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. 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 Synfuels Investors, L.P., 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 member interest of 45% in CLLC. Future revenue to CLLC is based upon the production of these plants continuing 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. If the LP is successful in producing fuel which qualifies for tax credits, sells the synthetic fuel, sells the tax credits to investors, and has sufficient cash flow to cover all operating expenses, then the LP remits cash to CLLC as additional purchase price for the sale of the plants. CLLC generally distributes any cash receipts to its investors.
Also, the Company received a 25% partnership position in the General Partner (“GP”) of the LP and in Carbontronics II, LLC (“C2LLC”). C2LLC receives royalty payments from the LP only if the LP is successful in producing fuel which qualifies for tax credits, sells the synthetic fuel, sells the tax credits to investors, and has sufficient cash flow to cover all other operating expenses. 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 member positions in CLLC, C2LLC, and the GP, the Company has the potential for income subject to the performance of the LP. 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 were 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 had 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 would be entitled to the section 29 credit for the production of qualified fuel that is sold to unrelated persons.
Although the IRS advised us that it is satisfied with the chemical testing procedures, it nevertheless proceeded with a general IRS audit. Therefore the previously imposed Tax Event continued and the Limited Partners were not allowing revenue to be distributed to Gencor until satisfactory conclusion of the audit.
On January 5, 2005, the Company was informed that the IRS had concluded its examination of the investees with no material adverse findings. As a result, distributions suspended since August 2003 resumed and the Company received distributions totaling $27,382 during the second quarter of fiscal 2005. The Company received a distribution of $6,964 in the third quarter of fiscal 2005, and $9,892 in the fourth quarter of fiscal 2005. There were no distributions in fiscal 2004. These distributions are subject to state and Federal income taxes.
Future distributions from these entities depend upon the production of these operations continuing to qualify for tax credits under Section 29 of the Internal Revenue Code and the ability to economically produce and market synthetic fuel produced by the plants. One of the contingencies related to future benefits from these entities is based on the average price of crude oil. Per a provision of Section 29, if the average price of crude oil reaches a certain level, the tax credits will terminate. The escalation in oil prices in 2005 raises serious doubt on the continued availability of tax credits under Section 29 for the future. If oil prices remain at the recent levels or increase, the tax credits could phase-out or terminate. The existing tax credit legislation is scheduled to expire at the end of calendar year 2007. Any one of the above eventualities may interrupt, reduce, or terminate 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’s H&B (Hetherington and Berner) product line is the world’s oldest asphalt plant line, first manufactured in 1894. 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 industry 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. The Company continues to evaluate opportunities in the energy field.
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.
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.
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 $24 million and $13 million as of December 1, 2005 and December 1, 2004, 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.
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, 2005, the Company employed a total of 294 employees; there were 284 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.
ITEM 2. PROPERTIES
The following table lists the properties owned or leased by the Company as of September 30, 2005:
(1) These properties are owned and pledged as security under the Company’s credit agreement.
ITEM 3.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On September 12, 2005, at an Annual Meeting of Shareholders, the following was approved:
(1) The election of a director to be voted upon by the holders of Common Stock and the election of the directors to be voted upon by the holders of Class B Stock: and
(2) The ratification of the selection of Moore Stephens Lovelace, P.A., independent certified public accountants, as auditors for the Company for the year ending September 30, 2005.
The total number of shares entitled to vote at this meeting was 8,252,457 shares of Common Stock and 1,642,998 shares of Class B Stock, and the tabulation of proxies was as follows:
Election of Director by holders of Common Stock:
Election of Directors by holders of Class B Stock:
Ratification of appointment of Moore Stephens Lovelace, P.A. as auditors for the year ending September 30, 2005:
For
Against or
Withheld
Abstentions
Broker Non-votes
9,240,516
29,686
12,642
No other business was brought before the Annual Meeting.
PART II
ITEM 5.
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 and the OTC Electronic Bulletin Board under the symbol “GNCI.OB”. Following are the high and low per share closing bid prices for our common stock for the periods indicated:
As of September 2, 2005, there were 363 holders of Common Stock of record and 6 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.
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, 2005, including the 1997 Stock Option Plan and the 1992 Stock Option Plan.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
(1) The operating results of the food processing equipment manufacturing businesses (CPM) are reflected as discontinued operations.
ITEM 7.
