UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10 – K
For the Fiscal Year Ended September 30, 2004
Commission File No. 0-3821
GENCOR INDUSTRIES, INC.
I.R.S. Employer
Identification
5201 North Orange Blossom Trail
Orlando, Florida 32810
Registrant’s Telephone Number, Including Area Code:
(407) 290-6000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None.
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock ($.10 Par Value)
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 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. x Yes ¨ No
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). ¨ Yes x No
The aggregate market value of the common equity held by non-affiliates computed by reference to the price at which the common equity was last sold as of the last business day of the most recently completed second fiscal quarter was $34,141,302.
Indicate the number of shares outstanding of each of the Registrant’s classes of Common Stock, as of the latest practicable date: 7,026,070 shares of Common Stock ($.10 par value) and 1,786,398 shares of Class B Stock ($.10 par value) as of December 14, 2004.
List hereunder the following documents if incorporated by reference and the part of the Form 10-K into which the document is incorporated.
PART I
ITEM 1. BUSINESS
General
Gencor Industries, Inc. and its subsidiaries (the “Company”) is a leading manufacturer of heavy machinery used in the production of highway construction materials, synthetic fuels, and environmental control equipment. The Company’s products are manufactured in two facilities in the United States and one facility located in the United Kingdom. The Company’s products are sold through a combination of Company sales representatives and independent dealers and agents located throughout the world.
The Company designs and manufactures machinery and related equipment used primarily for the production of asphalt and highway construction materials. The Company’s principal core products include asphalt plants, combustion systems and fluid heat transfer systems. Gencor Industries, Inc.’s technical and design capabilities, environmentally friendly process technology and wide range of products have enabled it to become a leading producer of equipment worldwide. The Company believes it has the largest installed base of asphalt production plants in the United States.
Because the Company’s products are sold primarily to the highway construction industry, the business is seasonal in nature. The majority of orders for the Company’s products are received between November and February, with a significant volume of shipments occurring prior to May. The principal factors driving demand for the Company’s products are the level of government funding for domestic highway construction and repair, infrastructure development in emerging economies, the need for spare parts and a trend towards larger plants resulting from asphalt contractor and plant consolidation.
In 1968, the foundation of the Company was formed by the merger of Mechtron Corporation with General Combustion, Inc. and Genco Manufacturing, Inc. The new entity reincorporated in Delaware in 1969 and adopted the name Mechtron International Corporation in 1970. In 1985, the Company began a series of acquisitions into related fields starting with the Beverley Group Ltd. in the United Kingdom. Hy-Way Heat Company, Inc. and the Bituma Group were acquired in 1986. In 1987, the Company changed its name to Gencor Industries, Inc. and acquired the Davis Line Inc. (Hetherington and Berner) and its subsidiaries in 1988.
In January 1998, the Company finalized agreements with Carbontronics, LLC (“CLLC”) pursuant to which the Company sold, manufactured, and installed four synthetic fuel production plants. These plants were sold by CLLC to a limited partnership (“LP”), Carbontronics Synfuel Investors, LLC, which is now the owner of the plants. The Company was paid in full for these plants in 1998. In addition to payment for the plants, the Company received a partnership interest of 45% in CLLC. Also, the Company subsequently received a 25% partnership position in the General Partner (“GP”) of the LP and in Carbontronics II, LLC (“C2LLC”). The remaining interests in the GP, CLLC, and C2LLC are owned by other, unrelated entities. An administrative member of the GP, not the Company, is responsible for administration of the day-to-day affairs of the GP and LP. The Company is entitled to appoint only one of the three members of the GP Management Committee and has 1/3 of the voting rights thereof. As a part of the partnership positions in CLLC, C2LLC, and the GP, the Company has the potential for income subject to the performance of the partnership. Future benefits realizable by the Company on the synthetic fuel production plants depend on whether the production from these plants will continue to qualify for tax credits under Section 29 of the Internal Revenue Code and the ability to economically produce and successfully market synthetic fuel produced by the plants.
On August 8, 2003, Gencor Industries, Inc. (“Gencor”) was notified by its investee General Partner that the income tax returns for its synthetic fuel producing partnership are being audited. As previously reported, the Limited Partners may declare a “Tax Event” and suspend further distributions indefinitely. Gencor was informed that the Limited Partners have declared a “Tax Event” and therefore future distributions had ceased.
On December 12, 2003, Gencor was notified by the General Partner that the IRS had issued rulings dated December 10, 2003 to the producing partnership concluding that, if the partnership adheres to the specified production methods and chemistry, the partnership will be entitled to the section 29 credit for the production of qualified fuel that is sold to unrelated persons.
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Although the IRS now advises that it is satisfied with the chemical testing procedures, it is proceeding with a general IRS audit. Therefore the previously imposed Tax Event continues and the Limited Partners are not allowing revenue to be distributed to Gencor until satisfactory conclusion of the audit. The Company records the income as the distributions are received and does not project or forecast amounts, if any, or timing of future distributions.
Products
Asphalt Plants. The Company manufactures and produces hot-mix asphalt plants used in the production of asphalt paving materials. The Company also manufactures related asphalt plant equipment including hot mix storage silos, fabric filtration systems, cold feed bins and other plant components. The Company H&B (Hetherington and Berner) business built the first asphalt batch plant in 1894 and is the world’s oldest asphalt plant line. The Company’s subsidiaries, Bituma Corporation, formerly known as Boeing Construction Company, developed the continuous process for asphalt production, which has been adopted as the United States industry’s standard technology, as well as patented the counterflow technology, several adaptations of which have become the new standard, which recaptures and burns emissions and vapors, resulting in a cleaner and more efficient process. The Company manufactures a very comprehensive range of fully mobile batch plants, as well as mobile shredders and trommel screens.
Combustion Systems and Industrial Incinerators. The Company manufactures combustion systems, which are large burners that can transform most solid, liquid or gaseous fuels into usable energy, or burn multiple fuels, alternately or simultaneously. Through its subsidiary General Combustion, the Company has been a significant source of combustion systems for the asphalt and aggregate drying industries since the 1950’s. The Company also manufactures soil decontamination machinery, as well as combustion systems for rotary dryers, kilns, fume and liquid incinerators, boilers and tank heaters. The Company believes maintenance and fuel costs are lower for its burners because of their superior design.
Fluid Heat Transfer Systems. The Company’s General Combustion subsidiaries in the USA and U.K. manufacture the Hy-Way heat and Beverley lines of thermal fluid heat transfer systems and specialty storage tanks for a wide array of industry uses. Thermal fluid heat transfer systems are similar to boilers, but use high temperature oil instead of water. Thermal fluid heaters have been replacing steam pressure boilers as the best method of heat transfer for storage, heating and pumping viscous materials (i.e., asphalt, chemicals, heavy oils, etc.) in many industrial and petrochemical applications worldwide. The Company believes the high efficiency design of its thermal fluid heaters can outperform competitive units in many types of process applications. Heaters are available for vertical, horizontal and underground tanks in steel, stainless steel, and other materials designed to meet large or small specific job requirements.
