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GENCOR INDUSTRIES INC - Quarter Report: 2006 June (Form 10-Q)

Form 10-Q
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 


FORM 10-Q

 


 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED June 30, 2006

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD From              to             

Commission file number 0-3821

 


GENCOR INDUSTRIES, INC.

 


 

Delaware   59-0933147

(State or other jurisdiction of

incorporated or organization)

 

(I.R.S. Employer

Identification No.)

5201 North Orange Blossom Trail, Orlando, Florida 32810

(Address of principal executive offices) (Zip Code)

(407) 290-6000

(Registrant’s telephone number, including area code)

 


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 and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.

(Check one)

Large accelerated filer  ¨    Accelerated filer  ¨    Non-accelerated filer  x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ¨  Yes    x  No

Indicate number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.

 

Class

 

Outstanding at July 31,2006

Common stock, $.10 par value   8,302,130 shares
Class B stock, $.10 par value   1,642,998 shares

 



Table of Contents

GENCOR INDUSTRIES, INC.

Index

 

              Page

Part I.

 

Financial Information

  
  Item 1.    Financial Statements   
     Condensed consolidated balance sheets – June 30, 2006 (Unaudited) and September 30, 2005    3
     Unaudited condensed consolidated statements of income – Three-months and Nine-months ended June 30, 2006 and 2005    4
     Unaudited condensed consolidated statements of cash flows – Nine-months ended June 30, 2006 and 2005    5
     Notes to condensed consolidated financial statements    6
  Item 2.    Management’s Discussion and Analysis of Financial Position and Results of Operations    9
  Item 3.    Quantitative and Qualitative Disclosure About Market Risk    11
  Item 4.    Controls and Procedures    12

Part II.

 

Other Information

  
  Item 6.    Exhibits    13

Signatures

   14

 

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Part I. Financial Information

GENCOR INDUSTRIES, INC.

Condensed Consolidated Balance Sheets

(In thousands, except per share data)

 

    

June 30

2006

    September 30
2005
 
     (Unaudited)        

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 5,261     $ 4,206  

Marketable securities at market value (Cost $37,000 at June 30, 2006 and $31,000 at September 30, 2005)

     40,049       32,787  

Account receivable, less allowance for doubtful accounts of $1,460 ($1,159 at September 30, 2005)

     4,896       3,760  

Other receivables

     74       189  

Inventories, net

     19,436       19,236  

Deferred income taxes

     1,921       1,921  

Prepaid expenses

     1,390       1,646  
                

Total current assets

   $ 73,027     $ 63,745  

Property and equipment, net

     13,216       13,754  

Other assets

     397       511  
                

Total assets

   $ 86,640     $ 78,010  
                

LIABILITIES AND SHAREHOLDERS’ EQUITY

    

Current Liabilities:

    

Account payable

   $ 5,402     $ 4,491  

Customer deposits

     2,178       2,102  

Income and other taxes payable

     2,165       143  

Accrued expenses

     4,197       3,625  
                

Total current liabilities

     13,942       10,361  

Long-term debt

     —         —    

Deferred income taxes

     9,349       16,214  
                

Total liabilities

     23,291       26,575  

Commitments and contingencies

    

Shareholder’s 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; 8,302,130 shares issued at June 30, 2006 and 8,359,530 shares issued at September 30, 2005

     830       834  

Class B stock, par value $.10 per share; 6,000,000 shares authorized; 1,642,998 shares issue at June 30, 2006 and 1,734,998 shares issued at September 30, 2005

     164       174  

Capital in excess of par value

     10,003       11,659  

Retained earnings

     53,917       42,054  

Accumulated other comprehensive income (loss)

     (1,565 )     (1,582 )

Common stock in treasury, 179,400 shares at cost at September 30, 2005

     —         (1,704 )
                

Total shareholders’ equity

     63,349       51,435  
                
   $ 86,640     $ 78,010  
                

See notes to condensed consolidated financial statements.

 

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GENCOR INDUSTRIES, INC.

