening applications. The product also
has numerous industrial applications.
2
3-IN-ONE Oil is a drip oil lubricant, sold primarily through the same
distribution channels as the WD-40 brand. It is a low-cost, entry-level
lubricant. The unique drip tip allows precise application for small mechanisms
and assemblies, tool maintenance, and threads on screws and bolts. 3-IN-ONE Oil
is a market share leader among drip oils for household consumers. It also has
wide industrial applications in such areas as locksmithing, HVAC, marine,
farming, construction, and jewelry manufacturing. The product's high quality
and the established distribution network that was acquired with the brand
trademarks have enabled the product to gain international acceptance.
T.A.L 5 was developed during the Company's fiscal 1996 as an extra
strength, longer-lasting synthetic spray lubricant for heavy-duty
applications. Marketing for T.A.L 5 is targeted at specialized users in the
trades and general industry, especially manufacturing. T.A.L 5, which stands
for "Triple Additive Lubricant / 5 functions," resists breakdown due to
corrosion, friction, temperature, load, and motion. It provides long-lasting
film strength and durability which can ultimately help prolong the life of
equipment. There are numerous competing heavy-duty spray lubricant products,
none of which are seen as being dominant. T.A.L 5 was designed to be
competitive as a high quality multi-application product that can be funneled
into the Company's existing distribution network.
WD-40 Company is subject to competition from many similar products which
perform some or all of the functions of WD-40, 3-IN-ONE Oil and T.A.L 5. The
Company is aware of at least 250 competing products, some of which sell for
lower prices. Competition in international markets varies by country. The
Company has no way of estimating the total size of the market or the
proportion of the market held by the Company.
With the trend toward consolidation in the retail marketplace, the
Company's customer base is shifting toward fewer, but larger, customers who
purchase in larger volumes. To support this trend, the Company has had to
expand its use of customer- and market-specific promotions and allowances,
which has negatively impacted and will continue to impact the Company's
ability to maintain existing profit margins.
Alternate sources of constituent chemicals are readily available and
there are no current or anticipated shortages of any raw materials considered
essential to the business. There are no environmental laws or regulations
currently affecting capital expenditures. Recent focus on environmental
regulations relating to VOC's (Volatile Organic Compounds) resulted in a
change in the formulation of the WD-40 product whereby CO2 was chosen as the
aerosol propellant in late 1996. As a result of this change, the cost of
manufacturing WD-40 increased and the Company increased its selling prices to
offset the increased cost. In the event of future increases in product cost,
the Company may not be in a position to increase selling prices, and
therefore an increase in costs could have an adverse effect on the Company's
competitive position.
The Company has no patents, but relies upon its established trademarks,
brand names, and marketing efforts, including advertising and sales
promotion, to compete effectively. The WD-40, 3-IN-ONE Oil and T.A.L 5
trademarks are registered in the United States and in various foreign
countries.
At August 31, 1998, the Company employed 167 people throughout the
world: 97 by the United States parent corporation, 10 by the Company's
Canadian subsidiary, 48 by the United Kingdom subsidiary, and 12 by the
Australian subsidiary. The majority of the Company's employees are engaged
in sales and/or marketing activities.
3
(d) Financial Information About Foreign and Domestic Operations and
Export Sales.
The information required by this item is included in Note 5--Business
Segment and Foreign Operations, of the Company's consolidated financial
statements which have been included in ITEM 8, Financial Statements and
Supplementary Data. The Company is subject to a variety of risks due to its
foreign operations, including currency risk and credit risk. The Company
attempts to minimize its exposure to foreign currency exchange fluctuations
by the use of forward contracts to hedge non functional currency cash
balances. With the deepening economic turmoil in Asia, Latin America, Eastern
Europe and various states in the former Soviet Union, the Company is subject
to increased credit risk for product sold to customers in these areas.
ITEM 2 - PROPERTIES
The Company owns and occupies an office and plant facility at 1061
Cudahy Place, San Diego, California 92110. The building consists of
approximately 11,000 square feet of office space and 4,000 square feet of
plant and storage area.
The Company owns and occupies an office and plant facility at Kiln Farm,
Milton Keynes, England. The building consists of approximately 8,000 square
feet of office space and 4,700 square feet of plant and storage area.
The Company leases approximately 1,300 square feet of office space for
sales offices in each of the following cities: Atlanta, Georgia; Miami,
Florida; Northbrook, Illinois; Thousand Oaks, California, and Trevose,
Pennsylvania.
The Company leases approximately 2,000 square feet of office space in
Etobicoke, Ontario, Canada, approximately 2,500 square feet of office space
in Epping, New South Wales, Australia, and approximately 1,800 square feet of
office space in Kuala Lumpur, Malaysia.
The Company believes that these properties should be sufficient to meet
its needs for office and plant facilities for several years.
ITEM 3 - LEGAL PROCEEDINGS
The Company is party to various claims, legal actions and complaints,
including product liability litigation, arising in the ordinary course of
business. In the opinion of management, all such matters are adequately
covered by insurance or will not have a material adverse effect on the
Company's financial position or results of operations.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
4
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the names and ages of, and the positions
and offices held by, all executive officers within the Company:
Name Age Position
- ---- --- ------------
Garry O. Ridge 42 President and Chief Executive Officer. Mr. Ridge joined the Company's
Australian subsidiary, WD-40 Company (Australia) Pty. Limited, in 1987 as Managing Director
and has held several senior management positions prior to his election as CEO in 1997.
Graham P. Milner 44 Senior Vice President, Sales and Marketing, The Americas. Mr. Milner joined the Company in
1992 as International Director, was appointed Vice President, Sales and Marketing, The
Americas in March, 1997 and became Senior Vice President, the Americas, in April, 1998.
Michael L. Freeman 45 Vice President Administration, Chief Information Officer. Mr. Freeman joined the Company
in 1990 as Director of marketing and was named Director of Operations in 1994. He was
promoted to Vice President Administration and Chief Information Officer in December, 1996.
Geoffrey J. Holdsworth 36 Managing Director, Asia Pacific, WD-40 Company (Australia) Pty. Limited.
Mr. Holdsworth joined the Company's Australian subsidiary, WD-40 Company (Australia) Pty.
Limited, in 1996 as General Manager. Prior to joining WD-40 Company, Mr. Holdsworth held
sales management positions at Columbia Pelikan Pty. Ltd., Australia.
William B. Noble 40 Managing Director, Europe, WD-40 Company Ltd. (U.K.): Mr. Noble joined the Company's
Australian subsidiary, WD-40 Company (Australia) Pty. Limited, in 1993 as International
Marketing Manager for the Asia Region. He was appointed Managing Director, Europe in
December, 1996.
Thomas J. Tranchina 50 Vice President Finance, Chief Financial Officer and Treasurer. Mr. Tranchina
joined the Company in April, 1998. Prior to joining WD-40 Company, Mr. Tranchina held a
variety of senior financial and operating positions, including eight years with
Spectragraphics Corporation in San Diego, California.
All officers hold office at the pleasure of the Board of Directors.
5
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock is traded in the over-the-counter market
(Nasdaq National Market System). As of August 31, 1998, the approximate
number of holders of record of the Company's common stock was 2,166. The
following table sets forth the range of high and low sales prices on the
Nasdaq National Market of the Company's common stock for the periods
indicated, as reported by Nasdaq.
SELECTED STOCK INFORMATION*
FISCAL 1998 FISCAL 1997
----------------------------------- ----------------------------------
HIGH LOW DIVIDEND HIGH LOW DIVIDEND
----------------------------------- -----------------------------------
First Quarter 32 7/8 26 3/8 $ .32 26 5/8 22 1/2 $ .31
Second Quarter 30 1/4 26 3/16 $ .32 26 5/8 24 3/4 $ .31
Third Quarter 33 26 3/8 $ .32 29 7/8 24 3/8 $ .31
Fourth Quarter 27 7/8 20 $ .32 31 1/4 26 $ .32
* Amounts have been retroactively restated to reflect the two-for-one stock
split effective July 11, 1997.
