UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
{ X } ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1998 Commission file #0-8408
OR
{ } TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
WOODWARD GOVERNOR COMPANY
(Exact name of registrant as 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)
Registrant's telephone number - (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.
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 shares of common stock
with a par value of $.00875 per share were outstanding. The aggregate
market value of the voting stock held by non-affiliates of the registrant
was approximately $201,189,000 as of November 30, 1998(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's annual report to shareholders for the fiscal
year ended September 30, 1998 (1998 Annual Report), a copy of which
is attached hereto, are incorporated by reference into Parts I, II and IV
hereof, to the extent indicated herein.
Portions of the registrant's proxy statement dated December 11, 1998,
are incorporated by reference into Part III hereof, to the extent indicated
herein.
Part I
Item 1. Business
(a)General Description of Business
Woodward Governor Company (the Company), established in
1870, designs and manufactures hydromechanical and electronic
fuel controls and fuel-delivery systems, subsystems and
components. These products are supplied to original equipment
manufacturers and operators of diesel engines, steam turbines,
industrial and aircraft gas turbines, and hydraulic turbines.
In addition to original equipment products, the Company also
provides aftermarket parts and service through a worldwide
network including distributors, dealers, 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 27 of the consolidated financial statements
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 O to the consolidated financial statements on Pages
32 through 33 of the registrant's 1998 Annual Report and
is hereby incorporated by reference.
(c)(1) Narrative Description of Business
(i) Information with respect to business segments 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.
(ii) In 1996, the Company and Catalytica
Combustion Systems, Inc. (CCSI), a subsidiary of
Catalytica, Inc., formed GENXON(tm) Power 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 products 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 levels sufficient
to meet customer demands. The Company's working capital
requirements are not materially affected 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 for
approximately 20% of consolidated sales in the fiscal
year ended 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
unfilled orders are not necessarily an indicator of future
shipment levels. As customers demand shorter lead times
and flexibility in delivery schedules, 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
data to be submitted in connection with contract
negotiations. The contracts 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
competition has increased worldwide, the Company believes
it maintains a significant competitive position within its
line of business. The Company has several competitors in
all product applications. Published information pertinent
to the Company's product line and its competitors is not
available in sufficient detail to permit an accurate
assessment of its current relative competitive position.
The principal methods of competition in the industry are
price, product quality and customer service. In the
opinion of management, the Company's prices are generally
competitive and its product quality and customer service
are favorable competitive factors.
(xi) Information with respect to research
and development is set forth in Note A to the consolidated
financial statements on Page 26 of the registrant's
1998 Annual Report and is hereby incorporated by
reference. The Company's products, whether proposed by the
Company or requested by a customer, 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 to Note M to the consolidated
financial statements on Page 32 of the registrant's 1998
Annual Report which is hereby incorporated by reference.
Item 4. Submission of Matters to a Vote of Shareholders
There were no matters submitted during the fourth quarter of the
year ended September 30, 1998 to a vote of shareholders,
through the solicitation of proxies or otherwise.
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's common stock is listed on the Nasdaq National
Market and as of September 30, 1998, there were approximately
1,900 holders of record.
Item 6. Selected Financial Data
Information with respect to this matter 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.
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Management's Discussion and Analysis of Financial Condition and
Results of Operations is set forth in the "Financial Summary and
Analysis" on Pages 15 through 20 of the registrant's 1998
Annual Report and is hereby incorporated by reference.
Information with respect to forward-looking statements is set
forth under the heading "Cautionary Statement" on Page 35
of the registrant's 1998 Annual Report and is hereby
incorporated by reference.
Item 7.A. Quantitative and Qualitative Disclosures About Market Risk
The Company's long-term debt obligations are sensitive to
changes in interest rates. The Company manages its interest rate
risk 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'd
Item 8. Financial Statements and Supplementary Data
The Company's Consolidated 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, and are incorporated herein 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
The accounting firm of PricewaterhouseCoopers LLP (formerly
Coopers & Lybrand L.L.P.) has been engaged as 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:
John A. Halbrook, age 53, is chairman and chief executive officer of
the Company and was elected to this position in January 1995. He
was elected chief executive officer in November 1993 and served as
president from November 1991 until January 1995. He also served as
chief operating officer from November 1991 until November 1993.
Stephen P. Carter, age 47, is vice president, chief financial
officer and treasurer of the Company and was elected to this
position in January 1997. He was elected vice president and
treasurer in September 1996 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 August 1996.
He has been employed in management positions for the last five
years.
Gary D. Larrew, age 48, was elected vice president of the Company
and manager of Business Development in June 1997. He has been
employed by the Company in management positions for the last five
years.
C. Phillip Turner, age 58, is a vice president of the Company and
general manager of Aircraft Engine Systems. He was elected vice
president in 1988.
Carol J. Manning, age 49, was elected secretary of the Company in
June 1991.
