UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
{(Mark One)
[ X } ANNUAL REPORT PURSUANT TO SECTION] Annual Report Pursuant to Section 13 ORor 15(d) OF THE SECURITIES
EXCHANGE ACT OFof the Securities
Act of 1934
For the fiscal year ended September 30, 19981999 Commission file #0-8408
OR
{ } TRANSITION REPORT PURSUANT TO SECTIONnumber 0-8408
or
[ ] Transition Report Pursuant to Section 13 ORor 15(d) OF THE SECURITIES
EXCHANGE ACT OFof the
Securities Exchange Act of 1934
WOODWARD GOVERNOR COMPANY
(Exact name of registrant asregistant specified in its charter)
Delaware 36-1984010
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5001 North Second Street, Rockford, Illinois 61125-7001
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, -including area code (815) 877-7441
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common stock, par value $.00875 per share
(Title of Class)
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. [ X ] Yes X[ ] No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. { X }
As of November 30, 1998, 11,298,750[ ]
There were 11,274,223 shares of common stock with a par value
of $.00875 per share were outstanding.outstanding at November 30, 1999. The aggregate
market value of the voting stock held by non-affiliates of the registrant
was approximately
$201,189,000 as of$219,445,335 at November 30, 1998(such1999 (such aggregate market value does not
include voting stock beneficially owned by directors, officers, the
Woodward Governor Company Profit Sharing Trust or the Woodward Governor
Company Charitable Trust).
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant'sour annual report to shareholders for the fiscal year ended
September 30, 1998 (19981999 (1999 Annual Report), a copy of which
is attached hereto, are incorporated by
reference into Parts I, II and IV hereof,of this filing, to the extent indicated herein.indicated.
Portions of the registrant'sour proxy statement dated December 11, 1998,6, 1999, are
incorporated by reference into Part III hereof,of this filing, to the extent
indicated
herein.indicated.
TABLE OF CONTENTS
Page
Part I Item 1. Business 3
Item 2. Properties 6
Item 3. Legal Proceedings 7
Item 4. Submission of Matters to a Vote of
Shareholders 7
Part II Item 5. Market for the Registrant's Common
Stock and Related Shareholder Matters 7
Item 6. Selected Financial Data 7
Item 7. Management Discussion and Analysis of Results
of Operations and Financial Condition 8
Item 7a. Quantitative and Qualitative Disclosures
About Market Risk 8
Item 8. Financial Statements and Supplementary Data 9
Item 9. Changes in and Disagreements with Accountants
On Accounting and Financial Disclosure 8
Part III Item 10. Directors and Executive Officers of the
Registrant 8
Item 11. Executive Compensation 9
Item 12. Security Ownership of Certain Beneficial
Owners and Management 9
Item 13. Certain Relationships and Related
Transactions 9
Part IV Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K 10
Signatures 13
2
Part I
Item 1. Business
(a)General Description of Business
Woodward Governor Company, (the Company), established in 1870 designs and manufactures hydromechanical and electronic
fuelincorporated
in 1902, provides innovative engine controls and fuel-deliveryfuel delivery
systems subsystemsdesigned for a wide variety of applications. Serving
global markets from locations worldwide, we are a leading
producer of fuel control systems and components. Thesecomponents for aircraft and
industrial engines and turbines. Our products and services are
suppliedused in the aviation, marine, locomotive, large off-road vehicle,
power generation, gas generation, and oil and gas process
industries.
Our operations are organized based on the nature of products and
services provided. In 1999, we adopted Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information." Under this statement, we
have two reportable segments - Aircraft Engine Systems and
Industrial Controls. Aircraft Engine Systems provides fuel
control systems and components primarily to original equipment
manufacturers of aircraft engines. Industrial Controls provides
fuel control systems and operators of diesel engines, steam turbines,
industrial and aircraft gas turbines, and hydraulic turbines.
In additioncomponents primarily to original
equipment manufacturers of industrial engines and turbines.
Our other operations include Global Services and Automotive
Products. Global Services, which resulted because of a change in
the structure of our internal Industrial Controls organization in
1999, focuses on providing control systems and related services
to industrial engine users in retrofit situations. Automotive
Products, which began in 1998, focuses on products for small
industrial engines that require low-cost, high-volume, high-
reliability manufacturing processes characteristic of suppliers
to the Company also
provides aftermarket partsautomotive industry.
Information about our operations in 1999 and service through a worldwide
networkoutlook for the
future, including distributors, dealers,certain segment information, is included in
"Management Discussion and authorized
independent service facilities.
During 1998, the Company acquired two companies, Woodward
FST, Inc. and Baker Electrical Products, Inc. For further
information regarding these acquisitions, refer to Note B on
Pages 26 through 27Analysis of the consolidated financial statementsResults of Operations
and Financial Condition" on pages 14 through 21 of our 1999
Annual Report, incorporated here by reference. Additional
segment information and certain geographical information is
included in the registrant's 1998 Annual Report, and incorporated
by reference as noted in Item 14.
(b)Industry Segments
Information with respect to business segments is set forth
in Note OR to the consolidated financial statementsConsolidated Financial Statements, on
Pagespages 32 through 33 of the registrant's 1998our 1999 Annual Report, and
is hereby incorporated here
by reference. (c)(1) Narrative DescriptionOther information about our business follows.
Aircraft Engine Systems
We provide fuel control systems and components through Aircraft
Engine Systems, primarily to original equipment manufacturers of
Business
(i) Informationaircraft engines for use in those engines. We also sell
components as spares or replacements, and provide repair and
overhaul services to these customers and other customers.
3
Certain components with respectbroader applications are also sold to
business segments is
set forth in Note O to the consolidated financial
statements on Pages 32 through 33original equipment manufacturers of the registrant's
1998 Annual Report and is hereby incorporated by
reference.
(ii)industrial engines. In 1996, the1999,
our largest customers were General Electric Company and Catalytica
CombustionUnited
Technologies Corporation, together accounting for about 50% of
Aircraft Engine Systems Inc. (CCSI), a subsidiarybillings.
We generally sell Aircraft Engine Systems products and services
directly to our customers, although we also generate aftermarket
sales through distributors, dealers, and independent service
facilities. We carry certain finished goods and component parts
inventory to meet rapid delivery requirements of Catalytica, Inc., formed GENXON(tm) Powercustomers,
primarily for aftermarket needs. We do not believe Aircraft
Engine Systems LLC, a 50/50
joint venture. This venture combines the Company's
proprietary fuel metering control technology with CCSI's
unique XONON(tm) catalytic combustion technology to offer a
highly competitive, ultra-low NOx emission control system.
This system is expected to be offered as a retrofit on
installed, out-of-warranty industrial gas turbines.
For further information related to the impact of
this joint venture on the registrant's consolidated net
earnings, see Note C of the consolidated financial
statements included in the registrant's 1998 Annual
Report, and incorporated by reference as noted in Item 14.