Unaudited Condensed Consolidated Statements of Income

(In thousands, except per share data)

 

     Three-Months Ended
June 30,
    Nine-Months Ended
June 30,
 
     2006     2005     2006     2005  

Net revenue

   $ 18,919     $ 14,846     $ 52,452     $ 39,902  

Cost and expenses:

        

Production costs

     13,798       11,478       38,639       30,162  

Product engineering and development

     506       452       1,561       1,465  

Selling, general and administrative

     3,130       2,485       9,373       6,964  
                                
     17,434       14,415       49,573       38,591  

Operating income

     1,485       431       2,879       1,311  

Other income (expense):

        

Interest income

     51       25       126       81  

Interest expense

     (21 )     (19 )     (83 )     (142 )

Income from Investees

     —         6,964       14,547       34,346  

Increase (decrease) in value of marketable securities

     (1,351 )     446       1,262       323  

Miscellaneous

     22       19       56       56  
                                
     (1,299 )     7,435       15,908       34,664  

Income before income taxes

     186       7,866       18,787       35,975  

Income taxes

     66       210       6,924       9,830  
                                

Net Income

   $ 120     $ 7,656     $ 11,863     $ 26,145  
                                

Basic and diluted earnings per common share:

        

Basic earnings per share

   $ 0.01     $ 0.87     $ 1.20     $ 2.97  

Diluted earnings per share

   $ 0.01     $ 0.77     $ 1.19     $ 2.73  

See notes to condensed consolidated financial statements

 

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GENCOR INDUSTRIES, INC.

Unaudited Condensed Consolidated Statements of Cash Flows

(In Thousands)

 

     Nine Months Ended
June 30,
 
     2006     2005  

Cash flows from operations:

   $ 11,863     $ 26,145  

Net income

    

Adjustments to reconcile net income To cash provided (used) by operations:

    

Increase in Marketable securities

     (6,000 )     (25,000 )

Increase in market value of marketable securities

     (1,262 )     (323 )

Deferred income taxes

     (6,865 )     10,430  

Depreciation and amortization

     1,012       610  

Income from investees

     0       (34,346 )

Provision for allowance for doubtful accounts

     301       (255 )

Change in assets and liabilities:

    

Accounts receivable

     (1,322 )     (992 )

Other receivables

     0       (50 )

Inventories

     (200 )     (1,542 )

Prepaid expenses

     256       478  

Other assets

     (10 )     —    

Accounts payable

     911       928  

Customer deposits

     76       (644 )

Income and other taxes payable

     2,022       (2,262 )

Accrued expenses

     572       (816 )
                

Total adjustments

     (10,509 )     (53,784 )
                

Cash provided by (used for) operations

     1,354       (27,639 )
                

Cash flows from (used for) investing activities:

    

Stock options exercised

     34       301  

Distributions from unconsolidated investees

     —         34,346  

Capital expenditures

     (350 )     (1,063 )

Proceeds from assets held for sale

     —         48  
                

Cash from (used for) investing activities

     (316 )     33,632  
                

Cash flows used for financing activities:

    

Net repayment of debt

     —         (5,701 )
                

Cash provided (used) for financing activities

     —         (5,701 )
                

Effect of exchange rate changes on cash

     17       81  

Net increase (decrease) in cash

     1,055       373  

Cash and cash equivalents at:

    

Beginning of period

   $ 4,206     $ 550  
                

End of period

   $ 5,261     $ 923  
                

See notes to condensed consolidated financial statements.

 

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GENCOR INDUSTRIES, INC.

Notes to Condensed Consolidated Financial Statements

All amounts in thousands, except per share amounts

Note 1 – Basis of Presentation

The accompanying condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all material adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three-months and nine-months ended June 30, 2006 are not necessarily indicative of the results that may be expected for the year ended September 30, 2006.

The balance sheet at September 30, 2005 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

For further information, refer to the consolidated financial statements and footnotes thereto included in the Gencor Industries, Inc. Annual Report on Form 10-K for the year ended September 30, 2005.

Note 2- 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 June 30, 2006, Marketable securities consisted of $7.2 in municipal bonds, $.4 in money market funds, and $32.4 in equity stocks.

Note 3 – Inventories

The components of inventory consist of the following:

 

     June 30,
2006
   September 30,
2005

Raw materials

   $ 7,893    $ 7,564

Work in process

     3,805      4,823

Finished goods

     6,697      5,627

Used equipment

     1,041      1,222
             
   $ 19,436    $ 19,236
             

 

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Note 4 – Earnings Per Share Data

The following table sets forth the computation of basic and diluted earnings per share for the periods indicated.