ITEM 6 - SELECTED FINANCIAL DATA
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following table sets forth certain unaudited quarterly financial information
for each of the two years in the period ended August 31, 1998:
DILUTED
NET GROSS NET EARNINGS
QUARTER ENDED: SALES PROFIT INCOME PER SHARE*
-------------- ----------- ------------- -------------
November 30, 1996 $ 28,265,000 $16,846,000 $ 4,240,000 $ .27
February 28, 1997 39,806,000 22,334,000 6,565,000 .42
May 31, 1997 34,525,000 19,641,000 5,134,000 .33
August 31, 1997 35,297,000 19,786,000 5,424,000 .35
------------ ----------- ----------- ------
$137,893,000 $78,607,000 $21,363,000 $ 1.37
------------ ----------- ----------- ------
------------ ----------- ----------- ------
November 30, 1997 $ 33,597,000 $19,279,000 $ 5,225,000 $ .34
February 28, 1998 39,174,000 22,420,000 6,334,000 .40
May 31, 1998 31,831,000 17,596,000 4,061,000 .26
August 31, 1998 39,795,000 22,118,000 6,268,000 .40
------------ ----------- ----------- ------
$144,397,000 $81,413,000 $21,888,000 $ 1.40
------------ ----------- ----------- ------
------------ ----------- ----------- ------
* Amounts have been retroactively restated to reflect the two-for-one stock
split effective July 11, 1997.
6
The following data has been derived from the Company's audited financial
statements. The balance sheet at August 31, 1998 and 1997 and the related
statements of income, of cash flows and of shareholders' equity of the Company
for the three years ended August 31, 1998 and notes thereto appear elsewhere
herein. The data should be read in conjunction with such financial statements
and other financial information appearing elsewhere herein.
YEAR ENDED AUGUST 31,
-------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------- ------------- ------------- ------------ --------------
Net sales $144,397,000 $137,893,000 $130,912,000 $116,776,000 $112,166,000
Cost of product sold 62,984,000 59,286,000 57,925,000 50,229,000 47,028,000
------------------------------------------------------------------------
Gross profit 81,413,000 78,607,000 72,987,000 66,547,000 65,138,000
Operating expenses 47,253,000 43,959,000 40,311,000 35,065,000 32,755,000
Interest and other income (expense), net 96,000 (1,288,000) 736,000 1,171,000 (11,900,00)
------------------------------------------------------------------------
Income before income taxes 34,256,000 33,360,000 33,412,000 32,653,000 20,483,000
Provision for income taxes 12,368,000 11,997,000 12,115,000 12,200,000 7,800,000
------------------------------------------------------------------------
Net income 21,888,000 21,363,000 21,297,000 20,453,000 12,683,000
------------------------------------------------------------------------
------------------------------------------------------------------------
Earnings per share $1.40 $1.37 $1.38 $1.33 $0.83
Dividends per share $1.28 $1.25 $1.24 $1.21 $1.15
Total assets $ 70,945,000 $ 65,418,000 $ 61,658,000 $ 59,579,000 $ 54,872,000
Number of employees 167 165 149 148 144
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Net sales were $144.4 million in fiscal 1998, $137.9 million in 1997, and $130.9
in 1996, representing increases over the prior year of 4.7% in 1998 and 5.3% in
1997. Sales for the Company's three trading blocs are broken down as follows
(in millions):
1998 1997 1996
---------------- ----------------- ----------------
Americas $98.6 68% $93.4 68% $87.7 67%
Europe 34.9 24% 32.2 23% 29.9 23%
Asia Pacific 10.9 8% 12.3 9% 13.3 10%
-----------------------------------------------------------------
TOTAL $144.4 100% $137.9 100% $130.9 100%
-----------------------------------------------------------------
In the Americas region, 83% of the sales in 1998 came from the U.S., and 17%
came from Canada and Latin America. This distribution of sales is virtually
unchanged from 1996 and 1997, although
7
sales from Latin America have exhibited the greatest growth rates, growing by
19% from 1996 to 1997 and by 11% from 1997 to 1998. As the U.S. and Canada
are both mature markets for the Company's products, the Company expects Latin
America to continue to present the strongest growth opportunities within the
region.
Within the European region, sales from the UK, which is a mature and
well-established market for the Company's products, essentially remained flat
for the three year period, accounting for 37% of the region's sales in 1998,
40% in 1997 and 44% in 1996. To the contrary, the principal European
countries where the Company sells through a direct sales force - France,
Germany and Spain -together accounted for 27% of the region's sales in 1998,
24% in 1997 and 22% in 1996. This shift in sales within the European
region reflects the growing acceptance of the Company's products in
developing markets at the expense of more mature markets like the UK. For
example, sales in France, Germany and Spain combined grew by 22% from 1997 to
1998 and by 16% from 1996 to 1997. The Company expects the majority of its
growth in the region to continue to come from the direct European countries
during the coming fiscal year.
The Asia/Pacific region continued to suffer the effects of the Asian economic
and political crisis which has severely impacted the economies of several
countries important to the Company's success in the region. Australian sales
have been flat from 1996 to 1998, while sales to the remaining Asian
countries declined by 14% from 1997 to 1998 and by 10% from 1996 to 1997.
Due to the severity of economic conditions in Asia, the Company expects no
growth in sales from this region in the near future.
Gross profit was $81.4 million, or 56.4% of sales in fiscal 1998, $78.6
million, or 57.0% in fiscal 1997, and $73.0 million, or 55.8% in fiscal 1996.
Except for the conversion to CO2 propellant in the fourth quarter of fiscal
1996, there has been no significant increase in the cost of manufacturing the
Company's products over the three year period. The conversion to CO2
increased the cost of product sold but was offset to a certain degree by a
simultaneous price increase. Changes in gross profit percentage from year to
year are due primarily to changes in average selling prices arising from
changes in both the mix of products sold and the mix of customers and trade
channels in which the products are sold. Although the decline in gross
profit as a percentage of sales from 1997 to 1998 was not significant, the
Company expects continued pressure on gross profit due to changes in its
customer mix. Due to the consolidation of companies in the retailing
industry, an increasing portion of the Company's sales are made to fewer, but
larger, customers with greater purchasing power, negatively impacting selling
prices and margins.
A breakdown of gross profit by trading bloc by year follows (in millions):
1998 1997 1996
---------------------------------------------------------
Americas $55.8 57% $53.5 57% $48.5 55%
Europe 20.0 58% 18.6 58% 18.0 60%
Asia/Pacific 5.6 51% 6.5 53% 6.4 48%
---------------------------------------------------------
Total $81.4 56% $78.6 57% $72.9 56%
---------------------------------------------------------
Selling, general, & administrative expenses were $31.1 million in fiscal 1998,
or 21.5% of sales compared to $28.8 million, or 20.9% of sales in 1997 and $27.0
million, or 20.6% of sales in 1996. The increase in 1998 from 1997 was due
primarily to three factors: increased selling costs to support the higher level
of sales; recognition of more than $500,000 in bad debts in the Americas region
- - from two South American distributors and from several retail accounts in the
U.S.; and, non-recurring employee-related expenses in the areas of severance,
retirement, and relocation. The
8
increase in SG&A Expenses from 1996 to 1997 was due to a general increase in
overhead, higher legal costs, the establishment of a national computer
network, implementation of a comprehensive disaster recovery plan, and
increased staffing in Europe in support of expected growth.