All of the executive officers, unless otherwise noted, were
elected to their present positions at the January 14, 1998 Board of
Directors' meeting to serve until the organizational meeting of the
Board of Directors to be held on January 19, 1999 or until their
respective successors shall have been elected and qualified.
Item 11. Executive Compensation
Information with respect to executive compensation is set forth
under the caption "Executive Compensation" on Pages 9 through 13
of the registrant's proxy statement dated December 11, 1998,
which is made a part hereof.
Item 12. Security Ownership of Certain
Beneficial Owners and Management
Information with respect to security ownership of certain
beneficial owners and management is set forth under the captions
"Security Ownership of Principal Holders and Executive Officers"
and "Election of Directors" on Pages 6 through 8 of the
registrant's proxy statement dated December 11, 1998, which
is made a part hereof.
Item 13. Certain Relationships and Related Transactions
Information with respect to certain relationships and related
transactions is set forth under the caption "Compensation
Committee Interlocks and Insider Participation" on Page 13 of
the registrant's proxy statement dated December 11, 1998,
which is made a part hereof.
Part IV
Item 14.
Exhibits, Financial Statement
Schedule, and Reports on Form 8-K
(a) Index to Consolidated Financial Statements and Schedule
Reference
Form 10-K Annual Report
Annual Report to Shareholders
Page Page
Incorporated by reference to the
registrant's annual report to shareholders
for the fiscal year ended September 30, 1998
and filed as Exhibit 13 to this Form 10-K:
Statements of Consolidated Earnings for
the years ended September 30, 1998,
1997 and 1996 22
Consolidated Balance Sheets
at September 30, 1998 and 1997 23
Statements of Consolidated Shareholders'
Equity for the years ended September 30,
1998, 1997 and 1996 24
Statements of Consolidated Cash Flows
for the years ended September 30,
1998, 1997 and 1996 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 Statements of Subsidiaries
Not Consolidated and Fifty Percent-or-Less-
Owned Persons:
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
Financial Statement Schedule:
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.
With the exception of the consolidated financial statements and the
accountants' report thereon 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 1998 Annual Report to Shareholders of Woodward Governor Company and
incorporated by reference into this Form 10-K Annual Report, the 1998
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 the acquisition of Woodward
FST (formerly Fuel Systems Textron, Inc.) was during the fourth quarter of
the fiscal year ended September 30, 1998. The following financial statements
were filed with the 8-K/A:
(a) Financial Statements of Business Acquired:
FUEL SYSTEMS TEXTRON INC.
1. 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 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.
(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)By-laws, as amended Filed as an exhibit hereto.
(4)Instruments defining the rights Instruments with respect to
of security holders, including long-term debt and the ESOP
indentures debt guarantee are not being
filed as they do not
individually exceed 10
percent of the registrant's
assets. The registrant
agrees 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 forth
in exhibits filed with Form 10-Q
for the quarter ended June 30,
1998 and is hereby incorporated
by reference.
Purchase and sale agreement on
the acquisition of Woodward FST
dated June 15, 1998 is set forth
in exhibits filed with Form 8-K
on June 30, 1998 and is hereby
incorporated by reference.
(13)Annual report to shareholders Except to the extent
for the fiscal year ended specifically incorporated
September 30, 1998 herein by reference, said
report is 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 Filed as an exhibit hereto.
(21)Subsidiaries of the
registrant Filed as an exhibit hereto.
(23)Consents of Independent Accountants Filed as an exhibit hereto.
(27)Financial data schedule Filed as an exhibit hereto.
(99)Additional exhibit - description
of annual report graphs Filed as an exhibit hereto.
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.
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.
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 12/23/98
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:
Signature Title Date
Director
J. Grant Beadle
/s/ Carl J. Dargene Director 12/23/98
Carl J. Dargene
/s/ Lawrence E. Gloyd Director 12/23/98
Lawrence E. Gloyd
Director
Thomas W. Heenan
/s/ Peter Jeffrey Director 12/23/98
J. Peter Jeffrey
/s/ Vern H. Cassens Director 12/23/98
Vern H. Cassens
Director
Michael T. Yonker
NOTE: THE FOLLOWING FINANCIAL STATEMENTS AND REPORT OF INDEPENDENT
ACCOUNTANTS OF THE REGISTRANT'S 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
<CAPTION
ASSETS
Current 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 $ 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
The accompanying notes are an integral part of these financial statements
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:
Research contract $ 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.
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) $(1,486,151)
The accompanying notes are an integral part of these financial instruments.
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 $ 54,366
The accompanying notes are an integral part of these financial instruments.
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-age
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
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
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. 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
Shareholder and Worker Members
Woodward Governor Company
Our report on the consolidated financial statements of Woodward Governor
Company and Subsidiaries has been incorporated by reference in this Form 10-
K from Page 34 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 10 of this Form 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.
PricewaterhouseCoopers LLP
Chicago, Illinois
November 10, 1998
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 $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.