(iii) Many of the Company's productssales are machined
from cast iron, cast aluminum and bar steel. Many of the
Company's machined products are produced by contractors.
In addition to the machined parts, electrical components
are also purchased. There are numerous sources for most of
the raw materials and components used by the Company in its
operations, and they are believed to be in adequate supply.
Certain control systems also utilize software or purchased
electromagnetic products as their core technology.
Part I, (Cont'd)
(iv) The Company has pursued a policy of applying for
patents in both the United States and certain other
countries on inventions made in the course of its
development work. The Company regards its patents
collectively as important, but does not consider its
business dependent upon any one of such patents.
(v) The Company's business is not subject to significant seasonal
variation.
(vi) The Company maintains inventory levelsWe believe Aircraft Engine Systems has a significant competitive
position within the market for fuel control systems and
components for aircraft engines. We compete with several other
manufacturers, including divisions of original equipment
manufacturers of aircraft engines. While published information
is not available in sufficient detail to meetenable an accurate
assessment, we do not believe any company holds a dominant
competitive position. Companies compete principally on price,
quality and customer demands. The Company's working capital
requirementsservice. In our opinion, our prices are
not materially affectedgenerally competitive, and our quality and customer service are
favorable competitive factors.
Aircraft Engine Systems backlog orders were $192 million at
November 30, 1999, approximately 69% of which we expect to fill
by return policies
or extended credit terms provided to customers.
(vii) One customer, General Electric Company,
accounted for approximately 16% of consolidated sales
during the fiscal year ended September 30, 1998.
Seven other customers in total accounted for2000. Last year, Aircraft Engine Systems
backlog orders were $211 million at November 30, 1998,
approximately 20%77% of consolidated sales in the fiscal
year endedwhich we expected to fill by September 30,
1998. Sales to these
customers involve several autonomous divisions and
agencies. Products are supplied on the basis of individual
purchase orders and contracts. There are no other material
relationships between the Company and such customers.
(viii) The Company's management believes that
unfilled1999. Backlog orders are not necessarily an indicator of future
shipment levels. As customers demand shorterbilling levels because of variations in lead timestimes.
Aircraft Engine Systems products make use of several patents and
flexibilitytrademarks of various durations that we believe are collectively
important. However, we do not consider our business dependent
upon any one patent or trademark. Our products consist of
mechanical, electronic, and electromagnetic components.
Mechanical components are machined primarily from aluminum, iron,
and steel. Generally there are numerous sources for the raw
materials and components used in delivery schedules,our products, and they have also
revised their purchasing practices. As a result,
notification of firm orders may occur only within thirty to
sixty days of delivery.
Consequently, the backlog of unfilled orders at
fiscal year-end cannot be relied upon as a valid indication
of sales or profitability in a subsequent year.
Unfilled orders at September 30, 1998 totaled $247,879,000, a
63% increase from $152,034,000 as of September 30, 1997. This
increase was primarily caused by the company's acquisition of
Woodward FST and changes in customers' purchasing practices
and is not necessarily an indicator of future sales levels,
as noted above.
Of the September 30, 1998 total, $200,123,000 is currently
scheduled for delivery in fiscal year 1999.
(ix) The Company does business with various U.S.
government agencies, principally in the defense area, as
both a prime contractor and a subcontractor. Substantially
all contracts are
firm fixed price and may require cost
databelieved to be submitted in connection with contract
negotiations. The contractssufficiently available to meet all Aircraft Engine
Systems requirements.
Industrial Controls
We provide fuel control systems and components through Industrial
Controls, primarily to original equipment manufacturers of
industrial engines and turbines. We also sell components as
spares or replacements, and provide other related services to
these customers and other customers. In 1999, our largest
customer was General Electric Company, accounting for 11% of
Industrial Controls billings.
We generally sell Industrial Controls products and services
directly to our customers, although we also generate sales
through distributors, dealers, and independent service
facilities. We carry certain finished goods and component parts
inventory to meet rapid delivery requirements of customers,
primarily for aftermarket needs. We do not believe Industrial
Controls sales are subject to government
audit and review. It is anticipated that adjustments, if
any, with respect to determination of reimbursable costs,
will not have a material effect on the Company's financial
condition. Substantially all of the Company's business,
including both commercial and government contracts, is
subject to cancellation by the customer. The military
portion of all shipments is less than 10% of total company
shipments in fiscal 1998.
Part I, (Cont'd)
(x) The Company competes with several other
manufacturers, including divisions of large diversified and
integrated manufacturers. The Company also competes with
other divisions of its major customers. Although
competitionsignificant seasonal variation.
We believe Industrial Controls has increased worldwide, the Company believes
it maintains a significant competitive
position within its
linethe market for fuel control systems and
components for industrial engines. We compete with as many as 10
other independent manufacturers and with the in-house control
operations of business. The Company has several competitors in
all product applications. Publishedoriginal equipment manufacturers. While published
information pertinent
to the Company's product line and its competitors is not available in sufficient detail to permitenable an
accurate assessment, of its current relative competitive position.
The principal methods of competition inwe believe we hold a strong position among
the industry areindependent manufacturers for small steam turbines, diesel
and gas engines, and gas turbine markets. Companies compete
principally on price, product quality and customer service. We also see
increasing demand for products that result in lower environmental
emissions, particularly in gas turbine applications. In theour
4
opinion, of management, the Company'sour prices are generally competitive and its productour quality,
and customer service and technology used in products to reduce
emissions are favorable competitive factors.
(xi) InformationIndustrial Controls backlog orders were $41 million at November
30, 1999, approximately 96% of which we expect to fill by
September 30, 2000. Last year, Industrial Controls included the
operations of Global Services. On a combined basis, Industrial
Controls' and Global Services' backlog orders were $60 million at
November 30, 1999, 96% of which we expect to fill by September
30, 2000 and $74 million at November 30, 1998, approximately 90%
of which we expected to fill by September 30, 1999. Backlog
orders are not necessarily an indicator of future billing levels
because of variations in lead times.
Industrial Controls products make use of several patents and
trademarks of various durations that we believe are collectively
important. However, we do not consider our business dependent
upon any one patent or trademark. Our products consist of
mechanical, electronic and electromagnetic components.
Mechanical components are machined primarily from aluminum, iron,
and steel. Generally there are numerous sources for the raw
materials and components used in our products, and they are
believed to be sufficiently available to meet all Industrial
Controls requirements.
Other Operations
Our other operations include Global Services and Automotive
Products. Global Services provides control systems and related
services to industrial engine users in retrofit situations.
These industrial engine users are principally involved in power
generation or oil and gas processing. Automotive Products
focuses on products for small industrial engines, although
products are also sold to original equipment manufacturers in the
automotive industry.