 

     Three-Months Ended
June 30,
   Nine-months Ended
June 30,
     2006    2005    2006    2005

Net income

   $ 120    $ 7,656    $ 11,863    $ 26,145
                           

Denominator (shares in thousands):

           

Weighted average shares outstanding

     9,935      8,832      9,910      8,817

Effect of dilutive stock options

     —        1,089      23      749
                           

Denominator for diluted EPS computation

     9,935      9,921      9,933      9,566
                           

Per common share:

           

Basic:

           

Net income

   $ 0.01    $ .87    $ 1.20    $ 2.97
                           

Diluted:

           

Net income

   $ 0.01    $ .77    $ 1.19    $ 2.73
                           

Note 5 – Comprehensive Income (Loss)

The total comprehensive income for the three-months and nine-months ended June 30, 2006 was $145 and $11,880, respectively. The total comprehensive income for the three-months and nine-months ended June 30, 2005 was $7,623 and $26,226, respectively. Total comprehensive income differs from net income due to gains and losses resulting from foreign currency translation, which are reflected separately in the shareholders’ equity section of the balance sheet under the caption “Accumulated other comprehensive loss.” Gains and losses resulting from foreign currency transactions are included in income.

Note 6 – Income From Investees

The Company owns a 45% interest in Carbontronics LLC and a 25% interest in Carbontronics Fuels LLC and Carbontronics II, LLC. These interests were earned as part of value of risk on 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. The operations of Carbontronics LLC consist of the receipt of contingent payments from the sales of the plants and the distribution thereof to its members. Carbontronics LLC has no other significant operations or assets. The operations of Carbontronics II, LLC consist of the receipt of royalty payments from the plants and the distribution thereof to its members. Carbontronics II, LLC has no other significant operations or assets. 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 the quarter ended June 30 2006. The Company recognized income of $14,547 in the quarter ended March 31, 2006, for the distribution received less an accrual of $1,000 for certain expenses associated with efforts by the Company as plaintiff in a matter against its synthetic fuels partners. The Company received distributions of $27,382 in the quarter ended March 31, 2005, and $6,964 in the quarter ended June 30, 2005. The Company received distributions of $44,238, $13,428 and $1,526, during the fiscal years 2005, 2003, and 2002, respectively. The Company received 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

 

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certain level, the tax credits will terminate. The recent escalation in oil prices raises serious doubt on the continued availability of tax credits under Section 29 for the future. If oil prices remain at the current levels or increase, the tax credits could phase-out or terminate.

On May 15, 2006, the Company received notification from the administrative partner of these investments that the limited partners gave notice that the plants should be “idled” until further notice. They indicated the operations will be curtailed until the earlier of : 1) a legislative change adjusting the determination of the phase-out price, or 2) a downward movement in oil prices signaling some improved expectation that the credit phase-out will still provide sufficient capital to support the continuation of operations.

The Company can not predict when operations will resume nor the amount, if any, of future distributions.

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 further distributions.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Results of Operations

Net sales for the quarters ended June 30, 2006 and 2005 were $18.9 million and $14.8 million, respectively. Domestic sales during the third quarter of fiscal 2006 increased $4.3 million from year ago levels. Domestic sales were higher than the prior year’s quarter due to the general improvement in the construction industry, partially due to the passage of the Federal highway bill in the summer of 2005. Foreign sales decreased $.2 million from the prior year.

Net sales for the nine-months ended June 30, 2006 and 2005 were $52.5 million and $39.9 million, respectively. Domestic sales during the first nine-months of fiscal 2006 increased $12.6 million from year ago levels. Domestic sales were higher than the prior year’s due to the general improvement in the construction industry, partially due to the passage of the Federal highway bill in the summer of 2005. Foreign sales remained constant from the prior year.

The Company’s revenues are concentrated in the asphalt-related business and are subject to a seasonal slow-down during the third and fourth quarters of the calendar year.

Gross margins as a percent of net sales improved to 27% for the quarter ended June 30, 2006, up from 23% in the prior year. Gross margins as a percent of net sales was 26% for the nine-months ended June 30, 2006, and 24% for the nine-months ended June 30, 2005. Margin improvement is due to the higher volumes being manufactured at the Company’s two domestic operations.