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, 2005 compared with the year ended September 30, 2004
Net sales for the years ended September 30, 2005 and 2004 were $48.1 million and $54.1 million, respectively. Domestic sales during this period for 2005 and 2004 were $46.9 million and $52.3 million, respectively. Domestic sales were lower than the prior year due to the timing of finalizing certain orders and delays in customers receiving permits. Backlog was only $5 million at September 30, 2005, however has increased to over $24 million as of December 1, 2005. This compares to a backlog of only $13 million as of December 1, 2004.
Gross margin for fiscal 2005 was $5.0 million less than fiscal 2004 and as a percent of net sales were 22.7% in 2005 and 29.4% of sales for 2004. Domestic margins were negatively affected by $.5 million in 2005 and $.8 million in 2004 due to an increase in the LIFO reserve. Lower sales volume reduced margin by $2 million and unfavorable purchase price variances due to higher steel and other material costs increased costs by $.8 million.
Product engineering and development costs remained at comparable levels with 2004. Selling and administrative expenses increased $.5 million during 2005 due to higher legal costs and a bonus paid on the receipt of the cash distributions from our investees. Selling and administrative expenses in 2004 includes $270 of costs related to the tender offer withdrawn in December 2003.
Operating (loss) was ($1.3) million in 2005. Operating income decreased from $4.2 million and 8% of net sales for 2004, as a result of reduced domestic business, lower gross margins in 2005, and higher selling and administrative expenses.
Interest expense during 2005 is less than 2004 due to reduced average borrowings and a lower interest rate. The outstanding bank debt was reduced to zero in the second quarter of fiscal 2005. The increase in value of marketable securities is a result of the net cash invested in marketable securities since the second quarter of fiscal 2005.
Income from investees consisted of cash distributions of $44,238 in 2005. There were no distributions from investments in Carbontronics LLC, Carbontronics II LLC, and Carbontronics Fuels LLC, in fiscal 2004. Distributions suspended since August 2003, as a result of an IRS examination, resumed in the second quarter of fiscal 2005. Future distributions from these entities depend upon the production of these operations continuing to qualify for tax credits under Section 29 of the Internal Revenue Code and the ability to economically produce and market synthetic fuel produced by the plants. One of the contingencies related to future benefits from these entities is based on the average price of crude oil. Per a provision of Section 29, if the average price of crude oil reaches a certain level, the tax credits will terminate. The escalation in oil prices in 2005 raises serious doubt on the continued availability of tax credits under Section 29 for the future. If oil prices remain at the recent levels or increase, the tax credits could phase-out or terminate. The existing tax credit legislation is scheduled to expire at the end of calendar year 2007. Any one of the above eventualities may interrupt, reduce, or terminate future distributions.
Income taxes were 31% of pre-tax income for 2005 and 37% for 2004. The tax provision in 2005 includes a reduction of $2.5 million (5.5%) in the tax contingency reserve as a result of resolution of prior year tax filings and expiration of the statute of limitations.
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 were 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 were being examined by the Internal Revenue Service. Any distributions were then 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.
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, 2005, the Company had $.3 million of letters of credit outstanding. The interest rate at September 30, 2005, is at prime less .25% (6.50%) 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.
As of September 30, 2005, the Company had $4.2 million in cash and cash equivalents, and $32.8 million in marketable securities. The marketable securities are invested in stocks and bonds through a professional investment advisor. The securities may be liquidated at any time into cash and cash equivalents.
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.
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, 2005, 2004 and 2003, 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 $44,238 and $13,428, during 2005 and 2003, respectively.
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, 2005:
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.
ITEM 7A.
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, 2005, the Company had no 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’s Marketable securities are invested in stocks and bonds through a professional investment advisor. Investment securities are exposed to various risks such as interest rate, market and credit. Due to the level of risk associated with certain investment securities and the level of uncertainty related to changes in the value of securities, it is possible that changes in these risk factors could have an adverse material impact on the Company’s results of operations or equity.
The Company’s 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.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
GENCOR INDUSTRIES, INC.
All other schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto.
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, 2005 and 2004, and the related consolidated statements of income, shareholders’ equity and cash flows for the years ended September 30, 2005, 2004 and 2003. 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 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 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 audits provide a reasonable basis for our opinion.
