As a result of the adoption of SFAS No. 123R, the Company’s net income included $1.8 million of compensation expense for each of the fiscal years ended August 31, 2007 and 2006; and $0.6 million and $0.5 million of income tax benefits in fiscal years ended August 31, 2007 and 2006, respectively, related to the Company’s stock options. For the fiscal year ended August 31, 2005, there was no compensation expense or corresponding income tax benefits related to stock options included in net income.
As of August 31, 2007, there was $1.8 million and $0.3 million of unamortized compensation costs related to non-vested stock option awards and non-vested restricted stock awards, respectively. These costs are expected to be recognized over weighted-average periods of 1.8 years and 3.0 years, respectively.
The Company estimates the fair value of each option award on the date of grant using the Black-Scholes option valuation model with the assumptions described in Note 10 to the Consolidated Financial Statements.
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For fiscal year 2008, the Company will continue to grant stock options to employees. The Company has also evaluated the use of other forms of long-term stock-based compensation arrangements. The Board of Directors has approved a policy for compensation of non-employee directors effective in calendar year 2008 that, subject to stockholder approval, includes the award of restricted stock units. As with all compensation arrangements, the award of stock-based compensation is subject to periodic review.
Readers are also directed to refer to Note 10 - Stock-based Compensation, included in the Notes to Consolidated Financial Statements under Part IV - Item 15.
CRITICAL ACCOUNTING POLICIES
The Company’s results of operations and financial condition, as reflected in the Company’s consolidated financial statements, have been prepared in accordance with accounting principles generally accepted in the United States of America. Preparation of financial statements requires management to make estimates and assumptions affecting the reported amounts of assets, liabilities, revenues and expenses and the disclosures of contingent assets and liabilities. Management uses historical experience and other relevant factors when developing estimates and assumptions. These estimates and assumptions are continually evaluated. Note 1 to the Company’s consolidated financial statements includes a discussion of significant accounting policies. The accounting policies discussed below are the ones management considers critical to an understanding of the Company’s consolidated financial statements because their application places the most significant demands on our judgment. The Company’s financial results may have been different if different assumptions had been used or other conditions had prevailed. The Company’s critical accounting policies have been reviewed with the Audit Committee of the Board of Directors.
Revenue Recognition
Sales are recognized as revenue at the time of delivery to the customer when risk of loss and title pass. Management must make judgments and certain assumptions in the determination of when delivery occurs. Through an analysis of end-of-period shipments, the Company determines an average time of transit that is used to estimate the time of delivery. Differences in judgments or estimates, such as the lengthening or shortening of the estimated delivery time used, could result in material differences in the timing of revenue recognition. Sales are recorded net of allowances for damaged goods and other sales returns, sales incentives, trade promotions and cash discounts.
Accounting for Sales Incentives
The Company records sales incentives as a reduction of sales in its consolidated statements of operations. The Company offers on-going trade promotion programs with customers, and consumer coupon programs that require the Company to estimate and accrue the expected costs of such programs. Programs include cooperative marketing programs, shelf price reductions, coupons, rebates, consideration and allowances given to retailers for space in their stores, consideration and allowances given to obtain favorable display positions in the retailers’ stores and other promotional activity. Costs related to rebates, co-operative advertising and other promotional activity are recorded upon delivery of products to customers. Costs related to coupon offers are based upon historical redemption rates and are recorded as incurred, when coupons are circulated.
Estimated sales incentives are calculated and recorded at the time related sales are made and are based primarily on historical rates and consideration of recent promotional activities. The determination of sales incentive liabilities requires the Company to use judgment for estimates that include current and past trade-promotion spending patterns, status of trade-promotional activities and the interpretation of historical spending trends by customer and category. We review our assumptions and adjust our reserves quarterly. Our financial statements could be materially impacted if the actual promotion rates fluctuate from the estimated rate. If the Company’s accrual estimates for sales incentives at August 31, 2007 were to differ by 10%, the impact on net sales would be approximately $0.5 million.
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Allowance for Doubtful Accounts
The preparation of financial statements requires our management to make estimates and assumptions relating to the collectibility of our accounts receivable. Management specifically analyzes historical bad debts, customer credit worthiness, current economic trends and changes in our customer payment terms when evaluating the adequacy of the allowance for doubtful accounts.