Advertising and sales promotion expense was $14.8 million, or 10.3% of sales
in 1998, $13.8 million, or 10.0% of sales in 1997, and $12.2 million, or 9.3%
of sales in 1996. The growth in advertising and sales promotion as a
percentage of sales has not been significant over the three years, but the
trend is for greater spending in this area to support the mix in the
Company's customer base towards fewer but larger customers with greater
purchasing power. Supporting these larger customers requires additional
spending in customer-specific marketing and promotional programs.
Income from operations was $34.2 million, or 23.7% of sales in fiscal 1998,
$34.6 million, or 25.1% of sales in 1997, and $32.7 million, or 25.0% of
sales in 1996. The decline in income from operations as a percentage of
sales from 1997 to 1998 was due to the items discussed above, namely the
lower gross profit percentage and higher SG&A and advertising and promotion
expenses.
Other income (expense) was $96,000 in fiscal 1998, a loss of $1,288,000 in
fiscal 1997, and $736,000 in 1996. The components of other income (expense)
are shown below:
1998 1997 1996
--------------------------------------
Interest Income, net $551,000 $54,000 $398,000
Foreign Currency Gains (Losses) (41,000) (1,274,000) 135,000
Loss on Disposal of PP&E (392,000) (108,000) (32,000)
Other Income (Expense) (22,000) 40,000 235,000
--------------------------------------
TOTAL $96,000 ($1,288,000) $736,000
--------------------------------------
--------------------------------------
The increase in interest income (net) in fiscal 1998 over 1997 was due to the
Company having greater cash balances on hand during the year which were
available for investment, and the decline from 1996 to 1997 was due to there
being less cash available. Foreign currency exchange produced a net loss of
$41,000 in 1998 versus a loss of $1,274,000 in 1997 due to a more favorable
movement in exchange rates in countries where the Company operates in local
currencies and to programs put in place, particularly in the UK, to better
manage currency conversion. The loss on disposal of property, plant and
equipment in 1998 was due largely to a decision to convert company owned
vehicles to leased vehicles and was partially offset by lower depreciation
expense.
The provision for income taxes was 36% of taxable income in fiscal 1998,
1997, and 1996. However, the Company is currently evaluating its income tax
provision in light of expected shifts in taxable income throughout the world
making it likely that the effective tax rate will increase in the coming
fiscal year.
Net income was $21.9 million, or $1.40 per share on a fully diluted basis in
fiscal 1998, versus $21.4 million, or $1.37 in 1997, and $21.3 million, or
$1.38 in 1996.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased by $2.3 million from $10.9 million at the
end of fiscal 1997 to $8.6 million at the end of fiscal 1998. The principal
reason for the decline was due to cash invested
9
in short term investments which grew from zero in 1997 to $6.1 million at
August 31, 1998. These investments are comprised primarily of state, county
and municipal securities which are readily marketable.
At August 31, 1998, working capital was $35.9 million, an increase of $4.9
million from $31.0 million at the end of 1997. The current ratio of 3.6 at
August 31, 1998 is essentially unchanged from 3.7 a year earlier despite an
increase of $7.4 million in current assets. The increase in current assets is
primarily the result of the above mentioned increase in short term investments
and an increase of $4.4 million in accounts receivable. The increase in
accounts receivable is due to the timing of sales during the last two months of
the year, whereby a larger portion of the fourth quarter's sales occurred in the
last two months of 1998 compared to fiscal 1997. Current liabilities grew by
$2.5 million, due largely to an increase of $1.6 million in taxes payable.
The Company has an unsecured $10.0 million line of credit with a commercial bank
which expires on November 30, 2000. To date, no funds have been borrowed
under this line of credit.
The Company's primary source of funds is cash flow from operations, which is
expected to provide sufficient funds to meet both short and long-term operating
needs, as well as future dividends. However, in an effort to augment the
growth of the existing business by leveraging its core competencies, the Company
has announced that it is seeking to make an acquisition of one or more branded
products in related markets. If the Company is successful in doing so,
existing cash flow may not be sufficient and outside financing may be required
to support the acquisition.
The Company spent $1.3 million for new capital assets during fiscal 1998,
primarily in the area of improvements to existing facilities, vehicle exchanges,
and computer hardware and software. In fiscal 1999, the Company expects to
spend approximately $1.6 million for new capital assets, primarily for computer
hardware and software in support of sales and operations.
YEAR 2000 ISSUE
In 1997 the Company established a project team, reporting to the Year 2000
Compliance Committee of the board of directors, to ensure an uninterrupted
transition to the year 2000. The project encompasses software, hardware,
EDI, supply chain systems, third party contract packagers, environmental and
safety systems, facilities, utilities, supplier readiness and other outside
agencies. To date, the project team has assessed all internal systems and
acquired the necessary computer hardware and software to assure compliance of
its internal systems.
The Company has also contacted all key service suppliers, subcontractors,
electronic commerce customers, and other customers to assess their
compliance. Based on these contacts, management believes that all key outside
parties will be compliant in a timely manner, however, there can be no
assurance that there will not be a material adverse effect on the Company if
third parties do not convert their systems in a timely manner and in a way
that is compatible with the Company's systems.
Noncompliance with year 2000 requirements may cause a material adverse impact
on the results of operations in several ways: (1) in the event that the
Company's internal systems are not compliant, the Company may be unable to
efficiently process customer orders, manage production, deliver products,
and perform other related functions; (2) noncompliance by a service provider
could result in the Company being deprived of a resource necessary for
ongoing operations, such as electrical
10
power, communications, and transportation; (3) noncompliance by one or more
subcontractors could result in the Company being unable to manufacture a
sufficient supply of finished goods to meet demand; and, (4) noncompliance
by one or more customers could result in the customers' inability to order,
receive, and sell the Company's products.
The Company is in the process of developing contingency plans in the event
that either internal systems or systems of key outside parties are not
compliant. Costs related to the year 2000 issue are expensed as incurred
except for certain hardware and software acquisition costs which may be
considered capital expenditures. All costs related to the year 2000 issue
have been funded through operating cash flows, and have not been material.
MARKET RISK
The Company is exposed to a variety of risks, including foreign currency
fluctuations and changes in the market value of its investments. In the
normal course of its business, the Company employs established policies and
procedures to manage its exposure to fluctuations in foreign currency values
and changes in the market value of its investments.
The Company's objective in managing its exposure to foreign currency exchange
rate fluctuations is to reduce the impact of adverse fluctuations in earnings
and cash flows associated with foreign currency exchange rate changes.
Accordingly, the Company's U.K. subsidiary utilizes forward contracts to
hedge its exposure on converting cash balances maintained in French francs,
German marks, and Spanish pesetas into sterling. The Company regularly
monitors its foreign exchange exposures to ensure the overall effectiveness
of its foreign currency hedge positions. However, there can be no assurance
the Company's foreign currency hedging activities will substantially offset
the impact of fluctuations in currency exchange rates on its results of
operations and financial position.
The fair value of the Company's investments in marketable securities at
August 31, 1998 was $6,093,000. The Company's investment policy is to manage
its portfolio of marketable securities in order to preserve principal and
liquidity while maximizing the return. The Company's portfolio is primarily
invested in variable rate demand notes issued by state and local governmental
agencies. These notes offer liquidity on regularly scheduled auction dates,
on a one-week or five-week cycle and are traded at face value, thereby
eliminating risk of principal loss. While these notes depend upon the
creditworthiness of the issuers, the Company attempts to minimize credit risk
by limiting its investment in any one particular state or local agency.
FORWARD LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for certain forward-looking statements. This annual report contains
forward-looking statements, which reflect the Company's current views with
respect to future events and financial performance.
These forward-looking statements are subject to certain risks and
uncertainties. The words "aim," "believe," "expect," "anticipate," "intend,"
"estimate" and other expressions that indicate future events and trends
identify forward-looking statements.