Products and services of Global Services and Automotive Products
are sold directly to customers. We do not believe sales are
subject to significant seasonal variation. Although power
generators plan retrofit activities around periods of peak energy
usage, these periods vary by location.
The industrial engine retrofit market is a competitive market
with respectabout 15 major competitors. None of the competitors hold a
dominant position. We compete effectively by providing what we
believe is the best technical evaluation of retrofit needs in the
industry, strong product performance, and high levels of customer
services from locations worldwide. Our sales price is
competitive, but rarely will our price be the lowest.
We have a small, but growing, position in the small industrial
engines market. Automotive Products began in May 1998 and is now
designing products that use low-cost, high-volume, high-
reliability manufacturing processes characteristic of suppliers
to the automotive industry. We believe this will enable us to
strengthen our competitive position in markets that compete
principally on price, quality and customer service.
Combined backlog orders for Global Services and Automotive
Products were $21 million at November 30, 1999, approximately 97%
of which we expect to fill by September 30, 2000. Last year,
Global Services was included with Industrial Controls. Backlog
orders for Automotive Products alone were $2.0 million at
November 30, 1999, all of which we expect to fill by September
30, 2000 and were $1.1 million at November 30, 1998, all of which
5
we expected to fill by September 30, 1999. Backlog orders are
not necessarily an indicator of future billings levels because of
variations in lead times.
Global Services and Automotive Products generally assemble their
products using purchased components that are readily available
from multiple sources. Many components for Global Services are
purchased from Industrial Controls. In addition to purchased
components, Automotive Products uses wire and plastics in its
coil winding and injection molding operations. These materials
are also readily available from multiple sources.
Other Matters
We spent approximately $24.6 million for company-sponsored
research and development is set forthactivities in Note A to the consolidated
financial statements on Page 26 of the registrant's1999, $18.5 million in
1998, Annual Report and is hereby incorporated by
reference. The Company's products, whether proposed by the
Company or requested by a customer,$11.3 million in 1997.
We are offered for sale as
proprietary designs and products of the Company.
Consequently, all activities associated with basic
research, the development of new products and the
refinement of existing products are Company-sponsored.
(xii) Compliance with provisions regulating
the discharge of materials into the environment has caused
and will continue to require capital expenditures. The
Company is involved in certain environmental matters, in
several of which it has been designated a "de minimis
potentially responsible party" with respect to the cost of
investigation and cleanup of third-party sites. The
Company's current accrual for these matters is based on
costs incurred to date that have been allocated to the
Company and its estimate of the most likely future
investigation and cleanup costs. There is, as in the case
of most environmental litigation, the theoretical
possibility of joint and several liability being imposed upon
the Company for damages which may be awarded.
It is the opinion of management, after
consultation with legal counsel, that additional
liabilities, if any, resulting from these matters are not
expected to have a material adverse effect on the financial
condition of the Company, although such matters could have
a material effect on quarterly or annual operating results
and cash flows when (or if) resolved in a future period.
(xiii) Information with respect to the number of
persons employed by the Company is set forth in the
"Summary of Operations/Ten Year Record" on Page 36 of the
registrant's 1998 Annual Report and is hereby
incorporated by reference. As of November 30, 1998,
4,065 members were employed by the Company.
Part I, (Cont'd)
(d) Company Operations
Information with respect to operations in the United States
and other countries is set forth in Note O to the
consolidated financial statements on Pages 32 through 33 of
the registrant's 1998 Annual Report and is hereby
incorporated by reference. Management is of the opinion there
are no unusual risks attendant to the conduct of its
operations in other countries.
Item 2. Properties
The registrant owns seven plants located in the United
States. Aircraft engine systems and related components
are manufactured in Rockford, and Rockton and Harvard, Illinois
plants, Buffalo, New York plant and Zeeland, Michigan
plant. Activities related to overhaul and repair of aircraft
engine systems and sales of spare parts take place in the
Rockton, Illinois facility. Industrial controls are manufactured
in the Fort Collins and Loveland, Colorado plants. Corporate
offices are maintained at the Rockford, Illinois facility. The
registrant leases manufacturing plants in Memphis, Michigan,
Greenville, South Carolina and a facility in which sales and
development activities are performed in Oak Ridge,
Tennessee.
The registrant also has twelve facilities located overseas,
that are predominantly utilized for manufacturing and servicing
of industrial control systems, components and related products.
Overseas manufacturing and assembly plants that are owned are
located in Hoofddorp, The Netherlands and Tomisato, Chiba, Japan.
The Company operates from leased plants in Reading, England;
Rotterdam, The Netherlands; and Aken and Kelbra, Germany.
Service shops are leased in Prestwick, Scotland; Sydney,
Australia; Kobe, Japan; Campinas, Sao Paulo, Brazil; Singapore;
and Ballabgarh, Haryana, India. Additional leased sales offices are
maintained worldwide.
The Company also owns a plant in Stevens Point, Wisconsin that was
closed in 1995. A portion of the plant is being leased to a
Woodward supplier. This facility is currently listed for sale.
Management considers all facilities to be in excellent condition
and all plants to have adequate production capacity available to
satisfy the Company's customers' needs throughout the coming year.
Item 3. Legal Proceedings
The Company is currently involved in matters of litigation arising from
the normal course of business, including certain environmental
and product liability matters. For a further
discussion of these issues refer toThese matters are discussed in Note MP to the
consolidated
financial statementsConsolidated Financial Statements on Pagepage 32 of the registrant's 1998our 1999 Annual
Report, incorporated here by reference. We do not believe that
compliance with provisions regulating the discharge of materials
into the environment, or otherwise relating to the protection of
the environment, will have any material effect on our financial
condition and competitive position, although such matters could
have a material effect on our quarterly or annual operating
results and cash flows (including capital expenditures) in a
future period. We are not aware of any material capital
expenditures that we will make for environmental control
facilities through September 30, 2001.
We employed about 3,765 people at November 30, 1999.
This report and the 1999 Annual Report, sections of which have
been incorporated by reference, contain forward-looking
statements and should be read with the "Cautionary Statement" on
page 35 of the 1999 Annual Report, incorporated here by
reference.