Accounting for 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. A valuation allowance is provided if it is more likely than not that some or all of the deferred tax assets will not be realized.
The Company establishes accruals for certain tax contingencies when, despite the belief that the Company’s tax return positions are fully supported, the Company believes that certain positions may not be fully sustained upon challenge by relevant tax authorities. The tax contingency accruals are adjusted in light of changing facts and circumstances, such as the progress of tax audits, case law and emerging legislation. The Company’s tax contingency accruals are reflected as a component of income taxes payable.
U.S. income tax expense is provided on remittances of foreign earnings and on unremitted foreign earnings that are not indefinitely reinvested. U.S. income taxes and foreign withholding taxes are not provided when foreign earnings are indefinitely reinvested in accordance with APB Opinion No. 23, “Accounting for Income Taxes, Special Areas.” The Company determines whether its foreign subsidiaries will invest their undistributed earnings indefinitely and reassesses this determination on a periodic basis. Change to the Company’s determination may be warranted based on the Company’s experience as well as plans regarding future international operations and expected remittances.
Valuation of Long-lived Assets, Intangible Assets and Goodwill
The Company assesses the potential impairment of long-lived assets, identifiable intangibles and related goodwill whenever events or changes in circumstances indicate that the carrying value may not be recoverable. For goodwill and intangibles determined to have indefinite lives, impairment is tested at least annually under the guidance of SFAS No. 142, during our second fiscal quarter of each year unless there are indicators during an interim period that assets may have become impaired. The Company’s impairment test is based on a discounted cash flow approach that requires significant management judgment and estimates, such as forecasted revenue, advertising and promotional expenses, cost of products sold, gross margins, operating margins, the success of product innovations and introductions, customer retention and the selection of appropriate discount and royalty rates. Management judgments and estimates are based on assumptions that are most reasonably likely to occur. For goodwill, impairment occurs when the carrying value of a reporting unit exceeds the fair value of that reporting unit. For intangible assets, impairment occurs when the carrying value of an asset exceeds its fair value. In addition, intangible assets with indefinite lives are evaluated quarterly to determine whether events and circumstances continue to support an indefinite useful life.
Events and circumstances that we consider important which could trigger impairment include the following:
| • | Significant underperformance relative to historical or projected future operating results |
| • | Significant changes in the manner of our use of the acquired assets or the strategy for our overall business |
| • | Significant negative industry or economic trends |
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| • | Significant decline in our stock price for a sustained period |
| • | Decreased market capitalization relative to net book value |
| • | Unanticipated technological change or competitive activities |
| • | Loss of key distribution |
| • | Loss of key personnel |
| • | Acts by government and courts |
When there is indication that the carrying value of intangibles or long-lived assets may not be recoverable based upon the existence of one or more of the above indicators, an impairment loss would be recognized if the carrying amount of the asset exceeds its fair value. When there is an indication of impairment of goodwill, an impairment loss would be recognized to the extent that the carrying amount of the goodwill exceeds its implied fair value.
During the second quarter of fiscal year 2007, the Company tested its goodwill and indefinite-lived intangible assets for impairment based on future discounted cash flows compared to related book values. Based on this review, the Company determined that there were no instances of impairment. If the fair values of the Company’s goodwill and intangible assets, as calculated during the annual impairment test, were reduced by 10%, there would still be no instances of impairment.
RECENT ACCOUNTING PRONOUNCEMENTS
In February 2007, the Financial Accounting Standards Board (FASB) issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115.” This Statement permits entities to choose to measure many financial instruments and certain other items at fair value. This Statement is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. Early adoption is permitted as of the beginning of a fiscal year that begins on or before November 15, 2007, provided the entity also elects to apply the provisions of SFAS No. 157, “ Fair Value Measurements.” Management is currently evaluating the impact that the implementation of SFAS No. 159 may have on the Company’s consolidated results of operations and financial position.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS No. 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Management is currently evaluating SFAS No. 157 to determine the impact, if any, on the Company’s consolidated financial statements.