11
Actual future results and trends may differ materially from historical
results or those anticipated depending upon factors including, but not
limited to, the rate of sales growth in Latin America and direct European
countries, the impact of customer mix on gross margins, the effect of future
income tax provisions, the impact of one or more acquisitions, the amount of
future capital expenditures, foreign exchange rates and fluctuations in those
rates, the effects of, and changes in, worldwide economic conditions,
particularly in the Asia/Pacific region, the impact of the year 2000 issue,
and legal proceedings.
Readers also should be aware that while the Company does, from time to time,
communicate with securities analysts, it is against the Company's policy to
disclose to them any material non-public information or other confidential
commercial information. Accordingly, shareholders should not assume that the
Company agrees with any statement or report issued by any analyst
irrespective of the content of the statement or report. Further, the Company
has a policy against issuing or confirming financial forecasts or projections
issued by others. Accordingly, to the extent that reports issued by
securities analysts contain any projections, forecasts or opinions, such
reports are not the responsibility of the Company.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's financial statements at August 31, 1998 and 1997 and each
of the three years in the period ended August 31, 1998, and the Report of
PricewaterhouseCoopers LLP, Independent Accountants, are included in this
Report on pages i through xv.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
12
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is set forth under the captions
"Security Ownership of Directors and Executive Officers," "Nominees for
Election as Directors," "Compensation, Committees and Meetings of the Board
of Directors," "Compensation Committee Interlocks and Insider Participation"
and "Section 16(a) Beneficial Ownership Reporting Compliance" on pages 4
through 6 of the Company's Proxy Statement filed with the Securities and
Exchange Commission in connection with the 1998 Annual Meeting of
Shareholders, December 15, 1998 (the "Proxy Statement"), which is
incorporated by reference herein.
ITEM 11 - EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to
the Proxy Statement under the headings "Executive Compensation,"
"Compensation Committee Report on Executive Compensation" and "Stock
Performance Graphs" on pages 7 through 12.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to
the Proxy Statement under the headings "Principal Security Holders" on page
2 and "Security Ownership of Directors and Executive Officers" on page 4.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to
the Proxy Statement under the heading "Related Party Transaction" on page 6.
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K
PAGE
----
(a) Documents filed as part of this report
(1) Report of Independent Accountants i
Consolidated Balance Sheet at August 31, 1998 and 1997 ii
Consolidated Statement of Income for Fiscal 1998, 1997 and 1996 iii
Consolidated Statement of Shareholders' Equity for Fiscal 1998,
1997 and 1996 iv
Consolidated Statement of Cash Flows for Fiscal 1998, 1997 and 1996
Notes to Consolidated Financial Statements v
(2) Financial Statement Schedule for Fiscal 1998, 1997 and 1996
Schedule II - Consolidated Valuation and Qualifying Accounts and Reserves xv
All other schedules are omitted because they are not applicable or the
required information is shown in the consolidated financial statements or
notes thereto.
13
(3) Exhibits
Exhibit No. Description
- ----------- -----------
Articles of Incorporation and By-Laws.
3(a) The Restated Articles of Incorporation are incorporated by reference from the
Registrant's Form 10-K Annual Report dated November 9, 1995, Exhibit 3(a)
thereto.
3(b) The Certificate of Amendment of Restated Articles of Incorporation is incorporated by
reference from the Registrant's From 10-K/A filed December 5, 1997, Exhibit 3(b) thereto.
3(c) The Restated By-Laws are incorporated by reference from the Registrant's Form 10-Q filed
April 14, 1998, Exhibit 3 (c) thereto.
Material contracts.
Executive Compensation Plans and Arrangements (Exhibits 10(a) through 10(d) are
management contracts and compensatory plans or arrangements required to be filed as
exhibits pursuant to ITEM 14(c)).
10(a) The Restated WD-40 Company Incentive Stock Option Plan is incorporated by reference
from the Form 10-K Annual Report dated November 9, 1995, Exhibit 10(a) thereto.
10(b) The WD-40 Company Supplemental Death Benefit Plan is incorporated by reference from
the Form 10-K Annual Report dated November 9, 1995, Exhibit 10(b) thereto.
10(c) The WD-40 Company Supplemental Retirement Benefit Plan is incorporated by reference
from the Form 10-K Annual Report dated November 9, 1995, Exhibit 10(c) thereto.
10(d) The Second Amendment and Restatement, WD-40 Company 1990 Incentive Stock Option
Plan is incorporated by reference from the Form 10-K/A Annual Report dated
December 4, 1997, Exhibit 10(d) thereto.
21 Subsidiaries of the Registrant.
23 Consent of Independent Accountants.
27 Financial Data Schedule (electronic filing only).
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of the
Registrant's fiscal year ended August 31, 1998.
14
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this annual report to be
signed on its behalf by the undersigned, thereunto duly authorized.
WD-40 COMPANY
Registrant
By /s/ Thomas J. Tranchina
--------------------------------
Thomas J. Tranchina,
Vice President Finance
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
Date: November 23, 1998
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 and on the dates indicated.
/s/GARRY O. RIDGE
------------------------------------
GARRY O. RIDGE
Chief Executive Officer and Director
(Principal Executive Officer)
Date: November 16, 1998
/s/ JOHN S. BARRY
------------------------------------
JOHN S. BARRY, Director
Date: November 15, 1998
------------------------------------
HARLAN F. HARMSEN, Director
Date:
/s/ MARIO L. CRIVELLO
------------------------------------
MARIO L. CRIVELLO, Director
Date: November 16, 1998
15
/s/ MARGARET L. ROULETTE
------------------------------------
MARGARET L. ROULETTE, Director
Date: November 15, 1998
/s/ C. FREDRICK SEHNERT
------------------------------------
C. FREDRICK SEHNERT, Director
Date: November 16, 1998
/s/ DANIEL W. DERBES
------------------------------------
DANIEL W. DERBES, Director
Date: November 16, 1998
/s/ JACK L. HECKEL
------------------------------------
JACK L. HECKEL, Director
Date: November 18, 1998
/s/ EDWARD J. WALSH
------------------------------------
EDWARD J. WALSH, Director
Date: November 16, 1998
/s/ GERALD C. SCHLEIF
------------------------------------
GERALD C. SCHLEIF, Director
Date: November 15, 1998
16
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of WD-40 Company
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) and (2) on page 13 present fairly, in all material
respects, the financial position of WD-40 Company and its subsidiaries at August
31, 1998 and 1997, and the results of their operations and their cash flows for
each of the three years in the period ended August 31, 1998, in conformity with
generally accepted accounting principles. 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 of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
San Diego, California
September 29, 1998
i
WD-40 COMPANY
- ------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET
- ------------------------------------------------------------------------------
August 31,
----------------------------------------------
1998 1997
ASSETS --------------- ----------------
Current assets:
Cash and cash equivalents $ 8,572,000 $ 10,868,000
Short-term investments 6,093,000
Trade accounts receivable, less allowance for cash discounts
and doubtful accounts of $585,000 and $495,000 27,037,000 22,608,000
Product held at contract packagers 2,038,000 2,132,000
Inventories 1,697,000 3,341,000
Other current assets 4,329,000 3,407,000
------------------ -----------------
Total current assets 49,766,000 42,356,000
Property, plant and equipment, net 3,593,000 4,160,000
Low income housing investments 3,378,000 3,711,000
Goodwill, net 12,468,000 13,435,000
Other assets 1,740,000 1,756,000
------------------ ------------------
$ 70,945,000 $ 65,418,000
------------------ ------------------
------------------ ------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 6,906,000 $ 6,683,000
Accrued payroll and related expenses 3,059,000 2,383,000
Income taxes payable 3,115,000 1,546,000
Current portion of long-term debt 830,000 756,000
------------------ ------------------
Total current liabilities 13,910,000 11,368,000
Long-term debt 916,000 1,671,000
Deferred employee benefits 1,121,000 1,039,000
------------------ ------------------
Total long-term liabilities 2,037,000 2,710,000
Commitments and contingencies (Note 12)
Shareholders' equity:
Common stock, no par value, 18,000,000 shares authorized -
15,633,308 and 15,561,942 shares issued and outstanding 9,680,000 8,459,000
Paid-in capital 321,000 321,000
Retained earnings 44,318,000 42,403,000
Cumulative translation adjustment 679,000 157,000
------------------ ------------------
Total shareholders' equity 54,998,000 51,340,000
------------------ ------------------
$ 70,945,000 $ 65,418,000
------------------ ------------------
------------------ ------------------
See accompanying notes to consolidated financial statements.
