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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[ X ] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Act of 1934
For the fiscal year ended September 30, 1999 Commission file number 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 registant 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 [ ] 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. [ ]
There were 11,274,223 shares of common stock with a par value
of $.00875 per share outstanding at November 30, 1999. The aggregate
market value of the voting stock held by non-affiliates was approximately
$219,445,335 at November 30, 1999 (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 our annual report to shareholders for the fiscal year ended
September 30, 1999 (1999 Annual Report), are incorporated by
reference into Parts I, II and IV of this filing, to the extent indicated.
Portions of our proxy statement dated December 6, 1999, are
incorporated by reference into Part III of this filing, to the extent
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
Woodward Governor Company, established in 1870 and incorporated
in 1902, provides innovative engine controls and fuel delivery
systems designed for a wide variety of applications. Serving
global markets from locations worldwide, we are a leading
producer of fuel control systems and components for aircraft and
industrial engines and turbines. Our products and services are
used 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 components 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 automotive industry.
Information about our operations in 1999 and outlook for the
future, including certain segment information, is included in
"Management Discussion and Analysis of the Results 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 Note R to the Consolidated Financial Statements, on
pages 32 through 33 of our 1999 Annual Report, incorporated here
by reference. Other 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
aircraft 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 broader applications are also sold to
original equipment manufacturers of industrial engines. In 1999,
our largest customers were General Electric Company and United
Technologies Corporation, together accounting for about 50% of
Aircraft Engine Systems billings.
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 customers,
primarily for aftermarket needs. We do not believe Aircraft
Engine Systems sales are subject to significant seasonal
variation.
We 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 enable an accurate
assessment, we do not believe any company holds a dominant
competitive position. Companies compete principally on price,
quality and customer service. In our opinion, our prices are
generally 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 September 30, 2000. Last year, Aircraft Engine Systems
backlog orders were $211 million at November 30, 1998,
approximately 77% 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.
Aircraft Engine Systems 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 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 significant seasonal variation.
We believe Industrial Controls has a significant competitive
position within the 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 original equipment manufacturers. While published
information is not available in sufficient detail to enable an
accurate assessment, we believe we hold a strong position among
the independent manufacturers for small steam turbines, diesel
and gas engines, and gas turbine markets. Companies compete
principally on price, quality and customer service. We also see
increasing demand for products that result in lower environmental
emissions, particularly in gas turbine applications. In our
4
opinion, our prices are generally competitive and our quality,
customer service and technology used in products to reduce
emissions are favorable competitive factors.
Industrial 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 about 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 activities in 1999, $18.5 million in
1998, and $11.3 million in 1997.
We are currently involved in matters of litigation arising from
the normal course of business, including certain environmental
matters. These matters are discussed in Note P to the
Consolidated Financial Statements on page 32 of our 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 not 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, 1999.
Part II
Item 5. Market for the Registrant's
Common Stock and Related Shareholder Matters
Our common stock is listed on the Nasdaq National Market and at
November 30, 1999, there were 1,844 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
Selected financial data is included in the "Summary of
Operations/Eleven-Year Record" on page 36 of our 1999 Annual
Report, incorporated here by reference.
7
Item 7. Management's Discussion and Analysis of
Results of Operations and Financial Condition
"Management Discussion and Analysis of Results of Operations and
Financial Condition" is included on pages 14 through 21 of
our 1999 Annual Report, incorporated here by reference. This
discussion should be read with the consolidated financial
statements on pages 22-33 of our 1999 Annual Report and the
"Cautionary Statement" on page 35 of our 1999 Annual Report, both
incorporated here by reference.
Item 7.A. Quantitative and Qualitative Disclosures About Market Risk
Disclosures about market risk are included under the captions
"Other Matters - Market Risks" on page 20 of our 1999 Annual
Report, incorporated here by reference.
Item 8. Financial Statements and Supplementary Data
Consolidated financial statements and schedules, as listed in
Item 14(a) and excluding the two items listed under the caption
"Other Financial Statement Schedules", are incorporated
here by reference.
Item 9. Changes in and Disagreements with
Accountants on Accounting and Financial Disclosure
There have been no changes in or disagreements on accounting
principles and financial disclosure. PricewaterhouseCoopers LLP,
or its predecessors, have been our independent accountants since
1940.
Part III
Item 10. Directors and Executive Officers of the Registrant
Executive Officers:
John A. Halbrook, age 54 - chairman and chief executive officer
since January 1995; chief executive officer and president
November 1993 through January 1995; president November 1991
through November 1993.
Stephen P. Carter, age 48 - vice president, chief financial
officer, and treasurer since January 1997; vice president and
treasurer September 1996 through January 1997; and assistant
treasurer January 1994 through September 1996.
Gary D. Larrew, age 49 - vice president and manager of business
development since June 1997; in the past five years has been in
management positions.
C. Phillip Turner, age 59 - vice president and general manager of
Aircraft Engine Systems since 1988.
Carol J. Manning, age 50 - secretary since June 1991.