In June 2006, the FASB issued Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109.” FIN 48 seeks to reduce the significant diversity in practice associated with recognition and measurement in the accounting for income taxes. It applies to all tax positions accounted for in accordance with Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes.” FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company will adopt this interpretation as required beginning September 1, 2007. Management is currently evaluating the impact that the implementation of FIN 48 may have on the Company’s consolidated results of operations and financial position.
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TRANSACTIONS WITH RELATED PARTIES
VML Company L.L.C. (VML), a Delaware Limited Liability Company, was formed in April 2001, at which time the Company acquired a 30% membership interest. Since formation, VML has served as the Company’s contract manufacturer for certain household products and acts as a warehouse distributor for other product lines of the Company. Although VML has begun to expand its business to other customers, the Company continues to be its largest customer. VML makes profit distributions to the Company and the 70% owner on a discretionary basis in proportion to each party’s respective interest.
The Company has a put option to sell its interest in VML to the 70% owner, and the 70% owner has a call option to purchase the Company’s interest. The sale price in each case is established pursuant to formulas based on VML’s operating results.
Under Financial Interpretation No. 46, “Consolidation of Variable Interest Entities, an interpretation of Accounting Research Bulletin No. 51,” VML qualifies as a variable interest entity, and it has been determined that the Company is not the primary beneficiary. The Company’s investment in VML is accounted for using the equity method of accounting, and its equity in VML earnings or losses is recorded as a component of cost of products sold, as VML acts primarily as a contract manufacturer to the Company. The Company recorded equity earnings related to its investment in VML of $0.1 million for the fiscal year ended August 31, 2007, equity losses of $0.1 million for the fiscal year ended August 31, 2006 and equity earnings of $0.4 million for the fiscal year ended August 31, 2005.
The Company’s maximum exposure to loss as a result of its involvement with VML was $1.0 million as of August 31, 2007. This amount represents the balance of the Company’s equity investment in VML, which is presented as investment in related party on the Company’s consolidated balance sheets. The Company’s investment in VML as of August 31, 2006 was $1.0 million.
Cost of products sold which were purchased from VML, net of rebates and equity earnings or losses, was approximately $19.1 million, $41.0 million and $38.4 million during the fiscal years ended August 31, 2007, 2006 and 2005, respectively. The Company had product payables to VML of $1.5 million and $0.5 million at August 31, 2007 and 2006, respectively. Additionally, the Company receives rental income from VML, which is recorded as a component of other (expense) income, net. Rental income from VML was $0.2 million for each of the fiscal years ended August 31, 2007, 2006 and 2005.
During the fourth quarter of fiscal year 2006, the Company acquired $2.0 million of inventory from VML. The inventory purchased from VML consisted of certain finished goods that had been acquired from other manufacturers on behalf of the Company. As the Company transitioned to direct acquisition of these finished goods, it acquired the remaining inventory at VML.
FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for certain forward-looking statements. This 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.
Actual future results and trends may differ materially from historical results or those anticipated depending upon factors including, but not limited to, the near-term growth expectations for lubricants, household products and heavy-duty hand cleaners in the Americas, the impact of changes in product distribution, competition for shelf
39
space, plans for product and promotional innovation, the impact of new product introductions on the growth of sales, the impact of customer mix and raw material, component and finished goods costs on gross margins, the impact of promotions on sales, the rate of sales growth in the Asia-Pacific region, direct European countries and Eastern Europe, the impact of changes in inventory management, the effect of future income tax provisions and audit outcomes on tax rates, the amount of future capital expenditures, foreign currency exchange rates and fluctuations in those rates, the effects of, and changes in, worldwide economic conditions, legal proceedings and the other risk factors identified in Item 1A.
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 or readers 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 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 7A – Quantitative and Qualitative Disclosures About Market Risk
Foreign Currency Risk
The Company is exposed to a variety of risks, including foreign currency fluctuations. 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 foreign currency forward contracts in accordance with SFAS No. 52, “Foreign Currency Translation,” to limit its exposure on converting cash and accounts receivable balances maintained in non-functional currencies. 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. While the Company engages in foreign currency hedging activity to reduce its risk, for accounting purposes, none of the foreign currency forward contracts are designated as hedges.