ii
WD-40 COMPANY
- -------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF INCOME
- -------------------------------------------------------------------------------
Year Ended August 31,
------------------------------------------------------------------
1998 1997 1996
----------------- ---------------- ----------------
Net sales $ 144,397,000 $ 137,893,000 $ 130,912,000
Cost of product sold 62,984,000 59,286,000 57,925,000
----------------- ---------------- ---------------
Gross profit 81,413,000 78,607,000 72,987,000
----------------- ---------------- ---------------
Operating expenses:
Selling, general and administrative 31,098,000 28,770,000 27,027,000
Advertising and sales promotion 14,811,000 13,846,000 12,219,000
Amortization expense 1,344,000 1,343,000 1,065,000
----------------- ---------------- ---------------
47,253,000 43,959,000 40,311,000
----------------- ---------------- ---------------
Income from operations 34,160,000 34,648,000 32,676,000
Interest income, net 551,000 54,000 398,000
Other (expense) income, net (455,000) (1,342,000) 338,000
----------------- ---------------- ---------------
Income before income taxes 34,256,000 33,360,000 33,412,000
Provision for income taxes 12,368,000 11,997,000 12,115,000
----------------- ---------------- ---------------
Net income $ 21,888,000 $ 21,363,000 $ 21,297,000
----------------- ---------------- ---------------
----------------- ---------------- ---------------
Earnings per common share:
Basic $ 1.40 $ 1.38 $ 1.38
----------------- ---------------- ---------------
----------------- ---------------- ---------------
Diluted $ 1.40 $ 1.37 $ 1.38
----------------- ---------------- ---------------
----------------- ---------------- ---------------
Common equivalent shares:
Basic 15,604,160 15,512,140 15,423,728
----------------- ---------------- ---------------
----------------- ---------------- ---------------
Diluted 15,664,119 15,603,790 15,465,421
----------------- ---------------- ---------------
----------------- ---------------- ---------------
See accompanying notes to consolidated financial statements.
iii
WD-40 COMPANY
- ------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
- ------------------------------------------------------------------------------
COMMON STOCK CUMULATIVE
-------------------------------- PAID-IN RETAINED TRANSLATION
SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENT
-------------- ------------- ------------ ------------ -------------
Balance at August 31, 1995 15,406,310 $ 6,083,000 $ 321,000 $ 38,251,000 $ (150,000)
Issuance of common stock
upon exercise of options 45,392 747,000
Exchange of common stock
upon exercise of options (9,796) (227,000)
Cash dividends (19,123,000)
Change in cumulative translation
adjustment (28,000)
Net income 21,297,000
---------- ----------- --------- ----------- --------
Balance at August 31, 1996 15,441,906 6,603,000 321,000 40,425,000 (178,000)
Issuance of common stock
upon exercise of options 177,400 3,509,000
Exchange of common stock
upon exercise of options (57,364) (1,653,000)
Cash dividends (19,385,000)
Change in cumulative translation
adjustment 335,000
Net income 21,363,000
---------- ----------- --------- ----------- --------
Balance at August 31, 1997 15,561,942 8,459,000 321,000 42,403,000 157,000
Issuance of common stock
upon exercise of options 119,856 2,640,000
Exchange of common stock
upon exercise of options (48,490) (1,419,000)
Cash dividends (19,973,000)
Change in cumulative translation
adjustment 522,000
Net income 21,888,000
---------- ----------- --------- ----------- --------
Balance at August 31, 1998 15,633,308 $ 9,680,000 $ 321,000 $44,318,000 $ 679,000
---------- ----------- --------- ----------- --------
---------- ----------- --------- ----------- --------
See accompanying notes to consolidated financial statements.
iv
WD-40 COMPANY
- ------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF CASH FLOWS
- ------------------------------------------------------------------------------
YEAR ENDED AUGUST 31,
------------------------------------------------------------
1998 1997 1996
--------------- --------------- ----------------
Cash flows from operating activities:
Net income $ 21,888,000 $ 21,363,000 $ 21,297,000
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 2,161,000 2,216,000 1,760,000
Loss on sale of equipment 392,000 108,000 32,000
Deferred income taxes (305,000) 18,000 619,000
Changes in assets and liabilities:
Trade accounts receivable (4,406,000) (998,000) (4,276,000)
Product held at contract packagers 94,000 172,000 3,000
Inventories 1,668,000 624,000 (1,270,000)
Other assets (365,000) (331,000) (342,000)
Accounts payable and accrued expenses 913,000 435,000 1,109,000
Income taxes payable 1,551,000 (383,000) (832,000)
Long-term deferred employee benefits 85,000 85,000 92,000
--------------- -------------- --------------
Net cash provided by operating activities 23,676,000 23,309,000 18,192,000
--------------- -------------- --------------
Cash flows from investing activities:
(Increase) decrease in short-term investments (6,093,000) 104,000 13,123,000
Non-cash intangible assets of business acquired (15,047,000)
Proceeds from sale of equipment 624,000 291,000 163,000
Capital expenditures (1,271,000) (1,478,000) (1,353,000)
--------------- -------------- --------------
Net cash used in investing activities (6,740,000) (1,083,000) (3,114,000)
--------------- -------------- --------------
Cash flows from financing activities:
Proceeds from issuance of common stock 1,221,000 1,856,000 520,000
Repayments of long-term debt, net (669,000) (706,000) (658,000)
Dividends paid (19,973,000) (19,385,000) (19,123,000)
--------------- -------------- --------------
Net cash used in financing activities (19,421,000) (18,235,000) (19,261,000)
--------------- -------------- --------------
Effect of exchange rate changes on cash 189,000 129,000 (159,000)
--------------- -------------- --------------
(Decrease) increase in cash and cash equivalents (2,296,000) 4,120,000 (4,342,000)
Cash and cash equivalents at beginning of year 10,868,000 6,748,000 11,090,000
--------------- -------------- --------------
Cash and cash equivalents at end of year $ 8,572,000 $ 10,868,000 $ 6,748,000
--------------- -------------- --------------
--------------- -------------- --------------
Non-cash investing and financing activities:
Exchange of common stock upon exercise
of options $ 1,419,000 $ 1,653,000 $ 227,000
--------------- -------------- --------------
--------------- -------------- --------------
See accompanying notes to consolidated financial statements.
v
WD-40 COMPANY
- ------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries, WD-40 Products (Canada) Ltd., WD-40 Company
Ltd. (U.K.), and WD-40 Company (Australia) Pty. Ltd. All significant
intercompany transactions and balances have been eliminated.
CASH AND CASH EQUIVALENTS
Cash equivalents are highly liquid investments purchased with an original
maturity of three months or less.
SHORT-TERM INVESTMENTS
Short-term investments consist principally of variable rate demand notes
issued by state and local governments. While these notes have contractual
maturities of up to 30 years, they also provide liquidity at regularly
scheduled auction dates, which typically occur every one to five weeks. Such
investments are considered short-term due to the auction dates and the
Company's intent to sell the securities from time to time during the year.
The Company has classified its investment portfolio as available-for-sale.
Additionally, the cost of securities sold is based upon the specific
identification method.
FAIR VALUE OF FINANCIAL INSTRUMENTS
At August 31, 1998, the carrying amounts of the Company's other financial
instruments, including cash equivalents, trade receivables and accounts
payable, approximated their fair values due to their short-term maturities.
