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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, 1997 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, 1997, 11,449,875 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 $265,598,000 as of November 30, 1997(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, 1997 (1997 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 4, 1997,
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.
There have been no material changes in the mode of
conducting the business during the last five years.
(b)Industry Segments
Information with respect to business segments is set forth
in Note N to the consolidated financial statements on Page
31 of the registrant's 1997 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 N to the consolidated financial
statements on Page 31 of the registrant's 1997 Annual
Report and is hereby incorporated by reference.
(ii) In October 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 B of the consolidated financial
statements included in the registrant's 1997 Annual
Report, and incorporated by reference as noted in Item
14. Pursuant to Rule 3-09 of Regulation S-X, separate
financial statements of the joint venture are included
herein as noted in Item 14. See also pages 13 through
15 of the "Financial Summary and Analysis" in the
registrant's 1997 Annual Report with respect to
forward-looking statements and a summary of the joint
venture's achievements during its first year of
operation.
While the joint venture is expected to have initial
market sales in fiscal 1998, additional funding of on
-going product development will be necessary. The
Company remains committed to the joint venture and
will assess future capital funding needs as necessary.
Despite optimism about the unique technology and
opportunities the joint venture brings to the
marketplace, there can be no assurance the joint
venture will be successful in marketing and producing
commercial quantities of this new emission control
system. Furthermore, there can be no assurance the
system will be accepted by the marketplace and be
economically attractive. The success of this joint
venture may also be partially dependent upon certain
competitive and economic factors, as well as the
regulatory environment.
(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.
(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 17% of consolidated sales during the
fiscal year ended September 30, 1997. Seven other
customers in total accounted for approximately 17% of
consolidated sales in the fiscal year ended September
30, 1997. 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, 1997 totaled
$152,034,000, a 30% decline from $218,020,000 as of
September 30, 1996. This decline was primarily caused
by changes in customers' purchasing practices and is
not necessarily an indicator of future sales levels,
as noted above. Of the September 30, 1997 total,
$124,673,000 is currently scheduled for delivery in
fiscal year 1998.
(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
has declined from approximately 10 percent of total
company shipments in fiscal 1996 to 9.3 percent in
fiscal 1997. Military shipments are principally made
by the Company's Aircraft Controls group.
(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 24 of the registrant's 1997 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.
See also (c)(ii) of this section for information
relative to development efforts by the Company's
GENXON(tm) Power Systems, LLC joint venture.
(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 35 of the
registrant's 1997 Annual Report and is hereby
incorporated by reference. As of November 30, 1997,
3,271 members were employed by the Company.
(d) Company Operations
Information with respect to operations in the United
States and other countries is set forth in Note N to the
consolidated financial statements on Page 31 of the
registrant's 1997 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.
Executive Officers of the Registrant
John A. Halbrook, age 52, 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 46, 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.
Charles F. Kovac, age 41, 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 47, 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 57, is a vice president of the Company and
general manager of the Aircraft Controls group. He was elected vice
president in 1988.
Carol J. Manning, age 48, 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 8, 1997 Board of Directors'
meeting to serve until the organizational meeting of the Board of
Directors to be held on January 14, 1998 or until their respective
successors shall have been elected and qualified.
Item 2. Properties
The registrant owns five plants located in the United States.
Aircraft controls and related components are manufactured in
Rockford and Rockton, Illinois plants and the Buffalo, New
York plant. Activities related to overhaul and repair of
aircraft controls 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 also has eleven facilities located overseas,
that are predominantly utilized for manufacturing and
servicing of industrial control systems, components and
related products. Overseas manufacturing 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 Sydney,
Australia; Kobe, Japan; Campinas, Sao Paulo, Brazil;
Singapore; and Ballabgarh, Haryana, India. In addition, the
Company plans to lease a facility in Prestwick, Scotland that
will combine European aircraft product support services
previously maintained in the Hoofddorp, The Netherlands and
Reading, England facilities. 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 L to the consol-
idated financial statements on page 30 of the registrant's
1997 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, 1997 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 34 and 35 of the registrant's
1997 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, 1997, there were approximately
2,000 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 35 of the
registrant's 1997 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 13 through 18 of the
registrant's 1997 Annual Report and is hereby incorporated by
reference.
Information with respect to forward-looking statements is set
forth in the Introduction section of the "Financial Summary and
and Analysis" on page 13 of the registrant's 1997 Annual
Report and is hereby incorporated by reference.
Item 8. Financial Statements and Supplementary Data
The Company's Consolidated Financial Statements, the Notes thereto and the
Report of Independent Accountants, as required hereunder, are set forth
on Pages 20 through 34, inclusive, of the 1997 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.
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, is further set forth in Item 14 of
this document and is hereby incorporated by reference.
Item 9. Changes in and Disagreements with
Accountants on Accounting and Financial Disclosure
The accounting firm of 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 appears in Part I of
this document, is set forth in the registrant's proxy
statement dated December 4, 1997, which was filed with the
Securities and Exchange Commission within 120 days following
the end of the registrant's fiscal year ended September 30,
1997, and is made a part hereof.
Item 11. Executive Compensation
Information with respect to executive compensation is set
forth under the caption "Executive Compensation" on Pages 9
through 12 of the registrant's proxy statement dated
December 4, 1997, 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
4, 1997, 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 "Compen-
sation Committee Interlocks and Insider Participation" on
Page 12 of the registrant's proxy statement dated December
4, 1997, 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, 1997
and filed as Exhibit 13 to this Form 10-K:
Statements of Consolidated Earnings for
the years ended September 30, 1997,
1996 and 1995 20
Consolidated Balance Sheets
at September 30, 1997 and 1996 21
Statements of Consolidated Shareholders'
Equity for the years ended September 30,
1997, 1996 and 1995 22
Statements of Consolidated Cash Flows
for the years ended September 30,
1997, 1996 and 1995 23
Notes to Consolidated Financial Statements 24-31
Report of Independent Accountants 33
Selected Quarterly Financial Data 34
Included herein:
Separate Financial Statement of Subsidiaries
Not Consolidated and Fifty Percent-or-Less-
Owned Persons:
GENXON(tm) 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
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.