Selling and administrative expense increased $645 for the quarter ended June 30, 2006 to $3,130 and $2,409 for the nine-months ended June 30, 2006 to $9,373 due to higher wages, higher commissions based on volume, and higher legal costs for fiscal 2006.

The Company owns a 45% interest in Carbontronics LLC and a 25% interest in Carbontronics Fuels LLC and Carbontronics II, LLC. These interests were earned as part of value of risk on 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. The operations of Carbontronics LLC consist of the receipt of contingent payments from the sales of the plants and the distribution thereof to its members. Carbontronics LLC has no other significant operations or assets. The operations of Carbontronics II, LLC consist of the receipt of royalty payments from the plants and the distribution thereof to its members. Carbontronics II, LLC has no other significant operations or assets. 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 the quarter ended June 30 2006. The Company recognized income of $14,547 in the quarter ended March 31, 2006, for the distribution received less an accrual of $1,000 for certain expenses associated with efforts by the Company as plaintiff in a matter against its synthetic fuels partners. The Company received distributions of $27,382 in the quarter ended March 31, 2005, and $6,964 in the quarter ended June 30, 2005. The Company received distributions of $44,238, $13,428 and $1,526, during the fiscal years 2005, 2003, and 2002, respectively. The Company received 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 recent escalation in oil prices raises serious doubt on the continued availability of tax credits under Section 29 for the future. If oil prices remain at the current levels or increase, the tax credits could phase-out or terminate.

On May 15, 2006, the Company received notification from the administrative partner of these investments that the limited partners gave notice that the plants should be “idled” until further notice. They indicated the operations will

 

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be curtailed until the earlier of : 1) a legislative change adjusting the determination of the phase-out price, or 2) a downward movement in oil prices signaling some improved expectation that the credit phase-out will still provide sufficient capital to support the continuation of operations.

The Company cannot predict when operations will resume nor the amount, if any, of future distributions.

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 further distributions.

Interest expense for the first nine-months of fiscal 2006 decreased by $59 from the first nine-months of fiscal 2005, reflecting a decrease in debt balance. The increase (decrease) in value of marketable securities is a result of net unrealized gains during the period.

Income tax expense decreased from year ago levels, reflecting the decrease in pre-tax income. Deferred taxes changed primarily due to the income from investees becoming taxable in the current year.

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 June 30, 2006, the Company had no borrowings on the facility and had $.3 million of letters of credit outstanding. The interest rate at June 30, 2006, is at prime less .25% (7.50%) 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.

On July 31, 2006, the credit facility discussed above was renewed for an additional three years.

As of June 30, 2006, the Company had $5.3 million in cash and cash equivalents, and $40.0 million in marketable securities. The marketable securities are invested in stocks, bonds, and money market funds 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. The securities may be liquidated at any time into cash and cash equivalents.

The common stock held in treasury at September 30, 2005 was retired during the quarter ended June 30, 2006.

Seasonality

The Company is concentrated in the asphalt-related business and is 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 ended September 30.

Forward-Looking Information

This Form 10-Q 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

 

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future financing plans. 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 and demand for the Company’s products.

Item 3. 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 June 30, 2006, 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 or a Eurodollar rate.

The Company’s Marketable securities are invested in stocks, bonds, and money market funds 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.

 

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Item 4. Controls and Procedures

The Company’s Chief Executive Officer and Chief Financial Officer evaluated the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based upon this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in ensuring that material information required to be disclosed is included in the reports that it files with the Securities and Exchange Commission.

There were no significant changes in the Company’s internal controls or, to the knowledge of the management of the Company, in other factors that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting during the period covered by this report.

 

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Part II. Other Information

Item 6. Exhibits

 

31.1    Certification of Chief Executive Officer Pursuant to Rule 13a – 14(a) of the Securities Exchange Act of 1934, as amended.
31.2    Certification of Chief Financial Officer Pursuant to Rule 13a – 14(a) of the Securities Exchange Act of 1934, as amended.
32    Certifications of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U. S. C. Section 1350.

 

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SIGNATURES

Pursuant to the requirements 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.

 

    GENCOR INDUSTRIES, INC.
August 10, 2006   By:  

/s/ E.J. Elliott

   

E.J. Elliott,

Chairman and Chief Executive Officer

August 10, 2006   By:  

/s/ Scott W. Runkel

   

Scott W. Runkel,

Chief Financial Officer

    (Principal Financial and Accounting Officer)

 

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