Management believes that the estimated fair value of the Company's low income
housing investments and debt approximated their carrying values at August 31,
1998.
DIVERSIFICATION OF CREDIT RISK
The Company's policy is to place its cash, cash equivalents and investments
in high credit quality financial institutions, in investment grade commercial
paper and in securities of various government agencies. Additionally, the
Company limits its credit exposure from trade receivables by performing
on-going credit evaluations of customers.
USE OF ESTIMATES
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 and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
REVENUE RECOGNITION
Revenues are recognized upon the shipment of product to third party
wholesalers.
PRODUCT HELD AT CONTRACT PACKAGERS
Product held at contract packagers represents the inventory held at United
States, Australian, and Canadian contract packagers underlying their
obligation to pay the Company for the inventory acquired.
These contract packagers will continue to package WD-40 products to rigid
specifications, and upon order from WD-40 Company, ship ready-to-sell
inventory to the Company's customers. The contract packagers, rather than the
Company, are
vi
responsible for inventory control. The Company does not record a sale on the
inventory until such inventory is shipped to third party wholesalers.
INVENTORIES
Inventories are stated at the lower of average cost or market. The inventory
balance primarily represents inventory owned by WD-40 Company Ltd. (U.K.) and
concentrate owned by WD-40 Company (U.S.).
PROPERTY, PLANT AND EQUIPMENT
Property, plant, and equipment are stated at cost. Depreciation has been
computed principally using the straight-line method based upon estimated
useful lives of ten to thirty years for buildings and improvements, three to
fifteen years for machinery and equipment, five years for vehicles and three
to ten years for furniture and fixtures.
GOODWILL
Goodwill represents the excess of the purchase cost over the fair value of
identifiable assets at the date of acquisition (Note 2) and is amortized on a
straight-line basis over its estimated useful life of fifteen years. The
Company evaluates the carrying value of goodwill at each balance sheet date
as well as the amortization period to determine whether adjustments are
required. No such adjustments have been recorded by the Company.
LONG-LIVED ASSETS
The Company assesses potential impairments to its long-lived assets when
there is evidence that events or changes in circumstances have made recovery
of the asset's carrying value unlikely. An impairment loss would be
recognized when the sum of the expected future undiscounted net cash flows is
less than the carrying amount of the asset. No impairment losses have been
identified by the Company.
ADVERTISING COSTS
The Company expenses advertising costs when the liabilities arise.
INCOME TAXES
Current income tax expense is the amount of income taxes expected to be
payable for the current year. A deferred income tax liability or asset is
established for the expected future tax consequences resulting from the
differences in financial reporting and tax bases of assets and liabilities.
Deferred income tax expense is the change during the year in the deferred
income tax liability or asset.
FOREIGN CURRENCY
The accounts of the Company's foreign subsidiaries have been translated into
United States dollars at appropriate rates of exchange. Cumulative
translation gains or losses are recorded as a separate component of
shareholders' equity. Gains or losses resulting from foreign currency
transactions (transactions denominated in a currency other than the entity's
local currency) are included in the consolidated statement of income as other
income (expense). Aggregate foreign currency transaction gains and (losses)
were ($41,000), ($1,274,000) and $135,000 for the years ended August 31,
1998, 1997 and 1996, respectively.
During 1998, the Company entered into forward foreign currency exchange rate
contracts to hedge cash balances denominated in various currencies held by
one of its wholly-owned foreign subsidiaries, WD-40 Company Ltd. (U.K.).
Realized and unrealized gains and losses on these contracts are recorded in
income. The effect of this practice is to minimize variability in the
Company's operating results arising from foreign exchange rate movements. The
Company does not engage in foreign currency speculation. These foreign
exchange contracts do not subject the Company to significant risk from
exchange rate movements, because gains and losses on these contracts offset
losses and gains on the balances being hedged. The Company does not purchase
contracts which exceed the amount of the balances being hedged. At
vii
August 31, 1998, the Company had approximately $900,000 of foreign exchange
contracts outstanding, which mature between November 1998 and April 1999. The
amount of net realized and unrealized gains on the foreign exchange contracts
was not material during the year ended August 31, 1998.
EARNINGS PER SHARE
The Company adopted Statement of Financial Accounting Standard ("SFAS") No.
128, "Earnings Per Share" in 1998. This statement requires presentation of
basic and diluted earnings per common share. Basic earnings per common share
is calculated by dividing net income for the period by the weighted-average
number of common shares outstanding during the period. Diluted earnings per
common share is calculated by dividing net income for the period by the
weighted-average number of common shares outstanding during the period
increased by dilutive potential common shares ("dilutive securities") that
were outstanding during the period. Dilutive securities are comprised of
options granted under the Company's stock option plan (Note 6).
STOCK-BASED COMPENSATION
The Company measures compensation expense for its stock-based employee
compensation plans using the intrinsic value method. Pro forma disclosures of
net income and earnings per share, as if the fair value method had been
applied in measuring compensation expenses, are presented in Note 8.
NEW PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
standardizes the accounting for derivative instruments by requiring that all
derivatives be recognized as assets and liabilities and measured at fair
value. The Company will be required to adopt this standard during the year
ending August 31, 2000. The Company has not determined what impact, if any,
the adoption of SFAS No. 133 will have on the Company's consolidated
financial position or results of operations.
RECAPITALIZATION
In July 1997, the Company filed a Certificate of Amendment of Restated
Articles of Incorporation to effect a 2 for 1 stock split of all outstanding
shares of common stock and stock options. All shares and per share data in
the accompanying financial statements have been adjusted retroactively to
give effect to the stock split. The Certificate of Amendment increased the
authorized stock of the Company such that the Company is authorized to issue
18,000,000 shares of no par value common stock.
NOTE 2 - ACQUISITION
On December 8, 1995, the Company acquired all of the worldwide trademarks and
other intangible assets relating to the sale of 3-In-One brand lubricating
oil products from Reckitt & Colman, Inc., a Delaware corporation, Reckitt &
Colman (Overseas) Limited, an English corporation, and other affiliates of
Reckitt & Colman P.L.C., an English corporation, (collectively, Reckitt &
Colman) under an asset purchase and sale agreement. The acquisition of assets
included inventory and the rights to manufacture, sell and distribute this
product line. No other physical property, plant, or equipment was acquired.
The Company paid cash in the amount of $15,047,000 for the trademarks and
other intangible assets and approximately $400,000 for inventory. None of the
funds required for the acquisition were borrowed. Accumulated amortization of
goodwill at August 31, 1998 and 1997 was $2,766,000 and $1,746,000,
respectively, and the related amortization expense for the years ended August
31, 1998, 1997 and 1996 was $1,010,000, $1,014,000 and $732,000, respectively.
viii
NOTE 3 - SHORT-TERM INVESTMENTS
The cost of the Company's investment portfolio by type of security is as
follows:
AUGUST 31,
1998
-------------
Type of security:
State, county and municipal securities $ 5,965,000
Other securities 128,000
-----------
$ 6,093,000
-----------
-----------
The interest income provided by the state, county and municipal securities is
exempt from federal income taxes. The realized gain on disposal of securities in
1998, as well as the unrealized gain on investments as of August 31, 1998, were
not material.