Item 14 (Con't)
Exhibits, Financial Statement
Schedule, and Reports on Form 8-K (continued)
(b)There were no reports filed on Form 8-K during the fourth quarter
of the fiscal year ended September 30, 1997.
(c)The following exhibits are filed as part of this report:
(3) Articles of incorporation Articles of incorporation are
and by-laws set forth in the exhibits
filed with Form 10-K for the
fiscal year ended September
30, 1977 and are hereby
incorporated by reference.
Two amendments to the
Articles 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
Articles 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 Articles
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 Articles
of incorporation effective
January 23, 1997 is filed
herewith.
By-laws as amended through
September 30, 1992 together
with three amendments to the
by-laws effective November
16, 1993 are set forth in
exhibits filed with Form 10-K
for the fiscal year ended
September 30, 1993 and are
hereby incorporated by
reference.
Item 14 (Con't)
Exhibits, Financial Statement
Schedule, and Reports on Form 8-K (continued)
(3) Articles of incorporation One amendment to the by-laws
and by-laws (continued) effective June 22, 1994 is
set forth in exhibits filed
with Form 10-K for the fiscal
year ended September 30, 1994
and is hereby incorporated by
reference.
Three amendments to the by-
laws effective January 11,
1995, March 29, 1995 and June
28, 1995 are set forth in
exhibits filed with Form 10-K
for the fiscal year ended
September 30, 1995 and are
hereby incorporated by
reference.
Two amendments to the by-laws
effective January 15, 1996 and
January 23, 1996 are set forth
in exhibits filed with Form
10-K for the fiscal year ended
September 30, 1996 and are
hereby incorporated by
reference.
One amendment to the by-laws
effective June 25, 1997 is
filed herewith.
(4) Instruments defining the Instruments with respect to
rights of security holders, long-term debt and the ESOP
including 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.
(11) Statement re computation Filed as an exhibit hereto.
of per share earnings
(13) Annual report to Except to the extent
shareholders for the specifically incorporated
fiscal year ended herein by reference, said
September 30, 1997 report is furnished solely
for the information of the
Commission and is not deemed
"filed" as part of this
report.
(21) Subsidiaries of the Filed as an exhibit hereto.
registrant
(23) Consent of Independent Filed as an exhibit hereto.
Accountants
(27) Financial data schedule Filed as an exhibit hereto.
(99) Additional exhibit - description Filed as an exhibit hereto.
of annual report graphs
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 accord-
ance 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
Coopers & Lybrand L.L.P., independent accountants, as indicated in
their report in the annual report to shareholders for the fiscal year
ended September 30, 1997.
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
John A. Halbrook the Board and Chief
Executive Officer
/s/ Stephen P. Carter Vice President, Chief
Stephen P. Carter Financial Officer and
Treasurer
Date 12/18/97
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
/s/ J. Grant Beadle Director
J. Grant Beadle
/s/ Carl J. Dargene Director December 18, 1997
Carl J. Dargene
/s/ Lawrence E. Gloyd Director December 18, 1997
Lawrence E. Gloyd
/s/ Thomas W. Heenan Director
Thomas W. Heenan
/s/ J. Peter Jeffrey Director
J. Peter Jeffrey
/s/ Vern H. Cassens Director December 18, 1997
Vern H. Cassens
/s/ Michael T. Yonker Director December 18, 1997
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 CONSOLI-
DATED, 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 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.
Coopers & Lybrand L.L.P.
San Jose, California
October 17, 1997
GENXON POWER SYSTEMS, L.L.C.
(a Delaware limited liability company)
BALANCE SHEET, September 30, 1997
ASSETS
Current assests:
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.
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
statements.
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
statements.
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
statements.
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 Combusions
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.
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.
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.
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 Informa-
tion. 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.
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.
REPORT OF INDEPENDENT ACCOUNTANTS
Shareholders 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 33 of the 1997 Annual Report to Share-
holders and Worker Members of Woodward Governor Company and Subsid-
iaries. In connection with our audits of such financial statements,
we have also audited the related financial statement schedule listed
in the index on Page 11 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.
COOPERS & LYBRAND L.L.P.
Chicago, Illinois
November 8, 1997
WOODWARD GOVERNOR COMPANY AND SUBSIDIARIES
SCHEDULE II -VALUATION AND QUALIFYING ACCOUNTS
for the years ended September 30, 1997, 1996 and 1995
(In thousands of dollars)
Col. A Col. B Col. C Col. D Col. E
Additions
Balance Charged to Balance
Beginning Costs and Other at End
DESCRIPTION of Year Expenses Accounts Deduct. of Year
1997:
Allowance for
Doubtful accounts $2,755 $539 $136 $673 $2,757
1996:
Allowance for
Doubtful accounts $4,605 $937 $50 $2,837 $2,755
1995:
Allowance for
Doubtful accounts $3,021 $2,192 $32 $640 $4,605
NOTE:
(A) Represents accounts written off during the year and also
overseas currency translation adjustments that increased the
deduction from reserves by $134 in 1997 and $99 in 1996 and
decreased the deduction from reserves by $80 in 1995.
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.