In our opinion, 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, 2005 and 2004, and the results of their operations and their cash flows for the years ended September 30, 2005, 2004 and 2003, 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
Orlando, Florida
December 14, 2005
GENCOR INDUSTRIES, INC.
Consolidated Balance Sheets
(In thousands, except per share data)
See accompanying notes to consolidated financial statements.
GENCOR INDUSTRIES, INC.
Consolidated Statements of Income
(In thousands, except per share data)
See accompanying notes to consolidated financial statements.
GENCOR INDUSTRIES, INC.
Consolidated Statements of Shareholders’ Equity
(In thousands)
For the Years Ended September 30, 2005, 2004 and 2003
See accompanying notes to consolidated financial statements.
GENCOR INDUSTRIES, INC.
Consolidated Statements of Cash Flows
In Thousands
See accompanying notes to consolidated financial statements.
GENCOR INDUSTRIES, INC
Notes to Consolidated Financial Statements
All amounts in thousands, except per share amounts
NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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, 2005, 2004 and 2003:
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.
Marketable Securities
Marketable securities are categorized as trading securities and stated at market value. Market value is determined using the quoted closing or latest bid prices. Realized gains and losses on investment
transactions are determined by specific identification and are recognized as incurred in the statement of income. Net unrealized gains and losses are reported in the statement of income and represent the change in the market value of investment holdings during the period. At September 30, 2005, Marketable securities consisted of $5.2 in municipal bonds and $27.6 in equity stocks.
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, marketable securities, 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 marketable securities are invested in stocks and bonds through a professional investment advisor. Investment securities are exposed to various risks such as interest rate, market and credit. 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
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.
NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
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 in 2004 was comprised of property and equipment in the UK and is valued at the lower of carrying value or fair value less cost to sell. Since the property has not been sold, in 2005, the assets were reclassified in property and equipment and these assets continued to be depreciated. Property and equipment at September 30, 2004, includes property, machinery and equipment primarily within the discontinued operations segment of $3,482. The assets were stated at lower of depreciated cost or fair value less cost to sell and were no longer depreciated.
In 2005, the assets of our discontinued operation in Brazil were disposed of with all proceeds used to pay liens and claims against the property. The net assets were fully reserved in 2001 when the other assets of the discontinued operation were sold. Other Assets of $3.2 million, Property and Equipment of $3.5 million, Accounts Payable, Income and Other Taxes Payable and Accruals of $2.9 million, Other Liabilities of $3.3 million, and Accumulated Translation Loss of $4.3 million were charged to the impairment reserve with no resulting gain or loss on the disposition.
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:
Years
Land improvements
Buildings and improvements
6-40
Equipment
2-10
NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
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.
Investment in Unconsolidated Investees
As of September 30, 2005, 2004 and 2003, 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 distributions of $44,238 and $13,428, during 2005 and 2003 respectively. The Company received no distributions in 2004.
Future distributions from these partnerships depend upon the production of these operations continuing to qualify for tax credits under Section 29 of the Internal Revenue Code and the ability to economically produce and market synthetic produced by the plants. One of the contingencies related to future benefits from these entities is based on the average price of crude oil. Per a provision of Section 29, if the average price of crude oil reaches a certain level, the tax credits will terminate. The escalation in oil prices in 2005 raise serious doubt on the continued availability of tax credits under Section 29 for the future. If oil prices remain at the recent levels or increase, the tax credits could phase-out or terminate. The existing tax credit legislation is scheduled to expire at the end of calendar year 2007. Any one of the above eventualities may interrupt, reduce, or terminate future distributions.
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.
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.
NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
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:
Revenues are attributed to geographic areas based on the location of the assets producing the revenues.
NOTE 2 - INVENTORIES, NET
Inventories, net at September 30 consist of the following:
At September 30, 2005, accumulated costs of approximately $3,084 on major contracts, net of progress payments of approximately $792, and estimated earnings of approximately $1,857 amount to approximately $4,149 and are included in work-in-process inventory. 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, 2005 and 2004, cost is determined by the last-in, first-out (LIFO) method for 99% 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 $3,838 and $3,338, respectively.
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment at September 30 consist of the following:
Property and equipment includes approximately $7,485 and $12,429 of fully depreciated assets, which remain in service during fiscal 2005 and 2004.
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, 2005, 2004 and 2003 was approximately $847, $828, and $1,371, respectively. There was no interest capitalized during these years.