Item 2. Properties
Our principal plants are as follows:
United States
Fort Collins, Colorado - Industrial Controls manufacturing
Loveland, Colorado - Industrial Controls and Global Services
manufacturing
Rockford, Illinois - Aircraft Engine Systems manufacturing
and corporate offices
Rockton, Illinois - Aircraft Engine Systems manufacturing and
repair and overhaul
Memphis, Michigan (leased) - Automotive Products
manufacturing
Zeeland, Michigan - Aircraft Engine Systems manufacturing
Buffalo, New York - Aircraft Engine Systems manufacturing
Greenville, South Carolina (leased) - Aircraft Engine Systems
manufacturing
Oak Ridge, Tennessee (leased) - Automotive Products
manufacturing
6
Other Countries
Aken, Germany (leased) - Industrial Controls manufacturing
Tomisato, Chiba, Japan - Industrial Controls manufacturing
Hoofddorp, The Netherlands - Industrial Controls
manufacturing
Rotterdam, The Netherlands - Automotive Products
manufacturing
Reading, England, United Kingdom (leased) - Industrial
Controls manufacturing
Prestwick, Scotland, United Kingdom (leased) - Aircraft
Engine Systems repair and overhaul
Our principal plants are suitable and adequate for the
manufacturing and other activities performed at those plants, and
we believe our utilization levels are generally high. However,
with continuing advancements in manufacturing technology and
operational improvements, we believe we can continue to increase
production in our existing plants. Also, following our
Industrial Controls reorganization in 1999, we changed the way
our Fort Collins and Loveland, Colorado, plants were used. The
primary effect of this change was to reduce our utilization of
the Loveland plant. Currently, approximately one-third of the
space in the Loveland plant is herebynot being used.
In addition to the principal plants listed above, we lease
several facilities in locations worldwide, used primarily for
sales and service activities.
Item 3. Legal Proceedings
We are currently involved in environmental litigation. These
matters are discussed in Note P to the Consolidated Financial
Statements on ppage 30 of our 1999 Annual Report,
incorporated here by reference.
Item 4. Submission of Matters to a Vote of Shareholders
There were no matters submitted to a vote of shareholders during
the fourth quarter of the year ended September 30, 1998 to a vote of shareholders,
through the solicitation of proxies or otherwise.
1999.
Part II
Item 5. Market for the Registrant's
Common Stock and Related Shareholder Matters
Information with respect to common stock price ranges and
dividends is set forth on Pages 35 and 36 of the registrant's
1998 Annual Report and is hereby incorporated by reference.
The Company'sOur common stock is listed on the Nasdaq National Market and as of Septemberat
November 30, 1998,1999, there were approximately
1,9001,844 holders of record. Cash
dividends were declared quarterly during 1999 and 1998. The
amount of cash dividends per share and the high and low sales
price per share for our common stock for each fiscal quarter in
1999 and 1998 are included in the "Selected Quarterly Financial
Data" on page 35 of the 1999 Annual Report, incorporated here by
reference.
Item 6. Selected Financial Data
Information with respect to this matterSelected financial data is set forthincluded in the "Summary of
Operations/Ten YearEleven-Year Record" on Pagepage 36 of the
registrant's 1998our 1999 Annual
Report, and is hereby incorporated here by reference.
7
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations Management'sand Financial Condition
"Management Discussion and Analysis of Financial Condition and
Results of Operations and
Financial Condition" is set forth inincluded on pages 14 through 21 of
our 1999 Annual Report, incorporated here by reference. This
discussion should be read with the "Financial Summary and
Analysis"consolidated financial
statements on Pages 15 through 20pages 22-33 of the registrant's 1998our 1999 Annual Report and is hereby incorporated by reference.
Information with respect to forward-looking statements is set
forth under the heading
"Cautionary Statement" on Pagepage 35 of the registrant's 1998our 1999 Annual Report, and is herebyboth
incorporated here by reference.
Item 7.A. Quantitative and Qualitative Disclosures About Market Risk
The Company's long-term debt obligationsDisclosures about market risk are sensitive to
changes in interest rates. The Company manages its interest rate
riskincluded under the captions
"Other Matters - Market Risks" on page 20 of our 1999 Annual
Report, incorporated here by monitoring trends in rates as a basis for determining
whether to enter into fixed rate or variable rate agreements. All
current long-term debt is denominated in U.S. dollars. The table
below presents principal cash flows (in thousands of dollars) and
weighted average interest rates of the Company's long-term debt
obligations at September 30, 1998 by year of expected maturity.
The expected maturity dates presented are contractual (assuming no
conditions arise that require prepayment), except with respect to
borrowing under a revolving line of credit, in which case it is
assumed that the principal balance due will be repaid in
approximately equal amounts over the next five years. The
weighted average interest rates are contractual, assuming the
underlying basis for variable rates (primarily LIBOR) remains
unchanged.
Fixed Rate Variable Rate
Obigations Obligations
Principal Average Principal Average
Cash Interest Cash Interest
Flows Rate Flows Rate
September 30,
1999 $5,283 8.43% $19,750 6.27%
2000 5,435 8.23% 33,000 6.28%
2001 2,500 8.01% 36,750 6.29%
2002 2,500 8.01% 36,750 6.30%
2003 2,000 8.01% 56,750 6.26%
Total $17,718 8.26% $183,000 6.28%
Fair Value $19,227 $183,000
Part II, cont'dreference.
Item 8. Financial Statements and Supplementary Data
The Company's Consolidated financial statements and schedules, as listed in
Item 14(a) and excluding the two items listed under the caption
"Other Financial Statements, the Notes
thereto, the Report of Independent Accountants, and the
supplementary Selected Quarterly Financial Data, as required
hereunder, are set forth on Pages 21 through 35, inclusive, of
the 1998 Annual Report, andStatement Schedules", are incorporated
hereinhere by reference as set forth in Item 14 of this document and filed as
Exhibit 13 to this Form 10-K. The Company's Financial Statement
Schedule and related Report of Independent Accountants, as
required hereunder, is further set forth in Item 14 of this
document and is hereby incorporated by reference.
Pursuant to Rule 3-09 of Regulation S-X, separate Financial
Statements and Report of Independent Accountants of GENXON(tm) Power
Systems, L.L.C., the Company's fifty percent-owned joint venture,
which is not consolidated, for the year ended September 30, 1997
are further set forth in Item 14 of this document and hereby
included. Separate financial statements for the year ended
September 30, 1998 are not included, pursuant to Rule 3-09. A
summary of the joint venture's achievements during its first two
years of operation is set forth on Page 16 of the registrant's 1998
Annual Report .
See also page 35 under the heading "Cautionary Statement" in the
registrant's 1998 Annual Report with respect to forward-looking
statements.
Item 9. Changes in and Disagreements with
Accountants on Accounting and Financial Disclosure
TheThere have been no changes in or disagreements on accounting
firm ofprinciples and financial disclosure. PricewaterhouseCoopers LLP,
(formerly
Coopers & Lybrand L.L.P.) hasor its predecessors, have been engaged asour independent accountants since
1940. There have been no disagreements on any
matter of accounting principles or practices or financial
statement disclosure.
Part III
Item 10. Directors and Executive Officers of the Registrant
Information with respect to directors and executive officers, except
for information which follows, is set forth in the registrant's
proxy statement dated December 11, 1998, which was filed with the
Securities and Exchange Commission within 120 days following the end
of the registrant's fiscal year ended September 30, 1998, and is made
a part hereof.