Product Engineering and Development
The Company is engaged in product engineering and development efforts to expand its product lines and to further develop more energy efficient and environmentally compatible systems.
Significant developments include the use of cost effective, non-fossil fuels, biomass (bagasse, municipal solid waste, sludge and wood waste), refuse-derived fuel, coal and coal mixtures, the economical recycling of old asphalt and new designs of environmentally compatible asphalt plants. Product engineering and development activities are directed toward more efficient methods of producing asphalt and lower cost fluid heat transfer systems. In addition, efforts are also focused on developing combustion systems that operate at higher temperatures and offer a higher level of environmental compatibility.
Sources of Supply and Manufacturing
Substantially all products sold by the Company and its subsidiaries are manufactured or assembled by the Company, except for procured raw materials and hardware. The Company purchases a large quantity of steel, raw materials and hardware used to manufacture its products from hundreds of suppliers and is not dependent on any single supplier. Periodically, the Company reviews the cost effectiveness of internal manufacturing versus outsourcing its product lines to independent third parties and currently believes it has the internal capability to produce the highest quality product at the lowest cost. This, however, may change from time to time.
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Seasonality
The Company is concentrated in the asphalt-related business and subject to a seasonal slow-down during the third and fourth quarters of the calendar year. Traditionally, the Company’s customers do not purchase new equipment for shipment during the summer and fall months to avoid disrupting their peak season for highway construction and repair work. This slow-down often results in lower reported sales and earnings and/or losses during the first and fourth quarters of the Company’s fiscal year.
Competition
The markets for the Company’s products are highly competitive. Within a given product line, the industry remains fairly concentrated, with typically a small number of companies competing for the majority of a product line’s industry sales. The principal competitive factors include technology and overall product design, dependability and reliability of performance, brand recognition, pricing and after-the-sale customer support. Management believes its ability to compete depends upon its continual efforts to improve product performance and dependability, competitively price its products, and provide the best customer support and service in the industry.
Sales and Marketing
The Company’s products and services have been marketed internationally through a combination of Company-employed sales representatives and independent dealers and agents. Each of the Company’s business groups has been responsible for marketing its products and services with support from the corporate sales and marketing department.
Sales Backlog
The Company’s manufacturing processes allow for a relatively short turnaround from the order date to shipment date of usually less than ninety (90) days. Therefore, the size of the Company’s backlog should not be viewed as an indicator of the Company’s annualized revenues or future financial results. The Company’s backlog was approximately $13 million and $12 million as of December 1, 2004 and December 18, 2003, respectively.
Licenses, Patents and Trademarks
The Company holds numerous patents covering technology and applications related to various products, equipment and systems, and numerous trademarks and trade names registered with the U.S. Patent and Trademark Office and in various foreign countries. In general, the Company depends upon technological capabilities, manufacturing quality control and application know-how, rather than patents or other proprietary rights in the conduct of its business. The Company believes the expiration of any one of these patents, or a group of related patents, would not have a material adverse effect on the overall operations of the Company.
Government Regulations
The Company believes its design and manufacturing processes meet all industry and governmental agency standards that may apply to its entire line of products, including all domestic and foreign environmental, structural, electrical and safety codes. The Company’s products are designed and manufactured to comply with Environmental Protection Agency regulations. Certain state and local regulatory authorities have strong environmental impact regulations. While the Company believes that such regulations have helped, rather than restricted its marketing efforts and sales results, there is no assurance that changes to federal, state, local, or foreign laws and regulations will not have a material adverse effect on the Company’s products and earnings in the future.
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Environmental Matters
The Company is subject to various federal, state, local and foreign laws and regulations relating to the protection of the environment. The Company believes it is in material compliance with all applicable environmental laws and regulations. The Company does not expect any material impact on future operating costs as a result of compliance with currently enacted environmental regulations.
The Company has conducted environmental assessments consistent with recognized standards of due diligence on properties and businesses which it acquired. These assessments had not identified contamination resulting from acquired properties that would be reasonably likely to result in a material adverse effect on the Company’s business, results of operations, or financial condition.
Employees
As of September 30, 2004, the Company employed a total of 299 employees; there were 289 employees in the domestic U.S. operations and 10 employees in the U.K. operations. The Company has collective bargaining agreements covering production and maintenance employees at its Marquette, Iowa facilities. The remaining domestic employees are not represented by a labor union or collective bargaining agreement. The Company believes that its relationship with its employees is good.
ITEM 2. PROPERTIES
The following table lists the properties owned or leased by the Company as of September 30, 2004:
Location
Principal Function
Billingshurst, West Sussex England (1)
Leicester, England (1)
Marquette, Iowa (1)
Orlando, Florida (1)
Denver, Colorado
As of September 30, 2004, the Company still owns offices and manufacturing facility in Araraquara, Brazil. This facility is approximately 295,000 square feet of space on 29.2 acres. This facility is part of the discontinued operations. The Leicester, England facility is included in Assets held for sale as of September 30, 2004.
ITEM 3. LEGAL PROCEEDINGS
The Company has various litigation and claims pending as of the date of this Form 10-K which have occurred in the ordinary course of business, and which may be covered in whole or in part by insurance. Management has reviewed all litigation matters arising in the ordinary course of business and, upon advice of counsel, has made provisions, not deemed material, for any estimable losses and expenses of litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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PART II
ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Company’s stock is traded over the counter on the Pink Sheets. Following are the high and low per share closing bid prices for our common stock for the periods indicated:
2004
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2003
As of December 14, 2004, there were 377 holders of Common Stock of record and 7 holders of Class B Stock of record.
Dividend Policy
The Company has not paid any dividends during the last two fiscal years and there is no intention to pay cash dividends in the foreseeable future.
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EQUITY COMPENSATION PLAN
In the following table is information about our common stock that may be issued upon exercise of options, warrants and rights under all of our existing equity compensation plans and arrangements as of September 30, 2004, including the 1997 Stock Option Plan and the 1992 Stock Option Plan.