Interest Rate Risk
As of August 31, 2007, the Company had $53.6 million remaining on an original $75 million, 7.28% fixed-rate term loan. As a result of the fixed interest rate on the term loan, the Company is not currently exposed to interest rate risk.
ITEM 8 – Financial Statements and Supplementary Data
The Company’s consolidated financial statements at August 31, 2007 and 2006 and for each of the three years in the period ended August 31, 2007, and the Report of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm, are included in this Annual Report on Form 10-K in Item 15.
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QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following table sets forth certain unaudited quarterly consolidated financial information for each of the two years in the period ended August 31, 2007. Amounts are presented in thousands, except for earnings per share data.
| QUARTER ENDED: |
NET SALES |
GROSS PROFIT |
NET INCOME |
DILUTED EARNINGS PER COMMON SHARE |
|||||||||
| November 30, 2005 |
$ | 67,215 | $ | 32,314 | $ | 7,513 | $ | 0.45 | |||||
| February 28, 2006 |
71,480 | 34,276 | 7,231 | 0.43 | |||||||||
| May 31, 2006 |
73,052 | 35,419 | 7,046 | 0.42 | |||||||||
| August 31, 2006 |
75,169 | 36,391 | 6,322 | 0.37 | |||||||||
| $ | 286,916 | $ | 138,400 | $ | 28,112 | $ | 1.66 | (1) | |||||
| November 30, 2006 |
$ | 71,956 | $ | 34,473 | $ | 5,694 | $ | 0.33 | |||||
| February 28, 2007 |
79,331 | 39,038 | 8,939 | 0.52 | |||||||||
| May 31, 2007 |
77,581 | 36,867 | 7,644 | 0.44 | |||||||||
| August 31, 2007 |
78,948 | 38,484 | 9,257 | 0.54 | |||||||||
| $ | 307,816 | $ | 148,862 | $ | 31,534 | $ | 1.83 | ||||||
(1) Amounts in table may not total due to rounding.
ITEM 9 – Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Not applicable.
ITEM 9A – Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The term “ disclosure controls and procedures” is defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities and Exchange Act of 1934 (Exchange Act). The term disclosure controls and procedures means controls and other procedures of a Company that are designed to ensure the information required to be disclosed by the Company in the reports that it files or submits under the Act is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a Company in the reports that it files or submits under the Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosures. The Company’s chief executive officer and chief financial officer have evaluated the effectiveness of the Company’s disclosure controls and procedures as of August 31, 2007, the end of the period covered by this report (the Evaluation Date), and they have concluded that, as of the Evaluation Date, such controls and procedures were effective at ensuring that required information will be disclosed on a timely basis in the Company’s reports filed under the Exchange Act. Although management believes the Company’s existing disclosure controls and procedures are adequate to enable the Company to comply with its disclosure obligations, management continues to review and update such controls and procedures. The Company has a disclosure committee, which consists of certain members of the Company’s senior management.
Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act rule 13a-15(f). Under the supervision and with the participation of our
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Chief Executive Officer and Chief Financial Officer, our management conducted an evaluation of the effectiveness of our internal control over financial reporting based upon the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that evaluation, our management concluded that our internal control over financial reporting is effective as of August 31, 2007.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Changes in Internal Control over Financial Reporting
For the quarter ended August 31, 2007, there were no significant changes to the Company’s internal control over financial reporting that materially affected, or would be reasonably likely to materially affect, its internal control over financial reporting.
| ITEM 9B | – Other Information |
Not applicable.
PART III
ITEM 10 – Directors and Executive Officers of the Registrant
Certain information required by this item is set forth under the captions “Security Ownership of Directors and Executive Officers,” “Nominees for Election as Directors,” “Compensation Committee Interlocks and Insider Participation,” “Audit Committee” and “Section 16(a) Beneficial Ownership Reporting Compliance” in the Company’s Proxy Statement to be filed with the Securities and Exchange Commission in connection with the 2007 Annual Meeting of Stockholders on December 11, 2007 (the Proxy Statement), which information is incorporated by reference herein. Additional information concerning executive officers of the Registrant required by this item is included in this Annual Report on Form 10-K under the heading, “Executive Officers of the Registrant” following Item 4 of Part I.