Executive Officers of the Registrant:Officers:
John A. Halbrook, age 53, is54 - chairman and chief executive officer
of
the Company and was elected to this position insince January 1995. He
was elected1995; chief executive officer inand president
November 1993 and served asthrough January 1995; president from November 1991
until January 1995. He also served as
chief operating officer from November 1991 untilthrough November 1993.
Stephen P. Carter, age 47, is48 - vice president, chief financial
officer, and treasurer of the Company and was elected to this
position insince January 1997. He was elected1997; vice president and
treasurer in September 1996 through January 1997; and was previously assistant
treasurer since 1994. He has been employed by the Company in management
positions for the last five years.
Part III cont'd
Charles F. Kovac, age 42, was elected vice president of the Company
and general manager of the Industrial Controls group in AugustJanuary 1994 through September 1996.
He has been employed in management positions for the last five
years.
Gary D. Larrew, age 48, was elected49 - vice president of the Company and manager of Business Developmentbusiness
development since June 1997; in June 1997. Hethe past five years has been employed by the Company in
management positions for the last five
years.positions.
C. Phillip Turner, age 58, is a59 - vice president of the Company and general manager of
Aircraft Engine Systems. He was elected vice
president inSystems since 1988.
Carol J. Manning, age 49, was elected50 - secretary of the Company insince June 1991.
All of the executive officers unless otherwise noted, were elected to their presentcurrent positions at
the January 14, 199819, 1999 Board of Directors' meeting to serve until
the organizational meeting of theJanuary 18, 2000 Board of Directors to be held on January 19, 1999meeting, or until their
respective successors shall have been electedelected.
8
Section 16(a) Beneficial Ownership Reporting Compliance:
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires our executive officers, directors and qualified.holders of more
than 10% of the common stock to file with the Securities and
Exchange Commission initial reports of ownership and reports of
changes in ownership of common stock and other equity securities
of the company. We believe that during the fiscal year ended
September 30, 1999, with the exception of the following, our
executive officers, directors and holders of more than 10% of the
common stock complied with all Section 16(a) filing requirements.
Messrs. Halbrook, Carter, Larrew and Turner filed Amended Form
5's correcting the failure to file Form 4's with respect to
acquired grants of phantom stock under the Unfunded Deferred
Compensation Plan No. 2. In making these statements, we have
relied upon the written representations of our executive officers
and directors.
Other information regarding our directors and executive officers
is included in our proxy statement dated December 6, 1999,
incorporated here by reference.
Item 11. Executive Compensation
Information with respect to executiveExecutive compensation is set forth under the caption "Executive
Compensation" on Pages 912 through 1314 of the registrant'sour proxy statement
dated December 11, 1998,
which is made a part hereof.6, 1999, incorporated here by reference.
Item 12. Security Ownership of Certain
Beneficial Owners and Management
Information with respect to securitySecurity ownership of certain beneficial owners and management is
set forth under the captions "Security"Share Ownership of Principal HoldersManagement" and Executive Officers"
and "Election"Persons
Owning More than Five Percent of Directors"Woodward Stock" on Pages 69
through 810 of the
registrant'sour proxy statement dated December 11, 1998, which
is made a part hereof.6, 1999,
incorporated here by reference.
Item 13. Certain Relationships and Related Transactions
Information with respect toregarding certain relationships and related
transactions is set forth under the caption "Compensation Committee
Interlocks and Insider Participation" on Page 138 of the registrant'sour proxy
statement dated December 11, 1998,
which is made a part hereof.6, 1999, incorporated here by
reference.
9
Part IV
Item 14. Exhibits, Financial Statement Schedule,Schedules, and Reports on Form 8-K
(a) Index to Consolidated Financial Statements and ScheduleSchedules
Reference
Form 10-K Annual Report
Annual Report to Shareholders
Page Page
Incorporated by reference to the
registrant's annualAnnual report to shareholdersshareholder for the
fiscal year ended September 30, 1998
and1999
filed as Exhibit 13 to this Form 10-K:10-K
and incorporated by reference:
Statements of Consolidated Earnings
for the years ended September 30,
1999, 1998, 1997 and 19961997 22
Consolidated Balance Sheets at
September 30, 19981999 and 19971998 23
Statements of Consolidated Shareholders'Share-
holders' Equity for the years ended
September 30, 1999, 1998, 1997 and 19961997 24
Statements of Consolidated Cash
Flows for the years ended September
30, 1999, 1998, 1997 and 19961997 25
Notes to Consolidated Financial
Statements 26-33
Management's Responsibility for
Financial Statements 34
Report of Independent Accountants 34
Selected Quarterly Financial Data 35
Included herein:
Separate Financial Statementsfinancial statements of
Subsidiaries
Not Consolidatedsubsidiaries not consolidated and
Fifty Percent-or-Less-
Owned Persons:fifty percent-or-less-owned persons,
included with this filing:
GENXON Power Systems, L.L.C.
Financial Statements and Report of
Independent Accountants for the
period from October 21, 1996
(date of inception) to
September 30, 1997 S-1 - S-11
10
Reference
Form 10-K Annual Report
Annual Report to Shareholders
Page Page
Other Financial Statement Schedule:Schedules:
Report of Independent Accountants S-12
II. Valuation and Qualifying Accounts S-13
Item 14 (Con't) Exhibits, Financial Statement
Schedule, and Reports on Form 8-K (continued)
Financial statements and schedules other than those listed above
are omitted for the reason that they are not applicable, are not
required, or the information is included in the financial
statements or the footnotes
therein.footnotes.
With the exception of the consolidated financial statements and
the accountants' report thereonreports of indendepent accountants listed in the above index,
the information referred to in Items 1, 3, 5, 6, 7, and 8, and
the supplementary quarterly financial information referred to in
Item 8, all of which is included in the 19981999 Annual Report to
Shareholders of Woodward Governor Company and incorporated by
reference into this Form 10-K Annual Report, the 19981999 Annual
Report to Shareholders is not to be deemed "filed" as part of
this report.
(b)An 8-K/A, dated August 28, 1998, regarding Reports Filed on Form 8-K During the acquisition of Woodward
FST (formerly Fuel Systems Textron, Inc.) was during the fourth quarterFourth Quarter of the
fiscal year endedFiscal Year Ended September 30, 1998. The following financial statements
were filed with the 8-K/A:
(a) Financial Statements1999. None
(c) Exhibits Filed as Part of Business Acquired:
FUEL SYSTEMS TEXTRON INC.
1.This Report
of Independent Accountants
2. Statements of Income and Changes in Parent Company's Investment for
the fiscal years ended January 3, 1998, December 28, 1996 and
December 30, 1995.
3. Balance Sheets as of January 3, 1998 and December 28, 1996 .
4. Statements of Cash Flows for the fiscal years ended January 3, 1998,
December 28, 1996 and December 30, 1995.