NOTE 4 - SELECTED FINANCIAL STATEMENT INFORMATION
AUGUST 31,
-----------------------------------
1998 1997
--------------- ---------------
Inventories:
Raw materials $ 886,000 $ 459,000
Finished goods 811,000 2,882,000
---------------- ----------------
$ 1,697,000 $ 3,341,000
---------------- ----------------
---------------- ----------------
Property, plant and equipment:
Land $ 254,000 $ 254,000
Buildings and improvements 2,161,000 1,919,000
Furniture and fixtures 2,995,000 2,832,000
Machinery, equipment and vehicles 1,959,000 2,840,000
---------------- ----------------
7,369,000 7,845,000
Accumulated depreciation (3,776,000) (3,685,000)
---------------- ----------------
$ 3,593,000 $ 4,160,000
---------------- ----------------
---------------- ----------------
NOTE 5 - BUSINESS SEGMENTS AND FOREIGN OPERATIONS
The Company operates in one business segment - the manufacture and sale of
multi-purpose lubricants principally through retail chain stores, automotive
parts outlets, and industrial distributors and suppliers.
Information regarding the Company's operations in different geographic areas
is summarized below. WD-40 Company (U.S.) includes all domestic and
intercompany sales, as well as sales to the Caribbean, Mexico, South America,
and the Pacific Rim, except for Australia and New Zealand. WD-40 Company
(U.S.) export sales were $18,814,000, $19,141,000 and $18,163,000 during the
years ended August 31, 1998, 1997 and 1996, respectively. WD-40 Company Ltd.
(U.K.) includes sales to Europe, the Middle East, and Africa. WD-40 Products
(Canada) Ltd. and WD-40 Company (Australia) Pty. Ltd. are included in other
foreign subsidiaries. Substantially all sales by these entities are to
customers within Canada, Australia, and New Zealand.
ix
YEAR ENDED AUGUST 31,
------------------------------------------------------
1998 1997 1996
--------------- -------------- -------------
Net sales:
WD-40 Company (U.S.) $ 101,953,000 $ 98,275,000 $ 93,487,000
WD-40 Company Ltd. (U.K.) 34,885,000 32,244,000 29,949,000
Other foreign subsidiaries 9,186,000 9,174,000 8,751,000
Intercompany (1,627,000) (1,800,000) (1,275,000)
-------------- -------------- --------------
$ 144,397,000 $ 137,893,000 $ 130,912,000
-------------- -------------- --------------
-------------- -------------- --------------
Operating profit:
WD-40 Company (U.S.) $ 23,694,000 $ 25,146,000 $ 22,352,000
WD-40 Company Ltd. (U.K.) 8,084,000 7,078,000 8,134,000
Other foreign subsidiaries 2,382,000 2,424,000 2,190,000
Interest income, net 551,000 54,000 398,000
Other (expense) income, net (455,000) (1,342,000) 338,000
-------------- -------------- --------------
Income before income taxes $ 34,256,000 $ 33,360,000 $ 33,412,000
-------------- -------------- --------------
-------------- -------------- --------------
AUGUST 31,
------------------------------------------------------
1998 1997 1996
--------------- -------------- -------------
Identifiable assets:
WD-40 Company (U.S.) $ 53,627,000 $ 46,811,000 $ 44,876,000
WD-40 Company Ltd. (U.K.) 14,666,000 16,526,000 14,949,000
Other foreign subsidiaries 2,652,000 2,081,000 1,833,000
-------------- -------------- --------------
$ 70,945,000 $ 65,418,000 $ 61,658,000
-------------- -------------- --------------
-------------- -------------- --------------
NOTE 6 - EARNINGS PER COMMON SHARE
The schedule below summarizes the elements included in the calculation of basic
and diluted earnings per common share for the years ended August 31, 1998, 1997
and 1996.
YEAR ENDED AUGUST 31,
--------------------------------------------------------------------------------------------------
1998 1997 1996
------------------------------ ------------------------------- ---------------------------------
PER PER PER
NET SHARE NET SHARE NET SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT INCOME SHARES AMOUNT
----------- ---------- ------ ----------- ---------- ------ ----------- --------- -------
$21,888,000 $21,363,000 $21,297,000
Basic EPS 15,604,160 1.40 15,512,140 1.38 15,423,728 1.38
Dilutive Securities 59,959 91,650 41,693
---------- ---------- ----------
Diluted EPS 15,664,119 1.40 15,603,790 1.37 15,465,421 1.38
---------- ---------- ----------
---------- ---------- ----------
For the years ended August 31, 1998, 1997 and 1996, 137,400, 0 and 86,800
options outstanding were excluded from the calculation of diluted EPS, as
their effect would have been antidilutive.
x
NOTE 7 - INCOME TAXES
The provision for income taxes includes the following:
YEAR ENDED AUGUST 31,
------------------------------------------------------
1998 1997 1996
--------------- --------------- ---------------
Current tax provision:
United States $ 7,911,000 $ 8,359,000 $ 6,812,000
State 1,964,000 1,687,000 1,818,000
Foreign 2,798,000 1,933,000 2,866,000
-------------- -------------- -------------
Total current 12,673,000 11,979,000 11,496,000
-------------- -------------- -------------
Deferred tax provision (benefit):
United States (343,000) 8,000 563,000
Foreign 38,000 10,000 56,000
-------------- -------------- -------------
Total deferred (305,000) 18,000 619,000
-------------- -------------- -------------
$ 12,368,000 $ 11,997,000 $ 12,115,000
-------------- -------------- -------------
-------------- -------------- -------------
Deferred tax assets included in other current assets are comprised of the
following:
AUGUST 31,
----------------------------------
1998 1997
-------------- -------------
Accrued employee benefits $ 454,000 $ 363,000
State income taxes 260,000 232,000
Reserves and allowances 320,000 118,000
-------------- --------------
$ 1,034,000 $ 713,000
-------------- --------------
-------------- --------------
Long-term deferred tax assets and (liabilities) included in other assets are
comprised of the following:
AUGUST 31,
----------------------------------
1998 1997
-------------- -------------
Depreciation $ (226,000) $ (281,000)
Deferred compensation 461,000 439,000
Other - 93,000
------------- --------------
$ 235,000 $ 251,000
------------- --------------
------------- --------------
Following is a reconciliation of the amount computed by applying the statutory
federal income tax rate to income before income taxes to the provision for
income taxes:
YEAR ENDED AUGUST 31,
-------------------------------------------------
1998 1997 1996
---------- ---------- ---------
Amount computed at U.S. statutory federal tax rate $ 11,990,000 $ 11,676,000 $ 11,694,000
State income taxes, net of federal benefit 1,257,000 1,409,000 1,182,000
Affordable housing credits (717,000) (654,000) (499,000)
Other (162,000) (434,000) (262,000)
-------------- -------------- --------------
$ 12,368,000 $ 11,997,000 $ 12,115,000
-------------- -------------- --------------
-------------- -------------- --------------
Income taxes paid during the years ended August 31, 1998, 1997 and 1996
amounted to $11,638,000, $11,850,000 and $12,329,000, respectively.
xi
NOTE 8 - STOCK OPTIONS
The Company has a stock option plan whereby the Board of Directors may grant
officers and key employees options to purchase up to 1,480,000 shares of the
Company's common stock at a price not less than 100 percent of the fair
market value of the stock at the date of grant. Options are generally
exercisable one year after grant and may not be granted for terms in excess
of ten years. At August 31, 1998, options for 224,979 shares were
exercisable, and options for 756,898 shares were available for future grants.