NOTE 4 - OTHER ASSETS
Other assets at September 30 consist of the following:
NOTE 5 - ACCRUED EXPENSES
Accrued expenses consist of the following at September 30:
NOTE 6 - INCOME TAXES
The provision for income taxes consists of:
The difference between the U.S. federal income tax rate and the Company’s effective income tax rate is as follows:
Accumulated deficits of non-U.S. subsidiaries included in consolidated retained earnings (deficit) amounted to ($2,695), ($16,608) and ($16,147) as of September 30, 2005, 2004 and 2003, 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 $1,331, $3,210, and $1,916 in 2005, 2004, and 2003, respectively.
NOTE 7 - RETIREMENT BENEFITS
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 $105, $91, and $88 to operating expense under the provisions of the plan during the fiscal years 2005, 2004 and 2003, respectively.
NOTE 8 - LONG-TERM DEBT
Long-term debt at September 30, 2005 and 2004 consisted of the following:
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, 2005, the Company had $.3 million of letters of credit outstanding. The interest rate at September 30, 2005, is at prime less .25% (6.50%) 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 $147, $175 and $1,557 on borrowings during the fiscal years ended 2005, 2004 and 2003, respectively. The weighted-average interest rate on these borrowings was 5.1%, 3.9% and 6.1%, respectively.
NOTE 9 - COMMITMENTS AND CONTINGENCIES
Leases
The Company leases certain equipment under non-cancelable operating leases. Future minimum rental commitments under these leases at September 30, 2005 consist of $157 due over the next four years.
Total rental expense for the fiscal years ended 2005, 2004 and 2003 was $147, $270 and $282, 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.
NOTE 10 - SHAREHOLDERS’ EQUITY
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.
NOTE 11 - STOCK OPTIONS
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 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.
During 2005, 1,322,000 options were exercised at prices ranging from $1.65-$1.82 per share for a total of $2,331,000 and was paid to the Company with 259,000 shares of Company stock at the then current market price of $9.00 per share. The shares received into treasury were immediately retired. An additional 40,000 options were exercised at prices ranging from $.87-$2.38 per share. As of September 30, 2005, the Company has approximately 54,000 stock options outstanding and 1,480,000 options available for future grants under the plans.
NOTE 11 - STOCK OPTIONS (continued)
The following table summarizes option activity under the plans:
The following table summarizes information about stock options outstanding at September 30, 2005:
At September 30, 2005, 28,000 shares were exercisable at a weighted exercise price of $1.09.
NOTE 12 - RELATED PARTY TRANSACTIONS
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 2005, 2004 and 2003, the Company made lease payments to Marcar totaling $131, $141 and $179, respectively.
Quarterly Financial Information (Unaudited)
SCHEDULE II
Valuation and Qualifying Accounts
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
(a) Our principal executive officer and principal financial officer have conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-14(c) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this report. Based on their evaluation, our principal executive officer and principal accounting officer concluded that our disclosure controls and procedures are effective.
(b) There have been no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation referenced in paragraph (a) above.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The names of directors and the Named Executive Officers of the Company are listed in the following table:
(1) Except as otherwise indicated, there has been no change in principal occupation or employment during the past five years.
(2) Member of the Executive Committee.
(3) E.J. Elliott is the father of John E. Elliott and Marc G. Elliott.
(4) Each executive officer holds office until his successor has been elected and qualified, or until his earlier resignation or removal.
(5) Member of the Audit Committee and Compensation Committee.
(6) Member of the Audit Committee, Compensation Committee, and Financial Expert.
Meetings of the Board of Directors and Certain Committees of the Board
During the fiscal year ended September 30, 2005, the Board of Directors of the Company held 5 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 Compensation Committee met four times in fiscal 2005.
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 Proxy Statement dated January 21, 2003. During the fiscal year ended September 30, 2005, the Audit Committee had seven meetings, six of which were attended by all members of the audit committee, one member was absent from one meeting. Mr. David A. Air and Mr. Russell R. Lee, III. are considered independent by NASDAQ rules; Mr. Fields may be considered “independent” by NASDAQ rules but is a shareholder in the Company’s primary outside law firm. Mr. Lee serves as the “audit committee financial expert.”
The three members of the Nominating Committee are E. J. Elliott, John Elliott and Randolph Fields. 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. The Nominating Committee met on an informal basis during board meeting recesses in 2005.