Plan Category
Number ofSecurities to beissued upon
exercise ofoutstanding options,warrants and rights
Weighted-averageexercise price ofoutstanding
options, warrantsand rights
Number of Securitiesremaining available for futureissuance under equitycompensation plans(excluding securities
reflected in second column)
Equity compensation plans approved by security holders
Equity compensation plans not approved by security holders
Total
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ITEM 6. SELECTED FINANCIAL DATA
Net revenue from continuing operations
Operating income (loss) from continuing operations
Income (loss) from continuing operations
Discontinued operations: (1)
Operating income (loss)
Gain on sale of businesses
Extraordinary item- debt extinguishment
Net income (loss)
Per share data:
Basic:
Extraordinary item - debt extinguishment
Diluted:
Cash dividends declared per common share
Selected balance sheet data:
Current assets
Current liabilities
Total assets
Long-term debt, less current maturities
Shareholders’ equity (deficit)
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
“Forward-Looking” Information
This Form 10-K contains certain “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which represent the Company’s expectations and beliefs, including, but not limited to, statements concerning gross margins, sales of the Company’s products and future financing plans, income from investees and litigation. These statements by their nature involve substantial risks and uncertainties, certain of which are beyond the Company’s control. Actual results may differ materially depending on a variety of important factors, including the financial condition of the Company’s customers, changes in the economic and competitive environments, whether or not the Company receives income from its investees, and demand for the Company’s products.
Results of Operations
Year ended September 30, 2004 compared with the year ended September 30, 2003
Net sales for the years ended September 30, 2004 and 2003 were $54.1 million and $55.9 million, respectively. Domestic sales during this period for 2004 and 2003 were $52.3 million and $43.1 million, respectively. The decline in sales is related to reduced foreign sales primarily due to the increased competition and consolidation of a portion of its UK operation in the US to better control costs and margins.
Gross margins as a percent of net sales were 29.4% in 2004 and 24.1% of sales for 2003. In 2003, foreign margins were only 14% and therefore a portion of the UK operations was consolidated into the US operation. Domestic margins were negatively affected by $.6 million in 2004 and $1.5 million in 2003 due to an increase in the LIFO reserve.
Product engineering and development costs increased 12% during 2004 due to additional engineering staff. Selling and administrative expenses decreased $3.1 million (24%) during 2004 as over $3.6 million of costs in 2003 were eliminated in the consolidation of certain UK operations into the US. Selling and administrative expenses includes $270 of costs related to the tender offer withdrawn in December 2003.
Operating (loss) was ($1,173) in 2003 as a result of foreign operating losses of $2.8 million and $1.5 million of increases in the domestic LIFO inventory reserves. Operating income increased to $4.2 million and 8% of net sales for 2004, as a result of increased domestic business and the consolidation of certain foreign operations.
Interest expense during 2004 is less than 2003 due to reduced average borrowings and a lower interest rate. The debt was refinanced on August 1, 2003 with interest at the prime rate.
Income from investees consisted of cash distributions of $13,428 in 2003. There were no distributions from investments in Carbontronics LLC, Carbontronics II LLC, and Carbontronics Fuels LLC, in fiscal 2004. The investments are currently being examined by the Internal Revenue Service. Any distributions have been suspended subject to the results of the IRS examination. Future benefits realizable by the Company on the synthetic fuel production plants depend on whether the production from these plants will continue to qualify for tax credits under Section 29 of the Internal Revenue Code and the ability to economically produce and successfully market synthetic fuel produced by the plants.
Income taxes were 37% of pre-tax income for 2004 and 34% for 2003. The effective rate was higher in 2004 primarily due to state income taxes.
Year ended September 30, 2003 compared with the year ended September 30, 2002
Net sales for the years ended September 30, 2003, and 2002, were $55.9 million and $67.5 million, respectively. Domestic sales during this period for 2003 and 2002 were $43.1 million and $41.2 million, respectively. The decline related to reduced foreign sales primarily due to the stalling of Asian sales in the spring due to the SARS epidemic and lower order intake. Increased competition resulted in fewer foreign orders. The Company consolidated a portion of its UK operation in the US to better control costs and margins.
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Gross margins as a percent of net sales were 24.1% in 2003 and 24.5% of sales for 2002. Foreign margins were only 14% and therefore a portion of the UK operations was consolidated into the US operation. Domestic margins were negatively affected by $1.5 million increase in the LIFO reserve.
Product engineering and development costs remained constant during 2003. Selling and administrative expenses increased $414 (3%) during 2003. Restructuring costs, which consist of legal and professional fees relating to the reorganization in 2002, were $302 for fiscal 2002.
Operating income (loss) was ($1,173) in 2003 versus $2,059 in 2002. This was a result of foreign operating losses of $2.8 million and $1.5 million of increases in the domestic LIFO inventory reserves.
Interest expense during 2003 is less than 2002 due to reduced borrowings and a lower interest rate. The debt was refinanced on August 1, 2003 with interest at the prime rate.
Income from investees includes cash distributions of $13,428 received during the first three fiscal quarters of 2003. There were distributions of $1,526 in fiscal 2002. Future benefits realizable by the Company on the synthetic fuel production plants depend on whether the production from these plants will continue to qualify for tax credits under Section 29 of the Internal Revenue Code and the ability to economically produce and successfully market synthetic fuel produced by the plants.
Income taxes were 34% of pre-tax income for 2003. Net income for 2003 was $7,260 from continuing operations, while 2002 included $1,829 from continuing operations and $241 from discontinued operations.
Liquidity and Capital Resources
On August 1, 2003, the Company entered into a Revolving Credit and Security Agreement with PNC Bank, N.A. The Agreement established a three year revolving $20 million credit facility. The facility provides for advances based on accounts receivable, inventory and real estate. The facility includes a $2 million limit on letters of credit. At September 30, 2004, the Company had $.3 million of letters of credit outstanding. The interest rate at September 30, 2004, is at prime (4.75%) and subject to change based upon the Fixed Charge Coverage Ratio. The Company is required to maintain a Fixed Charge Coverage Ratio of 1.1:1. There are no required repayments as long as there are no defaults and there is adequate eligible collateral. Substantially all of Company’s assets are pledged as security under the Agreement. The borrowings under the previous credit agreements were paid in full with cash and proceeds from this new Revolving Credit and Security Agreement.
Critical Accounting Policies, Estimates and Assumptions
The Company believes the following discussion addresses the Company’s most critical accounting policies, which are those that are most important to the portrayal of the Company’s financial condition and results of operations and require management’s most difficult, subjective, or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Accounting policies, in addition to the critical accounting policies referenced below, are presented in Note 1 to the Company’s consolidated financial statements, “Accounting Policies.”
Estimates and Assumptions
In preparing the consolidated financial statements, the Company uses certain estimates and assumptions that may affect reported amounts and disclosures. Estimates and assumptions are used, among other places, when accounting for certain revenue (e.g., contract accounting), expense, and asset and liability valuations. Management believes that the estimates and assumptions made in preparing the consolidated financial statements are reasonable, but are inherently uncertain and unpredictable. Assumptions may be incomplete or inaccurate and unanticipated events may occur. The Company is subject to risks and uncertainties that may cause actual results to differ from estimated results.
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Revenues
Revenues from contracts for the design and manufacture of certain custom equipment are recognized under the percentage-of-completion method. Revenues from all other sales are recorded as the products are shipped or service is performed.