A summary of the changes in options outstanding under the Company's stock
option plan during the three years ended August 31, 1998 is as follows:
NUMBER OPTION PRICE
OF SHARES PER SHARE
------------ -----------------
Outstanding at August 31, 1995 385,318 $12.25 - $23.75
Options granted 124,800 $21.19
Options exercised (45,392) $12.25 - $21.25
Options canceled (22,994) $21.19 - $23.75
--------- ---------------
Outstanding at August 31, 1996 441,732 $15.34 - $23.75
Options granted 126,800 $23.00
Options exercised (177,400) $15.34 - $23.75
Options canceled (16,082) $21.19 - $23.75
--------- ---------------
Outstanding at August 31, 1997 375,050 $15.44 - $23.75
Options granted 147,800 $31.75
Options exercised (120,634) $16.13 - $23.75
Options canceled (25,379) $17.13 - $31.75
--------- ---------------
Outstanding at August 31, 1998 376,837 $15.44 - $31.75
---------
---------
The following table summarizes information concerning outstanding and
exercisable options as of August 31, 1998:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------- -------------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
RANGE OF NUMBER AVERAGE AVERAGE NUMBER AVERAGE
EXERCISE OUTSTANDING AS OF REMAINING EXERCISE EXERCISABLE AS OF EXERCISE
PRICES AUGUST 31, 1998 LIFE (YEARS) PRICE AUGUST 31, 1998 PRICE
----------------- ------------ --------- ----------------- ----------
$15.44 - $21.25 120,879 5.85 $20.47 120,879 $20.47
$23.00 - $31.75 255,958 8.21 $27.80 104,100 $26.44
------- -------
376,837 7.45 $25.45 224,979 $21.75
------- -------
------- -------
xii
If the Company had elected to recognize compensation expense for its stock
option plan using the fair value method, the Company's net income and earnings
per share would be reduced to the pro forma amounts indicated below.
YEAR ENDED AUGUST 31,
----------------------------------------------------
1998 1997 1996
------------ ---------- -----------
Net income
As reported $ 21,888,000 $ 21,363,000 $ 21,297,000
Pro forma $ 21,561,000 $ 21,055,000 $ 21,098,000
Diluted earnings per share
As reported $1.40 $1.37 $1.38
Pro forma $1.38 $1.36 $1.37
The fair value of each option grant was estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions used
for the years ended August 31, 1998, 1997 and 1996: expected volatility of
17.0%, risk-free interest rates ranging from 5.96% to 6.21%, an average
expected life of three years and a dividend yield of 5.6%. The weighted
average fair value of stock options granted during the years ended August 31,
1998, 1997 and 1996 was $3.23, $2.58 and $2.11 per share, respectively.
NOTE 9 - EMPLOYEE BENEFIT PLANS
The Company has a combined Money Purchase Pension Plan and Profit Sharing
Plan for the benefit of its regular full-time employees who meet certain
criteria. The Plans provide for annual contributions into a trust to the
extent of 10% of covered employee compensation for the Money Purchase Pension
Plan and as approved by the Board of Directors for the Profit Sharing Plan,
but which may not exceed the amount deductible for income tax purposes. The
Plans may be amended or discontinued at any time by the Company.
Contributions charged to income under the plans in the years ended August 31,
1998, 1997 and 1996 totaled $1,376,000, $1,094,000 and $1,029,000,
respectively.
The Company has a Salary Deferral Employee Stock Ownership Plan whereby
regular full-time employees who have completed certain minimum service
requirements can defer a portion of their income through contributions to a
trust. The Plan provides for Company contributions to the trust, as approved
by the Board of Directors, equal to fifty percent or more of the compensation
deferred by employees, but not in excess of the amount deductible for income
tax purposes. Company contributions to the trust are invested in the
Company's common stock. The Plan may be amended or discontinued at any time
by the Company. Company contribution expense during the years ended August
31, 1998, 1997 and 1996 was approximately $123,000, $129,000 and $118,000,
respectively.
The Company has agreed to provide fixed retirement benefits to certain of its
key executives. The Company's gross liability related to these agreements
approximates $7,900,000 of which $1,103,000, representing the present value
of these obligations to employees for service through August 31, 1998, has
been accrued.
The Company has life insurance policies on certain of its key executives. As
of August 31, 1998, the aggregate cash surrender value of these policies is
$1,504,000, which is included in other assets. Keyman life insurance premiums
paid by the Company during the years ended August 31, 1998, 1997 and 1996
were $30,000, $56,000 and $46,000, respectively.
NOTE 10 - LOW INCOME HOUSING INVESTMENTS AND RELATED DEBT
On August 31, 1993 and December 13, 1994, the Company purchased partnership
units in an affordable housing tax credit fund for $3,000,000 and $2,000,000,
respectively. The Company's decision to invest in the fund was due to the
favorable tax credits that are available over the investment period of 15
years, subject to certain tax restrictions. The investment is accounted for
at historical cost, amortized on a straight line basis over 15 years.
Amortization expense was $333,000 in each of the last three fiscal years.
xiii
The Company entered into seven-year promissory notes to fund its investments
in the affordable housing tax credit fund. Each note is secured by the
corresponding investment and bears interest at 7.0%. Combined interest and
principal payments on each note are $559,000 and $370,000, respectively, due
annually each January through 2000. Interest paid during the years ended
August 31, 1998, 1997 and 1996 was $173,000, $223,000 and $270,000,
respectively.
NOTE 11 - BANK LINE OF CREDIT
In July 1998, the Company obtained an unsecured line of credit with a
commercial bank which expires on November 30, 2000. Under the terms of the
credit agreement, the Company may borrow up to $10,000,000 at the bank's
reference rate (8.50% at August 31, 1998) or LIBOR plus 1.5%. The credit
agreement requires the Company to maintain minimum income levels and meet
certain other restrictive covenants. There were no borrowings outstanding on
this line at August 31, 1998.
NOTE 12 - COMMITMENTS AND CONTINGENCIES
The Company is party to various claims, legal actions and complaints,
including product liability litigation, arising in the ordinary course of
business. In the opinion of management, all such matters are adequately
covered by insurance or will not have a material adverse effect on the
Company's financial position or results of operations.
The Company was committed under certain noncancelable operating leases at
August 31, 1998 which provide for the following future minimum lease
payments: 1999, $497,000; 2000, $388,000; 2001, $231,000; 2002, $35,000; and
2003, $6,000. Rent expense for the years ended August 31, 1998, 1997 and 1996
was $267,000, $257,000 and $273,000, respectively.
NOTE 13 - SUBSEQUENT EVENTS
On September 29, 1998, the Company declared a cash dividend of $.32 per share
payable on November 2, 1998 to shareholders of record on October 19, 1998.
From September 2, 1998 through September 29, 1998, the Company repurchased
25,697 shares of common stock on the open market for $593,000. These
repurchases were made pursuant to a plan authorized by the Board of Directors
for management to acquire up to five percent of the outstanding shares from
time to time in the open market subject to available cash flow and market
conditions.
xiv
SCHEDULE II
WD-40 COMPANY
CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
ADDITIONS
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND AT END OF
OF PERIOD EXPENSES DEDUCTIONS* PERIOD
---------- ---------- ----------- ---------
Reserve for bad debts and sales discounts:
Year ended
August 31, 1996 $ 476,000 $ 1,085,000 $ 1,141,000 $ 420,000
---------- ----------- ----------- ----------
---------- ----------- ----------- ----------
Year ended
August 31, 1997 $ 420,000 $ 1,104,000 $ 1,029,000 $ 495,000
---------- ----------- ----------- ----------
---------- ----------- ----------- ----------
Year ended
August 31, 1998 $ 495,000 $ 1,647,000 $ 1,567,000 $ 585,000
---------- ----------- ----------- ----------
---------- ----------- ----------- ----------
* Write-off of doubtful accounts and sales discounts taken.
xv
INDEX TO EXHIBITS
INCORPORATED
BY REFERENCE
NO. EXHIBIT PAGE
- -- ------- ------------
3(a) Restated Articles of Incorporation 14
3(b) Certificate of Amendment of Restated Articles of Incorporation 14
3(c ) Restated By-Laws 14
10(a) Restated WD-40 Company Incentive Stock Option Plan 14
10(b) WD-40 Company Supplemental Death Benefit Plan 14
10(c ) WD-40 Company Supplemental Retirement Benefit Plan 14
10(d) Second Amendment and Restatement, WD-40 Company 1990 14
Incentive Stock Option Plan
21 Subsidiaries of the Registrant
23 Consent of Independent Accountants
27 Financial Data Schedule (electronic filing only)