5. Notes to Financial Statements.
6. Unaudited Balance Sheet as of April 4, 1998 and Statement of Income
and Changes in Parent Company's Investment and Statement of Cash
Flows for the interim three month periods ended April 4, 1998 and
March 29, 1997
(b) Pro Forma Financial Information:
WOODWARD GOVERNOR COMPANY AND FUEL SYSTEMS TEXTRON INC. COMBINED
1. Pro Forma Financial Information -- Introduction
2. Unaudited Pro Forma Condensed Balance Sheet as of March 31, 1998
3. Unaudited Pro Forma Condensed Statements of Earnings for the fiscal
year ended September 30, 1997 and the six month period ended March
31, 1998
4. Notes to Pro Forma Financial Information
(c)The following exhibits are filed as part of this report:
(3)(A)Certificate(i) Certificaterticles of
Incorporation Certificate of Incorporation
are set forth in the exhibits
filed with Form 10-K for the
fiscal year ended September 30,
1977 and are hereby incorporated
by reference.
Filed as an exhibit.
(3)(A)Certificate of Incorporation Two amendments to the Certificate
(cont'd) of Incorporation effective
January 14, 1981 are set
forth in the exhibits filed
with Form 10-K for the fiscal
year ended September 30, 1981
and are hereby incorporated
by reference.
Two amendments to the Certificate
of Incorporation effective
January 11, 1984 are set
forth in exhibits filed with
Form 10-K for the fiscal year
ended September 30, 1984 and
are hereby incorporated by
reference.
One amendment to the Certificate
of Incorporation effective
January 13, 1988 is set forth
in exhibits filed with Form
10-K for the fiscal year
ended September 30, 1988 and
is hereby incorporated by
reference.
One amendment to the Certificate
of Incorporation effective
January 23, 1997 is set forth in
exhibits filed with Form 10-K for
the fiscal year ended September
30, 1997 and are hereby
incorporated by reference.
(B)(ii) By-laws, as amended Filed as an exhibit hereto.exhibit.
(4)Instruments defining the rights Instruments with respect
tothe rights of security holders, includingto long-term debt and the ESOP
indenturesholders, including debt guarantee are not being
indentures filed as they do not individually
exceed 10 percent of the registrant'sour
assets. The registrant
agreesWe agree to furnish a
copy of each such instrument to the
Commission upon request.
Item 14 (Con't) Exhibits, Financial Statement
Schedule, and Reports on Form 8-K (continued)
(10)Material contracts A
$250,000,000 credit agreement
dated June 15, 1998 is
set forthincluded in exhibits filed
with Form 10-Q for the quarter
ended June 30, 1998,
and is hereby incorporated here by
reference.
Purchase and sale
agreement on the acquisition
of WoodwardWooward FST dated June 15,
1998 is set forthincluded in exhibits
filedfilled with Form 8-K on June
30, 1998, and is hereby
incorporated here by
reference.
11
(11) Statement re computation of Filed as an exhibit hereto.
per share earnings
(13)Annual report to shareholders Except to the extentspecifically incorporated
for the fiscal year ended specifically incorporatedby reference, report is
September 30, 1998 herein by reference, said
report is1999 furnished solely for
the information of the
Commission and is not deemed
"filed" as part of this
report.
(18)Letter regarding a change in
accounting principle(21) Subsidiaries Filed as an exhibit hereto.
(21)Subsidiaries of the
registrant Filed as an exhibit hereto.exhibit.
(23)Consents of Independent
Accountants Filed as an exhibit hereto.exhibit.
(27)Financial data schedule Filed as an exhibit hereto.exhibit.
(99)Additional exhibit -
description of annual
report graphs Filed as an exhibit hereto.exhibit.
12
SIGNATURES
This report has been prepared in accordance with the rules and regulations
of the Securities and Exchange Commission and the financial statements
referenced herein have been prepared in accordance with such rules and regulations
and with generally accepted accounting principles, by officers and worker
members of Woodward Governor Company. This has been done under the general
supervision of Stephen P. Carter, vice president, chief financial officer
and treasurer. The consolidated financial statements have been audited by
PricewaterhouseCoopers LLP, independent accountants, as indicated in their
report in the annual report to shareholders for the fiscal year ended
September 30, 1998.1999.
This report contains much detailed information of which the various
signatories cannot and do not have independent personal knowledge. The
signatories believe, however, that the preparation and review processes
summarized above are such as to afford reasonable assurance of compliance
with applicable requirements.
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.undersigned.
WOODWARD GOVERNOR COMPANY
/s/ John A. Halbrook Director, Chairman of the
John A. Halbrook Board and Chief Executive
Officer
/s/ Stephen P. Carter Vice President, Chief
Stephen P. Carter Financial Officer and
Treasurer
Date 12/23/98Date: December 18, 1999
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 andWoodward
Governor Company on the dates indicated:
Signature Title Date
Director/s/ J. Grant Beadle Director December 21, 1999
J. Grant Beadle
/s/ Vern H. Cassens Director December 21, 1999
Vern H. Cassens
/s/ Carl J. Dargene Director 12/23/98December 21, 1999
Carl J. Dargene
/s/ Lawrence E. Gloyd Director 12/23/98December 22, 1999
Lawrence E. Gloyd
Director/s/ Thomas W. Heenan /s/ Peter Jeffrey Director 12/23/98December 20, 1999
Thomas W. Heenan
_____________________ Director
J. Peter Jeffrey
/s/ Vern H. CassensRodney O' Neal Director 12/23/98
Vern H. CassensDecember 22, 1999
Rodney O'Neal
_____________________ Director
Lou L. Pai
_____________________ Director
Michael T. Yonker
13
NOTE: THE FOLLOWING FINANCIAL STATEMENTS AND REPORT OF INDEPENDENT
ACCOUNTANTS OF THE REGISTRANT'SOUR FIFTY PERCENT-OWNED JOINT VENTURE, WHICH IS NOT
CONSOLIDATED, IS REQUIRED TO BE FILED AS PART OF THIS FORM 10-K IN
ACCORDANCE WITH REGULATION S-X, RULE 3-09.
GENXON POWER SYSTEMS, L.L.C.
(a Delaware limited liability company)
FINANCIAL STATEMENTS
for the period October 21, 1996
(date of inception) to September 30, 1997
S-1
GENXON POWER SYSTEMS, L.L.C.
(a Delaware limited liability company)
FINANCIAL STATEMENTS
for the period from October 21, 1996
(date of inception) to September 30, 1997
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Managers and Members
GENXON Power Systems, L.L.C.:
We have audited the accompanying balance sheet of GENXON Power Systems,
L.L.C. (a Delaware limited liability company) as of September 30, 1997, and
the related statements of operations, members' capital and cash flows for
the period from October 21, 1996 (date of inception) to September 30, 1997.