The percentage-of-completion method of accounting for long term contracts recognizes revenue in proportion to actual labor costs incurred as compared with total estimated labor costs expected to be incurred during the entire contract. All selling, general and administrative expenses are charged to operations as incurred. Provision is made for any anticipated contract losses in the period that the loss becomes evident.
Investment in Unconsolidated Investees
As of September 30, 2004, 2003 and 2002, the Company owns a 45% interest in Carbontronics LLC and a 25% interest in Carbontronics Fuels LLC and Carbontronics II LLC. These interests were obtained as part of contracts to build four synthetic fuel production plants during 1998. The Company has no basis in these equity investments or requirement to provide future funding. Any income arising from these investments is dependent upon tax credits (adjusted for operating losses at the fuel plants) being generated as a result of synthetic fuel production, which will be recorded as received. The Company received no distributions in 2004 and distributions of $13,428 and $1,526, during 2003 and 2002 respectively. Any distributions by the investments have been suspended pending the results of the current IRS examination of the partnerships.
Inflation
The overall effects of inflation on the Company’s business during the periods discussed have not been significant. The Company monitors the prices it charges for its products and services on an ongoing basis and believes that it will be able to adjust those prices to take into account future changes in the rate of inflation.
Contractual Obligations
The following table summarizes the Company’s outstanding borrowings and long-term contractual obligations at September 30, 2004:
Long-term debt
Operating leases
The long-term debt facility matures in 2006 and is expected to be renewed or refinanced at that time. The Company also has $300 of letters of credit outstanding. The letters of credit are for one year and have been renewed annually.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company operates manufacturing facilities and sales offices principally located in the United States and the United Kingdom. The Company is subject to business risks inherent in non-U.S. activities, including political and economic uncertainty, import and export limitations, and market risk related to changes in interest rates and foreign currency exchange rates. The Company’s principal currency exposure against the U.S. dollar is the British pound. Periodically, the Company will use derivative financial instruments consisting primarily of interest rate hedge agreements to manage exposures to interest rate changes. The Company’s objective in managing its exposure to changes in interest rates on its variable rate debt is to limit their impact on earnings and cash flow and reduce its overall borrowing costs.
At September 30, 2004, the Company had approximately $5.7 million of debt outstanding. Under the Revolving Credit and Security Agreement, substantially all of the Company’s borrowings will bear interest at variable rates based upon the prime rate. The Company performed a sensitivity analysis assuming a hypothetical 10% adverse movement in the interest rates on the debt outstanding at the end of 2004. Such a movement in interest rates would cause the Company to recognize additional interest expense of approximately $27,000 along with a corresponding decrease in cash flows.
The above sensitivity analysis for interest rate risk excludes accounts receivable, accounts payable and accrued liabilities because of the short-term maturity of such instruments. The analysis does not consider the effect on other variables such as changes in sales volumes or management’s actions with respect to levels of capital expenditures, future acquisitions or planned divestures, all of which could be significantly influenced by changes in interest rates and cause the results to differ significantly from those indicated by the sensitivity analysis.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of September 30, 2004 and 2003
Consolidated Statements of Income for the years ended September 30, 2004, 2003 and 2002
Consolidated Statements of Shareholders’ Equity for the years ended September 30, 2004, 2003 and 2002
Consolidated Statements of Cash Flows for the years ended September 30, 2004, 2003 and 2002
Notes to Consolidated Financial Statements
Quarterly Financial Information (Unaudited)
Financial Statement Schedule:
Schedule II. Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
Gencor Industries, Inc.
Orlando, Florida
We have audited the accompanying consolidated balance sheets of Gencor Industries, Inc. and subsidiaries as of September 30, 2004 and 2003, and the related consolidated statements of income, shareholders’ equity and cash flows for the years ended September 30, 2004, 2003 and 2002. Our audits also included the financial statement schedule listed in the accompanying index. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We did not audit the financial statements of certain wholly-owned subsidiaries, whose statements reflect total assets constituting 4% and 5% of consolidated assets as of September 30, 2004 and 2003, and total revenues constituting 3%, 5% and 5% of consolidated revenues for the years ended September 30, 2004, 2003 and 2002, respectively. Those statements were audited by other auditors whose reports have been furnished to us and, our opinion, insofar as it relates to the amounts included those subsidiaries, is based solely on the reports of the other auditors.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States of America). Those standards require that we plan and perform the audits 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 audits and the reports of the other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the audit reports of the other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Gencor Industries, Inc. and subsidiaries as of September 30, 2004 and 2003, and the results of their operations and their cash flows for the years ended September 30, 2004, 2003 and 2002, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the financial statement schedule referred to above, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
MOORE STEPHENS LOVELACE, P.A.
Certified Public Accountants
November 24, 2004
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Consolidated Balance Sheets
(In thousands, except per share data)
Current assets:
Cash and cash equivalents
Accounts receivable, less allowance for doubtful accounts of $1,214 ($2,428 in 2003)
Other receivables
Inventories, net
Deferred income taxes
Prepaid expenses
Total current assets
Property and equipment, net
Assets held for sale
Other assets
Current liabilities:
Accounts payable
Customer deposits
Income and other taxes payable
Accrued expenses
Total current liabilities
Other liabilities
Total liabilities
Commitments and contingencies
Shareholders’ equity:
Preferred stock, par value $.10 per share; authorized 300,000 shares; none issued
Common stock, par value $.10 per share; 15,000,000 shares authorized; 7,093,470 shares and 6,971,470 shares issued at September 30, 2004 and 2003, respectively
Class B stock, par value $.10 per share; 6,000,000 shares authorized; 1,878,398 shares and 1,890,398 shares issued at September 30, 2004 and 2003, respectively
Capital in excess of par value
Retained earnings
Accumulated other comprehensive income (loss)
Subscription receivable from officer
Common stock in treasury, 179,400 shares at cost
Total shareholders’ equity
See accompanying notes to consolidated financial statements.
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Consolidated Statements of Income
Net revenue
Costs and expenses:
Production costs
Product engineering and development
Selling, general and administrative
Restructuring costs
Other income (expense):
Interest income
Interest expense
Income from investees
Miscellaneous
Income from continuing operations before income taxes and discontinued operations
Income taxes (benefit)
Income from continuing operations
Discontinued operations
Operating income (net of income tax expense of $0 in 2002)
Net income
Basic earnings per common share:
Diluted earnings per common share:
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Consolidated Statements of Shareholders’ Equity
(In thousands)
For the Years Ended September 30, 2004, 2003 and 2002
SubscriptionReceivableFromOfficer
Shareholders’
Equity
September 30, 2001
Translation adj.