The registrant has a financial reporting code of ethics applicable to its principal executive officer, principal financial officer, principal accounting officer or controller and persons performing similar functions. A copy of the code of ethics applicable to such persons may be found on the Registrant’s internet website on the Officers & Directors link from the Investor Relations page at www.wd40.com.
ITEM 11 – Executive Compensation
The information required by this item is incorporated by reference to the Proxy Statement under the headings “Board of Directors Compensation”, “Compensation Discussion & Analysis,” “Compensation Committee Report,” “Executive Compensation,” “Supplemental Death and Retirement Benefit Plans” and “Change of Control Severance Agreements.”
ITEM 12 – Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain information required by this item is incorporated by reference to the Proxy Statement under the headings “Principal Security Holders” and “Security Ownership of Directors and Executive Officers.”
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The following table provides information regarding shares of the Company’s common stock authorized for issuance under equity compensation plans as of August 31, 2007:
Equity Compensation Plan Information
| Plan category |
Number of securities to be issued upon exercise of outstanding options, warrants and rights ( a ) |
Weighted-average exercise price of outstanding options, warrants and rights ( b ) |
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column ( a )) ( c ) |
|||||
| Equity compensation plans approved by security holders | 1,238,574 | $ | 28.91 | 1,037,160 | (1) | |||
| Equity compensation plans not approved by security holders | n/a | n/a | n/a | |||||
| Total |
1,238,574 | $ | 28.91 | 1,037,160 | ||||
| (1) |
Includes 14,493 shares available pursuant to the Company’s 1999 Non-Employee Director Restricted Stock Plan. |
Non-Employee Director Restricted Stock Plan
On October 28, 2003, the Board of Directors adopted the Third Amended and Restated WD-40 Company 1999 Non-Employee Director Restricted Stock Plan. The plan was approved by the Company’s stockholders at the annual meeting of stockholders held on December 16, 2003. Pursuant to the plan and the director compensation policy in effect for 2007, shares were issued to non-employee directors of the Company in lieu of cash compensation of up to $32,000 according to an election to be made by the director by November 30 of the prior year. A director who held shares of the Company having a value of at least $50,000 may have elected to receive his or her annual director’s fee entirely in cash. Otherwise, directors would have elected to receive restricted stock in lieu of cash in the amount of $5,500, $11,000, $16,500, $22,000, $27,500 or $32,000. The restricted shares were issued in accordance with a director’s election as soon as practicable after the first day of March. The number of shares issued was equal to the amount of compensation to be paid in shares divided by 90% of the closing price of the Company’s shares as of the first business day of March or other date of issuance of such shares. Restricted shares issued to a director do not become vested for resale for a period of five years or until the director’s retirement from the Board following the director’s 65th birthday. Unless a director has reached age 65, the shares are subject to forfeiture if, during the five-year vesting period, the director resigns from service as a director.
ITEM 13 – Certain Relationships and Related Transactions
Not Applicable.
ITEM 14 – Principal Accounting Fees and Services
The information required by this item is incorporated by reference to the Proxy Statement under the heading “Ratification of Appointment of Independent Registered Public Accounting Firm.”
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PART IV
ITEM 15 – Exhibits and Financial Statement Schedule
| Page | ||||
| (a) |
Documents filed as part of this report |
|||
| (1) |
Report of Independent Registered Public Accounting Firm |
i | ||
| Consolidated Balance Sheets at August 31, 2007 and 2006 |
ii | |||
| Consolidated Statements of Operations for the Fiscal Years Ended August 31, 2007, 2006 and 2005 |
iii | |||
| Consolidated Statements of Shareholders’ Equity and Comprehensive Income for the Fiscal Years Ended August 31, 2007, 2006 and 2005 | iv | |||
| Consolidated Statements of Cash Flows for the Fiscal Years Ended August 31, 2007, 2006 and 2005 |
v | |||
| Notes to Consolidated Financial Statements |
vi | |||
All other schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto.