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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of GENXON Power Systems,
L.L.C. as of September 30, 1997, and the results of its operations and its
cash flows for the period from October 21, 1996 (date of inception) to
September 30, 1997 in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered losses from operations and
has a net capital deficiency that raise substantial doubt about its ability
to continue as a going concern. Management's plans in regard to these
matters are also described in Note 2. The financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.
San Jose, California
October 17, 1997
S-2
GENXON POWER SYSTEMS, L.L.C.
(a Delaware limited liability company)
BALANCE SHEET, September 30, 1997
ASSETS
ASSETS
Current assets:assets :
Cash and cash equivalents $ 54,366
Inventory 233,977
Prepaid expenses 358,482
Total current assets 646,825
Property and equipment 557,362
Total assets $ 1,204,187
LIABILITIES AND MEMBERS' CAPITAL
Current liabilities:
Payable to Woodward Governor Company $Company$ 89,483
Payable to Catalytic Combustion Systems,Inc. 315,580
Accounts payable 1,852,014
Accrued liabilities 433,261
Total current liabilities 2,690,338
Commitments and contingencies (Note 3)
Members' capital (1,486,151)
Total liabilities and members' capital $ 1,204,187$1,204,187
The accompanying notes are an integral part of these financial statementsstatements.
S-3
GENXON POWER SYSTEMS, L.L.C.
(a Delaware limited liability company)
STATEMENT OF OPERATIONS
for the period from October 21, 1996
(date of inception) to September 30, 1997
Revenues:
Revenues:
Research contract $ 268,000contract$ $268,000
Operating expenses:
Research and development 8,656,442
Selling, general and administrative expenses 2,147,797
10,804,239
Loss from operations (10,536,239)
Other income (expense):
Interest income, net 50,088
Net loss $ 10,486,151
The accompanying notes are an integral part of these financial instruments.statements.
S-4
GENXON POWER SYSTEMS, L.L.C.
(a Delaware limited liability company)
STATEMENT OF MEMBERS' CAPITAL
for the period from October 21, 1996
(date of inception) to September 30, 1997
Woodward Catalytica
Governor Combustion
Company Systems, Inc. Total
Capital contributions $7,100,000 $1,900,000 $ 9,000,000
Net loss (8,243,076) (2,243,075) (10,486,151)
Members' capital,
September 30, 1997 $(1,143,076) $ (343,075)$(343,075) $(1,486,151)
The accompanying notes are an integral part of these financial instruments.
The accompanying notes are an integral part of these financial statements.
S-5
GENXON POWER SYSTEMS, L.L.C.
(a Delaware limited liability company)
STATEMENT OF CASH FLOWS
for the period from October 21, 1996
(date of inception) to September 30, 1997
Cash flows from operating activities:
Net loss $(10,486,151)
Adjustments to reconcile net loss to net
cash used in operating activities:
Changes in assets and liabilities:
Inventory (233,977)
Prepaid expenses (358,482)
Payable to members 405,063
Accounts payable 1,852,014
Accrued liabilities 433,261
Net cash used in operating activities (8,388,272)
Cash flows from investing activities:
Acquisition of property and equipment (557,362)
Cash flows from financing activities:
Members' capital contributions 9,000,000
Net increase in cash and cash equivalents 54,366
Cash and cash equivalents, beginning of period -_
Cash and cash equivalents, end of period $period$ 54,366
The accompanying notes are an integral part of these financial instruments.statements.
S-6
GENXON POWER SYSTEMS, L.L.C.
(a Delaware limited liability company)
NOTES TO FINANCIAL STATEMENTS
1.Formation and Business of the Company:
GENXON Power Systems, L.L.C. (the Company), a Delaware limited liability
company, was formed on October 21, 1996 to develop and sell products and
services to a wide range of users of out-of-warranty gas turbines which
require reductions in emissions, overhaul or upgrade. Except as provided
for in the Limited Liability Operating Agreement, the existence of the
Company will be perpetual.
Investor members in GENXON Power Systems, L.L.C. received a percent-agepercentage
interest in the Company based on the amount of cash and the agreed-upon
fair value of certain technology licenses contributed to the Company.
There were two initial investor members, each receiving a 50 percent
interest in the Company. Their initial capital commitments were as
follows:
Cash Technology
Commitment Licenses Total
Catalytica Combustion Systems,
Inc.(Catalytica) $2,000,000 $8,000,000 $10,000,000
Woodward Governor Company
(Woodward) $8,000,000 $2,000,000 $10,000,000
At September 30, 1997, each member had contributed its agreed-upon
technology licenses and cash in the total amount of $9 million.
Subsequent to year-end, the members contributed the balance of their
initial cash commitment and an additional $1,200,000 in cash.
Additional future cash contributions will be at the discretion of
each of the members, but will generally be in proportion to their
respective percentage interests in the Company and will be governed
by the terms of the Operating Agreement. For financial statement
purposes only, the fair value of the technology licenses has not been
recorded.
S-7
1. Formation and Business of the Company, continued:
The Operating Agreement generally provides that profits and losses
in any fiscal year, or other applicable period, shall be allocated
to each member in proportion to their respective percentage
interest. In the event that a member's cumulative capital account,
including the fair value of the technology licenses contributed, is
reduced to zero, losses will be reallocated to members having
positive capital account balances until all members' capital
accounts have been reduced to zero. Thereafter, losses will again
be allocated to the members based on their respective percentage
interests. Such "reallocated" losses shall first be restored by an
allocation of profits before any additional profits are allocated to
the members. Under the terms of the Operating Agreement, the
Company is required to make cash distributions to each member in the
amount of the estimated tax liability for the net taxable income and
gains allocated to such member during the fiscal year. Any
additional distributions of cash or property will be at the
discretion of the Board of Managers as provided for in the Operating
Agreement. At September 30, 1997, cumulative capital account
balances determined in accordance with the Operating Agreement are
as follows:
Catalytica Woodward Total
Cash contributed $1,900,000 $7,100,000 $ 9,000,000$9,000,000
Technology licenses contributed 8,000,000 2,000,000 10,000,000
Allocation of net loss (5,243,075) (5,243,076) (10,486,151)
Capital account balances $4,656,925 $3,856,924 $ 8,513,849$8,513,849
2. Summary of Significant Accounting Policies:
Basis of Presentation:
The Company's financial statements have been prepared on a basis of
accounting assuming that it is a going concern, which contemplates
realization of assets and satisfaction of liabilities in the normal
course of business. The Company has reported a net loss for the
period from October 21, 1996 (date of inception) to September 30,
1997 in the amount of $10,486,151. Management plans to obtain
additional capital contributions from its members or other
additional investors to meet its current and ongoing obligations.
Continued existence of the Company is dependent on the Company's
ability to ensure the availability of adequate funding and the
establishment of profitable operations. The financial statements
do not include adjustments that might result from the outcome of
this uncertainty.
S-8
2. Summary of Significant Accounting Policies, continued:
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 amount 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.