Comprehensive income
September 30, 2002
September 30, 2003
Stock options exercised
Conversion of Class B Stock
September 30, 2004
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Consolidated Statements of Cash Flows
In Thousands
For the Years Ended
September 30,
Cash flows from operations:
Adjustments to reconcile net income to cash provided (used) by operations:
Depreciation and amortization
Gain on sale of assets
Provision for allowance for doubtful accounts
Other non-cash items
Change in assets and liabilities - net of businesses sold:
Accounts receivable
Inventories
Total adjustments
Cash provided (used) by operations
Cash flows from (used for) investing activities:
Distributions from unconsolidated investees
Capital expenditures
Proceeds from sale of property and equipment
Proceeds from assets held for sale
Cash from (used for) investing activities
Cash flows used for financing activities:
Repayment of debt
Net Borrowings
Cash provided (used) for financing activities
Effect of exchange rate changes on cash
Net increase (decrease) in cash
Cash and cash equivalents at:
Beginning of year
End of year
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GENCOR INDUSTRIES, INC
All amounts in thousands, except per share amounts
Gencor Industries, Inc. and its subsidiaries (collectively the “Company”) is a diversified heavy machinery manufacturer for the production of highway construction materials, synthetic fuels and environmental control machinery and equipment.
These consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the 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.
Net Income Per Share
The financial statements include basic and diluted per share information. Basic earnings per share is based on the weighted average number of shares outstanding. Diluted earnings per share is based on the sum of the weighted average number of shares outstanding plus common share equivalents.
The following presents the calculation of the basic and diluted income per share from continuing operations for the years ended September 30, 2004, 2003 and 2002:
Basic EPS
Diluted EPS
Cash Equivalents
Cash equivalents, which consist of short-term certificates of deposit and deposits in money market accounts with original maturities of three months or less, are carried at cost, which approximates their market value.
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Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, accounts receivable and accounts payable approximate fair value because of the short-term nature of these items. The carrying amount of substantially all of the Company’s long-term debt approximates fair value due to the variable nature of the interest rates on the debt.
Foreign Currency Translation
Assets and liabilities of the Company’s foreign subsidiaries are translated into U.S. dollars at the applicable rate of exchange in effect at the end of the fiscal year. Revenue and expense accounts are translated at the average rate of exchange during the period and equity accounts are translated at the rate in effect when the transactions giving rise to the balances took place. Gains and losses resulting from translation are included in “Accumulated Other Comprehensive Income (Loss).” Gains and losses resulting from foreign currency transactions are included in income.
Risk Management
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable. The Company maintains its cash accounts in various domestic and foreign financial institutions. Domestic funds are swept daily into interest-bearing overnight repurchase agreements invested in U.S. government securities. The Company’s customers are not concentrated in any specific geographic region, but are concentrated in the road and highway construction industry. The Company extends limited credit to its customers based upon their creditworthiness and generally requires a significant up-front deposit before beginning construction and full payment subject to hold-back provisions, prior to shipment on asphalt plant orders. The Company establishes an allowance for doubtful accounts based upon the credit risk of specific customers, historical trends and other pertinent information.
Inventories are stated at the lower of cost or market. The Company uses the last-in, first-out (LIFO) method of determining cost for substantially all inventories in the United States. All other inventories are accounted for using the first-in, first-out (FIFO) method.
Used equipment, acquired by the Company by trade in from customers acquiring new equipment, is valued at estimated net realizable value at the time of trade in.
Property and Equipment
Property and equipment are stated at cost. Depreciation of property and equipment, including depreciation on assets acquired under capital leases, is computed using straight-line and accelerated methods over the estimated useful lives of the related assets.
Assets held for sale is comprised of property and equipment in the UK and is valued at the lower of carrying value or fair value less cost to sell. Property and equipment includes property, machinery and equipment primarily within the discontinued operations segment of $3,482, $3,482 and $3,659 as of September 30, 2004, 2003 and 2002, respectively. The assets are stated at lower of depreciated cost or fair value less cost to sell and are no longer depreciated.
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Depreciation of property and equipment, including depreciation on assets acquired under capital leases, is computed using straight-line and accelerated methods over the estimated useful lives of the related assets as follows:
Land improvements
Buildings and improvements
Equipment
Impairments
If the carrying value of an asset, including associated intangibles and goodwill, exceeds the sum of estimated undiscounted future cash flows, an impairment loss is recognized for the difference between estimated fair value and carrying value.
The estimated costs of product warranties are charged to production costs as revenue is recognized.
Shipping and Handling Costs
Shipping and handling costs are included in production costs in the statements of income.
Restructuring costs include legal, professional fees and redundancy costs relating to the reorganization of the Company and a wholly-owned subsidiary.
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Income Taxes
The Company recognizes deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns using current tax rates. The Company and its domestic subsidiaries file a consolidated federal income tax return. The foreign subsidiaries provide income taxes based on the tax regulations of the countries in which they operate. Undistributed earnings of the Company’s foreign subsidiaries are intended to be indefinitely reinvested. No deferred taxes have been provided on these earnings.
Deferred tax assets and liabilities are measured using the rates expected to apply to taxable income in the years in which the temporary differences are expected to reverse and the credits are expected to be used. The effect on deferred tax assets and liabilities of the change in tax rates is recognized in income in the period that includes the enactment date. An assessment is made as to whether or not a valuation allowance is required to offset deferred tax assets.
Accounting for Stock-Based Compensation
The Company measures compensation expense for employee and director stock options as the aggregate difference between the market price of the common stock and exercise prices of the options on the date that both the number of shares the grantee is entitled to receive and the purchase price are known.
Comprehensive Income (Loss)
Other comprehensive income (loss) consists of net income and includes all other changes in shareholders’ equity except those resulting from investments by owners and distributions to them. For all years presented, the Company’s comprehensive income (loss), which encompasses net income and foreign currency translation adjustments, is separately displayed in the consolidated statement of shareholders’ equity.
Reporting Segments
Information concerning principal geographic areas for the continuing operations is as follows:
United States
United Kingdom
Revenues are attributed to geographic areas based on the location of the assets producing the revenues.
In September 2000, the Company announced its intent to dispose of its food segment. Accordingly, the Company reported the results of the operations of the food processing equipment manufacturing business as discontinued operations.
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Certain information with respect to discontinued operations is summarized as follows:
Costs and expenses
Income from discontinued operations before income taxes
Income taxes
Income from discontinued operations, net of income taxes
Assets and liabilities of the discontinued operations included in the Balance Sheets at September 30, 2004 and 2003, were:
Property, plant and equipment, net
Long-term liabilities
Net assets (liabilities) of discontinued operations
On May 29, 2001, the Company sold the stock of certain foreign subsidiaries and the assets and certain liabilities of the domestic subsidiaries. The Company’s foreign food processing machinery operations located in Brazil were not included in the sale. The Company intends to dispose of these operations.