| (2) | Exhibits |
| Exhibit | ||
| No. | Description | |
| Articles of Incorporation and Bylaws. | ||
| 3(a) | Certificate of Incorporation. | |
| 3(b) | Bylaws, incorporated by reference from the Registrant’s Form 8-K filed October 20, 2005, Exhibit 3 thereto. | |
| Material Contracts. | ||
| Executive Compensation Plans and Arrangements (Exhibits 10(a) through 10(l) are management contracts and compensatory plans or arrangements required to be filed as exhibits pursuant to ITEM 15(b)). | ||
| 10(a) | Form of WD-40 Company Supplemental Death Benefit Plan applicable to certain executive officers of the Registrant. | |
| 10(b) | Form of Amended and Restated WD-40 Company Supplemental Retirement Benefit Plan applicable to certain executive officers of the Registrant, incorporated by reference from the Registrant’s Form 10-Q filed January 9, 2007, Exhibit 10(a) thereto. | |
| 10(c) | Fourth Amendment and Restatement, WD-40 Company 1990 Incentive Stock Option Plan, incorporated by reference from the Registrant’s Proxy Statement filed on November 4, 2003 (appendix thereto). | |
| 10(d) | Form of Indemnity Agreement between the Registrant and its executive officers and directors. | |
| 10(e) | Third Amended and Restated WD-40 Company 1999 Non-Employee Director Restricted Stock Plan incorporated by reference from the Registrant’s Proxy Statement filed on November 4, 2003 (appendix thereto). | |
| 10(f) | Change of Control Severance Agreement between WD-40 Company and Garry O. Ridge dated February 14, 2006, incorporated by reference from the Registrant’s Form 10-Q filed April 10, 2006, Exhibit 10(a) thereto. | |
44
| Exhibit | ||
| No. | Description | |
| 10(g) | Change of Control Severance Agreement between WD-40 Company and Michael J. Irwin dated February 14, 2006, incorporated by reference from the Registrant’s Form 10-Q filed April 10, 2006, Exhibit 10(b) thereto. | |
| 10(h) | Change of Control Severance Agreement between WD-40 Company and Michael L. Freeman dated February 14, 2006, incorporated by reference from the Registrant’s Form 10-Q filed April 10, 2006, Exhibit 10(c) thereto. | |
| 10(i) | Change of Control Severance Agreement between WD-40 Company and Geoffrey J. Holdsworth dated February 14, 2006, incorporated by reference from the Registrant’s Form 10-Q filed April 10, 2006, Exhibit 10(d) thereto. | |
| 10(j) | Change of Control Severance Agreement between WD-40 Company and Graham P. Milner dated February 14, 2006, incorporated by reference from the Registrant’s Form 10-Q filed April 10, 2006, Exhibit 10(e) thereto. | |
| 10(k) | Change of Control Severance Agreement between WD-40 Company and William B. Noble dated February 14, 2006, incorporated by reference from the Registrant’s Form 10-Q filed April 10, 2006, Exhibit 10(f) thereto. | |
| 10(l) | Amended and Restated Compensation Agreement between WD-40 Company and Geoff Holdsworth dated March 27, 2007, incorporated by reference from the Registrant’s Form 10-Q filed April 9, 2007, Exhibit 10(a) thereto. | |
| 21 | Subsidiaries of the Registrant. | |
| 23 | Consent of Independent Registered Public Accounting Firm. | |
| 31(a) | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 31(b) | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 32(a) | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| 32(b) | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
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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 |
| /s/ MICHAEL J. IRWIN |
| MICHAEL J. IRWIN |
| Executive Vice President |
| Chief Financial Officer |
| (Principal Financial Officer) |
| Date 10/25/07 |
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/ JAY REMBOLT |
| JAY REMBOLT |
| Vice President of Finance, Controller |
| (Principal Accounting Officer) |
| Date 10/25/07 |
| /s/ GARRY O. RIDGE |
| GARRY O. RIDGE |
| Chief Executive Officer and Director |
| (Principal Executive Officer) |
| Date 10/25/07 |
| /s/ JOHN C. ADAMS |
| JOHN C. ADAMS, JR., Director |
| Date 10/22/07 |
| /s/ GILES H. BATEMAN |
| GILES H. BATEMAN, Director |
| Date 10/22/07 |
| /s/ PETER D. BEWLEY |
| PETER D. BEWLEY, Director |