Cash and Cash Equivalents:
The Company considers all highly liquid investments purchased with
original or remaining maturities of three months or less at the date
of purchase to be cash equivalents. Substantially all of the
Company's excess cash is invested in money market accounts with a
major investment company.
Fair Value of Financial Instruments:
Carrying amounts of certain of the Company's financial instruments,
including cash and cash equivalents, accounts payable and other
accrued liabilities approximate fair value due to their short
maturities.
Inventory:
Inventory, consisting of purchased and manufactured parts to be used
in the overhaul and upgrade of gas turbine engines, is stated at the
lower of cost or market.
Property and Equipment:
Property and equipment are stated at cost and will be depreciated
using the straight-line method over their estimated useful lives,
generally 3 to 10 years. Gains and losses from the disposal of
property and equipment will be taken into income in the year of
disposition. At September 30, 1997, property and equipment consists
solely of tooling costs incurred in the construction of the
Company's manufacturing equipment. As this equipment has not yet
been completed or placed in service, no depreciation costs have been
recorded.
S-9
2. Summary of Significant Accounting Policies, continued:
Income Taxes:
The financial statements include no provision for income taxes
since the Company's income and losses are reported in the members'
separate tax returns.
Recent Accounting Pronouncements:
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 130 (SFAS 130),
Reporting Comprehensive Income. This statement establishes
requirements for disclosure of comprehensive income and becomes
effective for the Company for its fiscal year 1999, with reclass-
ification of earlier financial statements for comparative purposes.
Comprehensive income generally represents all changes in members'
capital except those resulting from investments or contributions by
members. The Company is evaluating alternative formats for
presenting this information, but does not expect this pronouncement
to materially impact the Company's results of operations.
In June 1997, The Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 131 (SFAS 131),
Disclosures about Segments of an Enterprise and Related Information.
This statement establishes standards for disclosure about operating
segments in annual financial statements and selected information in
interim financial reports. It also establishes standards for
related disclosures about products and services, geographic areas
and major customers. This statement supersedes Statement of
Financial Accounting Standards No. 14, Financial Reporting for
Segments of a Business Enterprise. The new standard becomes
effective for the Company's fiscal year 1999, and requires that
comparative information from earlier years be restated to conform to
the requirements of this standard. The Company is evaluating the
requirements of SFAS 131 and the effects, if any, on the Company's
current reporting and disclosures.
S-10
3. Commitments and Contingencies
The Company entered into an exclusive agreement with Agilis Group,
Inc. (Agilis) to provide assistance and advice in the development
and design of the combustor and combustor related hardware for the
Company's proprietary catalytic combustion technology. Under the
terms of the agreement, Agilis has responsibility as to the details,
methods, and means of performing its services. Subject to the
Company's approval and on its behalf, Agilis may enter into purchase
commitments and contracts with outside vendors to provide materials
and services to complete the projects. At September 30, 1997, the
Company has approximately $2.3 million in open purchase commitments
through Agilis. The agreement will expire on the later of the
completion of all services described in the agreement or December
31, 1999, unless extended in writing and agreed to by both parties.
The Company has entered into a technical services agreement with the
City of Glendale, California to retrofit an FT4 gas turbine engine
which was provided by the City. Under the terms of the agreement,
the retrofit will include adding the Company's proprietary
combustion system and a digital control system for a total turnkey
price of $700,000, and must be completed by December 1998.1999. In the
event that the Company is unable to complete the agreed upon
retrofit on time or damages the engine in the process, the agreement
requires the Company to return the engine to its original state or
replace it with a similar engine, for which the Company has recorded
a reserve of $134,000.
4. Related Party Transactions:
The Company has entered into a services agreement with Catalytica
and Woodward to provide the Company with management support,
technical services support and administrative services. For the
period from October 21, 1996 (date of inception) through September
30, 1997, the Company incurred general and administrative support
costs from Catalytica in the amount of $1,355,308 and research and
development costs totaling $3,450,077. For the same period, the
Company incurred $65,192 of general and administrative support costs
from Woodward and $513,487 for research and development services.
The Company has also entered into supply agreements with both
Catalytica and Woodward to supply combustion system products and
control system products to be used by the Company in its business of
retrofitting installed and operating gas turbine engines.
S-11
REPORT OF INDEPENDENT ACCOUNTANTS
ShareholderTo the Board of Directors and Worker MembersShareholders
Woodward Governor Company
Our report onaudits of the consolidated financial statements referred to in our
report dated November 9, 1999 appearing on page 34 in the 1999 Annual
Report to Shareholders of Woodward Governor Company and Subsidiaries has been(which
report and consolidated financial statements are incorporated by reference
in this Annual Report on Form 10-
K from Page 3410-K) also included an audit of the 1998 Annual Report to Shareholder and Worker Members
of Woodward Governor Company and Subsidiaries. In connection with our
audits of such financial statements, we have also audited the related financial
statement schedule listed in the Index on Page 10Item 14(a) of this Form 10-
K.10-K. In our
opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole, presents fairly, in all material
respects, the information required to be
included therein.set forth therein when read in conjunction with
the related consolidated financial statements.
PricewaterhouseCoopers LLP
Chicago, Illinois
November 10, 19989, 1999
S-12
WOODWARD GOVERNOR COMPANY AND SUBSIDIARIES
SCHEDULE II -VALUATION AND QUALIFYING ACCOUNTS
for the years ended September 30, 1998, 1997 and 1996
(In thousands of dollars)
Col. A Col. B Col. C Col. D Col.E
Additions
Balance at Charged to Charged to Balance
Beginning Costs and Other at End
DESCRIPTION of Year Expenses Accounts (B) Deduct. (A) Of Year
1998:
Allowance for
Doubtful accts $2,757 $1,869 $368 $543 $4,451
1997:
Allowance for
Doubtful accts
Col A. Col. B Col. C Col. D Col. E
Additions Balance
Balance at Charged to Charged to at End
Beginning Costs and Other of
Description of Year Expenses Accounts (B) Deductions (A) Year
1999:
Allowance for
Doubtful
accounts $4,451 $1,593 $49 $1,676 $4,417
1998:
Allowance for
Doubtful
accounts $2,757 $1,869 $368 $543 $4,451
1997:
Allowance for
Doubtful
accounts $2,755 $539 $136 $673 $2,757
1996:
Allowance for
Doubtful accts $4,605 $937 $50 $2,837 $2,755
NOTE:
(A) Represents accounts written off during the year and also overseas
currency translation adjustments that increased the deduction from
reserves by $16 in 1998, $134 in 1997 and $99 in 1996.
Write-offs in 1996 were $1,864, with the remaining portion
related to reduction of previously established reserves based on an
overall assessment of accounts.
(B) Recovery of accounts previously written-off. FY1998 also includes
$287 due to the acquisition of Woodward FST.
S-13