Inventories, net at September 30 consist of the following:
Raw materials
Work in process
Finished goods
Used equipment
At September 30, 2004, accumulated costs of approximately $4,553 on major contracts, net of progress payments of approximately $1,569, and estimated earnings of approximately $2,590 amount to approximately $5,574 and are included in work-in-process inventory. At September 30, 2003, accumulated costs of approximately $2,242 on major contracts, net of progress payments of approximately $2,303 and estimated earnings of approximately $1,154, amount to approximately $1,093 and are included in work-in-process inventory.
At September 30, 2004 and 2003, cost is determined by the last-in, first-out (LIFO) method for 96% and 99%, respectively, of total inventories, exclusive of progress payments, and the first-in, first-out (FIFO) method for all other inventories. The estimated current cost of inventories exceeded their LIFO basis by approximately $3,338 and $2,573, respectively.
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Property and equipment at September 30 consist of the following:
Land and improvements
Building and improvements
Less: Accumulated depreciation and amortization
Property and equipment includes approximately $12,429 and $11,724 of fully depreciated assets, which remain in service during fiscal 2004 and 2003.
Substantially all of the Company’s property and equipment is pledged as collateral for the Company’s debt.
Depreciation and amortization expense for the years ended September 30, 2004, 2003 and 2002 was approximately $828, $1,371 and $1,088, respectively. There was no interest capitalized during these years.
Other assets at September 30 consist of the following:
Deposits
Deferred loan costs, net
Other
Accrued expenses consist of the following at September 30:
Payroll and related accruals
Warranty and related accruals
Professional fees
Interest
Sales and property taxes
Impairment reserve
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The provision for income taxes consists of:
Current:
Federal
State
Foreign
Total current expense (benefit)
Deferred
Provision for (benefit from) income taxes
The difference between the U.S. federal income tax rate and the Company’s effective income tax rate for the continuing operations is as follows:
Federal income tax rate
State income taxes
Difference arising from transactions with, and profit and loss of, foreign subsidiaries not deductible or includable for U.S. federal income tax purposes
Losses for which no tax benefit has been recognized
Use of net operating loss carryforward
Deferred taxes are recorded as follows:
Deferred tax assets (liabilities):
Inventory cost adjustments
Income from unconsolidated investees
Domestic NOL
Long-term deferred tax liabilities
Allowance for doubtful accounts
Accrued expenses and other
Domestic tax credits and NOLs
Current deferred tax assets
Less: Valuation allowance
Net deferred tax asset
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Accumulated deficits of non-U.S. subsidiaries included in consolidated retained earnings (deficit) amounted to ($16,608), ($16,147) and ($23,905) as of September 30, 2004, 2003 and 2002, respectively. The Company follows the policy of indefinitely reinvesting foreign earnings, if any, to expand its international operations. Accordingly, the Company will not provide U.S. income taxes on any future earnings. In the event any earnings of non-U.S. subsidiaries are repatriated, the Company will provide U.S. income taxes upon repatriation of such earnings which will be offset by applicable foreign tax credits, subject to certain limitations.
Total income taxes paid were $3,210 and $1,916 in 2004 and 2003. There were no income taxes paid in 2002.
401(k) Plan
The Company has a voluntary 401(k) employee benefit plan which covers all eligible domestic employees. The Company makes discretionary matching contributions subject to a maximum level, in accordance with the terms of the plan. The Company charged approximately $91, $88, and $101 to operating expense under the provisions of the plan during the fiscal years 2004, 2003 and 2002, respectively.
Long-term debt at September 30, 2004 and 2003 consisted of the following:
Revolving Credit and Security Agreement
Less: Current maturities
On August 1, 2003, the Company entered into a Revolving Credit and Security Agreement with PNC Bank, N.A. The Agreement established a three year revolving $20 million credit facility. The facility provides for advances based on accounts receivable, inventory and real estate. The facility includes a $2 million limit on letters of credit. At September 30, 2004, the Company had $.3 million of letters of credit outstanding. The interest rate at September 30, 2004, is at prime (4.75%) and subject to change based upon the Fixed Charge Coverage Ratio. The Company is required to maintain a Fixed Charge Coverage Ratio of 1.1:1. There are no required repayments as long as there are no defaults and there is adequate eligible collateral. Substantially, all of Company’s assets are pledged as security under the Agreement.
The Company paid interest of $175, $1,557 and $2,281 on borrowings during the fiscal years ended 2004, 2003 and 2002, respectively. The weighted-average interest rate on these borrowings was 3.9%, 6.1% and 6.9%, respectively.
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Leases
The Company leases certain equipment under non-cancelable operating leases. Future minimum rental commitments under these leases at September 30, 2004 consist of $331 due over the next four years.
Total rental expense for the fiscal years ended 2004, 2003 and 2002 was $270, $282 and $349, respectively.
Litigation
The Company has various pending litigation and other claims. Those claims which are made in the ordinary course of business may be covered in whole or in part by insurance, and if found against the Company, management does not believe these matters will have a material effect on the Company’s financial position, results of operations or cash flows.
Under the Company’s amended Certificate of Incorporation, certain rights of the holders of the Company’s Common Stock are modified by shares of Class B Stock for as long as such shall remain outstanding. During that period, holders of Common Stock will have the right to elect approximately 25% of the Company’s Board of Directors, and conversely, Class B Stock will be entitled to elect approximately 75%. During the period when Common Stock and Class B Stock are outstanding, certain matters submitted to a vote of shareholders will also require approval of the holders of Common Stock and Class B Stock, each voting separately as a class. Common stock and Class B shareholders have equal rights with respect to dividends, preferences, and rights, including rights in liquidation.
The Company maintains stock option plans, which provide for the issuance of nonqualified or incentive stock options to certain directors, officers and key employees.
The 1992 Stock Option Plan (the “1992 Plan”) authorizes the granting of options to purchase up to 400,000 shares of the Company’s Common Stock, 400,000 shares of the Company’s Class B Stock and fifteen percent (15%) of the authorized Common Stock of any Company subsidiary. Shares are no longer available for grant under the 1992 Plan since all options authorized under the Plan have been granted.
The 1997 Stock Option Plan (the “1997 Plan”) provides for the issuance of incentive stock options and nonqualified stock options to purchase up to 1,200,000 shares of the Company’s Common Stock, 1,200,000 shares of the Company’s Class B Stock and up to fifteen percent (15%) of the authorized Common Stock of any subsidiary.
Under the terms of the Plans, option holders may tender previously owned shares with a market value equal to the exercise price of the options at exercise date, subject to Compensation Committee approval. Additionally, option holders may, upon Compensation Committee approval, surrender shares of stock to satisfy federal withholding tax requirements.
Options become exercisable in a manner and on such dates and times as determined by a committee of the Board of Directors. Options expire not more than ten years from the date of grant. The option holders have no shareholder rights until the date of issuance of a stock certificate for such shares. Exercise of the options granted during 2002 and 2001 are limited to 20% per year over the next 5 years. As of September 30, 2004, the Company has approximately 1.4 million stock options outstanding and 1.5 million options available for future grants under the plans.