If a stockholder wishes to suggest a candidate for consideration by the nominating committee as a nominee for board membership at an annual meeting, the name of that candidate, along with supporting information below, should be submitted to John E. Elliott at the Company’s address. The submission should include a current resume and curriculum vitae of the candidate and a statement describing the candidate’s qualifications and contact information for personal and professional references. The submission should also include the name and address of the stockholder who is submitting the nominee, the number of shares which are owned of record or beneficially by the submitting stockholder and a description of all arrangements or understandings between the submitting stockholder and the candidate.
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, 2005, by its officers or directors.
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 board meeting attended and $500 per committee meeting attended. Total fees paid in fiscal 2005 were $57,000.
Communications with Directors
Stockholders wishing to communicate with Directors should send their correspondence to the Director or Directors concerned in care of the Chairman of the Board of the Company at the Company address. The Company’s policy is to forward such communications to the addressees, if the issues/subjects are material and relevant.
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.
REPORT OF THE AUDIT COMMITTEE
The following report of the Audit Committee, covering our fiscal year ended September 30, 2005, shall not be deemed to be “soliciting material” or to be “filed” with the Securities and Exchange Commission (the “Commission” or “SEC”) or subject to Regulations 14A or 14C of the Commission, or the liabilities of Section 18 of the Exchange Act. Such Report shall not be deemed incorporated by reference into any filing under the Exchange Act or the Securities Act of 1933, notwithstanding any general incorporation by reference of this Proxy Statement into any other document.
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, 2005, for filing with the Securities and Exchange Commission.
The Audit Committee members do not serve as professional accountants or auditors and their functions are not intended to duplicate or to certify the activities of management and the independent auditors.
ITEM 11.
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 earned or paid to each individual during the Company’s last three fiscal years:
SUMMARY COMPENSATION TABLE
(1) Does not include an amount for incidental personal use of business automobiles furnished by the Company to certain of its Named Executive Officers. The Company has determined that the aggregate incremental cost of such benefits to the Named Executive Officers does not exceed, as to any named individual, the lesser of $50,000 or 10% of the cash compensation reported for such person.
(2) The compensation reported under All Other Compensation represents contributions to the Company’s 401(k) Plan on behalf of the Named Executive Officers to match 2003-2005 pretax executive contributions (included under salary) made by each executive officer to such plan.
Option Grants in Fiscal Year 2005
There were no options granted during the fiscal year 2005 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 2005 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, 2005.
* Exercisable (E)/Unexercisable (U)
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.
STOCK PERFORMANCE GRAPH
The following graph sets forth the cumulative total shareholder return (assuming reinvestment of dividends) to Gencor Industries’ shareholders during the five-year period ended September 30, 2005, as well as the Wilshire Small Capitalization Index and the Dow Jones Heavy Construction Index. The stock performance assumes $100 was invested on October 1, 2000.
Comparison of Cumulative Total Return Among Gencor Industries, Inc., the
Wilshire Small Capitalization Index and the Dow Jones Heavy Construction Index
(1) Subsequent to June 1, 2000, the Company’s stock has traded on the “pink sheets” under the stock symbol “GCRX” until 2003 when the stock symbol was changed to “GNCI”. In January 2005, quotations on the Company’s stock commenced reporting on the OTC Electronic Bulletin Board under the symbol “GNCI.OB”.
REPORT OF THE COMPENSATION COMMITTEE
The following Report of the Compensation Committee shall not be deemed to be “soliciting material” or to be “filed” with the Commission or subject to Regulation 14A or 14C of the Securities and Exchange Commission (the “Commission” or “SEC”) or the liabilities of Section 18 of the Exchange Act. Such Report shall not be deemed incorporated by reference into any filing under the Exchange Act or the Securities Act of 1933, as amended, notwithstanding any general incorporation by reference of this Proxy Statement into any other document.
General
During fiscal year 2005 the Compensation Committee (the “Committee”) of the Board of Directors consisted of David A. Air and Randolph H. Fields, each of whom serves as non-employee directors of the Company. In 2005, Russell R. Lee, III joined the Committee also as a non-employee director of the Company. The Compensation Committee administers the Company’s executive compensation program, monitors corporate performance and its relationship to compensation for executive officers, and makes appropriate recommendations concerning matters of executive compensation.