All executive officers were elected to their current positions at
the January 19, 1999 Board of Directors' meeting to serve until
the January 18, 2000 Board of Directors meeting, or until their
successors have been elected.
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 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
Executive compensation is under the caption "Executive
Compensation" on Pages 12 through 14 of our proxy statement
dated December 6, 1999, incorporated here by reference.
Item 12. Security Ownership of Certain
Beneficial Owners and Management
Security ownership of certain beneficial owners and management is
under the captions "Share Ownership of Management" and "Persons
Owning More than Five Percent of Woodward Stock" on Pages 9
through 10 of our proxy statement dated December 6, 1999,
incorporated here by reference.
Item 13. Certain Relationships and Related Transactions
Information regarding certain relationships and related
transactions is under the caption "Compensation Committee
Interlocks and Insider Participation" on Page 8 of our proxy
statement dated December 6, 1999, incorporated here by
reference.
9
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Index to Consolidated Financial Statements and Schedules
Reference
Form 10-K Annual Report
Annual Report to Shareholders
Page Page
Annual report to shareholder for the
fiscal year ended September 30, 1999
filed as Exhibit 13 to this Form 10-K
and incorporated by reference:
Statements of Consolidated Earnings
for the years ended September 30,
1999, 1998, and 1997 22
Consolidated Balance Sheets at
September 30, 1999 and 1998 23
Statements of Consolidated Share-
holders' Equity for the years ended
September 30, 1999, 1998, and 1997 24
Statements of Consolidated Cash
Flows for the years ended September
30, 1999, 1998, and 1997 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
Separate financial statements of
subsidiaries not consolidated and
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 Schedules:
Report of Independent Accountants S-12
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.
With the exception of the consolidated financial statements and
the reports 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 1999 Annual Report to
Shareholders of Woodward Governor Company and incorporated by
reference into this Form 10-K Annual Report, the 1999 Annual
Report to Shareholders is not to be deemed "filed" as part of
this report.
(b) Reports Filed on Form 8-K During the Fourth Quarter of the
Fiscal Year Ended September 30, 1999. None
(c) Exhibits Filed as Part of This Report
(3)(i) Certificaterticles of
Incorporation Filed as an exhibit.
(3)(ii) By-laws, amended Filed as an exhibit.
(4) Instruments defining Instruments with respect
the rights of security to long-term debt and the ESOP
holders, including debt guarantee are not being
indentures filed as they do not individually
exceed 10 percent of our
assets. We agree to furnish a
copy of each instrument to the
Commission upon request.
(10) Material contracts A
$250,000,000 credit agreement
dated June 15, 1998 is
included in exhibits filed
with Form 10-Q for the quarter
ended June 30, 1998,
incorporated here by
reference.
Purchase and sale
agreement on the acquisition
of Wooward FST dated June 15,
1998 is included in exhibits
filled with Form 8-K on June
30, 1998, incorporated here by
reference.
11
(11) Statement re computation of Filed as an exhibit hereto.
per share earnings
(13) Annual report to shareholders Except specifically incorporated
for the fiscal year by reference, report is
September 30, 1999 furnished solely for
the information of the
Commission and is not deemed
"filed" as part of this
report.
(21) Subsidiaries Filed as an exhibit.
(23) Consents of Independent
Accountants Filed as an exhibit.
(27) Financial data schedule Filed as an exhibit.
(99) Additional exhibit -
description of annual
report graphs Filed as an 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 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, 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.
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: 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 Woodward
Governor Company on the dates indicated:
Signature Title Date
/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 December 21, 1999
Carl J. Dargene
/s/ Lawrence E. Gloyd Director December 22, 1999
Lawrence E. Gloyd
/s/ Thomas W. Heenan Director December 20, 1999
Thomas W. Heenan
_____________________ Director
J. Peter Jeffrey
/s/ Rodney O' Neal Director December 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 OUR 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
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 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) $(1,486,151)
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 $(10,486,151)
Adjustments to reconcile net loss to net
cash used in operating activities:
Changes in assets and liabilities:
Inventory (233,977)
Prepaid expenses (358,482)
Payable to members 405,063
Accounts payable 1,852,014
Accrued liabilities 433,261
Net cash used in operating activities (8,388,272)
Cash flows from investing activities:
Acquisition of property and equipment (557,362)
Cash flows from financing activities:
Members' capital contributions 9,000,000
Net increase in cash and cash equivalents 54,366
Cash and cash equivalents, beginning of period _
Cash and cash equivalents, end of period$ 54,366
The accompanying notes are an integral part of these financial 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 percentage
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 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
To the Board of Directors and Shareholders
Woodward Governor Company
Our audits 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 (which
report and consolidated financial statements are incorporated by reference
in this Annual Report on Form 10-K) also included an audit of the financial
statement schedule listed in Item 14(a) of this Form 10-K. In our
opinion, the financial statement schedule presents fairly, in all material
respects, the information set forth therein when read in conjunction with
the related consolidated financial statements.
PricewaterhouseCoopers LLP
Chicago, Illinois
November 9, 1999
S-12
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
S-13