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The following table summarizes option activity under the plans:
Outstanding at September 30, 2001
Options granted (at an exercise price of $3.66 in 2002)
Cancelled
Outstanding at September 30, 2002
Outstanding at September 30, 2003
Expired
Exercised at price of $1.65 and $.87 per share
Outstanding at September 30, 2004
The following table summarizes information about stock options outstanding at September 30, 2004:
Range of Exercise Price
$ 0.00 - $ 1.00
$ 1.01 - $ 2.00
$ 2.01 - $ 3.00
At September 30, 2004, 1,344,000 shares were exercisable at a weighted exercise price of $1.76.
Marcar Leasing Corporation (“Marcar”) is engaged in leasing machinery and vehicles to the public and the Company. Marcar is owned by family members of the Company’s Chairman. The terms of the leases are established based on the rates charged by independent leasing organizations and are believed to be more favorable than those generally available from independent third parties. Leases between the Company and Marcar generally provide for equal monthly payments over either thirty-six months or forty-eight months. During fiscal 2004, 2003 and 2002, the Company made lease payments to Marcar totaling $141, $179 and $204, respectively.
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In thousands, except per share amounts
Quarters ended
Net sales
Income from operations
Basic earnings per share:
Diluted earnings per share:
Income (loss) from operations
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SCHEDULE II
Valuation and Qualifying Accounts
Description
Valuation accounts deducted from assets to which they apply:
For doubtful accounts receivable:
For inventory obsolescence:
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
ITEM 9A. CONTROLS AND PROCEDURES
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The names of directors and the Named Executive Officers of the Company are listed in the following table:
Name and Principal Occupation
or Employment (1)
Directors for Class B Shareholders:
E. J. Elliott
Chairman of the Board and President (2) (3)
John E. Elliott
Executive Vice President (2) (3)
Randolph H. Fields (5)
Attorney, Greenberg Traurig, P.A. since October, 1995
David A. Air (5)
Director, Synuthane International Inc., since 1993.
Engineering / Sales Consulting Rubbercraft Inc., 1994 to 1999.
Director for Common Stock Shareholders:
Russell R. Lee, III, CPA (6)
Vice President of Finance & Chief Financial Officer, Teltronics, Inc.,
Previously served as Vice-President of Finance and Administration/ Chief Financial Officer, SinoFresh Healthcare, Inc., and as Executive Vice-President of Finance and Operations for Esprix Technologies, LLP, 1999 to 2003.
Executive Officers (4)
David F. Brashears
Senior Vice President Technology
Marc G. Elliott (3)
President, Construction Equipment Group
Previously served as Vice President, Marketing
Scott W. Runkel
Chief Financial Officer and Treasurer
Financial advisor prior to joining the Company in August 2000, and
former partner in the accounting firm of Ernst &Young.
Jeanne M. Lyons
Secretary
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Meetings of the Board of Directors and Certain Committees of the Board
During the fiscal year ended September 30, 2004, the Board of Directors of the Company held 4 meetings. All Directors attended the meetings.
The Compensation Committee endeavors to ensure that the compensation program for executive officers of the Company is effective in attracting and retaining key executives responsible for the success of the Company and in promoting its long-term interests and those of its stockholders. The committee, without applying any specific quantitative formulas, considers such factors as net income, earnings per share, duties and scope of responsibility, industry standards and comparable salaries for the geographic area, corporate growth, profits, goals and market share increases. The functions of the Compensation Committee include establishment of compensation plans for Gencor’s executive officers and administration of certain of Gencor’s employee benefit and compensation programs.
The Audit Committee’s responsibilities include selecting the Company’s auditors and reviewing the Company’s audit plan, financial statements and internal accounting and audit procedures. The Audit Committee Charter was adopted by the Board of Directors and a copy is included in the September 30, 2002 Proxy Statement. During the fiscal year ended September 30, 2004, the Audit Committee had three meetings which were attended by all members. The Company’s 2003 fiscal year Audit Committee was initially composed of three board members, two of whom were independent as per NASDAQ definitions. The two independent Audit Committee members resigned from the Board of Directors on June 2, 2003 at which time the Audit Committee functions were assumed by the Board of Directors until January 16, 2004 when the Board of Directors elected two new replacement directors, Mr. David A. Air and Mr. Russell R. Lee, III. Messrs. Air and Lee are considered independent by NASDAQ rules. Mr. Lee now serves as the “audit committee financial expert.”
At present the three members of the Nominating Committee are E. J. Elliott, John Elliott and Randolph Fields, none of whom were considered “independent” by NASDAQ rules. The Nominating Committee of the Company does not have a charter, but has developed guidelines. The Nominating Committee guidelines provide that it consider for director candidates by stockholders or others, and believes that for smaller companies it is desirable and beneficial to recommend board candidates who possess a proven track record in heavy manufacturing operations, understand the company’s overall business, and are able to make maximum contribution to guiding the Company’s affairs. Accordingly, the Nominating Committee reviews recommendations of its individual members and gives considerable weight to candidates with industry-related experience and expertise that will benefit the Company. Additionally, the Nominating Committee believes that persons selected must have a serious work ethic and an ability to work as a constructive member of a team for the benefit of the stockholders.
Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires the Company’s directors, officers and certain stockholders to file with the Commission an initial statement of beneficial ownership and certain statements of changes in beneficial ownership of equity securities of the Company. Based solely on its review of such forms received by it, the Company is unaware of any instances of noncompliance, or late compliance, with such filings during the fiscal year ended September 30, 2004, by its officers, directors or stockholders.
Directors Fees
Directors’ fees are paid by the Company to non-employee directors at the rate of $1,000 per month, plus $1,000 per meeting attended. Total fees paid in fiscal 2004 were $51,000.
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Communications with Directors
The Company has a process for holders of common stock to communicate with the Board of Directors which request that such holders mail their communication by United States mail to the Company’s headquarters and to the attention of the director or directors with whom one wants to communicate c/o the Chief Executive Officer of the Company. The Chief Executive Officer shall cause this communication to be forwarded to the directors on a regular basis as soon as practicable.
Code of Ethics
The Company has adopted a code of ethics that applies to the Company’s principal executive officer, principal accounting officer and persons performing similar functions. The Company will provide to any person without charge, upon written request, addressed to its corporate headquarters, attention Corporate Secretary, a copy of such code of ethics.
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REPORT OF THE AUDIT COMMITTEE
Management is responsible for the preparation, presentation and integrity of the Company’s financial statements, accounting and financial reporting principles and internal controls and procedures designed to assure compliance with accounting standards and applicable laws and regulations. The independent auditors, Moore Stephens Lovelace, P. A., are responsible for performing an independent audit of the consolidated financial statements in accordance with generally accepted auditing standards.