Compensation Philosophy
One of the major objectives of the Committee was to develop and implement a compensation program designed to attract, motivate, reward and retain the broad-based management talent required to achieve the Company’s business objectives. The Committee believed that offering a competitive base salary and certain incentives designed to encourage achievement of the Company’s objectives were the two major components of its compensation philosophy.
Base Salary
The Company’s salary levels for executive officers are intended to be consistent with competitive pay practices of similar sized companies within the industry. In determining executive officers’ salaries, the Committee considered such factors as the level of responsibility, competitive trends, the financial performance and resources of the Company. An individual’s experience level, overall job performance, prior service and job knowledge were also important considerations. Base salaries were increased for one executive officer in fiscal 2005, and one executive officer during fiscal 2004 to maintain a competitive compensation level for that position.
Incentives
Incentives consist of stock options and, to a lesser extent, cash awards. The Committee believes that the compensation program should provide employees with an opportunity to increase their ownership and potential for financial gain from increases in the Company’s stock price. This approach closely aligns the interests of Stockholders, executives and employees. Therefore, executives and other employees are eligible to receive stock options, giving them the right to purchase shares of the Company’s Common Stock at a specified price in the future. The grant of options is based primarily on a key employee’s potential contribution to the Company’s growth and profitability, as measured by the market value of the Company’s Common Stock. The granting of cash awards is discretionary and is not dependent on any one factor.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of December 15, 2005 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.
(1) In accordance with Rule 13d-3-f the Securities Exchange Act of 1934, as amended, shares that are not outstanding, but that are subject, to option, warrants, rights or conversion privileges exercisable within 60 days have been deemed to be outstanding for the purpose of computing the percentage of outstanding shares owned by the individual having such right but have not been deemed outstanding for the purpose of computing the percentage for any other person.
(2) Includes 48,978 shares owned by the Elliott Foundation, Inc.
(3) Includes options to purchase 20,000 shares of Common Stock.
(4) Includes options to purchase 8,000 shares of Common Stock.
(5) Based solely on a Schedule 13D dated August 8, 2005 filed by Harvey Houtkin with the Securities and Exchange Commission. Amount beneficially owned is: 2,171,969 shares (includes 834,780 shares owned by Mr. Houtkin’s wife Sherry Houtkin); 45,974 shares owned by Mr. Houtkin’s son Stuart; 67,980 shares owned by Mr. Houtkin’s son Brad; 26,830 shares owned by Mr. Houtkin’s son Michael; and 30,500 shares owned by Domestic Securities, Inc., of which Mr. Houtkin is Chief Executive Officer, Secretary, director and a 50 percent indirect beneficial owner.
(6) Includes options to purchase 28,000 shares of Common Stock.
(7) Based solely on a Schedule 13D dated August 3, 2005 filed by Mark Shefts with the Securities and Exchange Commission. Amount beneficially owned: 575,130 shares (includes 546,130 shares owned by Mr. Shefts’ wife Wanda Shefts, as to which Mr. Shefts disclaims beneficial ownership); and 29,000 shares owned by Domestic Securities, Inc., a market maker in the issuer’s stock and of which Mr. Shefts is president, a director and a 50 percent indirect beneficial owner.
ITEM 13.
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 fiscal 2004, the Company made lease payments to Marcar in the aggregate amount of $131,000.
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.
ITEM 14.
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 $184,866 in 2005 and $151,083 in 2004.
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 $44,643 in 2005 and $28,000 in 2004.
All Other Fees
The aggregate fees billed by Moore Stephens, Lovelace, P.A. for the last two fiscal years for other services was $-0- in 2005 and $13,517 in 2004 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.
PART IV
ITEM 15.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) A listing of financial statements and financial statement schedules filed as part of this report and which financial statements and schedules are incorporated into this report by reference, is set forth in the “Index to Financial Statements” in Item 8 hereof.
(b) Exhibit Index
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.
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/ E.J. Elliott
/s/ Scott W. Runkel
E.J. Elliott
Scott W. Runkel
Chairman of the Board
Chief Financial Officer
/s/ John E. Elliott
/s/ Russell R. Lee, III
John E. Elliott
Russell R. Lee, III
Executive Vice President
Director
/s/ Randolph H. Fields
/s/ David A. Air
Randolph H. Fields
David A. Air
Director
Director
EXHIBITS FILED HEREWITH