| Date 10/22/07 |
| /s/ RICHARD A. COLLATO |
| RICHARD A. COLLATO, Director |
| Date 10/22/07 |
| /s/ MARIO L. CRIVELLO |
| MARIO L. CRIVELLO, Director |
| Date 10/22/07 |
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| /s/ LINDA A. LANG |
| LINDA A. LANG, Director |
| Date 10/22/07 |
| /s/ GARY L. LUICK |
| GARY L. LUICK, Director |
| Date 10/22/07 |
| /s/ KENNETH E. OLSON |
| KENNETH E. OLSON, Director |
| Date 10/22/07 |
| /s/ NEAL E. SCHMALE |
| NEAL E. SCHMALE, Director |
| Date 10/22/07 |
47
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of WD-40 Company:
In our opinion, the consolidated financial statements listed in the index appearing under 15(a)(1) present fairly, in all material respects, the financial position of WD-40 Company and its subsidiaries at August 31, 2007 and August 31, 2006, and the results of their operations and their cash flows for each of the three years in the period ended August 31, 2007 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of August 31, 2007, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included 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. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
As discussed in Note 1 of the consolidated financial statements, the Company changed its method of accounting for share-based payments during the year ended August 31, 2006.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PRICEWATERHOUSECOOPERS LLP
San Diego, California
October 24, 2007
i
WD-40 Company
Consolidated Balance Sheets
August 31, 2007 and 2006
| August 31, 2007 | August 31, 2006 | |||||||
| Assets |
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| Current assets: |
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| Cash and cash equivalents |
$ | 61,078,000 | $ | 45,206,000 | ||||
| Trade accounts receivable, less allowance for doubtful accounts of $369,000 and $762,000 |
47,204,000 | 44,491,000 | ||||||
| Product held at contract packagers |
1,447,000 | 1,385,000 | ||||||
| Inventories |
13,208,000 | 15,269,000 | ||||||
| Current deferred tax assets, net |
4,145,000 | 4,331,000 | ||||||
| Other current assets |
3,489,000 | 4,858,000 | ||||||
| Total current assets |
130,571,000 | 115,540,000 | ||||||
| Property, plant and equipment, net |
8,811,000 | 8,940,000 | ||||||
| Goodwill |
96,409,000 | 96,118,000 | ||||||
| Other intangibles, net |
42,543,000 | 42,722,000 | ||||||
| Investment in related party |
1,015,000 | 972,000 | ||||||
| Other assets |
3,837,000 | 4,183,000 | ||||||
| $ | 283,186,000 | $ | 268,475,000 | |||||
| Liabilities and Shareholders’ Equity |
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| Current liabilities: |
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| Current portion of long-term debt |
$ | 10,714,000 | $ | 10,714,000 | ||||
| Accounts payable |
21,854,000 | 11,287,000 | ||||||
| Accounts payable to related party |
1,506,000 | 463,000 | ||||||
| Accrued liabilities |
12,780,000 | 11,678,000 | ||||||
| Accrued payroll and related expenses |
6,906,000 | 7,485,000 | ||||||
| Income taxes payable |
97,000 | 2,040,000 | ||||||
| Total current liabilities |
53,857,000 | 43,667,000 | ||||||
| Long-term debt |
42,857,000 | 53,571,000 | ||||||
| Deferred employee benefits and other long-term liabilities |
2,195,000 | 1,895,000 | ||||||
| Long-term deferred tax liabilities, net |
16,005,000 | 13,611,000 | ||||||
| Total liabilities |
114,914,000 | 112,744,000 | ||||||
| Commitments and contingencies (Notes 6, 7, 8 and 13) |
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| Shareholders’ equity: |
||||||||
| Common stock, $.001 par value, 36,000,000 shares authorized — 17,883,299 and 17,510,668 shares issued; and 16,848,601 and 16,975,970 shares outstanding |
18,000 | 17,000 | ||||||
| Paid-in capital |
74,836,000 | 62,322,000 | ||||||
| Retained earnings |
118,260,000 | 103,335,000 | ||||||
| Accumulated other comprehensive income |
7,504,000 | 5,083,000 | ||||||
| Common stock held in treasury, at cost (1,034,698 and 534,698 shares) |
(32,346,000 | ) | (15,026,000 | ) | ||||
| Total shareholders’ equity |
168,272,000 | 155,731,000 | ||||||