In performing its oversight role, the Audit Committee has considered and discussed the audited financial statements with management. The Audit Committee has also discussed with the independent auditors the matters required to be discussed by Statement on Auditing Standards No. 61, Communication with Audit Committees, as currently in effect. The Audit Committee has received the written disclosures and the letter from the independent auditors required by Independence Standards Board Standard No. 1, Independent Discussions with Audit Committees, as currently in effect, and has discussed with the auditors the auditors’ independence.
Based on the review and discussions described in this report, and subject to the limitations on the role and responsibilities of the Audit Committee with regard to its oversight functions referred to below, the Audit Committee approved the audited financial statements for inclusion in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2004, for filing with the Securities and Exchange Commission.
The members of the Audit Committee are not professionally engaged by the Company to practice auditing or accounting and the present members are not experts in the fields of accounting or auditing, including with respect to matters of auditor independence. Members of the Audit Committee rely without independent verification on the information provided to them and on the representations made by management and the independent auditors. Accordingly, the Audit Committee’s oversight does not provide an independent basis to determine that management has maintained appropriate accounting and financial reporting principles or appropriate internal controls and procedures designed to assure compliance with accounting standards and applicable laws and regulations. Furthermore, the Audit Committee’s considerations and discussions referred to above do not assure that the audit of the Company’s financial statements has been carried out in accordance with generally accepted auditing standards, that the financial statements are presented in accordance with generally accepted accounting principles or that Moore Stephens Lovelace, P.A. is in fact independent.
Date: December 9, 2004
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ITEM 11. EXECUTIVE COMPENSATION
The following table presents certain annual and long-term compensation for the Company’s Chief Executive Officer, the four highest-paid executive officers other than the CEO, (collectively the “Named Executive Officers”) as well as the total compensation paid to each individual during the Company’s last three fiscal years:
SUMMARY COMPENSATION TABLE
Long-TermCompensation
Awards
(2)
All OtherCompensation($)
Name and Principal Position
E. J. ElliottChairman of the Board and President
John E. ElliottExecutive Vice President
David F. BrashearsSenior Vice President, Technology
Marc G. ElliottPresident, Construction Equipment Group
D. William GarrettVice President, Sales
Scott W. RunkelChief Financial Officer and Treasurer
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Option Grants in Fiscal Year 2004
There were no options granted during the fiscal year 2004 to the Named Executive Officers.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values
The following table provides information concerning stock options exercised by each of the Named Executive Officers of Gencor during fiscal 2004 and the value of options held by such officers at the end of each year measured in terms of the closing price of Gencor Common Stock on September 30, 2004.
Name
SharesAcquired onExercise
(#)
* Number of Securities
Underlying UnexercisedOptions at
* Value of UnexercisedIn-the-Money
Options at
590,000E
318,000E
Marc G. Elliott
20,000E 48,000U 72,000E
112,500 304,800U 457,200E
Scott W . Runkel
20,000E 20,000U
142,600E 142,600U
STOCK OPTION PLAN
1997 Stock Option Plan
In July 1996, the Company’s Board of Directors, subject to the approval of its shareholders, adopted the Gencor Industries, Inc. 1997 Stock Option Plan (the “1997 Plan”) which provides for the issuance of stock options to purchase an aggregate of up to 1,200,000 shares of the Company’s Common Stock, 1,200,000 shares of the Company’s Class B Stock and up to fifteen percent (15%) of the authorized common stock of any subsidiary. The 1997 Plan permits the grant of options to officers, directors and key employees of the Company. The 1997 Plan was approved by shareholders on April 11, 1997.
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STOCK PERFORMANCE GRAPH
The following graph sets forth the cumulative total shareholder return (assuming reinvestment of dividends) to Gencor Industries’ shareholders during the nine-year period ended September 30, 2004, as well as the Wilshire Small Capitalization Index and the Dow Jones Heavy Construction Index. The stock performance graph assumes $100 was invested on October 1, 1995. On December 22, 1997, a cash dividend of $0.025 per share (split adjusted) was declared by Gencor Industries, payable January 14, 1998 to shareholders of record on December 31, 1997.
Comparison of Cumulative Total Return Among Gencor Industries, Inc., the
Wilshire Small Capitalization Index and the Dow Jones Heavy Construction Index
Gencor
Industries, Inc.
DJ Heavy Construction Index
Wilshire Small Cap Index
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of December 14, 2004 with respect to (i) each person known to management to be the beneficial owner of more than 5% of the Company’s Common Stock or Class B Stock, (ii) each Director, (iii) each Executive Officer of the Company named in the Summary Compensation Table, and (iv) the Directors and Executive Officers of the Company as a group. Except as otherwise noted, each named beneficial owner has sole voting and investment power over the shares shown.
Name And Address of Beneficial Owner
Common
Stock
5201 N. Orange Blossom Trail
David A. Air
All Directors and Executive Officers as a group (9 persons)
Harvey Houtkin
160 Summit Avenue
Montvale, NJ 07645
Mark Shefts
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company leases vehicles from Marcar Leasing Corporation (“Marcar”), a corporation engaged in general leasing to the public of machinery, as well as, vehicles owned by members of E.J. Elliott’s immediate family, including Marc G. Elliott. The terms of the leases are established based on the rates charged by independent leasing organizations and are believed by the Company to be more favorable than those generally available from independent third parties. Leases between the Company and Marcar generally provide for equal monthly payments over either thirty-six months or forty-eight months. During fisca1 2004, the Company made lease payments to Marcar in the aggregate amount of $141,000.
Randolph H. Fields, a director of the Company, is a shareholder of the law firm of Greenberg Traurig P.A., which serves as the Company’s primary legal counsel.
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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Audit Fees
The aggregate fees billed by Moore Stephens, Lovelace, P.A. for the last two fiscal years audit of the annual financial statements and review of financial statements included in the Company’s Form 10-Qs was $151,083 in 2004 and $134,000 in 2003.
Tax Fees
The aggregate fees billed by Moore Stephens, Lovelace, P.A. for the last two fiscal years for preparation of income tax returns was $28,000 in 2004 and $28,000 in 2003.
All Other Fees
The aggregate fees billed by Moore Stephens, Lovelace, P.A. for the last two fiscal years for other services was $13,517 in 2004 and $ -0- in 2003 for other accounting assistance.
In accordance with Company policy, all Fees for Moore Stephens, Lovelace, P.A. were approved in advance by the audit committee or full board of directors.
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PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
DESCRIPTION
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44
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SIGNATURES
Pursuant to the requirements of Sections 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.
Dated: December 21, 2004
/s/ E.J. Elliott
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. The signatures of Directors constitute a majority of Directors.
/s/ Scott W. Runkel
/s/ John E. Elliott
/s/ Russell R. Lee, III
/s/ Randolph H. Fields
/s/ David A. Air
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EXHIBITS FILED HEREWITH
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